Question

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

Short answer

Revenue is $3,600.

Step-by-step solution

Meaning of Contract Modification

Acontract modification occurs if the contractual parties agree to modify the existing terms of a contract. Contract modification can only be legal if both parties sign the acceptance of modification.

Journal entries when the contract signed

Date	Particular	Debit ($)	Credit ($)
January 2, 2019	Cash a/c	3,600
	Unearned service revenue a/c		3,600

Working Notes:

The services supplied during the extended time are the same as those given during the initial contract period. The adjustments will be deemed part of the original contract because they are not separate.

$\begin{array}{rcl}\mathbf{Unearned}\mathbf{}\mathbf{revenue}& \mathbf{=}& \mathbf{Extended}\mathbf{}\mathbf{contract}\mathbf{\times }\mathbf{Price}\\ & \mathbf{=}& \mathbf{40}\mathbf{\times }\mathbf{\$}\mathbf{90}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}\end{array}$