Question

Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay \(100,000 at the beginning of each year (the standalone selling price of the service at contract inception is \)100,000 per year). At the end of the second year, the contract is modified, and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to \(80,000 (the standalone selling price of the services at the beginning of the third year is \)80,000 per year). Briefly describe the accounting for this contract modification.

Short answer

$80,000 will be recorded in the third year.

Step-by-step solution

Meaning of Contract Modification

A contract modification is a change, adjustment, or alteration to a contract's scope or price (or both) that adds new rights or responsibilities or changes existing ones.

Accounting for the contract modification

Stengel Co. has a contract with Laplante Inc. to provide maintenance services. $100,000 each year will be the revenue for the two years in the beginning and in Stengel’s record will be credited to Laplante's account when received in cash. Due to a change in contract revenuein the third year, the disclosure will be restricted to $100,000, with a contract debit.

Costs of modification is $20,000, which must be expensed. Only $80,000 will be paid in cash from Laplante Inc. in the third year and will be deposited into their account.