Kingbird Financial Services performs bookkeeping and tax-reporting services to s
ID: 2332817 • Letter: K
Question
Kingbird Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Kingbird entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,800 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,800. In addition, Walleye agrees to pay an additional $21,600 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.
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Account Titles and Explanation
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Account Titles and Explanation
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Kingbird Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Kingbird entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,800 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,800. In addition, Walleye agrees to pay an additional $21,600 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.
Explanation / Answer
Date Account Titles and Explanation Debit Credit a January 1, 2017 Cash $ 10,800 Unearned Service Revenue $ 10,800 December 31, 2017 Unearned Service Revenue $ 10,800 Service Revenue $ 10,800 January 1, 2018 Cash $ 10,800 Unearned Service Revenue $ 10,800 December 31, 2018 Unearned Service Revenue $ 10,800 Service Revenue $ 10,800 b January 1, 2019 Cash (8800+21600) $ 30,400 Unearned Service Revenue $ 30,400 December 31, 2019 Unearned Service Revenue(30400÷4) $ 7,600 Service Revenue $ 7,600 In this case, the modification of the contract does not result in new performance obligation. As a result, the remaining service revenue is recognized evenly over the remaining four years. c Given the change in services in the extended contract period, the services are distinct; the modification should not be considered as part of the original contract – Kingbird recognizes revenue on the remaining services at different rates. Kingbird will recognize $7,200 ($21,600 ÷ 3) per year in the extended period (2021–2023). For 2019, Kingbird makes the following entry. January 1, 2019 Cash (8800+21600) $ 30,400 Unearned Service Revenue $ 30,400 December 31, 2019 Unearned Service Revenue $ 8,800 Service Revenue $ 8,800
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