Question: JustKitchens Inc. provides services to restaurants and hotels. The company supplies paper products, tableware, cookware, restaurant and kitchen equipment, and cleaning supplies. On January 2, 2017, Just- Kitchens enters into a contract with a local restaurant chain to provide its services for 3 years at a cost of $10,000 per year. The restaurant chain pays the total contract fee on January 2, 2017. JustKitchens's stand-alone selling price is also $10,000 per year.
After 2 years, the restaurant asks to modify the contract. On January 2, 2019, the companies agree to reduce the fee for the third year to $9,000 in exchange for extending the contract for 2 additional years at a fee of $11,000 per year. This modification is agreed to by both parties, and on that date the restaurant chain pays for the additional 2 years of service and deducts $1,000 for the adjustment to the original contract. The $11,000 fee for the additional years is the same as JustKitchens's stand-alone price.
Required: 1. How should JustKitchens account for the contract modification?
2. Prepare the journal entries that JustKitchens would make over the life of the contract.
How should JustKitchens account for the contract modification?
The contract modification should be accounted for.
Prepare the journal entries that JustKitchens would make over the life of the contract. Assume all annual year-end entries are made on December 31.