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.

1) Prepare the journal entries that JustKitchens would make over the life of the contract.

Answer 1

Year 1	Particulars	Dr.	Cr.
2nd Jan	Bank A/c Dr.	30000
	To Unearned Revenue		30000
31/12	Unearned Revenue A/c	10000
	To Sales A/c		10000
Year 2
	Unearned Revenue A/c	10000
	To Sales A/c		10000
Year 3
2nd Jan	Bank A/c Dr.	21000
	To Unearned Revenue		21000
	(Being 22,00 received for the new contract and
	1000 deducted for the old contract)
	Unearned Revenue A/c	9000
	To Sales A/c		9000
	(Revenue for 3rd year was 9000)
Year 4
	Unearned Revenue A/c Dr.	11000
	To Sales A/c		11000
	(For 4th and 5th Revenue was 11,000)
Year 5
	Unearned Revenue A/c Dr.	11000
	To Sales A/c		11000