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Problem: Nash Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 20X1, Clarke entered into a 3-year service contract with Walleye Tech. Phillip 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, Phillip 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.
Instructions
(a) Prepare the journal entries for Nash in 20X1 and 20X2 related to this service contract, assuming that the annual revenue is recognized at year end. (4 journal entries)
(b) Prepare the journal entries for Nash in 20X3 related to the modified service contract, assuming a prospective approach. (2 journal entries).
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