Check your answer
Write your response and explain your reasoning.
Fictional Northstar Support has six months left in an approved service contract. Its unrecognized allocation for the remaining service is $42,000. The parties sign an amendment that adds three monthly support services for $21,000. Each remaining and added month is distinct from service already transferred. Current standalone selling price is $8,000 per month. The record contains no supported adjustment for contract circumstances.
In a separate promise, Northstar bills a customer $12,000 for an inspection by Lakeview Testing and pays Lakeview $9,500 after acceptance. The customer directs Lakeview's work and receives Lakeview's report. Lakeview is responsible for meeting the inspection specifications. Northstar does not combine the inspection with another promised output and bears no inventory or fulfillment risk. Its contract permits some discretion over the customer price.
Prepare two decision records. For the modification, state why the separate- contract test passes or fails, select the path, and calculate monthly revenue after the change. For the inspection, identify the specified service, analyze control and the indicators, and state revenue and cost presentation. Give one fact that could change each conclusion and state the calculation boundary.
Use ASC 606-10-25-10 through 25-13 and 55-36 through 55-40.
Compare your reasoning with the worked answer
The signed amendment creates enforceable rights and obligations. Each added month is distinct, but its $7,000 contract price is below the $8,000 current standalone selling price. No supplied contract adjustment explains the difference, so the amendment fails the separate-contract price condition.
The six remaining original months and three added months are distinct from service already transferred. Northstar therefore accounts for the change prospectively as termination of the original residual and creation of a new contract. It combines $42,000 of unrecognized original consideration with $21,000 from the amendment. The $63,000 total allocated to nine remaining months produces $7,000 of revenue per month. It does not revise revenue for service transferred before approval.
The specified service is Lakeview's independent inspection and report. Lakeview is responsible for acceptability and works directly for the customer. Northstar neither controls the service as an input before transfer nor bears inventory or fulfillment risk. Northstar's limited price discretion is one indicator and does not outweigh that control evidence. Northstar is an agent for this item.
Northstar recognizes its $2,500 fee: $12,000 billed to the customer less the $9,500 paid to Lakeview. It reports $2,500 of revenue and no separate $9,500 cost for the arranged service. Gross billing and cash collection do not make Northstar the principal.
Evidence that the added price reflects an adjusted standalone selling price could change the modification to a separate contract. Evidence that the remaining work forms part of one partially satisfied combined obligation could require a cumulative catch-up. Evidence that Northstar controls an integrated inspection output before transfer could support principal presentation.
The calculation accepts the prospective path and agent conclusion as inputs. It checks only the remaining-unit revenue and presentation amounts. It cannot establish approval, standalone selling price, distinctness, or control.