Refer to the information in E18.31.

Tyler Financial Services performs bookkeeping and taxreporting services to startup companies in the Oconomowoc area. On January 1, 2020, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,000 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 $8,000. In addition, Walleye agrees to pay an additional $20,000 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. Does the accounting for capitalized costs change if the contract is for 1 year rather than 3 years? Explain.

b. Dan’s Demolition is a startup company; as a result, there is more than insignificant uncertainty about Dan’s ability to make the 6-month payments on time. Does this uncertainty affect the amount of revenue to be recognized under the contract? Explain.