ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue
Kappa Co agreed to supply 1,000 units at $50 each, delivered over six months. After 400 units were delivered, the customer and Kappa agreed to add 200 more units at $40 each. The standalone selling price of the units at that date is $45. How should Kappa account for the modification?
Kappa treats the modification as a termination of the old contract and creation of a new one, applied prospectively. The extra units are distinct but priced below standalone selling price, so it is not a separate contract. Remaining consideration of $38,000 is allocated across the 800 undelivered units.
- AAs a separate contract, because the additional units are priced at $40 each
- BAs a termination of the old contract and creation of a new contract, with remaining consideration reallocated prospectivelyCorrect
- CAs a cumulative catch-up adjustment to revenue recognised to date
- DAs a separate contract only if the customer pays in advance
Explanation
A modification is a separate contract only if it adds distinct goods and the price reflects their standalone selling price; here $40 is below $45, so it fails. The remaining units are distinct from those already delivered, so the modification is treated prospectively as if the old contract were terminated. The remaining consideration (600 x $50 + 200 x $40 = $38,000) is spread over 800 units, giving $47.50 per unit. A catch-up applies only when the remaining goods are not distinct.
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