Under ASC 606, how should a company account for a contract modification that adds distinct goods at a price that does NOT reflect their standalone selling price?

Answer options:

As a separate contract.

As a termination of the old contract and creation of a new contract (prospective adjustment).

As a cumulative catch-up adjustment to revenue.

Recognize all new revenue immediately.

How to approach this question

Decision Tree: 1. Are new goods distinct? Yes. 2. Is price standalone? No -> Terminate old, start new (Prospective). If Price was standalone -> Separate contract. If goods NOT distinct -> Cumulative Catch-up.

Full Answer

B.As a termination of the old contract and creation of a new contract (prospective adjustment).✓ Correct

ASC 606-10-25-13: If remaining goods are distinct but price is not SSP, account for as termination of existing contract and creation of a new contract. The remaining transaction price + new consideration is allocated to remaining performance obligations.

Common mistakes

Confusing prospective treatment with cumulative catch-up (used for single performance obligations like construction).

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