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 cumulative catch-up adjustment.

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

By recognizing revenue immediately for the new goods.

How to approach this question

Decision Tree: 1. Are new goods distinct? No -> Cumulative Catch-up. Yes -> Go to 2. 2. Is price at standalone? Yes -> Separate Contract. No -> Terminate old, create new (Prospective).

Full Answer

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

When additional goods are distinct but not priced at standalone selling price, the modification is accounted for as a termination of the existing contract and the creation of a new contract. The unrecognized revenue from the old contract is added to the new consideration and allocated to the remaining performance obligations.

Common mistakes

Confusing prospective treatment with cumulative catch-up (used when goods are not distinct).

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