CPA Financial Accounting and Reporting Far Quiz: Account For Contract Modifications

What this quiz covers

This quiz focuses on Account For Contract Modifications, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. As a separate contract, recognizing revenue on the additional 20 units at $9 each.
2. As a termination of the original contract and creation of a new contract, with revenue recognized on a cumulative catch-up basis. (correct answer)
3. As a modification to the existing contract, with the additional units priced prospectively at $9 each.
4. Ignored until the full modified contract is completed.

Explanation: When remaining goods are not distinct from those already transferred, the modification is treated as if the original contract were terminated and a new contract created. Revenue is adjusted on a cumulative catch-up basis reflecting the new blended price over all remaining units. Answer B is correct. Answer A requires the modification to meet separate contract criteria (distinct goods at standalone price), which is not met here. Answer C describes prospective treatment, which applies when remaining goods are distinct but do not meet the separate contract criteria. Answer D has no basis in ASC 606.

Question 2

1. As a separate contract; revenue on the additional scope is recognized separately as it is earned. (correct answer)
2. As a prospective modification; the remaining transaction price is updated going forward.
3. As a cumulative catch-up; prior revenue is restated to reflect the new contract price.
4. As a new contract replacing the original; the original contract is terminated.

Explanation: The modification adds distinct work and the price increase reflects the standalone selling price of the additional scope. Both criteria for a separate contract under ASC 606-10-25-12 are met. The modification is treated as a separate contract and revenue is recognized independently on the added scope. Answer A is correct. Answers B and C describe alternative modification treatments that apply only when the separate contract criteria are not met. Answer D incorrectly terminates the original contract.

Question 3

1. Treat as a separate contract.
2. Treat prospectively as a new contract replacing the old one.
3. Apply a cumulative catch-up adjustment.
4. Defer all revenue until the modification terms are fully performed. (correct answer)

Explanation: ASC 606 provides three methods for accounting for contract modifications: (1) treat as a separate contract, (2) prospective treatment (new contract replaces old), and (3) cumulative catch-up. Deferring all revenue until full performance of modified terms is not a prescribed approach under ASC 606. Answer D is correct. Answers A, B, and C all describe valid modification approaches under the standard.

Question 4

1. Prospectively, combining the additional widgets with the remaining original order.
2. As a separate contract, since the additional widgets are distinct and priced at standalone selling price. (correct answer)
3. Using a cumulative catch-up, blending the price across all delivered and undelivered units.
4. As a new contract terminating the original agreement.

Explanation: The additional 50 widgets are distinct (each widget is separately usable) and the price of $15 per widget reflects the standalone selling price. Both criteria for separate contract treatment under ASC 606-10-25-12 are met. Answer B is correct. Answer A applies prospective treatment, which is used when goods are distinct but the price does not reflect the standalone selling price - that condition is not present here. Answer C (cumulative catch-up) applies when goods are not distinct from those already transferred. Answer D incorrectly terminates the original contract rather than treating the modification as a new, separate contract alongside the existing one.

Question 5

1. $50,000
2. $45,000
3. $30,000
4. $27,000 (correct answer)

Explanation: The modification reduces the price for the remaining 600 units to $45 each. Because the remaining goods are distinct from those already delivered, prospective treatment applies. Remaining transaction price = 600 x $45 = $27,000, recognized over the remaining 600 deliveries. Revenue already recognized on the 400 delivered units ($20,000) is not restated. Answer D is correct. Answer A uses the original price of $50 for all remaining units ($50 x 1,000 = $50,000), ignoring the modification entirely. Answer B applies the new price retroactively to all 1,000 units ($45 x 1,000 = $45,000), which would be a cumulative catch-up approach rather than prospective treatment. Answer C applies the original price to the remaining 600 units ($50 x 600 = $30,000), failing to apply the modified rate.

Question 6

1. Recognize revenue equal to the costs incurred until the price is agreed.
2. Recognize revenue to the extent it is probable that a significant reversal will not occur, using the most likely amount or expected value method. (correct answer)
3. Defer all revenue on the contract until the change order price is settled.
4. Recognize revenue at the original contract price and expense the additional costs as incurred.

Explanation: An unapproved change order represents variable consideration under ASC 606. Revenue is recognized only to the extent that it is probable a significant reversal will not occur when the uncertainty is resolved, using either the most likely amount or expected value method. Answer B is correct. Answer A recognizes revenue equal to costs, which describes the cost-recovery method and is not the ASC 606 approach. Answer C defers all revenue, violating the ASC 606 variable consideration guidance. Answer D ignores the additional scope and understates revenue.

Question 7

1. A modification that changes the price of a partially completed single performance obligation that is not distinct in the context of the contract. (correct answer)
2. A modification that adds a new, distinct service at its standalone selling price.
3. A modification that adds distinct goods priced below standalone selling price.
4. A modification that extends the contract term at the original contract rate.

Explanation: A cumulative catch-up adjustment is required when a modification affects a single performance obligation (or remaining goods/services that are not distinct from those already transferred). In this case, the modification changes the consideration for work that is part of an ongoing, non-distinct performance obligation, requiring an update to the measure of progress and a catch-up in the current period. Answer A is correct. Answer B describes a separate contract (distinct + standalone price). Answer C describes prospective treatment (distinct but not at standalone price). Answer D would likely be prospective, applied to a new remaining contract period.

Question 8

1. The list price published in the seller's catalog, unadjusted for volume discounts.
2. The price charged to the most creditworthy customer in the most recent transaction.
3. The price at which the entity would sell a promised good or service separately to a customer. (correct answer)
4. The average price across all transactions in the prior fiscal year.

Explanation: Under ASC 606-10-32-32, the standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. It is the best evidence of standalone selling price when the good or service is actually sold separately. Answer C is correct. Answer A (catalog list price) may be used as an input but is not the definition. Answer B introduces creditworthiness criteria that do not exist in the standard. Answer D uses a historical average, which is not the prescribed definition.

Question 9

1. As a separate contract for $15,000.
2. Prospectively, applying the new price to the remaining 50% of construction.
3. No adjustment needed; the modification is immaterial.
4. Using a cumulative catch-up adjustment, since the flooring is part of one combined performance obligation. (correct answer)

Explanation: A custom home is typically a single performance obligation measured over time. Since the flooring upgrade is not distinct from the overall construction (it is part of the single combined obligation), the modification is accounted for using a cumulative catch-up adjustment. The total transaction price increases to $415,000 and the percentage of completion is remeasured, with an immediate catch-up to revenue recognized to date. Answer D is correct. Answer A requires distinct goods at standalone price. Answer B applies prospective treatment for distinct remaining goods. Answer C incorrectly dismisses the modification.

Question 10

1. Claims are recognized as revenue when submitted to the customer.
2. Claims are expensed as a cost of the contract until the customer formally approves them.
3. Claims are recognized as variable consideration to the extent it is probable a significant revenue reversal will not occur. (correct answer)
4. Claims are disclosed only in the notes until cash is received.

Explanation: Under ASC 606, a claim represents variable consideration. Revenue from a claim is recognized only to the extent it is probable that a significant revenue reversal will not occur when the uncertainty is resolved. This constraint on variable consideration governs claim recognition. Answer C is correct. Answer A recognizes revenue on submission without regard to probability - this is the old percentage-of-completion approach to claims. Answer B expenses the costs but provides no revenue recognition guidance. Answer D (cash basis) is inconsistent with accrual accounting under ASC 606.

Question 11

1. Determine the new transaction price, then assess whether the modification is a separate contract.
2. Reassign all performance obligations, then determine whether the modification qualifies as a change order.
3. Assess whether performance obligations are satisfied, then determine the modification type.
4. Determine if the modification qualifies as a separate contract; if not, assess whether remaining goods are distinct to determine prospective or catch-up treatment. (correct answer)

Explanation: The correct ASC 606 modification analysis sequence is: (1) Is the modification a separate contract? (both conditions met - distinct goods and standalone price). If yes, account for it separately. If no: (2) Are the remaining goods distinct from those already transferred? If yes, prospective treatment. If no, cumulative catch-up. Answer D correctly describes this decision tree. Answer A starts with transaction price before the classification decision. Answer B introduces 'change order' terminology that is not the primary classification framework. Answer C starts with performance obligation satisfaction rather than modification type.

Question 12

1. $18,000
2. $12,000
3. $10,500 (correct answer)
4. $15,000

Explanation: Original monthly rate = $24,000 / 24 = $1,000/month. Modified monthly rate = $1,000 - $300 = $700/month. Revenue for remaining 15 months = 15 x $700 = $10,500. Because remaining services are distinct, the modification is applied prospectively and prior revenue is not restated. Answer C is correct. Answer A uses the original monthly rate for 18 remaining months. Answer B uses $800/month for 15 months. Answer D uses the original monthly rate for 15 months without applying the modification.

Question 13

1. As a cumulative catch-up adjustment applied to Year 1 revenue.
2. As a separate contract; the new module is recognized at $500/month going forward. (correct answer)
3. Prospectively; the total remaining price is blended across all remaining services.
4. As a termination and replacement of the original contract.

Explanation: The new module is a distinct service (it can be used on its own) and the price of $500/month reflects its standalone selling price. Both criteria for a separate contract under ASC 606-10-25-12 are met. The modification is treated as a new, separate contract. Revenue on the original support continues at $1,000/month and revenue on the new module is recognized separately at $500/month. Answer B is correct. Answer A applies a catch-up to prior periods, which is not warranted. Answer C blends the price prospectively, applying prospective modification treatment rather than separate contract treatment. Answer D terminates the original contract without basis.

Question 14

1. Prospectively, as if it were a termination of the original contract and the creation of a new contract going forward. (correct answer)
2. The modification is ignored and original contract terms continue.
3. As a termination of the original contract and creation of a new contract, using cumulative catch-up adjustment.
4. Retroactively restated for all prior periods presented.

Explanation: Under ASC 606-10-25-13, when a modification does not qualify as a separate contract and the remaining goods or services are distinct from those already transferred, the modification is accounted for prospectively - as if the old contract were terminated and a new one created going forward. The remaining transaction price is reallocated to the remaining performance obligations. Answer A is correct. Answer B ignores the modification entirely, which is not permitted under ASC 606. Answer C describes the cumulative catch-up method, which applies when remaining goods are NOT distinct from those already transferred - the opposite condition. Answer D retroactive restatement is not prescribed by ASC 606 for contract modifications.

Question 15

1. The entity applies judgment to determine whether enforceable rights and obligations have been created, considering legal rights and customary practices. (correct answer)
2. The entity suspends all revenue recognition until the dispute is resolved.
3. The entity continues recognizing revenue under the original contract terms only.
4. The entity recognizes revenue for the disputed amount immediately as a gain contingency.

Explanation: ASC 606 requires that enforceable rights and obligations exist for a contract or modification to be recognized. When there is a dispute, the entity applies judgment - considering whether legal and customary frameworks create enforceable obligations - to determine if a modification exists and what its terms are. Answer A is correct. Answer B halts all revenue recognition, which overstates the impact of a dispute. Answer C proceeds under original terms without applying judgment to the dispute, which may misstate the entity's position. Answer D treats the disputed amount as a gain contingency, which misapplies ASC 450.

Question 16

1. $2,000,000
2. $1,200,000
3. $800,000 (correct answer)
4. $600,000

Explanation: Revenue recognized to date: $2,000,000 x 60% = $1,200,000. The modification removes $200,000 of remaining work (distinct and not yet performed). Updated total contract price = $2,000,000 - $200,000 = $1,800,000. Remaining to be recognized prospectively = $1,800,000 - $1,200,000 = $600,000. Wait - if remaining work is distinct and a prospective approach applies, remaining transaction price = $2,000,000 x 40% - $200,000 = $800,000 - $200,000 = $600,000. Answer D = $600,000. Rechecking answer choices - Answer C = $800,000, which is the original remaining before the reduction. Answer D = $600,000 is the updated remaining. Setting correct answer to D.

Question 17

1. An adjustment applied prospectively to future performance obligations only.
2. A restatement of prior period revenue to conform to revised contract terms.
3. An adjustment to revenue in the current period to reflect the effect of the modification as if it had been in place from contract inception. (correct answer)
4. An accrual of expected future losses on the modified contract.

Explanation: A cumulative catch-up adjustment under ASC 606 recognizes in the current period any revenue that would have been recognized under the modified terms from the beginning of the contract. It is neither a restatement of prior periods nor a purely prospective change - it corrects the cumulative revenue recognized to date in the current period. Answer C is correct. Answer A describes prospective-only treatment. Answer B describes prior period restatement, which ASC 606 does not prescribe for modifications. Answer D describes loss contract accounting, not a modification catch-up.

Question 18

1. As a separate contract.
2. Using a cumulative catch-up adjustment.
3. It is ignored until a price at standalone selling price is agreed upon.
4. Prospectively, as a termination of the existing contract and creation of a new contract going forward. (correct answer)

Explanation: When a modification adds distinct goods or services but the price does not reflect the standalone selling price, the separate contract criteria are not met. Because the remaining goods are distinct from those already delivered, the modification is accounted for prospectively - as if the original contract were terminated and replaced by a new one. Answer D is correct. Answer A requires both conditions (distinct + standalone price), which is not met. Answer B (cumulative catch-up) applies when goods are not distinct. Answer C has no basis in ASC 606.

Question 19

1. $2,000,000
2. $1,200,000
3. $800,000
4. $600,000 (correct answer)

Explanation: Revenue recognized to date = $2,000,000 x 60% = $1,200,000. The modification removes $200,000 of distinct unperformed work and reduces the price by $200,000 (prospective treatment). Updated total contract price = $2,000,000 - $200,000 = $1,800,000. Remaining revenue = $1,800,000 - $1,200,000 = $600,000. Answer D is correct. Answer A uses the original contract price. Answer B is revenue already recognized. Answer C is the original remaining revenue before the scope reduction ($2,000,000 x 40%).

Question 20

1. As a separate contract, because both the scope and price increased.
2. Not as a separate contract; the price exceeds standalone selling price, so it must be evaluated as a prospective or catch-up modification. (correct answer)
3. As a separate contract, because the price increase is more than the standalone selling price.
4. As a new contract, terminating the original and recognizing all prior revenue immediately.

Explanation: The separate contract criteria require the price increase to reflect - not merely exceed - the standalone selling price. A price above standalone selling price means the criteria are not met in the same way as a price below it; the price must equal the standalone selling price to qualify. Under ASC 606, the modification would be evaluated under the prospective or cumulative catch-up methods depending on whether remaining goods are distinct. Answer B is correct. Answers A and C incorrectly conclude a separate contract exists when the price exceeds standalone. Answer D has no basis in ASC 606.