Final answer:
Adding another performance obligation to an existing contract that requires the customer to pay an additional price equal to the added good or service's standalone price results in a contract modification that is treated as a separate performance obligation.
Step-by-step explanation:
When a new performance obligation is added to an existing contract, and the customer is required to pay an additional price equal to the stand-alone price of the added good or service, it results in a contract modification that is treated as a separate performance obligation. In such cases, the modified contract is considered as two separate obligations: the original performance obligation and the added performance obligation.
This treatment is in line with the guidance provided by Accounting Standards Codification (ASC) 606, which governs revenue recognition for contracts with customers. ASC 606 requires that performance obligations in a contract be identified and accounted for separately if they are distinct and have standalone value.
To account for the contract modification, the entity must allocate the transaction price between the original and added performance obligations based on their relative standalone selling prices. This allocation ensures that revenue is recognized in a manner that reflects the transfer of control to the customer for each performance obligation.