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Topic 8 Tutorial Solutions

The document discusses revenue recognition for construction contracts. It provides calculations for percentage of completion, profit/loss for each year of a multi-year contract, and revenue. Journal entries are presented to record project costs, bill the customer, collect payment, and record profit.

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shayal Nand
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19 views

Topic 8 Tutorial Solutions

The document discusses revenue recognition for construction contracts. It provides calculations for percentage of completion, profit/loss for each year of a multi-year contract, and revenue. Journal entries are presented to record project costs, bill the customer, collect payment, and record profit.

Uploaded by

shayal Nand
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Question 1 Contracts and Performance Obligations

a Contracts
i ABC has a contract with X (rights and obligations of both parties are clearly outlined)

ii ABC doesn't have a contract with Y because Y is not deemed to be a customer within the
context of IFRS 15. Y operates in the same line of business as ABC and the exchange is likely
conducted to faciliate Y's business.

b Performance Obligations
i The car, tinted windows & warranty are combined because they can't be sold separately
Recognise this revenue at a point in time i.e. when the customer takes delivery.

ii Free servicing (this can be sold separately and is transferrable)


Recognise this revenue over time, as it is delivered e.g. quarterly
Question 2 Allocation of Transaction Price

Step 1 Identify the contract


The hotel advertised a package (bundle of distinct goods and services) which the customer then booked and paid fo
so there is an offer and acceptance (contract)
Step 2 Identify the performance obligations
(1) Provide a hotel room
(2) Provide breakfast

Step 3 Determine the transaction price


Amount paid by the customer 210

Step 4 Allocate the transaction price to the performance obligations


Performance Obligations Stand-alone Pro-rata Transaction
Selling Price Price

Hotel Room 160 67% 140


Breakfast 2 x $40 80 33% 70
240 210
customer then booked and paid for
Question 3 Credit Sales with right of return

a Units Price Total


Receivable 200 50 10,000
Expected Returns 2 50 100
Revenue 198 50 9,900

b Dr Provision for Refund 100


Cr Cash 100
Refund customer for 2 returned items

Dr Inventory 80
Cr Right to Recover 80
Recover 2 returned items
Question 4 Construction Contracts
If the customer controls the asset as it is created or enhanced, then control is transferred over time.
Percentage of completion can be determined through inputs or outputs.

Calculate % of Completion
Year 1 2 3
$ million $ million $ million
Estimated Total Cost
Actual Costs incurred to date 4.0 8.5 12.0
Estimated Costs to complete 8.0 3.5 -
Estimated Total Cost 12.0 12.0 12.0
% completed 4.0/12.0 8.5./12.0 12.0/12.0
33.33% 70.83% 100%

Calculate Profit/(Loss) for each year


Year 1 2 3
$ million $ million $ million
Contract Price (Fixed) 15.0 15.0 15.0
Estimated Total Cost 12.0 12.0 12.0
Estimated Total Gross Profit 3 3 3
% completed 33.33% 70.83% 100.00%
Cumulative Gross Profit 1 2.125 3
Less Profit recognised previously 0 1 2.125
Profit/(Loss) for this year 1 1.125 0.875

We know costs and profit, so we can calculate Revenue (i.e. Cost + Profit)

Calculate Revenue for each year


Year Y1 Y2 Y3
Profit 1 1.125 0.875
Cost 4.0 4.5 3.5
Revenue 5.000 5.625 4.375
nsferred over time.

Ques

Total
3
12.0
15.000
Question 4 Revenue Recognition for Construction Contracts

Calculate % of Completion
Year 1 2 3
$ million $ million $ million
Estimated Total Cost
Actual Costs incurred to date 4.0 10.5 14.0
Estimated Costs to complete 8.0 3.5 -
Estimated Total Cost 12.0 14.0 14.0
% completed 4.0/12.0 10.5/14.0 14.0/14.0
33.33% 75.00% 100%

Calculate Profit/(Loss) for each year


Year 1 2 3
$ million $ million $ million
Contract Price (Fixed) 15 15 15
Estimated Total Cost 12.0 14.0 14.0
Estimated Total Gross Profit 3 1 1
% completed 33.33% 75.00% 100.00%
Cumulative Gross Profit 1 0.75 1
Less Profit recognised previously 0 1 0.75
Profit/(Loss) for this year 1 -0.25 0.25

Calculate Revenue for each year


Year Y1 Y2 Y3
Profit 1 -0.25 0.25
Cost 4 6.5 3.5
Revenue 5 6.25 3.75

JE1. Record Project Costs


Year Y1 Y2 Y3
$ million $ million $ million
Dr Construction in Progress (CIP) 4 6.5 3.5
Cr Cash/Payables 4 6.5 3.5
Record actual cost of materials, labour and overhead used in the project

JE2. Bill/Charge customer


Year Y1 Y2 Y3
$ million $ million $ million
Dr A/cs Receivable 5 5 5
Cr CIP 5 5 5
Invoice customer according to agreed billing schedule

JE3. Collect from customer


Y1 Y2 Y3
$ million $ million $ million
Dr Cash 5 5 5
Cr A/cs Receivable 5 5 5

JE4. Record project profit


Year Y1 Y2 Y3
$ million $ million $ million
Dr CIP 1 ---- 0.25
Dr Project Expenses 4 6.5 3.5
Cr Project Revenue 5 6.25 3.75
Cr CIP ---- 0.25 ----
Record annual profit and revenue
Total
1
14
15

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