Unit 8 - Revenue from Contracts with Customers Tutorial Questions ABC is a motor vehicle dealer, with several customers + Xtaded in her existing vehicle for a new cas, paying the difference in value in cash. + ¥ purchased a motoreycle, delivering an identical vehicle in exchange. He also owns a vehicle dealership. + Z paid for a new car and also chose several additional products for which he paid extra, These included tinted windows, 2 three-year warranty and free servicing valued at $2000. ‘The servicing option can be used for any vehicles over two-year period. Required @ | Explain whether ABC has contracts with X and Y, | Identity the performance obligation(s) with respact to Customer Z For each performance obligation, explain whether the related revenue should be recognised at a point in time or over time, Solutions Question 1 Contracts and Performance Obligations a Contracts ABC has a contract with X (rights and obligations of both parties are clearly i outlined) ii ABC doesn't have a contract with V because V 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 Performance Oblications i The car, timted windows & warranty are combined because they can't be sold separately Recognise this revenue at a point in time i.e. whea the customer takes deliveryit Free servicing (this can be sold separately and is transferrable) Recognise this revenue over time, as itis delivered e.g. quarterly Abhotel advertised a package deal for $210 per night. The package includes a hotel room and breakfast for two. The hotel room is normally sold separately for $160 and cach breakfast costs $40 if purchased at the hotel. Mr and Mrs Tourist booked this package for 1 night. Required a | Calculate the transaction price for this contract. | Allocate the transaction price to the performance obligation(S) Allocation of Question? “Transaction Price step 1 Wdentify the contract The hotel advertised a package (bundle of distinct goods and services) which the customer then booked and paid for so there is an offer and acceptance (contract) step 2 Identify the performance obligations (1) Frovide a hotel room (2) Provide breakfest step 3 Determine the transaction price Amount paid by the customer step 4 Allocate the transaction price to the performance obligations Performance Stand Pro Transactio Obligations alone rata n Price Sellin g Price Hotel Room 160 67% 140 2x Breakfast $40 80[During April 2020, Hobart Lid sold 200 products on credit for $50 each Customers may jcccive a full refund for any unused products retuned within 30 days of sale. Each product costs $40. Based on past experience, Hobart Ltd estimates that 2 of the products will be| fetumed during May. The cost of recovering the products will be immetarial and returne: oducts can be resold at a profit Required a | Calculate the amount of revenue recognised by Hobart Lrd in April. | Assume that transactions occur in accordance with expectations. Prepare all joumal entries to record the retum of products during May. Question 3 ‘Credit Sales with right of return Unit a s Price Total Receivabl e 200 50 10,000 Expected Returns 2 50 100 Revenve 50 9,900 bo Dr Provision for Refund 100 cr cash 100 Refund customer for 2 returned items Dr Inventory 80 cr Right to Recover 80 Recover 2 retuned itemsA company is constructing a bridge at a fixed price of $15 million over three years. The customer remains in control of the bridge throughout the contract. The expected costs and billings are provided below. Year 1 2 a Expected Cost 4,000,000 4,500,000 3,500,000 Billings 5,000,000 5,000,000 5,000,000 Required Assume the percentage of completion CAN be measured reliably. a. | Ifactual costs coincide with expectations: Calculate the amount of revenue that the company should company recognise in each year. b. | Ifthe actual cost for Year 2 is $6,500,000 while costs for Year 1 and 3 remain unchanged: Prepare all journal entries relating the contract for Year 1-3 Question 4 _ Construction Contracts Calculate % of Completion Estimated Total Cost Actual Costs incurred to date 10 8s Estimated Costs to complete 2.0 a8 Estimated Total Cost 12.0 po 20 Ro % completed 40/120 85/120 120/12032.33% 70.83% 100% Calculate Profit/(Loss) for each year rn ‘Contract Price (Fixed) Estimated Total Cost ° ° o Estimated Total Gross Profit a 2 2 % completed 33.33% 70.83% 100.0% Cumulative Gross Profit 1 2425 2 Less Profit recognised previously 0 1 2425 Profit/(Loss) for this year 1 4.125 0.875 Calculate Revenue for each year a ee Profit 1 11250875 cost 40 45 as? ° Revenue 5.00 5.62 437 15.00 ° 5 5 0 PARTB Question 4 Revenue Recognition for Construction Contracts a $ million Calculate % of Completion Estimated Total Cost ‘Actual Costs incurred to date 40 105 140 Estimated Costs to complete as 20 r - Estimated Total Cost 20 uo | 140 % completed aofiz0 193/18 140/14 ° o 22.23% 75.00% 100% Calculate Proft/(Loss) for each year ‘Year Ey iedContract Price (Fixed) 15 15 as Estimated Total Cost x 10 10 Estimated Total Gross Profit 3 1 1 ‘% completed 33.33% 75.00% 10.00% Cumulative Gross Profit 1 0.75 a Less Profit recognised previously ° 1 0.75 Profit/{Loss) for this year 1 0.25 0.25 Calculate Revenue for each year ee ee ao Profit 0.25 0.25 Cost 4 65 35. 14 Revenue 5 6.25 275 15 JEL. Record Project Costs Dr Construction in Progress (CIP) Cr Cash/Payables 4 65 35 Record actual cost of materials, labour and overhead used in the project JE2. Bill/Charge customer aa Dr A/cs Receivable crap 5 5 5 Invoice customer according to agreed billing schedule JE3. Collect from customer Dr Cash Cr Afes Recsivable 5 5 5 JEA. Record project profit Drip 1 = 0.25 Dr Project Exoenses 4 65 35. Cr Project Revenue 5 625 3.75 crap 0.25 — Record annuol profit and revenue