Question

1. Morisot plc supplies mobile phones and network services to retail customers. On 1^st July 2019 it launched its latest model of handset, the Artwork 5. As a promotional offer, customers can sign a three-year contract which provides a free handset at the beginning of the period. The customer then pays £25 per month for unlimited calls, texts and data.

The handsets can be purchased separately for £648 and the monthly plan without the handset is available for £18 per month.

Gurpreet signed a contract on 1^st January 2020.

Requirement

Calculate how much revenue Morisot plc should recognise with respect to Gurpreet’s contract in the year ending 30^th June 2020.   (5 marks)

2. Morisot plc owns a piece of freehold land that it had been using for parking vehicles. However, in order to fund a new strategic development, the directors decided on 18^th June to dispose of the land as it was the only way funds could be raised. The land is carried on the Statement of financial position at the original cost of £60,000 at 30^th June 2020. The directors have appointed an agent to market the property on the company’s behalf. This agent has advised the fair value of the land is £85,000 and is advertising the land at this price. The agent expects in the current market that the sale will be completed within a month. The selling costs are expected to amount to 2% of selling price.

Requirement

Explain, with the aid of calculations, how the transaction should be accounted for in the year ending 30^th June 2020

Answer 1

A

OFFER TYPE 1

FREE HANSET IF CONTRACT SIGN FOR 3 YEARS

MONTHY INSTALMENT = 25

TOTAL REVENUE = 25 X 36=900

OFFER TYPE 2

HANDSET PRICE =648

MONTHLY INSTALMENT=18

SO FOR 3 YEARS ,TOTAL INSTALMENT =18 X36=648

SO TOTAL AMOUNT UNDER THIS OFFER = 648+648=1296

TOTAL SHARE OF MONTHY PLAN FOR 3 YEARS UNDER THE CONTRACT

=(648/1296)X900=450 THEREFORE 450 FOR HANDSET

THEREFORE MONTHY SHARE WILL BE

450/36=12.5

SO

revenue Morisot plc should recognise with respect to Gurpreet’s contract in the year ending 30^th June 2020.

= 12.5X6=75 UNDER MONTHLY PLAN OVER 6 MONTHS AND 450 OF HANDSET AT THE DATE OF CONTRACT SIGHINING. THERE FOR

TOTAL AMOUNT RECOGNISE =75+450=525

B

CURRENT VALUE OF ;LAND IS 60000

AFTER REVALUATION IT WILL BECAME 85000

THEREFORE THERE IS AN UPWARD REVALUATION OF 25000

IT WILL CREDITED TO REVALUATIO N SURPLUS .

AS OF NOW THERE IS NO NEWS OF SALE OF LAND IF THE SALE WHERE COMPLETED BEFORE THE YEAR END IT WILL BE RECORDED AS FOLLOWS

THE REVALUATION SURPLUS WILL BE CREDITED TO RETAINED EARNINGS

AND A SELLING EXPENSE OF 1700 WILL BE DEBITED