Question

Part 1: Work the following requirements from P5-13 on page 288 from your book. Part 1 Part 2a Part 2b Part 3a (revenue for the contract from 2018 and 2019) Part 3b (gross profit for the contract from 2018 and 2019) Part 2: Baker, a consulting firm, enters into a contract to help a small family owned business design a marketing strategy to compete with other companies in the region.. The contract spans eight months. Baker’s client promises to pay $93,000 at the beginning of each month. At the end of the contract, Baker either will give their client a refund of $31,000 or will be entitled to an additional $31,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Baker estimates an 80% chance that it will earn the $31,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the end of the contract, Baker receives the additional consideration of $31,000. Required: 1. Prepare the journal entry to record revenue for each of the first four months of the contract. 2. Prepare the journal entry that Baker would record after eight months to record the receipt of the $31,000 bonus.

Answer 1

Backer has an 8 month contract with his client to provide service in respect to increase client business turnover upto at certain agreed level. For this service backer will receive monthly payment of $93000 at each month with condition that at end of the contract either backer will receive a bonus of $31000( if target achived) or will pay back a penalty amount of $31000 to client for not achiving the target sale.

Requirement 1:

IFRS 15 Revenue from Contract with customer: This IFRS suggest that entity must fallow 5 step model for revenue recognisition from contract with customer:

1. Identify Contract with customer
2. Then Identify performance obligation to be fullfill in contract
3. Determine the transection price, The price at which contract with customer initially made and this price will free from all other future discount or increament.
4. Allocate transfer price to performance obligation, the revenue will receive from customer against the performance oblication.
5. Recognise the revenue when(or as) an entity satisfy a performance obligation.

Now Lets analysis the problem:

The contract is covered under one accounting cycle so we will recognise the revenue on Cash basis instead of accrual basis, i.e. as and when the payment receive from the client recognise as revenue. However before recognising the receipt as a revenue we must ensure that backer has taken or started such activities which ensure tha they will able to acheive the performance obligations till the expiary of contract period.

So on beginning of every month,when we will receive $93000 then recognise in books as 'revenue from service'. This entry will be done at beginning of every month till the 8 month end on receipt of payment from client.

Further we are required to make provision in respect of contigency that may arises if target are not achived at end of 8 month. It is an Accounting Convention that we should make provision for all probable lossess & expenses but not record future gains & incomes".

So at beignning of first month we should make provision for contigency (as only 80% certainity not 100% that target will achived). However this provision should be made at present value of $31000 but in absence of present value factor, we will provision for contigency by $31000.

SNO.	PARTICULAR	DEBIT	CREDIT
1	Customer account Dr	$93000
	To Revenue from services		$93000
	(Being Revenue recognise towards contract no: xxxx)
2	BANK/CASH Dr...	$93000
	To Customer Account		$93000
	(being Payment Receive from customer)
3	Provision for Contigency	$31000
	To Contigency from service contract(No: xxxx)		$31000
	(being provision made for future expected contigency)

Requirement 2:

After 8 month as the backer receive the bonus amount then it will receive as income and further the provision we made earlier at beignning of first month, not required now, so it will be reversed.

S.No	Particulars	Debit	Credit
1.	Customer A/c Dr	$ 31000
	To Bonus from Contract (no; xxxxx)		$ 31000
	{Being bonus recognised in books}
2	Contigency from Contract(no: xxxx)	$ 31000
	TO provision for contigency		$ 31000
	(being provision for contigency made now reversed)
3	Bank/Cash	$ 31000
	To Customer A/c		$31000
	(being Payment received towards bonus Amount)

EXTRACT OF INCOME STATEMENT(at close of accounting period)

Contract from revenue: ($93000 x 8 month) $ 7,44000 /-

Add: Bonus from contract service   $ 31000 /- $ 7,75000/-

THANKS.