Question

Gym Equipment Manufacturers Ltd (GEM) manufactures and sells gym equipment. It also installs the gym equipment for their customers.

On 1 January 2020, Keeping Fit Gym in Auckland signed a contract to purchase a piece of personalised gym equipment from GEM Ltd. The purchase price in the signed contract is $39,000. GEM Ltd also offers free installation service of the equipment to Keeping Fit.

The selling price of the same type of gym equipment, excluding the free installation, is $36,450. The installation of the equipment can also be done by registered manufacturers at $4,050.

On 10 January 2020, Keeping Fit paid the full amount, and on the same day, the equipment was delivered. The installation of the equipment was performed on the 20 January 2020.

Required:

(a)   Advise GEM Ltd on how to recognise the revenues in accordance with the 5-step model in NZ IFRS 15. (You are required to explain each step in the model with calculations).

(b)   Prepare relevant journal entries to recognise revenue for the above sale in terms of the 5-step model in GEM Ltd’s books.

Answer 1

As per IFRS 15, In contracts with customers, an entity should recognize revenue in a way that depicts the amount and timing of consideration received for transferring goods or services. To achieve this, an entity should apply the five-step approach outlined in the new revenue standard:

• Step 1: Identify the contract with a customer

Here contract is identified on 1 January 2020, when Gym Equipment Manufacturers Ltd (GEM) manufactures signed a contract to sell a piece of personalised gym equipment to Keeping Fit Gym.

• Step 2: Identify the performance obligations in the contract

There are two performance obligation in this contract. One is sale of piece of personalised gym equipment and other is providing installation services.

• Step 3: Determine the transaction price

Here the transaction price for the performance obligation is set in contract i.e  $39,000.

• Step 4: Allocate the transaction price to the performance obligations in the contract

1st Performance Obligation i.e sale of piece of personalised gym equipment= $36,450

2nd Performance Obligation i.e.providing installation services=$2550

• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Recognise the revenue in the books of account on 10th January 2020 for sale of equipment and on 20th January 2020 for installation services.

b) Relevant Journal Entries

	Account Receivable A/c	39000
	To Deferred Revenue-1st Performance Obligation		36450
	To Deferred Revenue-2nd Performance Obligation		2550
10th January	Deferred Revenue-1st Performance Obligation	36450
	To Revenue		36450
20th January	Deferred Revenue-2nd Performance Obligation	2550
	To Revenue		2550