Question

Mercure Corporation enters into a contract with Pluton Ltd. to provide a system that manages Pluton’s portfolio of clients for 5 years. Mercure will not transfer the system to Pluton, but it will provide the system and the services included in the contract while it is still valid. The contract is renewable for subsequent one-year periods. Mercure incurred the following costs to obtain the contract:

1. $2,000 bonus paid to the accounting department for preparing the proposal at very short notice.
2. $8,000 legal fees paid externally
3. $12,000 accommodation costs incurred to deliver the proposal.
4. $10,000 commission for the sales representatives.

After a month testing, Pluton decided to sign the contract.

Required:

1. Your manager wants advice on how to account for these expenditures under Australian accounting standards in each of the relevant years. The manager is aware that you do not have the full set of facts and encourages you to provide multiple solutions to each question. For example, if x is the case, then the accounting treatment would be …. Based on the information provided, I think it is more likelythat z would apply. You must justify your treatment by referring to specific paragraphs in the standards. You must also state any assumptions you make.
2. Present the journal entries (if any) for each expenditure.

Answer 1

i)

Accounting Treatment as per AASP 15 - Recognition of Revenue under Contract with Customer
Paragraph No.	Provision of the Accounting Standard
91	An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.
92	The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).
99	An asset recognised in accordance with paragraph 91 or 95 shall be amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract (as described in paragraph 95(a)).

Calculation of amount to be recognised as Asses :

S.No	Particulars	Amount ( $ )
1	Bonus Paid to Accounting Department	2,000
2	Legal Fee Paid	8,000
3	Accommodation Costs	12,000
4	Sales Commission	10,000
	Total Expense to be recognised as Asset ( 1+2+3+4)	32,000

Calculation of amount to be Amortised every Year :

S.No	Particulars	Amount ( $ )
1	Amount Recognised as Asses	32,000
2	Period of the Contract ( In Years )	5
3	Amortisation per Year ( 1/2 )	6,400

ii) Journal Entries In the books of Mercure Corporation :

Date	Particulars		Debit ( $ )	Credit ( $ )
Year 1	Contract Asset A/C	Dr	32,000
	To Cash A/C			32,000
	Being Incremental Expenses Incurred on contract recognised as Asset
Year 1 - Year 5	Amortisation Expense A/C	Dr	6,400
	To Contract Asset A/C			6,400
	Being Contract Asset Amortised every year