Question

In: Accounting

Question 5 During the year ending 30th April 2020, Borg plc entered into a contract to...

Question 5 During the year ending 30th April 2020, Borg plc entered into a contract to build a factory for a price of £1,000,000, plus a performance bonus of £100,000 if the factory was complete by 31st March 2021. The contract met the criteria for revenue to be recognised over time. Due to delays caused by poor weather the directors of Borg did not expect to complete the factory by 31st March 2021. Where relevant, Borg plc measures completion based on an independent valuer. The following information relates to the contract as at 30th April 2020: £ Costs incurred to date 600,000 Estimate of the costs to complete the contract 200,000 Value of work certified by independent expert 750,000 Amounts invoiced to date 665,000 Requirements IFRS 15 contains three criteria regarding when revenue should be recognised over time as opposed to at a point in time.

State any TWO of the three criteria.

Explain how the directors should treat the performance bonus with respect to revenue recognition.

Prepare the relevant Statement of profit or loss and Statement of financial position extracts in respect of the above contract for the year ended 30th April 2020.

Solutions

Expert Solution

1.) The two of the three criteria when revnenue should be recognized over a period of time as per IFRS 15 are given hereunder:-

Criteria 1:- The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity's performs.

Criteria 2:- The entities performance creates or enhances an asset (for example work in progress) that the customer controls as the asset is created or enhanced.

2.) There are 2 methods for estimating the amount of variable consideration under IFRS 115:-

a.) Expected value method-This method can be applied when the entity has large number of contracts with similar characteristics.

b.) Most likely outcome method-This method is used if the contract has only two possible outcomes, for example the entity can either achieve a performance bonus or not.

Hence most likely outcome method will be used to recognize revenue in respect of performance bonus. In the given case since the director's of Borg did not expect to complete the factory by 31st March 2021 due to delays caused by poor weather. Hence, amount of performance bonus should not be considered in revenue recognition in respect of this contract.

3.

Borg Plc
Statement of profit or loss (extracts) for the year ended April 30,2020
Particulars Amount
Revenue from contract 750000
Cost incurred for contract 600000
Profit from contract 150000
Borg Plc
Balance sheet (extracts) as at April 30,2020
Particulars Amount
Current Assets
Accounts receivable 665000
Unbilled revenue (750000-665000) 85000
Total current assets 750000

Workings:-

Cost incurred till date (A) 600000
Estimate of cost to complete (B) 200000
Total cost of the contract (A+B=C) 800000
Degree of completion (A/C*100=D) 75.00%
Contract value (E ) 1000000
Revenue to be recognized (E*D=F) 750000
Invoiced to customer (G) 665000
Unbilled revenue (F-G) 85000

Related Solutions

Superdry Plc Planning for the statutory audit for the year ended 30th April 2021 You are...
Superdry Plc Planning for the statutory audit for the year ended 30th April 2021 You are the audit manager in charge of planning the 2021 audit of Superdry Plc. At the time of writing the 2020 financial statements have not been published and the information relates to that which is currently available in the Permanent Audit File for Superdry Plc. It is anticipated that the financial statements for 2020 will have been finalised in June or July 2020 and additional...
At a coffee shop on the 30th of April 2019, Freddy, a licensed diamond dealer, entered...
At a coffee shop on the 30th of April 2019, Freddy, a licensed diamond dealer, entered into a contract with Sylvia for the purchase and sale of 10 twenty-one carat diamonds at a purchase price of N$ 25 000. It is agreed between the parties that Freddy will deliver the 10 diamonds to Sylvia on the 2nd of May 2019. When Freddy returned to his shop in order to package the diamonds he discovered that he had insufficient stock to...
On April 1, 2020, Larkspur Inc. entered into a cost plus fixed fee non-cancellable contract to...
On April 1, 2020, Larkspur Inc. entered into a cost plus fixed fee non-cancellable contract to construct an electric generator for Blue Spruce Corporation. At the contract date, Larkspur estimated that it would take two years to complete the project at a cost of $2,440,000. The fixed fee stipulated in the contract was $549,000. Larkspur appropriately accounts for this contract under the percentage-of-completion method. During 2020, Larkspur incurred costs of $976,000 related to this project. The estimated cost at December...
Question 2 The following are the financial statements for the year ended 30th June 2020. Sales...
Question 2 The following are the financial statements for the year ended 30th June 2020. Sales (credit) 500,000 Cost of goods sold (300,00) Gross profit 200,000 Loss on sale of plant 5,000 Depreciation – buildings 4,000 Depreciation – plant and equipment 8,000 Bad and doubtful debts 2,600 Other administrative and selling expenses 140,000 (159,600) Profit before tax 40,400 Tax expense (10,000) Profit after tax 30,400 Dividend – Ordinary share (20,750) Retained profits 9,650 Earth Ltd Balance Sheet as at 30...
Question2: elow are account balances of Nile’Stones Shop, for the period ending 30th June 2020: Accounts...
Question2: elow are account balances of Nile’Stones Shop, for the period ending 30th June 2020: Accounts Payable (creditors) $ 8,100 Accounts Receivable (debtors) 4,000 Cash 7,300 Land 15,300 Machinery 31,600 Merchandise Inventory 12,200 Long-term Debt 20,700 Accrued (utility) payable 2,200 Owner’s Capital 39,400 The following are transactions and additional information for Nile’Stones Shop for the month of June 2020 that have not been incorporated into those balances: 1. Collected cash $1,900 from credit customers. 2. Paid the creditors $2,600 of...
Sweet Construction Company began operations on January 1, 2020. During the year, Sweet Construction entered into...
Sweet Construction Company began operations on January 1, 2020. During the year, Sweet Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Sweet estimated that it would take 5 years to complete the facility at a total cost of $4,517,000. The total contract price for construction of the facility is $6,047,000. During the year, Sweet incurred $1,067,800 in construction costs related to the construction project. The estimated cost to complete the contract is...
5) During December of the current year, Exide company based in America, entered into the following...
5) During December of the current year, Exide company based in America, entered into the following transactions; Dec 10 Sold machinery to company located in Colombia for 6,500,000 pesos. On this date, the spot rate was 365 pesos per U.S. Dollar. Dec 12 Purchased Machine parts from a company domiciled in Japan. The contract was denominated in 600,000 Japan yen. The direct exchange spot rate on this date was $.0392. Required: A) Prepare journal entries to record the transactions above...
P11.7A (LO 4) On April 2, 2021, Pharma Company entered into a contract to supply medication...
P11.7A (LO 4) On April 2, 2021, Pharma Company entered into a contract to supply medication to Laxall Drug Stores, FOB shipping point, terms 2/30, n/45. The selling price of the medication is $40,000 and the medication cost Pharma Company $25,000. Pharma has a stated return policy that goods may be returned within 30 days. The medication was shipped on April 10, 2021. Pharma's management estimates returns using the expected value method and sales discounts are estimated using the most...
Question 6 Henman plc entered into a finance lease for a machine on 1st May 2019....
Question 6 Henman plc entered into a finance lease for a machine on 1st May 2019. The lease details are as follows: Length of lease 5 years Annual payments £3,500 payable in arrears Fair value £16,200 Deposit paid 1st May 2019 £1,457 Interest rate implicit in the lease 6% Useful life of the asset 6 years Requirements Prepare the relevant Statement of profit or loss extract in respect of the above lease for the year ended 30th April 2020. Prepare...
On 11 August 2020, Vanya Ho entered into a contract with Diego Toh to renovate her...
On 11 August 2020, Vanya Ho entered into a contract with Diego Toh to renovate her school, The Umbrella Learning Centre and to set up the internet system for the school’s online lessons starting in October. They agreed to the total sum of $100,000 with a 10% deposit of $10,000 to be paid on the signing of the contract. $20,0000 was to be paid upon the design being approved by Vanya Ho. The balance of $70,000 was to be paid...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT