Question

E13.12 Apply definition and recognition criteria for revenues. LO7

The Conceptual Framework defines revenues and outlines a number of criteria for their recognition. Surfin’ Magazines Ltd identifies the following independent transactions and events:

(a) Received $24 000 in subscriptions for magazines to be delivered once per month for the next 12 months.

(b) Received dividends from IAG for shares owned by the business.

(c) Paid interest on a loan to purchase a delivery vehicle.

(d) Received a discount for early payment of a supplier’s invoice.

(e) Delivered magazines for the month for customers who had paid in advance.

(f) Delivered magazines and invoices to customers who had not prepaid their

subscriptions.

Required

For each of the items listed above, explain whether you would recognise it as revenue in the statement of profit or loss. Refer to the definition and recognition criteria outlined in the Conceptual Framework to support your answer.

Answer 1

(a) Received $24 000 in subscriptions for magazines to be delivered once per month for the next 12 months.

This is not a revenue ,so will not be part of the P& L statement---whose recognition occurs along with the recognition of either increase in any asset or decrease in any liabilities--whereas,

This is a liability to be recognised in the balance sheet ,denoting a probable outflow of resources from the organisation as a settlement of the present obligation, whose amount is measurable reliably.

(b) Received dividends from IAG for shares owned by the business.

This item will be recognised as revenue in the statement of profit or loss---as it results in increase in assets (Cash).

(c) Paid interest on a loan to purchase a delivery vehicle.

This expense is recognised in P&L statement, as it results in decrease in assets (cash)

(d) Received a discount for early payment of a supplier’s invoice.

This is an income/revenue , recognised in P&L as it decreases liabilities (accounts payable)

(e) Delivered magazines for the month for customers who had paid in advance.

This is an income/revenue , recognised in P&L as it decreases liabilities (Unearned subscriptions)

(f) Delivered magazines and invoices to customers who had not prepaid their

subscriptions.

This is also an income/revenue , recognised in P&L as it increases assets (Accounts receivables)