Question

In: Accounting

a) A telecommunications company enters into a contract with a customer. Under the contract, the company...

a) A telecommunications company enters into a contract with a customer. Under the contract, the company promises to provide to the customer 4 GB data, 300 minutes of talk time, and 500 texts for $36.

Required:

Briefly explain how the telecommunications company should account for the contract under NZ IFRS 15. You need to refer to the relevant requirements but not to any specific paragraph of NZ IFRS 15.

b) A company sells mobile phone sets for $99 each. The company’s cost of each phone set is $70. The phone set became very popular with its customers. Near

the end of the financial year, 5000 customers purchased the phone set from the company. The company allows its customers to return the phone set within 14

days if they have not unpacked the set. The return period has not expired for any phone set sold by the end of the year. The company expects, based on its

past experience, that 1% of its customers will return the phone set.

Required:

i) Prepare the journal entries in the books of the company to record the transaction.

ii) Explain why the transaction is recorded in this manner using NZ IFRS 15 requirements.

Solutions

Expert Solution

Step 1:

Whenever a Tele-communication company is entering into a contract with the customer, it has to follow IFRS 15 and recognize the revenue for consideration which is expected by the entity for the exchange of a good or a service.

The important principle of the IFRS 15 includes a 5 step model :

  1. Identify the contract.
  2. Identify the obligations of performance.
  3. Calculate the transaction price(TP)
  4. Allocate the TP to the performance obligations of step 2.
  5. Finally recognize the revenue.

The final step is recognized in two ways i.e., over time or point in time based on the below mentioned criteria:

  1. The customer is receiving and consuming the benefits simultaneously.
  2. The performance is creating an asset.
  3. The performance is not creating an asset and it has to pay for performance completed up to date.

If any one of the above criteria is met it is to be recognized overtime, else it is point in time

Analysis:

  1. The contract is formed once the recharge is done.
  2. The three performance obligations are 4GB data,300 minutes talk time and 500 text messages for $36.
  3. The TP is $36 .
  4. Allocate the TP to the performance obligation in the ratio of fair value or standalone selling price.
  5. Finally the customer receives the three benefits simultaneously

Step 2:

i) Journal entry

Sales a/c.... Dr $495,000

To Cash a/c.......... Cr $495,000 (4950 x $99)

To return provision .........Cr $4,950

(Being phone sets purchased and returned)

Phone set purchased by customer 5,0000

Returned phone set of 1%

=5,000 -50 (5,000 x 1%)

=4,950

Step 3

ii)

An entity can recognize revenue when performance obligations have been settled, a performance obligation has been settled when the customer has received all the benefits associated with the performance obligation and is able to use and enjoy the asset to his or her own discretion.in this transaction, the company has an obligation of giving the price of return product price so the company obligation of it is not completed.


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