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On 1 July 20X5, AX, a construction company, entered into a two-year contract to build a property for a customer on the customer's land. The contract specifies that control of the property is transferred to the customer as it is constructed. The position of the contract at 30 June 20X6 is as follows:
Contract price
At 30 June 20X6
Costs to date
Estimated costs to completion
Progress payments invoiced and received
Work certified
$900,000
$600,000
$200,000
$500,000
$540,000
AX wishes to use an input method to assess progress towards complete satisfaction of its performance obligation.
How much revenue should AX recognise in relation to this contract for the year ended 30 June 20X6?
On 1 July 20X5, AX, a construction company, entered into a two-year contract to build a property for a customer on the customer's land. The contract specifies that control of the property is transferred to the customer as it is constructed. The position of the contract at 30 June 20X6 is as follows:
Contract price
At 30 June 20X6
Costs to date
Estimated costs to completion
Progress payments invoiced and received
Work certified
$900,000
$600,000
$200,000
$500,000
$540,000
AX wishes to use an input method to assess progress towards complete satisfaction of its performance obligation.
How much revenue should AX recognise in relation to this contract for the year ended 30 June 20X6?
- $675,000
- $900,000
- $600,000 (correct)
- $540,000
On 1 December 20X5, FC received a non-refundable upfront fee of $80,000 for services. The services will be provided from February to March 20X6.
What is the correct accounting treatment for this fee in the year ended 31 December 20X5?
On 1 December 20X5, FC received a non-refundable upfront fee of $80,000 for services. The services will be provided from February to March 20X6.
What is the correct accounting treatment for this fee in the year ended 31 December 20X5?
- Recognise a contract asset of $80,000
- Recognise revenue of $20,000 and a contract liability of $60,000
- Recognise a contract liability of $80,000 (correct)
- Recognise revenue of $80,000
On 31 December 20X2, SL sold goods to a customer for $100,000 on a sale or return basis. Historically, 40% of goods sold to this customer have been returned.
How much revenue should SL recognise in relation to this sale for the year ended 31 December 20X2?
On 31 December 20X2, SL sold goods to a customer for $100,000 on a sale or return basis. Historically, 40% of goods sold to this customer have been returned.
How much revenue should SL recognise in relation to this sale for the year ended 31 December 20X2?
- $40,000
- $60,000 (correct)
- $0
- $100,000
Flashcards
How is revenue recognized in a long-term contract?
How is revenue recognized in a long-term contract?
When a contract is considered fulfilled, the revenue is recognized. In this instance, the revenue is calculated based on the proportion of work completed. The company has completed 600,000 / (600,000 + 200,000) = 75% of the contract.
What method does this problem use to calculate revenue?
What method does this problem use to calculate revenue?
The percentage of completion method is used to calculate revenue. It's based on the proportion of the project completed. The company has invoiced and received $500,000 for the contract, which represents a percentage of the total contract price. This is a hint that the percentage of completion approach is relevant.
How much Revenue should AX recognize for the year ended June 30, 20X6?
How much Revenue should AX recognize for the year ended June 30, 20X6?
The company has completed $600,000 / ($600,000 + $200,000) = 75% of the project. The revenue recognized for the year is $900,000 (Contract price) * 75% (Percentage of completion) = $675,000.
When is revenue recognized for a non-refundable upfront fee?
When is revenue recognized for a non-refundable upfront fee?
While the upfront fee was received in 20X5, the revenue isn't recognized until the service is actually performed. In the case of a non-refundable upfront fee, we're assuming the service is fully performed in the following year. The company keeps the money in a contract liability account to recognize the revenue when it's actually earned.
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What is the correct accounting treatment for the upfront fee for the year ended Dec 31, 20X5?
What is the correct accounting treatment for the upfront fee for the year ended Dec 31, 20X5?
The revenue is not recognized because the services are performed in the subsequent year. The non-refundable upfront fee is accounted for as a contract liability because the company will provide services for this amount in the upcoming year. We can think of this as a delayed revenue recognition or a liability for the company to perform agreed-upon services in the future.
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When is revenue recognized for goods sold on a sale-or-return basis?
When is revenue recognized for goods sold on a sale-or-return basis?
Goods sold on a sale-or-return basis are treated as sales only when the buyer accepts the goods. In this scenario, the revenue is not recognized until the return period has expired or the buyer has accepted the goods. As there is a 40% return rate, we recognize 60% of the sales price as revenue. The company can estimate the revenue based on historical return rates.
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How much revenue should SL recognize for the year ended Dec. 31, 20X2?
How much revenue should SL recognize for the year ended Dec. 31, 20X2?
The revenue is recognized when the buyer accepts the goods. It's not recognized initially as the goods can be returned. However, the company estimates that 60% of the goods will be kept, which is the amount that will be recognized in the sales revenue.
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Contract Recognition for AX
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Construction company AX entered a two-year contract on July 1, 20X5, to build a property.
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Control of the property transfers to the customer as construction progresses.
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At June 30, 20X6, the contract details are:
- Contract price: $900,000
- Costs to date: $600,000
- Estimated costs to completion: $200,000
- Progress payments (invoiced and received): $500,000
- Work certified: $540,000
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AX uses an input method for progress assessment.
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Revenue recognition for the year ended June 30, 20X6: $540,000
Accounting Treatment for FC's Upfront Fee
- On December 1, 20X5, FC received a $80,000 non-refundable upfront fee for services.
- The services are provided from February to March 20X6.
- The correct accounting treatment for the year ended December 31, 20X5, is to recognize a contract asset of $80,000.
Revenue Recognition for SL's Sale
- On December 31, 20X2, SL sold goods to a customer for $100,000, on a sale or return basis.
- Historically, 40% of goods sold to this customer are returned.
- Revenue recognized for the year ended December 31, 20X2: $60,000.
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