Merlton Ltd Vehicle Sale Revenue Recognition
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akibhilaly255Merlton Ltd Vehicle Sale Revenue Recognition
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Powered by AIUjenzi Ltd uses the value of work certified to determine percentage completion. For a contract worth €500,000, with work certified at €325,000, the percentage completion is 65%. Thus, 65% of the contract value, i.e., €325,000, should be recognized as revenue. On the statement of financial position, the balance of €75,000 (certified work less invoiced amount of €270,000) represents unbilled revenue. Invoices of €270,000 demonstrate revenue realized, with costs of €300,000 recognized as expenses. The statement of profit or loss reflects the revenue, cost, and resultant profit margin calculated.
Mayunga Ltd should recognize the revenue from the contract in accordance with the 5-step model of IFRS 15, which involves identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price to performance obligations, and recognizing revenue as the performance obligations are satisfied. As of December 31, 2018, Mayunga had supplied computers but had not installed them, thus recognizing revenue only for the delivered goods. The transaction price of TZS 200,000,000 should be allocated to the computers, installation service, and maintenance using their stand-alone selling prices. Computers should be recognized at TZS 150,000,000, installation at TZS 20,000,000, and the service contract at TZS 50,000,000 over two years. For journal entries in 2018, recognize the revenue for the supplied computers and the liability for outstanding obligations. In 2019, recognize the revenue related to installation upon completion.
For a construction project, the company should apply the percentage completion method. Given the total contract price of €1,500,000, with costs incurred of €400,000 and estimated completion cost of €600,000, the percentage completion is 40%. Revenue should be recognized proportionate to this percentage, with €600,000 reflected in revenue (40% of €1,500,000). To date invoicing was €500,000, hence there’s a revenue in excess of billings of €100,000. Extracts from the Profit or Loss statement would show the revenue and recognized profit accordingly, while Work in Progress would be adjusted for this amount in the financial position.
Shipton Ltd needs to account for the deferred payment by discounting the future receivable amount back to its present value using its cost of capital, which is 7%. At the transaction date, the present value of the €40,000 (remainder to be paid in a year) should be recorded as a receivable along with the initial €10,000 cash paid. This requires an adjustment for the imputed interest. Entry on September 30, 2017: Debit Cash €10,000, Debit Receivable and Credit Revenue with the present value of the remaining €40,000 discounted at 7%. Recognition of interest income will be added over the 12 months until payment.
Shipton Ltd should show the initially recorded receivable at its present value at the end of the period as financial income derived from the 7% interest. By September 30, 2018, Shipton would recognize interest income for the difference between the discounted amount initially recorded and the €40,000 ultimately received. The adjustment will be made as: Debit Receivable, Credit Interest Income, to reflect accrued revenue tied to the cost of capital over the year. The Cash Receivable account would then reflect the final payment being realized.
For Merlton Ltd, the transaction involves receiving a non-refundable deposit in 2017, thus recognizing an initial cash receipt and liability. Entry for 2017: Debit Cash €6,000 (20% of €30,000); Credit Contract Liability €6,000. Upon delivery in January 2018, recognize the remainder of the revenue and discharge liability: Debit Cash €24,000; Debit Contract Liability €6,000; Credit Revenue €30,000 upon the fulfillment of obligations once the vehicle is delivered. The recognition of revenue is in 2018, in accordance with completed delivery performance obligations.