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Problem Revenue Recognition

Keema Co recognizes revenue of $655,000 in 20X3 when control of the furniture transfers to the customer, with a receivable recorded for the same amount. In 20X4, interest income of $45,850 is recognized, increasing the receivable to $700,850. By 20X5, further interest income of approximately $49,150 is recognized, bringing the receivable to $750,000, which is settled in cash upon payment.

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Usman Shaukat Khan
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13 views2 pages

Problem Revenue Recognition

Keema Co recognizes revenue of $655,000 in 20X3 when control of the furniture transfers to the customer, with a receivable recorded for the same amount. In 20X4, interest income of $45,850 is recognized, increasing the receivable to $700,850. By 20X5, further interest income of approximately $49,150 is recognized, bringing the receivable to $750,000, which is settled in cash upon payment.

Uploaded by

Usman Shaukat Khan
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Keema Co enters into a contract with a customer to supply furniture on 30 September

20X3. Control of the furniture transfers to the customer on that date. The price stated
in the contract is $750,000 and is due for payment on 30 September 20X5. Market rates
of interest available to this particular customer are 7%. Required: Explain how this
transaction should be accounted for in the financial statements of Keema Co for the
year ended 30 September 20X3 and 20X4.

Key Principles

 Revenue recognition (IFRS 15): Revenue is recognized when control of goods


transfers to the customer — here, 30 September 20X3.

 Significant financing component: Since payment is deferred for two years (until 30
September 20X5), the contract price ($750,000) must be discounted to present
value using the market interest rate (7%).

 Subsequent years: The receivable is increased each year by recognizing interest


income using the e ective interest method.

Step 1: Calculate Present Value of Consideration

Payment due = $750,000 Discount rate = 7% Period = 2 years (from 30 Sep 20X3 to 30 Sep
20X5)
750,000 750,000
𝑃𝑉 = = ≈ 655,000
(1.07) 1.1449

So, the transaction price (revenue recognized in 20X3) is $655,000.

Year Ended 30 September 20X3

 Revenue recognized: $655,000 (when control transfers).

 Receivable recognized: $655,000.

 No cash received yet.

Journal entry (simplified):

Dr Trade Receivable 655,000

Cr Revenue 655,000

Year Ended 30 September 20X4

 The receivable accrues interest at 7% (e ective interest method).


 Interest income = $655,000 × 7% = $45,850.

 Closing receivable balance = $655,000 + $45,850 = $700,850.

Journal entry:

Dr Trade Receivable 45,850

Cr Finance Income 45,850

Ended 30 September 20X5 (for completeness)

 Another year of interest accrual: $700,850 × 7% ≈ $49,150.

 Closing receivable = $750,000 (matches cash due).

 On payment date, cash received $750,000, receivable cleared.

Summary

 20X3: Recognize revenue at present value ($655,000).

 20X4: Recognize interest income ($45,850), receivable grows to $700,850.

 20X5: Recognize further interest income ($49,150), receivable equals $750,000,


settled in cash.

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