Dragon’s Fire Pty Ltd enters into three contracts in the same week with Red Hot Equipment Pty Ltd who have agreed to pay the total of $726 000 (GST inclusive). Red Hot Equipment Pty Ltd pay the total in full on 7 August 2021. The details for the three contracts are as follows:
Date of Contract | Description | Contract Price (GST Exc) | Stand Alone Selling Price (GST Exc) |
1/1/2021 | Construction of Outdoor wood heaters. Completed by 31/07/2021 | $600,000 | $320,000 |
3/1/2021 | Renovation of existing wood heaters owned by the client. Completed by 15/08/2021 | $40,000 | $140,000 |
5/1/2021 | Construction of new model of wood heater to be used inside. Completed by 30/08/2021 | $40,000 | $200,000 |
NOTE: The stand-alone selling price - is the price at which an entity would sell a promised good or service separately to a customer.
Required:
Apply the five-step process for revenue recognition in regards to the contract with Red Hot Equipment Pty Ltd. Discuss how Dragon’s Fire shall recognise the revenue from the contract. Please list each of the five steps and show any calculations.
Steps | Particulars | Contract details |
1 | Identify the contract | Contract 1: Outdoor wood heaters |
Contract 2: Renovation of existing wood heaters | ||
Contract 3: New model of wood heater | ||
2 | Identify performance obligations | Completion of contracts |
3 | Determine transaction price |
Contract price is the transaction price, which is as follows: Contract 1: $ 600,000 Contract 2: $ 40,000 Contract 3: $ 40,000 |
4 | Allocate price to performance obligations |
Performance obligations and amounts are: Performance obligation 1: Outdoor wood heaters - $ 600,000 Performance obligation 2: Renovation - $40,000 Performance obligation 3: New model - $ 40,000 |
5 | Recognize the revenue | On
31/07/2021 - $ 600,000 On 15/08/2021 - $ 40,000 On 30/08/2021 - $ 40,000 |
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