Question

Dragon’s Fire Pty Ltd enters into three contracts in the same week with Red Hot Equipment...

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.

Homework Answers

Answer #1
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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