Question

Adam Ltd. sells product at a price of $1,200,000, including a one-year warranty guarantee that the product was free of defects. The cost of the product is $960,000 and the estimated cost to provide warranty service is $10,000, based on Adam Ltd. past practice on the warranty service. In addition, Adam Ltd. sold extended warranties related to the products for an extra charge of $16,000.

Required:

Explain how should the revenue be recognized?

Answer 1

As per IFRS 15 - Revenue from contract with customers,

Revenue has to be recognised when performance obligation is satisfied.

We can see there are two performance obligations in the above problem.

One is sale of the product and other is provision of warranty services..

At the time of sale, one performance obligation is satisfied.

Revenue to be recognised at that time = 1,200,000*960,000/970,000 = $ 1,187,629

At the time of providing service of warranty or at the expiry of the warranty,

Revenue to be recognised = 1,200,000 - 1,187,629 = $ 12,371