Question

Part A

Two days before the financial year end of 31 December 2019, a major customer requested WT Limited to defer delivering 100,000 units of Product A until 2 January 2020 because the customer’s warehouse had already been closed for the New Year holidays. The customer requested WT Limited to issue the invoice for the goods at the current year end though the goods were delivered on 2 January 2020 and agreed to settle the amount within 30 days after the invoice date under the usual credit terms granted to the customer. Since this is a major customer with a good track record, WT Limited entertained the request and issued the invoice to the customer on 31 December 2019. The goods were delivered to the customer on 2 January 2020.

Required: Determine whether the above transaction of WT Limited should be accounted for in the year 2019 in term of revenue recognition.

Part B

Pacific Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2019 and completed in 2020. Cost and other data are presented below:

2019 2020

Costs incurred during the year $450,000 $1,100,000

Estimated costs to complete 1,050,000 0

Billings during the year 400,000 1,400,000

Cash collections during the year 300,000 1,500,000

Assume that Pacific recognizes revenue on this contract over time according to percentage of completion based on cost.

Required:

(a) According to the main theme of IFRS 15, explain the differences between contract assets, and contract liabilities.

(b) Calculate the following amounts in each of the 2019 and 2020.

(i) Total estimated profit of the contract (ii) Gross profit to be recognized for the year

(c) Prepare all necessary journal entries for the year 2020 in relation to the following:

(i)To record contract costs (ii)To record progress billings (iii)To record cash collection (iv)To record revenue recognition

Answer 1

Answer to first question only (since both are unrelated) as per answering guidelines

Under GAAP / IFRS 15, Revenue is recognized when the Control of goods is passed which can be either over time or at a point in time.

In the extant case since the goods sold were still under the control of WT Limited on the last day of the year ended 2019 which means it had the ability to prevent others from directing the use of and obtaining the benefits from the asset, Hence the control was not passed on till the last day of the year ended 2019. Hence revenue should not be recognized in 2019.

The goods were delivered to the customer on 2 January 2020, hence the control passed on 2 January 2020, hence revenue should be recognized in 2010.