Question

Terry Ltd. offers contract PC1 which is comprised of a free-standing video system for small studio use plus installation for a total price $9,600. On a standalone basis, the video system sells for $8,000 (cost $7,000), and Terry estimates that the fair value of the installation service (based on cost-plus estimation) is $2,000. Terry Ltd. signed 30 of PC1 contracts on July 15, 2018, and customers paid the contracts price in cash. The video was delivered and installed on August 30, 2018. Terry Ltd. uses perpetual inventory system to record inventory transactions.

Required:

Prepare journal entries for Terry Ltd. for PC1 in July and August 2018 with reference to HKFRS 15 “Revenue from Contracts with Customers”.

Journal entries for July 15, 2018:

Journal entries for August 30, 2018:

Answer 1

Allocation of transaction price

Standalone selling price of video system = $8000 *30 contracts = $240,000

Standalone price of installation services = $2000 *30 contracts = $60,000

Total of standalone prices = $240,000 + $60,000 = $300,000

Total consolidated price = $9600 * 30 contracts = $288,000

Contract price allocated to video system = $288,000 * $240,000 / $300,000

= $230,400

Contract price allocated to installation services = $288,000 * $60,000 / $300,000

= $57,600

Journal entries for Terry Ltd. for PC1 in July and August 2018 are as follows:

Date	Journal description	Debit ($)	Credit ($)
July 15	Cash	288,000
	To unearned revenue		288,000
	(Being cash received from the customers)
August 30	Unearned revenue	288,000
	To sales revenue		230,400
	To service revenue		57,600
	(Being revenue recorded on delivery of video system and installation services)