77001355725540005773420Munich IT SolutionsProfessor: Yahya MAREI
77001355725540005773420Munich IT SolutionsProfessor: Yahya MAREI
Omnia Al-sharif
7900035000Munich IT SolutionsProfessor: Yahya MAREI
Omnia Al-sharif
right23002457452022
760098002022
Issue 1 : Revenue Recognition for the Project x
A contract for $80 million has been made by MITS with a client. Engineering, design, and installation of solar panels will be included in the contract, as well as a three-year service contract that will begin after the solar panels are installed. The project was 25% complete as of December 31, 2020, with a total invoice amount of $11.5 million.
Handbook Analysis:
According to IFRS 15, a business must recognize revenue from contracts with customers using a five-step process:
Step 1: Determine the customer's contract. The customer has hired MITS to engineer, design, deliver, and install solar panels. MITS is also obligated to supply services for a three-year period under the contract.
Step 2: Identify the contract's different performance duties. The following performance duties are included in MITS' contract with the customer:
Engineer and design solar panels
Deliver solar panels
Install solar panels Provide three-year servicing after installation
Step 3: Calculate the transaction price MITS has agreed to deliver the aforesaid services for $80 million in total.
Allocation
Engineering and design $8,000,000
Solar panels $14,000,000
Installation $49,000,000
Three-year service contract, commencing once installation is complete $9,000,000
Total $80,000,000
Step 4: Assign the contract price to the contract's performance obligations.
The total transaction price must be allocated to the performance requirements by MITS. This distribution was made in accordance with the contract.
Step 5: Recognize revenue
The income will be recognized by MITS once all of the contract's performance obligations have been fulfilled.
Recommendation:
MITS assigns transaction prices to performance obligations under the contract, but this allocation must be based on the individual prices of these performance obligations. The calculation is as follows:
Stand-alone selling prices $ of total price Allocated price
Engineering and design $10,000,000 12.20% $9,756,098
Solar panels $15,000,000 18.29% $14,634,146
Installation $45,000,000 54.88% $43,902,439
Three-year service contract $12,000,000 14.63% $11,707,317
Total $82,000,000 100.00% $80,000,000
Three-year service contracts are treated differently than other performance obligations. Other performance requirements are fully integrated.
The total transaction price for engineering and design, solar panels, and installation is $ 68,292,683.
MITS may use the completion rate method to recognize revenue associated with these performance obligations.
Revenue for 2020= 0.25 * $ 68,292,683 = $ 17,073,171
Expenses associated with this project, as well as income, should be allocated on a unit price basis.
Stand-alone selling prices $ of the total price Allocated costs
Engineering and design $10,000,000 12.20% $7,219,512
Solar panels $15,000,000 18.29% $10,829,268
Installation $45,000,000 54.88% $32,487,805
Three-year service contract $12,000,000 14.63% $8,663,415
Total $82,000,000 100.00% $59,200,000
Engineering and design, solar panels, and installation costs total $50,536,585.
In 2020, the costs will be $14,800,000.
Therefore, the profit will be as follows:
Sales
Project A $17,073,171
Other small contracts $8,290,000
Total Sales $25,363,171
Cost of sales
Project A $14,800,000
Other small contracts $4,780,000
Total Cost of Sales $19,580,000
Gross profit $5,783,171
Issue 2: Warranty
MITS provides a 5-year warranty program as part of the sales contract, under which MITS replaces any solar panels that do not meet product standards.
Handbook Analysis:
According to IFRS 5, the warranty is reported as a separate performance obligation. The transaction price will be assigned separately.
Company shall recognize the Estimated Guarantee Cost as a Guarantee Obligation. When the warranty period expires, the proportional amount of the warranty obligation will be recognized as an expense.
Recommendation:
MITS should record the warranty obligations in the amount of $1,312,000 at the outset. Make the following entry in your journal:
$1,312,000 DR Warranty Expense CR Warranty Obligations $1,312,000
MITS should make the following journal entry as the warranty costs are incurred:
$225,000 CR
DR Warranty Obligations $225,000 in cash
The Queen and Prince Ltd
right5749290January 1, 2022
Yahya MareiStudent Names: Omnia Al-Sharif 100497189, Ali Badri 136466166, Faisal Baothman 1420981851000000January 1, 2022
Yahya MareiStudent Names: Omnia Al-Sharif 100497189, Ali Badri 136466166, Faisal Baothman 142098185
Refundable Deposits
Issue:
This year, six months before the wedding date, QP began collecting completely refundable deposits. The deposits secure the date and will be credited to the rental cost when the wedding takes place. Deposits are reported as revenue when they are received. As of December 31, 2020, the wedding deposits for 2021 were $25,000 each.
Handbook and Analysis:
As described in paragraph ASPE 3400, revenue is recognizedwhen the requirements for performance are satisfied, provided that at the time of performance, the ultimate collection is reasonably assured.
Recommendation:
Based on the analysis above, QP cant recognize the revenue of $25,000 because the risk of the wedding event has not happened by that time therefore it doesnt fulfill the ASPE 3400 standard. Consequently, QP should record $25,000 as deferred revenue. Once the wedding event has occurred then they can recognize the deposit payment of $25,000 as revenue as by that time the event would have occurred.
Advertising in Kiras Magazine Exchange Service
Issue:
Kira, Sasha's best friend, runs a local newspaper. In exchange for the Queen's use in 2020, Sasha promised to allow Kira's magazine to advertise in The Queen. In the spring of 2020, ads would have cost $4,850.
In September, the Queen was used twice, and the daily rate would have been $1,500. The financial statements did not reflect these transactions.
Handbook and Analysis:
Non-Monetary Transactions have their own section in ASPE: ASPE 3831.
Under ASPE, there are three essential procedures to recognising non-monetary transactions.
Determine whether the transaction qualifies as a Non-Monetary transaction. Check to see if the transaction has any commercial value. Finally, decide which estimate is more reliable to utilise for the transaction.
ASPE 3831.05 provides guidance as to the definition of Non-Monetary transaction.
A Non-monetary transactions can be one of two things:
(i) Non-monetary exchanges: "which are exchanges of non-monetary assets, liabilities or services for other non-monetary assets, liabilities or services with little or no monetary consideration involved;" OR
(ii) Non-monetary non-reciprocal transfers: "which are transfers of non-monetary assets, liabilities or services without consideration." For example, a donation would be considered a Non-monetary, non-reciprocal transfer. (CPA Solved, 2019)
Because Sashas decision to exchange the use of The Queen for advertisement in Kiras magazine and while there is no monetary value in this exchange
therefore, it meets ASPE 3831 for non-monetary transaction
Recommendation:
QP should record the below transaction to remove the non-monetary transaction.
Advertising expense entry of $1500 debit
Sales $1500 credit
Lawsuit Contingency
Issue:
During a wedding at The Queen in early 2020, a wedding guest engaged in risky behavior, prompting other guests to file a lawsuit. The Queen's or any of the QP's estates were not harmed in any way. QP was identified as one of the defendants in the complaint because the incident occurred at a QP event. QP was forced to pay $800,000, which it did without consulting its lawyers on November 30, 2020. QP's lawyer objected to Sasha's settlement without consulting him, and he filed an appeal right away. The lawyer believes QP will be refunded the $800,000 judgment plus interest within two to three years, according to the letter dated January 10, 2020.
Handbook and Analysis:
As per ASPE 3290 Contingencies, a contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. (ASPE 3290.05)
A lawyer can release the probability of gain in the notes to the year-end financial statements if they are certain that QP will be refunded $800,000 with interest.
Recommendation:
As the lawyer mentioned that it may take up to 3 years to receive the money, there is no entry required now, and once it is received it will be adjusted to the account receivable. However
QP should disclose the possible contingent gain of $800,00 in the financial statement.
Fixed-price contract
Issue:
Sasha signed a five-year fixed-price deal for wine in January 2018 to shield QP against market volatility. During each of Sasha's first three years on the job, the price of wine continued to rise. However, by the end of 2020, the price of wine had plummeted substantially. Sasha predicts that the price per case will likely stay the same or even fall over the next two years. On December 31, QP was entitled to cancel the contract, with Sasha's cancellation clause triggering a $60,000 payment. The payment was made in January 2021.
Handbook and Analysis:
As per ASPE 1000.41 the accrual concept for revenue and expenses: They are being recognized when they are occurred not when the cash is exchanged.
Recommendation:
Adjustment entry to debit $60000 as cancelation expense and credit the accounts payable of $60000 on Dec 31, 2020.
