- 6 Marks
Question
a) IFRS 15: Revenue from Contracts with Customers specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers.
Mankranso Ltd, a hotel, had the following transactions during the year:
i) On 31 March 2019, Mankranso Ltd signed a contract to supply 50,000 units of food packs at an agreed price of GH¢10 per unit. On the same day, 30,000 units were delivered at that date, with the remainder delivered on 1 June 2019. It was agreed that the customer would have extended credit terms of 12 months from the date of delivery. Mankranso Ltd’s cost of capital is 10%.
(3 marks)
ii) During the year ended 31 March 2019, Mankranso Ltd received payment in advance for the supply of 2,000 hotel room-nights to customers at GH¢100 per room per night. Only 400 of these had been occupied by 31 March 2019. The amounts paid by the customers are non-refundable unless the company fails to provide the agreed accommodation.
(3 marks)
Required:
In each scenario above, calculate the amount of revenue to be recognised in the financial statements of Mankranso Ltd for the year ended 31 March 2019. Justify the correct accounting treatment for each transaction.
Answer
i) Revenue from the Sale of Food Packs (Deferred Payment):
- Step 1: Identify the contract: A contract exists as Mankranso Ltd agreed to deliver 50,000 food packs at a price of GH¢10 per unit.
- Step 2: Identify performance obligations: Delivery of 50,000 food packs, with 30,000 delivered by 31 March 2019 and the remaining 20,000 to be delivered on 1 June 2019.
- Step 3: Determine the transaction price: The price is GH¢10 per unit.
- Step 4: Allocate the transaction price: The 30,000 units delivered by 31 March 2019 represent a performance obligation fulfilled, and thus revenue should be recognized for those units. However, because the customer has 12 months to pay, the transaction price must reflect the time value of money.
- Step 5: Recognize revenue: Mankranso Ltd must discount the price of 30,000 units to reflect the deferred payment. The effective revenue to be recognized for 30,000 units is:Revenue recognized=30,000×GH¢10×11.10=GH¢272,727\text{Revenue recognized} = 30,000 \times GH¢10 \times \frac{1}{1.10} = GH¢272,727
Thus, revenue of GH¢272,727 is recognized for the year ended 31 March 2019.
ii) Revenue from Advance Payment for Room-Nights:
- Step 1: Identify the contract: A contract exists for the supply of 2,000 hotel room-nights at GH¢100 per night.
- Step 2: Identify performance obligations: The obligation is to provide the hotel rooms. As of 31 March 2019, 400 room-nights have been provided.
- Step 3: Determine the transaction price: GH¢100 per room-night.
- Step 4: Allocate the transaction price: The transaction price is allocated based on room-nights provided. For the 400 room-nights provided by 31 March 2019, revenue can be recognized.
- Step 5: Recognize revenue: Revenue is recognized for the 400 room-nights provided as follows:Revenue recognized=400×GH¢100=GH¢40,000\text{Revenue recognized} = 400 \times GH¢100 = GH¢40,000
The remaining GH¢160,000 (for the 1,600 unoccupied room-nights) is recognized as deferred revenue.
Thus, GH¢40,000 is recognized as revenue for the year ended 31 March 2019, and GH¢160,000 is deferred revenue.
- Tags: Contracts, Deferred Revenue, IFRS 15, Revenue Recognition
- Level: Level 3
- Topic: IFRS 15: Revenue from contracts with customers
- Series: NOV 2019
- Uploader: Dotse