Revenue Recognition

Question 1

IFRS 15

Answer 1

1. identify contract
   - approved by all parties
   - rights for goods to be transferred is identifiable
   - payment terms can be identified
   - has commercial substance(change in CF)
   - Custo’s ability n intention to pay
2. identify the performance obligation
   - can custo benefit from goods or service
   - is this good or service identifiable
3. determine the transaction price
4. allocate price to each transaction
5. recognize revenue when eah obligation is satisfied

Question 2

RunFast Inc. sold 100 elliptical machines to a chain of fitness facilities. Payment was due on delivery in the amount of $300,000. The inventory has a cost of $200,000. The equipment has a 120-day return policy that allows for equipment to be returned if it has any performance issues. Based on past history, 5% of equipment will be returned.

At the end of the 120 days, 4% of goods were returned. Assume the cost to recover inventory and any decrease in value equates to 10% of the cost of the machine.

Required

a) Provide the journal entry RunFast should record on the date of sale.
b) Provide the journal entry RunFast should record on the return of the goods and expiration of the return period.

Answer 2

Answer

a) Date of sale

Dr. Cash

$300,000

Cr. Revenue

$285,000

Cr. Refund liability

$ 15,000

Record a refund liability for the 5% of goods expected to be returned ($300,000 × 5%) and recognize revenue on the remainder of the $300,000.

Dr. COGS

$191,000

Dr. Asset — right to recover

$ 9,000

Cr. Inventory

$200,000

Debit “asset — right to recover” for the 5% of goods expected to be returned, less the 10% to reflect the cost expected to recover and any decrease in value [$200,000 × 5% × (1 – 10%)], and debit cost of goods sold (COGS) for the remainder of the $200,000.

b) Return of goods and expiration of return period

Dr. Refund liability

$15,000

Cr. Revenue

$ 3,000

Cr. Cash

$12,000

Record the refund of 4% ($300,000 × 4%). The amount accrued as a refund liability is then removed, and the difference between expected returns and actual returns is adjusted to revenue.

Dr. COGS

$ 1,800

Dr. Inventory

$ 7,200

Cr. Asset – right to recover

$ 9,000

Record the goods returned to inventory of 4% less the 10% to reflect the cost to recover and any decrease in value [$200,000 × 4% × (1 – 10%)]. The amount accrued as “asset — right to recover” is removed and the difference is adjusted to COGS.

Question 3

ASPE - Rev Recognition criteria

Answer 3

Risks and rewards of ownership have transferred.

• Revenue can be measured reliably.
• Collection is reasonably assured

same criteria apply for the rendering of services as for the sale of goods

Question 4

Long term contracts - IFRS and ASPE

Answer 4

IFRS - match rev with expenses

ASPE - completed contract method, when all amounts are known