W5 - Revenue from Contracts with Customers

Question 1

When is revenue recognised?

Answer 1

When goods and services are transferred to the customer

Question 2

What are the 5 key steps when measuring recognition of revenue?

Answer 2

Step 1: Contract identification
Step 2: Identification of the performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligation
Step 5: Recognise revenue when a performance obligation is satisfied

Question 3

Does warranties constitute a separate obligation?

Answer 3

If just providing assurance that the product will work as intended, warranty is not a separate performance obligation

If warranty required by law – not a separate performance obligation
The longer the warranty period, the more likely it is a separate performance obligation

Question 4

What are the two methods to recognise revenue over time?

Answer 4

Input and output methods

Question 5

How to account for finance cost when the good is paid in advance for less?

Answer 5

You get the interest using the compound interest method
Real price = price paid*(1+r)^x

When you get payment:
DR Bank
CR Contract liability (differed income)

Increment differed income over the years.
DR Interest expense (price*r)
CR Contract liability

Recognise revenue
DR Contract Liability
CR Revenue

Question 6

What is a contract asset?

Answer 6

Contract asset: Company’s right to payment in exchange for goods transferred to the customer