78. Describe the output and input measures of performance that an entity is required to use when measuring the progress to date on a construction contract. 79. Explain the accounting treatment when a third party supplies the awards under a customer loyalty programme,Chapter 15 Key Unearned revenues are assets treated as liabilities, as these are received by a business for services to be performed at a future date. TRUE Chapter ~ Chapter 15 81 Ditty: Easy Seation: 18.08 Uneamed revenue Construction costs plus gross profit earned to date from a construction contract are accumulated in the construction in progress account less progress billings and these are disclosed in the liability section of the statement of financial position FALSE chapter - Chapter 15 #2 Ditty: Easy Sestion: 15.09 Accounting for construction contracts When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date TRUE chapter - Chapter 1523 Ditty: Easy Sestion: 15.09 Accounting for construction contractsWhen it is probable that total contract costs will exceed total contract revenue, the expected loss should not be recognised as an expense until the future economic sacrifice eventuates. FALSE chapter Chapter 15:84 Ditty: Easy Sestion: 15.09 Accounting for construction contracts If the borrower prepays interest, the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates, TRUE chapter - chapter 15 #5 Ditty: Easy Section: 15.07 interest and ddends Ifa company sells its product but gives the buyer the right to return the product, IASB (2011) requires revenue from the sales transaction to be recognised at the time of sale FALSE chapter Chapter 15 26 Ditty: Medurn Seaton: 15.06 Accounting for sales with associated cordltions7. 10. Under the AASB (IASB) Conceptual Framework an increase in economic benefits in the form of the reduction ofa liability that is not a contribution by equity participants and results in an increase in equity during the reporting period, is income. TRUE Chapter - Chapter 1537, Ditty: Easy Section: 15.02 Defintion of income and revenue The AASB (IASB) Conceptual Framework now divides revenues into ‘income’ and ‘gains. FALSE chapter Chapter 15.28 Ditty: Easy Section: 15.02 Defintion of income and revenue Transactions that result in an inflow of economic benefits such as the purchase of assets can be dlassified as a gain FALSE chapter Chapter 15 28 Ditty: Easy Section: 15.02 Defintion of income and revenue Gains that result from revaluation of long-term assets are included in income. TRUE Chapter - Chapter 15216 Ditty: Easy Section: 15.02 Defintion of income and revenue11 12 B 14, IASB (2011) requires revenues to be measured in terms of historical cost to improve reliability FALSE chapter Chapter 15 #11 Ditty: Medurn Section 15.04 Measurement of revenue Accounting standards require that the provision for doubtful debts should be shown as a deduction from the class of assets to which it relates. The net expense in relation to bad and doubtful debts must also be disclosed. TRUE Chapter ~ Chapter 15 #12 Ditcuty Easy Seeton: 5.05 income and revenue recogntion points When the gross method is used to record the interest inherent in a sales transaction, it is typical for the accrued interest to be offset against the note receivable. FALSE Chapter - Chapter 15213 Ditty: Easy Section: 15.07 interest and didends In most cases dividend revenue should not be recognised until the dividend proposed has been ratified by the shareholders at the annual general meeting FALSE chapter Chapter 15214 Ditty: Easy Section: 15.07 interest and didends15, 16. 17 18, Gains never arise from the ordinary activities of an entity. FALSE Chapter - Chapter 15215 italy: Easy Section: 15.02 Defintion of income and revenue Where the percentage-of-completion method is based on costs, costs that relate to the contract activity generally and are not normally related to specific contracts, such as finance costs, should be allocated across the projects currently in progress. FALSE Chapter - Chapter 1516 Ditty: Medurn Section: 15.09 Accounting for construction contrats Gains must be reported net of related expenses. FALSE Chapter - Chapter 5397 Dil oxy Secon 15.2 Detoton of incor nd revenue When making a provision for doubtful debts, debtors’ subsidiary ledgers are not adjusted, as the provision is made in anticipation of likely non-recoverability of amounts owing, although the identity of who will not pay is unknown TRUE Chapter - Chapter 15218 italy: Easy Section 18.05 Income and revenue recogntion points19, 20, 24 22, With the percentage-of-completion method of accounting for construction contracts, profit is recognised in proportion to the work performed in each reporting period TRUE Chopter~ Chapter 8 18 Diticaly Easy Seaton: 1.08 Accounting for construction contacts Transfer of ‘control’ of the asset is central to the recognition of revenue under the new accounting standard IASB (2011). TRUE chapter ~ Chapter 15 #26 Ditty: Medurn Section’ 18.08 Recognition criteria for revenue rom contracts with customers Interest revenue is derived from borrowing resources from another entity FALSE Chapter - Chapter 1521 Ditty: Easy Section: 15.07 interest and didends Revenues may be generated by: A. holding and disposing of inventory in the normal course of business 8. having a liability forgiven. C. receiving a donation. D. all of the given answers Chapter ~ Chapter 15 #2223, 24. Ditcuty: Easy Section: 15.02 Defintion of incorme and revenue The general rule under modified historical-cost accounting is that holding gains on non-current assets should be: A treated as revenue in the period that the fair value of the asset changes. 8. deferred and amortised over the life of the asset (effectively decreasing depreciation expense). ecognised as part of income and hence, of total comprehensive income never recognised. chapter ~ Chapter 15 #23 Ditty: Easy Section 18.05 Income and revenue recogntion points Under the AASB (IASB) Conceptual Framework income is now subdivided into: A. revenues, which only include sales, fees, interest, dividends, royalties and rent; gains, which are no different in nature to revenue. 8. gains, which are regarded as constituting a separate element in the framework; revenues, which may only arise in the course of the ordinary activities of the entity G. revenues, which arise in the course of the ordinary activities of the entity; gains, which may or may not arise in the course of the ordinary activities of the entity. D. increases in equity referred to as gains; reductions in liabilities which are classified as revenues, Chapter - Chapter 15.824 Ditty: Easy Section: 15.02 Defintion of income and revenue25. The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). Figure 18.4 Te earings eyete ——_.. ©. Receipt of cach 1. Devising on ideo £8, Detvety of goods 2.Moking purenases: tocustomers (eof ruentones) Receipt of orders ater 3. Receipt of orders before omping procvction ‘commencing production M 4. Commencing production 5, Progressively ‘throughout production ‘Source: Mrstatian Accounting Research Foundation, The Defend Recognition of Reverve under ison Coat Accounting. Accouting heey Monogra9h Mo. 3. Because of uncertainty and depending on which measurement model is being applied, revenue recognition will take place at a limited number of points in the earnings cycle. In traditional historical-cost accounting, in most cases, at which point in the cycle above have revenues been recognised? Chapter = Chapter 15 #25 Ditty: Easy Section 18.05 Income and revenue recogntion points26. The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982). The camings eee asa 8. Reet of can 1 Dvr an eo 8. Cater of goods 2, Maing purchases Semone (et ortentaras) “Rest feces ster 2, Receipt of ede tore comoting roscion commrng ronson 6-conevon ot 4. comet ‘roaatlen F 8. howersiey vsapo oda Sauce: Avs Acourrg Resewch Sout, The Definer Recogie Rewer wet Miser cou nce Acton heey Snaps. 3 In the traditional historical-cost accounting model, at what point has revenue been recognised for long-term construction contracts in the building industry? A, Point 8 8. Point 4 C Point 6 D. Point 5 Chapter ~ Chapter 1928 Ditty: Easy Section 18.05 Income and revenue recogntion points27. The following is a diagram of the earnings cycle as presented by Coombes and Martin (1982) ewe 1. The comings cycle — 9. Receipt of ah 1. Bevising on idee £8, Dever t goods 2. Moliegpuchoses weatones ‘oof hertone) cei of ere ater 3. Recep of odes tetore emp poascon commencing peducton M 4. Commencing production 5, Progressively ‘throughout production ‘Source: Mrstatian Accounting Research Foundation, The Defend Recognition of Reverve under ison Coat Accounting. Accouting heey Monogra9h Mo. 3. For products such as precious metals or agricultural products revenue is recognised at which point in the earnings cycle shown above? A, Point 1 8. Point 4 C. Point 6 D. Point 7 Chapter ~ Chapter 15 #27 Ditty: Easy Section 18.05 Income and revenue recogntion points28, 29, Revenue recognition under IASB (2011) requires that: A. the entity has transferred to the buyer the significant risks and rewards of ownership. 8. the entity retains neither continuing managerial involvement to the degree normally associated with ownership nor effective control over the goods C. the costs incurred or to be incurred can be measured reliably. D. there should be a direct function of the transfer of control of the goods and services to the customer. chapter - Chapter 15 #28 Ditty: Easy Section: 15.01 Naw requirements relating to revenue defiition Kringle Company has agreed to provide services to North to South Ltd in exchange for a piece of equipment and a cash payment. The equipment is currently recorded in North to South's books at $73 000 but independent assessors have set the fair value at $65 000. The cash payment of $20 000 will be received 12 months after completion of the services. Kringle should record revenue as: A $85 000 8. $65 000 in the current period, $20 000 next period C. $93 000 D, $65 000 plus the present value of the $20 000 cash component Chapter ~ Chapter 15928 Ditty: Medurn Section 15.04 Measurement of revenue30, 31 An entity shall recognise revenue from a contract when: A the entity has satisfied the performance obligation, B. the goods or service have been transferred to the customer. C. the customer obtains control of the goods or service. D, All of the given answers are necessary for recognition of revenue from a contract. Chapter - Chapter 15436 Ditty sy “Secon 15.03 Recognition ete for revenue rm contracts wth estore When goods are sold ‘free on board! (f0.b) shipping point, the revenue should be recognised when: A. the goods are completed and ready to be transported B. the goods are received by the purchaser. the goods are received by the common carrier. D. None of the given answers are correct, there is no revenue involved for goods sold on terms “free on board’. Chapter - Chapter 15231 Ditty: Easy Section 18.05 Income and revenue recogntion points32, When the collectability of an amount that has been recorded as revenue becomes uncertain, the appropriate accounting treatment is to: A. recognise as an expense the amount in respect of which recovery has ceased to be probable. 8. calculate the discounted present value of the amount expected to be received and adjust the recorded revenue accordingly. C. adjust the amount of revenue originally recognised, D. make no adjustment as the amount and timing of the uncollectible amount is uncertain Chapter - Chapter 1532 Ditty: Easy Section 18.05 Income and revenue recogntion points33. Vettori Ltd has the following information from an aged debtors listing for the current period. (Age ‘Amount Less thant month old $80 000 Between’ month and 2 manths old $60 000] Between 3 and 5 months old $30 000 [Over & months old $6 000 Based on experience in the industry, Vettori Ltd uses the following basis for estimating uncollectible amounts: Age Percentage luncollectible Less than 1 month old 0.50% Between {month and 2 months old [2.00% Between 3 and § monthe old 6.00% Over & months old [208% Assuming that the current balance in the provision for doubtful debts is zero, what is the entry to record the provision for this period? What is the entry to record the writing off of a bad debt of $1000 when a debtor goes bankrupt? To record the allowance: Dr [Provision for doubtful debts A100] Cr [Debtors 410] To record bad debt: Dr [Bad debts expense 7000) Cr [Debtors 1000) Ta record the provision: Dr_[Provision for doubtful debis 7968 Cr [Cash aba To record bad debt: Dr [Bad debts expense 7000) Cr [Debtors 1000)cc, Ta record the provision Dr [Doubtful debts expense A100] Cr [Provision for doubtful debts 410] To record bad debt: Dr [Provision for doubtful debts 7000) Cr [Debtors 1000) Ta record the provision: Dr [Bad debts expense A100] Cr [Provision for doubtful debts 410] To record bad debt: Dr [Provision for doubtful debts 7000) Cr [Cash 1000) In the situation that a debtor becomes unable to pay and the amount has not been anticipated through a provision for doubtful debts, what is the entry to record the bad debt? Dr Debtors; Cr Provision for doubtful debts Dr Provision for doubtful debts; Cr Debtors Dr Bad debts expense; Cr Cash Ip ), Dr Bad debts expense; Cr Debtors35, 36. Daniel Ltd sells one of its properties to a financing company with an attached call option, which allows Daniel Ltd to reacquire the property at a future date for $400 000. The current market value at the time of the sale is $300 000, but the financing company pays $350 000 for it. It is expected that the market value of the property will exceed $400 000 before the option expires What is the appropriate treatment of this sale? A. Record the revenue and make appropriate note disclosures about the call option and its associated risks B. Set-off the call option and the building—reporting changes in the difference between their current values as revenues or expenses as appropriate, A No entry would be required as the call option is off balance sheet and the building has not effectively been sold. D, Record the inflow of cash and a liability, chapter - Chapter 15 435 Ditty: Medurn Seaton: 15.06 Accounting for sales with associated cordltions There are various appropriate accounting treatments when a sale is made subject to a right of return. These methods include: A. recording the sale and accounting for the returns as they occur in future periods 8. recording the cash received as held in trust until all return privileges have expired. C. recording the sale but reducing sales by an estimate of the future returns, D, recording the sale and accounting for the returns as they occur in future periods and recording the sale but reducing sales by an estimate of the future returns. chapter - Chapter 15436 Ditty: Easy Seaton: 15.06 Accounting for sales with associated cordltions37, When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement. In order to separate the financing element from the sale, it is necessary to calculate the applicable interest rate inherent in the agreement. What advice does ASB (2011) provide about this? ‘A. The implicit rate of interest is the more clearly determinable of either: (a) the prevailing rate of a similar instrument of an issuer with a similar credit rating; or (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. 8. The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset. C. The implicit rate of interest is the more reliably determinable of either: (a) the prevailing rate of a debt instrument of an issuer adjusted to the organisation-specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts the sales price to the fair market value of the goods or services. D. The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset. This rate may have to be adjusted to take account of the risk of the issuer if it is significantly different to the market-determined interest rate for similar entities. chapter - Chapter 5 #37 italy: Easy Section: 15.07 interest and didendsOn 1 July 2013 Bryson Ltd sells a machine to Adams Ltd in exchange for a promissory note that requires Adams Ltd to make five payments of $8000, the first to be made on 30 June 2014. The machine cost Bryson Ltd $20 000 to manufacture. Bryson Ltd would normally sell this type of machine for $30 326 for cash or short-term credit. The implicit interest rate in the agreement is 10%. What are the appropriate journal entries to record the sale agreement and the first two instalments using the net-interest method? T duly 2073 Dr [Note receivable 40.000] cr [Sales 40-000] Dr [Cost of sales 20 000] Cr [Inventory 20-000] 30 June 2074 Dr [Cash 2000) Cr_|Note receivable 2000 30 June 2078 Dr [Cash 2000) Cr [Note receivable 8000) B, [Tduly 2073 Dr [Note receivable 30 326 Cr [Sales 30 225] Dr [Cost of sales 20 000] Cr [inventory 20 000] 30 June 2074 Dr [Cash 3000) Cr_|Note receivable 4967| Cr interest revenue 3033] 30 June 2075 Dr [Cash 2000) Cr _|Note recewvable 2464) Cr interest revenue 2536]T duly 2073 Dr [Note receivable 20 000 Cr [Sales 20 000 30 June 2074 Dr [Cash 2000) Cr_|Note receivable 2000 Cr interest revenue 6000 [30 June 2078 Dr [Cash 2000) Cr_|Note receivable 1800} Cr interest revenue 6200] T duly 2073 Dr [Note receivable 30 326 Cr [Sales 30 225] Dr [Cost of sales 20 000] Cr [inventory 20 000] [30 June 2014 Dr [Cash 000) Cr interest revenue 4967| Cr_|Note receivable 3033 30 June 2015 Dr [Cash 2000) Cr interest revenue e464 Cr [Note receivable 2536On 1 July 2013 Bigwell Ltd sells a machine to Archer Ltd in exchange for a promissory note that requires Archer Ltd to make five payments of $8000, the first to be made on 30 June 2014. The machine cost Bigwell Ltd $20 000 to manufacture. Bigwell Ltd would normally sell this type of machine for $30 326 for cash or short-term credit. The implicit interest rate in the agreement is 10%. What are the appropriate journal entries to record the sale agreement and the first two instalments using the gross method? A, dduly 2073 Dr_ [Note receWvable 40.009] Cr [Sales 40.000 Dr [Cost of sales 20 000 Cr [inventory 20-000 30 June 2074 Dr [Cash 2000 Cr [Note receivable 8000 Dr [Note receivable 3033] Cr interest revenue 3033] 30 June 2078 Dr [Cash 8000 Cr [Note recewable 8000 Dr [Note receivable 2836 Cr interest revenue 2536]lo Tul y 2013 Or Note receivable 40.009] Cr Sales 30 325 Cr Uneamed revenue ‘9674 Dr (Cost of sales 20 000] Cr inventory 20 000 30 June 2014 Or [Cash 000 Cr Note receivable 2000 Dr Interest revenue 4000] Cr Uneamed revenue 4000] 30 June 2015 Or [Cash 2000 Cr Note receivable 8000 Dr Interest revenue 3600 Cr Uneamed revenue 3600) Tul y 2013 Or Note receivable 40.009] Cr Sales 30 325 Cr Uneamed revenue ‘9674 Dr (Cost of sales 20 000] Cr inventory 20 000 30 June 2014 Or [Cash 000 Cr Note receivable 2000 Dr [Uneamed revenue 3033] Cr Interest revenue 3033] 30 June 2015 Or [Cash 2000 Cr Note receivable 8000 Dr [Uneamed revenue 2636 Cr Interest revenue 2536)Tduly 2073) Dr [Note receivable 30 326 Cr [Sales 30-325 Dr [Cost of sales 20 000 Cr [inventory 20000 30 June 2014 Dr [Cash 000 Cr [Note recewvable 4967 | Cr interest revenue 3033] 30 June 2015 Dr [Cash 3000 Cr [Note receivable 4497 Cr_ interest revenue 3603 1.07 interest and dvidends40. Magazines Galore receives subscription money in advance, and has received $50 000 from customers on 1 February to cover the next ten issues of Wheels Galore. There are ten issues a year—one at the end of each month except for January and December. What are the appropriate accounting entries to record the receipt of the subscription money and (assuming no monthly entries have been made) the adjusting entry at 30 June (after June's issue has been mailed to subscribers)? 1 February Dr [Cash at bank 80 000 Cr [Subscription revenue 50 000 30 June Dr [Subscription revenue 25 000 Cr_ [Subscriptions received in advance 25 000 1 February Dr [Subscriptions received in advance 50000 Cr [Cash at bank 50000 30 June Dr [Subscription revenue 26 000 Cr_ [Subscriptions received in advance 25 000 1 February Dr_[Cash at bank 50 000] Cr_|Subscription revenue 50 000 30 June Dr [Subscription revenue 20 000] Cr [Subscriptions received in advance 20 000 p, 1 Febriany "Dr [Cash at bank 80 000 Cr [Subscriptions received in advance 50 000 30 June Dr [Subscriptions received in advance 25 000 Cr_ [Subscription revenue 25 00041 42. Chapter ~ Chapter 15 #46 Diticuty Easy Section 1507 interest and dividends The percentage-of-completion method that may be used to account for construction contracts can be justified on the basis that: A. The contractor will be continuously working and therefore earning revenue. 8. In most long-term construction projects, payments are made periodically throughout the life of the contract allowing revenue to be recognised, C. It is unreasonable to expect a contractor to record revenue only when construction is completed. The contracting firm has a basis for measuring completion at particular interim dates chapter - Chapter 15281 Ditty: Easy Sestion: 15.09 Accounting for construction contracts In the case of a fixed price contract, AASB 111 specifies four conditions that must all be met in order for the percentage-of-completion method to be applied. These conditions include A. Costs related to the contract can be clearly identified and measured reliably. It is probable that the economic benefits arising from the contract will flow to the contractor. A The entity commissioning the work has a good credit rating and is able to pay its debts 9 ). Costs related to the contract can be clearly identified and measured reliably and it is probable that the economic benefits arising from the contract will flow to the contractor. Chapter - Chapter 15.842 Ditty: Easy Sestion: 15.09 Accounting for construction contracts43. IASB (2011) specifies the accounting treatment in the case that the outcome of a construction contract cannot be reliably assessed. The treatment specified is A, (a) Contract costs must be deferred and matched against revenues in the financial year in which they are recognised where it is not probable that the costs will be recovered in the current period; and (b) where it is probable that the costs will be recovered in the current period, revenue must be recognised only to the extent of the costs incurred. B. (a) Construction costs must be recognised as a contra asset in the financial year in which they are incurred and set-off against the receivable recorded on the contract; and (b) where the receivable is less than the accrued costs, the difference must be written off as an expense in the period In . (a) Contract costs must be recognised as an expense in the financial year in which they are incurred; and (b) where it is probable that the costs will be recovered, revenue must be recognised only to the extent of the costs incurred. D. (a) Construction costs must be accrued and reported as a deferred asset to the extent that it is considered probable that the costs will be recovered; and (b) revenue may be recognised only to the extent of the costs incurred. chapter - Chapter 5943 Ditty: Medurn Section: 15.09 Accounting for construction contrats45. The percentage of completion can be measured in a number of ways, including > physical estimates or surveys of the work performed to date. 8. the work plan basis, which uses the project management plan to calculate the percentage of the construction completed. a C. the billings basis, using the proportion that progress billings to date bear to the total estimated billings for the contract. Ip ). physical estimates or surveys of the work performed to date and the billings basis, using the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. Chapter Chapter 15248 Ditty: Easy Sestion: 15.09 Accounting for construction contracts When the cost basis is used to calculate the percentage of completion, cost items that may need adjustment include: A. discounts for the bulk purchase of construction materials 8. gains and losses on foreign currency translation . materials delivered and paid for, but not yet used. D. interest charges on late payments for materials and other items used in the construction project. chapter - Chapter 5945 Ditty: Easy Sestion: 15.09 Accounting for construction contracts46. Using the cost method to calculate the percentage of completion, the formula for the current period revenue or gross profit to be recognised is: A. costs incurred to the end of the current period divided by most recent estimate of total costs. Ie estimated total revenue or gross profit from the contract multiplied by (costs incurred to the end of the current period divided bymost recent estimate of total costs) /ess (total revenue or gross profit recognised in prior periods) A costs incurred to the end of the current period divided bymost recent estimate of total costs multiplied by (total revenue or gross profit recognised in prior periods). D. estimated total revenue or gross profit from the contract divided by (costs incurred to the end of the current period multiplied by most recent estimate of total costs) /ess (total revenue or gross profit recognised in prior periods). Chapter- chapter 15 #46 Ditty: Medurn Sestion: 15.09 Accounting for construction contracts41. Hillier Construction Ltd commenced the construction of a building on 1 July 2013. It has a fixed- price contract for total revenues of $45 million. The expected completion date is 30 June 2016 The expected total cost to Hillier Construction at the beginning of the project is $35 milion. The following information relates only to the construction of this building} For the year ending 30 June ‘at0o) 000) 009 Costs for the year 12.500[ 15 00010 000] Costs incurred to date 12 500 27 500 37 500 Estimated costs to complete 2000] 6 600 - Progress billings during the year io-000[ 42 000[ 23 000] Cash collected during the year 40000 44 000[ 24 000] Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)? a, 2014 GOOD) [207 ($000) 2016 ($000) 3345 [3 530. [3 970 g, 2014 (G00) [207 ($000) 2016 ($000) 3345 [3 530. 625 c. 2014 ($000) 12015 ($000) [2016 ($000) 7 7aT 120 135 17 118 p 20i4 BOND) [207 ($000) 2016 ($000), 3571 [4 286 [2 857 Chapter ~ Chapter 15 247 ediuen Section: 16.08 Accounting for constuction contracts48, Hillier Construction Ltd commenced the construction of a building on 1 July 2013. thas a fixed- price contract for total revenues of $45 million. The expected completion date is 30 June 2016. The expected total cost to Hillier Construction at the beginning of the project is $35 milion. The following information relates only to the construction of this building} For the year ending 30 June eon) obs) oie) Costs forthe year 42500[ 15 000[ 10 000 Costs incurred to date 12 500] 27 500| 37 500} Estimated costs to complete 23.000] 6500 z Progress billings during the year 70.000[ 12 000[ 23000 [Cash collected during the year 40-000[ 11 600[ 24 000 Hillier Construction uses the percentage-of-completion method based on cost to account for its construction contracts. What are the journal entries for the year ended 30 June 2014 (rounded to the nearest $000)? A $000 $000 Dr Construction expenses 72.500 Cr_|Materials. cash. etc 72 500 Dr [Accounts recenable 70000 Cr_|Revenue from long-term contract 10 000) Dr |Cash 70 000 Cr Accounts receivable 70.000 Dr_|Constnuction in progress 3a Cr_|Gross profit on construction contract 3345)$000 $000 Dr_[Construction in progress 12 500 Cr_[Materials. cash, etc 12.500 Dr [Accounts recewable 10 000 Cr_|Revenue from long-term contract 10 000) Dr [Cash 10 000 Cr [Accounts recewvable 70-000) Dr [Construction in progress 3671 Dr [Construction expenses 12.500 Cr_|Revenue from long-term contract 16 071 $000 $000 Dr_[Construction in progress 12 500 Cr_[Materials. cash, etc 12.500 Dr [Accounts recewable 10 000 Cr_[Billings on construction in progress 10 000] Dr [Cash 10 000 Cr [Accounts recewvable 70-000) Dr [Construction in progress 3205] Dr [Construction expenses 12500 Cr_|Revenue from long-term contract 15 845] $000 $000 Dr_[Construction in progress 12 500 Cr_[Materials. cash, ete. 12 500 Dr [Accounts recewable 10 000 Cr_[Billings on construction in progress 40 000 Dr [Cash 10 000 Cr [Accounts receWvable 70-000) Dr [Construction expenses 12500 Cr_|Revenue from long-term contract, 12 500] Chapter ~ Chapter 15.24849. Undersea Construction Ltd commenced the construction of a tunnel under a major river for public transport on 1 July 2014. It has a fixed-price contract for total revenues of $36 million The expected completion date is 30 June 2017. The expected total cost to Undersea Construction at the beginning of the project is $28 milion. The following information relates only to the construction of the tunnel For the year ending 30 June fatto) 000) 009] Costs for the year S000] 15 000 10 000 Costs incurred to date 000] 20000 20 000 Estimated costs to complete 22000[ 8 600 | Progress billings during the year 40.000 22 o00[ 4 000) Cash collected during the year 9 000 19 000 8 000 Undersea Construction uses the percentage-of-completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)? a, [2014 ($000) [ani ($000) 2016 ($000), [4 000 [4 000 ( 000) 2014 ($000) [2076 ($000) 2016 ($000), 10.000 [22 000 4.000 cc. 2014 ($000) [207 ($000), [2076 ($000) = 687 [3 696 737 p, 2074 (S000) [2078 (S000). [2076 (S000) 925 3 989 1086 Chapter ~ Chapter 15.248 ediuen Section: 16.08 Accounting for constuction contracts50. Russell Ltd commenced the construction of a bridge on Wuly 2013. It has a fixed-price contract for total revenues of $35million. The expected completion date is 30 June 2016, The expected total cost to Russell Ltd at the beginning of the project is $29 million. The following information relates only to the construction of the bridge: For the year ending 30 June at0o) 000) 009 Costs for the year 12.000[ 18 000[ 7 000] Costs incurred to date 12 000 30 000) 37 000 Estimated costs to complete 79500[ 6 300 - Progress billings during the year 10. 000[ 42 000 73 000) Cash collected during the year 7000] 10 000[ 18-000 Russell Ltd uses the percentage-of-completion method based on cost to account for its construction contracts. What is the gross profit to be recognised in each of the 3 years (rounded to the nearest $000)? a, 2014 (000) [2075 (000) 2076 (000) 1333 (2 408) 408 g, 2014 (G00) [207 (g000) 2016 ($000) ~ 1333 [2 408) 926 < DOi4 ON) [ani ($000) 2016 ($000) 1200 (2314) (i000) Did BOND) [207 ($000) 2016 ($000) 1 664 1 477 (6.341) Chapter ~ Chapter 15 #56 ediuen Section: 15.08 Accounting for constuction contractsRussell Ltd commenced the construction of a bridge on Wuly 2013. It has a fixed-price contract for total revenues of $35 million. The expected completion date is 30 June 2016. The expected total cost to Russell Ltd at the beginning of the project is $29 million. The following information relates only to the construction of the bridge: 2014] 2078] 2078] For the year ending 30 June sone asone| esb0a Costs for the year 42.000[ 18000[ 7 000) Costs incurred to date 12.000[ 30 000[ 37 000) Estimated costs to complete 19500[ 6 300 -| Progress billings during the year TT A Cash collected during the year Zooo] 10 000[ 18 000) Russell Ltd uses the percentage-of-completion method based on cost to account for its construction contracts. Assuming that the entries for 2014 have been made, what are the journal entries for the year ended 30 June 2015 (rounded to the nearest $000)? SOOO] S000] Dr [Construction in progress 18 000 Cr_[Materials, cash. etc 78-000 Dr _ [Accounts receivable 12 000) Cr [Billings on construction in progress 72000 Dr [Cash 70.000) Cr _|Accounts receivable 10 000) Dr [Construction expenses 76.000 Cr [Revenue from long-term contract 7 992 Er [Construction in progress 2 408]Sooo] S000] Dr [Construction in progress 30.000 Cr_[Materials, cash. etc 30 000 Dr [Accounts receivable 12 000 Cr [Billings on construction in progress 72.000 Dr [Cash 70.000) Cr_|Accounts receivable 10 000) Dr |Uneamed revenue 76.000 Cr [Revenue from long-term contract 18 686 Er [Construction in progress 2314 S(00[ $000) Dr [Construction in progress 12.000 Cr_|Materials, cash. ete 72000 Dr [Accounts receivable 12 000 Cr [Billings on construction in progress 72000 Dr [Cash 10.000 Cr _|Accounts receivable 10 000 Dr [Construction in progress 78.000 Dr Construction expenses 12.000 Cr [Revenue from long-term contract 30 000 Hoo] S000] Dr [Construction in progress 18 000 Cr |Materials, cash. ete 78.000 Dr [Accounts recehvable 72.000) Cr_[Billings on construction in progress 42000 Or [Cash 10 000) Gr |Accounts receivable 70-000 Dr [Construction in progress 7477] Dr [Construction expenses 78 000 Cr [Revenue from long-term contract 1477 chapter - Chapter 15552. 53. Transactions such as the purchase of assets or the issuance of debt are not considered income because: ‘A. they involve external parties. B. they necessarily involve cash C. they do not result in an increase in equity. D. they both result in an increase of the asset or liability concerned. Chapter - Chapter 15452 Ditty: Easy Section: 15.02 Defintion of income and revenue Biological assets are: A. recognised as income when sold. 8. to be valued at market value, with any increase being capitalised and amortised over the period until the asset is sold A to be valued at market value, with any increase being treated as income Ip ). to be valued at fair value, with any increase being treated as income. Chapter ~ Chapter 15 #83 Ditty: Medurn Section 18.05 Income and revenue recogntien points54, 55. Which of the following is an example of a situation in which an entity does not retain the control of the asset? A. when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions B, when the entity provides a 30-day return from purchase with a full refund for the goods sold C. when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return D. when the goods are shipped subject to installation and the installation is a significant part of the contract that has not yet been completed by the entity chapter -Chaper 15354 Ditty: Easy Section: 15.01 Naw requirements relating to revenue defiition In relation to the expense associated with the creation of an allowance for doubtful debts, the Australian Taxation Office: A. never allows a deduction for taxation purposes for that amount. 8. allows a deduction for taxation purposes for that amount when it is recognised as an expense. A allows a deduction for taxation purposes immediately Ip allows a deduction for taxation purposes only when there is a bad debt written off against a debtors account. Chapter Chapter 15 #85 Ditty: Medurn Section 18.05 Income and revenue recogntion points56, In considering whether to recognise revenue when there are associated options A. The probability of the exercise of the options must be considered, 8. The probability of the exercise of the options must not be considered, C. Put options will always give rise to revenue, whereas call options will not D. Call options will always give rise to revenue, whereas put options will not. chapter - Chapter 15456 Ditty: Easy Seation 15.06 Accounting for sales with associated condltions57. The following journal entries were recorded by a vendor who sold goods and received promissory notes on 1 July 2012 in exchange. Taluly 2072 Dr [Note recewable 12 009] Cr [Sales 42.009 Dr [Cost of sales 9000 Cr [Inventory 9000) 30 June 2013 Dr [Cash 5000 Cr [Note recewvable 3569) Cr_ [interest revenue 1441 What is the interest rate implicit in the arrangement? Section’ 18.07 interest and duidends58. The following journal entries were recorded by a vendor who sold goods and received promissory notes on 1 July 2012 in exchange. T duly 2072 Dr [Note receivable 12.009] Cr [Sales 12.009 Dr [Cost of sales 9000) Cr [inventory 9000) 30 June 2013 Dr [Cash 5000 Cr [Note receivable 3569) Cr interest revenue 1441 Assuming that the issuer of the promissory notes intends to make three equal payments of $5000 at the end of each of the 3 years, 30 June 2013, 30 June 2014 and 30 June 2015; what is the amount of interest revenue recorded by the vendor at 30 June 2015? A Nil B. $536 $1014 D. $1441 Chapter ~ Chapter 15 #8859. 60, A group of contracts shall be treated as: A. asingle contract if negotiated as a package. B. a single contract only when the contracts are performed concurrently. individual construction contracts. D. all of the given answers. chapter ~ Chapter 15 #85 Ditty: Medurn Seaton: 15.09 Accounting for construction contacts Which of the following is nota disclosure requirement of IASB (2011)? > progress billings in excess of costs incurred on construction contracts If control of an asset is transferred to a customer before the customer pays consideration this must be disclosed as a contract asset or receivable. a C. If alternative descriptions are used in the statement of financial position sufficient information must be disclosed to the users to be able to distinguish between receivables and contract assets. D. The gross amount of work progress must be disclosed in the statement of financial position chapter - Chapter 5 66 Ditty: Hara Sestion: 15.09 Accounting for construction contracts61 62, Which of the following statements is not an indicator of the transfer of the control of an asset to a customer? A. The entity has a present right to payment for the asset. 8. The entity has transferred physical possession of the asset. C. The customer has legal title to the asset. D. When goods or services are exchanged or swapped for goods or services, the revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred Chapter - Chapter 15 261 Ditty: Medurn Section’ 18.08 Recognition criteria for revenue rom contracts with customers Which of the following statements is notin accordance with IASB (2011) Revenue from Contracts with Customers with respect to revenue recognition when right of return exists? A, Revenue E Revenue recognition of the consideration for the transferred products to which the entity is reasonably assured to be entitled B. when goods are sold or services are rendered recognition of a refund liability A recognition of an asset for its right to recover products from customers on settling the refund liability D. All of the given answers are in accordance with the accounting standard chapter - Chapter 5 162 Ditty: Hara Seaton: 15.06 Accounting for sales with associated cordltions63, Lonsdale Ltd sells mobile phones and provides a one-year warranty. Lonsdale is able to recognise revenue at point-of-sale in accordance with IASB (2011) because A. this is industry practice. 8. repairs are unlikely within a year of sale. G. cost of repairs can be estimated based on experience and this is recognised as warranty expense in the year of sale D. cost of repairs can be estimated based on experience and this is recognised as sales returns. Chapter ~ Chapter 15 #63 Ditty: Medurn Section: 15.09 Accounting for construction contrats Which of the following statements is incorrect with respect to revenue recognition of construction contracts? A The percentage-of-completion method is to be applied for fixed price contracts if the recognition criteria are satisfied. 8. IASB (2011) requires individual construction contracts to be accounted for separately and the requirements of the standard to be applied separately to each contract C. The percentage-of-completion method should be used, provided certain conditions are met that enable the outcome of the contract to be reliably measured D, Percentage-of-completion method requires contract revenue to be matched with progress billings, resulting in the reporting of revenue, expenses and profit which can be attributed to the amount billed to customers. Chapter - Chapter 15 #6 Ditty: Medurn Section: 15.09 Accounting for construction contrats65, 66. Werribee Direct Ltd is a mail order company that allows its customers to order online and return the goods without obligations. Werribee Direct Ltd had experienced a high ratio of returned merchandise from online sales. What is the appropriate accounting treatment for this sale that is in accordance with IASB (2011) Revenue? A. Record the sale only when the option to return has expired B. Record the sale and reduce this by an estimate of future returns. ©. Record the sale and account for returns as they occur. D. Record the sale as deferred revenue and recognise revenue progressively until expiry of the option. chapter - Chapter 5 465 Ditty: Medurn Seaton: 15.06 Accounting for sales with associated cordltions Bellarine Ltd is publisher of Mode magazine and its customers usually sign a three-year subscription with an advance payment of $500. Mode magazine has 12 issues in a year. What is the appropriate accounting treatment for this sale on the date of signing that is in accordance with IASB (2011) Revenue? A, Recognise revenue in full as this is an immaterial amount, B. Recognise the sale as a provision Recognise the sale as unearned revenue. D Disclose the sale in the notes as a contingent item. chapter Chapter 15 #66 Ditty: Medurn Seation: 18.08 Uneamed revenue67. 68, 69, IASB and FASB initiated a joint project to clarify the principle for recognising revenue and develop a common revenue standard for IFRS and US GAAP so as to > remove inconsistencies and weaknesses in existing revenue requirements. provide a more robust framework for addressing revenue issues. a C. simplify the preparation of financial statements D. All of the given answers are correct hapter- Chapter 15267 Ditty: Medurn Seation: 18.08 Uneamed revenue When a performance obligation is satisfied, an entity shall recognise revenue: A. in full if it is an immaterial amount. B. when the asset is transferred and the customer gains control of the asset. C. when the entity retains control. D. when the risks and rewards are transferred to the customer. Chapter ~ Chapter 15 #68 Ditty: Medurn Section: 15.02 Defintion of income and revenue Which of the following is nota step in recognising revenue according to IASB (2011)? A. Identify the contract with a customer. B. Determine the transaction price. C. Recognise revenue before title of the assets transfers to the customer. D. Identify the separate performance obligations in a contract. Chapter ~ Chapter 15 #68Ditty: Mediuen Section 18.05 Income and revenue recogntion points 70. IASB (2011) requires an entity to recognise revenue for a performance obligation satisfied over time only if the entity can > reasonably measure with complete satisfaction the performance obligation reasonably measure its expected revenue of the performance obligation a C. reasonably measure its expected costs of the performance obligation D, reasonably measure its progress towards complete satisfaction of the performance obligation hapter- chapter 1576 ical edn Seaton 15.08 Uneamed revere 71. In accordance with IASB (2011) discuss the five steps to recognising revenue. Chapter - Chapter 15871 Ditty: Medurn Section 18.05 Income and revenue recogntion points72. Describe, with examples, how the recognition of revenue, at the time of sale, is affected when products require transportation. Where products require transportation, the revenues from manufacturing and selling activities are commonly recognised at the time of sale, normally determined by the shipping terms. That is time of sale is commonly interpreted as the time when title passes. Ifthe goods are shipped on terms referred to as f0.b. shipping point (where f0.b. stands for free on board), title passes to the buyer when the seller delivers the goods to a common carrier (the ‘shipping point’) who acts as an agent for the buyer. Revenue would typically be recognised when the goods reach the carrier. Ifthe goods are shipped f.o.b. destination, title does not pass until the buyer receives the goods from the common carrier (that is, at the destination). In this case, revenue would not typically be recognised until the goods reach their destination. ‘Shipping point’ and ‘destination’ are frequently designated by a particular location, for example, fo.b. Sydney, which would mean the title passes from the seller to the purchaser when the goods arrive in Sydney. For more information refer to ‘Revenue recognition at the time of sale’ chapter - Chapter 8 272 Ditty: Medurn Section 18.05 Income and revenue recogntion points2. Discuss how the use of call and put options affect revenue recognition for sales of merchandise with associated conditions. Transactions involving the sale of assets with conditions attached should be reviewed to assess whether control has actually passed from the seller to the purchaser and whether it is probable that the inflow of economic benefits to the seller will occur. For example, merchandise might be sold subject to reservation of title, whereby a stipulation is placed in the sales contract to the effect that ownership of the goods does not pass to the purchaser until the time of payment. The seller, while possessing legal title to the merchandise and therefore the right to reclaim the merchandise if the buyer defaults, has passed to the purchaser effective control over the future economic benefits embodied in the transferred merchandise. Recognition of the revenue would appear appropriate. Goods or other assets might be sold subject to various other conditions, such as the existence of put or call options, a related leaseback or the right to return the assets Paragraphs B40 to B42 of the Exposure Draft Revenue from Contracts with Customers (IASB, 2011) provide guidance that requires that where the original owner of an asset has sold an asset, but also holds a call option that allows it to acquire the asset at a future date at a price less than the original selling price, then no revenue shall be recognised. However, should the option lapse, then revenue can be recognised. Similarly, if an entity sells an asset to another organisation and the other organisation (customer) has a put option which requires the entity to acquire the asset at a price in excess of the original sale price then no revenue shall be recognised. See paragraphs B46 to B48 of IASB (2010). For more information refer to ‘Accounting for sales with associated conditions’ chapter Chapter 15273 Ditty: Hara Seaton: 15.06 Accounting for sales wth associated cordltions74. What are the three conditions that must be met in order for revenue to be recognised when the sale of a product gives the buyer the right to return the product? chapter ~ Chapter 15.974 Ditty: Medurn Seaton: 15.06 Accounting for sales with associated cordltions 75. Discuss the different conditions detailed in IASB (2011) that must be satisfied before the percentage-of-completion method can be used. chapter Chapter 15 275 Ditty: Medurn Section: 15.09 Accounting for construction contrats76. Explain the difference between revenue and gains as defined in the AASB (IASB) Conceptual Framework. As indicated in the AASB (IASB) Conceptual Framework, income can be subdivided into ‘revenues’ and ‘gains. Specifically: The definition of income encompasses both revenues and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest dividends, royalties and rent. In relation to ‘gains’, the AASB Conceptual Framework provides the following Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence they are not regarded as constituting a separate elernent in this Framework Gains include, for example, those arising on the disposal of non-current assets. The definition of income also includes unrealised gains, for example, those arising on the revaluation of marketable securities and those resulting from increases in the carrying amount of long-term assets. When gains are recognised in the income statement, they are usually displayed separately because knowledge of thern is useful for the purpose of making economic decisions. Gains are often reported net of related expenses. For more information refer to ‘Definition of income and revenue’. chapter - Chapter 15 276 Ditty: Medurn Section: 15.02 Defintion of income and revenue77. IASB and FASB initiated a joint project to address some inconsistencies of recognition of revenue in contracts with customers with other accounting standards. Discuss two of these inconsistencies. It was argued in IASB (2008) that the recognition of revenue for some transactions, as required by IAS 18/AASB 118 and IAS 11/AASB 111, was inconsistent with the definition and recognition criteria for revenue as provided in the [ASB Conceptual Framework. The recognition principles in these standards utilised recognition criteria dependent upon whether the transaction transferred the ‘risks and rewards of ownership’ of the assets, rather than basing the recognition on the transfer of control. ‘Control’ is central to the definition of an asset. As paragraph 1.10 of [ASB (2008) stated: Some criticise revenue recognition standards in IFRSs because an entity applying those standards might recognise amounts in the financial staternents that do not faithfully represent economic phenomena. That can happen because, under existing accounting standards revenue recognition for the sale of a good depends largely on when the risks and rewards of ownership of the good are transferred to a customer. Therefore, an entity might recognise a good as inventory (because a preponderance of risks and rewards may not have passed yet t0 the custorner) even after the customer has obtained contral over the good. That outcome is inconsistent with the IASB's definition of an asset which depends on control of the good, not the risks and rewards of owning the good. Adopting a view that revenue recognition should be consistent with the Conceptual Framework, the IASB and FASB embrace a view, as reflected in IASB (2011), that revenue recognition should be a direct function of whether goods and services have been transferred to the control of the customer (and not be a function of who holds the risks and rewards of ownership of the asset) As paragraph 6.7 of IASB (2008) states: An entity satisfies a performance obligation when it transfers goods and services to a customer. That principle, which the boards think can be applied consistently to all contracts with customers, is the core of the boards’ proposed modelfor a revenue recognition standard. In further considering the ‘core' requirement that revenue recognition should be directly linked to the transfer of control of the underlying goods and services, paragraph 4.62 of IASB (2008) refers. This approach reinforces the perspective that under current thinking, revenue recognition from contracts with customers is very much linked to the transter of control of assets and not to the transfer of the risks and rewards of ownership as has been the accepted position for many ‘years, This is quite a significant shift in thinking. For more information refer to ‘New requirements relating to revenue definition’ chapter - Chapter 1 277 Ditty: Medurn Seation: 15.01 Naw requirements relating to revenue defiition78. Describe the output and input measures of performance that an entity is required to use when measuring the progress to date on a construction contract. Paragraphs 41 to 46 of IASB (2011) describe output and input measures of performance: Output methods 41 Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date 42 If an entity has a right to invoice a customer in an amount that corresponds directly with the value to the custorner of the entity's performance completed to date 43A disadvantage of output methods is that they are often not directly observable and the information required to apply them may not be available to the entity without undue cost. Hence, an input method may be necessary. Input methods 44 Input methods recognise revenue on the basis of the entity's efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. If the entity's efforts or inputs are expended evenly throughout the performance period, it may be appropriate far an entity to recognise revenue on a straight- line basis. 45.A shortcorning of input methods is that there may not be a direct relationship between the entity’s inputs and the transfer of control of goods or services to the customer because of inefficiencies in the entity's performance or other factors. Hence, when using an input method, an entity shall exclude the effects of any inputs that do not depict the transfer of control of goods or services to the customer (for example the costs of wasted materials, labour or other resources to fulfil the contract that were not reflected in the price of the contract) 46 When applying an input method to a separate performance obligation that includes goods that the customer obtains control of significantly before receiving services related to those goods, the best depiction of the entity's performance may be for the entity to recognise revenue for the transferred goods in an amount equal to the costs of those goods if both of thefollowing conditions are present at contract inception: (4) the cost of the transferred goods is significant relative to the total expected costs to completely satisly the performance obligation; and (b) the entity procures the goods from another entity and is not significantly involved in designing and manufacturing the goods (but the entity is acting as a principal in accordance with paragraphs BI6-B19), For more information refer to ‘Accounting for construction contracts’ chapter - Chapter 8 278 Ditty: Medurn Seation: 15.09 Accounting for construction contacts 79. — Explain the accounting treatment when a third party supplies the awards under a customer loyalty programme. chapter - Chapter 1 #78 Ditty: Medurn Section 1510 Customer loyalty prograrmmnes