St Joseph’s College of Commerce ( Autonomous)

Accounts Elective
Advanced Corporate Reporting II
Module 6 – Revenue from contracts with Customers IndAS 115

Problem with Solutions

Combining contract

1. Manufacturer of airplanes for the air force negotiates a contract to design and
manufacture new fighter planes for a Kashmir air base. At the same meeting, the
manufacturer enters into a separate contract to supply parts for existing planes at
other bases. Would these contracts be combined?

Ans :Contracts were negotiated at the same time, but they appear to have separate
commercial objectives. Manufacturing and supply contracts are not dependent on
one another, and the planes and the parts are not a single performance obligation.
Therefore, contracts for supply of fighter planes and supply of parts shall not be
combined and instead, they shall be accounted separately.

2. An entity promises to sell 120 products to a customer for Rs. 120,000 (Rs. 1,000 per
product). The products are transferred to the customer over a six-month period. The
entity transfers control of each product at a point in time. After the entity has
transferred control of 60 products to the customer, the contract is modified to require
the delivery of an additional 30 products (a total of 150 identical products) to the
customer at a price of Rs. 950 per product which is the standalone selling price for
such additional products at the time of placing this additional order. The additional
30 products were not included in the initial contract. It is assumed that additional
products are contracted for a price that reflects the stand-alone selling price.
Determine the accounting for the modified contract?

Ans: When the contract is modified, the price of the contract modification for the
additional 30 products is an additional Rs. 28,500 or Rs. 950 per product. The pricing
for the additional products reflects the stand-alone selling price of the products at the
time of the contract modification and the additional products are distinct from the
original products.

Accordingly, the contract modification for the additional 30 products is, in effect, a
new and separate contract for future products that does not affect the accounting for
the existing contract and Rs. 950 per product for the 30 products in the new contract.

3. On 1st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for Rs.2.5 million
-  One year of maintenance services for Rs. 55,000 per month
On 1st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the
amount of services from Rs. 55,000 per month to Rs. 45,000 per month.
Determine the effect of change in the contract.

Ans: The next six months of services are distinct from the services provided in the
first six months before modification in contract, Therefore, KLC Ltd. will account for
the contract modification as if it were a termination of the existing contract and the
creation of a new contract. The consideration allocated to remaining performance
obligation is Rs. 270,000, which is the sum of
 ●  The consideration promised by the customer (including amounts already received
from the customer) that was included in the estimate of the transaction price and had
not yet been recognized as revenue. This amount is zero.

●  The consideration promised as part of the contract modification ie Rs. 270,000.

Identifying Performance Obligation

4. A construction services company enters into a contract with a customer to build a

water purification plant. The company is responsible for all aspects of the plant
including overall project management, engineering and design services, site
preparation, physical construction of the plant, procurement of pumps and
equipment for measuring and testing flow volumes and water quality, and the
integration of all components.
Determine whether the company has a single or multiple performance obligations
under the contract?

Ans : Determining whether a good or service represents a performance obligation on

its own or is required to be aggregated with other goods or services can have a
significant impact on the timing of revenue recognition. In order to determine how
many performance obligations are present in the contract, the company applies the
guidance above. While the customer may be able to benefit from each promised good
or service on its own (or together with other readily available resources), they do not
appear to be separately identifiable within the context of the contract. That is, the
promised goods and services are subject to significant integration, and as a result will
be treated as a single performance obligation.

This is consistent with a view that the customer is primarily interested in acquiring a
single asset (a water purification plant) rather than a collection of related
components and services.

5. An entity, a software developer, enters into a contract with a customer to transfer a

software license, perform an installation service and provide unspecified software
updates and technical support (online and telephone) for a two-year period. The
entity sells the license, installation service and technical support separately. The
installation service includes changing the web screen for each type of user (for
example, marketing, inventory management and information technology). The
installation service is routinely performed by other entities and does not significantly
modify the software. The software remains functional without the updates and the
technical support.
Determine how many performance obligations does the entity have?

Ans: The entity assesses the goods and services promised to the customer to
determine which goods and services are distinct. The entity observes that the
software is delivered before the other goods and services and remains functional
without the updates and the technical support. Thus, the entity concludes that the
customer can benefit from each of the goods and services either on their own or
together with the other goods and services that are readily available.

The entity also considers the factors of Ind AS 115 and determines that the promise
to transfer each good and service to the customer is separately identifiable from each
of the other promises. In particular, the entity observes that the installation service
 does not significantly modify or customise the software itself and, as such, the
software and the installation service are separate outputs promised by the entity
instead of inputs used to produce a combined output.

On the basis of this assessment, the entity identifies four performance obligations in
the contract for the following goods or services:

 The software license

 An installation service

 Software updates

 Technical support

6. TVC is building a multi -unit residential complex. The entity enters into a contract
with a customer for a specific unit that is under construction. The contract has the
following terms:
 The customer pays a non-refundable security deposit upon entering the
contract.
 The customer agrees to make progress payments during construction
 If the customer fails to make the progress payments, the entity has the right to
all of the consideration in the contract if it completed unit
 The terms of the contract prevent the entity from directing the unit to another
customer
Determine whether this performance obligation is satisfied over time or at a point of
time.

Ans: This performance obligation is satisfied over time because:

a. The unit does not have an alternative future use to the entity because it cannot be
directed to another customer.
b. The entity has a right to payment for performance to date because the entity has a
right to all of the consideration in the contract if it completes the unit.

7. TVC is building a multi-unit residential complex. The entity enters into a contract
with a customer for a specific unit that is under construction. The contract has the
following terms:
 The customer pays a deposit upon entering the contract that is refundable if
the entity fails to complete the unit in accordance with the contract
 The remainder of the purchase price is due on completion of the unit
 If the customer defaults on the contract before completion, the entity only has
the right to retain the deposit
Determine whether this performance obligation is satisfied over time or at a point in
time.

Ans: This is performance obligation satisfied at a point of time because it is not a

service contract, the customer does not control the unit as it is created, and the entity
does not have an enforceable right to payment for performance completed to date(i.e.
the entity only has a right to the deposit until the unit is completed ).
 8. TT Ltd. sold handsets with 12 months data and voice services. The handset is locked
in the network of TT Ltd. and cannot be used in other network without considerable
customization through an unlock code. But it can be used to perform certain
functions like calendar, contract list, e-mail, internet access etc. also customers are
reselling the handset through on line auction. TT Ltd. regularly sells data and voice
services separately. Hand set can be separately purchased from a retailer as well.
Should TT Ltd recognize handset and data and voice services as single items or
distinct goods and services?

Ans: Two criteria set out in IndAS 115 to identify that goods and services are distinct:
a. Whether customer can benefit from goods and service on its own or together
with other resources that are readily available with the customer, and
b. Whether goods and services are separately identifiable
Since the hand set, and date and voice services are separately sold in the market, they
are distinct. The conclusion will remain the same even if handsets are available only
from the company because the handset can be used separately.

Determination of Transaction Price

9. AST Limited enters into a contract with a customer to build a manufacturing facility.
The entity determines that the contract contains one performance obligation satisfied
over time.
Construction is scheduled to be completed by the end of the 36th month for an
agreed-upon price of Rs. 25 crore.
The entity has the opportunity to earn a performance bonus for early completion as
follows:
- 15 percent bonus of the contract price if completed by the 30th month (25%
likelihood)
- 10 percent bonus if completed by the 32nd month (40% likelihood)
- 5 percent bonus if completed by the 34th month (15% likelihood)
In addition to the potential performance bonus for early completion, AST Limited is
entitled to a quality bonus of Rs. 2 crore if a health and safety inspector assigns the
facility a gold star rating as defined by the agency in the terms of the contract. AST
Limited concludes that it is 60% likely that it will receive the quality bonus.
Determine the transaction price.

Ans : In determining the transaction price, AST Limited separately estimates variable
consideration for each element of variability i.e. the early completion bonus and the
quality bonus.

AST Limited decides to use the expected value method to estimate the variable
consideration associated with the early completion bonus because there is a range of
possible outcomes and the entity has experience with a large number of similar
contracts that provide a reasonable basis to predict future outcomes. Therefore, the
entity expects this method to best predict the amount of variable consideration
associated with the early completion bonus. AST’s best estimate of the early
completion bonus is Rs. 2.13 crore, calculated as shown in the following table:

Amount of bonus Probabilit Probability-weighted

Bonus %
(Rs. in crore) y amount (Rs. in crore)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
 5% 1.25 15% 0.1875
0% - 20% -
2.125

AST Limited decides to use the most likely amount to estimate the variable
consideration associated with the potential quality bonus because there are only two
possible outcomes (Rs. 2 crore or Nil) and this method would best predict the
amount of consideration associated with the quality bonus. AST Limited believes the
most likely amount of the quality bonus is Rs.2 crore.

10. (Financing component)On Jan 1 2015, DLF sold furniture to a customer for Rs.4,000
with 3 years’ interest -free-credit. The customer took delivery of the furniture on that
day. The Rs.4,000 payable to DLF on Dec 31 2017. DLF cost of capital is 8%.
Determine the transaction price for the sale of furniture.

Ans: The transaction price is Rs.3,176. Time value to be considered when

determining the transaction price. The difference is recognized as Interest Income.
Cash inflow on 31/12/17 = Rs.4,000.
Sales recognized on 1/1/ 2015 = Discounted value of future cash flow – at discount
factor @ 8% , 3 years, P.V.factor = 0.794 ( using the formula ( 1/(1+r)n) )
Sales to be recognized = 4000 X 0.794 = Rs.3,176
Interest to be recognized for following years :
Outstanding liability Interest @ 8% Closing balance
3,176 254 3430
3,430 274 3704
3704 296(B/F) 4000 – payable by customer

Accounts receivable a/c Dr 4,000

To Sales a/c 3,176
To Interest Income a/c 824
11. Tata Ltd. sold passenger cars to various customers on instalment payment system. In
a particular sale of goods transaction on 1st April 2017, instalment payment price is
fixed at Rs.10 lakhs with down payment of 20% and balance in 2 equal instalments
due on 31st March 2018 and 31st March 2019. Identify the transaction price and
interest income and also show the accounting entries. ( Discount rate @ 10%)

Ans: Determination of Transaction price

Date Cash flow Discount factor Present value
1/4/17 2,00,000 1 2,00,000
31/3/18 4,00,000 0.909 ( 1/(1+0.1)1) 3,63,600
31/3/19 4,00,000 0.826(1/ (1+0.1)2) 3,30,400
10,00,000 8,94,000
Present value of cash inflow = Rs.8,94,000 = Transaction Price = Sales value

Computation of Interest:
Outstanding liability Interest @ 10% Closing balance
(8,94,000-200000) 6,94,000 X 10%=69,400 (6,94,000+69,400-
4,00,000=3,63,400
3,63,400 36,600(b/f) 4,00,000-4,00,000=0
(Note : In the last year, interest will be the balancing figure (4,00,000 – 3,63,400 =
36,600)(Do not compute on outstanding liability)
 Journal Entries
Date Particulars Debit Credit
1/4/201 Bank a/c Dr 2,00,000
7 Receivables a/c Dr 6,94,000(P)
To Sales a/c 8,94,000
(for recognition of sales and down
payment)
31/3/18 Bank a/c Dr 4,00,000
To Interest income a/c 69,400
To Receivables a/c 3,30,600(P)
(For I instalment received)
31/3/19 Bank a/c Dr 4,00,000
To Interest income a/c 36,600
To Receivables a/c 3,63,400
(For II instalment received)

12. (Financing component) An entity enters into a contract with a customer to sell an
asset. Control of the asset will transfer to the customer after two years. The contract
includes two payment options: payment of Rs.10,000 after two years when the
customer obtains control of the asset or payment of Rs.8,000 when the contract is
signed. The customer elects the second option to pay Rs.8,000 upfront. The entity
concludes that the contract contains a significant financing component because of the
length of time between when the customer pays for the asset and when the entity
transfers the asset to the customer, as well as the prevailing interest rates in the
market. The interest rate implicit in the transaction is 11.8% (based on two payment
options). However, the entity’s incremental borrowing rate is 6%, and this rate (not
11.8%) should be used in adjusting the promised consideration. Give journal entries
to record the above.

Ans:
Amount received in advance Rs.8,000
Risk and rewards , control of asset transfer : after 2 years
Journal entries
Date Particulars Debit Credit
Year 1 Cash a/c Dr 8,000
To Contract Liability ( Creditor ) a/c 8,000
(For advance payment received)
End of Interest expense a/c Dr 480
year 1 To Contract liability a/c 480
( For interest on outstanding liability @
6%)
End of Interest expense a/c Dr 508.8
year 2 To Contract liability a/c 508.8
( For interest on outstanding liability @
6% compounding)(8480 X 6%)
End of Contract Liability a/c Dr 8,989
Year 2 To Sales revenue a/c (P +I) 8,989
(For Revenue recognised in books)

13. ( Estimation of variable consideration)- Most likely and Expected value- An entity
enters into a contract and will receive an amount of Rs.1,00,000 as performance
 bonus if the specified performance targets are met. There will be no bonus if the
target is not met. • The entity estimates an 80% likelihood it will receive the entire
performance bonus and a 20% likelihood it will receive none of the bonus. What
amount has to be included in the Transaction price as variable consideration?

Ans: Estimation is based on Most likely method:

80% probability that it will receive the bonus, therefore, Amount to be included in
transaction price will be Rs.1,00,000.

14. On 1st April 2018, Entity X enters into a contract with Entity Y to sell mobile chargers
for Rs.100 per charger. As per the terms of the contract, if Entity Y purchases more
than 1,000 chargers till March 2019, the price per charger will be retrospectively
reduced to Rs.90 per unit. Till September 2018, Entity X sold 95 chargers to Entity Y.
Entity X estimates that Entity Y’s purchases by March 2019 will not exceed the
required threshold of 1,000 chargers.
In October 2018, Entity Y acquires another Entity C and from October to December,
2018, the Entity X sells an additional 600 chargers to Entity Y. Due to these
developments, the Entity X estimates that purchases of Entity Y will exceed the 1,000
chargers threshold for the period and therefore, it will be retrospectively reduce the
price per charger to Rs.90. How should the revenue be recognised in such a
situation?

(IAS 8 – Changes in Estimates – Prospective application or retrospective

application)
Ans:
Quarter 2: Till September :
Revenue recognised :95 chargers x Rs.100 per charger = Rs. 9500

Quarter 3 : From October 600 chargers X Rs.90 per charger ( revised price) = 54,000
For the past 95 chargers sold :Change in transaction price Rs.10 = (950)

Revenue to be recognised for the quarter ending December =53,050

(Retrospective Effect )

(Assumption) ( Contd..)Quarter 4 : 200 Chargers

Revenue to be recognised : ( 600 + 95 + 200 = 895 chargers X 100 each = 89,500 total
revenue to be recognised – already recognised (695 x 90 =62550) = 26,950

15. An entity enters into a contract and will receive a performance bonus up to
Rs.1,00,000 if it meets specified performance targets. It estimates the likelihood of
achieving the targets as below: Possible outcomes Probability Calculated amount
Rs.100,000 10% , Rs.80,000- 30% , Rs.60,000- 35% , Rs.40,000- 10% , NIL 15% .
Compute the expected value of the consideration.

Ans:
Computation of Transaction price ( variable consideration)
Transaction Price Probability of achieving Expected value(weighted
average)
100000 10% 10,000
80000 30% 24,000
 60000 35% 21,000
40000 10% 4,000
NIL 15% Nil
Transaction price = 59,000 ( Bonus )

16. Company A enters into an arrangement to sell a chair, a couch, and a table for
Rs.125,000. The standalone selling prices of the chair, couch and table are Rs.30,000,
Rs.65,000 and Rs.40,000 respectively. Thus, the customer gets a discount of Rs.10,000.
The company regularly sells the chair and couch together as a bundle at Rs.10,000
discount. The table is not normally discounted. How the discount has to be
allocated?

Ans:
Computation of allocation of transaction price
Total transaction price = Rs.1,25,000
Total standalone price ( If discount is allocated on chair and couch )
Chair = Rs.30,000 – 3,157.8 = 26,842
Couch = Rs.65,000 -
Table = Rs.40,000
Total = Rs. 1,35,000
Discount received = Rs.10,000 to be allocated on the basis of stand -alone selling
price.
But table never sold at discount. Therefore , discount is allocated over chair and
couch only.
Allocation of transaction price =
Table = Rs.40,000 ( no discount )
Chair and Couch = Rs.85,000 ( 95000 – 10000)
What if discount is given on all the items? Compute each item’s TP.

30000 : 65000 : 40000 (6 : 13 : 8)– Standalone selling price

Chair = (30000 X 125000)/135000 = Rs.27,778 ( Discount =2,222)(10000 x 6 / 27)

Couch = (65000 X 125000) / 135000 = Rs.60,185 (discount = 4,815)(

Table = (40000 X 125000) / 135000 = Rs.37037 ( Discount = 2,963)

17. (Principal and Agent )Rosemary Co's revenue includes Rs.2 million for goods it sold
acting as an agent for Elaine. Rosemary Co earned a commission of 20% on these
sales and remitted the difference of Rs.1.6 million (included in cost of sales) to Elaine.
How should the agency sale be treated in Rosemary's statement of profit or loss?

Ans:
Journal Entry
Debit Credit
Revenue a/c Dr 1.6
To Cost of Sales a/c 1.6
(reversing the excess revenue which
was credited earlier)
(or)Cash / Bank a/c Dr 0.4
To Commission a/c 0.4
(Recording only the commission
 received)

18. (Financing Component) Keema Co enters into a contract with a customer to supply
furniture on 30 September 20X3. Control of the furniture transfers to the customer on
that date. The price stated in the contract is $750,000 and is due for payment on 30
September 20X5. Market rates of interest available to this particular customer are 7%.

Required: Explain how this transaction should be accounted for in the financial
statements of Keema Co for the year ended 30 September 20X3 and 20X4.

Ans: Due to the length of time between the transfer of control of the asset and the
payment date, this contract includes a significant financing component. The
consideration must be adjusted for the impact of the financing transaction. A
discount rate should be used that reflects the rate available to the customer i.e. 7%.

Revenue should be recognised when the performance obligation is satisfied. This is

achieved when control of the furniture passes to the customer. Revenue and a
2
corresponding receivable should be recognised at $655,079 ($750,000 × 1/1.07 ) on 30
September 20X3. (*Using PV Table, @ 7% , 2 years , P V factor = 0.873)

Each year, the discount on the receivable will be unwound by 7%, recognising the
increase as finance income, and increasing the value of the receivable (debit
receivable, credit finance income).

In the financial statements for the year ended 30 September 20X4 Keema Co will
recognise finance income of $45,856 and a receivable of $700,935, as follows:

1/10/13 ( Brought forward) 6,55,079

Finance income @ 7% ( Credited to P/L) 45,856
30 September 20X4 Receivable balance 7,00,935
Finance Income @ 7 % ( next year ) 49,065
Receivable amount (rounded) 7,50,000

19. (Allocation of transaction price)Coal Co sold a specialised piece of equipment to Oil

Co on 1 September 20X7 for a total price of Rs.4m, which incorporated both the sale
of equipment and support service. Due to the specialised nature of the equipment,
Coal Co had additionally agreed to provide a support service for two years to 31
August 20X9. The cost to Coal Co of providing this service will be Rs.300,000 per
annum. Coal Co usually earns a gross margin of 20% on such contracts.
What revenue should be included in the statement of profit or loss of Coal Co for the
year ended 31 December 20X7?

Ans:
Identifying Performance obligation :
Delivery of Equipment and two years support services
Standalone price on support services = Rs.3,00,000 + 75000 ( Margin 20% on SP)
((300000/80)X 20) per year, for years = Rs.7,50,000
Therefore revenue to be recognised for Equipment = 40,00,000 – 7,50,000 =
Rs.32,50,000
 Journal entry for recognising revenue:

Bank a/c Dr 40,00,000

To Revenue a/c Rs. 33,75,000
To Contract Liability a/c Rs.6,25,000
( For delivery of equipment and 4 months support service recognised)

20. On 1st January ABC enters into a contract with TBC for the sale of an excavator and
spare parts. The manufacturing lease time is 6 months. On 1 st July TBC pays for the
machine and spare parts, but only takes possession of the machine. TBC inspects and
accepts the spare parts, but requests that the parts to be stored in ABC’s warehouse
because TBC does not have a place to store the parts and its premises are very close
to ABC’s warehouse.
ABC expects to store the spare parts in separate section of its warehouse for 3 years.
The parts are available for immediate delivery to TBC, ABC cannot use the spare
parts or transfer them to another customer. Identify the performance obligation(s) in
the contract and determine when revenue is recognized on each performance
obligation.

Ans :
Identification of performance obligation
- Promise to provide the excavator
- Promise to provide spare parts
- Custodial service related to the spare parts
ABC recognises revenue for excavator and spare parts on 1 st July when the
excavator is transferred to TBC, who obtained the control of spare parts
ABC recognises revenue on the custodial services overt the three year that the
service is provided.

Revenue recognition

21. Contractor A enters into a lump-sum contract with Customer B to construct a four-
story office building and install new elevators for total consideration of Rs.60 million.
The following facts are relevant.
• Construction service, including the installation of elevators, is a single
performance obligation that is satisfied over time
• A is not involved in designing or manufacturing the elevators, but is acting as the
principal
• A uses an input method based on costs incurred to measure its progress
The total cost for the contract is as follows:
Elevators Rs. 20 million
Other costs Rs.30 million
At year-end, other cost (excluding elevator) incurred amounted to Rs.12 million. The
contractor has also procured the elevator and transferred to the site. Compute the
revenue recognised and total cost incurred .

Ans: Computation of revenue to be recognised:

(Input method = % of work completed = cost incurred / total cost = 12/30 = 40%)

Value of Elevator = Rs.20 m

Other revenue = Rs.16 m ( 40m X 40%) ( 60 m – 20 m)
Total revenue = Rs. 36 m ( 20 + 16 )
 (-) COS = Rs.12 m
(-)Elevator Cost Rs.20 m
Profit for the year = Rs.4 m

Construction contracts

22. (Presentation )On 1 January 20X1, Castle entered into a contract with a customer to
construct a specialised building for consideration of Rs.10 Lakhs. Castle is not able to
use the building themselves at any point during the construction. At 31 December
20X1, Castle had incurred costs of Rs.6 Lakhs. Costs to complete are estimated at Rs.6
lakhs. Castle measures progress towards completion based on costs incurred. At 31
December 20X1 Castle had received Rs.3 lakhs from the customer.
Required: How should this transaction be accounted for in the year ended 31
December 20X1?
Ans :
Performance obligation recognised over the period of time

Step 1 : Computation of overall profit or loss :

Transaction Price / Revenue = Rs.10 lakhs
Cost of sales = (Rs.12 lakhs )
Overall Loss = (Rs. 2 lakhs)
In case of overall loss, it has to be recognised in the first year of contract itself

Step 2 : Computation of % of work completion :

(Input method- based on cost incurred )
% of work completed = cost incurred / total cost = 6 / 12 X 100 = 50%

Step 3 : Statement of profit or loss for the year

Revenue ( 10 X 50% ) = 5 lakhs
COS ( 12 X 50% ) = 6 lakhs
Loss for the current year = 1 lakh
+ balance loss = 1 Lakh
Together loss to be recognised = 2 lakhs for the year

Step 4 : Balance sheet

Computation of Contract asset or liability
Cost incurred = Rs.6 lakhs
Less Loss = (Rs.2 lakhs)
Amount to be received = Rs.4 lakhs
Actual received = Rs.3 lakhs
Contract Asset (receivable) = Rs.1 lakhs – Shown as Current Asset

23. On 1 January 20X1 Amir entered into a contract with a customer to construct a
stadium for consideration of Rs.100m. The contract was expected to take 2 years to
complete.
At 31 December 20X1 Amir had incurred costs of Rs.24m. Costs to complete are
estimated at Rs.20m. In addition to these costs, Amir purchased plant to be used on
the contract at a cost of Rs.16m. This plant was purchased on 1 January 20X1 and will
have no residual value at the end of the 2 year contract. Depreciation on the plant is
to be allocated on a straight line basis across the contract.
 Amir measures progress on contracts using an output method, based on the value of
work certified to date. At 31 December 20X1, the value of the work certified was
Rs.45 million, and the customer had paid Rs.11.4m. Required: How should this
transaction be accounted for in the year ended 31 December 20X1?

Ans:
Step 1 : % of work completion :
( output method) % = Given already = 45%

Step 2 : Computation of overall profit or loss:

Total revenue = Rs.100m
Total COS = Rs.60 m ( 24 + 20m + 16 m)
Total profit = 40 m

Step 3:Statement of profit or loss

Revenue ( 100 X 45% ) = Rs.45m
COS ( 60 X 45% ) = (Rs.27m)
Profit for the year = Rs.18 m

Step 4 : Balance sheet

Profit = Rs.18 m
Cost incurred = Rs.24 m
Depreciation cost = Rs.8 m
Amount to be received = Rs.50 m
Actual amount received = Rs.11.4 m
Contract Asset = Rs.38.6 m
Fixed Asset : Plant ( 16 – 8 ) = Rs.8 m

24. (Homework)On 1 January 20X1, Baker entered into a contract with a customer to
construct a specialised building for consideration of Rs.2m plus a bonus of Rs.0.4m if
the building is completed within 18 months. Estimated costs to construct the
building were Rs.1.5m. If the contract is terminated by the customer, Baker can
demand payment for the costs incurred to date plus a mark-up of 30%. On 1 January
20X1, as a result of factors outside of its control, Baker was not sure whether the
bonus would be achieved. ( Most likely method)
At 31 December 20X1 Baker had incurred costs of Rs.1m. They were still unsure as to
whether the bonus target would be met. Baker measures progress towards
completion based on costs incurred. At 31 December 20X1 Baker had received Rs.1
million from the customer.
Required: How should this transaction be accounted for in the year ended 31
December 20X1?
Step 1 : Computation of overall profits
Total transaction price = 2 m
Total project cost = (1.5)m
Overall project profit =0.5 m

Step 2 : Computation of work completed ( Input method / cost method)

% of work completed = cost incurred / total cost = 1 m / 1.5 m X 100 = 66.67%

Step 3 : Statement of Profit or Loss

Revenue ( Transaction price X 66.67% ) = 13,33,400

Cost of sales (Total cost X 66.67% ) = (10,00,050)
 Profit for the year = Rs.3,33,350

Step 4 : Statement of Financial position

Computation of Contract Asset / Liability

Profit earned = Rs.3,33,350
Actual Cost incurred = Rs.10,00,000
Total amount receivable = Rs.13,33,350
Actual Amount received = Rs.10,00,000
Contract Asset ( receivable ) = Rs.3,33,350 ( Receivable – received ) ( Current Asset)

25. Sky Ltd is building a multi-units residential complex. Last year, Sky Ltd entered into
a contract with a customer for a specific unit that is under construction. This 3 year
contract is expected to be completed next year. Company has determined the
contract to be single performance obligation satisfied over time. Company gathered
the following information for contract during the current year ( ie second year of the
contract)
Year- end 31st December (Rs. In lakh)
Cost to date 1,500
Future expected costs 1,000
Work certified to date 1,800
Expected sales value 3,200
Revenue recognized in earlier years 1,200
Cost recognized in earlier years 950
Calculate the figures to be recognized in the statement of profit or loss in respect of
revenue and cost for the year ended 31st December on both
a. A sale basis ( output method)
b. A cost basis ( input method )

Output and Input Method

Step 1 : Calculation of overall profit or loss
Revenue = Rs.3,200 Lakhs
COS = Rs.(1,500+1,000 lakhs)
Profit = Rs.700 lakhs

Step 2 : % of work completed

Input method = 1500 / 2500 = 60%
Output method = 1,800/ 3,200 = 56.25%

Step 3 : SOPL – Input method

Revenue ( 3200 X 60%) = Rs.1920 – 1,200 = Rs.720
COS ( 2500 X 60% ) = Rs. 1,500 – 950 = ( Rs.550)
Profit for the year = Rs.170

SOPL – Output method

Revenue ( 3200 X 56.25%) = Rs.1800 – 1200 = Rs.600
COS ( 2500 X 56.25% ) = Rs.1406 – 950 = (Rs.456)
Profit for the year = Rs.144
Revision Problem:

Step 1 : Computation of overall project profit

Transaction price = Rs.12,500 ( Revised price)

Total cost = Rs.11,100
Overall profit = Rs.1,400

Step 2 : Computation of work completed

(Input method = % = cost incurred till date / Total cost )(Amount ‘ 000)
2015 2016 2017 2018
Cost incurred 2,750 5,750(2,750+3000 9950 11,100
till date )
Total Cost 10,500 13,500 11,500 11100
% 26.19% 42.59% 86.52% 100%

Step 3 : Computation of Profit or loss for the year ( Amount ‘000)

2015 2016 2017 2018

Revenue (TP X %) 3,143 5,111-3,143=1,968 10,382 – 3143-1968 12500-3143-1968-5271
=5271 = 2118
(-) COS (TC X %) (2,750 5,750 – 2,750 = 9950-2750-3000 11100-2750-3000-4200
) 3,000 =4200 = 1150
Profit / Loss for 393 (1,032) 1,071 968
the year
Step 4 : Computation of Contract Asset or liability ( Cumulative / till date )(Amount ‘000)

2015 2016 2017 2018

Cost incurred 2,750 5,750 9,950 11,100
till date (2750+3000)
Profit or loss till 393 (639) – Loss 393-1032+1071 1,400(B/F)
date (393 – 1032) = 432 (12,500 – 11,100)
Amount 3,143 5,111 10,382 12,500
receivable till
date
Amount 3,000 5,000 11,000 12,500
received till
date
Contract 143 - Asset 111-Asset Liability=618 NIL
Asset /Liability