Goodwill and Revenue recognition class activity

Question 1

At the acquisition date Company B’s assets and liabilities are valued as follows:

Book value Fair value

Current assets 10 000 10 000
Plant and equipment 190 000 220 000
Land 120 000 140 000
320 000 370 000
Liabilities 100 000 100 000
Net assets 220 000 270 000

Company A believes the value of Company B is higher than the fair value of the net assets
and offer €100 000 for a 25% interest in Company B. A part of the excess purchase price is
attributable to the difference between book value and fair value of the identifiable assets and
a part to goodwill.

REQUIRED

Calculate goodwill.

Example 2:

On 1 January 2014 Company A acquired 30% of Company B for the cash price of €1 million.
Company A can exert significant influence on Company B’s financial and operating
decisions. Company B’s assets and liabilities had the following values on 1 January 2014:

Company B Book value Fair value

Current assets 200 000 200 000
Plant and equipment 3 800 000 4 400 000
4 000 000 4 600 000
Liabilities 1 600 000 1 600 000
Net assets 2 400 000 3 000 000

REQUIRED

Calculate the Goodwill

Question 2
Fairplay had the following information related to the sale of its products during 2006, which was its
first year of business:
Revenue €1,000,000
Returns of goods sold €100,000
Cash collected €800,000
Cost of goods sold €700,000

Under the accrual basis of accounting, how much net revenue would be reported on
Fairplay’ s 2006 income statement?
Question 3

iSolutions Ltd has a contract to install and implement a new ERP system for a customer for a total
sales price of R9 000 000. The system will take an estimated three years to install and implement.
Total costs to iSolutions Ltd are estimated to be €5 400 000. iSolutions Ltd recognises long-term
contract revenue using the percentage-of-completion method and estimates percentage complete
based on expenditure incurred as a percentage of total estimated expenditures.

1. At the end of Year 1 iSolutions has spent €2 700 000. Total costs to complete are estimated
to be another €2 700 000.

2. At the end of Year 2 iSolutions has spent €4 320 000. Total costs to complete are estimated
to be another €1 080 000.

3. At the end of Year 3 the contract is complete. iSolutions Ltd spent a total of €5 400 000.

REQUIRED

Calculate how much revenue iSolutions Ltd will recognise in each of the three years.

Question 4
Use the same information as supplied in example 2, except that iSolutions Ltd is unsure of the
extent of the costs as new technologies are involved. Calculate how much revenue was recognised
each year using the completed contract method.

Question 5

Stelle Technology has a contract to build a network for a customer for a total sales price of €10
million. The network will take an estimated three years to build, and total building costs are estimated
to be €6 million. Stelle recognizes long-term contract revenue using the percentage-of-completion
method and estimates percentage complete based on expenditure incurred as a percentage of total
estimated expenditures.

1. At the end of Year 1, the company has spent €3 million. Total costs to complete are estimated to
be another €3 million. How much revenue will Stelle recognize in Year 1?

2. At the end of Year 2, the company has spent €5.4 million. Total costs to complete are estimated to
be another €0.6 million. How much revenue will Stelle recognize in Year 2?

3. At the end of Year 3, the contract is complete. The company spent a total of €6 million. How much
revenue will Stelle recognize in Year 3?

Question 6
Kolenda Technology Group has a contract to build a network for a customer for a total sales price of
€10 million. This network will take an estimated three years to build, but considerable uncertainty
surrounds total building costs because new technologies are involved. Kolenda recognizes contract
revenue using the completed contract method.

1. At the end of Year 1, Kolenda has spent €3 million. How much revenue will the company
recognize in Year 1?

2. At the end of Year 2, Kolenda has spent €5.4 million. How much revenue will the company
recognize in Year 2?

3. At the end of Year 3, the contract is complete. Kolenda spent a total of €6 million. How much
revenue will the company recognize in Year 3?