- 4 Marks
Question
On September 20, 2019, Phonetell Nigeria Limited sold 100 units of Android PT-Tablet to a major customer for N200,000 each. The PT-Tablet costs Phonetell Nigeria Limited N160,000 each.
The terms of sales are that the customers have the right to return the tablets for a full refund within 3 months. On expiration of the 3 months period, the customer can no longer return the PT-Tablet, and payment becomes immediately due. Phonetell has entered into transactions of this type with these customers previously and can reliably estimate that 4% of the Android PT-Tablets are likely to be returned within the three-month period.
Required:
Explain how the above transactions would be reported in the financial statements of Phonetell Nigeria Limited for the year ended September 30, 2019.
(4 Marks)
Answer
When the customer has a right to return products, the transaction price
contains a variable element.
• Since this can be reliably measured, it is taken into account in measuring the
revenue and the total revenue will be N19,200,000 i.e. (N200,000 x 96).
• N20,000,000 i.e. (N200,000 x 100) will be recognized as receivable.
• It implies that N800,000 i.e. (N20,000,000 less N19,200,000) will be
recognized as a refundable liability. This will be shown as current liability.
• The total cost of goods sold is (N160,000 x 100) = N16,000,000 of this amount
only N15,360,000 i.e. (N160,000 x 96) will be shown as cost of sales.
• The other N640,000 i.e. (N16,000,000 – N 15,360,000) will be shown as a
right of return assets under current assets (inventory).
• Reported Gross Profit = N3,840,000 (i.e N 19,2000,000 – N 15, 360,000)
- Tags: IFRS 15, Returns, Revenue Recognition, Variable Consideration
- Level: Level 2
- Topic: Revenue from Contracts with Customers (IFRS 15)
- Series: NOV 2019
- Uploader: Kofi