- 6 Marks
AT – Nov 2014 – L3 – SB – Q2c – Corporate Tax Compliance and Reporting
Determine whether Maidogo Limited’s revenue recognition change is a policy change and calculate adjusted revenue for NIXAQ.
Question
Maidogo Limited sells NIXAQ, a product manufactured by it, from several retail outlets. In previous years, the company has undertaken responsibility for fitting the product in customers’ premises. Customers pay for the product at the time they are ordered. The average length of time it takes from ordering to its fitting is 14 days. In previous years, Maidogo Limited had not recognised a sale in its books until the product had been successfully fitted because the rectification costs of any fitting error would be expensive.
With effect from 1 April, 2013, Maidogo Limited changed its method of trading by sub-contracting the fitting to approved contractors. Under this policy, the sub-contractors are paid by Maidogo Limited and they (the sub-contractors) are liable for any errors made in the fitting. Consequently, Maidogo Limited is proposing to recognise sales when customers order and pay for the goods rather than when they have been fitted.
Details of the relevant sales figures are:
- Sales made in retail outlets for the year to 31 March, 2014: N69,000,000
- Sales value of NIXAQ fitted in the 14 days to 14 April, 2013: N3,600,000
- Sales value of NIXAQ fitted in the 14 days to 14 April, 2014: N4,800,000
Note:
The sales value of NIXAQ in the 14 days to 14 April, 2013 is not included in the annual sales figure of N69 million, but those for the 14 days to 14 April, 2014 are included.
Required:
- Discuss whether the above represents a change in accounting policy.
- Calculate the amount to include in revenue for NIXAQ for the year to 31 March, 2014.
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