- 22 Marks
FR – L2 – Q13 – Revenue Recognition
Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.
Question
13 Davies Ltd
Davies Ltd manufactures and sells machines and has a 31 December year-end.
Customers are required to pay a deposit of 10% on order. The remaining 90% is paid on delivery.
Machines are delivered to customers by a third party. Within one week after delivery, Davies Ltd’s employees install the machines on customers’ premises. The installation required is not complex and is capable of being performed by several alternative service providers. Installation costs 1% of the transaction price.
A fee for a three year servicing contract amounting to 6% of the transaction price, are included in the final invoice.
Required
(a) Explain how performance obligations are identified when deciding how to account for a contract to supply goods and services in accordance with IFRS 15.
(b) Identify and explain the performance obligations that should be identified in the above contract.
Construct journals for the year end to 31 December to account for a sale of a single machine with a selling price of GH¢1,000,000 in each of the following circumstances.
(c) Circumstance 1: A customer orders the machine on 30 November. It is delivered and installed on 10 January.
(d) Circumstance 2: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 10 January.
(e) Circumstance 3: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 30 December.
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