exercises

1. exercises REVENUE RECOGNITION

2. REVENUE RECOGNITION When should revenue be recognised in the following independent circumstances? Assumed financial year end 31/12/20x8 (a) Goods at selling price of RM10K were sent out on 14-day ‘sale or return basis’ on 20 December X8 which were not returned by the balance sheet date The specification for the term period of sales is 14 days. Within this period, it is probable for sale transaction to take place and at same time for buyers to return back their purchase. Nevertheless, once the sale has taken place, there is a transfer of significant risks and reward. The fact that the gds can be return (if faulty) does not impose significant risk on the seller. However, from the statement there is no indication that the goods have changed hands (legal title and possession) rather the fact that goods have been sent out to be sold. Hence revenue should be

3. Continue from (a) recognised when the goods have been sold to the customer. If it has been sold, revenue should be recognised after the 14 days have passed to remove the element of uncertainty.

4. Continue… (b) Commission of RM 2K was received by an agent for selling a 20 year life insurance policy The agent was employed to sell life insurance policy. Eventhough, the policy will mature in 20 years time, the agent has provided or performed the service and hence would recognised the RM2K commission as revenue upon completion of service.

5. Exercise continue….. (c) On 1 Dec, the company received RM800 cash from the sale of a television set whereby the customer had agreed to pay 40% down payment and the balance in 6 monthly installments beginning on 1 January x9. As at 1/12/20x8, the sale had taken place and the revenue of RM2000 would Be recognised the fact that significant risk and rewards had been transferred to the buyer (changed hand or delivered to the customer) and the seller may hold insignificant risk with respect to legal title of the television until all payment due has been paid. Eventhough the cash received was RM800, the amount of revenue recognised would be RM2000, where the balance of RM1200 would be a debtor balance in the company’s a/c as f/s is prepared based on accrual basis and not cash basis.

6. Exercise Continue…. (d) On 1 November x8, Fragrance Wonder entered into a contract to deliver 100,000 sachets of perfume to Pleasure Hotel. The hotel paid RM40,000 on signing the contract and the balance of RM60,000 to be paid on delivery. However Fragrance wonder would only be able to deliver the perfume in February x9. In a separate contract with Ruby Hotel , Fragrance Wonder had delivered 50,000 sachets in May x8. The sales value was RM60K but Ruby Hotel had paid only RM25,000 and promised to pay the balance in April X9

7. Answer continue…. For the first case Fragrance Wonder can only recognise the revenue of RM100K upon the delivery of the perfume which is expected to be in February x9. The RM40K is an unearned profit and only realisable upon the delivery of the perfume to Pleasure Hotel. On the second case, Fragrance Wonder would recognise a revenue of RM60K in May X8 as the sale transaction has completed, i.e. the goods have been delivered to the customer. It will debit cash of RM25K and debtor or receivable balance of RM35K.

8. Exercise continue….. (e) Receipt of RM25,000 by the radio station to play an advertisement daily 10 times during the ‘morning hour’ for a period of 5 months. The cash was received on 1 September x8 and the advertisements were aired from 1 October x8. The airing of advertisement is a form of service. Upon the completion of the service the revenue would be recognised accordingly. In this case how to recognise the revenue. The RM25000 is a payment to the Radio station for playing 10 times of the advertisement during the Morning hours for a period of 5 months. The radio company may Apportion the RM25K on monthly . For instance up to 1/11/x8 the amt Of revenue that can be recognised is RM5K to reflect the 20% Completion Of the service. By end of 31/12/x8, the total amount of Revenue recognise would be RM15K.

9. Exercise Continue (f) Jacques an architect was commissioned in July to design a mansion for a total fee of RM2 million. Jacques estimated that the total cost he will incur will be RM1 Mil. As at the balance sheet date, he had completed 60% of the work. To date Jacques has received RM800K from the client. As at 31/12/x8 the revenue that Jacques should recognise would be: Revenue = 60% x RM2 = RM 1.2Mil. Cost to expense would be 60% x RM1Mil = 600K. (To recognise revenue and costs relatedto the genneration of revenue simultaneously). Dr Cash of RM800K, Dr 400K and credit Commission of RM1.2Mil

10. Continue…. (g) Sandiwara Semasa had recorded a new set of songs. The recording company had to date produced 1 million compact disc but only 400K were distributed for sales. The royalty agreement provides that royalty of RM10 will be paid based on the number of compact disc sold. As at 31/12/x8, revenue from royalties for Sandiwara Semasa is not yet confirmed as there is no information indicated for the sale of the disc other than the fact that 400K disc have been distributed for sale. The derivation of revenue from royalties can only be recognised upon the sale of the disc by the

11. Continue distributor to the customer, which is also part of the royalty payment agreement. Upon the sale of the 400K disc by 31/12/x8, Sandiwara would recognise the revenue from royalty for the amt of RM400K x RM10 = RM4 Mil

12. Exercise continue…. h) Merchant Traders sell their machine subject to installation. On 15Septx8, it received an order to install its machine at the premises of Kline Manufacturers. The cost of the machine was RM3 Mil. As at the end of the year the installation was not completed although Kline Manufacturers had paid RM1Mil

13. Continue…. • Interest of 6% per annum from fixed deposit of RM20K for 15mths was received on 1 MarchX8. (j) Serina publisher publishes a monthly internal design’s magazine called Minimalise. Carriage SdnBhd paid RM4K for advertising their products on the centre pages in 12 issues of the magazine. As at the end of the year Serina Publisher had only managed to run four such advertisements

14. Exercise Continue State with reasons when should revenue be recognised in the following cases • Home Shopping SdnBhd has sent gds worth RM4K to a buyer on 15Aug2000. The buyer has been given 30days to return the gds if he is not satisfied with the gds • NTV7 was paid RM25K for an advertisement project. The advertisement would be shown on the television for a period of 6 months starting from 1 May 2000 • RM500K was collected by Mega Entertainment from sales of tickets to an Orchestra Concert which will be performed at Stadium Negara on 31July 2000 • RM500 commission was received by an agent for selling 10 vacum cleaners on 10august 2000

15. Exercise continue • Tour and Travel company, taj Travel conducts tours to Europe. Customers are required to pay a deposit of 10% on booking and the balance 2 weeks before the tour. The company recognises revenue when the tour starts. Recently it introduced compulsory insurance purchase by the customers whereby the company will be compensated for the cancellation of booking. The company wants to recognise the revenue now, when the customer makes a booking as it is assured of revenue. Required Advise the company on the proposed change in the timing of recognition of revenue.