FR - Specific Application

Question 1

Explain what long-term construction contract is used for

Answer 1

• THe obligation of longer term contract satisfied over a period of time
• Can include multiple performance obligation, transaction price would be allocated to various components

Question 2

What is the general ledger accounting used to determine long-term contract

Answer 2

• Contra asset account -progress billing.
• All eligible construction-related costs are debited to the contract asset account
  -Interim billing on the project, net balance of the contract asset, and progress billing account is reported on statement of FP

Question 3

Provide the GL accounting for the long term construction contract

Answer 3

Cost incurred for the year
1. Dr. Contract asset xx
Cr. Cash, A/P, other account xx
Billing to client
2. Dr.Account Receviable xx
Cr. Progress billing (contra). xx
Receiving payment from the client
3. Dr. Cash xx
Cr. Accounts receivable xx
Revenue and expense recognition ( at each period)
4. Dr. Cost of sales xx
Dr. Contract asset xx
Cr. Revenue xx
At the completion of the contract
5. Dr. Progress billing xx
Cr. Contract asset. xx

Question 4

Explain how cost plus contract and fixed price contract is determine

Answer 4

1. Cost plus contract - Requires customer to reimbursement the entity for all expenses plus an agreed upon fee for completing the contract (% or fixed amount considered)
2. Fixed price contract - Customer pay the entity a fixed amount for completing the contract. Outcome include.
   
   • Eneitty earns overall profit in all period
   • Entity earns an overall profit of contract but suffer loss in more than one period
   • Entity suffers an overall loss on the contract

Question 5

What is the 4-step process to determine the amount of revenue and cost of goods expenses in each period

Answer 5

1. Estimate the expected profit or loss of the contract
   - Total the sum of costs incurred to date and the estimated remaining cost to satisfy the performance obligation
2. Determine the stage of completion
   - Progress on construction contract can be measured using either input or output measures.
   Output based method : Percentage completed = work certified to date/contract price
   Cost to cost approach: Percentage completed = cost incurred to date / estimated total cost
3. Calculate revenue
   - Current period revenue = percentage completed * Contract price - cumulative revenue previously recognized
4. Ascertain COGS (expenses) -
5. Contract profitable in all period
6. Contract profitable overall but a loss is suffered in one or more period
7. Loss on contract (onerous contract)

Question 6

What incurs when there is a cost increase in fixed price contract

Answer 6

• Can be difficult to accurately estimate contract cost and unexpected events can occur that cause additional cost to be incurred
• Cost are accounted for on a prospective basis, adjusted for current and future period but not prior

Question 7

Explain what a consignment arrangement is

Answer 7

• Consignment arrangement is where an entity delivers a product to a second party to sell
  It is for the following:
  1. Product is controlled by the consignor until a specified event occurs, such as sale of the product by consignee to the customer
  2. Consignee does not have an unconditional obligation to pay for the product
  3. If goods are not sold in a consignment arrangement within a specific period of time, item will return to consignor.
  4. When goods are sold, consignee has an obligation to pay the consignor the proceeds on the sale

Question 8

What happens when there is a right for sales return in revenue recognition

Answer 8

• IFRS 15 consideration of variable consideration for rights to return
• If the vendor cannot estimate the amount of sales return back, revenue cannot be recognized, recognized as deferred revenue
• Estimate can be measured - revenue is recognized at an amount the vendor is expected to pay. REfund liability is recognized for the consideration
• COGS is recognized in line with the revenue that is expected to be received

Question 9

Explain what rebates and volume discount is when recognizing revenue

Answer 9

1. Rebates - a reduction in price to the customer after the customer has already paid for the goods. Measure by. 1. Expected value, 2. Most likely amount
2. Volume discount - adjustment to price of goods or service based on the quantity of goods or services purchased. Decrease the cost of filling order for the seller
   • Is a reduction in price before customer payment

Question 10

What is a bill-and-hold arrangement

Answer 10

• Is when an entity bills a customer for a product, but entity retains physical possession of product until it is transferred to customer at point in time in the future
• Initiated by the customer

Question 11

What are the 4 requirement for when revenue should be recognized for bill and hold arrangement

Answer 11

1. Control must have change hands, which is possible in certain circumstances even if physical delivery has not occurred
2. Reason for the bill to hold arrangement must be substantive
3. Product must be identified separately as belonging to customer
4. THe product must currently by ready for physical transfer to the customer

Question 12

Explain what a principal-agent arrangement is

Answer 12

• Revenue excludes amount collected on behalf of third parties, involves in providing goods or service, entity needs to assess whether it is principal or agent
  Factor: Entity does not bear inventory risk
  The entity has no discretion in establishing the price
  Entity consideration is in the form of commission

Question 13

Explain how revenue recognition is determine for royalties and warranties

Answer 13

1. Royalties - payment made for ongoing use of originally created assets and license based intellectual property and can include copyright
   - Royalities may be paid to software develops based on sales of software. Revenue recognized in same period
2. Warranties - A promise from an entity to a customer to replace or repair a good or service. Accounted for in IAS 37

Question 14

What are refundable and non-refundable fees

Answer 14

1. REfunable fee - up to the point the performance obligation has been satisfied, seller is fully entitled to the fee
2. non-refundable fee - paid up front at once or at inception of the contract in which it is not return back to the payer. Ex. Fitness membership, often recognized either when it is received or on basis of timely manner of membership on a basis.