[Razaul Karim]

Question # 1

I have a got problem with revenue recognition:

Splendid Limited publishes a local languages newspaper which is distributed through agencies in sal cities and towns. the demand for newspapers is quite volatile.Agencies return the unsold newspaper to Splendid Limited at the end of a particular month for refund/credit.

Can you plz tell me when it will be appropriate for Splendid Limited to recognize revenue from sale of newspapers?

Question # 2

On 1 July 2011, Brilliant Limited, an importer of textile machinery, sold a machine

Costing Rs. 3.6 million to its regular customer Superb Textile Mills Limited. The details of

the transaction are as follows:

Delivery of the machine was made on 5 July 2011.

Cash price before trade discount was Rs. 4.8 million.

Trade discount amounted to Rs. 0.8 million.

The agreed price is payable in three annual installments as follows:

30 June 2012 Rs. 0.4 million

30 June 2013 Rs. 0.4 million

30 June 2014 Rs. 4.8 million

Required:

Discuss the recognition and measurement of revenue from the above transaction.

(Calculations are not required)

[Roma]

Both questions raise several interesting issues on revenue recognition.

1. I would think that if Splendid is unable to quantify sales / returns (due to volatility), then it should not recognize revenue until the end of month. Other factors come into play not mentioned in the question. Is Splendid actually selling the papers to the Agents and collecting cash initially based on shipment? If Splendid is selling to the Agents and IS ABLE to reasonably estimate returns, then there may be rationale to recognize revenue + a provision for returns at time of shipment.

2. Several factors/assumptions come into play. The timing of revenue recognition (and gross profit) generally would be at the title transfer point based on the contract (i.e. either at shipment, receipt or acceptance). Sales would be measured at Rs 4.0 Million (always net of trade discounts) which I am assuming is also the present value of the payments. The remaining value of the payments would be recognized as interest income as earned. This answer assumes 1) collection is probable and 2) installment method is not being used. If collection is uncertain, then the installment method might be used to recognize both revenue and gross profit when payment is received.

I am not really certain about the above, but hopefully this identifies some of the issues.

Good luck.

Using Wiley
FAR = 94 Feb 2012
BEC = 92 April 2012
AUD = 95 July 2012
REG = 91 Nov 2012

[Razaul Karim]

Well……………in..case.of….Question #2

If it is Installment method then do you think the revenue will be deferred ? And if it is then what amount should be recognized during 2011 to 2012 ? and how much should be deferred ? Whether am I thinking right?

[Roma]

@Razaul,

If the installment method were to be used in question #2, no revenue / profit would be recognized in 2011. Revenue would be recognized in future years as cash is received and profit would be recognized as: Revenue Recognized * Gross Profit %. In this case, the gross profit % would be (4.0 Sales Price – 3.6 Cost ) / 4.0 = 10%. Interest income would also be recognized.

Hope this helps.

Using Wiley
FAR = 94 Feb 2012
BEC = 92 April 2012
AUD = 95 July 2012
REG = 91 Nov 2012

[Razaul Karim]

I have a question to the relevant topic which I have solved by myself. Now I would like to ask whether the solution I made is it OK in case of the presentation and calculation and i have made any mistakes…………………………?

Question:

WL is engaged in the manufacturing and sale of textile machinery.Following are

the draft extracts of the Statement of Financial Position and Statement of Comprehensive Income

for the year ended 30 june 2012

Statement of Financial Position

($ million)

yr 2012 yr 2011

Property Plant & Equipment 189 130

Retained Earnings 166 108

Deferred Tax 45 27

Statement of Comprehensive Income

($ million)

yr 2012 yr 2011

Profit before tax 90 120

Taxation 32 42

Profit after tax 58 78

Following additional information has not been taken into account in the

preparation of the financial statement:

(i) Cost of repairs amounting to $ 20 m was erroneously debited to the machinery

account on 1 October 2010.The estimated useful life of the machine is 10 years.

(ii) On 1 July 2011,WL reviewed the estimated useful life of its plant and reviewed

if from 5 years to 8 years.The plant was purchased on 1 July 2010 at a cost of $ 70m.

Depreciation is provided under the straight line method.Applicable tax rate is 30%.

Required;

Prepare relevant extract (including comparative figures) for the year ended 30 June

2012 related to the following:

(a)Statement of Financial Position

(b)Statement of Comprehensive Income

(c)Statement of Changes In Equity

(d) Correction fo Error Note

Answers:

(a) Statement of Financial Position

Restated)

yr 2012 yr 2011

Property Plant & Equipment 189 130

Less:Repairs & Maintenan -20 -20

Add: Added back depreciation

wrongly debited 3.5 1.5

Less: Depre added back calculated

on 5 years earlier 14

Less: Depre of Machinery -8

178.5 111.5

(b) Statement of Comprehensive Income

(Restated)

yr 2012 yr 2011

Profit before tax 90 120

Add: Depre of machinery 2 1.5

Less: Cost of Repairing & Maintenance

-20

Add: Depre of Machinery (5 yr useful life)

14

Add: Depre of Machinery (8 yr useful life)

-8

98 101.5

Tax@30%

(29.4) (30.45)

68.6 71.05

© Statement of Changes In Equity

(Restated)

yr 2012 yr 2011

Opening earnings as previously recorded

108 30

Correction of fundamental error

6.95

101.05 30

Net profit 68.6 71.05

169.65 101.05

(d)

Correction of Error Note

1.1 An adjustment $20m has been made in the

the Statement of Comprehensive Income for the year 2011 for representing the

effect of fundamental error retrospectively.

1.2 The changes of accounting estimate has been accounted

for prospectively in the year 2012.

[jenuno01]

Congrats on solving this on your own… I wanted to help, but I can't even follow what you wrote. Maybe present it in a different format. Also, is this a CPA exam question? Seems like your Intermediate Acctg homework lol

Class of 2012

[Author]

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