9.

5 Required: According to generally accepted accounting principles, determine the total amount of sales revenue Steele Ltd should report on its statement of financial performance for 2008. 1. 2. There is no sale. Sale made for $300 000. Risks and rewards of ownership pass when the goods are shipped (EXW shipping point), which has occurred. Sale of $12 000 000 made. It does not matter that $200 000 has not been received in cash, since the accrual method is used. This is a consignment, not a sale. The sales basis should be used, since there is no great uncertainty of collecting the payments. Sales of $150 000 to be recorded. There is interest income of $3 000. There is no sale. Paper products do not qualify for the revenue recognition exception of recording revenue at end of production. $ 300 000 12 000 000 150 000 $12 450 000

3.

4. 5.

6.

Sales revenue for 2008

The interest income is not sales revenue.

9.6 Required: Prepare entries to record the sale of the franchise to T under each of the following assumptions: (a) The deposit is not refundable, no future services are required by the franchisor and collection of the note is reasonably assured. (b) The franchisor has substantial services to perform and the collection of the note is very uncertain. D Ltd will charge an annual fee of $4 000 for services rendered. (c) The deposit is not refundable, collection of the note is reasonably certain, the franchisor has yet to perform substantial services and the deposit represents services already performed. (a) Cash Notes Receivable (at present value) Revenue from Franchise Fees $150 000 128 855 $278 855

It is possible to record the note at $150 000 and credit a discount account for the difference (150 000 128 855 = 21 145) Present value of ordinary annuity, 3 periods, 8% 2.5770 $50 000 = $128 855 (b) Cash Unearned Franchise Fees (c) Cash Notes Receivable (at present value) Revenue from Franchise Fees Unearned Franchise Fees 150 000 128 855 150 000 128 855 150 000 150 000

9.4

Revenue was recognised when the events below occurred (accrual system). State whether it was proper or improper according to accepted recognition principles. No. There is no sale there was no transfer of significant risks and rewards of ownership. No. Revenue should have been recorded a year ago when the repair was done. Yes. There is a credit sale. The transfer of goods and the risks and rewards of ownership have passed. No. Title does not pass until the common carrier has possession of the goods. The common carrier is the agent of the buyer in this case, and the goods have not been delivered to the agent yet. No. Title passes at point of destination, and presumably the goods are still in transit. Yes. The sale has occurred for two reasons. First, delivery is delayed at the convenience and request of the buyer. Second, the item is unique and costly, and therefore, legally, the sale is made when the buyer agrees to purchase the 1912 automobile. The presumption here is that delivery is the only outstanding action, and that the significant risks and rewards of ownership have passed to the buyer. No. This is cash received in advance of the sale of the service. This is unearned revenue. It depends on whether the conditions specified in AASB 118 are met. If significant risks and rewards of ownership have passed to the buyer and the seller effectively no longer controls the goods and it is probable that the sale will take place, they could recognise the revenue now. If not, recognition should be delayed. No. This is a consignment, not a sale. No. There is no performance yet. If the company had already begun to construct the yacht, then it could record the full amount as revenue. If there is performance, then a sale has been made. This assumes that the contract is not cancellable and that costs to be incurred can be measured reliably. Yes. The sale was made because the truck was delivered. This is not an instalment sale, since there will be no periodic payments. Despite the fact that legal title has not passed, this is simply a credit sale. Yes. Although this is an instalment sale, the sales basis should be used, because there is no evidence of great uncertainty in collecting the payments.

1. 2. 3.

4.

5. 6.

7. 8.

9. 10.

11.

12.

9.2

State whether revenue (or gain) is to be recorded in the following cases:

1.

Yes. In this case, the orchard is a biological asset, and according to AASB 141, changes in the fair value of biological assets are taken to profit or loss at the end of each accounting period. The trees will be measured at fair value less estimated costs to sell. Yes. The tax refund qualifies as other income. It is not extraordinary and it is not a prior period adjustment. There is a realised increase in assets (increase in wealth) and the transaction is not a capital or financing one. Yes. The cash from the lawsuit qualifies as other income. It is not a prior period adjustment. There is a realised increase in assets and the transaction is not a capital or financing one. No. Production of paper does not qualify for the end of production revenue recognition principle, unless the firm has a financial contract. Yes. There is a gain of $10 000. Since the amount of recovery from the insurance company exceeds the carrying value, a gain will be recorded. Yes. An exchange of non-monetary dissimilar assets completes the earning process, and therefore a gain of $10 000 is to be recorded. The receipt of a cash dividend is usually treated as income. Where a dividend is not received in cash, but rather in shares, the decision of whether it is income or not depends on how the market views the share dividend. If the market value of the shares drops, so that in total Company Xs investment value (and therefore net asset base) has not changed as a result of the share dividend, then there would be no income. However, if the overall value of the assets has increased by the receipt of the additional shares, then the definition of revenue is met and the dividend would be treated as income. There is insufficient information here to give a definitive answer, but students should be encouraged to discuss the issues around this. Yes. An inflow of economic benefits has occurred and can be measured reliably.

2.

3.

4.

5.

6.

7.

8.

9.3 Required: Calculate the amount of revenue for each year under each of the following recognition principles: (a) sales recognition principle (completed contract method) (b) production recognition principle (percentage-of-completion method) (c) instalment recognition principle (cash received method).
(a) Completed contract method: 2005 0 2006 0 2007 0 2008 $600 000 2009 0

Revenue

The project was completed in 2008, and therefore the sale is consummated in that year. (b) Percentage-of-completion method: 2006 $150 000 $100 000/$400 000 = 25% 25% $600 000 = $150 000 $350 000/$400 000 = 87% less 25% = 62% 62 $600 000 = $375 000 $400 000/$400 000 = 100% less 87 = 12% 12% $600 000 = $75 000 2007 $375 000 2008 $75 000

Revenue For 2006:

For 2007:

For 2008:

(c)

Cash received method: 2006 Revenue 0 2007 $100 000 2008 $200 000 2009 $300 000