Question

Really Nice Company Pte Ltd (RNC), a non-GST registered company, manufactures and markets computer hardware, middleware and software, and provides hosting and consulting services in areas of mainframe computer. On 1 September 2017, RNC entered into a 36-month InfoSphere Information Server (IIS) contract with a Singapore-based internet search provider. RNC’s financial year ends on 31 December. The terms of the contract are as follows: Monthly server consulting and maintenance fixed fee: $5,500 (to be billed monthly) A complimentary IIS computer at the inception of the plan. RNC sells the same IIS computer separately for $12,000 and the same monthly plan without the IIS computer for $6,000.

i) Identify the 5 steps that are applied to recognise revenue in accordance with FRS 115 (SFRS(I) 15 Revenue from Contracts with Customers.

ii) Suppose steps one and two of the 5-step model are met in recognizing revenue in accordance with the core principle stated in FRS 115 (SFRS(I) 15).
What is the transaction price for the 1 September 2017 contract?

iii)What is a performance obligation? Under what conditions does a performance obligation exist?

iv)Under FRS 115 (SFRS(I) 15), determine the allocation of the transaction price to the performance obligation(s) identified in the 1 September 2017 contract. Be specific with regard to amount (if any).

v)Under FRS 115 (SFRS(I) 15), when and how much should RNC recognise revenue for the 1 September 2017 contract? Show all the necessary journal entries.

Note: For (ii) (iv) (v), show all necessary workings and round off all your workings including percentage to integer.

Answer 1

Answer to the Question No. 1.

The 5 steps that are applied to recognize revenue in accordance with FRS 115 (SFRS(I) 15 Revenue from Contracts with Customers are as followes: -

• Step 1: Identify the contract with a customer.
• Step 2: Identify the performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction prices to the performance obligations in the contract.
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Answer to the Question No. 2.

The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, hence in the above said question the transaction price is $5,500 per month. Thus total Contract price for 36 months is $1,98,000.

Answer to the Question No. 3.

Performance obligations are the promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations.