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Application Problem 4-2B al, b (Part Level Submission) Derby Transportation Inc. designs and buids trains for rail networks across Canada. The company, which is publicly traded, has an October 31 year end. On March 15, 2020, Derby Transportation signed a contract with OM Corridor Corp. to design and build 10 high-speed trains, with each train consisting of seven passenger cars. The high-speed train will operate between Ottawa and Montreal. The following events took place in 2020 in relation to the contract: 1. March 15: At the signing ceremony, officials from Derby and OM sign a contract, which is for $12,000,000. Derby is to design, manufacture, and deliver the 10 trains to ON'S train yards in Montreal, Derby's management estimates that the design component of the contract would be valued at $2,389.980 if contracted for separately, while the manufacturing of the ten trains would be valued at a total $10,670,020 they were purchased separately. Derby agreed to provide a two-year assurance-type warranty for the trains, and the company's management estimates that the warranty dams would total $520,000 based on experience. OM agrees to pay a $5,490,000 deposit within 14 days of signing the contract and to pay the balance within 45 days of the trains receiving final approval and certification from the Transportation Safety Board. 2. March 29: OM pays the deposit specified in the contract. 2. May 9: Derby's engineering staff complete the train design and it is approved by officials from OM as well as the Transportation Safety Board. 4. August 1: Derby completes construction of the 10 trains. 5. September 1: The 10 trains are delivered according to the contract to OM's Montreal train yards. 6. September 30: After testing for safety compliance, the trains receive final approval from OM and the Transportation Safety Board and are certified to carry passengers. 7. November 15: OM Days the balance owing on the contract ( 1) Determine when and how much revenue Derby would be able to recognize for the year ended October 31, 2020. (Hound allocation percentage o 1 decimal nace, 15.296 and final answers to decimal places . 125.) o Revenue recognized on Revenue recognized on

Answer 1

Design component of the contract - $2,389,980/-

Manufacturing of ten trains - $ 10,670,020/-

Warranty claim - $520,000

Allocation of revenue as per IFRS 15 i.e. Revenue from contract with customers

The revenue will be divided as per the fair value of different performance obligation.

Allocation of revenue-:

Particulars	Fair Value	Revenue
Design component of the contract	$   2,389,980.0	$   2,111,911.6
Manufacturing of ten trains	$ 10,670,020.0	$   9,428,589.1
Warranty claim	$      520,000.0	$      459,499.3
Total	$ 13,580,000.0	$ 12,000,000.0

Revenue recognition-:

May 9-: Since the designing component of the train is complete, so the Company should recognise $2,111,911.6 after Transportation board safety approval.

September 30-: The Company should account for $9,428,589.1 after getting final approval.

Note-:

(I) Warranty commission will be recognised in next two financial years.

(II) The Company should also opted for revenue recognition based upon POCM model for month on month revenue recording.

(III) It not necessary to receive the amount before year end to recognise the revenue.