Retallick Ltd sells boats and provides mooring services to its customers. They usually sell the boats for $30,000 each and mooring services for $5,000 per year paid annually in advance. Furthermore they consider the boats and mooring services to be distinct and account for them as separate performance obligations.
Retallick Ltd agrees to sell Coleman a boat and 1 year of mooring services on 1 July 2017 for $32,500. Finance is available from the local bank at 10% p.a. for customers wanting to borrow to finance the purchase.
Required:
For Retallick Ltd
Current revenue bifurcation product wise :
Boats | 30,000 |
Mooring Services | 5,000 |
Total | 35,000 |
When single price agreed for one or more products the revenue needs to be bifurcated between all products as per their fair prices. Usually their prices when they are sold standalone is used to derive the fair value allocation which is worked out as under :
Boats | 27,857 |
Morring Services | 4,643 |
Total | 32,500 |
Q.1 a - Journal Entry on 1st July 2017
Colmen A/c Dr | 32,500 | |||
Revenue for Boats A/c Cr | 27,857 | |||
Revenue for Mooring service A/c Cr | 4,643 | |||
(Being revenue recognised and allocated to two products) |
The mooring service is usually for one year however the payment terms is 1 year in advance. As per US Local GAAP if an advance payment have component of financing then allocation needs to be carried out between revenue from product/service and finance income/expense. However the intention of advance payment is not in relation to financing but it is for administrative convenience (instead of monthly payment) and also targeted towards retention.
Q.1 b : Journal Entry for 31st July 2017 for Monthly financial reporting :
The mooring service have duration of 12 month period hence the revenue for July-17 is for only one month & hence 11 month revenue needs to be transferred to deferred revenue :
Revenue for Mooring service A/c Dr | 4,256 | ||
Deferred revenue for Mooring Service A/c Dr | 4,256 | ||
(Being 11 month revenue for mooring services transferred to deferred revenue) |
Retallick Ltd sells boats and provides mooring services to its customers. They usually sell the boats...
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