Chapter 6

Illustration 1

Principal versus agent

A ticket agency sells tickets to a theatre show for $100. The ticket agent is entitled to a commission of 5% of the
ticket price and passes the remainder to the theatre. The tickets are non-refundable and there is no sales tax.

Solution
The ticket agent can only recognise ………………… as revenue rather than recognising
$100 as revenue and $95 as costs as the ticket price is collected as agent on behalf of the theatre.
The remaining $95 received is reported as ……………………..

Illustration 2
A wholesaler sells goods to a retailer for $42,000 on credit on 31 December 20X1 and accounts for them as a
sale.
The wholesaler sells at a mark-up of 20% on cost.
The retailer will sell the goods to the final customer, but can return any unsold goods for a refund. No goods were
sold to the final customer on 31 December 20X1.

Required
What are the adjustments needed to correct the wholesaler's financial statements for the year ended 31
December 20X1?
Solution
Revenue cannot be recognised in the wholesaler's financial statements as at 31 December 20X1 as control has not
transferred to the buyer (the retailer).
The sales transaction must be reversed in the wholesaler's financial statements:
DR Revenue …………. and DR Inventories ……….. CR Trade
receivables …………. CR Cost of sale ….……..

1
 Lecture example 1 $
Total contract price 100,000
Costs incurred to date 48,000
Estimated costs to completion 32,000
Invoices issued 58,000
Cash received 50,000
Stage of completion (proportion of contract costs incurred) 60%

Required
(a) Prepare relevant extracts from the statement of profit or loss and statement of financial position.
(b) Show how the statement of financial position would differ if invoices issued were $64,000 (of which $50,000
was received).

Approach
• Determine whether contract is profitable
• Calculate amount of performance obligation satisfied (stage of completion) (here given in example)

Lecture example 2
$
Total contract price 100,000
Costs incurred to date 72,000
Estimated costs to completion 48,000
Invoices issued 58,000
Cash received 50,000
Stage of completion (proportion of contract costs incurred) 60%

Required
(a) Prepare relevant extracts from the statement of profit or loss and statement of financial position.

2
 Lecture example 3

WB entered into a five-year contract with the national government to extend a metro line for an agreed fee of $6,000m
(including costs).

At the end of the first year, total costs incurred were $850m. At this stage surveyors estimated that the total costs of the
contract would be in the range $4,000m to $5,500m. This was based on the fact that delays had meant that the project
may take substantially more than five years to complete together with their experience of similar contracts where costs
had spiralled out of control.

Invoicing was to be undertaken at regular stages of the contract. By the end of the first year of the contract, invoices to
the value of $1,130m had been issued and $675m had been received in settlement of the debt. There is no indication
that the government would be unable to pay the rest of the invoices.

Required

Prepare the numerical financial statement disclosures for the contract.

Lecture example 4
Alltraders entered into the following transactions in the year ended 31 December 20X2:

(1) A 6 month contract to undertake IFRS training for a client over the period 1 September 20X2 to 28 February
20X3. The value of services performed to date amounts to $45,000 out of a total contract value of $60,000.
All costs are expected to be recoverable.
(2) Performed advertising services costing $4,450 relating to a fixed price $20,000 contract covering the period 1
December to 31 March. Due to fluctuating advertising costs, the expected total cost cannot be reliably
measured at the year end, but Alltraders is certain that the customer will pay the costs incurred to date.

Required
How much revenue should be recognised in Alltraders' financial statements for the year ended 31
December 20X2?
A $44,450
B $45,000
C $65,000
D $49,450

3
 Lecture example 5

A company entered into a 4-year contract to build a sports stadium. Details of the contract activity at 31 December 20X1 and
20X2, are as follows:

20X1 20X2
$'m $'m
Total fixed contract price 380 380
Costs incurred to date 84 176
Budgeted future costs to completion 239 164
Invoices issued 80 160
Cash received from the customer to date 72 144

It is company policy to calculate satisfaction of performance obligations based on the work certified as a
proportion of total contract price. Work certified as at 31 December 20X1 and 20X2 was $76m and $171m
respectively.
Required
1 What should be recognised in the profit or loss for the year ended 31 December 20X1?
A $100m loss
B $11.4m profit
C $57m profit
D $204m profit
2 What are the total assets to be recorded in the Statement of Financial Position for the year
ended 31 December 20X2?
A $16m
B $34m
C $38.6m
D $50m

4
 Lecture example 6

Maddoc purchased a new item of plant for $800,000 on 1 January 20X2, and expected to use it for 5 years with a zero residual
value. The government awarded Maddoc a grant of $300,000 towards the cost of the plant on the same date.

Maddoc treated the grant as deferred income and has a 30 June year end.
Required
How much is recognised in Non-current liabilities in respect of the grant as at 30 June 20X2?
A $60,000
B $30,000
C $210,000
D $270,000