johan question in kaplan kit

This answer is from BPP revision kit ( condensed)

Johan bears the risk of loss of value of the handset as the dealer may return any handset before a service contract is signed with a customer-The dealer is acting as an Agent for the sale of the handset and the service contract. IAS 18 does not deal directly with agency but implies that revenue for an Agent is the commission earned for the amounts collected on behalf of the principal

The handset cannot be sold separately from the service contract-the two transactions have to be taken together because the commercial effect of either cannot be understood in isolation. Johan earns revenue from the service contract with the final customer not from the sale of the handset to the dealer. So Johan does not recognize any revenue when the handsets are sold to the dealers.

Instead the net payment of $130 (i.e commission paid to agent of $280 less cost of the handset of $150) should be recognized as a Customer Acquisition Cost, which may qualify as an Intangible Asset under IAS 38.

If it is recognized as such it will be amortized over the 12 month contract period. Revenue from the Service Contract will be recognized as the service is rendered.

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