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Which of the following items has correctly been included in Hatton’s revenue for the year to 31 December 20X1?
A )$2 million in relation to a fee negotiated for an advertising contract for Rees, one of Hatton’s clients. Hatton acted as an agent during the deal and is entitled to 10% commission.
B) $500,000 relating to a sale of specialised equipment on 31 December 20X1. The full sales value was $700,000 but $200,000 relates to servicing that Hatton will provide over the next 2 years, so Hatton has not included that in revenue this year.
C) $800,000 relating to a sale of some surplus land owned by Hatton.
D) $1 million in relation to a sale to a new customer on 31 December 20X1. Control passed to the customer on 31 December 20X1. The $1 million is payable on 31 December 20X3. Interest rates are 10%.Correct variant is C. Can you explain me why other options are incorrect? Thanks in advance
Hi,
I think you need to have more of an attempt at explaining why you think that A, B and D are not correct first before I give you more detail.
Thanks
okay, I took B variant. The full sales value was $700,000 and $200,000 has not included this year. Then isn’t it 500 our revenue? (700-200)
OK, so B is correct as it is splitting the full revenue proceeds into a sale of goods (recognised at a point in time) and provision of a service (recognised over time).
A is not correct as we should only be recognising the commission on the sale and not the full amount of cash processed as we are acting as the agent, not the principal.
C is not correct as this is in relation to the disposal of PPE, where we just recognise a profit/loss on disposal of the PPE.
D is not correct as the revenue needs to be recognised at present value and then interest income recognised over the following two years.
Hope that helps clear it all up.
Thanks
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