• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for March and June 2025 exams.
Get your discount code >>

Contract liability

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Contract liability

  • This topic has 13 replies, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 14 posts - 1 through 14 (of 14 total)
  • Author
    Posts
  • October 13, 2016 at 7:59 am #343134
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    Hi Mike, I’m confused with how this question (Kaplan revision kit question 75) deals with contract liability

    Sugar has entered into a long term contract to build an asset for a customer. Sugar will satisfy the performance obligation over time and has measured the progress towards satisfying the performance obligation at 45% at the year end.
    The price of the contract is $8m. Sugar has spent $4.5m to date, but the estimated costs to complete are $5.5m. To date, the customer has paid sugar $3m.

    What items should appear in sugar’s statement of financial position?

    Answer: trade receivables $600,000; provision $1,100,000

    Explanation:
    “As the contract is loss making, sugar should record the full loss immediately. $5,600,000 should be taken to cost of sales. As only $4,500,000 has been spent on costs to date, this means that a provision of $1,100,000 must be included in the statement of financial position”

    How did they get $5,600,000? I remember getting this figure a month ago when I attempted this but after attempting questions from BPP revision kit and looking at this question again I get so confused.

    My answer was:
    Trade receivables $600,000; contract liability $500,000

    I was using the BPP study text method as I found it easier

    To be charged to SOPL:
    REVENUE $8000*0.45 = $3,600
    Cost of sales $10,000*0.45= $4,500
    Losses = ($900)
    Expected losses (*) = ($1,100)
    Estimated losses ($2,000)

    In SOFP:
    Costs incurred to date $4,500
    Full loss $(2,000)
    Amounts invoiced $(3,000)
    Contract liability $500

    If the Kaplan answer is right, how should then contract liability be split in the statement of financial position?

    Hope you could help me on this, thank you!

    October 13, 2016 at 8:21 am #343135
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    Contract liability is the same for both Kaplan and for BPP at $500,000 so I don’t understand your question “How should contract liability be split in the statement of financial position?”

    If you had re-read the free course notes, you would have remembered that the cost of sales figure is arrived at normally by applying the percentage completed to the total estimated costs of the contract

    However, where a loss is forecast, this loss should be recognised in full in the year it is first foreseen

    So, in the scenario of the question, $3,600,000 revenue is recognised (45% x $8,000,000) and the temptation is to calculate costs to date in the same way ie 45% x $10,000,000

    But that doesn’t recognise the full amount of the loss

    Contract value is $8,000,000. Costs to date ($4,500,000) plus estimated costs to complete ($5,500,000) means that we’re forecasting a loss of $2,000,000

    If revenue to be recognised is $3,600,000 and we have a loss to recognise of $2,000,000, that must mean that costs to be recognised (the balancing figure) is $5,600,000

    Better?

    October 13, 2016 at 9:43 am #343158
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    Should the provision be recorded in the statement of financial position, along with the contract liability of $500,000? The expected loss calculated using the BPP’s method as shown above was $1,100,000 too. Can I do it this way instead?

    I first had thought that contract liability was like contract asset, which could be presented as trade receivables and work in progress and so on.

    October 13, 2016 at 9:54 am #343159
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    Sorry, I have another question relating to government grants.

    Question:
    The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. If the asset is sold within four year a repayment on a sliding scale would be applicable.

    The company is certain that it will keep the asset for up to 10 years.

    How should this grant be treated under IASB conceptual framework?

    The answer said that the grant would be treated as income for the year on receipt of the grant, because there was no past event to give rise to a liability.

    My question is, if there is no repayment then shouldn’t the grant be treated as if it were a “normal” grant related to asset – “present as deferred income and deduct the grant in arriving at the carrying amount of the asset”?

    October 13, 2016 at 10:13 am #343160
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    This government grant question does not belong on this thread – the title of your original post is “Contract liability” so a question on government grants needs its own thread

    Please re-post

    October 13, 2016 at 10:15 am #343161
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    “Should the provision be recorded in the statement of financial position, along with the contract liability of $500,000? The expected loss calculated using the BPP’s method as shown above was $1,100,000 too. Can I do it this way instead?

    I first had thought that contract liability was like contract asset, which could be presented as trade receivables and work in progress and so on.”

    The provision of $1,100,000 is dealt with automatically within the recognition of $2,000,000 loss

    The only figure on the statement of financial position in this question is the $500,000 amounts due to customers

    October 13, 2016 at 10:58 am #343169
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    I can understand it a bit better now, but there’s one thing still that I don’t get: if contract liability is indeed $500,000, why can’t the answer be “trade receivables $600,000; contract liability 500,000”?

    October 13, 2016 at 11:15 am #343172
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    Where on Earth have you found the possibility of $600,000 trade receivables?

    October 13, 2016 at 1:40 pm #343190
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    My apologies. The question was a MCQ, I left out receivables because I got that right. The two options were (the other two were quite obviously wrong):

    1) Receivables 600,000; contract liability $500,000

    2) Receivables $600,000; provisions $1,100,000

    The solution gave option 2 as the answer. Nothing else from the question and answer is left out now.. were these two options acceptable in your opinion?

    October 13, 2016 at 5:17 pm #343206
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    Ok, now I have half of the possible solutions. What about giving me the EXACT question?

    I really do love it when I’m given half a task and quarter of an answer and have to puzzle my way through it!

    Not!

    October 14, 2016 at 2:08 am #343236
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    This is the whole question and answer:

    Sugar has entered into a long term contract to build an asset for a customer. Sugar will satisfy the performance obligation over time and has measured the progress towards satisfying the performance obligation at 45% at the year end.
    The price of the contract is $8m. Sugar has spent $4.5m to date, but the estimated costs to complete are $5.5m. To date, the customer has paid sugar $3m.

    What items should appear in sugar’s statement of financial position?

    Answer:

    There is a trade receivables of $600,000. The amount recorded in revenue will be $3,600,000 (45% x 8,000,000). Hewed has paid $3m, leaving $600,000 in Receivables.
    As the contract is loss making, sugar should record the full loss immediately. $5,600,000 should be taken to cost of sales. As only $4,500,000 has been spent on costs to date, this means that a provision of $1,100,000 must be included in the statement of financial position.

    These were the options for the MCQ question:
    Option 1: trade receivables $600,000; contract liability
    Option 2: trade receivables $5,000,000; provision $1,100,000
    Option 3: no asset; contract liability $500,000
    Option 4: trade receivables $600,000; provision $1,100,000

    Referring to the above answer, option D was the answer. Can option A be chosen as well, since contract liability was found to be $500,000?

    October 14, 2016 at 8:24 am #343261
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    Oh dear, you’ve done it again!

    “Option 1: trade receivables $600,000; contract liability”

    “Can option A be chosen as well, since contract liability was found to be $500,000?”

    There’s a bit of a contradiction in your two sentences! (Option 1 / Option A does NOT show a $500,000 contract liability!)

    I’ve had another look at IFRS 15 and cannot easily see where it says that the revenue recognition should be debited to a receivables account – the printed solution that you have typed would suggest that this entry has been done

    The way that I would have accounted for the revenue recognition would be to have debited the contract account (also the destination for the cost recognition)

    The net effect of the revenue receivable ($600,000) and the provision for future loss ($1,100,000) is a net liability of $500,000

    So Option 1 / Option A cannot be correct since the $600,000 receivable cannot exist alongside the $500,000 provision

    October 15, 2016 at 12:48 pm #343336
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • ☆☆☆

    I’m sorry Mike, for not checking for any errors in my previous post.

    I finally understand it now, thank you 🙂

    October 15, 2016 at 4:05 pm #343351
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23313
    • ☆☆☆☆☆

    You’re welcome

  • Author
    Posts
Viewing 14 posts - 1 through 14 (of 14 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • mohammedayan31 on Presentation of financial statements – Example 1 (revision) – ACCA Financial Reporting (FR)
  • John Moffat on The capital asset pricing model (part 2) – ACCA (AFM) lectures
  • John Moffat on Foreign exchange risk management (2) Part 1 – ACCA (AFM) lectures
  • zainab@24 on The capital asset pricing model (part 2) – ACCA (AFM) lectures
  • hana1992 on Foreign exchange risk management (2) Part 1 – ACCA (AFM) lectures

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in