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hi could you tell me how to solve this adjustment.
Revenue 213,500
On 1 October 2011, Quincy sold one of its products for $10 million (included in revenue in the trial balance). As part of the sale agreement, Quincy is committed to the ongoing servicing of this product until 30 September 2014 (i.e. three years from the date of sale). The value of this service has been included in the selling price of $10 million. The estimated cost to Quincy of the servicing is $600,000 per annum and Quincy’s normal gross profit margin on this type of servicing is 25%. Ignore discounting.Cost of servicing is $600,000
Profit margin is 25% so profit is $200,000 giving an invoice value for the service of $800,000
And that’s for 3 years
So the revenue to be recognised on the sale of the product is $10,000,000 – (3 x $800,000) = $7,600,000
I assume that the accounting year end that we’re looking at is 30 September, 2012 so the first year of the three year service has now passed
Therefore, in revenue for the year ended 30 September, 2012 there will be the $7,600,000 plus the first year of service revenue of $800,000
The remaining part of the $10,000,000 included in the trial balance will be shown as deferred income on the statement of financial position as at 30 September, 2012
OK?
I didn’t understand the Profit margin is 25% so profit is $200,000 giving an invoice value for the service of $800,000 part
How did you calculate $800,000? and what about the $600,000 Cost of servicing?If cost of servicing is $600,000 and profit margin is 25%, then cost of service must be 75%
And if $600,000 is 75%, then the 25% profit margin must be $200,000
And that gives an invoice value of $800,000
And 25% of $800,000 is $200,000
And this is F3 stuff!
Hi, I have a question about this problem.
If we deduct 2 year’s service price of 800*2 and indicate it as deferred revenue, what happens to the cost of this service?
The way I understand it, if service price is included in revenue, probably cost of providing service also must have been included in the cost of sales. Question does not say about it openly though.
The way I solved it was to reduce cost of sales too by 600*2=1200.
So, I’d like to know where is a mistake in my judgement. Thanks in advance.
Hi,
The cost will be recognised as the service is provided. The question doesn’t state that they’ve recognised any costs as of yet, so no adjustment to costs would be required. Once the time elapses and the service is provided then the cost will be recognised as incurred to match against the revenue.
Thanks
Hi, can you please help me with this question.
For equity dividend paid, why do we multiply it with 4 in the calculation i.e, 60000*4*0.08=19200
Thanks
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