Deferred Income

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May 25, 2024 at 8:20 pm #706023
sarbrina
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Hi please explain why they take 100/75 instead of 25/125. Thanks.
On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.
What is the amount of deferred income witch Speculate Co should recognise in its Statement of Financial position as at 30 September 20X3 relating to the contract for supply and servicing of products.
June 1, 2024 at 10:46 am #706371
P2-D2
Keymaster
- Topics: 4
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Hi,
This about dealing correctly with cost structures, where here we have been given a 25% gross profit margin. This looks as follows:
%
Revenue 100
Cost 75
Profit 25
So, to get the revenue from the costs given then we need to gross up the costs by 100/75.
Thanks
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