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Mighty IT Co provides hardware, software and IT services to small business customers.
Mighty IT Co has developed an accounting software package. The company offers a supply and installation service for $1,000 and a seperate two-year technical support service for $500. Alternatively, it also offers a combined goods and services contract that includes both of these elements for $1,200. Payment for the combined contract is due one month after the date of installation.
In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2.5m.
Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects had reduced its value to $400,000. No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.
Mighty IT Co’s income tax rate is 30%.
Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its financial year.
In accordance with IFRS 15, what is the total amount for deferred income that will be reported in Mighty IT Co’s statement of financial position at 31 December 20X6 (to the nearest $)?
Answer: 500/1,500 x 1,200 = 400/2 = $200
Could you please explain the logic of this question?
Thank you very much 🙂
Not a deferred tax question but deferred income…….
Step 1: Identify the contract – supply and support contract
Step 2: Performance obligations – two performance obligations (1) supply and install (2) service. Note the supply and install is one obligation as they offer it as a package. In this case, it does not appear that you can buy the equipment without having them install as well.
Step 3: Transaction price – this is $1,200
Step 4: Allocation of price to performance obligations – based on the relative stand alone price. The key term here is “relative standalone”. Standalone for supply and install is $1,000 and 2 year service is $500. Typically where a discount is given, you need to consider whether this relates to all or some of the performance obligations. In this case, it the absence of any additional information, this appears to relate to all performance obligations, so apportion the discount over both. As a consequence, the supply and install is $1,000/$1,500 = $800 and the service is $500/$1,500 = $400.
Step 5: Recognition of revenue – in year one, the company would recognise the supply and install (ie $1,000) and one year of the two year contract (ie $400/2 = $200). The remaining $200 for the second year of the service contract would be deferred.
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