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Hi I don’t understand this adjustment in the question. Kindly tell me what it means, how to do the calculation part and how to deal with it in the financial statement.
Revenue 380000
Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 2008. The terms of the sale are that Sandown will incur ongoing service and support costs of $1·2 million per annum for three years after the sale. Sandown normally makes a gross profit of 40% on such servicing and support work. Ignore the time value of money.Thanks a lot
If a service costs $1,200,000 and is invoiced out to achieve a gross profit of 40%, then the cost of that service must represent 60% of the invoice value
If cost is $1,200,000 and that’s 60% of invoice value, then invoice value must be $2,000,000
That’s for each of 3 years so a total of $6,000,000 of revenue is attributable to the on-going service obligations and should be treated separately from “normal” revenue achieved on the sale
You haven’t told me the entity year end so I’m going to assume that this contract was entered into on the first day of the accounting period
Therefore, to be included in revenue is the $10,000,000 “normal” revenue PLUS the first year of the revenue attributable to the on-going service obligations ie $2,000,000
That now requires a deduction from the draft figures where $16,000,000 has been included and the figure should be only $12,000,000
OK?
PS Are you doing F3 or are you doing F7?
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