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Question: Which of the following should revenue from the sale of goods be recognised:
1. Case 1- Sale or Return
– goods are sold by a manufacturer to a retailer who has the right to return goods within 28 days if unable to see them
2. Case 2- Sale with delivery included
– goods have been shipped but have not yet arrived at the customers premises. the seller is responsible for delivery.For case1- I understand that we can not recognise revenue until after the 28 days have passed. the risk here has not yet been transferred to the buyer because the retailer can return the goods.
for case 2- the answer says that revenue should not be recognised until the customer has accepted the goods. until then the risk of ownership still lie with the seller. but is the explanation not a contradiction to case 1 reasoning? so in case 2 if the customer receives the good they can straight away recognise revenue? since risk has been transferred to the buyer.. what if like in case 1 there is a return policy? should I assume there is no return policy. hence why for case 2 revenue can be recognised when customer accepts goods?
thanks in advance.
Not sure that it’s IAS 16! It’s a good job that there are no marks for remembering IAS numbers nor titles 🙂
Besides which, IAS 18 Revenue no longer exists and is replaced by IFRS 15
But apart from that …
… you’re correct with case 1 in that risks and rewards have not been passed over until the 28 day return period has expired
But case 2 is a different situation. Whenever goods are sold in business there is a general acceptance that the goods delivered will conform with all the order specifications (minor deviations accepted). So, whenever goods are delivered, there is always the possibility that they may be returned
This is not the same as a sale of goods arrangement under sale or return terms
Where goods are delivered to the buyer the seller has to give the buyer the opportunity to inspect the goods and, normally, the buyer will accept.
But if there is a lack of conformity (quantity, description, or even the timing of the delivery) the buyer is able to reject those goods.
Thus hopefully you can see that the goods are not safely delivered until the buyer has accepted the delivery
OK?
haha! thanks. I am no good at remembering these IAS numbers!!! ahh ok.
Yes I follow. I guess like you mentioned when the good are delivered the customer has the opportunity to inspect the goods.. like you said.
Mike can you please assist me with a question called Aztech,I’m trying to find a proper link to the question but not available all i know is that its from June 2000 UK stream,the question is about how one would value Aztech’s hotels in the financial Statements and second part is about accounting treatment of Aztech’s Aircraft Fleet,doing all these using relevant IAS.the question also appears in a text ” FINANCIAL REPORTING BY DAVID ALEXANDER.Please Help me out
THE QUESTION IS AS FOLLOWS:Aztech, a public limited company manufactures and operates a fleet of small aircraft. It
draws up its financial statements to 31 March each year,
Aztech also owns a small chain of hotels (carrying value of £16 million), which are used in
the sale of holidays to the public. It is the policy of the company not to provide depreciation
on the hotels as they are maintained to a high standard and the economic lives of the hotels are
long (20 years remaining life). The hotels are periodically revalued and on 31 March 2000,
their existing use value was determined to be £20 million, the replacement cost of the hotels
was £16 million and the open market value was £19 million. One of the hotels included above
is surplus to the company’s requirements as at 31 March 2000. This hotel had an existing use
value of £3 million, a replacement cost of £2 million and an open market value of £2.5 million,
before expected estate agents and solicitors fees of £200 000. Aztech wishes to revalue the hotels
as at 31 March 2000. There is no indication of any impairment in value of the hotels.
The company has recently finished manufacturing a fleet of five aircraft to a new design.
These aircraft are intended for use in its own fleet for domestic carriage purposes. The company
commenced construction of the assets on 1 April 1998 and wishes to recognise them as
fixed assets as at 31 March 2000 when they were first utilised. The aircraft were completed
on 1 January 2000 but their exterior painting was delayed until 31 March 2000.
The costs (excluding finance costs) of manufacturing the aircraft were £28 million and
the company has adopted a policy of capitalising the finance costs of manufacturing the aircraft.
Aztech had taken out a three year loan of £20 million to finance the aircraft on 1 April
1998. Interest is payable at 10% per annum but is to be rolled over and paid at the end of the
three year period together with the capital outstanding. Corporation tax is 30%.
During the construction of the aircraft, certain computerised components used in the
manufacture fell dramatically in price. The company estimated that at 31 March 2000 the
net realisable value of the aircraft was £30 million and their value in use was £29 million.
The engines used in the aircraft have a three year life and the body parts have an eight
year life; Aztech has decided to depreciate the engines and the body parts over their different
useful lives on the straight line basis from 1 April 2000. The cost of replacing the engines on
31 March 2003 is estimated to be £15 million. The engine costs represent thirty per cent of
the total cost of manufacture.
The company has decided to revalue the aircraft annually on the basis of their market
value. On 31 March 2001, the aircraft have a value in use of £28 million, a market value of
£27 million and a net realisable value of £26 million. On 31 March 2002, the aircraft have a
value in use of £17 million, a market value of £18 million and a net realisable value of £18.5
million. There is no consumption of economic benefits in 2002 other than the depreciation
charge. Revaluation surpluses or deficits are apportioned between the engines and the body
parts on the basis of their year end carrying values before the revaluation.
Required:
(i) Describe how the hotels should be valued in the financial statements of Aztech on
31 March 2000 and explain whether the current depreciation policy relating to the
hotels is acceptable under IAS 16 PPE. (6 marks)
(ii) Show the accounting treatment of the aircraft fleet in the financial statements on the
basis of the above scenario for the financial years ending on:
(a) 31 March 2000. (4 marks)
(b) 31 March 2001, 2002. (6 marks)
(c) 31 March 2003 before revaluation.There is NO WAY that this is an F7 question! and, even if you swear on all that’s holy that it is, it certainly is not anything like an F7 question that you will face in 2016, 2017, 2018 and onwards!
You could try asking the P2 tutor the same question …. and good luck!
Sorry for interfering, I just do not want to double – post topics.
Referring to IAS 16, question Enca (6/14)- why in that example does revaluation go to PL not to revaluation surplus? Please, explain.
I’ve just checked the answer for DELTA (not Enca) and I don’t see any revaluation going through profit or loss
Here’s what I see in the printed solution:
‘(i) Delta – Extracts from statement of profit or loss (see workings):
Year ended 31 March 2013
Plant impairment loss 20,000
Plant depreciation (32,000 + 22,400) 54,400Year ended 31 March 2014
Loss on sale 8,000
Plant depreciation (32,000 + 26,000) 58,000Where’s the revaluation that’s going through profit or loss?
Working
Item A Item B
$’000 $’000
Cost 240,000 120,000
Carrying amount 31.2.X2 180,000 80,000Loss – to P/L (20,000)
Gain – to other comprehensive income 32,000Revalued amount 160,000 112,000
Depreciation to 31.3.X3:
160,000/5 (32,000)
112,000/5 (22,400)
Carrying amount 31.3.X3 128,000 89,600
Addition 1.4.X3 14,400
128,000 104,000
Depreciation to 31.3.X4 (32,000) (26,000)
96,000 78,000
Disposal proceeds (70,000)
Loss on disposal 8,000Are you querying the $20,000 impairment loss on the asset Item A?
Is that the basis of your question / problem?
Yes, I am confused why 20 000 of revalued amount is charged to PL, am I right, assuming that the company might not have a revaluation reserve in the balance, so the revaluation should be charged to PL. If the company had any amounts in reserve, it would be possible to debit it.
According to the question, neither Item A nor Item B has previously been revalued so there is no revaluation reserve in existence relating to these two items of plant
When Item A is revalued, the value is lower and thus the deficit must be passed through the statement of profit or loss (because we cannot set it against any previous revaluation surplus – there isn’t one)
When Item B is revalued, the surplus shall be double entered to the revaluation reserve (from which an annual transfer will be made according to the question)
Is that ok for you?
Yes, thank you, all is clear apart from the following – question reads: annual transfer is made to the retained earnings in respect of excess depreciation. In the answer gain is charged to other income
In accounting the word ‘charged’ is technical and is synonymous with ‘debited’
To have a gain ‘charged to other income’ is an impossible combination
I don’t see in the answer where you are getting your information!
The sentence in the question that reads:
‘annual transfer is made to the retained earnings in respect of excess depreciation’
relates to the annual transfer from revaluation reserve to retained earnings of the excess depreciation that the statement of profit or loss has ‘suffered’ as a result of the revaluation
In this case the figure is $6,400 and this amount is seen to be taken from the revaluation reserve and transferred to retained earnings according to the printed solution
Again I ask, is that ok for you now?
Hi. I want to ask, regarding the Delta question. It is stated that Delga makes an annual trnasfer from rev surplus to retained earning in respect of excess dep. The amount of $6400 is taken from $32000/ 5 years.
But, I dont i understand why we cant make it like this
1. Year 1 n Year 2 depreciation is $ 20 000 for each year2. Then it is revalued for item B to 112 000. So I divided it by the remaining useful lives of 5 years, which is the depreciation is $22 400. Hence the excess dep is $2400
3. Hence I minus the $2400 from $ 32000. Why is this wrong ? Thank youu.I really u can answr and understand my question.
When you “minus” it (I love it when you use such technical language!! 🙂 ), I assume that you mean that you have debited it against the revaluation reserve of $32,000
Am I correct so far?
OK, now tell me this, when you have debited the $2,400 excess depreciation to the revaluation reserve, where have you plussed that amount?
However, the problem is more fundamental than this because, at the same time as the asset was being revalued from $80,000 to $112,000, its remaining useful life was also re-assessed from 4 years remaining to 5 years remaining
If there had been no revaluation, that revision would have resulted in a revision to the annual depreciation which would then have become $16,000 each year ($80,000 / 5)
So the revised depreciation on the revalued amount would be $112,000 / 5 = $22,400 whereas the depreciation on the non-revalued amount over the revised remaining life would have been $16,000
Hence a difference of $6,400
OK?
One final point … if you were to conduct the annual transfer of just $2,400 for each of the remaining 5 years, that would result in an aggregate transfer from revaluation reserve to retained earnings of $12,000 (5 * $2,400)
So you have credited revaluation reserve with $32,000 as at the revaluation date and then, over the remaining life of the asset, you have debited just $12,000 of that $20,000 to retained earnings
What are you going to do with the remaining $20,000 stuck in Revaluation Reserve at the end of 5 years?
OK?
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