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Dear Tutors,
i have a question regarding the Contract cost capitalization. ( contract period being more than a year)
lets say a commission of $5000 was paid attributable to a contract before hand. the total contract value being $10000.
how is this recorded ?
the payment of 5000 is received by sales staff and our bank is debited.
i understand the final journals as below.
Dr. Contract asset 5000
Cr. Revenue 5000When project was completed next year.
Dr Receivable 10000
Cr contract asset 5000
Cr Revenue (remaining amount) 5000I would like to know how the payment to the sales staff is recorded and how that is being connected to the contract asset capitalization.
Regards,
Commission should normally be expensed.
Let’s assume you have an expense that can be capitalised (e.g. bricks)
Dr contract asset Cr Cash 5000
Then, when sale is recognised:
Dr COS Cr Contract asset 5000
Dr Cash Cr Revenue 10000Just pretend you are accounting for inventory.
BUT REMEMBER …..in this exam you need to explain NOT write journals (unless asked) 🙂
just wanted to refine my understanding.
sometimes my curiosity goes to OCD levels.
just so i understood properly.
Let’s assume you have an expense that can be capitalised (e.g. bricks)
Dr contract asset Cr Cash 5000 —– understood ( this is when u incurred to prep for the contract)
Then, when sale is recognised ( i would like to know if the contract gets paid next year jun in full but we are here at the current year end and have the need to recognize revenue.
Lets also assume 30% work was completed by year end.)
Dr COS Cr Contract asset 5000. ( does passing a cost of sale entry equate to recognizing revenue ? )
Dr Cash Cr Revenue 10000 ( i think this is when payment gets release by customer )
i would appreciate a bit of elaboration.
Apologies for dragging this.Parag.
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