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Sir,
I got an adjustment in 1 of the published accounts that confused me, it is related to IFRS 15, it says that
S.co’s revenue includes $16 million for goods sold to Pending on 1 October 2015. The terms of the sale are that S.co will incur on-going 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.
As per the trial balance at 30 sept 2016
Revenue. $380,000,000
Cost of sales. $246,800,000The solution is given as follows
As the servicing and support is for three years and the date of the sale was 1 October 2015, revenue relating to two years’ servicing and support provision must be deferred: ($1·2 million × 2/0·6) = $4 million. This is shown as $2 million in both current and non-current liabilities.But I don’t get why $1·2 million × 2/0·6 = $4 million is done.
Thank you.
Looking forward for your answer.If we don’t gross up the $1.2 million for the profit that will be earned in each of the next two years, it would result in us recognising that same profit (40% gross profit) in year one but that same profit won’t be realised until the $1.2 million service costs are earned in each of those two years
If we only defer the service COST element of $1.2 million for those two years, then no profit is being deferred
Is that clear?
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