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Hello,
Answer sheet: regarding the deferred income-
The accounting treatment of the deferred income also needs to be considered. Depending on the terms of the contract
with BMC, the amount could be repayable, though this may not be the case given that it is BMC which has cancelled
the contract. If part or all of the amount is repayable, it can remain recognised as a current liability. If it is not repayable,
it should be released to the statement of profit or loss.
If the costs cannot be capitalised, then there is a loss which needs to be recognised. Assuming that the advance payment is non-refundable, the net position of the development cost and the deferred income balances result in a loss of
$150,000. This represents 16·7% of profit for the year and is material.1) If part or all of the amount is repayable, it can remain recognised as a current liability?
Which amount examiner is referring to? 350, 000?2) Since the contract has been cancelled by BMC, the $200, 000 is non refundable. Please confirm the accounting entry: Dr liability and credit P&L.?
3) If the costs cannot be capitalised, then there is a loss which needs to be recognised. Assuming that the advance payment is non-refundable, the net position of the development cost and the deferred income balances result in a loss of
$150,000.
Can you please explain on this part?Thanks
At the reporting date, the accounting entries have so far been:
Dr WIP 350/Cr Cash 350 – costs incurred in development on contract
Dr Cash 200/Cr Deferred income – advance payment from customer
(I recommend you do this – think about that entries so far that have got you to where you are.)So assuming that the advance payment is non-refundable, the accounting entries would now be:
Cr WIP 350 – i.e. writing it off – as it is “bespoke” it is unlikely that this would have value (but if it did have any value only the loss in value would be written off)
Dr Deferred income 200
Dr Profit an loss 150 – i.e. net loss on contractSo in answer to your questions:
1. It is the deferred income that represents a liability (if repayable) so it must mean 200.
2. yes
3. as above
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