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Where the present value of continuing the contract is lower than PV of penalty, how do we account for that?
For example, the revenue for the contract is $30 m and total expected cost at the moment is $45million. Provision for onerous contract is accounted for $15million.
The journal entry is :
Dr Expense $15 million
Cr Liability $15 millionWhen the performance obligation is later satisfied,
Dr Cost of sales $45m
Cr Inventory/etc $45mDr Receivable/Cash $30m
Cr Revenue $30mIs it correct? What shoudl be double entry for previous credit entry of liability? How should we derecognise it?
For the middle journal I would have
Dr COS 30, Dr Liability 15, Cr Cash 45
If it relates to an item of inventory still held at the year end
Dr Inventory Cr COS 45
BUT REMEMBER THAT IN THE EXAM ………………WRITING OUT JOURNALS WILL NOT GET YOU ANY MARKS ……………..YOU NEED EXPLANATIONS ………….UNLESS ‘ADJUSTMENTS’ SPECIFICALLY ASKED FOR.
🙂
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