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Hi Mike,
I have a question related to the COS of ongoing servicing committed in the next 2 years. I have deducted such 2 years deferred income in Revenue, with correspoding deduction in COS. However, the ans did not deduct 2 years- cost in COS in that year but only in Revenue.
Please helpThanks, Mike.
That sounds like the answer has got it wrong. Where’s the question from? I need more information if I’m to be able to help you – I need numbers and dates!
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It’s fr Past exam Dec 2012, Mike.
Fs date at 30 Sep 2012, TB show:
Rev 213.5
Cos 136.5
Note (i)
On 1 Oct 2011, Quincy sold one of its product for $ 10mil (included in rev in Tb). As part of the sale agreement, Q is committed to the ongoing servicing of this product until 30 Sep 2014. The value of this service has been included in the selling price of $10mil. The estimated cost to Q of the servicing is $600k per annum and Q’s normal gross profit margin on this type of servicing is 25%. Ignore discounting.This looks like revenue should be reduced by 2 x (600 x 1.3333) = 1,600,000 and shown as deferred revenue. One year (800) will be included within current liabilities and the other year within long term liabilities
The question isn’t specific about the cost of the product itself but presumably cost of sales already includes the cost of the product as well as the cost of three years’ servicing at 600,000 per year.
My inclination would be to defer also 2 x 600,000 = 1,200,000 from cost of sales. Those costs are included within this year’s cost of sales figure, they have not yet been incurred and should be matched against the revenue that those costs will generate.
I don’t know why this has not been done – maybe I need to re-read the IFRS.
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