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Hello sir,
I have a doubt in the treatment of this adjustment.
Revenue in trial balance 213500 (given) year end 30 september 20×2
Adjustment:
On 1 October 20×1, Quincy sold one of its products for $10 million(included in revenue in trial balance). As part of the sale agreement, Quincy is committed to the ongoing servicing of this product until 30 september 20×4( 3 years from the date of sale). The value of this service has been included in the selling price of $10 million. The estimated cost to Quincy of the servicing is $600,000 per annum and Quincy’s normal Gross profit margin on this type of servicing is 25%. The service performance obligation will be satisfied over time. Ignore discounting.Sir here two things related to this adjustment are done in the solution;
1) 213500-1600
2) Deferred revenue in current and non current liability of 800(answer is in thousands)
Sir, please explain how 1600 is calculated and its split of 800 between current and non current liability.Hi,
They are removing the revenue related to the provision of services that cannot yet be recognised until the service has been provided.
To work out the annual service revenue you need to apply the 25% margin to the cost of $600,000 per annum, and then multiply by the number of years it is provided for to get the total services revenue.
Try it, see how you get on and let me know so that we can check if you’re correct and then answer the rest of your question.
Thanks
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