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- August 5, 2017 at 9:55 am #400482
Dec 2016 exam – On 1 January 2016, Zippy entered into a contract to sell 10,000 units of a new product, the Whizoo, to a customer for $1,000 per unit. It was agreed that if the customer ordered an additional 5,000 units, a volume discounted price of $950 per unit would apply. 6,000 units were manufactured and delivered in the four months to 30 April 2016.
Minor defects were discovered in the first 6,000 units due to an error in the manufacturing process and it was agreed that a credit note of $40 per unit would be issued as compensation. Zippy and the customer agreed to net this amount off against subsequent payments for future orders. A further 7,000 units had been manufactured and delivered by 30 June 2016 without any defects. Zippy has included $6 million in revenue (6,000 x $1,000) for the first 6,000 units but has not recorded any additional revenue, as the directors are unsure of the correct
accounting treatment.The answer says “The revenue attributable to the further 7,000 units manufactured will therefore be calculated using a weighted average price of ((4,000 x $1,000) + (5,000 x $950)/(4,000 + 5,000)) $972 per item. The revenue to be included for these 7,000 units is ($972 x 7,000) $6·8m.
Can you kindly explain the logic behind this. 6K units were delivered for 1000 and 7K units were also delivered. So weighted average should be 6×1 + 7x.95 / 13??
August 6, 2017 at 5:10 pm #400767Hi,
The two transactions are treated as two separate contracts under IFRS 15 modifications. The first one has been completed at the original price but as the standard judges that there is a new contract due to the change in terms a new price needs to be calculated based on the goods under the old contract that haven’t been delivered and the goods under the new terms,
Thanks
August 9, 2017 at 4:11 am #401090Got it. Thank you for your kind help.
November 1, 2017 at 9:48 pm #414074Sir there is no mention in the question that further 5000 units have been ordered further. It only seems that further 3000 units have been ordered seeing the 7000 units delivery subsequently. So given we clearly state our assumptions and base our calculations and treatment on that 3000 units were ordered will we get the marks. Or shud we assume always otherwise in such cases?
November 5, 2017 at 9:12 pm #414472Hi,
Given the number that have been ordered in the past it is a fair enough assumption to make that they will be ordered in the future.
Thanks
November 5, 2017 at 9:37 pm #414485Right. Thanks
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