Revenue Recognition

"The issue is why on earth would a warranty be a revenue, the question clearly says the parts are FREE, so this should be a cost to the company" - imagine that the company has made a provision for this potential warranty out-going So, instead of crediting revenue, the company has credited the warranty value to a provision account After the warranty period has elapsed there in now no longer a potential outflow so the provision is no longer needed Dr Warranty Provision Account, Cr Warranty Revenue Account "i do not understand why 30 and 25 are subtracted from 500 for the revenue" - IFRS 15 says that revenue should be recognised when it is earned. If it isn't eared immediately, it shall be deferred to a period when it IS earned The 30 and the 25 are not earned at the point of sale - there are continuing obligations related to warranties (for three years) and the credit period of a year will not be complete for ..... a year. So only then will the cost of allowing that credit period be earned Therefore, of the total revenue from the sale, the amount to be recognised at the end of the first full year (note, the machines were sold in the first week of the accounting year!) 100 machines x value less warranty and interest free credit period 100 machines x the first year's warranty 100 machines x value of interest free credit period In the first year's statement of profit or loss will be 100 x (500 - 30 - 25) = 44,500 100 x 10 100 x 25 Is that better?

Dear Sir, thank you very much for your response. I'm really grateful the way you have replied point by point. Two issues: WARRANTY and MACHINE revenue (deferral) are crystal clear, although here we have made a vital assumption that NO CUSTOMER has complained. Do you think this would have been an important point to include in the question? Regarding the interest free credit period, I understand that the company has given an incentive to its customers by selling the machines on credit WITHOUT interest. I mean i understand we have removed from the $500 at the point of sale and then re added as a deferred revenue at the year end, my concern is on the wording "free credit period" (it's like this in paper F9, when the company gives a discount or waive an interest, it's a cost to the company, not a revenue.

If any customer HAD complained, that would have been included within the information given Giving discounts and waiving interest are both actual costs to the company. They represent income that is being foregone. Allowing an interest free credit period is merely deferring income - it's not losing revenue, merely deferring it (unlike discounts and foregone interest which was receivable but has now been given up) Is that ok?

That is much better, i thank you very much Sir. Really Tutors like you and Sir John are getting thousands of blessings throughout the world. Thank u so much.

Don't forget, Tax Tutor, Ken and P2-D2 as well as all the hard work put in by Admin. And that's just the ACCA side of things! But thanks for your kind words :-)