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any ideas!!?? am i being thick?
Exam question sandown 2009:
Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 2008. The terms of the sale are that Sandown will incur ongoing service and support costs of $1.2 million per annum for three years after the sale. Sandown normally make a gross profit of 40% on such servicing and support work.
Answer given in answers 2009:
IAS 18 Revenue requires that where sales revenue includes an amount for after sales servicing and support costs then a proportion of the revenue should be deferred. The amount deferred should cover the cost and a reasonable profit (in this case a gross profit of 40%) on the services. As the servicing and support is for three years and the date of the sale was 1 October 2008, revenue relating to two year’s servicing and support provision must be deffered: ($1.2 million x 2/0.6) = $4 million. This is shown as $2 million in both current and non-current liabilities.I don’t get it – why do you divide 2 by 0.6????
In the BPP text book their example is:
A product is sold with 1 year’s after sales support, the cost of providing support to one customer for a year is calculated to be $50. The company has a mark-up on cost of 15%, the product is sold for $350, how is the sale accounted for?
Answer
$292.50 as revenue
$57.50 as deferred income and recognised over the course of the yeari can’t understand why the answer booklet has 2/0.6…..
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What given in Sandown was a gross profit margin of 40% but BPP text example was a mark-up on cost.
thanks, that explains different but to me that still doesn’t make any sense – why divide 2 by 0.6?? I could understand if you multiplied 1.2 by 0.6 to remove the profit margin of 40% – but why would you divide the number of years by 0.6?
also in Bpp book it says:
servicing fees included in the price
the sales price of a product may include an identifiable amount for subsequent servicing. in this case, that amount is deferred and recognised as revenue over the period during which the service is performed. The amount deferred must cover the cost of those services with a reasonable profit on those services.So why remove the profit margin at all or multiply the figure by a % or fraction (0.6)? Is the text in the BPP a recent revision to IAS 18 revenue and the exam question old rules?
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According to Note 1 at the question, the RM1.2m ongoing service and support costs were on ‘per annum’.basis and for three years after 1 October 2008. Therefore, Sandown could recognise as revenue for the first year $1.2m, but not for the second and the third years.
Sorry that still doesn;t explain it –
1.2m a year support costs:
1st year – recognize 1.2m
then don’t recognise the second and third years – 1.2 + 1.2 = 2.4m, so how comes the deffered amount is £4m…it says specifcally in the question ignore the time value of money.why take 1.2 x 2/0.6.
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1.2m is the cost only
What you need to defer is the revenue, thus
2m is the revenue so that the gross profit is 2m – 1.2m = 0.8m (Proof: 0.8m GP / 2m revenue = 40% GP%)- Topics: 0
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I dont dont think I agree with Sosologos’s explanation. The reason for dividing by 0.6 or 60% is taking the 40% of the cost + 20% reasonable profit margin as per the standard. Since cost is 40% then thus we add the balance of 20% to it.
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