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(i) 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. The service
performance obligation will be satisfied over time. Sandown normally makes a gross
profit of 40% on such servicing and support work. Ignore the time value of money.
Revenue decrease by 4,000 (because revenue not earned is obligation)
CL increase 2,000
LTL increase 2,000
(we decrease revenue because 4,000 is included in the revenue which is not earned; if that is the case then even the COS should be adjusted because COS of 2,400 for 4,000 revenue should have been included in COS.)
Pls explain sir.
Cost of sales is NOT included so far – the costs of ongoing servicing will not be incurred until each of the three years that the service will be applicable