On 1 October 2011, Quincy sold one of its products for $10 million (included in revenue in the trial balance). As part of the sale agreement, Quincy is committed to the ongoing servicing of this product until 30 September 2014 (i.e. three 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 in this I correctly adjusted the sales revenue value. I just was having a doubt that the reason we are not adjusting Cost of Sales value. Is it that current year's cost was already included?
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Service over period of time
Has there not been any adjustment made for the future costs of $600,000 for the remaining two years? There should be a deferral in revenue of $1,600,000 and a deferral in cost of sales of $1,200,000
No sir, in the answer(kaplan kit) they just deffered the revenue. I did adjust the cost of sales by 1.2m but was getting different answer.
I don't think I can explain Kaplan's thinking - unless possibly the question asked you only for the affect on the revenue figure
Sorry :-(
Hi Sir,
Had the 1.2 million cost of sales been deducted from the original cost of sales? Will this deferred cost be listed as an asset (such as amortised cost): 600 non-current amortised cost, and 600 current amortised cost? Because if 1.2 million cost of sales is not listed, and the 1.2 million is deducted from the original cost of sales, the asset side will not be balanced off against the equity and liability side by 1.2 million.
Thanks.
That surely is common sense
If I'm to take $1,2 million from cost of sales (credit cost of sales) the I have to debit something!
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