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Revenue
On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.29 What is the amount of deferred income which Speculate Co should recognise in its statement of financial position
as at 30 September 20X3 relating to the contract for the supply and servicing of products?
A $1·2 million
B $1·6 million
C $600,000
D $1·5 millionI understand 600,000 X 2 but dont know why it have to X 100/75
100 (Selling price)=25 (profit) + 75 (cost)
so why have to multiple the selling price and divide the cost?
This is F3 stuff!
If you’re told that an entity makes 25% gross profit (or gross margin) on its sales then that means that the cost of the sale is 75% of the value of the sale
Cost + profit = selling price
This is set out for you in the free course notes for f7 as well as for F3
Gross profit expressed as a percentage is a percentage of selling price (mark up as a percentage is a percentage of cost)
So if cost + profit = selling price, then for every 25 profit that we make, selling price must be 100 and therefore cost must be 75
The question tells us that cost is 600 and that gross profit margin is 25%
Can you figure it out from there?
I finally realised that the question is mentioning the estimated COST instead of sales value. I misread the question.
thanks for your answer!
That’s twice in the space of 5 minutes that you have made what can only be described as an incredibly careless error
You need to stop this propensity before you get into that exam room next Tuesday!
R T F Q !!!!
Hi Mike,
A owns 30% of B & exercises significant influence over it.B sold goods to A for $160,000.B applies a one third mark up on cost.A still had 25% of these goods in inventory at year end.What amount should be deducted from consolidated retained earnings in respect of this transaction ?
What does this phrase mean ”applies a one third mark up on cost”
2 or 3 things arising from your post
1) What has this got to do with specimen exam question 29?
Do I hear you say “Nothing”?
Then why is it on this thread?
Start your own!
2) ‘What does this phrase mean ”applies a one third mark up on cost”’
This is an F3 question
If an item cost $60 and he ”applies a one third mark up on cost” then the selling price is $80
That is because one third of cost has been added as a mark-up
3) Sales of $160,000
One quarter still in inventory
He ”applies a one third mark up on cost” so profit in the $160,000 is $40,000
So pup is 1/4 x $40,000 = $10,000
Deduct that from the associate’s retained earnings
Take the parent’s 30% share of the associate’s adjusted retained earnings
So 30% x (whatever – $10,000)
The pup taken to consolidated retained earnings is therefore 30% x $10,000
4) In future, start your own thread if it’s not a question relating EXACTLY to an existing thread
🙂
Hi sir ,
I have doubt in the above qstn regarding revenue
Why they did 600000*2 I mean why they multiply by 2. What I did is I multiply by 3 I don’t know where I am wrong can you please explain me this question.
Hi,
We are the end of the first year of the three year agreement, and so there are two years left. The amount of deferred income shown in the accounts at this date will therefore be for the remaining two years, hence the multiplication by two.
Thanks
Is that bcz question states that (3years after the sale)?.so sorry but I am still not able to get it. Can you plz help me more out . Apologise for that. Thank u
And sir one more thing is for eg if qstn asked that what is the revenue charged to p/l??
Than what should be answer?. Is it 840000?
What I did is
Revenue. 10000000
Cost
(600000*2*100/75). 1600000Gives me. 8400
Or is should charged 10million??
cadhakan wrote:Is that bcz question states that (3years after the sale)?.so sorry but I am still not able to get it. Can you plz help me more out . Apologise for that. Thank u
The contract is entered into on 1 October 20X2 and spans three years until 30 September 20X5. The service revenue is spread over the three year period and so as we are at 30 September 20X3, one year has elapsed and there are two years left until the contract is complete.
Hope that helps it a bit.
Thanks
cadhakan wrote:And sir one more thing is for eg if qstn asked that what is the revenue charged to p/l??
This would be more tricky as you would need to remove the total service revenue from the $10 million to get the value of the goods sold. This amount would be recognised in the first year of the contract as revenue, alongside one year’s worth of service revenue. The remaining two years of service revenue are deferred.
Thanks
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