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Verge entered into a contract with a government body on 1 April 2011 to undertake maintenance services on a
new railway line. The total revenue from the contract is $5 million over a three-year period. The contract states
that $1 million will be paid at the commencement of the contract but although invoices will be subsequently sent
at the end of each year, the government authority will only settle the subsequent amounts owing when the
contract is completed. The invoices sent by Verge to date (including $1 million above) were as follows:
Year ended 31 March 2012 $2·8 million
Year ended 31 March 2013 $1·2 million
The balance will be invoiced on 31 March 2014. Verge has only accounted for the initial payment in the financial
statements to 31 March 2012 as no subsequent amounts are to be paid until 31 March 2014. The amounts of
the invoices reflect the work undertaken in the period. Verge wishes to know how to account for the contract to
date.
Market interest rates are currently at 6%. (6 markI am confused in the calculations part i know that we have calculate present value of future cash flows but as for year ended 31 march x12 i calculated PV as 2.8× 1 ÷ (1.06)1 but in answer its different and also 1 m is already been recognized as sales revenue so why it is included again in sales revenue thanks ur help is great
Hi,
You need to be careful with the wording of the question. The contract is for three years, and at the end of March 20X2 one year will have passed thus there will be two years remaining, so therefore any discounting will be for two years.
Also, of the $2.8m that has been invoiced, $1m has already been received and therefore there is no requirement to discount this amount, hence why we only discount the $1.8m.
Glad you find the help useful.
Thanks
P2-D2 wrote:Verge entered into a contract with a government body on 1 April 2011 to undertake maintenance services on a
new railway line. The total revenue from the contract is $5 million over a three-year period. The contract states<br>that $1 million will be paid at the commencement of the contract but although invoices will be subsequently sent<br>at the end of each year, the government authority will only settle the subsequent amounts owing when the<br>contract is completed. The invoices sent by Verge to date (including $1 million above) were as follows:<br>Year ended 31 March 2012 $2·8 million<br>Year ended 31 March 2013 $1·2 million<br>The balance will be invoiced on 31 March 2014. Verge has only accounted for the initial payment in the financial<br>statements to 31 March 2012 as no subsequent amounts are to be paid until 31 March 2014. The amounts of<br>the invoices reflect the work undertaken in the period. Verge wishes to know how to account for the contract to<br>date.<br>Market interest rates are currently at 6%. (6 markP2-D2 wrote:Verge entered into a contract with a government body on 1 April 2011 to undertake maintenance services on a
new railway line. The total revenue from the contract is $5 million over a three-year period. The contract states<br>that $1 million will be paid at the commencement of the contract but although invoices will be subsequently sent<br>at the end of each year, the government authority will only settle the subsequent amounts owing when the<br>contract is completed. The invoices sent by Verge to date (including $1 million above) were as follows:<br>Year ended 31 March 2012 $2·8 million<br>Year ended 31 March 2013 $1·2 million<br>The balance will be invoiced on 31 March 2014. Verge has only accounted for the initial payment in the financial<br>statements to 31 March 2012 as no subsequent amounts are to be paid until 31 March 2014. The amounts of<br>the invoices reflect the work undertaken in the period. Verge wishes to know how to account for the contract to<br>date.<br>Market interest rates are currently at 6%. (6 markI would stick with the Kaplan answer which I think looks fine (I assume you are not using the old exam question which is out of date).
Bear in mind that, since the syllabus change, marks are for explanations and calculations will get credit if they are correct in principle.
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