CPA PEP Prep Q&A

IFRS 15 Ques

IFRS 15 Ques

Question: A company entered into a contract on 1 January 20X5 to build a factory. The total contract revenue was $2.8 million. At 31 December 20X5 the contract was certified as 35% complete. Costs incurred during the year were$740,000 and costs to complete are estimated at $1.4 million.$700,000 has been billed to the customer but not yet paid.

Any one know how to record the JEs ?
Re: IFRS 15 Ques

Contract value  = $2,800,000 Cost to Complete Contract =$2,140,000 (1.4M+0.74M)

Contact Completed Rate = 35%

Method used is Percentage of Completion

So, Company can recognize the revenue of $980,000 (related cost is 740,000) [ 2.8M X35%) Billed to Customer to date =$700,000   (Assuming this amount is already booked in revenue the cost incurred is already accounted for 740K)

Additional revenue can be booked using below entry:

Accounts Receivable  Dr     $280,000 Revenue CR$280,000

Accounts Receivable   DR  700,000

Revenue                                   CR  700,000

COGS                          DR 740,000

Construction Inventory               CR 740,000

Re: IFRS 15 Ques

$2,800,000 * 35% =$980,000

Cr Contract Revenue                  $980,000 Dr AR$980,000

To record revenue earned to date. $700,000 was billed but not yet received, so it will be credited to AR with a corresponding debit to cash when received. I believe that's the answer, depending on whether the$700,000 billed to the customer was actually entered as a revenue/receivable yet. If it has, then the answer would change to the same AJE, except as $280,000 ($980,000 - 700,000). The wording is a little bit confusing.

The question is also not clear about whether the costs incurred have been recorded or not, but I assume they have been since they've been "incurred" and would have to have been adjusted through cash/inventory/salaries wages etc, so I wouldn't make any adjustment. I think it's simply to assure you that the contract is still profitable and that no losses are needed to be realized. ($740K +$1.4 million = $2.14 million, which is less than the contract amount). And$740K / $2.14 million = roughly 35%. Does that makes sense? Re: IFRS 15 Ques JE's Dr: Construction in Progress(Asset) 740,000 Cr: Cash (Expense) 740,000 Dr:Construction Expenses 740,000 Dr:Construction in Progress 231,000 Cr:Construction in Revenue 971,000 Note:Due to 35% being the maximum amount recognisable in the first year,(.35*660,000=2,800,000-2,140,000)it is not necessary to bill the full amount.Construction Revenue is a balancing amount. My view. Re: IFRS 15 Ques My view. IFRS 15 Revenue will be recognized when performance obligations has been satisfied. Revenue will be recognized over-time or at a point in time. In this case, revenue will be recognized over time DR AR. 980,000. (35% * 2.8 million) CR. Revenue. 980,000 For the cost DR. Cost of sale. 740,000 CR. Inventory. 740,000 Note: No JE for the invoice until when it's receive. When the amount invoiced is received, which is 700,000 in this case DR cash. 700,000 CR AR. 700,00 I hope that helps Re: IFRS 15 Ques My Views For Year 2015 Contract in Process 740,000 Contract Payable 740,000 Contract Receivables 700,000 Progress Billing 700,000 Total Estimated Profit =$2.8 M - $1.4M =$1.4M

Gross Profit in 2015 = 35% x 1,400,000 = \$490,000

JE

Contract in Process   490,000

Contract Expenses     740,000

Contract Revenue                           1,230,000

Thanks