CPA PEP Prep Q&A

ASPE Section 3400 Revenue Quiz

 
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ASPE Section 3400 Revenue Quiz
by Lawrence Tan Send a message - 5 Feb 2017, 8:35 PM
 
Trey Scott provides consulting services to firms quoting a usual daily rate of $1,200 for a six-hour training session. As part of an agreement with SUN, at a contract price of $1,600, he has agreed to provide five one-day training sessions to employees in various locations, as well as a weekly program designed for each of SUN's 30 employees, and software that can be used with the program to track individual performance. Employees are able to take advantage of the individual meeting for up to three months following their completion of the one- day training session. Trey Scott regularly meets with individuals not associated with SUN to design individual programs, for which he charges an individual rate of $100. Trey Scott might be able to sell the software for $20 per unit. Under Accounting Standards for Private Enterprises, how should the portion of the revenue earned from meeting with employees be allocated?
Select one:
1. 3000
2. Nil
3. 80 Incorrect
4. 88.9

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Your answer is incorrect.
Per CPA Canada Handbook Section 3400, Revenue, at issue here is the stand alone value of each component of the contract. The daily consulting session has a stand-alone value as Trey Scott has a track record of a regular fee charged to firms. He also regularly meets with individuals, so this service also has a stand-alone value. It is questionable whether the software has a separate stand alone value since it "might" be saleable for $20 per unit. In the absence of further information to suggest its value, only the daily consulting and the individual meetings have a stand-alone value. Accordingly, since there is evidence that each unit has an objective and reliable fair value, the arrangement consideration should be allocated to the separate units of accounting based on their relative fair values as follows: The allocation of price to individual employee meetings would be $88.90 per meeting ($3,000 / $9,000 x $8,000 = $2,667 in total).
The correct answer is: 88.9 Can someone please explain the calculation? Thanks.






Picture of Jennifer Silva
Re: ASPE Section 3400 Revenue Quiz
by Jennifer Silva Send a message - 6 Feb 2017, 12:27 AM
 

  • The daily rate quote is $1,200 x 5 days in contract = $6,000
  • The extra service is $100 x 30 employees in contract = $3,000 (includes software and meeting combined)
  • Total contract value of all components should be $6,000 + $3,000 = $9,000, 
  • but he is only charging $1,600 x 5 = $8,000 for the combined contract
  • You need to multiply up because each component is charged based on a different base (days vs. employees)
  • 2/3 of total is for the one-day training and 1/3 is for the meeting with employees (software is not separated based on "might be sold")
  • 1/3 x $8,000(amt charged) / 30 employees = $88.9









Picture of Lawrence Tan
Re: ASPE Section 3400 Revenue Quiz
by Lawrence Tan Send a message - 6 Feb 2017, 12:32 PM
 


Thank you Jennifer for the response. The clarity of your computation is superb!

Observation: If you have not experience or encounter this type of scenario or question before, there is a lot of possibility to confuse the students with the way the question was worded plus the confusing context of the software: for example, I thought there is just one software that does the tracking for all the 30 employees; also the wording looked like that the total contract price is $1,600 for all - five one-day training sessions to employees in various locations, as well as a weekly program designed for each of SUN's 30 employees, and software that can be used with the program to track individual performance.

I would really appreciate other comments on this observation on how these kind of wordings could confuse us as well as the strategy(ies) that students should put in mind and use to guide them in the right direction.