Apply the five-step process for revenue recognition

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Reference no: EM132981926

Caspian Pty Ltd is a business that manufactures and sells water filters. The business was established in 2013 and has grown to a large proprietary company with four owners: Olivia, Elliot, Alexandra and John. The business operates from a large factory in Melbourne and is registered for Goods and Services Tax (GST) with financial year end on 30 June. When it commenced its operations on 5 February 2013, Caspian was not able to purchase a building to manufacture water filters in and instead rented a factory. As the business has grown, the owners are considering purbhasing the following assets for $440,000 (GST Inclusive) on 1 July 2021:

Asset	Fair value of asset
Land	$120 000
Building	$330,000
Equipment	$30,000
Total	$480,000

Purchasing these assets would involve additional costs: legal fees of $5,500 (GST Inclusive) to register the land in business' name; $6,600 (GST Inclusive) to rewire the building; $4,840 (GST Inclusive) for a one year building insurance; $2,200 (GST Inclusive) to conduct a safety inspection of the equipment. In addition, the building will include the following necessary (not optional) fixture and fittings costs to ensure that the site is in a workable condition: $11,000 (GST Inclusive) to install solar panels; $12,100 (GST Inclusive) to install a surveillance system; $16,500 (GST Inclusive) to install a cooling/heating system.

The building is expected to have a useful life of 20 years and an estimated residual value of $60,000. The equipment is expected to have a useful life of 5 years and be used for 10,000 hours and an estimated residual value of $4,000. The equipment is expected to be used for 1,500 hours in year 1, 2,200 hours in year 2, 2,500 hours in year 3, 2,000 hours in year 4, and 1,800 hours in year 5. Caspian adopts the cost model to measure all existing non-current assets.

Because the business has seen a significant increase in demand for its products due to the pandemic in recent months, the owners believe existing non-current assets should be valued higher and it would be more appropriate to change to the revaluation model of measuring non-current assets.

On 1 July 2021, Caspian signed an agreement with ABlock to supply and install 170 of its premium water filters in a newly built apartment block for a contract price of $38,500 (GST Inclusive). This amount also includes one free service of all 170 water filters 4 months from the date of installation. The standalone price of one premium water filter is $220 (GST Inclusive), the standalone price of installing one premium water filter is $77 (GST Inclusive) and the standalone price of servicing one premium filter is $55 (GST Inclusive). Half of 170 premium water filters were installed on 11 August 2021 and the remaining half was installed one week later. ABlock paid the full contract amount on 20 July 2021.

Question: With reference to AASB15 Revenue from Contracts with Customers, apply the five-step process for revenue recognition for the contract with ABlock. List each of the five steps and show any calculations. Finally, provide double-entries to record all related transactions.

Reference no: EM132981926

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