Reference no: EM132512871
The following UK quoted companies are seeking advice on their accounting treatment in relation to revenue recognition.
Eagle Ltd
Eagle Ltd is a construction company which agreed to build a new office complex for £5 million. The construction will take 3 years and estimated costs are £3 million. The contract commenced on 1st March 2019 and is estimated to be completed by 31st March 2022. By 31st December 2019 the costs incurred to date were £900,000. The customer has been invoiced for the amount of £400,000 and has paid to date £195,000. The contract is to be treated as a single performance obligation which is satisfied over time. The company measures progress made on the contract by comparing the costs incurred for the work performed to date with the estimated total contract costs.
Sparrow Ltd
Sparrow Ltd is a supplier of commercial catering equipment to small restaurants and cafes. Sparrow Ltd enters into a contact to sell a coffee maker to a customer for £9,500 on 1st January 2020. The contract stipulates that the customer will pay £500 after the goods have been delivered and the customer has accepted the delivery, the remaining £9,000 is due in three years, payable on 31st December 2022. Sparrow Ltd applies an effective interest rate of 10% per annum. Sparrow Ltd prepares its financial statements on 31st December.
Robin Ltd
Robin Ltd is a major sportswear retailer and all sales made include a right of return.
In the month of December Robin Ltd sells 500 trainers for £90 each. The trainers cost Robin Ltd £60 each to buy. End-customers can return the trainers, as new and in original packaging, within one month from the date of purchase for a full refund, provided that they are unused and saleable as new.
Based on historical patterns, Robin Ltd has estimated that the probability-weighted expected value of returns is 5% of revenues. Robin Ltd does not expect to incur any costs to accept the return of the trainers, because the end-consumer will return them directly to the store.
Required:
Question 1: Show how the contract for Eagle Ltd should be reflected in the financial statements for the year to 31st December 2019.
Question 2: Calculate the transaction price of the coffee machine for Sparrow Ltd at the delivery date and the interest income to be recognised over the next three years.
Question 3: Show how Robin Ltd should record revenue and expected returns associated with these transactions in the financial statements for the month of December.