N1612 Intermediate Financial Accounting Week 10

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N1612 Intermediate Financial Accounting Week 10 Workshop Questions and Answers:

Workshop Learning Outcomes:

· Account for Income/Revenue: IFR15 Revenue from Contracts with Customers

· Account for Government Grants: IAS20 Accounting for Government Grants and Disclosure of Government Assistance

· Account for Discontinued Operations: IFRS5 Noncurrent assets held for sale discontinued operations

· Understand the limitation of Reporting Financial Performance: IAS8 Accounting Policies, Changes in Accounting Estimates and errors

Part 1 IFR15 Revenue from Contracts with Customers

1.1 Dan sells a package which gives customers a free tablet when they sign a three-year subscription for the reading app. The tablet has a stand-alone price of £100 and the app subscription fee is £10 per month. In accordance with IFRS 15 Revenue from Contracts with Customers, what amount will be recognised as revenue in the first year of a customer’s three-year subscription?

a. £120

b. £93.6

c. £172.8

d. £20

1.2 Confidence Co 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.

Identify the carrying amount that will be recognised as a contract asset or liability in the statement of financial position of Confidence Co as at 31 December 20X5?

a. $271,000

b. $231,000

c. $740,000

d. £660,000

1.3 On 1 October 20X2 Pricewell Co entered into a contract to construct a bridge over a river. The total contract revenue was $50 million and construction is expected to be completed on 30 September 20X4. Costs to date are:

Materials, labour and overheads: $12m

Specialist plant acquired 1 October 20X2 $8m

The sales value of the work done at 31 March 20X3 has been agreed at $22 million and the estimated cost to complete (excluding plant depreciation) is $10 million. The specialist plant will have no residual value at the end of the contract and should be depreciated on a monthly basis. Pricewell Co recognises satisfaction of performance obligations on the percentage of completion basis as determined by the agreed work to date compared to the total contract price.

What is the profit to date on the contract at 31 March 20X3?

a. $8,800,000

b. $13,200,000

c. $11,440,000

d. $10,000,000

1.4 The following details apply to a contract where performance obligations are satisfied over time at 31 December 20X5.

	$
Total contract revenue	120,000
Costs to date	48,000
Estimated costs to completion	48,000
Amounts invoiced	50,400

The contract is agreed to be 45% complete at 31 December 20X5.

What amount should be recognised in the statement of financial position as at 31 December 20X5 as a contract asset?

a. $8,400

b. $48,000

c. $6,000

d. $50,400

Part 2 IAS20 Accounting for Government Grants and Disclosure of Government Assistance

2.1 Which TWO of the following are acceptable methods of accounting for a government grant relating to an asset in accordance with IAS20 Accounting for Government Grants and Disclosure of Government Assistance?

a. Set up the grant as deferred income

b. Credit the amount received to profit or loss

c. Deduct the grant from the carrying amount of the asset

d. Add the grant to the carrying amount of the asset

2.2 Broom Co successfully receives a government grant of $1,500,000 on 1 January 2020 allowing it to purchase an asset which costs $500,000, also on 1 January 2020. The asset has a ten-year useful life and is depreciated on a 20% reducing balance basis. Company policy is to account for all grants received as deferred income.

What amount of income will be recognised in respect of the grant in the year to 31 December 2020?

a. $1,500,000

b. $500,000

c. $300,000

d. $150,000

2.3 Intellect intelligence Co receives a government grant of $400,000 on 1^st April 20X6 to facilitate purchase on the same day of an asset which costs $600,000. The asset has a five-year useful life and is depreciated on a 25% reducing balance basis. Company policy is to account for all grants received as deferred income.

What amount of income will be recognized in respect of the grant in the year to 31^st March 20X8?

a. $75,000

b. $300,000

c. $120,000

d. $150,000

Part 3 IFRS5 Non-current assets held for sale discontinued operations

3.1 For an asset to be classified as ‘held for sale’ under IFRS5 Non-current assets held for sale discontinued operations its sale must be ‘highly probable’. Which of the following is NOT a requirement if the sale is to be regarded as highly probable?

a. Management must be committed to a plan to sell the asset.

b. A buyer must have been located for the asset.

c. The asset must be marketed at a reasonable price.

d. The sale should be expected to take place within one year from the date of classification.

3.2 An asset classified as ‘held for sale’ should be measured at the lower of               and              .

a. Carrying amount less costs of disposal

b. Fair value less costs of disposal

c. Carrying amount

d. Value in use

3.3 As at 30 September 20X3 Dune Co's property in its statement of financial position was:

Property at cost (useful life 15 years): $45 million

Depreciation value should be accounted for $6 million per year. On 30 September 20X4 Dune Co decided to sell the property. The property is being marketed by a property agent at a price of $42 million, which was considered a reasonably achievable price at that date. The expected costs to sell have been agreed at $1 million. Recent market transactions suggest that actual selling prices achieved for this type of property in the current market conditions are 10% less than the price at which they are marketed. At 30 September 20X4 the property has not been sold.

At what amount should the property be reported in Dune Co's statement of financial position as at 30 September 20X4?

a. $36 million

b. $37.5 million

c. $36.8 million

d. $42 million

Part 4 Reporting Financial Performance – IAS8 Accounting Policies, Changes in Accounting Estimates and errors

4.1 Which of the following would be treated under IAS8 Accounting Policies, Changes in Accounting Estimates and errors as a change of accounting policy that requires numbers to be reported retrospectively?

a. A change in valuation of inventory from a weighted average to a FIFO basis

b. A change of depreciation method from straight line to reducing balance

c. Adoption of the revaluation model for non-current assets previously held at cost

d. Capitalisation of borrowing costs which have arisen for the first time

4.2 Which of the following would be a change in accounting policy in accordance with IAS8 Accounting Policies, Changes in Accounting Estimates and errors?

a. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting policies differ from those of its parent

b. A change in reporting depreciation charges as cost of sales rather than as administrative expenses

c. Depreciation charged on reducing balance method rather than straight-line

d. Reducing the value of inventory from cost to net realizable value due to a valid adjusting event after the reporting period

4.3 Which of the following items is a change in accounting policy under IAS8 Accounting Policies, Changes in Accounting Estimates and errors?

a. Classifying commission earned as revenue in the statement of profit or loss, having previously classified it as other operating income

b. Switching to purchasing plant using leases from a previous policy of purchasing plant for cash

c. Changing the value of a subsidiary’s inventory in line with the group policy for inventory valuation when preparing the consolidated financial statements

d. Revising the remaining useful life of a depreciable asset

Part 5 - Derringdo Co OTQ case

Information relevant to questions 5.1 - 5.4

Derringdo Co is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo Co invested in a new server at a cost of $800,000 on 1 October 20X2. The server has an estimated useful life of ten years with a residual value equal to 15% of its cost. Derringdo Co uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo Co has no intention of disposing of the server within the first four years. Derringdo Co's accounting policy for capital-based government grants is to treat them as deferred income and release them to income over the life of the asset to which they relate.

5.1 What is the net amount that will be charged to operating expenses in respect of the server for the year ended 31 March 20X3?

a. $10,000

b. $28,000

c. $22,000

d. $34,000

5.2 What amount will be presented under non-current liabilities at 31 March 20X3 in respect of the grant?

a. $228,000

b. $216,000

c. $240,000

d. $204,000

5.3 Derringdo Co also sells a package which gives customers a free laptop when they sign a two-year contract for provision of broadband services. The laptop has a stand-alone price of $200 and the broadband contract is for $30 per month. In accordance with IFRS 15 Revenue from Contracts with Customers, what amount will be recognised as revenue on each package in the first year? Select the correct answer from the options below:

a. $439

b. $281

c. $461

d. $158

5.4 Determining the amount to be recognised in the first year is an example of which stage in the process of applying IFRS15?

a. Determining the transaction price

b. Recognising revenue when a performance obligation is satisfied

c. Identifying the separate performance obligations

d. Allocating the transaction price to the performance obligations