Question 1 On 1 May 2015, Ashford Machines Limited sold a machine, which had a normal selling price of $315,000. Ashford offered the customer a special deal:
1) The total price to be paid by the customer was $320,000. However, the customer was required to pay only £100,000 on 1 May 2015, with payment of the balance of $220,000 deferred by one year to 30 April 2016. 2) Ashford agreed to provide training on how to use the machine for 20 of the customer’s staff. Ashford calculated that the cost of providing training would be $600 per person, and if Ashford were to charge customers for this training, the company would add a mark-up of 50% to cost in setting the selling price. Up to 31 December 2015, 10 employees had received training. 3) The contract included a complete service and maintenance agreement for the period to 30 April 2018 (three years). Ashford would normally charge $9,000 per year for such a service and maintenance agreement. The sales agent who negotiated the sale will be paid a commission of 1.5% of the contract price as part of her annual bonus. Ashford includes only the present value of deferred payments in calculating revenues, and discounts deferred payments using a discount rate of 10% per annum. All amounts are net of sales taxes. Ashford’s financial year-end is 31 December.
(a) How much revenue would Ashford Machines Limited recognise in its income statement for the year ended 31 December 2015 in respect of this transaction, assuming that it follows International Financial Reporting Standard 15 (IFRS15) – Revenue from Contracts with Customers in its financial statements? Show clearly how you have dealt with the five stages of the process for determining the amount of revenue to recognise in a particular period from a contract with a customer.
(b) Internet companies such as Amazon often offer goods on their websites on behalf of other suppliers. The customer orders the goods from the internet company and pays the internet company, but the goods are delivered to the customer by the supplier. Discuss the issues that may arise in deciding how much revenue can be recognised by internet companies in this situation. If different accounting methods for revenues lead to recognition of the same amount of profit, why should the choice of accounting method matter?
MN3245K Sept 2016
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Question 2 Datchet Limited needs to acquire a new integrated circuit printer for use in its business. The company believes that the “Acme” printer best meets its needs. The “Acme” printer would cost $3,000,000 to buy, and has a useful economic life of eight years. However, Datchet could lease the machine for eight years from 1 January 2016, paying a rental of $425,000 annually from 1 January 2016 to 1 January 2023. Datchet would be responsible for maintaining and insuring the machine. Datchet would also pay the lessor $20,000 on 1 January 2016 as an arrangement fee. The interest rate implicit in this lease is 4%.
The lessor advises Brookwood that another printer, the “Bruto”, would provide the same services as the “Acme” printer, but the “Bruto” printer has a useful economic life of 15 years. The lessor would be willing to enter into an eight-year lease of the “Bruto” printer on exactly the same terms as for the “Acme” printer. At the end of eight years, Datchet could extend the lease at a current market rental or return the machine to the lessee. The “Bruto” printer could be purchased for $4,950,000. The lessor comments that, while the lease of the “Acme” printer would be classified as a finance lease under International Accounting Standard 17 (IAS17) – Leases, the lease of the “Bruto” printer would qualify as an operating lease.
(a) Analyse the leases of the “Acme” and the “Bruto” printers and discuss whether the lessor is correct in categorising them respectively as a finance lease and an operating lease.
(b) Calculate the amounts that would appear in Datchet Limited’s financial statements for the years ending 31 December 2016 and 2017 in respect of the “Acme” and “Bruto” printers, in accordance with IAS17. You may use either the actuarial method or the sum of digits method where this is appropriate. Assume that Datchet will use straight line depreciation for any asset.
(c) The International Accounting Standards Committee issued International Financial Reporting Standard 16 (IFRS16) – Leases in January 2016. Why was a new standard needed? What impact, if any, would the new standard have on the accounting treatment of the two leases?