Recognition of Revenue

Order Details;

Question 1 A :

Abu Dhabi Sports Club (ADSC) operates eight health clubs in Abu Dhabi. Members may join ADSC at any time throughout the year. They may use any of the eight clubs, but must reserve court time for racquet sports (tennis, squash, and badminton) and pay a separate fee when making the reservation. This fee is non-refundable if the member does not turn up for his or her session.

Club membership fees are normally due at the beginning of the membership period. However, customers are given the option of paying the membership fee in quarterly instalments (that is, 25% of the annual fee is paid every three months at the end of the quarter). If they take this option, they are charged interest at the annual rate of 15% on any outstanding balance.

As an incentive to new customers, ADSC advertised that any customers who have paid their annual membership and who are not satisfied for any reason can receive a refund of the remaining portion of unused membership fees.

Required

  1. Using the case above define revenue (as explained in IAS 18) and explain the revenue recognition principle.

 

  1. Identify and explain the following criteria for revenue recognition in the above case.
    1. Performance
    2. Measurability
  • Collectability.

 

  1. Using the criteria identified in part (a), explain when revenue should be recognized for each of the following:
  2. Membership fees paid at the beginning of the membership period.
  3. Membership fees paid through quarterly instalments.
  • Court time reservation fees.

 

Question 1 B :

Saadiyat Beach Club charges its members an annual subscription of AED20,000 per member. It accrues for subscriptions owing at the end of each year and also adjusts for subscriptions received in advance.

 

  • On 1 January 2014, 18 members had not yet paid their subscriptions for the year 2013.
  • In December 2013, 4 members paid AED80,000 for the year 2014.
  • During the year 2014 it received AED7,420,000 in cash for subscriptions:

AED

For 2013                    360,000

For 2014                  6,920,000

For 2015                    140,000

7,420,000

 

  • At 31 December 2014, 11 members had not paid their 2014 subscriptions.

 

Required:

Prepare the Club’s Subscription Account to show the amount that should be recognized as revenue for the year ended 31 December 2014.

 

Subscriptions Account

 

 

 

Question 2:

The financial statements of Albar LLC are made up to 31 March in each year. Work on a certain contract started on 1 July 2013 and completed on 31 January 2015. The total contract price was AED360,000, but a penalty of AED5,000 was suffered for failure to complete by 31 December 2014.

The following is a summary of receipts and payments relating to the contract:

Year to 31 March
2014 2015
Payments:    
Materials 51,000 67,000
Wages 57,000 91,000
Direct expenses 4,000 6,000
Purchases of plant on 1 July 2013 24,000
Receipts:    
Contract price (less penalty) 108,000 255,000
Sale, on 31 January 2015, of all plant purchased on 1 July 2013 6,000

 

The amount received from the customer in 2014 represented the contract price of all work certified in that financial year less 10 per cent retention money.

When the financial statements to 31 March 2014 were prepared, it was estimated that the contract would be completed on 31 December 2014, and that the market value of the plant would be AED6,000 on that date. It was estimated that further expenditure on the contract would be AED161,000.

For the purposes of the financial statements, depreciation of plant is calculated, in the case of uncompleted contracts, by reference to the expected market value of the plant on the date when the contract is expected to be completed, and is allocated between accounting periods by the straight line method.

Credit is taken, in the financial statements, for such a part of the estimated total profit, on each uncompleted contract, as corresponds to the proportion between the contract price of the work certified and the total contract price.

 

Required:

Prepare a summary of the account for this contract, showing the amounts transferred to the profit and loss account at 31 March 2014 and 31 March 2015.

 

 

Workings:

  • Computation of profit of year to 31/3/14
Contract price xxxxxx
Less actual expenditure: xxxxx
     Materials xxxxx
     Wages xxxxx
     Direct expenses xxxxx
     Estimated cost of plant used to date xxxxx
     Estimated expenses year to 31/3/15 xxxxx
>>>>>>> xxxxxx
Estimated total contract profit: estimate made at the end of year 31/3/14 xxxxxx

 

Profit for the year to 31/3/2014

­__Work certified__

Total contract price

x Total estimated profit

 

  • Depreciation of plant to 31/3/2014 = (24,000 – 6,000) ÷ 18 = 1,000 per month = 9,000.

 

  • Work certified in year to 31/3/2015 = 360,000 – 120,000 = 240,000.

 

Contract

Year to 31/3/2014

Plant Work certified
Materials Plant c/d
Wages Stock and work in progress c/d
Direct expenses
Gross profit (to profit & loss)

 

Contract

Year to 31/3/2015

Plant b/d Work certified
Stock and work in progress b/d Sale of plant
Materials
Wages
Direct expenses
Penalty
Gross profit (to profit & loss)*

*This is a balancing figure.