Page 443 - F2 Integrated Workbook STUDENT 2019

Answers

Example 7.6

Suzy Ltd’s revenue from selling the non-current asset will be recorded at a point
in time. Suzy Ltd must determine the point in time at which the customer obtains
control over the non-current asset.

Control refers to the ability to direct the use of the asset and to obtain
substantially all of the remaining benefits.

Due to the option to repurchase in 3 years, the customer has not obtained
substantially all of the remaining benefits of the asset. Control of the asset has
not passed to the customer and so revenue should not be recognised.

In substance, this is a financing arrangement because the repurchase amount
exceeds the original selling price. A financial liability for $2 million should be
recognised. Interest of $1 million ($3m – $2m) should be recognised as an
expense over the three year period.

On receipt of the cash, Suzy will Dr Cash $2m Cr Liability $2m. No
derecognition of the apartment block inventory/non-current asset will occur.
Revenue recorded is nil.

Nb. If the option to repurchase the building lapses then the liability should be
derecognised and revenue will be recognised.

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