Page 444 - F2 Integrated Workbook STUDENT 2019
P. 444
Chapter 19
Example 7.7
Larry has entered into a contract with a customer that contains a single
performance obligation: to construct a building.
The transaction price is $4 million, all of which relates to the construction of the
building.
Revenue from the construction should be recognised as or when the
performance obligation is satisfied. Larry must therefore consider whether it
satisfies the performance obligation over time or at a point in time. Larry is
creating an asset with no alternative use and has a right to payment for
performance completed to date. Therefore, this should be accounted for as a
performance obligation satisfied over time.
For performance obligations satisfied over time, revenue should be recognised
based on progress towards the completion of the performance obligation.
Based on costs incurred, the performance obligation is 20% ($0.5m/$2.5m)
complete. Revenue of $0.8 million ($4m × 20%) should be recognised.
Costs of $0.5m would be recognised in the statement of profit or loss. Profit
overall would be $0.8m – 0.5m = $0.3m.
Larry should show a corresponding receivable for $0.8 million.
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