Chapter 4 - Solutions to Gripping IFRS: Graded Questions...

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Solutions to Gripping IFRS: Graded Questions Revenue Kolitz & Sowden-Service, 2009 Chapter 4: Page 1 Solution 4.1 a) Dividend income may be recognised by the persons holding the shares (i.e. the shareholders) on 31 st December, being the date on which the right to receive the dividend is firmly established. b) Since value-added tax is an amount received on behalf of a third party (the relevant tax authority) the economic benefit does not flow to the entity receiving it. The value-added tax should therefore be shown as a liability (a present obligation expected to result in an outflow of economic benefits). c) According to IAS 18, revenue should be recognised at fair value of the consideration received/ receivable, where ‘fair value’ is calculated by deducting the amount of any trade discount given. (It is interesting to note that the same principles should be applied when purchasing goods and receiving trade discount: the cost of purchases should be recorded net of trade discount received). d) Entities granting cash discounts to customers should reduce the amount of revenue recognised on the date of sale. e) Settlement discounts allowed have to be estimated at the date of sale and the amount of the revenue reduced accordingly. This is consistent with the requirement of IAS 18 that revenue should be recognised at the fair value of the consideration receivable (IAS 18, paragraph 9). f) A sale of goods on an instalment-sale basis includes a financing perspective. On completion of the necessary documentation, the customer is able to take the purchased goods into his custody. The payment for these goods occurs over a period of time and the total of the instalments add up to an amount in excess of the normal cash sale price. The reason for this excess is the financing cost that the customer is expected to pay. The revenue that may be recognised on the date of the sale is the cash sale price. The balance is recognised as interest income on a time basis, using the effective interest rate method. g) The revenue from sale of goods should only be recognised when ‘the significant risks and rewards of ownership’ have been transferred from the seller to the buyer and therefore the risks and rewards are generally assumed to be transferred on delivery of the goods. However assuming that the goods had been sent before year-end, but only arrived after year-end, whether or not the sale was made on a FOB or CIF basis would then become relevant. If the goods were transported to the buyer on a F.O.B. basis (free-on-board), as the goods are packed on board the ship, they become the property of the buyer. If the goods are shipped C.I.F. (customs, insurance and freight), the seller undertakes to ensure that the goods arrive intact. The question did not specify which method was adopted, so the assumption must be that the goods were shipped C.I.F. and that the risks and rewards are only transferred on the date of delivery. Therefore, no revenue should be recognised until after year-end.
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This note was uploaded on 03/19/2012 for the course ACCT 100 taught by Professor Ayeshab during the Spring '12 term at Alvin CC.

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Chapter 4 - Solutions to Gripping IFRS: Graded Questions...

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