A cleaning company enters into a contract to provide daily cleaning service to OUHK for one year. Under HKFRS 15 Revenue from Contracts with Customers, discuss whether the cleaning company should recognize the revenue from the contract at a point in time.

Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter17: Advanced Issues In Revenue Recognition
Section: Chapter Questions
Problem 2E: Consider each of the following scenarios: a. A seller orally agrees with one of its best customers...
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A cleaning company enters into a contract to provide daily cleaning service to OUHK for one year.

Under HKFRS 15 Revenue from Contracts with Customers, discuss whether the cleaning company should recognize the revenue from the contract at a point in time.

(b) Yellow Ltd. sells 2,000 pairs of running shoes to a retailer at $300 per pair. Yellow Ltd. provides an incentive scheme to the retailer by paying the retailer the difference between $300 and the lowest price that it will offer during the next 12 months. Yellow Ltd. estimates the selling price based on its past experience:

 

Price Probability $300 65%   $250 25%    $200 10%

Using the expected value method under HKFRS 15 Revenue from Contracts with Customers, determine the estimated transaction price for a pair of running shoes in this contract. Show your workings.

(c) On 1 January 2014, Blue Ltd. received a government grant of $10 million to finance the acquisition of a machine for $25 million on that day. The machine was depreciated at 10% per annum on cost using straight-line basis. Blue Ltd. recorded the grant as deferred income. The end of Blue Ltd.’s reporting period was 31 December.

On 1 January 2015, Blue Ltd. paid back $5 million to the government due to non-fulfillment of the conditions in the grant. Blue Ltd. was only entitled to $5 million of the grant.

Prepare the related journal entries with narratives for the machine and the government grant in 2014 and 2015. Show your workings.

 

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