Answer week 5

Additional illustration- principal or agent

1. Step 1: Identify the contract(s) with a customer
This is clear here when the ticket is purchased
2. Step 2: Identify the performance obligations in the contract
This is tricky - is it to arrange for another party provide a flight ticket - or is it - to provide the
flight ticket themselves?
Well - look at the risks involved. If the flight is cancelled the airline pays to reimburse,
If the ticket doesn't get sold - the entity loses out
Look at the rewards - the entity can set its own price and thus rewards
On balance therefore the entity takes most of the risks and rewards here and thus controls
the ticket - thus they have the obligation to provide the right to fly ticket
3. Step 3: Determine the transaction price
This is set by the entity
4. Step 4: Allocate the transaction price to the performance obligations in the contract
The price here is the GROSS amount of the ticket price (they sell it for)
5. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Recognise the revenue once the flight has occurred

Question 61- adapted from revision kit

Step 1: Identify total profit or loss
Total contract revenue
Cost to date
Costs to complete
Total Expected profit
X percentage of completion(Step 2)
Profit to date(Step 3)

$000
2,800
(740)
(1,400)
660
35%
231

Step 4: Calculate contract asset /liability

Costs incurred to date
Recognised profit
Amount invoiced
Contact asset

740
231
(700)
271

Answer week 5

Question 63- Adapted from revision kit

Total contract revenue
Cost to date
Specialist plant
Costs to complete
Total Expected profit
X percentage of completion(Step 2)
22/50
Profit to date(Step 3)

$000
50,000
(12,000)
(8,000)
(10,000)
20,000
22/50
8,800

Question 64- Adapted from revision kit

Total contract revenue
Cost to date
Costs to complete
Total Expected profit
X percentage of completion(Step 2)
Profit to date(Step 3)

$000
120,000
(48,000)
(48,000)
24,000
45%
10,800

Step 4: Calculate contract asset /liability

Costs incurred to date
Recognised profit
Amount invoiced
Contact asset

48,000
10,800
(50,400)
8,400

Answer week 5
Past Year question -ACCA
Step 1: Identify the total expected profit
$000
12,500
(5,500)
(4,000)
3,000

Agreed contract price

-)Estimated cost
-) Depreciation (8,000 X 24/48)

Step 2 and 3: Determine percentage of completion, cost and profit for the year
(using work certified to date)
Year 2011
Amount
Amount
recognised in
recognised this
year 2010(in Qs) year(bal)
Revenue
(12,500 X 65%)
3,500
4,625
8,125
Cost of sales(Bal)
(6,175)
2,660
3,515
Profit
(3,000X65%)
840
1,110
1,950
Percentage of
8,125/12,500 X 100%
completion
= 65%

Step 4: Calculate Contract asset

$000
Cost incurred to date
Contract cost
-depreciation (15/48 X
8,000)
Estimated profit
Amount invoiced
contract asset
Receivable (8,125-7,125)

$000

4,800
2,500
7,300
1,950
9,250
(8,125)
1,125
400

Answer week 5
Tutorial Question
On the date of the issuance NeedAid records as follows:
Dr Cash account
Cr Issuance of bonds (Liability)
(To record issuance of bonds)

RMmil
50

RMmil
50

Amortisation schedule
Year

1
2
3
4
5

Opening
amortised
amount
RM000
50,000
52,500
55,250
55,775
53,353

Interest
expense at 10%
RM000
5,000
5,250
5,525
5,578
5,335

Interest and
principal
paid
RM000
(2,500)
(2,500)
(5,000)
(8,000)
(8,690)

31 December 20x1
Dr Finance costs
Cr Cash account
Cr Issuance of bonds (Liability)

RM000
5,000

RM000
2,500
2,500

31 December 20x2
Dr Finance costs
Cr Cash account
Cr Issuance of bonds (Liability)

5,250
2,500
2,750

31 December 20x3
Dr Finance costs
Cr Cash account
Cr Issuance of bonds (Liability)

5,525
5,000
525

31 December 20x4
Dr Finance costs
Cr Cash account
Dr Issuance of bonds (Liability)

5,578
8,000
2,422

Closing
amortised
amount
RM000
52,500
55,250
55,775
53,353
49,998*

Answer week 5

31 December 20x5
Dr Finance costs
Cr Cash account
Dr Issuance of bonds (Liability)

5,335
8,690
3,355

Capital repaid at end of 20x5

Dr Issuance of bonds (Liability)
Cr Cash account

50,000*
50,000*

*Includes a $2 rounding error due to using only 2 decimal places in the interest paid and
interest expense in the question.
Past year question- ACCA
(a) (i)

Financial effect if the directors treatment (to show the convertible loan note as equity
instrument) were not acceptable:
-

This would improve the profit as a result of the classification (ie equity instrument) the
relevant finance cost would not be charged to SPL to reduce the profit and as a result
higher EPS.
By classifying convertible loan note as equity instrument, the gearing ratio would be
reduced and affect the user of financial statements decision.

(b) Extracts from the financial statements of Bertrand

Statement of profit or loss for the year ended 30 September 2011
$000
Finance costs (9,190 x 8%)
735
rounded
Statement of financial position as at 30 September 2011
Equity
Equity option
810
Non-current liabilities
8% convertible loan notes ((9,190 x 108) 500)
9,425
rounded

Answer week 5
Working
Year ended

Cash flow

Discount rate

30 September
2011
2012
2013

$000
500
500
10,500

at 8%
093
086
079

value of debt component

value of equity option component (= balance)
total
proceeds

Discounted
cash flows
$000
465
430
8,295

9,190
810

10,000