On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with

Question

On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $96,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing sytem to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $65,000 for the scales, $10,000 for the software, and $25,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date. Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2016 for this contract?

Explanation / Answer

Hey Dear Student !!

As per IFRS 15 we consider Transaction as performance obligation when Seller is bound to give services or goods by any contract.

So we will follow following Steps:

Identify Contract > Identify Obligation > Identify Transaction Price > Allocate Transaction price to each obligation > Recognise Revenue when each performance obligation is satisfied

Transaction Price is $96000

When Service or Goods are supplied over the time then we have to recognise revenue on over the time basis as follows:

Contract Obligation is for 1 year Services Commenced on 1 Aug 2016

So will recognise revenue for 5 months 96000/12 X 5 = $40000
In 2016

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