Questions IFRS 15

Q-1
Sky Link Limited (SLL) was incorporated as a public limited company on 1 July 2013. On 1
August 2013, SLL acquired an operating license from the telecommunication authority
for a mobile phone network for Rs. 50 million for twenty years. For obtaining the license,
SLL paid a professional fee of Rs. 6 million and incurred other indirect cost amounting to
Rs. 4 million. SLL’s financial year ends on 30 June each year.
SLL signed an agreement with a media house for carrying out a marketing campaign at
a cost of Rs. 25 million for the period up to 30 September 2014. The media house billed Rs.
20 million for the activities carried out upto 30 June 2014.
The network was completed on 31 December 2013 at a cost of Rs. 1,350 million. SLL
commenced commercial operations on 1 January 2014 by announcing a normal call
rate of Rs. 2.00 per minute and introducing a package comprising of free mobile phone
and 1200 free minutes per month.
The package requires payment of Rs. 3,000 per month payable in advance under a 12
month contract. On expiry of the contract, ownership of the mobile phone would be
transferred to the subscriber. Subsequently, the subscriber would be allowed 1000
minutes for Rs. 1,250 per month. In either case, calls in addition to the free minutes are
chargeable at Rs. 1.50 per minute.
The cost of a mobile phone is Rs. 12,000 and such mobile phone is usually available in
the market at Rs. 15,000.
According to the business plan, SLL expected to sign 80,000 subscribers and earn net
profit of Rs. 30 million by the end of 30 June 2014. However, only 50,000 subscribers were
signed upto 30 June 2014. Average unexpired term of 50,000 contracts is 8 months. A
further 20,000 subscribers were signed in July and August 2014. During the period upto 30
June 2014, SLL incurred a loss of Rs. 15 million. However, during the months of July and
August 2014 it earned a marginal profit of Rs. 5 million.
In a recent development, a foreign company intending to enter into Pakistan telecom
market has offered SLL a sum equivalent to Rs. 45 million for the operating license and to
buy net assets at their carrying value.
SLL’s financing cost is 12% per annum.
Required:
In accordance with the requirements of the International Financial Reporting
Standards, discuss the accounting treatment for the year ended 30 June 2014 in
respect of the following:
(a) Initial recognition and subsequent measurement of operating license (09)
(b) Marketing campaign cost (01)
(c) Revenue recognition (07)
(d) Amount of revenue to be recognized in respect of the annual package, for the
period ended 30 June 2014.
(03)
Q-2
Remal Enterprises commenced business as building contractors January 1, 1996 with a
capital of Rs. 1,000 paid into bank account. The contractor was awarded a contract on
March 31, 1996 to construct a Hospital building. The contract price was agreed at Rs.
2,000.
It was agreed that the contract should be completed by December 31, 1998. The
building is being constructed at the premises of customer and contractor has the
enforceable right to payment for the full price if the contract is cancelled before
completion.
The contractor made following payments in 1996: Rs.
Materials purchases 250
Wages 130
Site supervision 100
Lease rentals of hired equipment 26
Mobilization costs in shifting plant, equipment and materials to the 21
construction site
Design and technical assistance 3
Other expenses 20
550
Materials inventory at December 31 1996 amounted to Rs. 50.
During 1996 the contractor billed the customer Rs. 600 against progress billings. Cash
received amount to Rs. 500.
At December 31, 1996 it was estimated that further cost to complete this contract would
amount to Rs. 1,100.
During 1997 following payments were made Rs.
Material purchases 475
Wages 200
Site supervision 100
Lease rentals of hired equipment 26
Sub-contractors 20
Other expenses 4
825
Materials inventory at Dec. 31, 1997 75
During 1997 the contractor billed the customer Rs. 1,100 against progress billings. Cash
received from customer in 1997 amounted to Rs. 1,000.
At December 31, 1997 the contractor made a fresh estimate of costs of complete the
contract. The latest estimates revealed that further cost of Rs. 300 will be incurred in 1998.
During 1998, the company made following payments: Rs.
Materials purchases 165
Wages 150
Site supervision 50
Demobilization 10
375
Materials un-used was returned to the stores at cost Rs. 100. Progress billing amounted to
Rs. 300 and cash received was Rs. 100.
Required:
For the year 1996, 1997 and 1998:
a) Determine percentage completion of contract work.
b) Compute revenues to be recognized.
c) Prepare extracts of income statement and statement of financial position.
Q-2
Following is the data relating to Fine builders who commenced work on a contract from
January 1, 19X1.
 Rs.
Contract price 7,500
Costs incurred in 19X1
Machinery and equipment 700
Wages 1,500
Contract overheads 400
Materials 2,000
Sub contract costs 300
Part of the machinery costing Rs. 200 was unsuited for the work and was sold at a profit
of Rs. 50.
The value of the machinery and equipment on December, 31 19X1 was Rs. 400 and the
value of materials then on hand was Rs. 300.
In order to calculate the profit made on the contract up to December 31, 19X1 the
contractor estimated additional expenditure that would be incurred to complete the
job. The profit recognized is that percentage of estimated total profit that incurred costs
to date bear to estimated total costs.
Other information
i) The contract would be completed by June 30, 19X2. The building is being
constructed at the premises of customer and contractor has the enforceable right
to payment for the full price if the contract is cancelled before completion.
ii) The machinery and equipment would have a residual value of Rs. 100 upon the
completion of contract.
iii) The cost of the materials required in addition to those in stocks on December 31,
19X1 would be Rs. 1,000 and that further sub contract cost of Rs. 200 would be
incurred.
iv) Wages on the contract for six months ending June 30, 19X2 would amount to Rs.
800.
v) Contract overheads will amount to the same sum per month as in the previous
year; and
vi) 2.5% of total cost of the contract (excluding this percentage) should be provided
for maintenance and contingencies. The charge is made only at end of the
contract. The warranties are not sold separately and only offered to secure
customer that the services offered will be up to the mark as agreed in the contract.
Required: - Prepare relevant extract to statement of financial position and statement of
comprehensive income?

Q-3
Salman Co has two contracts in progress. The building is being constructed at the
premises of customer and contractor has the enforceable right to payment for the full
price if the contract is cancelled before completion. The details of which are as follows:
School Club
(Profitable) (Loss-making)
Rs. ‘000’ Rs. ‘000’
Total contract price 300 300
Costs incurred to date 90 150
Estimated costs to completion 135 225
Progress payments invoiced and received 116 11
Required:
Show extract from the income statement and the balance sheet for each contract,
assuming that School and Club contracts are 40% complete?
Q-4
Merry view specializes in construction contracts. One of its contracts, with Better Homes,
is to build a complex of luxury flats. The price agreed for the contract is Rs.40 million and
its scheduled date of completion is 31 December 2002. Details of the contract to 31
March 2001 are:
Commencement date 1 July 2000
Contract costs: Rs.000
Architects’ and surveyors’ fees 500
Materials delivered to site 3,100
Direct labor costs 3,500
Overheads are apportioned at 40% of direct labor costs Estimated cost to complete
(excluding depreciation – see below) 14,800,000 Plant and machinery used exclusively
on the contract cost Rs.3,600,000 on 1 July 2000. At the end of the contract it is expected
to be transferred to a different contract at a value of Rs.600,000. Depreciation is to be
based on a time apportioned basis.
Inventory of materials on site at 31 March 2001 is Rs.300,000.
Better Homes paid a progress payment of Rs.12,800,000 to Merry view on 31 March 2001.
At 31 March 2002 the details for the construction contract have been summarized as:
Contract costs to date (i.e. since the start of the contract) excluding all depreciation
20,400
Estimated cost to complete (excluding depreciation) 6,600
A further progress payment of Rs.16,200,000 was received on 31 March 2002.
The building is being constructed at the premises of customer and contractor has the
enforceable right to payment for the full price if the contract is cancelled before
completion.
Merry view accrues profit on its construction contracts using the percentage of
completion basis as measured by the percentage of the cost to date compared to the
total estimated contract cost.
Required:
(a) Prepare extracts of the financial statements of Merry view for the construction
contract with Better Homes for:
(i) the year to 31 March 2001;
(ii) the year to 31 March 2002.
Q-5
Linnet is part way through a contract to build a new football stadium at a contracted
price of Rs.300 million.
Details of the progress of this contract at 1 April 2003 are shown below:
Rs. million
Cumulative sales revenue invoiced 150
Cumulative cost of sales to date 112
Profit to date 38
The following information has been extracted from the accounting records at 31 March
2004: Rs. million
Total progress payment received for work certified at 29 February 2004 180
Total costs incurred to date (excluding rectification costs below) 195
Rectification costs 17
Linnet has received progress payments of 90% of the work certified at 29 February 2004.
Linnet’s surveyor has estimated the sales value of the further work completed during
March 2004 was Rs.20 million.
At 31 March 2004 the estimated remaining costs to complete the contract were Rs.45
million.
The rectification costs are the costs incurred in widening access roads to the stadium. This
was the result of an error by Linnet’s architect when he made his initial drawings.
The building is being constructed at the premises of customer and contractor has the
enforceable right to payment for the full price if the contract is cancelled before
completion.
Linnet calculates the percentage of completion of its contracts as the proportion of sales
value earned to date compared to the contract price. All estimates can be taken as
being reliable.
Required:
Prepare extracts of the financial statements for Linnet for the above contract for the year
to 31 March 2004?
Q.6
Mughals Limited, a firm of civil contractors, specializes in construction of highways. They
entered into a contract with the National Highway Authority (NHA) in the year 2003 for
construction of National Highway covering 1500 kilometers and having 6 lanes. However,
it was agreed that work shall commence on February 1, 2004. The agreed price was Rs.3.6
billion. The company closes its accounts on May 31.
On February 1, 2005 the NHA requested the company for extending the highway by
adding two further lanes. NHA was of the view that the price of this extension shall be in
the same proportion i.e. Rs. 1.2 billion, as there has been no significant increase in costs
since the signing of the contract in 2003. However Mughals Limited refused to accept this
price. Their board of directors was of the view that their company was in a position to
sign another contract if they forego the offer by NHA. After extensive negotiations, the
price of the extended work was agreed at Rs. 1.6 billion. It was also agreed that the work
on additional lanes will be carried out simultaneously and will be completed on
November 30, 2006.
The following data is available in respect of the above contract:
As at May 31
2004 2005 2006

Original Contract Rupees in million

Progressive billing to date 800 2,500 3,400
Amount received to date 600 2,400 3,240
Mobilization advance (included in the
above) 180 180 180
Actual cost to date 600 2,000 2,680
Value of work certified by NHA 300 2,000 3,300
Profit (latest estimate) 600 900 720

Additional Work
 Progressive billing to date -- 200 1,100
Amount received to date -- 80 800
Mobilization advance (included in the
above) -- 80 80
Actual cost to date -- 100 580
Value of work certified by NHA -- -- 1,000
Profit (latest estimate) -- 700 600
The road is being constructed under the supervision of customer and contractor
has the enforceable right to payment for the full price if the contract is cancelled
before completion. The contractor does not develop the asset for any alternative
use.
There is a clause in the agreement that NHA will pay an early completion bonus
of Rs.5.0 million per week. However in case of delay it will levy a penalty of Rs.10.0
million for each week the completion is delayed. In case of the original agreement
the company has always been confident that the contract will be completed two
weeks ahead of time and was actually completed accordingly. In case of
additional work the chances of delay at year-end were considered as:
2005 2006
Delay of two weeks Possible Probable
Delay of three weeks Remote Possible
Delay of four weeks -- Remote

Required:
(a) Discuss whether the contract for additional work shall be treated as a separate
contract or a part of the original contract, according to IAS-11 (Construction
Contracts)?
(b) Prepare extracts of the Income Statement and Balance Sheet of Mughals Limited
for the years to May 31, 2005 and 2006 in respect of the above contract along with
necessary disclosures regarding treatment of bonus and penalty as discussed
above?
Q.7
Silver Construction Limited (SCL) was incorporated on July 1, 2007 with a share
capital of Rs. 500 million. It is involved in the construction of bridges, dams, pipelines,
roads etc. During the year ended June 30, 2008, the company commenced work
on six contracts, details of which are as follows:
CONTRACTS
I II III IV V VI
Rupees in millions
Total contract price 300 375 280 400 270 1,200
Billing up to June 30, 2008 200 110 280 235 205 1,200
Contract cost incurred up to
June 30, 2008 248 68 186 246 185 1,175
Estimated further cost to
complete 67 221 - 164 15 -

Following additional information is available:

 (i) As per terms of Contract IV, the company will receive an additional Rs.40
million if the construction is completed within a period of twelve months
from the commencement of the contract. The management feels that
there is a 90% probability that it will be able to meet the target.
(ii) The assets are being constructed at the premises of customers and
contractor has the enforceable right to payment for the full price if the
contract is cancelled before completion. The contractor does not develop
any asset for alternative use.
(iii) An amount of Rs. 16 million was incurred on Contract II on account of a
change in design. The company has discussed it with the customer who has
informed SCL that the amount is on the higher side and needs to be revised.

Required:
(a) Make relevant calculations and prepare appropriate extracts to be reflected
in the Balance Sheet and Income Statement for the year ended June 30, 2008?
(b) Justify your accounting treatment in respect of the additional information
provided above?
Q-8
Modern construction Limited (MCL) was established on July 01, 2008. It had entered into
two different contracts up to June 30, 2010 and their progress is as under: -
Contract A Contract B
Contract start date 1-1-2009 1-9-2009
Work certified and billed up to June 30, 2009 25% -
Work certified and billed up to June 30, 2010 80% 20%
Work completed but not certified up to June 30, 2010 -- 5%
Rs. (M) Rs. (M)
Contract price 800 400
Cost incurred up to June 30, 2009 180 -
Cost incurred during the year ended June 30, 2010 420 125
Estimated cost to complete on June 30, 2009 500 -
Estimated cost to complete on June 30, 2010 100 270
Un paid bills (gross) as on June 30, 2010 140 -

Other relevant information is as under: -

(i) The company recognizes contract revenue and expenses using % of completion
method.
(ii) 10% of contract price had been paid as advance on signing of each contract
and is adjustable from the progress payments.
(iii) A progress bill is raised on the basis of work % certified by the consultant. All
customers deduct 5% retention money from the progress bills.
(iv) Contract costs incurred during the year do not include:
  Retainer-ship fee amounting to Rs. 2 million paid to the consultant for
technical assistance on contracts A and B. 30% of the consultant’s time was
used on contract A and 70% on contract B.
  Research cost for improving work quality and cost efficiency amounting to
Rs. 1.9 million.
(v) The company is required to rectify all the defects during warranty period of one
year. It is estimated that rectification costs to be incurred during warranty period
 would be 5% of the contract price. The warranties are not sold separately and only
offered to secure customer that the services offered will be up to the mark as
agreed in the contract.
(vi) The assets are being constructed at the premises of customers and contractor has
the enforceable right to payment for the full price if the contract is cancelled
before completion. The contractor does not develop any asset for alternative use.
Required:
Prepare appropriate extracts to be reflected in the Statement of Financial Position,
Income Statement and relevant notes to the accounts for the year ended June 30, 2010
in accordance with IAS 11 (Construction Contracts)?
Q.9
Kamal Associates won first contract of the financial year on April 1, 2001 for destruction
of a group of ten buildings of similar size and technical specification for a price of Rs 2
million. The work was to be completed within six months of an award of the contract
failing that a penalty of 6% per annum of the contract price would be paid to the
customer for the delay.
The contractor has the enforceable right to payment for the full price if the contract is
cancelled before completion. The contractor does not develop any asset for alternative
use.
Following information was available as at June 30, 2001; the date on which Kamal
Associates close their financial year. On that date five buildings were demolished.
Site labor Rs 200,000; site supervision Rs 150,000; material used Rs 250,000; depreciation
on plant used at site Rs 100,000; general and administration costs Rs 50,000; research and
development costs Rs 25,000; selling costs Rs 25,000: Other construction overheads Rs
200,000.
The management of Kamal Associates compared above information with budgeted
cost of the contract and was satisfied with performance except that it would require four
months to complete the rest of the contract. Due to delay in completion and inflation,
cost overrun would be as follows:
Increase in wages of site labor by 10%. Escalation in material cost by 20%. Other
construction overhead would increase by 20%. Research and development cost to go
down by Rs 5,000.
Subsequent to June 30, 2001 Kamal Associates was notified of a claim of Rs 50,000 from
third party for damage done to a building next to the one demolished by Kamal
Associates. Kamal Associates accepted the claim.
Required:
Prepare contract account clearly indicating profit earned or loss incurred as at the close
of financial year on June 30, 2001 in accordance with IAS 11 Construction Contracts?
Q.10
ABC is a limited liability company mainly engaged in construction of dams and power
houses. It has won a contract to construct a dam on River Indus. The contract was
awarded to ABC on July 01, 2010 but work could not be started till the end of September
2010. The assets are being constructed at the premises of customers and contractor has
the enforceable right to payment for the full price if the contract is cancelled before
completion. The contractor does not develop any asset for alternative use.
ABC received mobilization advance equal to 10% of the contract value of Rs. 5,000
million on August 31, 2010. ABC has to complete the dam within 5 years of the signing of
the contract. To avoid liquidity problems ABC arranged short term running finance of Rs.
1,000 million @ 19.5% from a local bank on October 15, 2010.
The progress billings raised during the year were Rs. 500 million. The whole amount was
received after adjustment of mobilization advance and retention money. The retention
money is 10% of the progress billings raised, receivable after three years of successful
completion of the dam and mobilization advance will be adjusted equally over five
years.
ABC incurred the following cost on the construction of dam

Rs. (m)
Fee paid to surveyors 200
Raw material used 500
Designing cost incurred 400
Fee paid to consultants 100
Labor and other overheads 150
Total cost 1,350
The expected future cost to complete the contract is Rs. 2,550 millions.
The work certified at the end of June 30, 2011 is Rs. 1,200 millions. ABC uses survey of work
performed method for determining stage of completion of contracts.
Total interest cost accrued during the year ended June 30, 2011 was Rs. 120 million.
Required: -
Provide extract of statement of financial position and statement of comprehensive
income for year ended June 30, 2011?
Q.11
Quality Works Limited (QWL) undertakes construction contracts. The following information
pertains to one of its contracts under progress as at June 30, 2014.
(i) Price of the contract is agreed at Rs. 3,000 million and cost to complete is
estimated at Rs. 2,400 million. Construction work was started on 01 July 2012 and is
planned to complete on 31 December 2014. Progress of the contract is
summarized as under: -
As at 30 As at 30
June 2014 June 2013
Rs. (m) Rs. (m)
Accumulated actual cost 2,560 1,500
Revised estimated cost to complete the contract 2,900 2,600
Unpaid gross bill as at 30 June 2014 100 75
Work certified and billed 80% 45%

(ii) QWL recognizes contract revenue and cost under percentage of completion
method. The assets are being constructed at the premises of customers and
contractor has the enforceable right to payment for the full price if the contract is
cancelled before completion. The contractor does not develop any asset for
alternative use.
(iii) Actual cost includes cost of preparation of quotations amounting to Rs. 7 million.
(iv) Payment terms as agreed with the client are as under: -
 a) Payment of 10% of contract price on signing of the contract, adjustable
from the monthly progress billings.
b) Deduction of 5% retention money from the monthly progress billings. The
amount is refundable at the end of warranty period i.e. one year after
completion of contract.
(v) QWL is required to rectify defects, if any, during the warranty period. Cost of
rectification is estimated at 5% of the contract price.
Required: -
In light of the International Financial Reporting Standards, prepare relevant extract from
the following: -
a) Statement of financial position as at 30 June 2014? (08)
b) Statement of comprehensive income for the year 30 June 2014? (07)
(Show comparative figures and ignore taxation)
Q-12
Mega Super Stores (MSS) introduced a customer loyalty scheme on 1 August 2013 which
was based on the following conditions:
 Customers were granted 500 points with each purchase of Rs. 5,000 or above.
 These points could be exchanged for goods supplied by MSS within two months
from the date the points were granted.
 For every 500 points, goods having a retail price of Rs. 200 were to be given.
However, the scheme was discontinued from 1 October 2013. During the period covered
by the scheme, the customers were granted 1.5 million points out of which 0.5 million
points were redeemed. At year end, a study was carried out and it was established that
approximately 30% of the points granted would lapse unutilized. Actual results showed
that finally 470,000 points lapsed unutilized.
MSS sells goods at a margin of 40%. No entries in respect of grant of points have been
recorded so far.
Required: Prepare accounting entries to record the above transactions in accordance
with IFRS. (08)
Q-13

A retailer has a stated policy that any products may be returned within 30 days subject
to a cap of 20% (i.e., only up to a maximum of 20% of goods purchased may be returned
within the 30 day window). On January 1, 2016, the retailer introduced a new product
with a carrying value of Rs. 35 in inventory. The following return patterns occurred during
the next three months:

January 1% returned

February 19% returned

March 5% returned

On April 1, 2016, the retailer enters into a new contract and sells 150 units of this new
product at a price of Rs. 50/unit. However, given that the product has been newly
introduced to the market and there is a large range of possible consideration amounts
(i.e., as evidenced by the pattern of returns over the last few months), the retailer is
unable to assert that it is highly probable a significant revenue reversal will not occur for
the variable component (i.e., the 20%).

Required: - What journal entries required for recognition of revenue under IFRS 15 on April
01 and May 01, 2016? (10)

Q-14

Manufacturing Co. entered into a contract with a customer to sell a machine for Rs.
100,000. The total contract price included installation of the machine and a two-year
extended warranty. Assume that Manufacturing Co. determined there were three
distinct performance obligations and the stand-alone selling prices of those performance
obligations were as follows:
Machine — Rs. 75,000,
Installation services — Rs. 14,000; and
Extended warranty — Rs. 20,000
Required: - Determine the amount of revenue to be recognized by Manufacturing Co.
on satisfaction of each performance obligation? (05)
Q-15
An entity has a customer loyalty program that rewards a customer with one customer
loyalty point for every CU10 of purchases. Each point is redeemable for a Re. 1 discount
on any future purchases of the entity’s products. During a reporting period, customers
purchase products for Rs. 100,000 and earn 10,000 points that are redeemable for future
purchases. The consideration is fixed and the stand-alone selling price of the purchased
products is Rs. 100,000. The entity expects 9,500 points to be redeemed. The entity
estimates a stand-alone selling price of Rs. 0.95 per point (totaling Rs. 9,500) on the basis
of the likelihood of redemption.
At the end of the first reporting period, 4,500 points have been redeemed and the entity
continues to expect 9,500 points to be redeemed in total.
At the end of the second reporting period, 8,500 points have been redeemed
cumulatively. The entity updates its estimate of the points that will be redeemed and
now expects that 9,700 points will be redeemed.
Required: - Discuss the accounting treatment of customer loyalty program at initial
recognition, end of first year and end of second year? (10)
Q – 16
On 15 December 2014, Builders and Developers (BnD) announced a project to build and
sell a 5-storey building on a piece of land acquired at a cost of Rs. 50 million. In the last
week of December 2014, BnD was approached by Jannat Homes (JH) with the offer to
acquire the entire building. JH also suggested that BnD may continue to provide
maintenance services for five years after the handover of building. The agreement was
signed on 1 January 2015. As per the agreement, the entire contract amount of Rs. 275
million (in respect of the building and five years maintenance charges) was paid by JH
on signing the agreement.
According to the terms of the agreement, the construction work was to be completed
within 18 months and control of the building was to be transferred immediately thereafter.
The control was transferred as agreed. The expenditures incurred on construction of the
building from 1 January 2015 to 30 June 2016 (evenly throughout the period) were as
follows:
 Rs. (m)
Direct materials 80.20
Direct labor 32.60
Other costs directly related to the 5.80
contract
During the period 1 July 2016 to 31 December 2016, BnD incurred Rs. 3 million for providing
maintenance services relating to the building. BnD expects this rate of expenditure to
continue in future also.
BnD’s incremental borrowing rate is 9% per annum. It normally earns a profit of 30% of
cost, on the provision of maintenance services.
Required:
Prepare relevant extracts from statements of financial position and comprehensive
income of BnD for the years ended 31 December 2015 and 2016. (18)
Answers on IFRS 15
A-1
Sky Link Limited
Accounting treatment in the financial statements for the year ended 30 June 2014
Treatment in accordance with the requirements of the international financial reporting
standards for the matters pertaining to the financial statements for the year ended 30
June 2014 is discussed as under:
(a) Operating license – measurement and recognized
The operating license shall be measured initially at cost of Rs. 50 million plus Rs. 6 million
of other directly attributable cost for preparing the asset for its intended use.
For subsequent measurement, IAS allows either the cost or revaluation model. However,
revaluation model can only be used when an active market of the intangible asset exists.
In this case, the operating license shall be carried at cost less accumulated amortizations.
However, carrying value should be reviewed annually to identify any impairment.
The license has finite useful life of twenty years. The cost should therefore be amortized
on a systematic basis over its useful life. Amortization shall begin when the asset is
available for use.
In this case, the license was acquired on 1 August 2013 but it is operative from 1 January
2014. Therefore, amortization should commence from 1 January 2014 and it would
amount to Rs. 1.43 million (56÷19.583×6÷12) for the period from 1 January to 30 June 2014.
Operating license – impairment
Significant lower number of subscribers and loss of Rs. 15 million during the first six months
as against the budgeted profit of Rs. 30 million are indicators for review of impairment.
The license itself does not generate cash flow independently of the other assets.
Therefore, SLL would be treated as a cash generating unit (CGU).
To determine impairment, recoverable amount is to be worked out by analyzing value in
use (VIU) and market value of operating license and tangible assets.
The loss for the first six months seems to be mainly because of significant marketing
campaign cost as excluding this cost loss for the first six months would be reduced to Rs.
10 million (30- 20). Earning profit of Rs. 5 million during the months of July and August 2014
and signing of further 20,000 customers are indicative of improving operating results.
Therefore, VIU of CGU is expected to exceed the carrying value of the net assets.
In view of the above, it may be concluded that there is no impairment of CGU.
(b) Cost incurred on launching of marketing campaign:
Cost incurred for launching of marketing campaign to introduce the network and sales
promotion of package offered should be expensed out when incurred. Therefore,
invoices totaling to Rs. 20 million should be charged to cost for the year ended 30 June
2014.
(c) Revenue recognition
1. Normal calls revenue should be recorded at the time call is made at Rs. 2 per minute.
2. SLL also deals in a single package which includes free mobile phone plus 1,200 free
minutes. In such combined packages, revenue recognition criteria need to be applied
to the separate components of a transaction to reflect substance. Each component of
the package should be recognized at its fair value and only recognized when it meets
the specific criteria. Accordingly, revenue shall be recognized as under:
(i) For the revenue arising from the package , it is measured at the fair value of the
consideration received or receivable taking into account any trade discount and
volume rebate allowed by the entity.
(ii) The package is comprised of two components, one is mobile phone and another
is calls duration. Revenue for mobile phone would be recognized on its delivery
whereas calls revenue would be recognized at the month-end. Revenue for both
the components would be determined as under:
Fair Discount Revenue to be
value recognized
Rs. (m) Rs. (m) Rs. (m)
Mobile set 15,000 2,671 12,329
Call charges 28,800 5,129 23,671
(2x1200x12)
43,800 7,800 36,000

(iii) Monthly call duration in excess of free 1,200 minutes per package would be
recognized at Rs. 1.50 per minute (net of discount).
(iv) An appropriate provision should be recorded to cover any default.
d) Revenue for average four months upto June 30, 2014 in respect of 50,000
packages is worked out as under: -
Mobile phone revenue Calls revenue
On start of package [12,329x50,000]=616.45 -
At month end [23,671/12]x50,000=98.63
At month end 98.63
At month end 98.63
At month end 98.63
Note: -
In addition to mobile set and charges a component of interest income may be
incorporated to take effect of financing cost of 12% per annum.
A-2
Extract to statement of financial position
1996 1997 1998
Contract Asset Rs. Rs. Rs.
Cost to date 550 1,375 1,650
Profit to date 125 325 350
Contract work in progress 675 1,700 2,000
Progress billings to date (600) (1,700) (2,000)
75 -- --
Receivables
Progress billings to date 600 1,700 2,000
Receipts to date (500) (1,500) (1,600)
100 200 400
Extract to statement of comprehensive income
Revenue 625 1,000 375
Cost of revenue (500) (800) (350)
Profit for the year 125 200 25
W-1 Stage of completion
Revenue 2,000 2,000 2,000
Cost to date A 550 1,375 1,750
Un- used raw material B 50 75 100
Future cost C 1,100 300 --
Stage of completion [(A-B)/(A-B+C)]x100 31.25% 81.25% 100%
W-2 Profit to date
Revenue to date 625 1,625 2,000
Expense to date (500) (1,300) (1,650)
Profit to date 125 325 350

A-2

FINE BUILDERS
Statement of Financial Position as at December 31, 19X1 (EXTRACT)

Note Rupees
ASSETS
CURRENT
ASSETS

Contract asset 1 4,584

Statement of Comprehensive Income for the year ended 31, 19X1 (EXTRACT)

Note Rupees
PROFIT AND LOSS ACCOUNT

Revenue 5 4,280
Expenses ( Stage of completion basis )
(3,946)
Profit ( Balancing figure) 334

NOTES TO THE ACCOUNTS

Rupees
1. Contract asset
Cost to date 4,250
 Profit to date 334
4,584
Progress billings to date -
4,584

2. Stage of Completion
Cost incurred to date to total cost basis

3,950
= X 100
3,950 + 2,973

= 57%
Rupees
3. Contract cost to date
Machinery (700 - 400 -250) 50
Wages 1,500
Contract overheads 400
Materials 2,000
Sub - contract cost 300
4,250
Un-used R/M
(300)
Cost to date 3,950
4. Future cost

Machinery 300
Material 1,300
Wages 800
contract overheads 200
Sub-contract cost 200
Provision for warranty 173
2.5%
(3,950 + 2,800) X
97.5%

Future Cost 2,973

5. Contract Revenue to date

 Total Contract Revenue 7,500
Stage of completion 57%

Contract revenue to date 4,280

A-3
Extract to statement of financial position
School Club
Contract asset Rs. (000) Rs. (000)
Cost to date 90 150
Profit / (loss) to date 30 (75)
Contract work in progress 120 75
Progress billings to date (116) (11)
4 64
Receivables
Progress billings to date 116 11
Receipts to date (116) (11)
-- --
Extract to statement of comprehensive income
Revenue 120 120
Cost of revenue (90) (150)
Profit/ (loss) 30 (30)
Provision for onerous contract -- (45)
Net profit / (loss) 30 (75)

A-4
a)
Merry view- Income statement (Extract) year to March 31, 2001
Rs. (000)
Sales revenue 14,000
Cost of sales (w (i)) (9,100)
Profit on contract 4,900

Balance sheet extract as at March 31, 2001

Non- current assets
Plant and machinery (3,600-900) (w (ii)) 2,700
Current assets
Contract asset (w(iii)) 1,500
ii) Income statement extract March 31, 2002
Sales revenue (40,000x75%-14,000 (w(ii)) 16,000
Cost of sales (22,500-9,100) (w (iii)) (13,400)
Profit on contract 2,600
Balance sheet extract March 31, 2002
Plant and machinery (3,600-900-1,200)(w(iii)) 1,500
Amount due from customers (w (iii)) 1,000
 Workings
i) Contract cost as at March 31, 2002
Architect’s and supervisor fee 500
Materials used (3,100-300) 2,800
Direct labore 3,500
Over heads (3,500x40%) 1,400
Plant and machinery depreciation 900
Cost at March 31, 2001 9,100

Estimated cost to complete

Excluding depreciation 14,800
Plant depreciation (3,600-600-900) 2,100
16,900
Total estimated cost to complete 26,000
Percentage of completion (9,100/26,000) 35%

Contract costs as at March 31, 2002

Summarized costs excluding depreciation 20,400
Plant depreciation (21 months @ 100) 2,100
22,500
Cost to date
Estimated cost to complete
Excluding depreciation 6,600
Plant depreciation 900
7,500
Estimated total costs on completion 30,000
Percentage of completion (22,500/30,000)*100 75%

ii)
The plant has a depreciable amount of Rs.3,000 (3,600 – 600 residual value) Its estimated
life on this contract is 30 months (1 July 2000 to 31 December 2002) Depreciation would
be Rs.100 per month i.e. Rs.900 for the period to 31 March 2001; Rs.1,200 for the period to
31 March 2002; and a further Rs.900 to completion.
iii)
Contract asset 2001 2002
Contract cost to date 9,400 22,500
Profit to date 4,900 7,500
Contract work in progress 14,300 30,000
Cash received to date (12,800) (29,000)
Contract asset 1,500 1,000
A-5
Income statement March 31, 2004 Rs. (m)
Sales revenue 70
Cost of sales (w (i)) (81)
Loss for the year (11)
 Balance sheet March 31, 2004
Cost to date 195
Profit to date 44
239
Progress billings to date (180)
Contract asset 59

Workings
Cumulative 1 April Cumulative 31, Amounts for the
2003 March 2004 year
Sales 150 220 70
Cost of sales (112) (176) (64)
Rectification costs Nil (17) (17)
38 27 (11)

i) Progress payments received are Rs.180 million. This is 90% of the work certified
(at 29 February 2004), therefore the work certified at that date was Rs.200
million. The value of the further work completed in March 2004 is given as Rs.20
million, giving a total value of contract sales at 31 March 2004 of Rs.220 million.
ii) the total estimated profit (excluding rectification costs) is Rs.60 million:
Rs. million
Contract price 300
Cost to date (195)
Estimated cost to complete (45)
Estimated total profit 60

The degree of completion (by the method given in the question) is 220/300
Therefore the profit to date (before rectification costs) is Rs.44 million (Rs.60 million ×
220/300). Rectification costs must be charged to the period they were incurred and not
spread over the remainder of the contract life. Therefore after rectification costs of Rs.17
million the total reported contract profit to 31 March 2004 would be Rs.27 million. With
contract revenue of Rs.220 million and profit to date of Rs.44 million, this means contract
costs (excluding rectification costs) would be Rs.176 million. The difference between this
figure and total cost incurred of Rs.195 million is part of the Rs.59 million of the amounts
due from customers shown in the balance sheet.
A-6
Mughal Limited
Extract to statement of financial position
For the year ended
2006 2005
Cont. A Cont. B Cont. A Cont. B
Contract asset/(liability) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Cost to date 2,680 580 2,000 100
Profit to date 658 380 500 --
Contract work in progress 3,338 960 2,500 100
Progress billings to date (3,400) (1,100) (2,500) (200)
 (62) 140 -- (100)
Receivable / (payable)
Progress billings to date 3,400 1,100 2,500 200
Receipts to date (3,060) (720) (2,220) --
Adjustments to mobilization advance (180) (80) (180) (80)
160 300 100 120

Mughal Limited
Extract to statement of comprehensive income
For the year ended
2006 2005
Cont. A Cont. B Cont. A Cont. B
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Revenue 1,300 1,000 1,700 --
Cost of revenue (1,142) (620) (1,250) --
Profit / (loss) 158 380 450 --

W-1 Stage of completion (Cont. A) 2004 2005 2006

Revenue 3,600 3,600 3,600
Incentive 10 10
A 3,600 3,610 3,610
Value of work certified B 300 2,000 3,300
(B/A)x100 8.3% 55.4% 91.4%
W-2 profit to date (Cont. A) 2004 2005 2006
Revenue to date 300 2,000 3,300
Expenses to date (balancing) (250) (1,500) (2,642)
Profit to date 50 500 658
W-3 Stage of completion (Cont. B)
Revenue 1,600 1,600
Penalty -- (20)
Net revenue A 1,600 1,580
Value of work certified B -- 1,000
%age of completion (B/A)x100 0% 63.3%
W-2 profit to date (Cont. A) 2006
Revenue to date 1,000
Expenses to date (balancing) (620)
Profit to date 380
A-7
Silver Construction Limited
Extracts from Income Statement
For the year ended June 30, 2008

Rs. in million
Contract revenue recognized 2,318.18
 Contract costs recognized (2,108.00)

Silver Construction Limited

Extracts from Balance Sheet
As of June 30, 2008

Rs. in million
ASSETS
Contract asset 106.75

LIABILITIES
Contract liability 21.76
Working schedule
I II III IV V VI Total
Rupees in Million
Contract price 300 375 280 400 270 1,200 2,825.00
Incentive payments - - - 40 - - 40.00
Total contract price (A) 300 375 280 440 270 1,200 2,865.00
Contract cost incurred to (B) 248 68 186 246 185 1,175 2,108.00
date
Estimated further costs 67 221 - 164 15 - 467.00
Total estimated costs to (C) 315 289 186 410 200 1,175 2,575.00

Completion % B/Cx (D) 78.73% 23.53% 100% 60% 92.50% 100%

Revenue to be recognized A (E) 236.19 88.24 280.00 264.00 249.75 1,200 2,318.18

Expected losses from (A- (15.00) - - - - - (15.00)

*233.00 88.24 280.00 264.00 249.75 1,200

Amount recoverable from (E)
Progress billings 200.00 110.00 280.00 235.00 205.00 1,200
Contract asset 33.00 - - 29.00 44.75 - 106.75
Contract liability - (21.76) - - - (21.76)
* Cost to be recognized – expected losses = 248 – 15 = 233
(b) Comments on additional information
(i) Incentive payments are included in contract revenue when:
 The contract is sufficiently advanced that it is probable that the
specified performance standards will be met or exceeded; and
 The amount of the incentive payment can be measured reliably.
Since the Contract IV is in advance stage and the probability to achieve
the target is very high, the company should recognize the incentive
payment to be received, on this contract.
(ii) Claims are recorded in contract revenue only when:
 Negotiations have reached an advanced stage such that it is probable
that the customer will accept the claim; and
 The amount that it is probable will be accepted by the customer can
be measured reliably.
Since the claim amount cannot be measured reliably, the claim should not be
recognized as contract revenue.
A-8
Extracts from Statement of Comprehensive Income for the year ended June 30, 2010
Rs. in million
Contract revenue recognized (800 x 55%) + (400 x 25%) 540.00
Contract costs recognized (412.48+116.4) W-2 528.88
Statement of Financial Position as of June 30, 2010

Assets
Construction contracts in progress (8.12+42.3) Note-1 50.42
Account receivables (Net unpaid bills) (140*0.85) 119.0
0
Retentions held by the customers (640+80)*5% 36.00
Liabilities
Advances received from the customers {(800+400)-(640+80)}*10% 48.00
Notes to the accounts for the year ended June 30, 2010
Note 1: Construction contracts in progress A B
Rs. in million
Contract costs incurred up to June 30, 2010 (126.40 + 600.60 138.70
12.30) (c)
Recognized profit/(loss) (59.40 x80%)/(16.40 X 100%) 47.52 (16.40)
648.12 122.30
Progress billings up to June 30, 2010 640.00 80.00
8.12 42.30
W-1 - Expected profit / (loss) on A B
completion of the contracts:
As of For the For the For the
June year year 2010 year
30, 2009 2010
2010
Contract price 800.00 800.00 800.00 400.0 0
(a)
Work completion % up to June 30, 2010 80% 25% 55% 25%
(b)
contract costs incurred 600.00 180.00 420.00 125.0 0
Technical assistance fee incurred but not 0.60 0.60 1.40
allocated to the contracts
600.60 180.00 420.60 126.4 0
(c)
Estimated costs to complete 100.00 500.00 100.00 270.0 0
Estimated warranty works (5% of the 40.00 40.00 40.00 20.00
contract price)
Total estimated costs to complete the 740.60 720.00 560.60 416.4 0
contracts (d)
Estimated profit / (losse) on completion of 59.40 (16.40 )
the contracts. (a)-(d)
W-2 : Contract costs to be recognized for the year ended June 30, 2010
Costs to be recognized up to June 30, 2010 W-1 (d)*(b) 592.48 104.10
Less: Costs recognized up to June 30, 2009 {(180+500)+(800*0.05)}*0.25 180.00 -
Costs for the year ended June 30, 2010 412.48 104.10
Add: Loss to be recognized {(400*0.25)+16.4}-104.1} 12.30
Contract costs to be recognized for 2010 412.48 116.40
A-9
Extract of statement of financial position
Rs. (m) Rs. (m)
Assets
Cost to date 1,470
Profit to date 235
Work in progress 1,705
Progress billings to date (500)
Contract asset 1,205
Retention money (500*.10) 50
Liabilities
Mobilization advance (5,000x10%) = (500-100) 400
Running finance 1,000

Extract of statement of comprehensive income

Rs. (m) Rs. (m)
Revenue 1,200
Expenses (965)
Profit for the year (980x.24) 235
Workings
W-1 Rs. (000)
Stage of completion
Work certified to date 1,200
Total revenue 5,000 1,200/5,000x100
24%
Cost to date (120+1,350) 1,470
Future cost 2,550
Total cost 4,020
Expected profit (5,000-3,900) 980

A-10
Extract of statement of financial position
Rs. (m) Rs. (m)
Assets
Cost to date 1,470
Profit to date 235
Work in progress 1,705
Progress billings to date (500)
Contract asset 1,205
Retention money (500*.10) 50
 Liabilities
Mobilization advance (5,000x10%) = 400
(500-100)
Running finance 1,000

Extract of statement of comprehensive income

Rs. (m) Rs. (m)
Revenue 1,200
Expenses (965)
Profit for the year (980x.24) 235

Workings
W-1 Rs. (000)
Stage of completion
Work certified to date 1,200
Total revenue 5,000 1,200/5,000x100
24%
Cost to date (120+1,350) 1,470
Future cost 2,550
Total cost 4,020
Expected profit (5,000- 980
3,900)
A-11
a)
Quality Works Limited
Extracts from statements of financial position
As at June 30, 2014
2014 2013
Rs. (m) Rs. (m)
Assets
Contract asset 103.00 255.50
Accounts receivable (net of 10% advance payment and
deduction of 5% retention money) (100x85%), (75x85%) 85.00 63.75
Retention money held by customers (3,000x80%x5%),
(3,000x45%x5%) 120.00 67.50

Liabilities
Advance from customers (3,000x20%x10%), (3,000x55%x10%) 60.00 165.00
b)
Quality Works Limited
Extracts from statement of comprehensive income
For the year ended June 30, 2014
Contract revenue recognized (3,000x80%-1,350), (3,000x45%) 1,050.00 1,350.00
Contract cost recognized (1,212.50) (1,237.50)
162.50 112.50
W-1 Expected profit / (loss) on completion of contract
 Contract price A 3,000.00 3,000.00
Work completed up to 30 June 2014 B 80% 45%
Accumulated cost incurred 2,560.00 1,500.00
Cost of quotation before award of contract (7.00) (7.00)
Accumulated cost incurred C 2,553.00 1,493.00
Estimated further cost to incur (Balancing) 347.00 1,107.00
Estimated cost to complete 2,900.00 2,600.00
Estimated cost of warranty works at 5% (3,000x5%) 150.00 150.00
Estimated cost of the contract D 3,050.00 2,750.00
Estimated profit /(loss) on completion
of the contract (A-D) (50.00) 250.00

W-2 Contract cost recognized for the year ended June 30,
2013 and 2014 2014 2013
Cost recognized up to end of the year DxB 2,44.00 1,237.50
Cost recognized up to June 30, 2013 (1,237.50) --
1,202.50 1,237.50
Loss to be recognized (50x20%) 10.00 --
1,212.50 1,237.50
W-3 Gross amount due from customers
Contract cost incurred up to end of the year C 2,553.00 1,493.00
Recognized profit / (loss) (50x100%), (250x45%) (50.00) 112.50
2,503.00 1,605.50
Progress billings up to end of the year AxB (2,400.00) (1,350.00)
Gross amount due from customers 103.00 255.50

A-12
Mega Super Store
Accounting entries for the customer incentive scheme
Date Description Debit Credit
30-Sep-2013 Sales revenue (1,500,000x70%x200/500) 420,000
Deferred revenue 420,000
(To record points granted under the scheme)
30-Sep-2013 Deferred revenue [500,000x(200/500)] 200,000
Sales revenue 200,000
(To record redemption of the points granted)
30-Nov- Deferred revenue (420,000-200,000) 220,000
2013
Sales revenue (1,500,000-500,000-470,000)x200/500 212,000
Profit or Loss account [470,000- 8,000
(1,500,000x30%)x200/500]
(To record redemption and lapsing of the unutilized
points)
A-13

The following entries will be made:

 Time Period Double entry Rs. Rs.
April 01, 2016 Asset (right to recover product) 1,050
Cost of Sales 4,200
Inventory 5,250
Cash 7,500
Refund liability 1,500
Revenue 6,000
May 01, 2016 Refund Liability 1,500
Revenue 1,500
Cost of sales 1,050
Asset (right to recover product) 1,050
A-14

The aggregate of the stand-alone selling prices (Rs. 109,000) exceeds the total
transaction price of RS.100,000, indicating there is a discount inherent in the
arrangement. That discount must be allocated to each of the individual performance
obligations based on the relative stand-alone selling price of each performance
obligation. Therefore, the amount of the Rs. 100,000 transaction price is allocated to each
performance obligation as follows:
Machine — Rs. 68,807 (RS. 75,000 x (RS. 100,000 / RS. 109,000))
Installation — RS.12,844 (RS. 14,000 x (RS. 100,000 / RS. 109,000))
Warranty — RS.18,349 (RS. 20,000 x (RS. 100,000 / RS. 109,000))
The entity would recognize as revenue the amount allocated to each performance
obligation when (or as) each performance obligation is satisfied.
A-15
The points provide a material right to customers that they would not receive without
entering into a contract. Consequently, the entity concludes that the promise to provide
points to the Customer is a performance obligation. The entity allocates the transaction
price (RS.100,000) to the product and the points on a relative stand-alone selling price
basis as follows:
RS.
Product 91,324 [RS.100,000 × (RS.100,000 stand-alone selling price ÷
RS.109,500)]
Points 8,676 [RS.100,000 × (RS.9,500 stand-alone selling price ÷
RS.109,500)]
The entity recognizes revenue for the loyalty points of RS.4,110 [(4,500 points ÷ 9,500
points) × RS.8,676] and recognizes a contract liability of RS.4,566 (RS.8,676 – RS.4,110) for
the unredeemed points at the end of the first reporting period.
The entity updates its estimate of the points that will be redeemed and now expects that
9,700 points will be redeemed. The entity recognizes revenue for the loyalty points of
RS.3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) ×
RS.8,676 initial allocation] – RS.4,110 recognized in the first reporting period}. The contract
liability balance is RS.1,073 (RS.8,676 initial allocation – RS.7,603 of cumulative revenue
recognized).
A – 16
Builders and Developers
Extracts from statement of financial position
As at 31 December 2016
2016 2015
Rs. (m) Rs. (m)
Fixed assets
Land -- 50
Current assets
Contract cost (80.20+32.60+5.80) /(18x12) 79.07

Non-current liabilities
Contract liability 27.30 35.10
(2016 3.9x7) (2015 39-3.9)
Current liabilities
Contract liability 7.80 264.65
(2016 3.9x2) (2015 236+3.9+24.75)

Builders and Developers

Extracts from statement of comprehensive income
As at 31 December 2016
2016 2015
Rs. (m) Rs. (m)
Revenue (sale of building) [275-39(3x10x1.3)+38.24 274.24 --
Less: contract cost
Land 50.00
Direct material 80.20
Direct labor 32.60
Other cost directly related to the contract 5.80
168.60 --
Profit from sale of building 105.64 --
Revenue from maintenance services (3x1.3) 3.90 --
Less: contract cost (3.00) --
Profit from maintenance services 0.90 --
Gross profit (105.64+0.90) 106.54 --
Interest expense (13.49) --
Net profit 93.05