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ACCA Applied Skills · Financial Reporting · Revenue

Kano Co sells a 2-year service plan on 1 October 20X1 for $24,000, paid in advance, with services provided evenly. Kano also incurred $3,000 of incremental commission on 1 October 20X1, capitalised and amortised over the 2-year term. Kano's year end is 31 December 20X1. What is the net effect on Kano's profit before tax for the year ended 31 December 20X1, and what contract liability is shown at that date?

Profit rises by $2,625 and the contract liability is $21,000. Three months of a 24-month contract gives revenue of $3,000 and commission amortisation of $375. The unearned advance payment remaining at the year end is $24,000 less $3,000, which is $21,000.

  1. AProfit effect $2,625; contract liability $21,000Correct
  2. BProfit effect $2,625; contract liability $24,000
  3. CProfit effect $5,250; contract liability $21,000
  4. DProfit effect $2,625; contract liability $18,000

Explanation

Revenue for 3 months is $24,000 x 3/24 = $3,000. Commission amortisation is $3,000 x 3/24 = $375. Net profit effect is $3,000 - $375 = $2,625. The contract liability is $24,000 - $3,000 = $21,000. Option with $5,250 doubles the revenue-less-cost effect, and $24,000 ignores the revenue recognised.

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