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ACCA Applied Skills · Financial Reporting · Revenue

Oakfield Co agrees to build a specialised processing unit to a customer's design on the customer's land. Under the contract, Oakfield cannot redirect the unit to another customer, and if the customer cancels, Oakfield is entitled to payment for work done to date plus a reasonable margin. Total price is $800,000 and total expected cost is $600,000. At the year end, costs incurred are $390,000, which Oakfield judges to be a fair measure of progress. What revenue and profit should Oakfield recognise for the year?

Oakfield recognises revenue of $520,000 and profit of $130,000. The unit has no alternative use and Oakfield has a right to payment, so revenue is recognised over time. Progress is 390,000/600,000 = 65%, giving revenue of 65% of $800,000, less costs of $390,000.

  1. ARevenue $520,000; profit $130,000Correct
  2. BRevenue $800,000; profit $200,000
  3. CRevenue $390,000; profit nil
  4. DRevenue $520,000; profit $200,000

Explanation

The unit has no alternative use and Oakfield has an enforceable right to payment for performance to date, so the obligation is satisfied over time. Progress = 390,000/600,000 = 65%. Revenue = 65% x 800,000 = $520,000. Profit = 520,000 - 390,000 = $130,000. Recognising only costs as revenue would be a zero-profit approach, which applies only where the outcome cannot be measured reliably.

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