Question

CASE STUDY 15.2

PAYMENT IN ADVANCE

Arizona Ltd sells goods to Barbados Ltd. The agreement between the two parties states that Barbados Ltd pays for the goods in advance of delivery which will occur in 12 months’ time. The control of the goods pass to Barbados Ltd at the date of delivery. Barbados Ltd pays $40 000 to Arizona Ltd on 1 July 2019. Arizona Ltd delivers the goods to Barbados Ltd on 1 July 2020.

Required

Advise Arizona Ltd on how to appropriately recognise the revenue from this transaction.

Answer 1

Advice to Arizona Ltd on revenue recognition:

Concept: As per revenue recognition standard, the entity Arizona Ltd should recognize the revenue only if all the risk and rewards relating to the goods or services have been transferred to the customer.

Explaination: In the given capsule, it was stated that control of the goods will be transferred to the customer only on the date of delivery. However the customer Barbados Ltd, made an advance payment of $ 40,000 to the entity Arizona Ltd which has to be recognized as a contract liability instead of revenue on 1st July, 2019.

Conclusion: Therefore on the date of delivery that is on 1st July 2020, Arizona Ltd after making delivery of the said goods to Barbados Ltd, it can recognize the revenue by reversing the contract liability of $40000. Date of recognizing revenue is equal to date of delivery of goods.