QUESTION 2 a Parson plc has entered into the following trans

QUESTION 2 (a) Parson plc has entered into the following transactions during the year ended 31 December 20X3. i. On 1 October 20X3 Parson plc received £400,000 in advance subscriptions. The subscriptions are for 20 monthly issues of a magazine published by Parson plc. Three issues of the magazine had been despatched by the year end. Each magazine is of the same value and costs approximately the same to produce. ii. A batch of unseasoned timber, which had cost £250,000, was sold to Banko plc for £100,000 on 1 January 20X3. Parson plc has an option to repurchase the timber in 10 years\' time. The repurchase price will be £100,000 plus interest charged at 8% per annum from 1 January 20X3 to the date of repurchase. The market value of the timber is expected to increase as it seasons. Required: For each of the two transactions above explain the correct accounting treatment according to the revenue recognition standard and provide the appropriate accounting entries. You can ignore any financing effects in relation to transaction (i). 10 marks

Solution

In the first case, the revenues received in advance are not considered as revenue till the time they are actually provided to the customers. The revenue against which the services has been rendered are considered as revenue and the revenue against which the services is not rendered is considered as unearned revenue. In this case, there is an advance received by 20 monthly issues. The three issues has been dispatched, so the revenue recognized is (40000/20 *3) = 60000 pounds and the unearned revenue is 340000 pounds which will be listed under current liabilities.

Answer II:

This is the case of Repurchase agreement. Under this there are two aspects which are lease agreement and financing arrangements. In the financing arrangement if the repurchase price is more than or equal to the original selling price or a part of sale-leaseback agrrements. Under this, the company recognizes the assets and records a liability for the amount of consideration received from the customers.

In this case, the transaction should be recoeded as the lease under ASC 840. the repurchase price is lower than the selling price i.e. 250000 pounds, the transaction will not be classified as the sale-leadeback agreement and this transaction will be classified as the Leaseagreement