Either A Ltd. enters into a contract with a customer for the exclusive supply of paint for a three-year period. A Ltd. makes a - 50,000 upfront…

Either Treatment of upfront payment of 50,000 Upfront payment of 50,000 would be accounted for as a reduction of the transaction price. It would be deferred and recognised as a reduction of revenue (in proportion to estimated sales) over the contract term. Accounting for Quarter 1 and Quarter 2 is as follows: For the first quarter Quarter 1 sales = 1,00,000Entity estimates - 10,00,000 sales over the three-year periodPercentage of Quarter 1 sale to total estimated sale = (₹ 1,00,000 /10,00,000) x 100 = 10%Share of upfront payment to be recognised in Quarter 1 = 10% x 50,000 = 5,000 Hence, in Quarter 1, A Ltd. recognizes revenue of 95,000 (₹ 1,00,000 actual sales - 5,000 consideration paid to the customer) For the second quarter Quarter 2 sales = 1,25,000A Ltd. updates its estimate of total sales over the contract to 15,00,000Total sales to date till Quarter 2 = 1,00,000+1,25,000 = 2,25,000Percentage of sale till Quarter 2 to total estimated sale = (₹ 2,25,000 /15,00,000) x 100 = 15%Share of upfront payment to be recognised in Quarter 2 = (15% x 50,000 upfront payment) – Upfront payment recognized in Quarter 1 = 7,500 -5,000 = 2,500 Hence, A Ltd. would recognize revenue of 1,22,500 for Quarter 2 (₹ 1,25,000 actual sales - 2,500 upfront payment made to the customer). Or For the year 20X1-20X2 S Limited accounts for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract, S Limited expects the following: Transaction price -20,00,000 Expected costs -11,00,000 Expected profit (45%) -9,00,000 At contract inception, S Limited excludes the - 2,50,000 bonus from the transaction price because it cannot be concluded that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. Completion of the heavy-duty equipment is highly susceptible to factors outside the entity's influence. By the end of the first year, the entity has satisfied 65% of its performance obligation on the basis of costs incurred to date. Costs incurred to date are therefore - 7,15,000 and S Limited reassesses the variable consideration and concludes that the amount is still constrained. Therefore at 31 st March, 20X2, the following would be recognised: Revenue (A) -13,00,000 (₹ 20,00,000 x 65%) Costs (B) -7,15,000 (₹ 11,00,000 x 65%) Gross profit (C) i.e.(A-B) -5,85,000 For the year 20X2-20X3 On 4 th June, 20X2, the contract is modified. As a result, the fixed consideration and expected costs increase by - 1,50,000 and - 80,000, respectively. The total potential consideration after the modification is 24,00,000 which is 21,50,000 fixed consideration +2,50,000 completion bonus. In addition, the allowable time for achieving the bonus is extended by six months with the result that S Limited concludes that it is highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the bonus of 2,50,000 can be included in the transaction price. S Limited also concludes that the contract remains a single performance obligation. Thus, S Limited accounts for the contract modification as if it were part of the original contract. Therefore, S Limited updates its estimates of costs and revenue as follows: S Limited has satisfied 60.60% of its performance obligation (₹ 7,15,000 actual costs incurred compared to 11,80,000 total expected costs). The entity recognises additional revenue of 1,54,400 [(60.60% of 24,00,000) – 13,00,000 revenue recognised to date] at the date of modification i.e. on 4 th June, 20X2 as a cumulative catch-up adjustment.