Question
Entity 4 has the following contracts. (i) Contract 1: Entity 4 has entered into a contract with a customer to supply a licence for a
Entity 4 has the following contracts.
(i) Contract 1: Entity 4 has entered into a contract with a customer to supply a licence for a standard off the shelf software package, install the software, and to provide unspecified software updates and tech support for a period of two years for a total contract price of 250,000. Entity 4 sells the licence and tech support separately, and the installation service is routinely provided by a number of other unrelated companies similar to Entity 4. The software will remain functional without the software updates and tech support.
(ii) Contract 2: Entity 4 entered a contract with a customer on 1 January 2020 with the following details:
| Contract |
| 000 |
Contract price | 14,000 |
Cost up to 31 December 2020 | 4,000 |
Anticipated cost to completion | 10,000 |
Percentage of completion | 30% |
Under the contract, Entity 4 would be delivering a custom-made defence system for the customer, and it has an enforceable right for payments to the cost incurred up to date for the customer.
During 2021, Entity 4 incurred a further 3,000,000 for the contract. Total invoice billed to the customer amount to 6m by 31 December 2021 of which 5,400,000 have been collected from the customer. The percentage of completion is 70% by 31 December 2021.
Required
(a) Explain how you would account for contract 1 in accordance with IFRS 15.
(3 marks)
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