A contract agreement has been signed between Fast Limited and Safe Limited. In the agreement, Fast Limited will distribute goods for Safe Limited based on the following terms.
i. Fast Limited has legal title to the goods delivered by Safe Ltd. Fast Limited sells the inventory to retailers.
ii. Safe Limited sets the selling price. Fast Limited is given a fixed margin on all sales.
iii.Safe Limited will bear the cost of product liability. Safe Limited is responsible for any production mistakes or defects.
iv. Fast Limited can return inventory to Safe Limited without penalty.
v. Fast Limited is not liable for credit risk resulting from sales to retailers.
In the course of the year ended 31 December 2017 Safe Ltd transferred legal title of goods to Fast Ltd which cost Safe Ltd ₦10,240. The goods should be sold at a margin of 25%. Fast Ltd will receive 5% of the selling price of the entire goods sold to retailers.
By 31 December 2017, Fast Limited had sold 78% of the entire inventory. The remaining goods were stored in its warehouse. Fast Limited collected all monies from the retailers but was yet to remit any cash to Safe Limited.
Required:
i. How is Fast Ltd acting in this contract?
ii.Based on IFRS 15, how should Fast Limited recognise cash, revenue and liability arising from the contract? How should Safe Ltd recognise receivable and revenue?
See the suggested solution to practice activity 13.16 here.
Suggested solution to practice activity 13.16
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