A contract between Work the Bridge Limited and the State of Mercy Land was legalised on 10 January 2018. Based on the contract agreement, Work the Bridge Limited is expected to build a bridge for the State of Mercy Land.
Using IFRS 15, Work the Bridge Limited assessed the criteria for accounting for a contract with the State of Mercy Land. The contract consideration to be paid by the State of Mercy Land is ₦565,000. The payment is to be made as follows:
First payment ₦365,000
Second payment ₦100,000
Third payment ₦100,000
On 16 January 2018, the customer made the first payment for the construction of the bridge. On 4 March 2018, the State of Mercy Land held a press briefing decrying their financial position and called for understanding and cooperation of their suppliers. Subsequently, a meeting was called by the State with the contractor where the former informed the later that they will only be able to make a payment of ₦50,000 out of the second payment. Thereafter, the contractor is to discontinue working on the site.
Required: Advise Work the Bridge Limited on the approach to take in the circumstances based on IFRS 15.
See a suggested answer to practice activity 13.8 here.
Suggested answer to practice activity 13.8
Based on the recent developments, Work the Bridge Ltd should renegotiate the terms of the contract with State of Mercy Land. Since the customer is unable to pay the complete consideration that they are entitled to receive, the criteria used in accounting for the contract with the State of Mercy Land should be reassessed.
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