Question

Binz Company provides cleaning services and sells garbage bins to office clients. On June 1^st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?
A. Revenue for the garbage bins and the cleaning services must be recognized on June 1^st.
b. Revenue for the garbage bins is recognized on June 1^st and no revenue will be recognized for the cleaning services until the end of the 5^th year.
c. Revenue for the garbage bins is recognized on June 1^st and revenue for the cleaning service is recognized over the 5 years as those services are performed.
d. Binz Company should not recognize any revenue until the end of the 5^th year.

Answer 1

Answer:

The correct option is C.

Explanation:

Based on IFRS 15 Revenue from Contracts with Customers:

• a contract is an agreement between two or more parties that creates enforceable rights and obligations.
• revenue is an income arising in the course of an entity's ordinary activities.

The recognition of income arising from the supply of garbage bins and cleaning services is bona fide, since the two services are in the company's ordinary activities.

• When the supply of the garbage bins took place, delivery took place and ownership has been transferred to the client, so Binz Company can recognize the income as earned.

• The contract for 5-year cleaning services has to be recognized over the service year in line with accrual principle in accounting.