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Revenue Recognition IFRS 15 for Hotai Motorcycle Case Solution & Answer

Revenue Recognition IFRS 15 for Hotai Motorcycle Case Study Solution

Analysis

The three major concerns raised by Aron, include: loss of the high amount of revenues i.e. $2 to $4 million, use of IFRS accounting standards by Hotai, which clearly states that the revenue could be recognized after the completion of delivery and the insurance claim by Hotai. Firstly, without the incident; Hotai would  have revenues and manufacturing cost of $3.33 and $2.33 million approximately,based onthe industry gross margin of 30%. In this case, the approximate loss for Hotai after insurance; if it bears the losses, would be $1 million. However, the amount lost cannot be considered debatable in this case.

Secondly, Hotai uses IFRS standards, and according to IFRS 15; revenue could not be recognized before the completion of delivery, which means that the goods were not transferred to the distributor yet. According to revenue recognition IFRS 15; revenue will not be recognized in the books of Hotai Motorcycles and the company will bear the loss only to the extent of revenue margin and sales and distribution cost, which would be considered as sunk cost or irrecoverable cost,and manufacturing cost will be recovered by the insurance covered……………………………..

 

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