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price of the discount voucher is Rs. 120 (Rs. 500 average purchase price of additional products x 30%
incremental discount x 80% likelihood of exercising the option). The stand-alone selling prices of Product A
and the discount voucher and the resulting allocation of the Rs. 1,000 transaction price are as follows:

Performance obligations Stand-alone selling price
Product A Rs. 1,000
Discount voucher Rs. 120
Total Rs. 1,120

Performance Allocated transaction price
obligations (to nearest Rs.10)
Product A (Rs. 1000 ÷ Rs. 1120 × Rs. 1000) Rs. 890
Discount voucher (Rs. 120 ÷ Rs. 1120 × Rs. 1000) Rs. 110
Total Rs. 1000

The entity allocates Rs. 890 to Product A and recognises revenue for Product A when control transfers. The
entity allocates Rs. 110 to the discount voucher and recognises revenue for the voucher when the customer
redeems it for goods or services or when it expires.

Q16. (MAY 20)
ST Limited enters into a contract with a customer to sell an asset. Control of the asset will transfer to the
customer in two years (i.e. the performance obligation will be satisfied at a point in time). The contract

includes two alternative payment options:
(1) Payment of Rs. 5,000 in two years when the customer obtains control of the asset or
(2) Payment of Rs. 4,000 when the contract is signed.
The customer elects to pay Rs. 4,000 when the contract is signed.

ST Limited concludes that the contract contains a significant financing component because of the length of
time between when the customer pays for the asset and when the entity transfers the asset to the customer,
as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to make the
two alternative payment options economically equivalent. However, the entity determines that the rate that
should be used in adjusting the promised consideration is 6%, which is the entity's incremental borrowing rate.

Pass journal entries showing how the entity would account for the significant financing component.
SOLUTION

Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the Rs. 4,000 payment received at contract inception:
Cash Dr. Rs. 4,000
To Contract liability Rs. 4,000
(b) During the two years from contract inception until the transfer of the asset, the entity adjusts the

promised amount of consideration and accretes the contract liability by recognising interest on Rs. 4,000
at 6% for two years:
Interest expense Dr. Rs. 494*

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