Introduction:
TechCo, a company that manufactures electronic gadgets, acted as an agent for another company, ElectroSupply Co. (“consignor”), to sell the consignor’s finished goods. As an agent, TechCo facilitated the sale, but it did not recognize the revenue or VAT from the sale of the goods. Instead, TechCo earned a commission for its role as an agent. The commission was subject to VAT. The consignor, ElectroSupply Co., recognized all revenue and expenses (commission expense) related to the sale, as well as the VAT.
The Situation:
ElectroSupply Co. produced 300 units of finished goods, each priced at $200. The total sales amount before VAT was $60,000. The sale was subject to a 10% VAT, making the total VAT on the sale $6,000, and the total amount due from the customer $66,000.
The customer made an advance payment of $20,000 (including VAT) to TechCo. The customer paid the remaining balance of $46,000 ($66,000 - $20,000) to TechCo upon receiving the finished goods.
TechCo earned a 5% commission from the consignor on the total sales, which amounted to $3,000 (5% of $60,000). The commission was also subject to a 10% VAT, which amounted to $300 (10% of $3,000).
Case Facts:
Total sales by ElectroSupply Co. (before VAT): $60,000
VAT on goods sold (ElectroSupply Co.’s responsibility): $6,000
TechCo’s commission (5% of $60,000): $3,000
VAT on TechCo’s commission: $300
Total amount TechCo received for commission including VAT: $3,300
Advance payment made by the customer to TechCo: $20,000
Final payment made by the customer to TechCo: $46,000
Can You Figure Out the IFRS Journal Entries?
For TechCo (Agent)
When TechCo receives the advance payment from the customer:
Debit: Cash/Bank for $20,000 (advance payment received from the customer).
Credit: Accounts Payable to ElectroSupply Co. for $20,000 (liability to pay the advance payment to ElectroSupply Co.).
When TechCo delivers the finished goods to the customer, recognizes commission revenue, and receives the final payment from the customer:
Debit: Cash/Bank from the customer for $46,000 (final payment received from the customer).
Credit: Accounts Payable to ElectroSupply Co. for $46,000 (final payment received from the customer).
Debit: Accounts Payable to ElectroSupply Co. for $3,300 (amount withheld by TechCo for commission plus VAT).
Credit: Commission Revenue for $3,000 (commission earned).
Credit: VAT Payable for $300 (VAT on the commission).
For ElectroSupply Co. (Consignor)
When ElectroSupply Co. recognizes the advance payment received by TechCo:
Debit: Accounts Receivable from TechCo for $20,000 (advance payment collected by TechCo from the customer).
Credit: Deferred Revenue for $18,181.82 (advance payment minus VAT portion of the advance payment).
Credit: Unearned VAT Payable for $1,818.18 (VAT portion of the advance payment).
When ElectroSupply Co. recognizes the final payment from the customer and the commission paid to TechCo:
Debit: Accounts Receivable from TechCo for $46,000 (final payment received by TechCo from the customer)
Debit: Deferred Revenue for $18,181.82 (advance payment minus VAT portion of the advance payment).
Debit: Unearned VAT Payable for $1,818.18 (VAT portion of the advance payment).
Credit: Sales Revenue for $60,000 (total sales amount before VAT).
Credit: VAT Payable for $6,000 (VAT on the sale of finished goods).
When ElectroSupply Co. recognizes the commission paid to TechCo:
Debit: Commission Expense for $3,000 (commission to be paid to TechCo).
Debit: VAT Receivable for $300 (VAT on the commission).
Credit: Accounts Payable to TechCo for $3,300 (amount of commission including VAT owed to TechCo).
Explanation:
For TechCo:
Cash/Bank (Debit): Reflects the advance payment received from the customer.
Accounts Payable to ElectroSupply Co. (Credit/Debit): Represents the liability to remit the advance payment.
Commission Revenue (Credit): Represents the revenue earned by TechCo for facilitating the sale.
VAT Payable (Credit): Represents the VAT on the commission that TechCo must remit to the government.
For ElectroSupply Co.:
Accounts Receivable from TechCo (Debit): Reflects the amount collected by TechCo on behalf of ElectroSupply Co.
Deferred Revenue (Credit): Represents the amount of revenue not yet recognized by ElectroSupply Co. upon receiving the advance payment.
Cash/Bank (Debit): Reflects the final payment received directly from the customer.
Sales Revenue (Credit): Represents the revenue earned from the sale of finished goods.
Unearned VAT Payable (Credit): Represents the VAT collected from the customer before finished goods are delivered to the customer.
VAT Payable (Credit): Represents the VAT collected on the sale, which ElectroSupply Co. must remit to the government.
Commission Expense (Debit): Reflects the cost of paying TechCo for its services as an agent.
VAT Receivable (Debit): Reflects the VAT paid on the commission, which ElectroSupply Co. can reclaim.
This case study demonstrates how TechCo, as an agent, appropriately recognizes revenue only from the commission earned, while the consignor, ElectroSupply Co., recognizes the revenue from the sale of goods and the associated VAT. The journal entries reflect the correct allocation of revenue, VAT, and liabilities between the agent and the consignor, ensuring compliance with IFRS standards.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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