Angel Limited develops and sells off-the-shelf accounting software packages. The retail price of each package is $550 (GST inclusive) . Included with each package sold are 'free' upgrades for a period of 12 months from the date of sale. These upgrades can be purchased separately for $66 (GST inclusive) . At the date of sale, Angel should record revenue of:

A) $440.00.
B) $484.00.
C) $550.00.
D) $616.00.

Question

Katie Misener · Accepted Answer

Final Answer : A, Explanation :  Revenue should be recognized at the fair value of the consideration received. The GST inclusive price is $550, but since GST should not be included in revenue, and assuming a GST rate of 10%, the revenue recognized would be $550 / 1.1 = $500. However, part of this amount ($66) relates to the upgrades, which should be recognized over the upgrade period. Therefore, the initial revenue recognition should be $500 - $60 (the GST-exclusive price of the upgrades) = $440.

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