Accounting for Contract Costs: AASB 15 and Terra Corporation

This report analyzes the accounting treatment of costs incurred by Terra Corporation to obtain a contract with Jupiter Ltd., focusing on the application of Australian Accounting Standards (AASB 15). The analysis addresses the classification of these costs as assets or expenses, referencing specific paragraphs within AASB 15. It advises treating the expenditures as expenses due to the contract's renewable one-year period. The report details the relevant journal entries for commission, legal fees, travel expenses, and bonuses, demonstrating how these costs are recorded in Terra Corporation's books. Assumptions made include the contract's one-year renewable period. The conclusion summarizes the correct accounting treatment of the expenditures and the importance of proper journal entries.

Running head: ACCOUNTING FOR CONTRACT COST
ACCOUNTING FOR CONTRACT COST
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Author Note

1ACCOUNTING FOR CONTRACT COST
Table of Contents
Introduction................................................................................................................................2
Requirement i:-...........................................................................................................................2
Requirement ii:-.........................................................................................................................3
Conclusion..................................................................................................................................4
References..................................................................................................................................4

2ACCOUNTING FOR CONTRACT COST
Introduction
This paper is prepared to analyse the accounting treatments of costs to obtain the
contract as per the Australian accounting standards. The paper analyses the AASB 15 to
understand and advice the proper accounting treatment of expenditures incurred by the
company to obtain the contract. Further, it also show the journal entries of the expenses
incurred by Terra Corporation to obtain the contract with the Jupiter Ltd.
Requirement i:-
As per the para 91 of AASB 15, the cost of obtaining the contract shall be treated as
an asset if recover of such costs have been expected by the firm (Aasb.gov.au 2019).
According to para 92 of AASB 15, the costs, which is incurred by the firm to obtain the
contract with its customers, which would not have incurred by the company if the contract
have not been obtained, is treated as the cost of obtaining a contract (AASB, C.A.S 2015).
For example, legal costs, professional fees, stamp duties and sales commission. The para 93
of AASB 15 states, that these costs shall be treated as an expenditure when incurred, if such
costs are chargeable to the customer from which the contract is obtained (deloitte 2019). For
the practical approach, an entity may treat the cost of obtaining the contract as an expenditure
at the time of actually paid, if the company have the amortisation period of the asset
otherwise recognised is less than one year or one year, as per the para 94 of AASB 15. If the
cost of obtaining the contract is recognise as an asset, shall be written off or amortised on
systematic consistent basis with the transfer to the customer of the services or goods to which
asset relates (Niescho, C., 2018).
This report advice the manager to treat the expenses incurred by the Terra
Corporation to obtain the contract with the Jupiter Ltd as cost of obtaining the contract
because it is fully incurred to obtain the contract and would not have incurred if the contract

3ACCOUNTING FOR CONTRACT COST
had not been obtained. Secondly, the manager should treat these costs as the expenses when
incurred because it is mentioned, that the contract is renewable in one-year period
subsequently. Therefore, the manager should treat the cost of obtaining the contract as the
expenses when incurred and pass the relevant entry in the book of account. Then, write off
the cost by passing the required entry by assuming the contract period as one year. The bonus
to sales supervisors is also treated same as other expenditure, as it is paid in the same first
year. The relevant journal entries are passed in requirement (ii).
Assumptions: - It is assumed that the contract period is for the one year and renewable after
the one year period for subsequent years.
Requirement ii:-
The below picture shows the required journal entries for the expenditures incurred by
the Terre Corporation to obtain the contract with the Jupiter Ltd, in the books of Terra

4ACCOUNTING FOR CONTRACT COST
Corporation:
Date Follio
No. Particulars Debit Credit
a 1 Comission Dr 15,000.00$
Contract cost 15,000.00$
[Comission paid to sales represtative for obtaining the contract]
2 Contract cost Dr 15,000.00$
Cash 15,000.00$
[cost of contract is writthen-off by transfering in cash account.]
b 3 Legal fee Dr 5,000.00$
Contract cost 5,000.00$
[Legal fees paid to obtaine the contract.]
4 Contract cost Dr 5,000.00$
Cash 5,000.00$
[cost of contract is writthen-off by transfering in cash account.]
c 5 Travelling expensess Dr 8,000.00$
Contract cost 8,000.00$
[Flight and accommodation costs incured to deliver the proposal.]
6 Contract cost Dr 8,000.00$
Cash 8,000.00$
[cost of contract is writthen-off by transfering in cash account.]
d 7 Bonus Dr 25,000.00$
Contract cost 25,000.00$
[Bonus paid to sales supervisors.]
8 Contract cost Dr 25,000.00$
Cash 25,000.00$
[cost of contract is writthen-off by transfering in cash account.]
Conclusion
The paper concludes that the expenditure incurred by the Terra Corporation are cost
to obtaining the contract with Jupiter Ltd and shall be treated as the expenditure when
incurred and duly write off by passing the required entry as the contract period is assumed as
one year.
References
AASB 15 (2019). [online] Www2.deloitte.com. Available at:
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-
clarity-financial-reporting-disclosures-what-you-need-know-december-2018-100118.pdf

5ACCOUNTING FOR CONTRACT COST
AASB, C.A.S., 2015. Investment property.
Aasb.gov.au (2019). [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14_COMPsep18_01-19.pdf
deloitte (2019). [online] Www2.deloitte.com. Available at:
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-
clarity-financial-reporting-disclosures-what-you-need-know-december-2018-100118.pdf
Niescho, C., 2018. Triple whammy. Company Director, 34(5), p.62.