AFAR 3- REVENUE RECOGNITION

Core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration
(payment) to which the entity expects to be entitled in exchanged for those goods or services.
The five-step process for revenue recognition under IFRS 15 are as follows:
Step 1: Identify the contract with customers. There should be an agreement between two or
more parties that creates enforceable right or obligations. It can be: written, oral, or implied
from customary business practice.

Step 2: Identify the separate performance obligations in the contract. A performance

obligation is a promise in a contract with a customer to transfer a good or service to the
customer.
Step 3: Determine the transaction price. Transaction price is the amount of consideration that
a company expects to receive from a customer in exchange for transferring a good or service.
Step 4. Allocate the transaction price to the separate performance obligations. For a contract
that has more than one performance obligation, an entity should allocate the transaction price
to each performance obligation in an amount that depicts the amount of consideration to
which the entity expects to be entitled in exchange for satisfying each performance obligation.
Step 5: Recognize revenue when each performance obligation is satisfied.
Accounting Procedures:
* Revenue cannot be recognized until a contract exists

* Company obtains right to receive consideration and assumes obligations to transfer goods or
services.
* Right and performance obligation gives rise to an (net) asset or (net) liability.

* Company does not recognize contract assets or liabilities until one or both parties to the
contract perform.
* Contract Asset = Right receive is greater than Performance obligation

* Contract Liability = Right receive is less than Performance obligation

Theory and Problems = INSTALLMENT SALES

 1. On January 15, 2019. AA company enters into a contract to build custom equipment for BB
company. The contract specified a delivery date on March 1. The equipment was delivered on
March 31. The contract required full payment of 150,000, 30 days after delivery. This contract
should be recorded on?
a. January 15 c. March 31
b. March 1 d. April 30
2. GG builders enters into a contract with a customer to build a warehouse for 1,020,000 on March
30, 2019 with a performance bonus of 60,000 if the building is completed by July 30, 2019. The
bonus is reduced by 12,000 each week that completion is delayed. GG builders commonly
includes these completion bonuses in its contracts and, based on prior experience, estimates
the following completion outcomes:
Completed by Probability

July 31, 2019 65%

August 7, 2019 25%
September 1, 2019 5%
September 10, 2019 5%
The transaction price for this transaction is?
a. 1,074,000 c. 663,000
b. 1,020,000 d. 702,000
3. XX company is a full-service technology company. They provide equipment, installation and
training. Customer can purchase any product or service separately or as a bundled package. YY
corporation purchased computer equipment, installation and training for a total cost of 144,000
on March 15, 2019. Estimated stand alone fair values of the equipment, installation and training
are 90,000, 60,000 and 30,000 respectively. The transaction price allocated to equipment,
installation and training is?
a. 90,000, 60,000, 30,000 respectively
b. 48,000, 48,000, 48,000 respectively
c. 144,000 for the entire bundle
d. 72,000, 48,000 and 24,000 respectively

OLD PROBLEMS

1. The following data pertains to NAOL MUGRADUATE company which sells cooking oil on
installment basis:
2018 2019 2020
Installment Sales 624,000 672,000 768,000
Cost of I/S 380,640 389,760 460,800

from sales made during

2018 2019 2020

Installment A/R at:
January 1, 2020 38,400 480,000 0
Dec. 31, 2020 0 96,000 512,000
 Repossessions on defaulted accounts were made during 2020 as follows,

from sales made during

2018 2019 2020

Account Balance 0 16,000 8,000
Net resale value of rep. mchd. 7,200 5,600
The total realized gross profit from installment sales during 2020 is:
a. 14,976 c. 154,560
b. 100,800 d. 268,736
2. On June 1, 2020 MAMAGSAKAY sells a new car costing 1,620,000 for 2,268,000. A used car
is accepted as down payment, 432,000 being allowed as a trade in value. The used car can
be resold for 468,000 after reconditioning cost of 64,800. The company expects to make a
20% gross profit on the sale of used cars. During the period 270,000 was collected on the
contract. How much is the realized gross profit in 2020?
a. 67,500 c. 118,800
b. 148,500 d. 175,500
NOTES: Over allowance – deduct to selling price
Under allowance – add to selling price
The FV of the item will be used to add to the collection to get the realized GP.

CONSTRUCTION CONTRACTS
Revenue recognition over time:
A company recognized revenue over time if at least one of the following two criteria is met:
1. Company’s performance creates or enhances an asset.
2. Company’s performance does not create an asset with an alternative use.
If the criterion 1 or 2 is met, then a company recognizes revenue over time if it can reasonably
estimate its progress toward satisfaction of the performance obligation.

 Company recognizes revenue and gross profit each period based

upon the progress of the construction. (percentage of completion
method)
 If criteria are not met, the company recognizes revenue and gross
profit when the contract is completed. (cost recovery/zero profit
method)
PROBLEMS
1. In 2019, Strong construction was engaged by SM on a fixed-price-contract to build a
3-storey shopping mall.
On January 1, 2022, a fire damaged the accounting records of Strong construction, the
president of the company has contracted you to reconstruct the contract information.
 The following data were taken from the salvaged files:

December 31 2020 2021

Architect’s estimated total cost of completion 7,500,000 8,000,000
Costs Incurred 3,000,000
Percentage of completion 60%
Income recognized to date 500,000 1,200,000
Compute for the percentage completed in 2020 on the SM shopping mall.
a. 40% c. 20%
b. 25% d. 30%
2. On January 2, 2019, BIG 8 company entered into contract to construct two projects. The
following data relate to the construction activities.
Contract Price Project A Project B
945,000 675,000
Cost incurred during 2019 540,000 630,000
Estimated costs to complete 270,000 157,500
Billings to customer 337,500 607,500
What amount of gross profit should BIG 8 report in its 2019 income statement under the
following methods?
Percentage of Completion Zero Profit
a. 0 (90,000)
b. (125,000) (22,500)
c. (22,500) 0
d. (22,500) (112,500)

DESTINY constructions, INC. started work on three job sites during 2019. The following data pertain to
the three jobs at the end of 2019.

Site Contract Price Cost incurred Est. cost to complete Billings Collection
Manila 525,000 393,750 - 525,000 525,000
Cebu 735,000 444,480 296,320 400,000 400,000
Davao 262,500 105,000 105,000 157,500 105,000
3. On the balance sheet of the end of 2019, the amount of CIP net of PB or the amount of PB net
of CIP to be reported for Cebu (using ZPM) and Davao (using % of C), will be;
a. 12,430 CA and 13,820 CL
b. 38,680 CA and 26,250 CL
c. 12,430 CA and 13,820 CL
d. 38,680 CA and 52,500 CL
4. On the income statement for the year ended December 31, 2019, the realized gross profit or
(loss) using:
Percentage of Completion Zero Profit
a. 154,020 131,250
b. 151,700 125,450
c. 157,500 (131,250)
d. (151,700) (125,450
FRANCHISE
GREAT WALL, INC., franchisor, entered into a franchise agreement with PITBULL INC., franchisee, on July
1, 2018. The total franchise fees agreed upon is 550,000, of which 50,000 is payable upon signing and
the balance is to be covered by a note payable in four equal annual installments. The direct franchise
cost incurred was 325,000. Indirect franchise expenses of 31,250 was also paid. The relevant interest
rate is 12% and the note is reasonably assured of collection. The franchise outlet commences its
operation on December 1, 2018 with a total sales of 250,000 during the month. The parties have further
agreed that the franchisor will charge 4% on the franchisee’s gross sales for continuing services
rendered by the former.

5. Assuming the note is interest-bearing, how much is the net income to be reported for 2018?
a. 198,750 c. 233,750
b. 77,550 d. 73,750
6. Assuming the note is non-interest bearing, how much net income is to be reported in 2018?
a. 198,750 c. 77,550
b. 106,550 d. 73,750

On January 2, 2018, NAIKEE INC., signed an agreement to operate as a franchise of CONVERSE

PRODUCTS, INC., for an initial franchise fee of 12,500,000 for 10 years. Of this amount, 2,500,000 was
paid when the agreement was signed and the balance payable in four annual payments beginning on
December 30, 2018. NAIKEE signed a non-interest bearing note for the balance.

NAIKEE’s rating indicates that it can borrow money at 24% for the loan of this type. PV of 1 for 4 periods
at 24% is 2.40.

Assume that substantial services amounting to 1,275,000 had already been rendered by CONVERSE
PRODUCTS. Indirect franchise cost paid amounted to 340,000.

7. Calculate the realized gross profit for 2018 assuming (1) collection of the note is reasonably
assured or (2) collection of the note is not reasonably assured:
a. (1) 6,885,000; (2) 4,050,000
b. (1) 7,225,000; (2) 3,026,000
c. (1) 11,225,000 (2) 4,250,000
d. (1) 4,725,000 (2) 2,883,600
8. WET, INC., charges an initial franchise fee of 90,000 broken down as follows:

Right to trade name, market area and proprietary know-how 40,000

Training Services 11,500
Equipment 38,500

Upon signing of the agreement, a payment of 40,000 is due. Thereafter, two annual payments of 30,000
are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to
borrow money. The franchise agreement is signed on August 1, 2018 and the franchise commences
operation on November 1, 2018. Assume that the total training fees includes training services for the
period leading up to the franchise opening (5,500 value) and for 3 months following opening. The
journal entry on August 1, 2018 would include:
 a. A credit to Unearned Service Revenue for 11,500
b. A credit to unearned Service Revenue for 6,000
c. A debit to Sales Revenue for 38,500
d. A debit to Unearned Franchise Revenue for 40,000
9. Franchise fee should be recognized
a. On the date the contract was signed
b. On the date the franchise is opened for business
c. On the date the franchise fee is paid to franchisor
d. When the performance obligation are satisfied

CONSIGNEMENT SALES
JESSIE J CORPORATION consigned 400 dresses to ANNE fashions at a suggested retail price of 500 each.
Jessie J paid freight charges of 2,000 on the shipment on consignment. Anne paid delivery charges of
2,100 for units sold, subject to subsequent settlement. Jessie and Anne agreed that any sales in excess
of the suggested retail price will accrue to the latter. Anne submitted an account sales on the sale of 215
dresses, 40% of which was sold at 580 each and the rest at 640 each, all these sales were paid in cash.
Jessie J cost is 375 each dress, before any deferred costs on consignment are taken into account.

1. How much should Anne remit to Jessie J for the aforementioned sales to customers?
a. 105,400 c. 107,500
b. 130,340 d. 132,440
2. How much is the commission earned by Anne from sales of consigned goods?
a. 13,226 c. 24,940
b. 49,800 d. 82,560
3. The cost of consigned goods to Jessie J for the units sold by Anne to customer was?
a. 81,700 c. 87,100
b. 100,654 d. 106,500

SGO CORP. consigned 10 one horsepower air conditioner units to DKI CORP. and paid 2,000 freight out.
Gross margin is 12.5% of sales. The consignee is allowed a commission of 5% on sales. DKI corp.
submitted an account sales on December 31, 2019 as follows:

Sales 72,000
Less: Advances to consignor 10,000
Selling Expenses 800
Delivery 1,200
Commission 3,600 15,600
Net Remittance 56,400

4. How much is the net profit or loss of SGO, corp. in the consignment?
a. 1,400 profit c. 2,200 profit
b. 8,800 loss d. 720 loss