REVENUE RECOGNITION PRINCIPLES (IFRS 15)

PROBLEM 1.
Mcjobee operates and franchises restaurants around the Philippines. On January 1, 2018, Mcjobee
entered into a franchise agreement with a franchisee. As per the franchise agreement, Mcjobee requires
the franchisee to pay a non-refundable upfront franchise fee of P95,000.00 upon opening a restaurant,
and an ongoing payment of royalties, which is 10% of the franchisee’s sales.

The franchise agreement requires Mcjobee to provide pre-opening services: supply and installation of
cooking equipment and cash registers valued at P30,000.00. In addition, the agreement includes a
license of trademark with a valued at P70,000.00. The franchise is valid for 10 years.

On March 31, 2018, Mcjobee already satisfied its obligation to supply and install the cooking equipment
and cash registers.

The franchisee reported the following sales:

Year Sales
2018 P 100,000.00
2019 150,000.00

For simplicity purposes, ignore significant financing component (time value of money) concept.

a. What is the accounting entry on January 1, 2018?

b. On January 1, 2018, how much is the contract liability to be recognized by Mcjobee?
c. On March 31, 2018, how much is the revenue recognized by Mcjobee?
d. What is the accounting entry on March 31, 2018?
e. On March 31, 2018, how much is the balance of contract liability?
f. How much is the revenue to be recognized by Mcjobee for the year ended December 31, 2018
in relation to the franchise?
g. How much is the balance of contract liability as of December 31, 2018?
h. How much is the revenue to be recognized by Mcjobee for the year ended December 31, 2019
in relation to the franchise?
i. How much is the balance of contract liability as of December 31, 2019?

PROBLEM 2.
Batong-balon, a property developer, builds a residential complex. On January 1, 2019, Batong-balon
enters into a contract with client A. The client wants to buy an apartment and agree with total price of
P100,000.00. The payment schedule is as follows:

 Upon the signature of a contract, client A pays deposit of P10,000.00.

 Milestone: At the end of 2019, Batong-balon will deliver progress reports to clients and clients
need to pay P50,000.00.
 Completion: Upon the completion of the construction in 2020, the legal ownership to
apartments is transferred to client A and client A must pay the remaining amount of P40,000.00

Another stipulation in the contract is that, Batong-balon cannot sell or transfer the apartment to another
client, since it was custom-built with client A’s needs. In return, client A cannot terminate the contract.

On December 31, 2019, Batong-balon’s engineers ascertained that the apartment is 50% complete.
The apartment was completed on December 31, 2020.

For simplicity purposes, ignore significant financing component (time value of money) concept.

a. What is the accounting entry on January 1, 2019?

b. On January 1, 2019, how much is the contract liability?
c. How much is the revenue to be recognized for the year ended December 31, 2019?
d. How much is the balance of contract liability as of December 31, 2019?
e. How much is the revenue to be recognized for the year ended December 31, 2020?

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Assuming the same facts, except that there is no stipulation in the contract that Batong-Balon cannot
sell or transfer the apartment to another client. That is, Batong-Balon sells identical apartments to all
potential clients. In this instance, the management of Batong-Balon ascertained that it has no
enforceable right to payment for performance completed to date. In case of default by client A, Batong-
Balon may not recover entity’s cost for work completed to date.

f. How much is the revenue to be recognized for the year ended December 31, 2019?
g. How much is the balance of contract liability as of December 31, 2019?
h. How much is the revenue to be recognized for the year ended December 31, 2020?

PROBLEM 3.
Hypebeast (HB) Computers is an entity that manufactures and sells computers. The computers has a
stand-alone selling price of P95,000.00 As part of its efforts to gain customers’ trust and as required by
law, it included an assurance-type warranty for the first 60 days. The coverage of this warranty includes
internal defects and manufacturing defects.

It also includes a gadget-care coverage plan on its sales, which extends to a 5-year period coverage.
The plan pertains to only repairs of the computer, and does not include return nor refund of the
computer. HB Computers’ management ascertains that this is a service-type warranty, and has a stand-
alone selling price of P5,000.00.

On January 1, 2018, HB Computers entered into a contract with customer B for the package price
P98,000.00. This includes the computer, plus the 5-year gadget-care coverage. The computer is already
received by customer B. On top of this, HB Computers assured customer B of his right to return or
repair the unit, in case of defects within the first 60 days.

The following are the estimates of the Company with regard to the estimated cost within the 60-day
assurance-type warranty.

Description Probability Cost

Replacement 15% P 60,000.00
Repair 20% 15,000.00
No replacement
65% -
and repair

For simplicity purposes, ignore significant financing component (time value of money) concept.

a. On January 1, 2018, how much is the revenue to be recognized?

b. On January 1, 2018, how much is the contract liability to be recognized?
c. On January 1, 2018, how much is the accrued warranty to be recognized, if any?
d. On January 1, 2018, what is the accounting entry?
e. How much is the revenue to be recognized for the year ended December 31, 2018?

PROBLEM 4.
On May 30, 2020, Angchevah Co., an automobile manufacturing company, enters into a contract with
Dasal University to deliver 3 service buses for a total contract price of P6,000,000.00 (P2,000,000.00
per bus), given upfront.

Dasal University agrees that Angchevah Co. will deliver each bus in 3 separate deliveries: On June 30,
2020; on August 30, 2020; then, on October 30, 2020. Dasal University takes control over the buses
upon delivery.

After the first delivery is made on June 30, 2020, Angchevah Co. and Dasal University amended the
contract. Angchevah Co. will supply 2 additional services buses (5 buses in total), which shall be
delivered on December 30, 2020, and February 28, 2021, respectively.

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REVENUE RECOGNITION PRINCIPLES (IFRS 15)

The price of the two additional buses was agreed at P3,880,000.00 (P1,940,000.00 per bus) to be paid
upfront upon signing the amendment. This is net of the 3% volume discount granted by Angchevah
Co. for the additional purchases. This discount is also provided by Angchevah Co. to other customers
with purchases in excess of 3 vehicles.

As of December 31, 2020, Angchevah Co. delivered a total of 4 buses (3 buses as agreed initially and
1 bus under the amended contract).

a. How much is the revenue to be recognized on June 30, 2020? On August 30, 2020? On October
30, 2020?
b. How much is the total revenue for the year ended December 31, 2020?
c. How much is the balance of contract liability as of June 30, 2020? As of August 30, 2020? As
of October 30, 2020? As of December 31, 2020?

Same facts, but assuming that the price of the two additional buses was agreed at P2,800,000.00
(P1,400,000.00 per bus) to be paid upfront upon signing the amendment. Angchevah Co. provided
Dasal University with a 30% discount because it expects long-term partnership with the University, by
providing them with fresh graduates for their management and technical operations. The discount is
not provided to other customers.

d. How much is the revenue to be recognized on June 30, 2020? On August 30, 2020? On October
30, 2020?
e. How much is the total revenue for the year ended December 31, 2020?
f. How much is the balance of contract liability as of June 30, 2020? As of August 30, 2020? As
of October 30, 2020? As of December 31, 2020?

PROBLEM 5.
Charing Mobile sells smartphones to various distributors in bulk (in multiples of 100). Gallon Trade is
one of the Charing Mobile’s main customer-distributor. On January 1, 2020, they entered into a one-
year agreement for the bulk-purchase of smartphones with the following pricing model arrangement:

 The first 200 items purchased – P25,000.00

 The next 100 items purchased – P22,000.00
 Beyond 300 items purchased – P19,000.00

Based on past experiences, Charing Mobile estimates that for the current year, the following likelihood
will occur:

No of units
Probability
purchased
600 units 30%
700 units 45%
800 units 25%

On the same day, Gallon Trade ordered 200 smartphones to restock their inventory for the first quarter
of 2020. The smartphones were immediately delivered. Subsequently Gallon Trade paid P5,000,000.00
(P25,000.00 x 200).

The management of Charing Mobile assessed that the contract price with Gallon Trade is one with a
variable consideration; hence, it needed to be accounted based on expected value of the average
price per unit.

a. How much is the weighted average price per unit?

b. How much is the total revenue to be recognized on January 1, 2020?
c. How much is the contract liability to be recognized on January 1, 2020, if any?
d. What is the accounting entry on January 1, 2020?

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Assuming that on April 1, 2020, Gallon Trade ordered additional 400 smartphone units (600 smartphone
units were delivered to them in total) and paid the price in accordance with the pricing scheme per
contract:

e. How much is the total revenue to be recognized on April 1, 2020?

f. How much is the contract liability as of April 1, 2020?
g. What is the accounting entry on April 1, 2020?

Assuming that Gallon Trade did not order additional units on July 1, 2020, but on October 1, 2020, they
ordered an additional 300 smartphone units (900 smartphone units were delivered to them in total)
and paid the price in accordance with the pricing scheme per contract. This is the last order for the
year, and thus will terminate the one-year contract.

h. How much is the total revenue to be recognized on October 1, 2020?

i. How much is the contract liability as of October 1, 2020?
j. What is the accounting entry on October 1, 2020?

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