186 ChaPter

3
contract is not obtained. As a practical expedient, the costs
·recognized as expense if their expected amortization pen~~ I
1 year or less. J
• Costs incurred in fulfilling a contract that are outside th
scope of other standards are recognized as.asset if they are: (ae
directly related to a contract, (b) generate or enhan )
Ce
resources, and (c) recoverable.
Presentation: A contract where either party has performed ~
presented in the statement of financial position as a contract
liability, contract asset or receivable.
• Contract liability - is an entity's obligation to transfer goods
or services to a customer for which the entity has received
consideration (or the amount is due) from the customer.
• Contract asset -:- is an entity's right to consideration in
exchange for goods or services that the entity has transferred
to a customer when that right is conditioned on something
other than the passage of time.
• Receivable - is an entity's right to consideration that is
unconditional.
PROBLEMS
PROBLEM 1: TRUE OR FALSE
1. PFRS 15 applies to a contract between two oil companies that
agree to an exchange of oil to fulfill demand from their
customers in different specified locations on a timely basis.
2. Contracts with customers that are accounted for in accordance
with PFRS 15 Revenue from Contracts with Customers must be
written.
3. A contract with customer that is implied by the entity's
customary business practice may nonetheless be accounted for
under PFRS 15.
4: The contract has commercial substance if it affects the entity's
cash flows.
__.......
..
ustomers 187
Revenue from Contracts with _C
s to se t up
in cl ud e ad m in is tra tiv e task
S. Pe rf or m an ce ob lig at io ns
a co nt ra ct .
th e fair va lu e
, re ve nu e is re co gn iz ed at
6. A cc or di ng to PFRS 15
ed or receivable.
of th e co ns id er at io n re ce iv po in t in tim e
io n th at is no t satisfied at a
7. A pe rf or m an ce ob lig at
d ov er time.
is pr es um ed to be sa tis fie
ov er time is
at io n th at is no t satisfied
B. A pe rf or m an ce ob lig
a po in t in time.
pr es um ed to be sa tis fie d at action pr ic e
at th e am ou nt of th e trans
9. Re ve nu e is re co gn iz ed e en tit y
ob lig at io n w he n (or as) th
al lo ca te d to a pe rf or m an ce
ligation.
satisfies a pe rf or m an ce ob ntract w ith a
e in te re st ex pe ns e from a co
10. A se lle r m ay re co gn iz
cu st om er .
R O O M D IS C U SS IO N
PROBLEM 2: FO R C LA SS ntract w ith a
de ve lo pe r, en te rs in to a co
1. A n en tit y, a re al es ta te n. The
a bu ild in g fo r Pl millio
cu st om er fo r th e sa le of g. The
a re st au ra nt in th e bu ild in
cu st om er inten.ds to op en face hi gh
ea w he re ne w re st au ra nt s
bu ild in g is lo ca te d in an ar rience jn
th e cu st om er ha s little expe
levels of co m pe tit io n an d nd ab le
e cu st om er pa ys a no n- re fu
th e re st au ra nt in du st ry . Th rs in to a
io n of th e co nt ra ct an d en te
de po si t of P50,000 at in ce pt y for th e
reemen~ w ith th e entit
lo ng -te rm fin an ci ng ag n. Th e
th e pr om is ed consideratio
re m ai ni ng 95 pe r ce nt of se basis,
pr ov id ed on a no n.-recour
fin an ci ng ar ra ng em en t is tit y ca n
cu st om er de fa ul ts , th e en
w hi ch m ea ns th at if th e pe ns at io n
t ca nn ot se ek fu rth er co m
re po ss es s th e bu ild in g, bu r th e full
th e collateral do es no t cove
fr om th e cu st om er , ev en if ild in g is
. Th e en tit y' s cost of th e bu
va lu e of th e am ou nt ow ed ild in g at
ob ta in s co nt ro l of th e bu
P600,000. Th e cu st om er
co nt ra ct in ce pt io n.
gnition on
ct qu al ify for re ve nu e reco
Requirement: D oe s th e co nt ra
e re as on fo r yo ur an sw er .
contract in ce pt io n? St at e th
188
-
Chapter3
Fact pattern
An entity, a manufacturer, sells a product to a distributor (i.e., its
customer) who will then resell it to an end customer.
Scenario A
2. In the contract with the distributor, the entity promises to
provide maintenance services for no additional consideration
(i.e., 'free') to any party (i.e., the end customer) that purchases
the product from the distributor. The entity outsources the
performance of the maintenance services to the distributor and
pays the distributor an agreed-upon amount for providing
those services on the entity's behalf. If the end customer does
not use the maintenance services, the entity is not obliged to
pay the distributor.
Requirement: Is the maintenance service a performance obligation? If
yes, is it an explicit promise or an implicit promise?
Scenario B
3. The entity does not promise maintenance services during
negotiations with the distributor and the final contract
between the entity and the distributor does not specify terms
or conditions for those services. The entity has historically
provided maintenance services for no additional consideration
(i.e., 'free') to end customers that purchase the entity's product
from the distributor, based on its customary business practice.
Requirement: Is the maintenance service a performance obligation? If
yes, is it an explicit promise or an implicit promise?
Scenario C
4. In the contract with the distributor, the entity does not
promise to provide any maintenance services. In addition, the
entity typically does not provide maintenance services and,
therefore, the entity's customary business practices, published
policies and specific statements at the time of entering into
Revenue from Contracts with Customers 189

then contract have not created an implicit promise to provide

goods or services to its customers. The entity transfers control
of the product to th~ distribu_tor and, therefore, the contract is
completed. However, before the sale to the end. customer, the
entity makes an offer to provide maintenance services to any
party that purchases the product from the distributor for no
additional promised consideration.

Requirement: Is the maintenance service a performance obligation? If

yes, is it an explicit promise or an implicit promise?

5. An entity enters into a contract with a customer to sell

Products A, B and C in exchange for PlOO. The entity will
satisfy the performance obligations for each of the products at
different points in time. The entity regularly sells Product A
separately at PSO. The stand-alone selling prices of Products B
and C are not direct~y observable. The entity evaluates the
market in which · it sells Product B and estimates that a
customer in that n1arket would be willing to pay P25 for
Product B. The entity's cost for Product C is PSO. The entity
regularly marks-up its goods at 50% above cost.

Requirement: Allocate the transaction price to the performance

obligations.

6. An entity.enters into a· contract with a customer to provide a

consulting service that results in the entity providing a
professional opinion to the customer. The professional opinion
relates to facts and circumstances that are specific to the
customer. If the customer were to terminate the consulting
contract for reasons other than the entity's failure to perform
as promised, the contract requires the customer to compensate
the entity for its costs incurred plus a 15 per cent margin. The
15 per cent margin approximates the profit margin that the
entity earns from similar rontracts.
190 Chapter 3

Requirement: Identify if the performance obligation is satisfied over

time or at a point in time. State how the entity recognizes revenue.

7. In 20xl, an entity enters into a service contract to manage a

rustomer' s information technology data center for five years.
The contract is renewable for subsequent one-year periods.
The average customer term is seven years. The entity pays an
_employee a Pl0,000 sales commission upon the customer
signing the contract. Before providing the services, the entity
designs and builds a technology platform for the entity's
internal use that interfaces with the customer's systems. That
platform is not transferred to the customer, but will be used to
deliver services to the customer.

The initial costs incurred to set up the technology platform are as

follows:
Design services 40,000
Hardware 120,000
Software 90,000
Migration and testing of data center 100,000

Additional information:
• The design services and migration and testing of data center
enhance resources that will be used in providing the services.
• ABC Co. uses the straight-line method of depreciation/
amortization for its PPE and intangible assets. A full-year's
depreciation is recognized in the year of acquisition and none
· in the period of disposal. Items of PPE and intangible assets
are depreciated/ amortized over 5 years.
• In addition to the initial costs to set up the technology
platform, the entity also assigns two employees who are
primarily responsible for providing the service to the
customer. Although the costs for these two employees are
incurred as part of providing the service to the customer, the
entity concludes that the costs do not generate or enhance
~

Revenue from Contracts with Customers 191

resources of the entity. The salarie s of these employ ees d~ring

the period totaled P30,000.

Require'!Jents:
a. How much is the toted year-en d carryin g amoun t of the assets
recognized from the contract?
b. . How much is the tGtal expens e recogn ized in 20xl?

8. On 1 Januar y 20X8, an entity enters into a contrac t to transfe r

Produc ts A and B to a custom er in exchan ge for Pl,000. The
contract require s Produc t A to be deliver ed first and states
that payme nt for the deliver y of Produc t A is conditi onal on
the delivery of Produc t B. The stand-a lone selling prices of
Produc ts A and Bare P480 and P720, respectively. Produc t A
is delivered on Januar y 3, 20X8 while Produc t Bis deliver ed
on March 31, 20X8. The custom er pays on April 8, 20X8.

Requirement: Provid e the journal entries.

9. Use the facts in the immed iately preced ing problem . In

addition, the contrac t also include s a promis e to transfe r
Product D. Total consid eration in the contract is P130. The
stand-alone selling price for Produc t D is highly variable
because the entity sells Produc t D to different custom ers for a
broad range of amoun ts (PlS - P45).

Requirement: Allocate the transac tion price to the perform ance

obliga~ons in the contract.

10. An entity enters into 100 contracts with custom ers. Each
contract include s the sale of one produc t for Pl00 (100 total
· produc ts x Pl00 = Pl0,000 total consideration). Cash is
received when control of a produc t transfers. The entity's
customary busine ss practice is to allow a custom er to return
any unused produc t within 30 days and receive a full refund .
The entity's cost of each produc t is P60. The entity applies the
192

requiren1ents in PFRS 15 to the portfolio of J(XJ c~ntra<t,

1
because it reasonably expects that the effects on the f ndfl<ia!
statements from applying requirements of PFRS 15 to tht
portfolio would not differ materially ~o~ applying tht
require ments to the individ ual contracts WJthm the portfoUo.
Because the contract allows a custom er to return the produ ~,
the consideration received from the custom er is variable. To
estimate the variable consideration to which the entity wiJJ be
entitled, the entity decides to use the expect ed value method
because it is the method that the entity expects to better
predict the amoun t of conside ration to which it will be
entitled. Using the expected value methoc l the entity
estimates that 97 produc ts will not be returne d. 1he entity aJso
considers the requirements in PFRS 15 on constraining
estimates of variable consideration to determ ine whethe r th!
estimated amoun t of variable conside ration can be include d in
the transaction price. The entity consid ers the factors in PFRS
15 and determines that althoug h the returns are outside the
entity's influence, it has significant experie nce in estimating
returns for this produc t and custom er class. 1n additio ~ the
uncertainty will be resolved within a short time frame (i.e., the
30-day return period). Thus, the entity conclu des that it is
highly probable that a si~ca nt reversal in the cumulative
amoun t of revenue recognized will not occur as the
uncertainty is resolved (i.e., over the return period). The entity
estimates that the costs of recovering the produc ts ,vill be
immaterial and expects that the returne d produc ts can ~
resold at a profit.

Requirement: Provide the journal entries on contrac t incepti on.

11. An entity enters into a contract with a custom er to sell an

asset. Control of the asset will transfe r to the rustom er in two
years (i.e., the perform ance obligation will be satisfied tit a
po~t in time). The contract includes two alterna tive paymt?llt
options: payme nt of PS,000 in tv.,o years when the customer
-
Revenue from Contracts with Customers 193

obtains control of the a.sset or payment of P4,000 when the

contract is signed. The customer elects to pay P4,000 when the
contract is signed. The entity concludes that the contract
contains a significant financing component because of the
length of ti~e between when the customer pays for the asset
and when the entity transfers the asset to the customer, as well
as the prevailing interest rates in the market. The interest rate
implicit in the transaction is 11.8 per cent, which is the interest
rate necessary to make the two alternative paym~nt options
economically equivalent. However, the entity determines that,
in accordance with PFRS 15, the rate that should be used jn
adjusting the promised conSideration is six per cent, which is
the entity's incremental borrowing rate.

Requirement: Provide all the journal entries during the contractual

period.

PROBLEM 3: EXERCISES
1. An entity enters into a contract to provide monthly payroll
processing services to a customer for one year for a monthly
retairier fee of Pl00,000.

Requirement: Identify if the performance obligation is satisfied over

time or at a point in time. State how the entity recognizes revenue.

2. An entity, an owner and manager of health clubs, enters into a

contract with a customer for one year of access to any of its
health clubs. The customer has unlimited use of the health
clubs and promises to pay PSOO per month.

Requirement: Identify if the performance obligation is satisfied over

time or at a point in time. State how the entity recognizes revenue.

3· An entity enters into a-contract with a customer on 1 January

20X9 to transfer products to the customer for PlSO per
 Chapter3
194

prod uct. If the cust ome r purc ha~ s mor e than 1

million
that the
prod ucts in a cale ndar year , the cont ract indi cate s
uct,
price per unit is retrospectively redu ced to P125 per prod
sfer to
Con side ratio n is due whe n cont rol of the prod ucts tran
entity
the customer. In dete rmin ing the tran sact ion pric e, the
t the
concludes at contract ince ptio n that the cust ome r will mee
s the
1 million prod ucts thre shol d. In Janu ary, the enti ty ship
first 100 prod ucts to the customer.

Requirement: Provide the jour nal ~ntry in Janu ary 20X9.

1 January
4. An entit y enters into a contract with a cust ome r on
mer
20X8 to sell Prod uct A for Pl00 per unit. If the custo
dar
purc hase s mor e than 1,000· unit s of Prod uct A in a calen
unit is
year, the contract specifies that the pric e per
, the
retrospectively redu ced to P90 per unit. Consequently
cons ider ation in the contract is variable. ·

75 units
For the first quar ter ende d 31 Mar ch 20X8, the enti ty sells
that the
of Prod uct A to the customer. The enti ty estim ates
threshold
cust ome r's purc hase s will not exceed the 1,000-unit
requ ired for the volu me disc ount in the cale ndar year.

pany and
In May 20X8, the enti ty's cust ome r acquires anot her com
sells an
in the ·second quar ter ende d 30 June 20X8 the enti ty
light of
additional 500 unit s of Prod uct A to the customer. In the
purchases
the new fact, the entity estimates that the cust ome r's
.
will exceed the 1,000-unit threshold for the cale ndar year
the
Requirements: Com pute for the net reve nue recognized in
ments,
March 31, 20x8 and June 30, 20x8 quar terly financial state
respectively.

5. An entity .enters into a contract with a cust ome

r to sell
y will
Products A, B and C in e~change for Pl00. The entit
at
satisfy the perf onna nce obligations for each of the products
A
different poin ts in time. The entit y regularly sells Products
IP

Revenue from Contracts with Customers 195

the following
B and C individually, thereby establishing
stand-alone selling prices:

Product Sta nd- alo ne selling price

Product A P40
Product B PSS
Product C P45

and C together
In addition, the entity regularly sells Products B
for P60.
•

Requirements:
customer.
a. Compute for the total discount granted to the
ance obligations
b. Allocate the transaction price to the perform
in the contract.

1 that is payable
6. An entity sells a pro duc t to a customer for P12
control of the
24 mo nth s after delivery. The customer obtains
permits the
pro duc t at contract inception. The contract
pro duc t is
customer to retu rn the pro duc t within 90 days. The
evidence of
new and the entity has no relevant historical
e. The cash
pro duc t retu rns or oth er available market evidenc
resents the
selling price of the pro duc t is Pl00, which rep
very for the
amo unt tha t the customer wo uld pay upo n deli
l terms and
same pro duc t sold und er . otherwise identica
cost of the
conditions as at contract inception. The entity's
the costs of_
pro duc t is P80. The entity estimates that
expects that
recovering the pro duc ts will be immaterial and
The contract
the retu rne d proq.ucts can be resold at a profit.
, the interest
includes an implicit interest rate of 10 per cent (i.e.
consideration
rate that ove r 24 mo nth s discounts the promised
ity evaluates
of Pl21 to the cash selling price of Pl00). The ent
wit h the rate
the rate and concludes tha t it is commensurate
g transaction
that wo uld be reflected in a sep ara te financin
ption.
between the ent ity and its customer at contract ince
 196 Chapter 3

Requirement: Provide the entries during the first 90 days of the

contract (assume that the product was not returned ).

7. An entity enters into a contract with a custome r to sell

equipment. Control of the equipme nt transfers to the customer
when the contract is signed. The price stated in the contract is
CUI million phis a five per cent contractual rate of interest,
payable in 60 monthly installments of Pl8,871.

CaseA
In evaluatin g the discount rate in the contract that contains a
significant financing component, the entity observes that the five '
per cent contractual rate -0£ interest reflects the rate that would be
used in a separate financing transaction between the entity and its
custome r at contract inception (i.e., the contractual rate of interest
of five per cent reflects the credit characteristics of the customer).

Requirement: Comput e for the s~e revenue to be recognized from

the transaction above.

CaseB
In evaluatin g the discount rate in the contract that contains a
significant financing component, the entity observes that the five
per cent contractual rate of intere~t is significantly lower than the
12 per cent interest rate that would be used in a separate financing
transaction between the entity and its custome r at contract
inception (i.e., the contractual rate of interest of five per cent does
-not reflect the credit characteristics of the customer).

~ Requirement: Comput e for the sale revenue to be recognized froIJl

, the transaction above.

8. An entity enters into a contract with a custome r to provide a

weekly service for one year. The contract is signed on 1
January 20Xl and work begins immediately. The entity
concludes that the service is a single perform ance obligation ill
-
Revenue from Contracts with Customers 197

acco ~d~c e wi~h PFRS 15. This is because the entity is

prov iding a series of distinct services that are substantially the
same and have the same patte rn of transfer (the services
transfer to the custo mer over time and use the same method to
meas ure prog ress -tha t is, a time-based measure of progress).
In exchange for the service, the customer promises 100 shares
of its co~m on stock per week of service. The terms in the
contract requ ire that the shares mus t be paid upon the
successful completion of each week of service. The entity
measures its prog ress towa rds complete satisfaction of the
performance ob4g ation as each week of service is complete.

Requirement: Com pute for the transaction price. Assume that the
quoted price of the shar es remained constant at P20 all throughout
the year.

9. An entity ente rs into a contract with a customer on 1 January

20X8 for the sale of a machine and spare parts. The
manufacturing lead time for the machine and spare par~s is
two years.

Upon completion of manufacturing, the entity demonstrates that

the machine and spar e parts meet the agreed-upon specifications
in the contract.

On 31 D~cember 20X9, the customer pays for the machine

and
spare parts, but only takes physical possession of the machine.
Although ·the custo mer inspects and accepts the spare parts, the
customer requests that the spare parts be stored at the entity's
warehouse because of its close proximity to the customer's
factory. The custo mer has legal tftle to the spare parts and the .
parts can be identified as belonging to the customer. Furthermore,
the entity stores the spar e parts in a separate section of its
Warehouse and the parts are read y for immediate shipment at the
customer's request. The entit y expects to hold the spare parts for
two to four year s and the entit y does not have the ability to
use
the spare parts or direc t them to another customer.
198 Chapter 3

Requirements:
a) Identify the performance obligations in the contracts.
b) How should the entity recognize revenue from .the contract?
(State also the timing of revenue recognition for each
identified performance obligation.)

10. An entity enters into a three-year contract to clean a

customer's offices on a weekly basis... The customer promises
to pay P100,000 per year. The stand-alone selling price of the
services at contract inception is Pl00,000 per year.

At the end of the second year, the contract is modified and the fee
for the third year is reduced •to PS0,000. In addition, the customer
agrees to extend the contract for three additional years for
consideration of P200,000 payable in three equal annual
installments of P66,667 at the beginning of years 4, 5 and 6. The
stand~alone selling price of the services at the beginning of the
third year is PS0,000 per year. The entity's stand-alone selling
price at the begfnning of the third year, multiplied by the
remaining number of years to provide services, is deemed to be an
appropriate estimate of the stand-alone selling pric;e of the multi-
-year contract (i.e., the stand-alone selling price is 4 years x P80,000
per year = P320,000). At contract inception, the entjty assesses that
each week of cleaning service is distinct.

Requirement: Compute for the amounts of revenue to be

recognized on each year of the six-year <;ontract.
- Revenue from Contracts with Customers 199

PROBLEM 4: CLASSROOM ACTIVITY

INSTRUCTIONS:
1. Fin9- a stud y partner.
of
2. Imagine that you and your stud y partner are accountants
ABC Co. and are tasked in accounting for the contract shown
below.
3. Read the contract individually first and then disruss with your
stud y part ner on how to account for the contract in accordance
with the revenue recognition principles of P~RS 15.
d
4. Use the guid e prov ided below by filling in the numbere
blanks.

CONTRACT TO SELL

KNOW ALL MEN BY THESE PRESENTS:

day of October,
This CONTRACT TO SELL, made and executed this 3rd
2015 by and between:
ged in the
. ABC CO., incorporated in the Philippines, primarily enga
st
at 1 Floor, Dakkel
business of selling lots, and with registered office address
Building, Dalan St., Tralala City, hereinafter referred · to as the
"SELLERNENDOR"; .
-AND-
l address
JACK M. AMMO, Single, Filipino and with residence and posta
Nakatsinelas Sur,
at #123 Naitublak St., Barangay Nakasakasaka, San
Tralala City, hereinafter referred to as the "BUYERNENDEE".

WITNESSETH;
registered
WHEREAS the SELLERNENDOR is the absolute and
square meters
owner of a parcel' of land consisting of TWO HUNDRED ~200)
and covered by
located at Barangay Nasipnget, San Nalawag, Tralala City,
by the Registry of
Transfer Certificate of Title (TCT) No. T-54321 issued
Deeds of Tralala City;
the SELLER
WHEREAS the BUYERNENDEE has offered to buy and
under the terms
/VENDOR has agreed to sell the above mentioned property
and conditions herein below set forth;

NOW THEREFORE 1 for and in consideration of the total

sum of ONE
and of the
MILLION PESOS (Php: 1,000,000.00), Philippine Currency,
s to sell and the
covenants herein after set forth the SELLERNENDOR agree
ct to the
BUYERNENDEE agrees to buy the· aforesaid property subje
following terms and conditions:
 ◄
200 Chapter 3

1. The total consideration shall be One Million Pesos (Php 1,000 000 OO)
Philippine Currency, payable as follows: ' · '

a) The amount of THREE HUNDRED THOUSAND PESOS (Php

300,000.00), representing earnest money, shall be payable by the
BUYERJVENDEE to the SELLERNENDOR upon signing of this Contract to
Sell;

b) The remaining balance in the amount of SEVEN HUNDRED THOUSAND

PESOS (Php 700,000.00) shall be paid in 12 monthly installments of FIFTY-
EIGHT THOUSAND, THREE HUNDRED THIRTY-THREE PESOS AND
33/100 (Php 58,333.33) starting on October 31 , 2015, and every end-of.
month thereafter. •

c) In case any of the checks representing the payment for the installments
provided in paragraph (b) hereof is dishonored by the drawee bank, the
earnest money in the amount of THREE HUNDRED THOUSAND (Php
300,000.00) PESOS and TEN PERCENT (10%) of any installments received,
shall be forfeited in favor of the SELLERNENDOR.

2. Capital Gains Tax and Real Estate Tax shall be for the account of the
SELLERNENDOR;

3. Documentary Stamps Tax, Registration Fee, registration expenses, and

all other miscellaneous fees and expenses shall be to the account of the
BUYERNENDEE;

4. ~ Possession to the subject property shall be transferred by the

SELLERNENDOR to the BUYERNENDEE upon full payment of the total
consideration;

5. Upon full payment of the total price, the SELLERNENDOR shall sign
and execute a DEED OF ABSOLUTE SALE in favor of the
BUYERNENDEE. The SELLERNENDOR shall likewise execute and/or
deliver any and all documents, including but not limited to the original copy of
Transfer Certificate of Title, Tax Declaration and all other documents
necessary for the transfer of ownership from SELLERNENDOR to the
BUYERNENDEE.

IN WITNESS WHEREOF, the parties have hereunto affixed their signatures,

this 3rd day of October, 2015 in Tralala City, Philippines.
~~
GEORGE M. UY-LOPA JACKA. AMMO
CHIEF EXECUTIVE OFFICER (BUYERNENDEE)
ABC CO.
(SELLERNENDOR)
-
Revenue from Contracts with Customers 201

SIGNED IN THE PRESENCE OF: OF:

/ /2, - -<""
~~
.: -=
~~---- ~
~£,..-

SHIEK A. GAYAM JAY B. ANGIR

ACKNOWLEDGMENT

REPUBLIC OF THE PHILIPPINES

CITY OF TRALA LA )-Sc
x----------------x
rd
BEFORE ME, a ·Notary Public, this 3 day of October 2015, personally
appeared the following:

Name CTC Number Date/Place Issued

1. GEORGE M. UY-LOPA 22233344 February 5, 2015 / Tralala City

2. JACK M. AMMO 22016543 January 7, 2015 / Tralala City
3. SHIEK A. GAYAM 22117246 January 15, 2015 / Tralala City
4. JAY B. BANGIR 22014723 January 4, 2015 / Tralala City

This instrument, consisting of three (3) pages, including the page on which
this acknowledgment is written, has been signed on the left margin of each
and every page thereof by the concerned parties and their witnesses, and
sealed with my notarial seal.
IN WITNESS Wt-fEREOF, I have hereunto set my hand the day, year and
place above written . ~ d--..:.
ATON Y A. BOGA DO
Notary Public
Doc. No. 300;
Until Decemb er 31, 2015
Page No. 58.;
Book No. X; P'fE no. 1678330; 01-6-15
Series of 2015 IBP no. 998379; 01-6-15

Additional information:
• Before entering into the contract, ABC Co. made_ a cre~it i~vest_igation on
the buyer through ABC'~ credit department. The invest1gat1on yielded a
favorable result.
• The carrying amount of the land in ABC Co.'s books is P400,000.

INSTRUCTION: Fill-in the numbered blanks.

202 Chapter3

STEP 1: Identify the contract with the customer

Checkiist7
PFRS 15 Criteria (✓/ X) i
----;
The contracting parties have appr~ved th~ ~ntr~ct and are
a.
committed to perform their respective obllgatIons, .

REASON/INDICATOR:
(1)
- !
!i
'
'
!
'
12\
I
b. The entity can identify each party's rights regarding the
goods or services to be transferred; · (3)_

C. The entity can identify the payment terms for the good~ or
services to be transferred; (4)_

REASON/INDICATOR:
{5) (Make a reference to certain e.arag_rae.hs in the
contractl

d. The contract has commercial substance; (6)_

(7) REASON:

e. The consideration in the contract is prc>~able of collection . j

(8)_
·

REASON/INDICATORS:
{9)
-
{10}
-

CONCLUSION: Does the contract qualify for accounting under PFRS 15?
State your reason.
(11) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __

STEP 2: Identify the performance obligations in the contract

(12) Identify the performance obligation(s) in the contract.

(13) State whether the performance obligation(s) is/are satisfied over time or
at a point _in time. _ _ _ _.;..__ _ _ _ _ _ _ _ _ _ _ __

STEP 3: Determine the transaction price

(14) _Determine the transaction price.
------------
(15) Identify whether the transaction price is fixed or variable. _ _ __

STEP 4: Alloca~e the transaction price to the performance obligations

(16) How much 1s allocated to each of the performance obligations?
 Revenue from Contracts with Customers 203

JOU.RNAL ENTRIES:
(17) Provide the entry at contract inception. Provide a brief description for the
journal entry. .

JOURNAL
DATE ACCO UNTS Ref. Debit Credit
.
- . I
''
·-· ... '

''
i
'
........ i ..' .. ........,..
i

·v ../V'vV'. / V" vV· ./'v'v'V •·.~ ..··v

!
·,A / '-.,·V ·•,./'V, ./V ·•./'V',.,"V ···/'-./',.,'V ·./'-.,' vv ·•./'-A/V··./'V'v"-'./ •,/ v VV ,A,. V V

(18) Assume that the next entry made by ABC Co. on the contract is on
.
. t·1on f or th e Jouma
. f descnp
Decem ber 31, 2015 Prov1.dea bne I emry.
t

JOURNAL
DATE ACCO UNTS Ref. Debit Credit
' j
' ' i
'
I ~
' ............ '

.....
~--·-···-..-.. ..,.. ..............
_ , ,,

f
i

VV'v''VV·v"-./ '-/VVv'VV './··./VV'✓··..../VV'-./' ~!"'vVV-..,, VV'./-l_ ..VV'-./'-

,''-./'v'V ·~,·V'-./V, . W VVVV'-./'- VV

-PRESENTATION .
How should the contract be presented in ABC Co.'s December 31, 2015
os~i~tio~n.!..:?:___ _ _---r-;;.:-::-:::..a:~-i-- - -- - -1
....~~tement of financial ...e,~

ACCOU NT -----···--1-c~~-:f~t.~.. . .
'·········-·-··-·· .......,.,,,
' ·····"""
- -····--···-·· -- - - i i - -,,.'""'"""'! "'"·'"""'
-M
- -A _T
_uN
_o _
.. ··""""·"""'··""""""" - """""'"''""""""- I
@fcontract asset
J 20) Contract liability ............... --·-, ···-- -· - •
(21fReceivable ........=
_ _ _ __L..___,,,,,,, . . .=. . . ., ., ,. ,. . . . . . . ............ . . ....... .. .. . . . . . . . . -.. . . . . . . . . . . . _
·•-·..··············· ··-·-- -- - - - · ···--·-····

(22) Assume that the January 31 , 2016 check is dishonored and the contra?t
is s ttl d on th·Is date, ·1n accordance with the terms• of the contract. What 1s
e e • . . I t
the journal entry? Provide a brief descnpt1on for the Jouma en ry.
 204 Cltapter3

JOURNAL
Ref. Debit
--
DATE ACCOUNTS Credi,
--
---
.
--
-
!'

--
/ ' , / V ,A. '-./V'/', VV A "v"-/ A ; VV,/'v "-/V'v"'. ·"-.,/V v',..W v''V'v'V A "-/V .A VV / '-. VV / v 'VV

Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation

(23) Disregard the assumption in number (22). Assume instead that the
consideration ·is fully paid and the land is transferred to the buyer as planned.
Provide the journal entries. Provide brief descriptions for the journal entries.

JOURNAL
DATE ACCOUNTS Ref. Debit Credit

. . . . . . . . . . . - --1---.. . . . . . . . . •. . . .,. . . . . . . .· - - - - - - + - - - - + - - - - - ~ - - - - i

-
- - -- - - - -- - - -- .... ..................-............................................................ .............- - - - - ; - - · ·..··--····· ·---

PROFIT OR LOSS .
Use the assumption in number (23). Determine the effects of the contract in
AB~ Co_.'s 2015 and 2016 profit or loss, respectively. Disregard taxes and
registration costs.
 Revenue from Contracts with Customers 205

r 201s 2016
!~i =======-=-=-~r···-··. ·-·. . ·-·· . .-:-.. . 24
---:(:-::--:-:)-_ ____ ___. _ _ _ .......-....-.... (-2-5)- .-.....-.......-.. ...-......-......-......---/
_ _ _ _ _ _ .................·-··-------- -<;
Revenue 1_

Expenses
i-::=-: .....1-- -----t-- - - -- - - - · ················· ·················- -
- -- - - -- --;
Profit

PROBLEM 5: MULTIPLE CHOICE - THEORY _

1. PFRS 15 applie s to
a. contra cts with custom ers
b. contra cts with sellers
c. a and b
d. all contra cts entere d into by an entity 1n the ordin ary
course of its busine ss.

2. ABC Co., a dealer of medic al machi nes, enters into the

following contracts:
I. ABC Co. transf ers a machi ne to X Hospi tal at contra ct
incept ion but ABC Co. retain s legal title until the full
paym ent of the consid eratio n.
11. ABC Co. transf ers a machi ne to Y Medic al Clinic at
contra ct incept ion. The consid eratio n is due after two
years. At contra ct inception, Y is under going financial
difficulties. This raises doubt in Y's ability and intent ion of
payin g the consid eratio n. ABC Co. canno t reliab ly
estima te the outco me of the contract.
III. ABC Co. transf ers a machi ne to Z Co. under a lease
contract. The contra ctual period is 5 years, which is equal
to the machi ne's estima ted useful life. At the end of the
contract, Z Co. is given the option of purch asing the
machine. ABC's past experi ence shows that almos t all
custom ers avail of the purch ase option .

Identify the contra cts to which PFRS 15 Revenue from Contract with
Customers may be applie d_- .
a. Contr act 1 c. Contracts 1 and 3
h. Contr act 2 d. None of these

_ I
 206 (?lapter 3

~ 3. Arrange the following steps of revenue recognition In

, accordance with PFRS 15.
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) the entity satisfies a
performance obligation
III. Determine the transaction price
IV. Identify the contract wi_th the customer
V. Allocate the transaction price to the performance
obligations in the contract

a. IV, I, V, III, II c. IV, I, Ill, V, II

b. ill, IV, I, V, II d. IV, m, I, V, n

4. Which of the following must be met before a contract with a

customer is accounted for under PFRS 15?
a. The collection of the consideration must be certain.
b. The contract must be in writing so that there will be no
doubt in the customer's ability and intention to pay the
consideration.
c. The promised goods or services must ·have already been
transferred to the customer._
d. Both contracting parties must acknowledge, whether
explicitly or implicitly, the rights and obligations created
under the contract.

5. A consideration received from a contract with a customer that

does not meet the criteria under 'Step 1' of PFRS 15 is
a. recognized as liability
b. recorded through memo entry only
c. disclosed only
d. band c

6. Which of the following may be treated as a performance

obligation to be accounted for separately?
I. A promise to transfer a distinct good or service
-
Revenue from Contracts with Customers 207

II. A pronuse to transfer a distinct bundle of goods oi

services
III. A ·promise to transfer a series of distinct goods or services
that are substantially the same and have the same pattern
of transfer to the customer
IV. A promise that is implied by the entity's customary
business practices which, at contract inception, creates a
valid expectation on the part of the customer that the
en~ty will satisfy the promise

a. I only b. I and II c. I, II and III d. all of these

7. A good or service is distinct-if:

I. The customer can benefit from the good or service either
on its own or together with other resources that are readily
available to the customer; and
II. The promise to transfer the good or service is separately
identifiable from other promises in the contract.

a. I only b. II only c. I and.II d. none of these

8. A good or SE:rvice that is not distinct (choose the incorrect

statement)
a. shall be combined with the other promises in the contract.
b. may be treated, together with other promises in the
contract, as a single performance obligation.
c. may be identified as a part of a bundle of goods or services
or a part of a series of goods or services to be. transferred
to the customer
d. shall be ignored. The entity allocates the transaction price
only to the other promises in the contract that are distinct.

9· A warranty is treated as a performance ob~gation, and

consequently in accordance with PFRS 15, if
a. the warranty provides the customer an assurance that th~
product complies with agreed-upon specifications
208 Chapter 3

b. the settleme nt of the warranty requires an outflow of cash

c. the warranty results from a provisio n of a law
d. the warranty is provided by a third party that is unrelated
to the entity
e. the warranty provides the custome r service in addition to
an assurance that the product complies with agreed-upon
specifications

10. An option granted to a custome r to acquire addition al goods

or services is treated as a performa nce obligation if
a. it provides the custome r service n:i addition to an
assuranc e that the product complies with agreed-upon
specifications
b. it relates to the transfer of goods or services.
c. it gives the custome r a material right.
d. the timing of agreed paymen ts provides the custome r or
the entity with a significant benefit of financing

11. A non-refu ndable upfront fee is treated as a performance

obligatio n
a. if it relates to the transfer of goods or services.
b. if it relates to administ rative tasks to set up a contract
c. if it gives the custome r a material right
d. with no exception

12. Which of the following would not cause a consider ation in a

contract with custome r to vary?
a. discount c. price concession
b. sale with right of return d. sale on approva l

13. Which of the following is false regardin g the accounti ng for a

sale with right of return in accordan ce with PFRS 15?
a. Revenue is recogniz ed only for the goods sold that are not
expected to be returned in the future.
b. The revenu_e recogniz ed may not be equal to the contract
price.
Revenue from Contracts with Customers 209

c. An asset is recogn ized for the entity 's right to ~eco:ver .

. produ cts ~om the custom er on settlin g the refund ·liability. ·
d. In all cases, no reven ue is recogn ized until after the period
where in the custom er can exercise its right to return the
goods elapse s.

14. If the timing of agreed payme nts provid es the custom er with a
significant benefi t of financ ing (choose the incorrect statem ent)
a. the entity recogn izes revenu e equal to the presen t value of
the consid eratio n receivable. This may requir e the
determ inatio n of an implic it intere st rate.
b. the entity recogn izes revenu e equal to · the cash selling
price of the goods or services transfe rred to the customer.
c. the entity need not discou nt the consideration_ if the
conside~ation is expec ted to be received within one year
d. the entity recogn izes revenu e when the related good or
service transf ers to the customer. However, the imput ed
intere st is recogn ized in profit or loss over the period from
the date the good or service is transferred to the custom er
until the date the consid eratio n is fully collected.
e. all of the statem ents are correct.

15. If the consid eratio n in a contra ct is other than cash, revenu e is

· recognized at
a. the fair value of the non-ca sh consideration
b. the selling price of the related good or service
c. choice (a), excep t when this is not available, then choice (b)
d. none of these

PROBLEM 6: MULTIPLE CHOICE .. COMPUTATIONAL

Use the following information for the next two questions:
Fact pattern . ·
ANCILLIARY Co. . and SUBORDINATE, Inc. are provincial
distrib utors of oil. ANCILLIARY' s principal place of busine ss is
located in Town One while SUBORDINATE's principal place of
 210 Chapter3

business is located in Town Two. However, each of the

distributors operates in both towns. During the year, a bridge
connecting these two towns has been dai:naged. Wary of the
disruption of their business operations, ANOLLIARY and
SUBORDINATE agreed to exchange inventories of oil so that each
could maintain its operations in both towns.

Case #1:
1. ANCILLIARY agreed to exchange its inventory of "premium"
oil in Town One with SUBORDINATE's inventory of "diesel"
oil in Town Two. ANCILLIARY' s ,✓premium" oil has a fair
value of P4M and carrying amount of P3.5M while
SUBORDINATE's "diesel" oil has a fair value of P3.8M. How
much shall ANCILLIARY recognize from the inventory
exchange?
a. 3,800,000 revenue d. 500,000 gain
b. 4,000,000revenue e.0
c. 200,000 gain

Case #2:
2. ANCILLIARY agre~d to exchange its inventory of '·'dieser' oil
in Town One with SUBORDINATE's inventory of diesel" oil
11

in Town Two. ANCILLIARY's "diesel" oil has a fair value of

P4M and carrying amount of P3.5M while SUBORDINATE's
/✓diesel" oil has a fair value of P3,992,000. The exchange lacks
commercial substance. How shall ANCILLIARY recognize
from the inventory exchange?
a. 3,992,000 revenue d. 500,000 gain
b. 4,000,000revenue e.O
c. 200,000 gain

3. ABC Co. had the following transactions during the year:

a. Sold goods to Customer W on·an installment basis for PS,000.
Legal title to the goods was retained by ABC. The installment
receivables are collectible over the next eight months.
Revenue from Contracts with Customers 211

The sa.le
b. Sold goods to Customer X on a cash basis for P20,000.
of .
agreement gives Customer X the right to return up to 40%
of .
the prod uct sold with in the first six months after the date
will
s~le prov ided an appropriate reason is given. Customer X
bly
be refu nde d for any goods returned. ABC can relia
estimate that 10% of the products sold would be returned.
00. The
c. Sold goods to Customer Yon account basis for Pl0,0
10%
sale agreement gives Customer Y the right to return up to
of
of the prod uct sold with in the first two weeks after the date
bly
sale prov ided an appropriate reason is given. ABC can relia
estimate that 5% of the produets sold would be .returned.
The sale
d. Sold goods to Customer Z on a cash basis for Pl2,000.
and
agreement gives Customer Z the right to return the goods
ot
be refu nde d for the sale price if he is not satisfied. ABC cann
reliably estimate the amo unt of goods to be returned.
s for
e. Sold goo ds to Customer Voiz&Gurlz on a cash basi
ion
Pl0,000. The sales representative was paid a 2% commiss
based on the selling price.

the
How muc h total net sales revenue is recognized from
transactions above?
b. 42,500 C. 54,300 d.54,500
a. 42,300

ices for
4. DESULTORY UNPLANNED Co. offers repair serv
parts.
manufacturing equ ipm ent and also sells machinery
ions.
During the year, DESULTORY had the following transact
ice
• In Janu ary 20xl, DESULTORY Co. signed a repair serv
e
contract with a customer for P4,000,000. The contract pric
ir
is due on March 31, 20xl. By the end of the year, the repa
service has long bee n completed. However, the contract
price has not yet been collected. DESlfLT~RY has
assessed that the receivable should be written-off.
DESULTORY' has no balance in its allowance for
uncollectible service contract receivables.
• In July 20xl, DESULTORY Co. sold various part
s to a
,
cust ome r on account for P2,000,000. By the end of the year
 - Chapter3
212

only half of the receivable from the custom er has been

collected. DESULTORY assessed that 5% of · the
outstanding balance as of December 31, 20xl is doubtful of
collection.

How much revenue from the transactions described above shall

be included in DESULTORY' s statement of profit or loss and other
comprehensive income for 20xl?
a. 6,000,000 c. 1,900,000 c. 1,100,000 d.0

5. The Ordessos Company sells. goods to a third party via an

agent. During 20X8 9t"dessos supplies the agent with goods
with a sales value of. P200,000. The agent charges a
commission of 15%. Under PFRS 15 how much revenue
should each of Ordessos and the ag~nt recognize in profit or
loss for 20X8?
Ordessos Agent
a. 170,000 25,500
b. 200,000 25,500
C. 170,000 30,000
d. 200,000 30,000
(Adapted)

Fact patten ,
The Khaki Company sells merchandise for PS,000 to a customer on
31 J?ecember 20X7. The terms of the sale agreem ent state that
payme nt is due in one year's time.

Case 1
6. The cash selling price of the merch andise is P7,900. Under
PFRS 15, how much revenue should Khaki recognize in profit
or loss for the year ended 31 December 20X7?
a. 7,900 · b. 7,339 c. Nil · d. 8,000
(Ad
· apted)

Case2
7 The cash selling price of the merch andise is not directlY
·
observable.- However, Khaki has an imput ed rate of interest of
Revenue from Contracts with Customers 213
9°/4. Under PFRS 15, how much revenue should Khaki
recognize in profit or loss for the year ended 31 December
20X7?
a. 8,720 b; 7,339 c. Nil d. 8,000
(Adapted)
Case3
8. The cash selling price of the merchandise is P7,900 and Khaki
has an imputed rate of interest of 9%. However, Khaki opts to
use the practical expedient" allowed under PFRS 15. How
much revenue should Khaki recognize in profit or loss for the
year ~nded 31 December 20X7?
a. 8,720· b. 7,339 c. Nil d. 8~000
(Adapted)
9. The Marfak Company provides service contracts to customers
for maintenance of their electrical systems. On 1 October 20X8
it agrees a four-year contract with a major customer for
P154,000. Costs over the period of the contract are reliably
estimated at- P51,333. Under PFRS 15, how much revenue
should the company recognize in· profit or loss in the year
ended 31 December 20X8?
a. 9,625 b. 38,500 c. 3,208 d. 12,833
(Adapted)
10. On 1 January 20X8 The Violet Company signs a four-year
fixed-price contract to provide services for a customer. The
contract value is PSS0,000. At 31 December 20X8 the contract is
thought to be 30% complete. Costs to complete the contract
cannot be reiiably estimated and costs incurred to date of
Pl.52,000 are recoverable from the customer. What is the
revenue to be r~cognized in profit or loss for the year ended 31
December 20X8, according to PFRS 15 Revenue from Contracts
with Customers?
a. 13,000 b. 152,000 c. 137,500 d. 165,000
(Adapted)