September 23, 2022

Seatwork 1 (Problem 5 - Activity 1)

Requirements:

a. Entity X's contract with the customer qualifies for accounting under PFRS 15 because
it was approved by both parties, can be determined how each party is related to the
goods being transferred, has commercial substance, can be determined how the
payment will be received, and there is a likelihood that the company will receive the
consideration.

b. Entity X's performance obligation consists of a collection of various items (a lot, a

built house, and a house design) that were collectively promised to the customer and
have a common method of transfer.

c. Entity X will satisfy the performance obligation through the following steps:

• First, the lot will be sold to the customer.

• After the selection and sale of the lot, the customer will be required to choose
a preferred house design.

• After the house design is chosen by the customer, the house construction will
be started.

• The Entity has to complete the house construction within 1 year and
according to the specification provided by the customer and the design
chosen.
 The performance obligations will be met when the completed and constructed house
(as per the chosen design and subject to any modifications made by the customer) is
delivered to the customer and payment is received.

d. The purchase price is P6,000,000. The transaction price is variable consideration due
to the uncertainty that failure to deliver the contract as specified and any delay in
contract completion will affect the consideration that is to be received at completion.

• When the transaction price of the contract is established, Entity X will account
for the variable consideration by estimating it. When it is likely that an
uncertain event would cause a future cumulative amount of revenue reversal,
the variable consideration is determined by the expected value.

• Due to the terms of the consideration, which allow for monthly payments, the
transaction price offers significant finance to Entity X for the construction of
the homes as well as to the customer. The customer and the entity receive
substantial funding under these terms of payment.

e. Using a stand-alone pricing for the contract, the business will divide the transaction
price among the performance duties. The cost that the entity charges for the entire
contract or just certain parts of it is known as the stand-alone pricing. The
standalone price of the contract will be used to assign the price to the performance
duties since Entity X's allocation is to be based on the three performance obligations
(lot, house design, and constructed house).
f. Entity X will record revenue as the contract is finished over time in the form of the
20% down payment that will be paid in monthly installments and the principal sum
at the end of the contract. As a result, as the asset is produced by the entity for the
client, the revenue is gradually recognized.

g. Since no entry is necessary for the simple act of signing a contract, none will be
made. When the contract's expenditures and revenues are recorded, a journal entry
will be made.