AFAR.03 Revenue Recognition

Page 1 of 15 | AFAR 03
REVENUE RECOGNITION
MARK ALYSON B. NGINA, CMA, CPA
REVENUE RECOGNITION
Syllabus:
4.0 Revenue Recognition (PFRS 15)
4.1 Revenue from Contracts with Customers
4.1.1 Five-Steps Model Framework
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4.1.2 Other Revenue Recognition Issues
4.1.2.1 Right of return
4.1.2.2 Principal-agent relationships
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4.1.2.3 Non-refundable upfront fees
4.1.2.4 Licensing / Royalties
4.1.2.5 Repurchase arrangements
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4.1.2.6 Gift Cards
4.1.2.7 Consignment arrangements
4.1.2.8 Bill-and-hold arrangements
4.1.2.9 Long – term Construction Contracts
4.1.2.9.1 Percentage of completion method
4.1.2.9.1.1 Input method
4.1.2.9.1.2 Output method
4.1.2.9.2 Contract Asset / Contract Liability
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4.1.2.10 Franchise Operations – Franchisor’s point of view
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4.1.2.10.1 Journal entries and determination of revenue, cost, and gross profit
4.1.2.10.1.1 Initial franchise fee
4.1.2.10.1.2 Continuing franchise fee
4.1.2.11 Accounting for Consignment Sales
4.1.2.11.1 Amount Remitted
4.1.2.11.2 Ending Inventory Valuation
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4.1.2.11.3 Determination of Net Income

4.1.3 Financial Statement Presentation
PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Core Principle
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An entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Five-Step Model Framework

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
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3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation
Other Revenue Recognition Issues

1. Sale with a right of return
2. Warranties
3. Principal versus agent considerations
4. Non-refundable upfront fees (and some related costs)
REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 support@reocpareview.ph MAY 2023 CPA REVIEW SEASON

REVENUE RECOGNITION
5. Licensing
6. Repurchase agreements
7. Consignment arrangements
8. Bill-and-hold arrangements
REVIEW QUESTIONS:
1. (Adapted) On 1 July 20x1, Its Depend Inc. entered into a contract to deliver one of its specialty machines to It
Depends Landscaping Co. The contract requires It Depends to pay the contract price of ₱125,000 in advance on 15
July 20x1. It Depends pays Its Depend on 15 July 20x1, and Its Depend delivers the machine (with cost of ₱80,000)
on 31 July 20x1.
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Applying PFRS 15, the contract exists on
a. July 1, 20x1 c. July 15, 20x1
b. July 31, 20x1 d. None of the choices
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2. (MBN) Ops Cor Company, a real estate developer, enters into a contract with a customer for the sale of a building for
₱20,000,000. The customer intends to open a restaurant in the building. The building is located in an area where new
restaurants face high levels of competition and the customer has little experience in the restaurant industry.
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The customer pays a non-refundable deposit of ₱1,000,000 at inception of the contract and enters into a long-term
financing agreement with the entity for the remaining 95% of the promised consideration. The financing arrangement
is provided on a non-recourse basis, which means that if the customer defaults, Ops Cor Company can repossess the
building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value
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of the amount owed. The entity’s cost of the building is ₱12,000,000.
Applying paragraph 9 of PFRS 15, which of the following is correct?
a. All the attributes of a contract are present so Ops Cor Company will record a revenue amounting to ₱1,000,000.
b. All the attributes of a contract are present so Ops Cor Company will record a revenue amounting to ₱950,000.
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c. Not all the attributes of a contract are present so Ops Cor Company will record a contract liability amounting to
₱950,000.
d. Not all the attributes of a contract are present so Ops Cor Company will record a contract liability amounting to
₱1,000,000.
3. (PFRS) Which of the following factors indicate that an entity's promise to transfer a good or service to a customer is
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separately identifiable?
I. The entity does not provide a significant service of integrating the good or service with other goods or services
promised in the contract into a bundle of goods or services that represent the combined output for which the
customer has contracted.
II. The good or service does not significantly modify or customize another good or service promised in the contract.
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III. The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in
the contract.
a. I only
b. II and III only
c. I, II and III
d. I and III only
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4. (MBN) Of Course Company, a contractor, enters into a contract to build a hospital for a customer. Of Course
Company is responsible for the overall management of the project and identifies various goods and services to be
provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and
wiring, installation of equipment and finishing. How many performance obligations exists in this contract?
a. One
b. Two
c. Three
d. None


REVENUE RECOGNITION
5. (MBN) Of Course Company, a software developer, enters into a contract with a customer to transfer a software
license, perform an installation service and provide unspecified software updates and technical support (online and
telephone) for a two-year period. Of Course Company sells the license, installation service and technical support
separately. The installation service includes changing the web screen for each type of user (for example, marketing,
inventory management and information technology). The installation service is routinely performed by other entities
and does not significantly modify the software. The software remains functional without the updates and the technical
support. How many performance obligations exists in this contract?
a. One
b. Two
c. Three
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d. Four
6. (MBN) EUP Inc. sells a big screen TV package consisting of a Sharp LB-1085 TV, a universal remote, and onsite
installation by EUP Inc. staff. The installation includes programming the remote to have the TV interface with other
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parts of the customer’s home entertainment system. EUP Inc. concludes that the TV, remote, and installation service
are separate performance obligations. EUP Inc. sells the Sharp LB-1085 TV separately for ₱70,000 and sells the
remote separately for ₱4,000, and offers the entire package for ₱76,000. EUP Inc. does not sell the installation
service separately. EUP Inc. is aware that other similar vendors charge ₱6,000 for the installation service. EUP Inc.
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also estimates that it incurs approximately ₱4,000 of compensation and other costs for EUP Inc. staff to provide the
installation services. EUP Inc. typically charges 40% above costs on similar sales.
Based on the above data, which of the following statements is incorrect?
a. The transaction price allocated to the installation service using the adjusted market assessment is ₱5,700.
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b. The transaction price allocated to the installation service using the estimated cost plus a margin is ₱5,600.
c. The transaction price allocated to the TV using the estimated cost plus a margin is ₱66,834.
d. The transaction price allocated to the installation service using the residual approach is ₱2,000.
7. Wipe It Down regularly sells Products A, B and C individually, thereby establishing the following stand-alone selling
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prices:
Product Stand-alone
selling price
Product A ₱ 40,000
Product B 55,000
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Product C 45,000
Total ₱140,000
The entity enters into a contract with a customer to sell Products A, B and C in exchange for ₱100,000 cash. The
entity will satisfy the performance obligations upon delivery to the customer.
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Based on the above data, which of the following statements is incorrect?

a. If the entity regularly sells Products A, B and C together, the amount of the transaction price allocated to Product
C is ₱32,143.
b. If the entity regularly sells Products A, B and C together, the amount of discount allocated to Product A is
₱15,714.
c. If the entity regularly sells Products B and C together for ₱60,000 and Product A for ₱40,000, the amount of
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discount allocated to Product C is ₱18,000.

d. If the entity regularly sells Products B and C together for ₱60,000 and Product A for ₱40,000, no discount will be
allocated to Product A.
8. (PFRS) An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation
and recognizes revenue over time, if:
I. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the
entity performs;
II. The entity's performance creates or enhances an asset (for example, work in progress) that the customer controls
as the asset is created or enhanced;


REVENUE RECOGNITION
III. The entity's performance does not create an asset with an alternative use to the entity and the entity has an
enforceable right to payment for performance completed to date;
a. I only
b. II and III only
c. I, II and III
d. I, II or III
9. If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time.
Which of the following may indicate transfer of control?
I. The entity has a present right to payment for the asset
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II. The customer has legal title to the asset
III. The entity has transferred physical possession of the asset
IV. The customer has the significant risks and rewards of ownership of the asset
V. The customer has accepted the asset
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a. I, II, III and V b. II, III and V c. I, III, IV and V d. I, II, III, IV and V
10. (PFRS) Which of the following performance obligation is satisfied at a point in time?
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a. Phasmophobia Company enters into a contract to provide monthly payroll processing services to a customer for
one year.
b. Philophobia Company 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
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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% margin. The 15% margin approximates the profit margin that the entity
earns from similar contracts.
c. Phobophobia Company enters into a contract with a customer, a government agency, to build a specialized
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satellite. Phobophobia builds satellites for various customers, such as governments and commercial entities. The
design and construction of each satellite differ substantially, on the basis of each customer’s needs and the type
of technology that is incorporated into the satellite.
d. Selfiephobia Company enters into a contract with a customer to build an item of equipment. The payment
schedule in the contract specifies that the customer must make an advance payment at contract inception of 10%
of the contract price, regular payments throughout the construction period (amounting to 50% of the contract
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price) and a final payment of 40% of the contract price after construction is completed and the equipment has
passed the prescribed performance tests. The payments are non-refundable unless the entity fails to perform as
promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments
received from the customer.
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11. (MBN) Multiple Choice, an electronics manufacturer, enters into an arrangement with one of its major retailers, under
which the retailer will receive a 5% discount on all purchases if the purchases by the retailer exceed ₱250,000 for the
annual period ending 31 December.
At 30 June, purchases by the retailer from Multiple Choice amount to ₱56,000 (inclusive of 12% VAT). Multiple Choice
forecasts that, due to the historic seasonality of the revenues (which peak prior to December in the run up to the year-
end holidays) and the launch of new products, the annual sales to the retailer will be in the range of ₱260,000 −
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₱310,000.
How much revenue should Multiple Choice report on 30 June?
a. ₱56,000
b. ₱50,000
c. ₱47,500
d. ₱47,200


REVENUE RECOGNITION
12. (MBN) Again The Lights is a high street retailer and has launched a promotional campaign with the following
elements:
• Discount coupons are provided to any customers that purchase goods with a total value of over ₱5,000.
• The discount coupons entitle the customer to an additional 50% till discount on selected items during the 90 days
immediately following the campaign.
Again The Lights has issued 60 of the 50% coupons to high spending consumers and took from them ₱100,000 at the
till during the campaign; and based on historical trends, management expects that:
• 75% of the end consumers receiving 50% discount coupons will use the coupon;
• customers using the coupons will spend on average ₱1,000 at the till; and
• It will still make a positive margin on the transactions when the coupons are used
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Which of the following is incorrect?
a. The company will credit ₱81,633 on the initial purchase by customer of ₱100,000.
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b. There are two performance obligations in the contract – sale of goods and material right.
c. The company will record revenue of ₱40,867 upon the redemption of 50% discount coupons.
d. The transaction price allocated to the sale of goods is ₱18,633.
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13. (MBN) Against The Light Company manufactures consumer goods enters into a one-year contract to sell goods to a
customer that is a large global chain of retail stores. The customer commits to buy at least ₱15,000,000 of products
during the year. The contract also requires Against The Light Company to make a non-refundable payment of
₱1,500,000 to the customer at the inception of the contract which will compensate the customer for the changes it
needs to make to its shelving to accommodate the entity’s products.
corresponding payment.
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During the first month, Against The Light Company transferred ₱2,000,000 worth of goods and received the
How much is the amount of revenue that will be recognized during the first month.
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a. ₱2,000,000
b. ₱1,800,000
c. ₱1,500,000
d. None of the choices
14. (MBN) It’s Really Hurt operates retail stores and a website where customers can buy dresses. There is a customer
loyalty program in place, awarding customers 1 point for every ₱200 spent on buying dresses. Points are only
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redeemable for future purchases and cannot be redeemed for cash. It’s Really Hurt expects 5% of points to expire
unredeemed, based on historical trends.
During the year, Its Really Hurt has sold dresses for ₱200,000 cash.
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How much is the amount of contract liability to be recorded in relation to the loyalty program?
a. ₱10,000
b. ₱950
c. ₱946
15. (MBN) It Really Hurts has launched a campaign of selling gift cards for the upcoming holiday season:
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• Gift cards are valid for up to one year from the date of purchase and only at It Really Hurts outlets; furthermore,
the customer cannot obtain a cash reimbursement for unspent amounts or unused cards. Unspent amounts after
a year are kept by the company.
• Based on historical trends, It Really Hurts expects 10% of the gift card’s value to expire unused.
• It Really Hurts has no obligation to remit unused gift card amounts to end customers or to a third party (for
example, government).
On 30 August, end-consumers purchase ₱6,000 gift cards. On 1 December, end-customers purchase ₱3,600 of
product using the gift cards.


REVENUE RECOGNITION
The amount of breakage revenue to be recorded on the redemption of gift card is

a. ₱6,000
b. ₱3,600
c. ₱400
16. (PFRS) Which of the following statements is incorrect in relation to contract cost?
a. Cost to obtain a contract are recognized as an asset if they are expected to be recovered;
b. Costs to fulfill a contract that are within the scope of PAS 2, PAS 16 or PAS 38 should be accounted with related
standard;
c. Costs to fulfill a contract that are not within the scope of PAS 2, PAS 16 or PAS 38 should be recognized as an
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asset and amortized on a systematic basis that is consistent with the pattern of transfer of the goods or services
to which the asset relates;
d. As a practical expedient, cost to obtain a contract are expensed in profit or loss if the contract costs related to the
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contracts for more than 12 months.
17. (MBN) Phobia Company enters into a service contract to manage a customer’s information technology data center for
five years. The contract is renewable for subsequent one-year periods. The average customer term is seven years.
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Phobia Company incurred the following costs to obtain the contract:
External legal fees for due diligence ₱ 300,000
Travel costs to deliver proposal 500,000
Commissions to sales employees 200,000
Total costs incurred
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₱1,000,000
Phobia Company expects to recover those costs through future fees for the service contract while the external legal
fees and travel costs would have been incurred regardless of whether the contract was obtained.
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Phobia Company also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall
profitability of the entity and individual performance evaluations. During the year, a total of ₱800,000 performance
bonus was given to sales supervisors.
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
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services to the customer.

The initial costs incurred to set up the technology platform are as follows:
Design services ₱ 800,000
Hardware 2,400,000
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Software 1,800,000
Migration and testing of data center 2,000,000
Total costs ₱7,000,000
The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services to the
customer.
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Which of the following statement is incorrect?

a. The amount of contract cost (cost to obtain and cost to fulfil) will be capitalized as an asset and amortized over 7
years.
b. The amount of costs to obtain the contract is ₱200,000.
c. The amount of cost to be accounted using PAS 16 is ₱2,400,000.
d. The amount of cost to fulfil the contract is ₱2,000,000.


REVENUE RECOGNITION
18. (PFRS) On 1 January 20x1, RBB Co. enters into a contract to transfer Products Bebe Ko and Bebe Mo to a customer
in exchange for ₱100,000. The contract requires Product Bebe Ko to be delivered first and states that payment for the
delivery of Product Bebe Ko is conditional on the delivery of Product Bebe Mo. In other words, the consideration of
₱100,000 is due only after the entity has transferred both Products Bebe Ko and Bebe Mo to the customer.
The entity identifies the promises to transfer Products Bebe Ko and Bebe Mo as performance obligations and
allocates ₱40,000 to the performance obligation to transfer Product Bebe Ko and ₱60,000 to the performance
obligation to transfer Product Bebe Mo on the basis of their relative stand-alone selling prices. The entity recognizes
revenue for each respective performance obligation when control of the product transfers to the customer.
Which of the following statement is correct?
a. The journal entry to record the delivery of Product Bebe Ko will include a debit to receivable of ₱40,000.
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b. The journal entry to record the delivery of Product Bebe Ko will include a credit to revenue of ₱100,000.
c. The journal entry to record the delivery of Product Bebe Mo will include a credit to revenue of ₱40,000.
d. The journal entry to record the delivery of Product Bebe Mo will include a credit to contract asset of ₱40,000.
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Use the following data to answer the next three questions:
19. (MBN) On 1 January 20x1, Phobos Company enters into a contract with a customer to build a customized asset. The
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promise to transfer the asset is a performance obligation that is satisfied over time because the customer controls the
asset during construction. The promised consideration is ₱6,235,000, but that amount will be increased by ₱10,000
for each day before 30 September 20x3 that the asset is complete.
The entity commonly includes performance bonus in its contracts and based on prior experience, estimates the
following completion outcomes:
Completed by:
29 September 20x3
28 September 20x3
27 September 20x3
Probability
65%
25%
5%
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26 September 20x3 5%
In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based on metrics that
are defined in the contract. If the asset receives a specified rating, the entity will be entitled to an incentive bonus of
₱150,000. Phobos Company determines that based on prior experience, the asset constructed will achieve the
specified rating.
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Data for the three-year construction period follows:

20x1 20x2 20x3
Costs incurred each year ₱1,782,000 ₱2,148,000 ₱1,570,000
Estimated costs to complete 3,618,000 1,570,000 -
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Contract billings each year 1,200,000 1,900,000 ?

Cash collections each year 1,000,000 1,800,000 3,615,000
Operating expenses 100,000 90,000 70,000
Included in the cost incurred in 20x2 is materials (not customized) costing ₱80,000 but was only used during the third
quarter of 20x3.
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Upon completion on 27 September 20x3, the third party inspected the asset and determined that the rating was
achieved for the incentive bonus.
The amount of variable consideration to be included as part of the transaction price is?
a. ₱165,000
b. ₱150,000
c. ₱15,000


REVENUE RECOGNITION
20. (MBN) Applying PFRS 15, which of the following statements is incorrect using the percentage of completion?
a. The amount of revenue to be reported in 20x1 is ₱2,112,000.
b. The amount of revenue to be reported in 20x3 is ₱1,935,000.
c. The amount of gross profit to be reported in 20x2 is ₱210,000.
d. The company will report a net profit of ₱230,000 in 20x1.
21. (MBN) Applying PFRS 15, which of the following statements is correct using cost recovery?
a. The company will not record revenue in 20x1 and 20x2.
b. The company will record revenue in 20x1 amounting to ₱2,068,000.
c. The company will report a gross profit of ₱330,000 in 20x1.
d. The company will report zero-profit in 20x2.
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22. A contract modification (otherwise known as change order, a variation or an amendment) is a change in the scope or
price (or both) of a contract that is approved by the parties to the contract. Which of the following statements does not
properly describe the accounting of contract modification?
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a. A contract modification is accounted for as for a separate contract if the scope of the contract increases because
of the addition of promised goods or services that are distinct and the price of the contract increases by an
amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or
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services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.
b. An entity shall account for the contract modification as if it were a termination of the existing contract and the
creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred
on or before the date of the contract modification.
c. An entity shall account for the contract modification as if it were a part of the existing contract if the remaining
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goods or services are not distinct and, therefore, form part of a single performance obligation that is partially
satisfied at the date of the contract modification.
d. A contract modification accounted as a separate contract should be accounted as a retroactive adjustment of the
existing contract
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23. (MBN) Arithmophobia Company promises to sell 120 products to a customer for ₱12,000 (₱100 per product). The
products are transferred to the customer over a six-month period. The entity transfers control of each product at a
point in time. After Arithmophobia Company has transferred control of 60 products to the customer, the contract is
modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The
additional 30 products were not included in the initial contract.
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During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of
₱80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained
minor defects that were unique to those delivered products. The entity promises a partial credit of ₱15 per product to
compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the
credit of ₱900 (₱15 credit × 60 products) into the price that the entity charges for the additional 30 products.
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Consequently, the contract modification specifies that the price of the additional 30 products is ₱1,500 or ₱50 per
product. That price comprises the agreed-upon price for the additional 30 products of ₱2,400, or ₱80 per product, less
the credit of ₱900. After contract modification, additional 10 products were transferred to the customer.
Which of the following statements is incorrect?
a. At the time of modification, the entity recognizes the ₱900 as a reduction of the transaction price and, therefore,
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as a reduction of revenue for the initial 60 products transferred.

b. In accounting for the sale of the additional 30 products, the negotiated price of ₱80 per product does not reflect
the stand-alone selling price of the additional products.
c. The contract modification is accounted for as a separate contract because the remaining products to be delivered
are distinct from those already transferred. Hence, the entity accounts for the modification as a termination of the
original contract and the creation of a new contract.
d. The amount recognized as revenue for each of the remaining products is a blended price of ₱93.33 {[(₱100 × 60
products not yet transferred under the original contract) + (₱80 × 30 products to be transferred under the contract
modification)] ÷ 90 remaining products}.


REVENUE RECOGNITION
24. (MBN) Aphenphosmphobia Company, a construction company, enters into a contract to construct a commercial
building for a customer on customer-owned land for promised consideration of ₱1,000,000 and a bonus of ₱200,000 if
the building is completed within 24 months. Aphenphosmphobia accounts for the promised bundle of goods and
services as a single performance obligation satisfied over time because the customer controls the building during
construction. At the inception of the contract, the entity expects the following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) ₱ 300,000
At contract inception, Aphenphosmphobia excludes the ₱200,000 bonus from the transaction price because it cannot
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conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not
occur. Completion of the building is highly susceptible to factors outside the entity’s influence, including weather and
regulatory approvals. In addition, the entity has limited experience with similar types of contracts.
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By the end of the first year, Aphenphosmphobia reported cost to date ₱420,000 and estimates total expected costs at
₱700,000. Aphenphosmphobia reassesses the variable consideration and concludes that the amount is still
constrained.
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In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor
plan of the building. As a result, the fixed consideration and expected costs increase by ₱150,000 and ₱120,000,
respectively. Total potential consideration after the modification is ₱1,350,000 (₱1,150,000 fixed consideration +
₱200,000 completion bonus). In addition, the allowable time for achieving the ₱200,000 bonus is extended by 6
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months to 30 months from the original contract inception date. At the date of the modification, on the basis of its
experience and the remaining work to be performed, which is primarily inside the building and not subject to weather
conditions, the entity concludes that it is highly probable that including the bonus in the transaction price will not result
in a significant reversal in the amount of cumulative revenue recognized and includes the ₱200,000 in the transaction
price. In assessing the contract modification, the entity concludes that the remaining goods and services to be
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provided using the modified contract are not distinct from the goods and services transferred on or before the date of
contract modification; that is, the contract remains a single performance obligation.
By the end of the second year, Aphenphosmphobia reported cost to date ₱656,000 and estimates total expected
costs at ₱820,000. Aphenphosmphobia reassesses the variable consideration and concludes that it is highly probable
that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative
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revenue recognized.
a. The amount of revenue recognized in the first year is ₱600,000
b. The cumulative catch-up adjustment to revenue at the date of modification is ₱91,463.
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c. The amount of revenue recognized in the second year is ₱480,000

d. The amount of revenue recognized in the second year is ₱691,463.
25. (MBN) Pentheraphobia Company enters into 30,000 contracts with customers. Each contract includes the sale of one
product for ₱100. Cash is received when control of a product transfers. The entity’s customary business practice is to
allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each
product is ₱60.
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Because the contract allows a customer to return the products, the consideration received from the customer is
variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the
expected value method because it is the method that the entity expects to better predict the amount of consideration
to which it will be entitled. Using the expected value method, Pentheraphobia Company estimates that 97% of the
products will not be returned.
Pentheraphobia Company determines that although the returns are outside the entity’s influence, it has significant
experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within
a short time frame (i.e. the 30-day return period). Thus, Pentheraphobia Company concludes that it is highly probable


REVENUE RECOGNITION
that a significant reversal in the cumulative amount of revenue recognized will not occur as the uncertainty is resolved
(i.e. over the return period).
Pentheraphobia Company estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit.
If the estimated 3% returned the goods, which of the following is an incorrect journal entry if the company uses
perpetual inventory system?
a. Debit to Merchandise Inventory - ₱54,000
b. Credit to Asset for Right to Recover - ₱54,000
c. Debit to Refund Liability - ₱90,000
d. Credit to Sales - ₱90,000
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26. (MBN) If the estimated 3% did not return the goods, which of the following is an incorrect journal entry if the company
uses perpetual inventory system?
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a. Debit to Cost of Goods Sold - ₱54,000
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27. (MBN) If the return period has lapsed, which of the following is an incorrect journal entry if the company uses
perpetual inventory system?
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28. (MBN) If the customer returned 5% of the goods, which of the following is an incorrect journal entry if the company
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d. Debit to Sales - ₱60,000
29. (MBN) If the customer returned 1% of the goods, which of the following is an incorrect journal entry if the company
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d. Debit to Sales - ₱60,000
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30. (MBN) On 31 December 20x1, Atychiphobia Company sells equipment to Basiphobia Inc. for ₱2,000,000.
Atychiphobia includes a 2-year warranty for the sale of all of its equipment. The customer receives and pays for the
equipment on 31 December 20x1. Which of the following statements is incorrect?
a. If the customer has the option to purchase the warranty separately and the stand-alone selling price of the
equipment and warranty is ₱2,016,000 and ₱84,000, respectively; the company shall allocate the transaction
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price to the two performance obligations.

b. If the warranty is an assurance-type warranty and the customer does not have the option to purchase it
separately, the company will record sales of ₱2,000,000 and warranty expense if it estimates based on prior
experience that 3% of sales will avail the warranty.
c. If the warranty is a service-type warranty and the customer does not have the option to purchase it separately, the
service type warranty should be accounted using PAS 37.
d. If in addition to the assurance-type warranty, Atychiphobia sold an extended warranty (service type warranty) for
an additional 2 years (20x4–20x5) for ₱50,000 (20% less than if purchased by other customer), it should
recognize revenue from warranty of ₱25,000in 20x4.


REVENUE RECOGNITION
31. (MBN) Plantdemic operates a website that sells plants produced by a selection of plant nursery. On 1 January 20x1,
Plantdemic enters into a contract with Plantliner to sell Plantliner’s plants on-line. Plantdemic’s website facilitates
payments between Plantliner and the customer. The sales price is established by Plantliner and Plantdemic earns a
commission equal to 5% of the sales price. Plantliner ships the plants directly to the customer and insures for
loss/damage during shipment. Legal title is transferred from Plantliner to Plantdemic when the plants are leaving
Plantliners plant nursery. The customer returns the plants to Plantdemic if they are dissatisfied. Plantdemic has the
right to return plants to Plantliner without penalty if they are returned by the customer.
During January, ₱50,000 worth of plants was sold and the collection (net of commission) was remitted by Plantdemic
to Plantliner.
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a. Plantdemic is the agent and Plantliner is the principal.
b. Plantdemic is the principal and Plantliner is the agent.
c. Plantliner will record a revenue amounting to ₱50,000.
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d. Plantdemic will record a revenue amounting to ₱2,500.
32. A license
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a. Is a contract in which an entity sells an asset and also promises or has the option (either in the same contract or
in another contract) to repurchase the asset.
b. Establishes a customer's rights to the intellectual property of an entity
c. Is a contract under which an entity bills a customer for a product but the entity retains physical possession of the
product until it is transferred to the customer at a point in time in the future.
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d. A grant from one party to another party, the right to sell the granting party’s goods or services.
33. (PFRS) Examples of licenses that are not distinct from other goods or services promised in the contract includes:
I. A license that forms a component of a tangible good and that is integral to the functionality of the good;
II. A license that the customer can benefit from only in conjunction with a related service (such as an online service
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provided by the entity that enables, by granting a license, the customer to access content);
a. I only b. II only c. Both I and II d. Neither I nor II
34. (PFRS) A promise to grant a distinct license is accounted as right to access if
I. A customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the
point in time at which the license is granted if the intellectual property to which the customer has rights will not
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change
II. A customer cannot direct the use of, and obtain substantially all of the remaining benefits from, the license at the
point in time at which the license is granted if the intellectual property to which the customer has rights changes
throughout the license period
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a. I only b. II only c. Both I and II d. Neither I nor II

35. (PFRS) The customer has the right to access the entity’s intellectual property if which of the following criteria will be
met
I. The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly
affect the intellectual property to which the customer has rights;
II. The rights granted by the license directly expose the customer to any positive or negative effects of the entity's
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activities;
III. Those activities do not result in the transfer of a good or a service to the customer as those activities occur
a. I only
b. II and III only
c. I, II and III
d. I and III only


REVENUE RECOGNITION
36. (MBN) On 1 January 20x1, The Taste of New Normal Inc. granted a franchise right to Covid-19 Inc., a franchisee, for
the operation of coffee shop using The Taste of New Normal’s trade name for a period of 5 years starting 1 January
20x1. The franchisee is required to pay nonrefundable initial franchise fee of ₱600,000 and continuing franchise fee of
1% of franchisee’s annual sales (payable every 31 January of the following year).
The following are considered to be a separate performance obligation and their corresponding stand-alone selling
price is as follows:
Rights to the trade name, market area, technical and proprietary know-how. ₱500,000
Services – training, etc. (costing, ₱50,000) 100,000
Machinery and equipment’s, etc. (costing, ₱100,000) _150,000
₱750,000
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Total
Training is completed on 1 February 20x1, the equipment is installed on 2 February 20x1, and Covid-19 Inc holds a
grand opening on 5 February 20x1.
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The franchisee generated sales of ₱1,000,000 for 20x1.
Applying PFRS 15, which of the following statements is incorrect?
a. The entity will report revenue from license amounting to ₱500,000 when the performance obligations are satisfied.
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b. The amount of revenue that will be recognized for the services – training, etc. is ₱80,000.
c. The total revenue that will be recorded in 20x1 is ₱290,000.
d. The revenue from license that will be recorded in 20x2 is ₱80,000.
37. (MBN) Regardless of whether the promise to grant a license is not distinct or distinct and regardless of whether the
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distinct license provides the customer a right to access or a right to use the entity’s intellectual property, an entity shall
recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual
property only when (or as)
a. The subsequent sale or usage occurs;
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b. The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated
has been satisfied (or partially satisfied);
c. The later of the subsequent sale or usage occurs and the performance obligation to which some or all of the
sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied)
d. The earlier of the subsequent sale or usage occurs and the performance obligation to which some or all of the
sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied)
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38. (MBN) Which of the following repurchase agreements is accounted as financing agreement?
a. Caligynephobia Inc., an equipment dealer, sells equipment on 1 January 20x1 to Catoptrophobia Company for
₱4,000,000. It agrees to repurchase this equipment on 31 December 20x2 for a price of ₱4,840,000. The imputed
interest rate on the agreement is 10%.
EO
b. Caligynephobia Inc., an equipment dealer, sells equipment on 1 January 20x1 to Catoptrophobia Company for
₱4,000,000. The contract includes a put option that obliges Caligynephobia Inc. to repurchase the excavator at
Catoptrophobia request for ₱3,305,785 on 31 December 20x2.
c. Caligynephobia Inc., an equipment dealer, sells equipment on 1 January 20x1 to Catoptrophobia Company for
₱4,000,000. The contract includes a put option that obliges Caligynephobia Inc. to repurchase the excavator at
Catoptrophobia request for ₱4,840,000 on 31 December 20x2.
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d. Two of the choices

39. (MBN) On May 1, the Darrel Products Company ships eight (8) of its appliances to the Rhad Company on
consignment. Each unit is to be sold at ₱75,000 payable ₱15,000 in the month of purchase and ₱3,000 per month
thereafter. The consignee is to be entitled to 20% of all amounts collected on consignment sales. Rhad Company
sells 3 appliances in May and 1 in June. Rhad also returned 1 appliance in June. Regular monthly collections are
made by the consignee, and the appropriate cash remittances are made to the consignor at the end of each month.
The cost of the appliances shipped by the consignor was ₱46,500 per unit. The consignor paid freight and cartage to
the consignee totaling ₱18,000. Expenses paid by the consignee to be charged to the consignor is ₱8,000.


REVENUE RECOGNITION
a. The total amount remitted to the consignor ₱104,800

b. The profit on consignment is ₱34,750
c. The cost of the inventory on consignment is ₱146,250
d. The total amount remitted to the consignor ₱112,800
40. (MBN) Dementophobia, a video game company, enters into a contract to supply 1,000 video game consoles at
₱10,000 per console to a retailer, Ignorophobia, branded with Ignorophobia’s logo, to be delivered by the end of the
year. The contract contains specific instructions from the retailer about where the consoles should be delivered. The
retailer expects to have sufficient shelf space at the time of delivery.
As of year-end, Dementophobia has shipped 600 units and the remaining 400 inventory of Ignorophobia branded
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consoles have been produced, packed and are ready for transport. However, the retailer asks for the shipment to be
held, due to lack of shelf space.
How much revenue will be recognized during the year by Dementophobia?
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a. ₱10,000,000
b. ₱6,000,000
c. ₱10,000
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Appendix (SME and Old US GAAP)
1. (PFRS) Applying PFRS for SME, what is the most significant criterion that must be satisfied for revenue to be
recognized from the sale of goods?
a. The probability that economic benefits associated with the transaction will flow to the seller
b. The amount of revenue can be measured reliably
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c. The transfer of significant risks and rewards of ownership from the seller to the buyer
d. The seller does not retain continuing managerial involvement to a degree usually associated with ownership or
effective control over the goods sold
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Use the following to answer the next five questions:
In 20x1, Gets Mo Me Construction Company commenced a 3-year, ₱6,000,000 construction project. Gets Mo Me
uses PFRS for SME and the percentage of completion, cost-to-cost basis in recognizing revenue. The financial
statement presentation relating to this project at December 31, 20x1 is as follows (RCPA Modified):
Statement of Financial Position
Accounts receivable – contract billings ₱ 129,000
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Construction in progress ₱ 390,000

Less: Contract billings 369,000
Costs of uncompleted contract in excess of billings 21,000
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Statement of Comprehensive Income

Gross profit (before tax) 109,200
2. (Adapted) How much is the 20x1 collection on the construction contract?
a. ₱ 240,000 b. ₱ 261,000 c. ₱ 320,000 c. ₱ 348,000
3. (Adapted) The initial estimated gross profit before tax on the contract is
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a. ₱ 1,092,000 b. ₱ 1,320,000 c. ₱ 1,680,000 d. ₱ 1,775,610

4. (Adapted) The 20x1 Percentage of completion is
a. 6.15% b. 6.50% c. 10% d. 12%
5. (Adapted) The gross profit rate on the contract is
a. 20% b. 25% c. 28% d. 30%
6. (Adapted) The 20x1 recognized revenue is
a. ₱ 238,200 b. ₱ 390,000 b. ₱ 369,000 d. ₱ 499,200


REVENUE RECOGNITION
7. (Adapted) Town’s Pizza grants a franchise to Kalbo Nga Road for an initial fee of ₱1,000,000. The agreement
provides that Town has the option within one year to acquire franchisee business, and it seems certain that Town will
exercise this option. On Town’s books, how should the initial fee be recorded applying PFRS for SME?
a. Realized revenue
b. Extraordinary revenue
c. Deferred revenue to be amortized.
d. Deferred and treated as reduction in Towns’ investment.
Use the following to answer the next three questions:
On November 31, 20x1, JohnnyInc. signed an agreement authorizing Starr Box Company to operate as a franchisee for
an initial franchise fee of ₱500,000. Of this amount, ₱200,000 was received upon signing of the agreement and the
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balance is due in three annual payments of ₱100,000 each beginning December 31, 20x1. The agreement provides that
the down payment (representing a fair measure of the services already performed by Okay Lang, Inc.) is not refundable
and substantial services are required of Okay Lang. Starr Box Company’s credit rating is such that collection of the note is
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reasonably assured. The present value at December 31, 20x1 of the three annual payments discounted at 14% (the
implicit rate for a loan of this type) is ₱232,200.
8. As of the date of signing the agreement, Starr Fox shall report franchise revenue of
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a. ₱232,200 b. ₱432,200 c. Nil d. ₱200,000
9. On December 31, 20x1, Starr Box Company should record unearned franchise fees of
a. ₱232,200 b. ₱432,200 c. ₱300,000 d. ₱200,000
10. On December 31, 20x1, Starr Box Company should record earned franchise fees of
a. ₱232,200 b. ₱432,200
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c. ₱300,000 d. ₱200,000
11. On April 1, 20x1, Johny Babao Enterprises entered into a franchise agreement with Mamatay Ka Sa Sarap
Manufacturing Company to sell their products. The agreement provides for an initial franchise fee of ₱4,375,000,
payable as follows: Upon signing the contract, ₱1,225,000 and balance in five equal payments every December 31,
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starting December 31, 20x1. Johny Babao signs a 10% interest bearing note for the balance. The agreement further
provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales. On
September 30, the franchisor completed the initial services required in the contract at a cost of ₱2,756,250 and
incurred indirect costs of ₱180,000. The business started on October 2, 20x1. The gross sales reported by Johny
Babao are October, ₱370,000; November, ₱423,500 and December, ₱516,500. The first installment was made on
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due date.
Assuming collection is reasonably assured, the reported net income will be:
a. ₱808,100 b. ₱886,850 c. ₱1,618,750 d. ₱1,740,500
12. Assuming collection is not reasonably assured and applying installment sales method, the reported net income will be:
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a. ₱808,100 b. ₱886,850 c. ₱988,100 d. ₱1,740,500

Accrual Installment
Realized gross profit *₱1,618,750 **₱ 686,350
Continuing Franchise Fee: (₱370,000 + ₱423,500 + ₱516,000) x 5% 65,500 65,500
Interest Income (₱3,150,000 x 10%) x 9/12 236,250 236,250
Expenses (180,000) (180,000)
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Net Income ₱1,740,500 ₱ 808,100

*₱4,375,000 – ₱2,756,250 **(₱1,225,000 + ₱630,000) x 37%
GPR: (₱4,375,000 – ₱2,756,250) / ₱4,375,000 = 37%
13. (Adapted) The installment method of recognizing profit for accounting purposes is acceptable if
a. Collections in the year of sale do not exceed 30% of the total sales price
b. The company is a micro-entity and opted to use income tax basis as its framework
c. Collection of sales price is not reasonably assured
d. The method is consistently used for all sales of similar merchandise


REVENUE RECOGNITION
14. The chief accountant of Julius Depp Appliances Inc. provided the following balances from its adjusted trial balance for
the year ended December 31, 20x3:
Account 01/01/20x3 12/31/20x3
Instalment receivable - 20x1 contract ₱2,000,000 ₱ 500,000
Instalment receivable - 20x2 contract 3,000,000 1,000,000
Instalment receivable – 20x3 contract 5,000,000
Deferred gross profit - 20x1 contract 800,000
Deferred gross profit - 20x2 contract 1,800,000
New inventory 200,000 300,000
Net purchases (excluding freight-in) 5,000,000
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Freight in 100,000
Cash sales for year 20x3 2,000,000
Instalment sales for year 20x3 8,000,000
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The following additional notes are provided for the year ended December 31, 20x3:
• The gross profit rate for 20x3 instalment sales is the average of previous years’ gross profit rate for instalment
sales.
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• On July 1, 20x3, Julius Depp wrote off 20x1 instalment receivable with account balance of ₱300,000 because of
the bankruptcy of the customer. Julius Depp records its impairment loss of instalment receivable using direct write
off method.
• On October 1, 20x3, a 20x2 contract customer defaulted on the instalment due which resulted to repossession of
the inventory with the fair value of ₱100,000. The defaulted account has a balance of ₱600,000.
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• On November 1, 20x3, the repossessed inventory was sold at a cash price of ₱150,000 after reconditioning it at a
cost of ₱20,000. The sale of repossessed inventory is not yet reflected on the cash sales stated above.
• The total operating expenses, exclusive of impairment loss and loss on repossession, of Julius Depp for the year
ended December 31, 20x3 amount to ₱400,000.
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What is the net income to be reported by Julius Depp Inc. for the year ended December 31, 20x3?
a. ₱2,840,000 b. ₱3,130,000 c. ₱3,520,000 d. ₱2,980,000
15. What is the total adjusted deferred gross profit as of December 31, 20x3?
a. ₱3,200,000 b. ₱3,300,000 c. ₱3,100,000 d. ₱3,400,000
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EO
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AFAR.03 Revenue Recognition

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AFAR.03 Revenue Recognition

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Page 1 of 15 | AFAR 03

4.1.2.11.3 Determination of Net Income

PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Five-Step Model Framework

3. Determine the transaction price

Other Revenue Recognition Issues

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Based on the above data, which of the following statements is incorrect?

discount allocated to Product C is ₱18,000.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

The amount of breakage revenue to be recorded on the redemption of gift card is

services to the customer.

Which of the following statement is incorrect?

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Data for the three-year construction period follows:

Contract billings each year 1,200,000 1,900,000 ?

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

as a reduction of revenue for the initial 60 products transferred.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

c. The amount of revenue recognized in the second year is ₱480,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

uses perpetual inventory system?

price to the two performance obligations.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

a. I only b. II only c. Both I and II d. Neither I nor II

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

d. Two of the choices

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

a. The total amount remitted to the consignor ₱104,800

Construction in progress ₱ 390,000

Statement of Comprehensive Income

a. ₱ 1,092,000 b. ₱ 1,320,000 c. ₱ 1,680,000 d. ₱ 1,775,610

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

a. ₱808,100 b. ₱886,850 c. ₱988,100 d. ₱1,740,500

Net Income ₱1,740,500 ₱ 808,100

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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