ICARE Accountancy Review Innovative + Competent + Responsive PERS 15 — Revenue from Contracts with Customers ‘© Core principle: revenue is recognized upon transfer of conteol to customer in an amount that reflects consideration to which an entity expeets to be entitled * S.step model 1. Identify the contract(s) with customers Identify the performance obligation(s) in the contract Determine the transaction price Allocate the transaction price to the performance obligation(s) in the contract Recognize revenue when (or as) the entity satisfies a performance obligation 2, 3 4. Theory Questions 1. Which of the following is not a criterion of a contract under PFRS 15? A. Icis virtually certain thac the entity will collect the consideration B. The contract has commercial substance, CC. ‘The parties to the contract have approved the contract D. The entity can identify each party’s rights regarding the goods or services to be transferred BE, The entity can identify the payment tetms for the goods or services to be transferred 2. Which of the following must be met in order for a promised good or service to be considered as a distinct performance obligation? A. The customer can benefit ftom the good or service either on its own or together with other resources that are readily available to the customer B. The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the conttact C. The ptomised good or service is separately stated in the contract. D. Both A and B must be met. 3. Which of the following is nota factor that indicate that two or more performance obligations are not separately identifiable? A. the entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted B. one or mote of the goods ot services significantly modifies or customizes, ot are significantly modified or customized by, one or more of the other goods or services promised in the contract. C. the goods or services are highly interdependent or highly interrelated. D. All of the following ate factors to be considered 4, How will performance bonuses, incentives and penalties be accounted for under PFRS 15? ‘A. Such items will be included in the transaction price once the requirements are met or underlying conditions have occurred B. Such items will be included in the transaction price only to the extent that itis highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur . Such items will be included in the transaction price only to the extent that itis likely that a significant reversal in the amount of cumulative revenue recognized will not occur D. Such items are not included in the scope of PFRS 15 5. If the contract includes a significant financing component, which of the following statements are true? Page RFERRER/RLACO/ATANG/PDEJESUSICARE Accountancy Review Innovative + Competent + Responsive A. ‘The entity shall always adjust the promised consideration for the effects of the time value of money, regardless of the payment term B. The entity shall not recognize the financing component and disregard the effects of the time value of money, regardless of the payment term C. ‘The entity need not adjust the promised amount for the money if it is expected at date of transfer, at date of satisfaction of performance obligation, the customer will pay for the consideration within one year D. None of the above -cts of the time value of 6. How ate non-cash considerations measured under PFRS 15? A. at agreed value B. at net realizable value C. at fair value D. at trade-in value Which is not an acceptable method for allocating transaction prices to performance obligations in case the stand-alone price is not directly observable? A. Adjusted market assessment method B. Expected cost plus a margin approach C. Residual approach D. Constant gross margin approach 8, Which is not a scenario wherein revenue is recognized over time? A. The customer simultaneously receives and consumes the benefits by the entity’s performance B. The entity’s performance creates or enhances an asset that will be transferred to the customer at a future date C. 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 D. Allof the above are scenarios wherein revenue is recognized over time 9, Which of the following is not an indicator of the transfer of control to the customer? A. The customer has legal ttle to the asset B. The entity has transferred physical possession of the asset to the customer C. ‘The entity retains significant risks and rewards of ownership of the asset D. ‘The customer has accepted the asset 10. Which of the following costs are generally expensed as incurred? A. Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations or to satisfied performance obligations B. Costs of wasted materials, labor or other resources to fulfill the contract that were clearly reflected in the price of the contract C. General and administrative costs that are explicitly chargeable to the customer under the contract D. All of the above are generally expensed as incurred Problem 1: ABC Company enters into a construction contract to build a building on the customer's land for a total contract price of P50,000,000. Included in the contract are the following, additional items that may affect the contract price: '* Bonus of P500,000 if the building is completed on or before September 8, 2022 ‘© Penalty of P20,000 per week if the building is not complete by September 17, 2022 2IPage RFERRER/RLACO/ATANG/PDEJESUSICARE Accountancy Review Innovative + Competent + Responsive ABC Company determines the following possible scenarios using reasonable and supportable information available: Scenario Details Probability #1 ABC Company finishes the project on or before September 8, 2022 40% #2 ABC Company finishes the project after September 8, 2022 but before 20% September 18, 2022 #3 ABC Company finishes the project 1 week after September 17, 2022 25% #4 ABC Company finishes the project 2 weeks after September 17, 2022 10% #5 ABC Company ishes the project 3 weeks after September 17, 2022 3% Required: Determine the transaction price of the contract under PERS 15. Problem 2: ABC Company agreed to build an office building for a contfaet price of P100,000,000 on January 1, 2021. Expected costs to complete the contract amounted to P80,000,000. Both parties have agreed that the customer will make annual payments to ABC, provided that it will not exceed the costs incurred by ABC during the year. Pertinent information regarding the project is as follows: 2021 2022 2023 Cost incurred during the year P35,000,000 20,000,000 30,000,000 Estimated costs to complete 45,000,000 25,000,000 - Progress billings during the year 16,000,000 28,000,000 56,000,000 Payments received during the year 14,000,000 25,000,000 61,000,000 ABC Company determines that the performance obligation is satisfied over time and elected to use the input method in measuring progress. Required: 1. How much is the realized gross profit for 2021? 2, How much is the ravinable balance as of December 31, 2021 applying View 7 of PIC Q&A. 2020-032 3. How much is the contract asset (liability) balance as of December 31, 2021 applying View 1 of PIC Q&eA 2020-032 4, How much is the realized gross profit For 2022? 5. How much is the realized gross profit for 2023? Problem 3: During the first year of one of the entity’s construction projects, the entity incurred the following costs: Site labor costs 10,500,000 Cost of materials used in construction 8,000,000 Cost of materials not yet used in construction 1,000,000 Depreciation of construction equipment 500,000 Depreciation of idle equipment not used in any projects 50,000 Cost of design and technical assistance directly related to the project 300,000 Insurance costs (75% related to other projects; 25% related to this project) 400,000 Research and development costs for which reimbursement is not specified in the 60,000 contract General and administrative costs for which reimbursement is specified in the 90,000 contract Construction overhead 130,000 Site supervision cos 200,000 3IPage RFERRER/RLACO/ATANG/PDEJESUSS) ICARE Accountancy Review sone Innovative + Competent + Responsive Zaere eT Advance payments to subcontractors (work not yer started) 1,500,000 Selling costs 80,000 Required 1. How much is the contract costs incurred during the year assuming the cost-to-cost method is used? 2, How much is the contract costs incurred during the year assuming the cost-to-cost method is used and the materials not yet used in construction is customized or specific to the design, measurements and structure of the projects? Problem 4: On January 1, 2021, ABC Company entered into a construction contract with a customer which has the following provisions: © Contract price: P50,000,000 ‘* Mobilization fee of 10% is to be paid upfront and to be charged against the final billing '* Progeess billings are to be paid within 2 weeks upon acceptance ‘* Payments of progress billings ate subject to 10% retention to be reverted to ABC upon completion and acceptance of the project On January 1, 2022, ABC and the customer agreed to an increase of P5,000,000 in the contract price due to change in the design of the project. Cost data related to the project are as follows: 2021 2022 Costs incurred to date 19,000,000 P45,045,000 Estimated costs to complete the project 28,500,000 5,005,000 Progress billings made during the two-year period are as follows: © 20% on June 6, 2021. The billing was accepted by the customer on June 10, 2021. 10% on October 12, 2021. The billing was accepted by the customer on October 15, 2021 7% on December 26, 2021 and accepted by the customer on December 30, 2021 30% on July 12, 2022 and accepted by the customer on July 19, 2022. 18% on December 23, 2022 and accepted by the customer on December 29, 2022. ABC uses the cost-to-cost method in measuring progress toward satisfaction of the performance obligation. Required: 1. How much is the total collections for 2021? 2. How much is the realized gross profit for 2021? 3. How much is the realized gross profit for 2022 4, How much is the excess of construction in progress over progress billings as of December 31, 2027 Problem 5: ABC Company has entered into a fixed price construction contract for P150 million to construct an innovative building with a design that has never been constructed before, using materials that have never been used in the construction of a building, As such, ABC has difficulty in estimating the outcome of the contract with sufficient reliability. ABC Company begin construction of the building in 2021 and expects that the construction will take at least five years. In 2021, ABC incurred contract costs of P5 million on the project. aIPage RFERRER/RLACO/ATANG/PDEJESUSS) ICARE Accountancy Review sone Innovative * Competent + Responsive Taare 0 Required: 1. How much is the revenue from the construction contract to be recognized in 2021? Problem 6: ABC Company accepted a long-term construction project on January 1, 2020 to build a building at a fixed contract price of P100,000,000. The outcome of the project can be estimated reliably. Because of supply chain problems brought about by the pandemic, the estimated costs of construction significantly increased. ‘The following data are provided: 12/31/2020 12/31/2021 12/31/2022 Cumulative costs incurred as of the end of the year P_ 40,000,000 P_ 50,000,000 70,000,000 Estimated total costs at completion 130,000,000 110,000,000 90,000,000 Required: 1. How much is the realized gross profit (loss) for the year ended December 31, 2022? Problem 7: On January 1, 2021, ABC Company accepted a long-term construction contract to construct a building with an initial contract price of P100,000,000. The outcome of the construction project can be estimated reliably. During 2023, an increase in the contraet price due to change in project design was agreed upon. Cost data are provided below: 12/31/2021 12/31/2022 12/31/2023 Cumulative costs incurred as of the end of the year P10,000,000 2 P108,000,000 Realized gross profit (loss) for the year 2 P350,000 (P1,600,000) Percentage completion as of the end of the year 1 60% 100% Required: 1. How much is the revised contract price as a result of the change in project design? 2. How much is the contract costs charged to profit or loss in 2023? “There are ho secrets to sucess. It is the result of preparation, hard work, and earning from failure.” Colin Powell SIPage RFERRER/RLACO/ATANG/PDEJESUS