CHAPTER 3:

REVENUES FROM
CONTRACTS
WITH
CUSTOMERS
PROBLEM 2 PROBLEM 3 PROBLEM 4
01 - 02 BERONIO 01 - 02 RAUTO BACONGUIS
03 - 04 ARELLANO 03 - 04 BATICA OCLARIT
05- 06 TOSLOLADO 05 - 06 TONG
07 - 08 PIMENTEL 07 - 08 MARIANO
10 - 11 RODRIGUEZ 09 - 10 CORTEZO
PROBLEM
2:
#1
An entity, a real estate developer, enters into a contract with a customer for
the sale of a building for P1 million. 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. The customer pays a non-refundable deposit of P50,000
at inception of the contract and enters into a long-financing agreement with
the entity for the remaining 95 percent of the promised consideration. The
financing arrangement is provided on a non-recourse basis, which means that
if the customer defaults, the entity can repossess the building, but cannot
seek further compensation from the customer, even if the collateral does not
cover the full value of the amount owed. The entity’s cost of the building is
P600,000. The customer obtains control of the building at contract
inception.
Requirement: Does the contract qualify for revenue recognition on
contract inception? State the reason for your answer.
BERONIO, CHRYSLER JEAN
#1 Answer:
The contract is not qualified for revenue recognition on contract
inception. The customer's capacity and desire to pay the balance is in
doubt for the following reasons:
1. The customer intends to pay the remaining balance of the
consideration primarily from the income generated by the restaurant
business, but is at high risk of failure due to high levels of competition
and a lack of experience.
2. The customer has no alternative sources of income that may be used
to pay the obligation.
3. It is a non-recourse basis, which means that if the customer defaults,
the entity may repossess the building but cannot seek additional
compensation.
BERONIO, CHRYSLER JEAN
#1
Answer:
The entity will not recognize any revenue derived from the contract
and will treat the P50,000 non-refundable deposit, subsequent
collections, as a deposit liability. Revenue is only recognized when the
collectability of the consideration becomes probable or when any of
the following occur:
1. There is no remaining obligation to transfer the products or
services to the client; practically all of the consideration has been
received and is non-refundable; or
2. The contract has been terminated and the consideration is non-
refundable.
BERONIO, CHRYSLER JEAN
#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?

BERONIO, CHRYSLER JEAN

#2
Answer:
Yes, the entity's promise to provide maintenance services is a
performance obligation. It is an explicit promise. Because
providing maintenance services involves transferring goods or
services to a customer in the future and is part of the
transaction between the entity and the distributor. The entity
determines that the promise represents a performance
obligation regardless of whether the entity, the distributor, or a
third party provides the service.

BERONIO, CHRYSLER JEAN

#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 who 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?

ARELLANO, PRINCE ALEJANDRE

#3
Answer:

Yes, The maintenance service is a performance obligation because the

entity has a history of providing it for free, even though it’s not explicitly
stated in the contract. This creates an implicit promise to the customer.

ARELLANO, PRINCE ALEJANDRE

#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 polices and specific statement at the time of entering
into. then contract have not created an implicit promise to provide goods
or services to its customers. The entity transfers control of the product to
the distributor and, therefore, the contract is completed. However, before
the sale to the end customer, the 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?
ARELLANO, PRINCE ALEJANDRE
#4
Answer:
the entity does not have an obligation to provide maintenance services.
This is because:
1. The contract with the distributor does not explicitly promise
maintenance services.
2. The entity’s customary business practices and published policies do
not include providing maintenance services.
3. There are no specific statements made at the time of entering into the
contract that would create an implicit promise to provide maintenance
services.

ARELLANO, PRINCE ALEJANDRE

#4
Answer:
Therefore, in this case:
1. The maintenance service is not a performance obligation.
2. There is neither an explicit nor an implicit promise to provide
maintenance services.

ARELLANO, PRINCE ALEJANDRE

#5
An entity enters into a contract with a customer to sell
Products A, B, and C in exchange for ₱100. 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 ₱50. The stand-alone selling prices of Products B
and C are not directly observable. The entity evaluates the
market in which it sells Product B and estimates that a
customer in that market would be willing to pay ₱25 for Product
B. The entity’s cost for Product C is ₱50. The entity regularly
marks-up its goods at 50% above cost.

Requirement: Allocate the transaction price to the

performance obligations.
TOSLOLADO, CHARISSE AHNNE
#5 Solution:

Estimation Estimated As
Product Allocation
method prices allocated
N/A ( Stand-alone
A 50 (100 x 50/150) 33
selling price)

Adjusted market
B 25 (100 x 25/150) 17
assessment

Estimated cost plus 75 (100 x 75/150) 50

C
a margin (₱50 x 150%)
Total 150 100

TOSLOLADO, CHARISSE AHNNE

#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 percent margin. The 15 percent margin
approximates the profit margin that the entity earns from similar
contracts.

Requirement: Identify if the performance obligation is satisfied

over time or at a point in time. State how the entity recognizes
revenue.
TOSLOLADO, CHARISSE AHNNE
#6 Answer:

The performance obligation is satisfied over time as it has satisfied

the following condition:

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.

Hence, the entity recognizes revenue over time by measuring the

progress towards complete satisfaction of the performance
obligation.

TOSLOLADO, CHARISSE AHNNE

#7 In 20x1, an entity 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 7 years. The entity pays an employee a
P10,000 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. PIMENTEL, ANGELICA
#7
The initial costs incurred to set up the technology
platform are as follows:

Design services 40,000

Hardware 120,000
Software 90,000
Migration & testing of data center 100,000

PIMENTEL, ANGELICA
#7
EXPENSES:
Amortization of design services 5,714
Depreciation of hardware 24,000
Amortization of software 18,000
Amortization of migration & testing 14,286
Employee Salaries Expense 30,000
TOTAL EXPENSES 92,000

PIMENTEL, ANGELICA
#7
ASSETS:
Design services 34,286
Hardware 96,000
Software 72,000
Migration & testing 85,714
TOTAL ASSETS 288,000

PIMENTEL, ANGELICA
#8
On 1 January 20x8,an entity enters into a contract to
transfer Product A and B to a customer in exchange for
P1,000. The contract requires Product A to be
delivered first and states that payment for the delivery
of Product A is conditional on the delivery of Product
B. The stand-alone selling prices of Products A and B
are P480 and P720, respectively. Product A is
delivered on January 3, 20x8, while Product B is
delivered on March 31, 2x8. The customer pays on
April 8,20x8.
PIMENTEL, ANGELICA
 JOURNAL ENTRY
#8
January 1, 20X8 NO ENTRY

Contract Asset 400

January 3, 20X8
Sales 400

Accounts Receivable 1,000

March 31, 20X8 Sales 600
Contract Asset 400

Cash 1,000
April 8, 20X8
Accounts Receivable 1,000

PIMENTEL, ANGELICA
PFRS 15: SALE WITH THE RIGHT OF RETURN
PFRS 15: SALE WITH THE RIGHT OF RETURN

NO REVENUE
PFRS 15: SALE WITH THE RIGHT OF RETURN

NO REVENUE
- IS
RECOGNIZED
FOR THE
PRODUCTS
EXPECTED TO
BE RETURNED
PFRS 15: SALE WITH THE RIGHT OF RETURN

NO REVENUE REFUND LIABILITY

- IS
RECOGNIZED
FOR THE
PRODUCTS
EXPECTED TO
BE RETURNED
PFRS 15: SALE WITH THE RIGHT OF RETURN

NO REVENUE REFUND LIABILITY

- IS IS RECOGNIZED FOR THE
RECOGNIZED PORTION OF THE
FOR THE CONSIDERATION
PRODUCTS RECEIVED THAT IS
EXPECTED TO EXPECTED TO BE
BE RETURNED REFUNDED TO THE
CUSTOMER
 PFRS 15: SALE WITH THE RIGHT OF RETURN

ASSET FOR RIGHT TO RECOVER PRODUCT

TO BE RETURNED
(CORRESPONDING ADJUSTMENT FOR COST OF GOODS SOLD)
 PFRS 15: SALE WITH THE RIGHT OF RETURN

ASSET FOR RIGHT TO RECOVER PRODUCT

TO BE RETURNED
(CORRESPONDING ADJUSTMENT FOR COST OF GOODS SOLD)

PRESENTED SEPARATELY FROM THE REFUND

LIABILITY
 #10
JAN. 1, 2024

RODRIGUEZ, MARC
SPENCER
 #10
JAN. 1, 2024

CASH 10,000

RODRIGUEZ, MARC
SPENCER
JAN. 1, 2024
#10
REV. (10,000x.97)
CASH 10,000
REVENUE 9,700

RODRIGUEZ, MARC
SPENCER
JAN. 1, 2024
#10
REV. (10,000x.97)
CASH 10,000
REF. LIAB. (10,000*.03)
REVENUE 9,700
REFUND LIABILITY 300

RODRIGUEZ, MARC
SPENCER
JAN. 1, 2024
#10
REV. (10,000x.97)
CASH 10,000
REF. LIAB. (10,000*.03)
REVENUE 9,700
REFUND LIABILITY 300

JAN. 1, 2024
COGS : (97*60=5280)

COST OF GOODS SOLD 5,820

RODRIGUEZ, MARC
SPENCER
JAN. 1, 2024
#10
REV. (10,000x.97)
CASH 10,000
REF. LIAB. (10,000*.03)
REVENUE 9,700
REFUND LIABILITY 300

JAN. 1, 2024
COGS : (97*60=5280)
AFRTRPTBR: (60*3=180)
COST OF GOODS SOLD 5,820
AFRTRPTBR 180

RODRIGUEZ, MARC
SPENCER
JAN. 1, 2024
#10
REV. (10,000x.97)
CASH 10,000
REF. LIAB. (10,000*.03)
REVENUE 9,700
REFUND LIABILITY 300

JAN. 1, 2024
COGS : (97*60=5280)
COST OF GOODS SOLD 5,820 AFRTRPTBR: (60*3=180)
AFRTRPTBR 180
INVENTORY 6,000

RODRIGUEZ, MARC
SPENCER
WHAT IF SALE ON ACCOUNT?
JAN. 1, 2024
#10
REV. (10,000x.97)
ACCOUNTS RECEIVABLE 10,000
REF. LIAB. (10,000*.03)
REVENUE 9,700
REFUND LIABILITY 300

JAN. 1, 2024
COGS : (97*60=5280)
COST OF GOODS SOLD 5,820 AFRTRPTBR: (60*3=180)
AFRTRPTBR 180
INVENTORY 6,000

RODRIGUEZ, MARC
SPENCER
#11 AN ENTITY ENTERS INTO A CONTRACT WITH A
CUSTOMER TO SELL AN ASSET. CONTROL OF THE
ASSET WILL TRANSFER TO THE CUSTOMER IN TWO
YEARS. THE CONTRACT INCLUDES 2 ALTERNATIVE
PAYMENT OPTIONS: PAYMENT OF $5,000 IN 2 YEARS
WHEN THE CUSTOMER OBTAINS CONTROL OF THE
ASSET OR PAYMENT OF $4,000 WHEN THE
CONTRACT IS SIGNED. THE CUSTOMER ELECTS TO
PAY $4,000 WHEN THE CONTRACT IS SIGNED. THE
ENTITY CONCLUDES THAT THE CONTRACT CONTAINS
A SIGNIFICANT FINANCING COMPONENT BECAUSE OF
THE LENGTH OF TIME 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.
#11
THE INTEREST RATE IMPLICIT IN THE TRANSACTION IS
11.8 PERCENT, WHICH IS THE INTEREST RATE
NECESSARY TO MAKE THE 2 ALTERNATIVE PAYMENT
OPTIONS ECONOMICALLY EQUIVALENT. HOWEVER,
THE ENTITY DETERMINES THAT, IN ACCORDANCE
WITH THE PFRS 15, THE RATE THAT SHOULD BE USED
IN ADJUSTING THE PROMISED CONSIDERATION IS 6
PERCENT, WHICH IS THE ENTITY’S INCREMENTAL
DISCOUNT RATE.
#11
EXISTENCE OF A SIGNIFICANT FINANCING
COMPONENT IN THE CONTRACT

10% INCREMENTAL BORROWING RATE

10% DISCOUNT RATE

10% ANNUAL PERCENTAGE RATE

 #10
JAN. 1, 2024

CASH 4,000
CONTRACT LIABILITY 4,000

DEC. 31, 2024

INTEREST EXPENSE 240
4000*6=240
CONTRACT LIABILITY 240
 #10
DEC. 31, 2025
INTEREST EXPENSE 254.4
CONTRACT LIABILITY 254.4 4,240*6

TRANSFER OF ASSET:
JAN. 1, 2026
4,000+240+254.4
CONTRACT LIABILITY 4,494.4
REVENUE 4,494.4
PROBLEM 3:
#1
An entity enter into a contract to provide
monthly payroll processing services to a
customer for one year for a monthly retainer
fee of P100,000

requirement: Identify if the performance obligation

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

RAUTO, NICOLE ROBIN

#1STEP 5: Recognize revenue when or as the entity
satisfies a performance obligation.

Answer:
The performance obligation is satisfied over time for
it has met one of the criteria, which is:

a. The customer simultaneously receives and

consumes the benefits provided by the entity’s
performance as the entity performs.

RAUTO, NICOLE ROBIN

#1STEP 5: Recognize revenue when or as the entity
satisfies a performance obligation.

Answer:
It does not qualify as a performance obligation
satisfied at a point in time because the entity has to
provide monthly payroll processing services. It
satisfies its obligation as it performs not after it
completely renders its services.

RAUTO, NICOLE ROBIN

#1 State how the entity recognizes its revenue
Answer:
The entity shall recognize revenue by measuring the
progress towards completion of performance
obligation. It was stated that the retainer’s monthly
fee is P100,000. The service is expended evenly
through out the perfomance period, revenue may be
recognized through straight-line basis. The entity
shall recognize P100,000 revenue per month.

RAUTO, NICOLE ROBIN

#2
An entity, an owner and manager of health
clubs, enter into a contract with a customer for
a one-year access to any of its health clubs.
The customer has unlimited use of the health
clubs and promises to pay P500 per month.

requirement: Identify if the performance obligation

is satisfied over time or at a point in time. State how
the entity recognizes revenue
RAUTO, NICOLE ROBIN
#2STEP 5: Recognize revenue when or as the entity
satisfies a performance obligation.

Answer:
In this case, there is a recurring simultaneous
consumption by the customer of the benefits of the
entity’s health clubs through unlimited use and
access.

RAUTO, NICOLE ROBIN

#1 State how the entity recognizes its revenue
Answer:
The customer can use the health clubs with no
restriction in access anytime within the performing
period. The number of usage of the clubs would not
increase nor decrease the monthly payment of P500.
Thus, expended evenly for a year. Revenue
recognition is through straight-line basis. The
entity shall recognize P500 revenue monthly
through the performing period.
RAUTO, NICOLE ROBIN
#3
An entity enters into a contract with a customer on 1
January 20X9 to transfer products to the customer for
P150 per product. If the customer purchases more than 1
million products in a calendar year, the contract indicates
that the price per unit is retrospectively reduced to P125
per product. Consideration is due when control of the
products transfer to the customer. In determining the
transaction price, the entity concludes at contract
inception that the customer will meet the 1 million
products threshold. In January, the entity ships the first
100 products to the customer.

BATICA, DANIELA FELICITY

#3
Requirement: Provide the journal entry in January 20X9.

Solution:

Receivable ₱ 15,000

BATICA, DANIELA FELICITY

#3
Requirement: Provide the journal entry in January 20X9.

Solution:

Receivable ₱ 15,000
Revenue ₱ 12,500

BATICA, DANIELA FELICITY

#3
Requirement: Provide the journal entry in January 20X9.

Solution:

Receivable ₱ 15,000
Revenue ₱ 12,500
Refund liability 2,500

BATICA, DANIELA FELICITY

#4
An entity enters into a contract with a customer on 1
January 20X8 to sell Product A for P100 per unit. If the
customer purchases more than 1,000 units of Product A
in a calendar year, the contract specifies that the price
per unit is retrospectively reduced to P90 per unit.
Consequently, the consideration in the contract is
variable.

BATICA, DANIELA FELICITY

#4
For the first quarter ended 31 March 20X8, the entity
sells 75 units of Product A to the customer. The entity
estimates that the customer's purchases will not exceed
the 1,000-unit threshold required for the volume
discount in the calendar year.

BATICA, DANIELA FELICITY

#4
In May 20X8, the entity's customer acquires another
company and in the second quarter ended 30 June 20X8
the entity sells an additional 500 units of Product A to
the customer. In the light of the new fact, the entity
estimates that the customer's purchases will exceed the
1,000-unit threshold for the calendar year.

BATICA, DANIELA FELICITY

#4
Requirements: Compute for the net revenue recognized
in the March 31, 20x8 and June 30, 20x8 quarterly
financial statements, respectively.
Solutions:
March 31, 20x8: (75 units x 100) = ₱7,500
June 30, 20x8:
Net revenue from units sold in ₱45,000
the 2nd quarter
(500 x 90)

Retrospective discount on units sold in the 1st quarter

(75 x 10) ₱ (750)

BATICA, DANIELA FELICITY

#4
Solutions:
March 31, 20x8: (75 units x 100) = ₱7,500

June 30, 20x8:

Net revenue from units sold in
the 2nd quarter
(500 x 90) ₱45,000
Retrospective discount
on units sold in the 1st
quarter
(75 x 10) (750)
Net revenue in 2nd quarter ₱44,250

BATICA, DANIELA FELICITY

#5
An entity enters into a contract with a customer to
Products A, B and C in exchange for P100. The entity will
satisfy the performance obligations for each of the
product at different point in time period the entity
regularly sells products A, B and C individually thereby
establishing the following standalone selling prices:
Product. Stand-alone Selling Price
A. P40
. B. P55
. C. P45

TONG, JHACE
#5
In addition the entity regularly sells products b and c
together for P60.

TONG, JHACE
#5
Requirement A:
Compute for the total discount granted to the
customer.

Stand-alone prices: P40+55+45=P140

P140-P100=P40 discount

TONG, JHACE
#5
Requirement B:
Allocate the transaction price to the performance
obligations in the contract.

TONG, JHAC
#6
An entity sells a product to a customer for P121 that is
payable 24 months after delivery. The customer obtains
control of the product at contract inception. The contract
permits the customer to return the product within 90
days. The product is new and the entity has no relevant
historical evidence of product returns or other available
market evidence. The cash selling price of the product is
P100, which represents the amount that the customer
would pay upon delivery for the same product sold under
otherwise identical terms and conditions as at contract
inception.
TONG, JHACE
#6
The entity's cost of the product is P80. The entity
estimates that the costs of recovering the products will
be immaterial and expects that the returned products can
be resold at a profit. The contract Includes an implicit
interest rate of 10 per cent (i.e., the interest tate that
over 24 months discounts the promised consideration of
P121 to the cash selling price of P100). The entity
evaluates the rate and concludes that it is commensurate
with the rate that with beer reflected in a separate
financing transaction between the entity and its customer
at contract inception . TONG, JHACE
 Requirement: provide the entries during the
#6 first 90 days of the contract (assume that the
product was not returned)

A) When the product is transferred to the customer:

Asset for right to recover product to be returned P80
. Inventory P80

(b) During the three-month right of return period, no

interest is recognized because no contract asset or
receivable has been recognized.

TONG, JHACE
#6
C) When the right of return lapses (the product is not
returned):
Receivable. 100
Revenue 100

Cost of sales. 80
Asset for product to be returned. 80

TONG, JHACE
#7
An entity enters into a contract with a customer
to sell equipment. Control of the equipment
transfers to the customer when the contract is
signed. The price stated in the contract is
1million plus a five percent contractual rate of
interest payable in 60 monthly installments of
Php18, 871.

MARIANO, RHIKA
 #7
CASE A:
In evaluating the discount rate in the contract that contains a significant
financing component, the entity observes that the 5% contractual rate of
interest reflects the rate that would be used in a separate financing
transaction between the entity and its customer at contract inception (i.e., the
contractual rate of interest of 5% reflects the credit characteristics of the
customer ).

Requirement: Compute for the sale revenue to be recognized from the

transaction above.

MARIANO, RHIKA
#7 CASE A:
Requirement: Compute for the sale revenue to be recognized from the
transaction above.

Monthly cash flow 18, 871

Multiply by: PV of ordinary annuity 52.99020
(0.004167 , n = 6)
Sale Revenue Php999, 978

5% annual rate / 12 months = 0.004167 MARIANO, RHIKA

 #7
CASE B:
In evaluating the discount rate in the contract that contains a significant
financing component, the entity observes that the 5% contractual rate of
interest is significantly lower than the 12% interest rate that would be used in
a separate financing transaction between the entity and its customer at
contract inception (i.e., the contractual rate of interest of 5% does not reflect
the credit characteristics of the customer ).

Requirement: Compute for the sale revenue to be recognized from the

transaction above.

MARIANO, RHIKA
#7 CASE B:
Requirement: Compute for the sale revenue to be recognized from the
transaction above.

Monthly cash flow 18, 871

Multiply by: PV of ordinary annuity 44.95504
(0.01 , n = 6)
Sale Revenue Php848, 347

12% annual rate / 12 months = 0.01 MARIANO, RHIKA

#8
An entity enters into a contract with a customer to provide a weekly
service for one year. The contract is signed on January 20X1 and
work begins immediately. The entity concludes that the service is a
single performance obligation in accordance with PFRS 15. This is
because the entity is providing a series of distinct services that are
substantially the same and have the same pattern of transfer (the
services transfer to customer over time and use the same method to
measure progress -- that is, a time-based measure of progress).

MARIANO, RHIKA
#8
In exchange for the service, the customer promise 100 shares of its
common stock per week of service. The terms in the contract require
that the shares must be paid upon the successful completion of each
week of service. The entity measures its progress towards complete
satisfaction of the performance obligation as each week of service is
complete.

Requirement: Compute for the transaction price. Assume that the

quoted price of the shares remained constant at Php20 all
throughout the year.

MARIANO, RHIKA
 #8
Requirement: Compute for the transaction price. Assume that the
quoted price of the shares remained constant at Php20 all throughout
the year.

100 shares per

X 52 weeks X Php20 = Php104, 000
week

MARIANO, RHIKA
#9 Problem:
An entity enters 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 parts is two years. Upon completion of manufacturing,
the entity demonstrates that the machine and spare parts meet the agreed-
upon specifications in the contract.

On 31 December 20X9, the customer pays for the machine and spare parts,
but only takes physical possession of the machine. Although the customer
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 customer has legal title to the spare parts and
the parts can be identified as belonging to the customer.
CORTEZO, KAYE
#9 Problem:
Furthermore, the entity stores the spare parts in a separate section of its
warehouse and the parts are ready for immediate shipment at the
customer's request. The entity expects to hold the spare parts for two to
four years and the entity does not have the ability to use the spare parts or
direct them to another customer.

Requirement:
a) Identify the performance obligations in the contracts.
b) How should the entity recognize revenue from the contract?

CORTEZO, KAYE
#9 Answer:
Requirement:
a) Identify the performance obligations in the contracts.

There are 3 performance obligation:

1. The Machine
2. The Spare Parts
3. The Custodial Services

CORTEZO, KAYE
#9 Answer:

Requirement
b.) How should the entity recognize revenue from the contract?

The entity should recognize the amount of the machine and

spare parts as revenue on DECEMBER 31, 2029. And the
amount in the custodial service is recognized OVER THE NEXT
2 TO 4 YEARS until the entity complete the obligation.

CORTEZO, KAYE
#10 Problem:
The entity enters into a new contract to clean a customer’s offices on a
weekly basis. The customer promises to pay P 100,000 per year. The
stand-alone selling price of the services at contract inception is P 100,000
per year.

At the end of the second year, the contract is modified and the fee for the
third year is reduced to P 80,000. In addition, the customer agrees to
extend the contract for three additional years for consideration of P
200,000 payable in three equal annual installments of P 66,667 at the
beginning of years 4,5, and 6.
CORTEZO, KAYE
#10 Problem:
The third year is P80,000 per year, multiplied by the remaining number of
years to provide services is deemed to be an appropriate estimate of the
stand-alone selling price of the multi-year contract (i.e., the stand-alone
selling price is 4 years x 80,000 per year = P 320,000). At contract
inception, the entity 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 contract.

CORTEZO, KAYE
#10 Answer:
Requirement:
Compute for the amounts of revenue to be recognized on each year of the six-
year contract.

YEAR REVENUE

1 100,000
2 100,000
TOTAL: P 480,000
3 70,000
4 70,000
5 70,000
6 70,000 CORTEZO, KAYE
#10 Answer:
The price of the original service
80,000
not yet rendered
The price for the three
additional year 200,000
Total transaction not yet
recognized 280,000
Divided by: year of service to be
rendered 4
Total revenue per year 70,000
CORTEZO, KAYE
PROBLEM 4:
page 199-201
 PFRS 15 CRITERIA CHECKLIST

a. The contracting parties have approved the contract

and are committed to performing their respective
obligations;

REASON/INDICATOR:
When the enforceable contract was signed and
notarized.

b. The entity can identify each party’s rights

regarding the goods or services to be transferred;

c. The entity can identify the payment terms for the

goods or services to be transferred;

REASON/INDICATOR:
Paragraph 1, A-C
a) The amount of THREE HUNDRED THOUSAND PESOS (Php
300,000.00) representing earnest money, shall be payable by the
BUYER/VENDEE to the SELLER/VENDOR upon signing of this Contract to
Sell

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

PESOS shall be paid in 12 monthly installments of FIFTY THOUSAND,
THREE HUNDRED FIFTY-THREE PESOS (Php 58,333.33) starting on
October 31, 2015, and every end-of-month thereafter.

c)In any case 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
PESOS and TEN PERCENT (10%) of any installments received shall be
forfeited in favor of the SELLER/VENDOR.
 PFRS 15 CRITERIA CHECKLIST

d. The contract has commercial substance;

REASON:
(7) Because the contract affects ABC’s future
cash flows.

e. The consideration in the contract is probable of

collection.

REASON/INDICATORS:
(9) The credit investigation yielded a favorable
result.
(10)The contract requires a down payment (earnest
money) and, in case of default, ABC Co. is entitled
to a significant portion of the amounts collected.
CONCLUSION:
Does the contract qualify for accounting under PFRS 15? State your
reason.
(11) Yes, because the contract has qualified all the criteria from ‘Step
1’.

STEP 2: Identify the performance obligations in the contract

(12) Identify the performance obligation(s) in the contract. The promise
to transfer the land to the buyer upon the full payment of the
consideration.
(13) State whether the performance obligation(s) is/are satisfied over
time or at a point in time. At a point in time.

STEP 3: Determine the transaction price

(14) Determine the transaction price. ₱1,000,000
(15) Identify whether the transaction price is fixed or variable. Fixed
STEP 4: Allocate the transaction price to the performance
obligations.

How much is allocated to each of the performance obligations?

(16) P 1,000,000 to the promise to transfer the land to the buyer.

JOURNAL ENTRIES:
(17) Provide the entry at contract inception.
JOURNAL ENTRIES:
(18) Assume that the next entry made by ABC Co. on the contract is on
December 31, 2015.
PRESENTATION:
How should the contract be presented in ABC Co.’s December 31, 2015
statement of financial position?

ACCOUNT CHECKLIST AMOUNT

(19) Contract Asset

(20) Contract liability P 475,000

(21) Receivable
PRESENTATION:
(22) Assume that the January 31, 2016 check is dishonored and the
contract is settled on this date, in accordance with the terms of the
contract. What is the journal entry?
STEP 5: Recognize revenue when (or as) the entity satisfies a
performance obligation.

(23) Disregard the assumption in number (18). Assume that the consideration
is fully paid and the land is transferred to the buyer. Provide the compound
journal entries.
PROFIT OR LOSS:
use the assumption in number (23). Determine the effects of the
contract on ABC Co.’s 2015 and 2016 profit or loss, respectively.
Disregard taxes and registration costs. (24-25)

2015 2016

Revenue 0 P 1,000,000

Expenses 0 P (400,000)

Profit 0 P 600,000
THANK YOU
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