Resa Handouts

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-04
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ
PFRS 15 – Revenue from Contracts

with Customers: CONSTRUCTION ACCOUNTING
What is a Construction Contract?
A construction contract is a contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent in terms of their design, technology
or function or their ultimate purpose or use.
Two Types of Construction Contract or Contract Price:
1. Fixed Price Contract – is a construction contract in which the contractor agrees to a fixed contract
price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses
2. Cost-plus Contract – is a construction contract in which the contractor is reimbursed for allowable
or otherwise defined costs, plus a percentage of these costs or a fixed fee.
Long-term contracts frequently provide that seller (builder) may bill the customer at intervals. The most
common examples are as follows:
• Development of military and commercial aircraft
• High-rise buildings
• Skyways, roads, and bridges
• Weapons-delivery systems
• Space exploration hardware
Revenue recognition depends on the performance obligation(s):

1. Percentage of Completion / Over Time
2. Cost Recovery Method or Zero-Profit Approach / Point in Time
Percentage of Completion / Over Time
Revenue should be recognized OVER TIME if it can reasonably estimate its progress toward satisfaction
of the performance obligations.
Revenue can be recognized over time if at least one of the following criteria is met:
1. The customer simultaneously receives and CONSUMES the benefit of the seller’s work as it is performed (e.g.,
service contracts such ass cleaning service or monthly payroll processing system) or
2. The customer CONTROLS the asset as it is created or enhanced i.e., when the company’s performance
CREATES or enhances an asset, (e.g., work in process or when a contractor builds an extension into a
customer’s existing school building), or
3. The seller is creating an asset that has NO ALTERNATIVE use to the seller, and the seller can receive payment
for its progress to date even if the customer cancels the contract as when a company manufactures
customized product (performance does not create an asset with an alternative use and the supplier has an
enforceable right to payment for performance completed to date).
Company recognizes revenues and gross profits each period based upon the progress of the
construction-referred to as the percentage-of-completion method (OVER TIME). Most popular input
measure used to determine the progress toward completion is the cost-to-cost method.
Cost Recovery Method or Zero-Profit Approach / Point in Time
Revenue should be recognized at a point in time when it does not qualify for recognizing revenue over
time.
If criteria mentioned above is not met, revenue should be recognized at a point in time (the company
recognizes gross profit when the contract is completed) referred to as the cost-recovery (zero-profit)
method/POINT in TIME. This method recognizes revenue only to the extent of costs incurred that are
expected to be recoverable. Only after all costs are incurred when gross profit will be recognized.
The performance obligation is satisfied when control of the goods or services is transferred from the
seller to the customer.
Usually transfer of control is obvious, and coincides with delivery.
Other indicators of transfer of control, the customer has (PAROL):
1. An obligation to pay the seller.
2. Legal title to the asset.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership.
5. Accepted the asset.
The indicators (No. 1 to 5 as mentioned above) indicates that control has been transferred from the seller to the
customer (the customer is more likely to control a good or service if the customer has those indicators).
Sellers should evaluate these indicators individually and in combination to decide whether control has been
transferred and revenue can be recognized.
Page 1 of 13 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CONSTRUCTION ACCOUNTING AFAR-04
Method of Recognizing Revenue in Construction Accounting:
A. Percentage-of-completion method (Over Time) – when the outcome of the construction contract can
be estimated reliably, contract revenue and costs associated with the contract should be recognized
as revenue and expenses, respectively, by reference to the stage of completion of the contract activity
at the balance sheet date since there is a reasonable estimate of its progress toward satisfaction of the
performance obligation.
Measuring Stage of Completion. The stage of completion of a contract may be determined in a variety
of ways. The enterprise uses the method that measures reliably the work performed. Depending on the
nature if the contract, the methods may include:
1. Input Measures/Cost Basis. Input measures are made in relation to the costs or efforts devoted to
a contract. Input methods recognize revenue on the basis of the efforts or inputs to satisfy the
performance obligation relative to the total expected inputs. Examples of input methods include
labor-hours worked; costs incurred; time elapsed; resources consumed. Revenue can be
recognized on a straight-line basis if inputs are used evenly throughout the performance period.
a. Cost-to-cost method (Proportion of contract costs incurred). Perhaps the most popular of the
input measures is the cost-to-cost method. Under this method, the degree of completion is
determined by comparing costs already incurred with the most recent estimates of total
expected costs to complete the project.
The percentage that costs incurred bear to total expected costs is applied to the contract
price to determine the revenue to be recognized to date as well as to the expected net
income on the project in arriving at earnings to date. Some of the costs incurred, particularly
in the early stages of the contract, should be disregarded in applying this method because
they do not relate directly to effort expended on the contract.
These include such items as subcontract costs for work that has yet to be performed and
standard fabricated materials that have not yet been installed. One of the most difficult
problems in using this method is estimating the costs yet to be incurred. Engineers are often
consulted to help provide estimates as to a project’s percentage of completion. How difficult
the estimation process may be, it is required in reporting income, regardless of how the
percentage of completion is computed.
b. Efforts-expended methods. The efforts-expended methods are based on some measure of
work performed. They include labor hours, labor pesos, machine hours, or material quantities.
In each case, the degree of completion is measured in a way similar to the use in the cost-to-
cost approach: the ratio of the efforts expended to date to the estimated total efforts to be
expended on the entire contract.
For example, if the measure of work performed is labor hours, the ratio of hours worked to
date to the total estimated hours would produce the percentage for use in measuring income
earned.
2. Output Measures/Sales Basis. Output measures are made in terms of results achieved. Examples
of output methods include; surveys of work performed or performance completed to date (the
value of “work certified” to date may be a measure used to identify the degree of completion
and therefore revenue to be recognized in profit or loss); units produced or delivered; tons
produced; storey’s of a building completed; appraisals of results achieved; kilometers of a
highway completed; contract milestones reached or achieved; time elapsed and values added.
For example, if the contract calls for units of output, such as kilometers of roadway, a measure of
completion would be a ratio of the miles completed to the total kilometers in the contract.
Output methods should only be used when the output selected represents performance towards
complete satisfaction of the performance obligation. The disadvantage of output methods is that
the outputs used may not be available or directly observable. When this is the case, an input
method may be necessary.
Architects and engineers are sometimes asked to evaluate jobs and estimate the percentage of
a job completed (surveys of work performed). These estimates are, in reality, output measures
and usually are based on the physical progress made on the contract. This may be appropriate
for the construction of buildings.
Output measures are of two types:
a. Proportional Cost Approach – the costs incurred computed under this method may not
equal to the actual costs incurred.
b. Actual Cost Approach – the costs incurred computed under this method should be equal
to the costs actually incurred.
The Proportional Cost and Actual Cost Approach are equally acceptable.
It should be noted that progress payments and advances from customers often do not reflect the
work performed.

B. Cost Recovery Method/Zero-Profit Approach (Point In Time). Cost recovery method of construction
accounting (zero-profit approach) is used when the contract’s outcome cannot be reliably estimated.
The treatment below should be followed:
1. Recognize revenue only to the extent of contract costs incurred which are expected to be
recoverable; and
2. Recognize contract costs as an expense in the period they are incurred. Only after all costs are
incurred is gross profit recognized.
In other words, the cost recovery method gives rise to zero profit. A zero-profit approach involves
recognizing revenues equal to the amount of costs incurred during the period so that no net profit is
recognized. But as soon as the ultimate outcome of a contract can be estimated, the percentage-of-
completion is applied.
This no profit/no loss approach reflect the situation near the beginning of a contract, i.e., the outcome
cannot be reliably estimated, but it is likely to recover the costs.
Contract costs that cannot be recovered should be recognized as an expense immediately. The
following are situations where this might occur:
• The contract is not fully enforceable, i.e. its validity is seriously questioned;
• The completion of the contract is subject to the outcome of pending litigation or legislation;
• The contract relates to properties which will probably be expropriated or condemned;
• The customer is unable to meet its obligations under the contract; and
• The contractor cannot complete the contract or in any other way meets his/her obligations
under the contract.
When these uncertainties cease to exist, the contract revenue and costs should be recognized as
normal by reference to the stage of completion.
PFRS (IFRS) 15 states that the following cost must be capitalized:
1. The incremental costs of obtaining a contract
2. The cost of fulfilling a contract if they do not fall within the scope of another standard [such as PAS
(IAS) 2 – Inventories] and the entity expects them to be recovered.
Companies divide cost to fulfill a contract or fulfillment costs (contract acquisition costs) into two
categories:
• Those that give rise to an asset.
• Those that are expensed as incurred.
The capitalized costs will be amortized as revenue is recognized. This means that they will be expensed to
cost of construction/sales as the contract progresses.
Construction costs should comprise of:
1. Costs that relate directly to the specific contract;
2. Costs that are attributable to contract activity in general and can be allocated to the contract,
such as insurance, cost of design and technical assistance not directly related to a specific contract
and construction overheads; and
3. Such other costs which are specifically chargeable to the customer under the terms of the contract,
which may include general administration costs and development costs.
Costs that relate directly to a specific contract include the following:
1. Site labor costs, including site supervision;
2. Costs of materials used in construction;
3. Depreciation of plant and equipment used on the contract;
4. Cost of moving plant, equipment and materials to and from the contract site;
5. Cost of hiring plant and equipment;
6. Cost of design and technical assistance that are directly related to the contract;
7. Estimated costs of rectification and guarantee work, including expected warranty costs; and
8. Claims from third parties.
General contract activity costs should be allocated systematically and rationally, and all costs with similar
characteristics should be treated consistently. The allocation should be based on the normal level of
construction activity. Borrowing cost may be attributed in this way.
Costs that may be attributable to contract activity in general and can be allocated to specific contracts
include:
1. Insurance;
2. Costs of design and technical assistance that are not directly related to a specific contract;
3. Construction overheads

Some costs cannot be attributed to contract activity and so the following should be excluded from
construction costs:
1. General administration costs (unless reimbursement is specified in the contract);
2. Research & Development (unless reimbursement is specified in the contract);
3. Depreciation of idle plant and equipment not used on any particular contract;
4. Cost of wasted materials, labor or other resources; and
5. Costs that related to satisfied performance obligations
Special Issues on Recognition of Contract Costs
• Costs are recognized in the same proportion that applies to the recognition of revenue, except for
the following.
▪ Abnormal costs (e.g. to rectify an error in the production or service process) are expensed as
incurred; and
▪ Input costs that are not proportionate to the construction process.
• If an incurred cost is not proportionate to the progress in the satisfaction of the performance
obligation that cost shall be excluded when measuring the progress of the contract. A cost incurred
that is not proportionate to the progress towards completion is excluded from the measurement of
progress.
• In this situation revenue will be recognized to the extent of the actual cost incurred in respect of
that component
• Companies recognize an asset for the incremental costs (or incremental costs of obtaining a
contract) if these costs are incurred to obtain a contract with a customer. In other words,
incremental costs are those that a company would not incur if the contract had not been obtained,
such as:
a. Sales commissions;
b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g.,
costs of contract management and supervision, insurance, and depreciation of tools and
equipment); and;
c. Costs that generate or enhance resources of the company that will be used in satisfying
performance obligations in the future. Such costs include intangible design or engineering
costs that will continue to give rise to benefits in the future.
Other costs that are expensed as incurred include general and administrative expenses (unless those costs
are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or other
resources to fulfill the contract that were not reflected in the price of the contract.
In summary, companies only capitalize costs that are direct, incremental, and recoverable (assuming that
the contract period is more than one year).
Recognition of Expected or Anticipated Losses
When it is probable that total contract costs will exceed total contract revenue, the expected
(anticipated) loss should be recognized as an expense (or loss) immediately.
The amount of such loss is determined irrespective of:
1. Whether or not the work has commenced on the contract;
2. The stage of completion of contract activity; or
3. The amount of profits expected to arise on other contracts which are not treated as a single
construction contract.
Long-term Contract Losses
Two types of losses can become evident under the long-term contracts:
1. Loss in Current Period on a Profitable Contract; and
2. Loss on an Unprofitable Contract.
Under PFRS 15, the loss in Current Period on a Profitable Contract and Loss on an Unprofitable Contract are
similarly accounted for.
Profitable Contract – Loss in Current Period. This situation happens when, during the construction, there is a
significant increase in the estimated total contract costs but the increase does not eliminate all profits on
the contract.

Financial Statement Presentation
Percentage-of-Completion/Over Time
During the life of the contract, the difference between the Construction In Progress and the Progress Billings
is reported in the statement of financial position as follows:
• Current asset – Contract Asset. It comprises of total costs incurred on the contract, plus the
cumulative recognized profit (or less cumulative recognized loss), less progress billings (i.e., the
amounts actually invoiced to customers for work performed on a contract whether or not they have
been paid by the customers).
• Current liability – Contract Liability. It comprises of progress billings less total costs incurred on the
contract, plus cumulative recognized profit (or less cumulative recognized loss).
Cost Recovery Method/Point In Time
During the life of the contract, the difference between the Construction In Progress and the Progress Billings
is reported in the statement of financial position as follows:
• Current asset – Contract Asset. It comprises of total costs incurred on the contract, less progress
billings (i.e., the amounts actually invoiced to customers for work performed on a contract whether
or not they have been paid by the customers).
• Current liability – Contract Liability. It comprises of progress billings less total costs incurred on the
contract.
Financial Statement Presentation – Multiple Contracts
When companies have more than one project going at a time and costs exceed billings on some contracts
and billings exceeds cost on others. In such case, the company segregates the presentation of the said
contracts.
The asset portion includes only those contracts on which costs and recognized profits exceed billings. While,
the liability side includes only those on which on which billings exceed costs and recognized profits.
Separate disclosures of the peso volume of billings and costs are preferable to a summary presentation for
the difference.
I – Performance Obligations
1. Inting Corporation constructs highly specialized communication satellites. A customer in Hong Kong
recently placed an order for a cable TV satellite at a price of P20 million. The order was placed in April
20x6, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the
end of 20x6, regardless of progress or cancellation. Inting uses “proportion of time” as its measure of
progress toward completion. When should Inting recognize revenue: at completion, or as the
construction is performed?
a. Over time c. No revenue recognized
b. Point in time d. No performance obligation
2. DJD Construction is constructing a building for Hotel Dian. Under the construction agreement, if for any
reason DJD can’t complete construction, Hotel Dian would own the partially completed building and
could hire another construction company to complete the job. When should DJD recognize revenue:
as the building is constructed, or after construction is completed?
a. Over time c. No revenue recognized
b. Point in time d. No performance obligation
3. Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated,
customized conference room to be completed for a fixed price of P400,000. Nonrefundable progress
payments are made on a monthly basis for work completed during the month. Legal title to the
conference room equipment is held by Crown until the end of the construction project, but if the
contract is terminated before the conference room is finished, Star retains the partially completed job
and must pay for any work completed to date. When should revenue be recognized?
a. No transaction c. Point in Time
b. No revenue d. Over Time
4. Regent Company entered into a contract with Star Hotel for constructing and installing a standard
designed gym for a fixed price of P400,000. Nonrefundable progress payments are made on a monthly
basis for work completed during the month. Legal title to the gym passes to Star upon completion of the
building process. If Star cancels the contract before the gym construction is completed, Regent removes
all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to
another customer. When should Silica recognize revenue?

5. Assume DJD International Tower (Phase II) is developing luxury residential real estate and begins to
market individual apartments during their construction. The Tower entered into a contract with Edwards
for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to
deliver the completed apartment in accordance with the contract. The remainder of the purchase
price is paid on completion of the contract when Edwards obtains possession of the apartment. When
should revenue be recognized?
6. On January 1, 20x6, Silver Construction Company signed a contract to build a custom garage for a
customer and received P10,000 in advance for the job. The new garage will be built on the customer’s
land. To complete this project, Silver must first build a concrete floor, construct wooden pillars and walls,
and finally install a roof. Silver normally charges stand-alone prices of P3,000, P4,000, and P5,000,
respectively, for each of these three smaller tasks if done separately. How many performance
obligations exist in this contract?
a. 0 c. 2
b. 1 d. 3
7. VJD Construction specializes in designing and installing customized manufacturing equipment. On
February 1, 20x7, it signs a contract to design a fully automated wristwatch assembly line for P2 million,
which will be settled in cash upon completion of construction. VJD Construction will install the equipment
on the client’s property, furnish it with a customized software package that is integral to operations, and
provide consulting services that integrate the equipment with VJD Construction’s other assembly lines.
How many performance obligations exist in this contract?
a. 0 c. 2
b. 1 d. 3
II – Transaction/Contract Price with Variable Consideration
1. DJ Builders Construction enters into a contract with a customer to build a warehouse for P850,000 on
March 30, 20x5 with a performance bonus of P50,000 if the building is completed by July 31, 20x5. The
bonus is reduced by P10,000 each week that completion is delayed. DJ Builders commonly includes
these completion bonuses in its contracts and, based on prior experience, estimates the following
completion outcomes:
Completed by Probability
July 31, 20x5 65%
August 7, 20x5 25%
August 14, 20x5 5%
August 21, 20x5 5%
The transaction price amounted to:
a. P895,000 c. P585,000
b. P850,000 d. P552,500
2. DJD Builders Construction Company enters into a contract with a customer to build a 50 kilometers road
for P100,000,000, with a performance bonus of P60,000,000 that will be paid based on the timing of
completion. The amount of the performance bonus decreases by 10% per week for every week beyond
the agreed-upon completion date. The contract requirements are similar to contracts that DJD Builders
has performed previously, and management believes that such experience is predictive for this
contract. Management estimates that there is a 60% probability that the contract will be completed by
the agreed-upon completion date, a 30% probability that it will be completed one week late, and only
a 10% probability that it will be completed two weeks late. Determine the probability-weighted amount
for the management to determine the transaction price.
a. P 96,000,000 c. P142,200,000
b. P111,000,000 d. P157,000,000
III – Entries, Revenue, Costs and Gross Profit Computation; F/S Presentation
In 2019, DJ Builders Construction agreed to construct an apartment building at a price of P500,000. The
information relating to the costs and billings for the contract is as follows:
2019 2020 2021
Direct and allocable costs to date (materials delivered to
site, architects’ and surveyors’ fees, direct labor costs
allocated overhead costs and equipment’s depreciation).P 140,000 P 300,000* P 392,500
Estimated costs yet to be incurred (to complete)................... 260,000 100,000 -0-
Customer/Progress billings each year………………………........ 187,500 140,000 182,500
Collection of billings each year……………………..................... 140,000 160,000 210,000
During 2020 the customer agrees to a variation with increases expected revenue from the contract by
P10,000 and causes additional costs of P5,000. At the end of 2020 there are materials stored on site for use
during the following period (2021) which cost P4,000*.

Required:
A. Prepare journal entries each year using:
1. Percentage-of-completion method/Over Time
2. Cost recovery method of construction accounting/Point in Time (Hybrid Method or Zero-profit
Approach). Assuming that at the beginning and end of 2019 (also in 2020) the contractor cannot
estimate the outcome of the contract with sufficient reliability to estimate the project’s percentage
of completion (i.e., because of the uncertainties arising from the new design and new materials the
entity cannot estimate total expected contract costs with sufficient reliability). It is highly likely that
the contract price will be received from the customer. However it is probable that the costs incurred
in 2019 and 2020 will be recoverable. The contract was completed in 2021.
B. For each year show how the details related to this contract would be disclosed on the balance sheet
and on the income statement:
Percentage-of-completion Method/Over Time:
1. In its December 31, 2019 balance sheet, DJ Builders would report:
a. The contract/current asset, cost and profits in excess of billings, P12,500.
b. The contract/current liability, billings in excess of cost and profits, P12,500.
c. The contract/current asset, contract amount in excess of billings, of P312,500.
d. The contract/current asset, deferred profit of P72,500.
2. In its December 31, 2020 balance sheet, DJ Builders would report:
b. The contract/current liability, billings in excess of cost and profits, P49,900.
d. The contract/current liability, deferred profit of P46,400.
3. In its December 31, 2021 balance sheet, DJ Builders would report in relation to the Construction in
Progress and Contract Billings Account:
a. The contract/current asset, P500,000.
b. The contract/current liability, P500,000.
c. The Construction-In-Progress Account of P500,000 and Contract Billings of P392,500.
d. None.
4. In its December 31 yearly income statement, the recognize revenue:
2019 2020 2021 2019 2020 2021
a. P175,000 P202,400 P132,600 c. P140,000 P300,000 P392,500
b. P 35,000 P 81,400 P117,500 d. P 0 P 0 P510,000
5. In its December 31 yearly income statement, the Construction Costs):
2019 2020 2021 2019 2020 2021
a. P140,000 P160,000 P 92,500 c. P 140,000 P 160,000 P 96,500
b. P140,000 P156,000 P 96,500 d. P 0 P 0 P 392,500
6. In its December 31 yearly income statement, the gross profit would be:
2019 2020 2021 2019 2020 2021
a. P 35,000 P 75,000 P107,500 c. P132,500 P160,000 P200,000
b. P 35,000 P 46,400 P 36,100 d. P 0 P 0 P107,500
Cost Recovery Method of Construction Accounting/Point in Time
7. In its December 31, 2019 balance sheet, DJ Builders report:
b. The contract/current liability, billings in excess of cost, P47,500.
d. The contract/current asset, P140,000; deferred profit of P187,500.
8. In its December 31, 2020 balance sheet, DJ Builders report:
b. The contract/current liability, billings in excess of cost, P31,500.
d. The contract/current asset, P156,000; current/contract liability deferred profit of P140,000.
9. In its December 31, 2021 balance sheet, DJ Builders would report in relation to the Construction in
Progress and Contract Billings Account:
a. The contract/current asset, 510,000.
b. The contract/current liability, P510,000.
c. The Construction-In-Progress Account of P510,000 and Contract Billings of P392,500.
d. None.
10. In its December 31 yearly income statement, the recognize revenue would be:
2019 2020 2021 2019 2020 2021
a. P140,000 P156,000 P214,000 c. P140,000 P 40,000 P200,000
b. P140,000 P300,000 P510,000 d. P 0 P 0 P500,000

11. In its December 31 yearly income statement, the Construction Costs:
2019 2020 2021 2019 2020 2021
a. P140,000 P156,000 P 96,500 c. P 140,000 P300,000 P392,500
b. P400,000 P400,000 P392,500 d. P 0 P 0 P392,500
12. In its December 31 yearly income statement, the gross profit:

2019 2020 2021
a. P 35,000 P 75,000 P107,500
b. P 35,000 P 40,000 P 32,900
c. P132,900 P160,000 P200,000
d. P 0 P 0 P117,500
IV – Reconstruction
In 2019, PJD Construction Corporation began construction work under a 3-year contract. The contract
price was P4,000,000. PJD uses the percentage-of-completion method/over time for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to total
estimated costs for completing the contract. The financial statement presentation relating to this contract
at December 31, 2019 was as follows:
Balance Sheet
Accounts Receivable – construction contract billings…………… P 86,000
Construction-in-progress…………………………………………………P260,000
Less: Contract Billings…………………………………………………….. 246,000
Costs of uncompleted contract in excess of billings……………… 14,000
Income Statement/Statement of Comprehensive Income
Gross profit (before tax) recognized in 2019……………………….. P 72,800
1. How much was collected in 2019 on this contract?
a. P 14,000 c. P160,000
b. P 86,000 d. P246,000
2. What was the initial estimated gross profit before tax on this contract?
a. P 72,800 c. P 260,000
b. P187,200 d. P1,120,000
3. What is the percentage of completion for the year ended?
a. 6.50% c. 28.00%
b. 13.00% d. 100.00%
4. What is the gross profit rate on the contract?
a. 6.50% c. 28.00%
b. 13.00% d. 100.00%
5. What is the recognized revenue to date at the end of 2019?
a. P 72,800 c. P 260,000
b. P187,200 d. P1,120,000
6. What is the recognized revenue in 2019?
a. P 72,800 c. P 260,000
b. P187,200 d. P1,120,000
V – Reconstruction
DJ Builders Construction Company has used the cost-to-cost percentage of completion method of
recognizing revenue. Ambrose assumed leadership of the business after the recent death of his father. In
reviewing the records, Ambrose finds the following information regarding a recently completed building
project for which the total contract was P2,000,000.
2019 2020 2021
Gross profit (loss) each year P 40,000 P 140,000 P( 20,000)
Costs incurred each year 360,000 ? 820,000
Ambrose wants to know how effectively the company operated during the last 3 years on this project and
since the information is not complete, has asked for answers to the following questions:
1. How much cost was incurred in 2020?
a. P 660,000 c. P1,180,000
b. P 820,000 d. P1,840,000
2. What percentage of the project was completed by the end of 2020?
a. 40% c. 60%
b. 51% d. 90%

3. What was the percentage of completion during the year 2020?
a. 20% c. 60%
b. 40% d. 100%
4. What was the estimated gross profit on the project by the end of 2020?
a. P140,000 c. P180,000
b. P160,000 d. P300,000
5. What was the estimated cost to complete the project at the end of 2020?
a. P 660,000 c. P1,020,000
b. P 680,000 d. P1,700,000
VI – Unprofitable Contract
GEI Enterprise entered into a construction agreement in 20x4 that called for a contract price of P9,600,000.
At the beginning of 20x5, a change order increase the initial contract price by P480,000. In relation to the
project, the following data were obtained:
20x4 20x5
Costs incurred to date . . . . . . . . . . P4,920,000 P8,640,000
Estimated costs to complete . . . . 4,920,000 2,160,000
Billings made to date . . . . . . . . . . . 5,280,000 8,700,000
Collections made to date . . . . . . . 4,920,000 8,700,000
Compute the amount of construction in progress (net)/contract assets or progress billings (net)/contract
liabilities for the year 20x5:
Percentage-of-completion Cost Recovery Method
Method (Over Time) of Construction Accounting (Point In Time)
a. P780,000 -- liabilities P 780,000 – liabilities
b. 780,000 – assets 780,000 – assets
c. 60,000 – liabilities 60,000 – liabilities
d. 636,000 – liabilities 636,000 – liabilities
VII – Comparing Input and Output Measures

TJD Construction Company won the recently concluded public bidding wherein the contract was
awarded starting January 7, 2019, to construct a bridge for a contract price of P16,800,000 payable in five
installments, of which one-fifth (1/5) of the price to be paid upon completion of each quarter of work, with
the final payment due within ten days (as agreed per contract) after the turnover of the acceptance of
the bridge.
By December 31, 2019, three-quarters of the bridge was completed which was estimated by the
company’s engineering department; whereupon the third billing was made (cash had been made on the
previous two billings).
During 2019, a total of P8,400,000 had been paid for costs incurred, and total liability for construction
materials purchased still amounted to P2,000,000. It is estimated that an additional P3,600,000 would be
required to complete the construction of the bridge.
Using the percentage-of-completion/over time to recognize revenue:

1. Using input measure (cost basis) – cost-to-cost method, the realized gross profit for 2019:
a. P2,080,000 c. P2,200,000
b. P2,100,000 d. P2,800,000
2. Using output measure (sales basis) – proportional cost approach (engineering estimates), the balance
of “Construction in Progress – net” at the end of 2019 (CA – current asset; CL – current liability):
a. P2,420,000 CA c. P12,500,000 CA
b. P2,420,000 CL d. P 320,000 CL
3. Using output measure (sales basis) – actual cost (measure of completion to be applied to revenues)
approach (engineering estimates), the realized gross profit for 2019:
a. P2,080,000 c. P2,200,000
b. P2,100,000 d. P2,800,000
4. Using output measure (sales basis) – actual cost (measure of completion to be applied to gross profit)
approach (engineering estimates), the realized gross profit for 2019:
a. P2,080,000 c. P2,200,000
b. P2,100,000 d. P2,800,000

VIII – Output (Sales Basis) and Input Measure (Cost Basis)
VJD International Inc. recently acquired the Vince Builders Company. Vince has incomplete accounting
records. On one particular project, only the information is available.
2019 2020 2021
Costs incurred during the year……………………………….....P200,000 P 250,000 ?
Estimated cost to complete…………………………………...... ? 190,000 0
Recognized revenue……………………………………………... 220,000 ? ?
Gross profit on contract………………………………………...... ? 10,000 (P10,000)
Contract price……………………………………………………... 700,000
Because the information is incomplete, you are asked the following questions assuming the percentage-
of-completion method is used; an output measure (sales basis) is used to estimate the percentage
completed, and revenue is recorded using the actual cost approach.
1. How much gross profit should be reported in 2019?
2. How much revenue should be reported in 2020?
3. How much revenue should be reported in 2021?
4. How much cost was incurred in 2021?
5. The total costs of the contract?
6. What would be the construction revenue, costs of revenue and gross profit for 2019 and 2020
assuming that in 2019, the outcome of the construction contract cannot be estimated reliably (no
estimated cost to complete). (Ignore the revenue amount shown for 2019 and gross profit amount
reported for 2020.)
7. What would be the gross profit for 2020 if the cost-to-cost percentage-of-completion method/input
method (cost basis) were used rather than the output measure assuming that the estimated cost
to complete in 2019 amounted to P450,000? (Ignore the revenue amount shown for 2019 and gross
profit amount reported for 2020.)
GOD BLESS as ALWAYS!!!
*The only thing that stands between a man and what he wants from life is often merely the will to try it
and the faith to believe that it is possible.*
*Don’t be afraid of shortcomings, because they are what will make you better. Stay on the right track,
Continue to pray and things will work out for you.*
*It is better to fail in doing something, than to excel in doing nothing.*
*For even a flawed diamond is more valuable than a perfect brick. And people who have no failures also
have few victories.*
*Sometimes a winner is just a dreamer who never gave up.*
*The spirit, the will to win, and the will to excel are the things that endure.*
*These qualities are so much important than the events that occur.*
*A dream unrealized is a dream imprisoned by that enemy of all enemies, the fear of failure.
Set that dream free by determining that you will make it happen.*
*Don’t let your learning lead to knowledge; let your learning lead to action.*
*Every great success was, at the beginning impossible*
*The secret of life is not just to live, but to have something worthwhile to live for.*
*Great achievements are not done by strength but by perseverance*
*No one knows what he can do until he tries*
*Not knowing when the dawn will come, I open every door*
*The great thing in the world is not so much where you are but in what direction you are going*
*No act of kindness, no matter how small is ever wasted.*
*One individual plus courage is a majority.*
*Never take direction from a crowd for your personal life.*
*And never choose to quit just because somebody disagrees with you*
*There is no great and no small
To the Soul that makes it all:
And where it comes, all things are equal;
And it comes everywhere.*

Solutions Problem III – DJ Builders or
2019 2020 2021 2021
Contract Price 500,000 *510,000 *510,000
Cost Incurred Each Year (CIEY) 140,000 160,000 92,500 ***96,500
+: Cost Incurred in Prior Years (CIPY) ____-0- 140,000 300,000 ***296,000
Cost (actual) Incurred to Date 140,000 **300,000 392,500 392,500
+: Estimated Cost to Complete 260,000 100,000 _____-0-
Total Estimated Cost 400,000 400,000 392,500
Estimated Gross Profit 100,000 110,000 117,500
x: Percentage of Completion (CI to date/TEC) 140/400 (300-4)/400
or 35% ___or 74% ____100%
Recognized Gross Profit to Date 35,000 81,400 117,500

Less: Recognized Gross Profit in Prior Yr(s) ____-0- _35,000 _81,400
RGP Each Year - % of Completion Method 35,000 46,400 36,100
RGP Each Year – Cost Recovery Method ____-0- _____-0- 117,500

* P500,000 + P10,000 variations in contract;
**to date means it include the additional costs of P5,000
***or CIEY – 2021, P92,500 + P 4,000 = P96,500; CIPY, P300,000 – P4,000 = P296,000
Journal Entries: Percentage of Completion/Over Time
(000’s omitted) 2019 2020 2021
1. To record Cost Incurred Each Year
Construction in Progress (CIP) 140 156.0 96.5
Materials Inventory 4.0 4.0
Cash, payables, materials, etc. 140 160.0 92.5
2. Progress / Contract Billings
Accounts receivable 187.5 140 182.5
Progress billings 187.5 140 182.5
3. Collections
Cash 140 160 210
Accounts receivable 140 160 210
4. Recognized Rev., Cost & GP
Cost of Construction 140 156.0 96.5
CIP 35 46.4 36.1
Revenue from Construction 175 202.4 132.6
5. To close CIP and Progress Billings
Progress billings 510
Construction in Progress 510
Journal Entries: Cost Recovery Method/Point In Time
(000’s omitted) 2019 2020 2021
1. To record Cost Incurred Each Year
Construction in Progress (CIP) 140 156 96.5
Materials Inventory 4 4.0
Cash, payables, materials, etc. 140 160 92.5
2. Progress / Contract Billings
Accounts receivable 187.5 140 182.5
Progress billings 187.5 140 182.5
3. Collections
Cash 140 160 210
Accounts receivable 140 160 210
4. Recognized Rev., Cost & GP
Cost of Construction 140 156 96.5
CIP -0- -0- 117.5
Revenue from Construction 140 156 214
5. To close CIP and Progress Billings
Progress billings 510
Construction in Progress 510

Or, alternative approach - % of Completion Method / Over Time
Recognized Recognized Recognized in
To Date in Prior Years Current Year
2019 Revenue (Contract Price x % of completion)
(500,000 x 35%) 175,000 -0- 175,000
Cost (Total Est’d. Cost x % of completion)
(P400,000 x 35%) 140,000 -0- 140,000
Gross Profit (Est’d. Gross Profit x % of
completion)
(P100,000 x 35%) 35,000 -0- 35,000
2020
Revenue (P510,000 x 74%) 377,400 175,000 202,400
Cost (P400,000 x 74%) ***296,000 140,000 156,000
Gross Profit (P110,000 x 74%) 81,400 35,000 46,400
2021
Revenue (P510,000 x 100%) 510,000 377,400 132,600
Cost (P392,500 x 100%) 392,500 296,000 ***96,500
Gross Profit (P117,500 x 100%) 117,500 81,400 36,100
Or, alternative approach – Cost Recovery Method/Zero-Profit Approach/Point In Time

2019
Revenue (equivalent to Costs Incurred) 140,000 -0- 140,000
Cost 140,000 -0- 140,000
Gross Profit -0- -0- -0-
2020
Revenue (equivalent to Costs Incurred) 296,000 140,000 156,000
Cost 296,000 140,000 156,000
Gross Profit -0- -0- -0-
2021
Revenue 510,000 296,000 214,000
Cost 392,500 296,000 96,500
Gross Profit 117,500 -0- 117,500
Problem IV – PJD Construction
2019
Contract Price 4,000,000
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
X: Percentage of Completion (CI to date/TEC)
Recognized Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
RGP (L) Each Year - % of Completion Method
Problem V – DJ Builders
2019 2020 2021
Contract Price 2,000,000 2,000,000 2,000,000
Cost Incurred Each Year 360,000 ? 820,000
+: Cost Incurred in Prior Years _____0__ _______ _______
Cost Incurred to Date 360,000
+: Estimated Cost to Complete _______ ? _______
Total Estimated Cost _______ _______ _______
Estimated Gross Profit ?
X: Percentage of Completion (CI to date/TEC) ?
Recognized Gross Profit to Date _______ _______ _______
Less: Recognized Gross Profit in Prior Yr(s) _______ _______ _______
RGP (L) Each Year - % of Completion Method 40,000 140,000 (20,000)

Problem VII Requirement 1 Requirement 2
- % of Completion - % of Completion
Cost to Cost Output Measure –
Proportional
2019 2019
Contract Price _______
+: Cost Incurred in Prior Years _______ _______
Cost (actual) Incurred to Date _______ _______
Total Estimated Cost _______ _______
Estimated Gross Profit _______ _______
x: Percentage of Completion (CI to date/TEC)
Less: Recognized Gross Profit in Prior Yr(s) _______ _______
RGP Each Year
% of Completion Method - Proportional Cost Approach
2019 Revenue (Contract Price x % of completion)
Cost (Total Est’d. Cost x % of completion)
Gross Profit (Est’d. Gross Profit x % of completion)
% of Completion Method – Actual Cost Approach (Revenue)

2019
Revenue
Cost
Gross Profit
% of Completion Method – Actual Cost Approach (Gross Profit)

2019
Revenue
Cost
Gross Profit
Problem VIII Requirement 6 Requirement 7
- Cost Recovery - % of Completion
2019 2020 2019 2020
Contract Price _______ _______ _______ _______
+: Cost Incurred in Prior Years _______ _______ _______ _______
Cost (actual) Incurred to Date _______ _______ _______ _______
Total Estimated Cost _______ _______ _______ _______
Estimated Gross Profit _______ _______ _______ _______
x: Percentage of Completion (CI to date/TEC)
Less: Recognized Gross Profit in Prior Yr(s) _______ _______ _______ _______
RGP Each Year _______ _______ _______ _______
**********************
Whatever is expressed is impressed. Whatever you say to yourself, with emotion, generates thoughts, ideas and behaviors consistent with those words
Be not afraid of life. Believe that life is worth living and your belief will help create the fact.
Develop an attitude of gratitude, and give thanks for everything that happens to you, knowing that every step forward is a step toward achieving something
bigger and better than your current situation.
The remarkable thing we have is a choice every day regarding the attitude we will embrace for that day. We cannot change our past... We cannot change the
fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our
attitude.
Attitude is more important than the past, than education, than money, than circumstances, than what people do or say.
It is more important than appearance, giftedness, or skill.
The only way to find the limits of the possible is by going beyond them to the impossible.
Nothing great will ever be achieved without great mean, and men are great only if they are determined to be so.

lOMoARcPSD|12221919
AFAR-06 (Revenue - Franchise and Consignment)
Accounting Systems (University of the Philippines System)
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lOMoARcPSD|12221919

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 6
ADVANCED FINANCIAL ACCOUNTING & REPORTING A. Dayag  G. Caiga  M. Ngina
AFAR-06: PFRS 15 – Revenue from Contracts

with Customers: Franchise & Consignment
Franchise Accounting
A franchise agreement involves the granting of business rights by the franchisor t o a f ranchisee
that will operate the franchise outlet in certain geographical area or location. Four types of
franchising arrangements have evolved:
 Manufacturer-retailer,
 Manufacturer-wholesaler,
 Service sponsor-retailer, and
 Wholesaler-retailer
PFRS 15 on Franchise Arrangements identifies two sources of revenue:
 Sale of initial franchises and related assets or services, and
 Continuing fees based on the operations of franchises.
Performance obligations relate to:
 Right to open a business.
 Use of trade name or other intellectual property of the franchisor.
 Continuing services, such as marketing help, training, and in some cases supplying inventory
and inventory management.
Franchisors commonly charge an initial franchise fee and continuing franchise fees:
1. Initial franchise fee (payment for establishing the relationship and providing some initial
services).
2. Continuing franchise fees received
a. In return for continuing rights granted by the agreement
b. For providing management training, advertising, legal assistance, and other support.
Initial Franchise Fee
Franchise agreements vary but usually involve an initial payment (called an initial franchise fee) by the
franchisee and ongoing payments of continuing franchise fees. For the initial franchise fee, the
franchisor (the party who grants business rights under the franchise) normally provides the
franchisee (the party who operates the franchised business) with the following services:
1. Assistance in site selection
a. Analyzing location
b. Negotiating lease
2. Evaluation of potential income
3. Supervision of construction activity
a. Obtaining financing
b. Designing building
c. Supervising contractor while building
4. Assistance in the acquisition of signs, fixtures, and equipment
5. Provision of bookkeeping and advisory services
a. Setting up franchisee's records
b. Advising on income, real estate, and other taxes
c. Advising on local regulations of the franchisee's business
6. Provision of employee and management training
7. Provision of quality control
Continuing Franchise Fee (Royalty Fee)
Continuing franchise fees (royalty fee) are received in return for the continuing rights granted
by the franchise agreement and for providing such services as management training, advertising
and promotion, quality control, budgeting and other accounting services, legal assistance, and
other support.
Continuing fees (royalty fee) should be reported as revenue when they are earned (overt time) and
receivable from the franchisee, unless a portion of them has been designated for a particular
purpose, such as providing a specified amount for building maintenance or local advertising . In
that case, the portion deferred shall be an amount sufficient to cover the estimated cost in excess
of continuing franchise fees and provide a reasonable profit on the continuing services (point in
time). The continuing fees (royalty payments), which are typically computed as a percentage of
the franchisee's sales but can also be a fixed periodic amount, are recognized by the franchisor as
revenue in the same period that the sales are made by the franchisee.
Page 1 of 12 0915-2303213/0908-6567516  www.resacpareview.com

lOMoARcPSD|12221919
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-06

Week No. 6: FRANCHISE & CONSIGNMENT
Occasionally, the continuing franchise fee (royalty payments) is not large enough to cover the
franchisor's cost of the continuing services provided. However, the initial franchise fee is unusually
large (so, in effect it involves a prepayment by the franchisee for the continuing services). In such
cases, the franchisor records a portion of the initial fee as a liability and amortizes the amount to
franchise revenue over the life of the franchise (over time).
I – Initial Franchise Fee/Commingled Revenue and Continuing Franchise Fee (Royalty)
Dominador’s Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Doming Corp.
the right to operate as a franchisee of Dominador’s Pizza for 5 years. Dominador’s charges Doming an
initial franchise fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is
payable when Doming Corp. signs the agreement, and the balance is payable in five annual
payments of P57,000 each on December 31.
Consider the following for allocation of the transaction price at December 31, 20x7.
Rights to the trade name, market area, technical and proprietary know-how. P 190,000.00
Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,591.50
Machinery and equipment, etc. (costing, P95,000). . . . . . . . . . . . . . . . . . . . . . . _133,000.00
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 417,591.50
The credit rating of Doming indicates that money can be borrowed at 8%. The present value of an
ordinary annuity of five annual receipts of P57,000 each discounted at 8% is P227,591.50. The discount
of P57,408.50 represents the interest revenue to be accrued by Dominador’s Pizza Inc. over the
payment period.
Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Doming
holds a grand opening on February 4, 20x8. On February 4, 20x8, franchise opens. Dominador’s
satisfies the performance obligations related to the franchise rights, training, and equipment.
Doming also promises to pay ongoing royalty payments of 1% of its annual sales (payable every
January 31 of the following year) and is obliged to purchase products from Dominador’s at its current
standalone selling prices at the time of purchase.
1. How many performance obligations exist in this contract for franchise?
a. 2 c. 4
b. 3 d. 5
2. When Dominador should recognize revenue for the rights (combined) to the trade name, market
area and proprietary know-how which give rise to a single performance obligation?
3. How much revenue (franchise revenue, service revenue and sales revenue – machinery and
equipments) be recognized on December 31, 20x7?
a. Zero. c. P133,000.00
b. P 94,591.50 d. P190,000.00
4. How much revenue (franchise revenue, service revenue and sales revenue – machinery and
equipment) be recognized on February 4, 20x8?
a. P 94,591.50 c. P190,000.00
b. P133,000.00 d. P417,591.50
5. How much continuing franchise revenue be recognized on December 31, 20x8, assuming the sales
of P4,987,500 was generated for the first year of operations ?
a. Zero. c. P190,000.00
b. P 49,875.00 d. P417,591.50
6. How much total franchise revenue (in relation to Nos. 4 and 5) on December 31, 20x8?
a. P372,466.50 c. P417,591.50
b. P390,673.82 d. P467,466.50
7. In relation to No. 6, the net income on December 31, 20x8 amounted to?
a. Zero. c. P390,673.82
b. P 372,466.50 d. P467,466.50
Answers/Solutions:
1. b – There are three performance obligations in the contract for franchise:
PO 1 - Rights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct. Each
one is not sold separately and cannot be used with other goods or services that are readily available to the
franchisee. Combined rights give rise to a single performance obligation,
PO 2 - Training services, and
PO 3 - Equipment
Note: It should be noted that training (similar) services and equipment are distinct and can be sold separately.
Commingled Revenue (Point in Time and Over Time) - It refers to a single initial franchise fee for franchise rights, initial
services, tangible property such as supplies and equipment. The portion of the fee applicable to these assets shall be
based on their fair values and these assets are recognized upon transfer of ownership regardless when substantial
performances of services were made.

lOMoARcPSD|12221919

 Dominador’s cannot recognize revenue for the royalty payments because it is not reasonably assured to be entitled to
those sales-royalty amounts. That is, these payments represent variable consideration (variable consideration
encompasses any amount that is variable under a contract, including, for example, performance bonuses, penalties,
discounts, rebates, price concessions, incentives and the customer’s right to return products. Variable consideration is
considered to be a component of the transaction price. It is part of the consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services and therefore should be estimated and included in the
transaction price for revenue recognition purposes)
Therefore, Dominador’s recognizes revenue for the royalties when (or as) the uncertainty is resolved.
 Dominador’s promise to stand ready to PROVIDE PRODUCTS/SERVICES to the franchisee in the future at a standalone
selling price is NOT ACCOUNTED for as a SEPARATE PERFORMANCE OBLIGATION (PO) in the contract because it DOES
NOT PROVIDE Doming with a material right (a “material right” is something the customer wouldn’t get otherwise, so the
seller is obligated to provide it or if the customer is in effect paying in advance for future goods and services such option
provides the customer with a “material right”, then the option should be accounted for as a separate performance
obligation)
Thus, revenue from those sales is recorded in the future when the sales are made.
2. c – Those combined rights (trade name, market areas and proprietary know-how) give rise to a single performance
obligation. Dominador’s satisfies performance obligation at point in time when Doming obtains CONTROL of the RIGHTS.
That is, once Doming begins operating the store. Dominador has no further obligation with respect to these rights.
It should be noted that training (similar) services and equipment are distinct and can be sold separately. Dominador’s
satisfies those performance obligations (services and equipment) when it transfer the services and equipment to Doming.
3. a - As of December 31, 20x7, only signing of agreement and receipts of upfront payment and note were made. Consider
the following for allocation of the transaction price at December 31, 20x7.
Rights to the trade name, market area, technical and proprietary know-how. P 190,000.00
Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,591.50
Machinery and equipments, etc. (costing, P95,000). . . . . . . . . . . . . . . . . . . . . . . _133,000.00
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 417,591.50
The entries on December 31, 20x7: Dominador’s signs the agreement and receives upfront payment and note.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000.00
Unearned interest income (or Discount on notes receivable) . . . 57,408.50
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000,00
Unearned service revenue – training, etc. . . . . . . . . . . . . . . . . . . . 94,591.50
Unearned sales revenue – machinery and equipments, etc. . . . 133,000.00
Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Doming holds a grand
opening on February 4, 20x8.
4. d - February 4, 20x8: Franchise opens. Dominador’s satisfies the performance obligations (point in time) related to the
franchise rights, training and equipment. That is, Dominador’s has no further obligations related to these elements of the
franchise. Therefore, franchise revenue amounted to P417,591.50 (P190,000 + P94,591.50 + P133,000).
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Unearned service revenue – training, etc. . . . . . . . . . . . . . . . . . . . . . 94,591.50
Service revenue – training, etc. 94,591.50
Unearned sales revenue – machinery and equipment, etc.. . . . . . . 133,000.00
Sales revenue – machinery and equipment, etc. . . . . . . . . . . . . . 133,000.00
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000.00
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000.00
As indicated, when Doming begins operations, Dominador’s Pizza satisfies the performance obligations (point in time)
related to the franchise rights, training and equipment under the franchise agreement . That is, Dominador’s has no
further obligations related to these elements of the franchise.
5. b - Dominador’s recognizes revenue for the royalties (continuing fee) when (or as) the uncertainty is resolved (over
time). On December 31, 20x8, the continuing (royalty) franchise fees:
Accounts receivable (P4,987,500) x 1%). . . . . . . . . . . . . . . . . . . . . . . . 49,875.00
Franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,875.00
December 31, 20x8: To record payment received and interest income on note:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000.00
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000,00
Unearned interest income (or Discount on notes receivable). . . . . . . 18,207.32
Interest income (P227,591.50 x 8%). . . . . . . . . . . . . . . . . . . . . . . . . . . 18,207.32
Date Collection Interest Principal Unpaid Balance

12/31/20x7 P417,591.50
12/31/20x8
12/31/20x9
12/31/20y0
6. d - Therefore, the total amount of franchise revenue recognized on December 31, 20x8 amounted to P467,466.50 computed
as follows:
Franchise Revenue:
(Point in time, February 4, 20x8):
Initial Franchise Fee.............................................................................. P 417,591.50
(Over time)
Continuing franchise fee , P4,987,500 x 1%)....................................... 49,875.00
Total Franchise revenue.......................................................................................P 467,466.50

lOMoARcPSD|12221919

7. c - Therefore, the total amount of franchise revenue recognized on December 31, 20x8 amounted to P467,466.50 (net
income of P390,673.82) computed as follows:
Franchise Revenue:
(Point in time, February 4, 20x8):
Initial Franchise Fee.............................................................................. P 417,591.50
(Over time)
Continuing franchise fee , P4,987,500 x 1%)...................................... 49,875.00
Total Franchise revenue...................................................................................... P 467,466.50
Less: Cost of goods sold............................................................................................... 95,000.00
Gross profit.....................................................................................................................P 372,466.50
Less: Operating expenses............................................................................................ 0.00
P 372,466.50
Add: Interest income................................................................................................... 18,207.32
Net income...................................................................................................................P 390,673.82
Recognition of Franchise Rights Revenue Over Time
Depending on the economic substance of the rights, the franchisor may be providing access to the right rather
than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather
than at a point in time.
II – Initial Franchise Fee/Commingled Revenue
Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as a franchisee
of Frozen Delight. Of this amount P25,000 is collected immediately. The remainder is collected in four
equal annual instalments of P12,500 each. These instalments have a present value of P41,402. As part
of the total franchise fee, Frozen Delight also provides training (with a fair value of P2,000) to help
franchisees get the store ready to open. The franchise agreement is signed of April 1, 20x5, training is
completed, and the store opens on July 1, 20x5.
1. The amount of revenue from training and franchise on April 1, 20x5 to:
a. Zero. c. P66,402
b. P64,402 d. P75,000
2. The amount of revenue from training and franchise on July 1, 20x5 to:
a. Zero. c. P66,402
b. P64,402 d. P75,000
III – Initial Franchise Fee
Items 1 to 7 are based on the following information:
Pacific Crossburgers Inc. charges an initial fee of P70,000. Upon the signing of the agreement
(which covers 3 years), a payment of P28,000 is due. Thereafter, three annual payments of
P14,000 are required. The credit rating of the franchisee is such that it would have to pay
interest at 10% to borrow money. The franchise agreement signed on May 1, 20x5, and the
franchise commences operation on July 1, 20x5.
1. The amount of franchise revenue on May 1, 20x5 assuming no future services are required by the
franchisor once the franchise starts operations:
a. Zero. c. P62,816
b. P28,000 d. P70,000
2. In relation to No. 1, the amount of franchise revenue on July 1, 20x5:
a. Zero. c. P62,816
b. P28,000 d. P70,000
3. The amount of franchise revenue on May 1, 20x5 assuming that t he franchisor has substantial
services to perform, once the franchise begins operations, to maintain the value of the
franchise.
a. Zero. c. P62,816
b. P28,000 d. P70,000
4. In relation to No. 3, the amount of franchise revenue on December 31, 20x5:
a. Zero. c. P62,816
b. P13,959 d. P70,000
5. The amount of franchise revenue on May 1, 20x5 assuming that the total franchise fee includes
training services (with a value of P2,400) for the period leading up to the franchise opening and for
two (2) months following opening.
a. Zero. c. P62,816
b. P60,416 d. P70,000
6. In relation to No. 5, the amount of franchise revenue excluding service revenue – training on July 1,
20x5:
a. Zero. c. P61,616
b. P60,416 d. P63,616
7. In relation to Nos. 5 and 6, the amount of service revenue on September 1, 20x5:
a. Zero. c. P 2,400
b. P1,200 d. P70,000

lOMoARcPSD|12221919

Solution:
1. a
May 1, 20x5 (Date of Signing)
Cash …………………………………………………………………………………………………. . 28,000
Notes Receivable (P70,000 – P28,000)…………………………………………………………………. 42,000
Discount on Notes Receivable /Unearned Interest Income
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Unearned Franchise Revenue (P28,000 + P42,000 – P7,184)…………..………………. 62,816
2. c
July 1, 20x5 (Date of Opening – Point in Time)
Unearned Franchise Revenue…………………………………………………………………………. 62,816
Franchise Revenue……………………………………………………………………………. 62,816
3. a
Cash ………………………………………………………………………………………………….. 28,000
Notes Receivable (P70,000 – P28,000)………………………………………………………………… 42,000
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Contract Liability (franchise) (P28,000 + P42,000 – P7,184)…………..………………. 62,816
Note: A contract liability is generally referred to as Unearned Sales Revenue,
Unearned Service Revenue, or any appropriate account title.
4. b - December 31, 20x5 (Date of Signing – Over Time): (P62,816 ÷ 3) x 8/12 = P13,959
Unearned Franchise Revenue…………………………………………………………………………. 13,959
Franchise Revenue……………………………………………………………………………. 13,959
5. a
Cash ………………………………………………………………………………………………….. 28,000
Notes Receivable (P70,000 – P28,000)………………………………………………………………… 42,000
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Unearned Service Revenue (Training)…………………………………………………… 2,400
Unearned Franchise Revenue (P28,000 + P42,000 – P7,184 – P2,400)..……………... 60,416
6. b
July 1, 20x5 (Date of Opening – Point in Time and Over Time)
Unearned Franchise Revenue………………………………………………………………………….. 60,416
Unearned Service Revenue (Training) – P2,400/2 …………………………………………………. 1,200
Franchise Revenue (Point in Time)......…………………………………………………….. 60,416
Service Revenue (Training – Over Time)…………………………………………………... 1,200
7. b
September 1, 20x5
Unearned Service Revenue (Training)………………………………………………………………... 1,200*
Service Revenue…………………………………………………………………………… ……… 1,200
(Calculations rounded). *Present value of ordinary annuity 3 years at 10%.
V – Initial Franchise Fee

1. TopChop sells hairstyling franchises. TopChop receives P50,000 from a new franchisee for providing
initial training, equipment and furnishings that have a stand-alone selling price of P50,000.
TopChop also receives P30,000 per year for use of the TopChop name and for ongoing consulting
services (starting on the date the franchise is purchased). Carlos became a TopChop franchisee
on July 1, 20x6, and on August 1, 20x6, had completed training and was open for business. How
much revenue in 20x6 will TopChop recognize for its arrangement with Carlos?
a. Zero c. P65,000
b. P10,000 d. P70,000
2. Pita Pal sells fast-food franchises. Pita Pal receives P75,000 from a new franchisee for providing
initial training, equipment, and furnishings that together have a stand-alone selling price of
P75,000. Pita Pal also receives P36,000 per year for use of the Pita Pal name and for ongoing
consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal
franchisee on March 1, 20x6, and on May 1, 20x6 Rachel had completed training and was open
for business. How much revenue in 20x6 will Pita Pal recognize for its arrangement with Rachel?
a. Zero c. P 99,000
b. P75,000 d. P105,000
VI – Initial Franchise Fee, Continuing Franchise Fee and Bargain Purchase
1. On January 1, 20x5 Dairy Treats, Inc. entered into a franchise agreement with a company allowing
the company to do business under Dairy Treats's name. Dairy Treats had performed substantially all
required services by January 1, 20x5, and the franchisee paid the initial franchise fee of P840,000 in
full on that date. The franchise agreement specifies that the franchisee must pay a continuing
franchise fee of P72,000 annually, of which 20% must be spent on advertising by Dairy Treats. What
entry should Dairy Treats make on January 1, 20x5 to record receipt of the initial franchise fee and
the continuing franchise fee for 20x5?

lOMoARcPSD|12221919

a. Cash .................................................................................................... 912,000
Franchise Fee Revenue ..................................................... 840,000
Revenue from Franchise Fees .......................................... 72,000
b. Cash .................................................................................................... 912,000
Unearned Franchise Fees ................................................. 912,000
c. Cash .................................................................................................... 912,000
d. Prepaid Advertising .......................................................................... 14,400
Cash .................................................................................................... 912,000
2. Wynne Inc. charges an initial franchise fee of P1,840,000, with P400,000 paid when the agreement
is signed and the balance in five annual payments. The present value of the future payments,
discounted at 10%, is P1,091,744. The franchisee has the option to purchase P240,000 of equipment
for P192,000. Wynne has substantially provided all initial services required and collectibility of the
payments is reasonably assured. The amount of revenue from franchise fees:
a. P 400,000. c. P1,491,744.
b. P1,443,744. d. P1,840,000.
3. Pasta Inn charges an initial fee of P1,600,000 for a franchise, with P320,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 10%, is P1,014,000. The franchisee has the right to purchase P60,000 of
kitchen equipment and supplies for P50,000. An additional part of the initial fee is for advertising to
be provided by Pasta Inn during the next five years. The value of the advertising is P1,000 a month.
Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial
services required by the contract. How much revenue from franchise fee be recognized when the
agreement is signed?
a. Zero. c. P1,590,000
b. P1,264,000 d. P1,600,000
Answer: b
Total Franchise Fee…………………………………………… P1,600,000
Less: Unearned Interest Income
Amount due………………………………………….. P1,280,000
Less: Present value of payments…………………. 1,014,000 ( 266,000)
Bargain Purchase Option (P60,000-P50,000) - note ( 10,000)
Advertising (P1,000 x 60 months)……………………. ( 60,000)
Revenue from Franchise Fee………………………………. P1,264,000
Incidentally, the entry would be as follows:
Cash …………………………………………………………................... 320,000
Notes Receivable........................................................................ 1,280,000
Unearned Interest Income/Discount on Notes Receivable.. 266,000
Revenue from Franchise Fees............................................... 1,264,000
Unearned Franchise Fees (P10,000 + P60,000)..................... 70,000
Note: Bargain Purchases (Point in Time)

In addition to providing services as part of the continuing franchise fee, a franchisor often sells
supplies to the franchisee. These sales occur because the franchisor may be able to obtain
quantity discounts from manufacturers or wholesalers, or to ensure the quality of the supplies.
The franchisor records these sales and related expenses in the normal manner.
In addition to paying continuing franchise fees, franchisees frequently purchase some or all of
their equipment and supplies from the franchisor. The franchisor would account for these sales
as it would for any other product sales.
Sometimes, however, the franchise agreement grants the franchisee the right to make bargain
purchases of equipment or supplies after the initial franchise fee is paid.
The amount to be deferred shall be either of the following:
 the reasonable profit If indicated bargain price or option price is lower than the normal
selling price of the same product,
 or if it does not provide the franchisor a reasonable profit, then a portion or the full amount
of the initial franchise fee should be deferred and recognize at point in time or at the time
the equipment and supplies will be delivered.
The deferred portion would be accounted for as an adjustment of the selling price when the
franchisee subsequently purchases the equipment or supplies (point in time).

lOMoARcPSD|12221919

Consignment Accounting
A consignment constitutes the transfer of possession of merchandise without the transfer of title from
the owner, called the consignor, to another person, called the consignee. The consignee acts as an
agent in behalf of the consignor for the purpose of selling the goods for a commission.
The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has
taken place, it is not the intent of either the consignor or the consignee that sale and purchase
transactions take place. Title of the goods remains with the consignor, and recognition of the sale is
deferred until goods are transferred to a third party by the consignee.
The merchandise is carried throughout the consignment as the inventory of the consignor, separately
classified as Merchandise Inventory on Consignment. It is not recorded as an asset on the consignee’s
books. Upon sale of the merchandise, the consignee has liability for the net amount due the
consignor.
When an entity delivers its product to a dealer for distributor for sale to end customers, the entity
needs to determine whether the contract is a sale or a consignment arrangement.
SALE The dealer or distributor Recognize revenue when the product is shipped
has obtained control of or delivered to the dealer or distributor
the product (depending on the terms of the contract.)
CONSIGNMENT The dealer or distributor Recognize revenue when the dealer or distributor
has not obtained sells the product to a customer, or when the
control of the product dealer or distributor obtains control of the
product (i.e. after a specified period of time
expires).
The following are indicators of a consignment arrangement:
 The entity controls the product until a specified event occurs, such as the sale of the product
to a customer or until a specified period expires.
 The entity can require the return of the product or transfer the product to another party.
 The dealer does not have an unconditional obligation to pay the entity for the product
(although it might be required to pay a deposit).
A common principal-agent relationship involves consignments. In these cases, manufacturers (or

wholesalers) deliver goods but retain title to the goods until they are sold. This specialized method of
marketing certain types of products makes use of an agreement known as a consignment.
Under this arrangement, the consignor (manufacturer or wholesaler) ships merchandise to the
consignee (dealer), who is to act as an agent for the consignor in selling the merchandise. Both
consignor and consignee are interested in selling – the former to make a profit or develop a market,
the latter to make a commission on the sale.
The consignee accepts the merchandise and agrees to exercise due diligence in caring for and
selling it. The consignee remits to the consignor cash received from customers, after deducting a sales
commission and any chargeable expenses.
In consignment sales, the consignor uses a modified version of the point-of-sale basis of revenue
recognition. That is, the consignor recognizes revenue only after receiving notification of the sale and
cash remittance from the consignee.
The consignor carries the merchandise as inventory throughout the consignment, separately classified
as inventory (consignment). The consignee does not record the merchandise as an asset on its books.
Upon sale of the merchandise, the consignee has a liability for the net amount due to the consignor.
The consignor periodically receives from the consignee a report called account sales that shows the
merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash
remitted. Revenue is then recognized by the consignor.
Rights and Responsibilities of the Consignee
Before goods are transferred on consignment, a written agreement should specify clearly the intent of
the parties. The agreement should address such issues as the amount and type of the consignee’s
expenses to be reimbursed by the consignor, how the consignee’s commissions are to be computed,
when commissions are to be paid, the credit terms and conditions, if any, to be considered by the
consignee in granting credit, and the responsibility for collection of receivables. The agreement
should be complete and attempts to avoid potential points of conflict. For items not provided for in
the agreement that result in litigation, the laws of bailment and agency apply.

lOMoARcPSD|12221919

Accounting by the Consignor
The journal entries t o be made on the books of the consignor vary, depending on:
 Whether consignment transactions are recorded in separate ledger accounts for
the purpose of determining profits on consignment sales, or are simply combined with
the regular account balances, and
 Whether a perpetual or periodic in v e n to ry system is used.
Because title to the merchandise is held by .the consignor but physical possession is held
by the consignee, special accounting records must be maintained by the consignor for
control purposes.
No revenue is recognized until a sale is made by the consignee. Upon shipment of the merchandise
by the consignor, an inventory account is established on the consignor's books to identify the
consigned merchandise.
Any consignment expenses paid by the consignor are added to the inventory balance as added
costs. The consignee does not make an entry for receipt of the Inventory in the general ledger;
however, memorandum control records usually are kept.
Any reimbursable expense paid by the consignee is charged to a receivable account by
consignee and added to the inventory balance by the consignor.
When -a sale is made, consignor recognizes the sale as revenue according to one of the revenue
recognition methods, and the consignee recognizes the commission as revenue on the transaction.
Consignor’s:
1. Consignment transactions recorded separately – this method determines consignment profit
separate from regular sales. An inventory account called as Inventory on Consignment* is
used to record transactions in relation to consignment.
Inventory on Consignment* account is debited for:
 Cost of goods shipped on consignment
 Expenses related to consignment incurred by the consignor
 Reimbursable expenses related to consignment paid by the consignee.
Inventory on Consignment* account is credited for:
 Cost of goods returned by the consignee
 Cost of consignment sales and expenses relating to consignment.
*account term “consignment-out” maybe alternatively used when consignment profit can be calculated separately.
2. Consignment transactions not recorded separately – consignment transactions are treated

like a regular type of sales. Determination of consignment profit is not required because it is
already part of the profit of the entire entity.
Accounting by the Consignee
Accounting procedures established by the consignee must recognize that goods received on
consignment are not owned. However, as noted earlier, the consignee must:
 Maintain records and controls that permit the identification of:
a. Goods held on consignment and
b. Related receivables and reimbursable expenses, and
 Prepare periodic reports. The consignee normally creates a special account: Consignor
Receivable or Consignor Payable* ,
Consignee’s
1. Consignment transactions recorded separately – under this method, two accounts are
needed to be maintained in relation to consignment transactions:
Consignor receivable* account is:
 debited for expenses paid by the consignee but chargeable to the consignor
 credited when remittance is made to the consignor
Consignor payable* account is:
 credited for the sales by the consignee
 debited when remittance is made by the consignor
*account term “consignment-in” maybe alternatively used when consignment profit can be calculated separately.
2. Consignment transactions not recorded separately – consignment transactions are treated like
a regular type of sales. Determination of consignment profit is not required because it is
already part of the profit of the entire entity.
Transactions recorded separately are more convenient on the consignor and consignee’s books to
determine the results of operations.

lOMoARcPSD|12221919

The following costs and expenses for the consignment transactions should carefully be noted:
 Items to be allocated between sold and unsold items:
a. Freight cost paid by the consignor upon shipment
b. Freight and cartages paid by the consignee upon receipt of the shipment
c. Insurance freight of consigned goods
d. Packaging costs of consigned goods
e. Costs and fees such as repairs, installation of devices paid by the consignor and/or
consignee related to the consigned goods.
 Items chargeable to the sold units:
a. Commissions
b. Delivery and installation
c. Advertising
d. Reconditioning on delivered units to customers
e. Insurance in transit to customers
f. Expenses related to returned units delivered
Consignment Sales
The accounting procedures regarding consignment sales under PFRS 15 still remains and for purposes
of overview regarding the application of PFRS 15 on consignment:
 Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold.
 Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is
to act as an agent for the consignor in selling the merchandise. Consignee makes a
commission on the sale.
 Consignor makes a profit on the sale and carries merchandise as inventory.
The CC Manufacturing Company delivered ten DVD players to CLTV Company on consignment.
These DVD player cost P3,000 each and are to be sold at P5,000 each. The CC Manufacturing Co.
paid shipment cost of P2,500.
CLTV Co. submitted an account sales stating that it had returned one unit and was remitting P21,900.
This amount represents the total amount due to CC Manufacturing Co. after deducting the following
from the selling price of the DVD player sold:
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% of selling price
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000
Delivery and installation . . . . . . . . . . . . . . . . . . . P 600
Cartage on consigned goods . . . . . . . . . . . . . . P 500
1. The number of units sold by TV Co. is:
a. 4 c. 6
b. 5 d. None of the above
2. The profit (loss) on consignment realized by CC Manufacturing Company is:
a. P2,300 c. (P2,550)
b. P2,480 d. None of the above
3. The cost of inventory in the hands of CLTV Company is:
a. P10,080 c. P10,200
Solution:
1.
Sales (unknown)
Less Charges:
Commission (unknown)
Advertising
Delivery and installation
Cartage on consigned goods
Remittance
x–( + + + )=P
x– x=P +P
%x = P
x = P________
Number of units sold = _P_________ = __
P per set

lOMoARcPSD|12221919

2.
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(10) (6) (3)
Consignor’s charges:
Cost, P300
Freight-in/Cartage-In
Consignee’s charges:
Commission (20% x P________)
Advertising
Delivery and installation
Freight/Cartage
Total
Sales price
Profit on Consignment
3. – refer to No. 2 for computation.

TS Trading consigned 100 beds costing P600 each to PP Company. The advertised selling price is
P1,000 each bed. The consignment agreement provides that the consignee is to be allowed a
commission of 15% of the selling price. Furthermore, PP Company has to draw a sight draft for 60% of
the cost of the beds; the advance is to be recovered periodically by monthly deductions (in
proportion to units sold) from the remittances which accompany the account sales. All expenses of
the consignee are to be deducted monthly as incurred.
At the end of the first month, the consignee rendered an account sales showing among others the
following charges: Commission, P2,250; Advertising, P1,500; and Delivery Expense, P750.
4. The number of units sold by PP Co. is:
a. 10 c. 20
b. 15 d. 25
5. The amount remitted to TS Co. for the month is
a. P1,500 c. P5,100
b. P4,500 d. P5,500
6. The consignment profit (loss) of TS Co. is:
a. (P1,500.00) c. P3,412.50
b. P 2,137.50 d. None of the above
Solution:
4. b
Sales (P2,250 / 15%) P15,000
Divided by: Selling price per unit P 1,000
Number of units sold 15 units
5. c
Sales P15,000
Less Charges by consignee
Commission P 2,250
Advertising 1,500
Delivery expense ___750 __4,500
Due to Consignor P10,500
Less: Advances
Value of note – sight draft: (100 beds x P600 per bed) x 60% P36,000
Multiplied by: Proportional number of beds sold 15/100 __5,400
Amount remitted P 5,100
6. d – P1,500
Sales P15,000
Less Charges:
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds) 9,000
Consignee’s charges:
Commission P2,250
Advertising 1,500
Delivery expense ___750 __4,500
Consignment net income P1,500

lOMoARcPSD|12221919

On June 1, DD Company shipped twenty five DVD to BB View Store on consignment. The DVD is to be
sold at an advertised price of P200 per item. The cost of each DVD to the consignor is P100. The
consignor paid P75 to ship the merchandise. Commission is to be 25% of sales price. During the month,
two DVD were returned. On June 30, BB View Store remitted the amount due to consignor after
deducting commission of P400.
7. The amount remitted by BB View Store is:
a. P1,100 c. P1,200
b. P1,600 d. P2,000
8. The consignment profit is:
a. P370 c. P720
b. P415 d. P800
9. The cost of inventory on consignment amounted to:
a. P1,400 c. P1,545
b. P1,550 d. P1,500
Items 10 and 11 are based on the following information:
On October 1, 20x4, the NN Company consigned one hundred wall clocks to P&G Retailers, Inc. Each
wall clock had a cost of P150. Freight on the shipment was paid by NN Company for P200. On
December 1, 20x4, P&G submitted an account sales stating that it had sold sixty pieces and it was
remitting the P12,840 balance due. The remittance was net of the following deductions from the sales
price of the wall clocks sold:
Commission (20% of sales price)………………………… ?
Advertising and repairs.........................................……… P500
Delivery and installation charges………………….……. P100
10. What was the total sales price of the wall clocks sold by P&G Retailers, Inc.?
a. P13,440 c. P16,800
b. P15,000 d. P17,000
11. What was the cost of inventory on consignment?
a. P 6,000 c. P6,280
b. P6,080 d. P6,320
Solution:
10. c – P16,800
Sales (unknown) x
Less Charges:
Advertising P500
Delivery and installation charges 100
Commission (unknown) 20%x _______
Remittance P 12,840
x – (P500 + P100 + 20%x) = P 12,840
x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800
11. b- P6,080
Cost (P150 per unit x 40 units) P6,000
Freight on shipment (P200 x 40/100) 80
Cost of inventory on consignment P6,080

On May 1, 20x4, TV Inc. consigned 80 VCD players to Ed's TV. The VCD player cost P270. Freight on the shipment
paid by Ed’s TV was P600. On July 10, TV Inc. received an account sales and P12,900 from Ed's TV. Thirty VCD
players had been sold and the following expenses were deducted:
Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 600
Commission (20% of sales price) . . . . . . . . . . . . ?
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 390
Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 210
14. The total sales price of the VCDs sold by Ed's TV was:
a. P15,375 c. P16,388
b. P16,125 d. P17,625
15. The inventory of VCDs will be reported on whose balance sheet and at what amount?
Balance Sheet Amount of Balance Sheet Amount of
of Inventory of Inventory
a. TV Inc. P 13,875 c. Ed TV P 13,875
b. TV Inc. P 13,500 d. Ed TV P 13,500
Solution:
14. d - P17,625
Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.
15. a-(P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.

lOMoARcPSD|12221919


Information relating to regular sales and consignment sales of EE Products for the year ended June 30,
20x4 follows:
Regular Sales Consignment Sales Total
Sales . . . . . . . . . . . . . . . . . . . . . . . . . P120,000 P30,000 P150,000
Cost of Sales . . . . . . . . . . . . . . . . . . 84,000 26,000 110,000
Operating expenses . . . . . . . . . . . ? 1,760 16,910
You ascertain that merchandise costing P6,500 are in the possession of consignees and are included
in the cost of consigned merchandise sold. Operating expenses of P15,150 (more than half of which
are fixed) are to be allocated to regular sales and to consignment sales on the basis of volume. The
P1,760 operating expenses relating to consignment sales include a commission of 5% and P260 Costs
incurred by consignees relating to the entire shipment of merchandise worth P26,000.
16. The net income on regular sales is:
a. P30,280 c. P17,380
17. The net income on consignment sales is:
a. P8,740 c. P2,240
Solution:
16. b
Consignment
Regular Sales Sales Total
Sales P120,000 P30,000 P150,000
Cost of sales 84,000 19,500* 103,500
Gross profit P 36,000 P10,500 P 46,500
Operating expenses:
Commission (P30,000 x 5%) P 1,500 P 1,500
Freight-in (P260 x P19,500*/P26,000) 1,950 1,950
Others
Regular (P15,150 x P19,500/P26,000) 12,120
Consignment
(P15,150 x P30,000/P150,000) _______ 3,030 3,030
Total P 12,120 P 4,725 _P16,845_
Net profit P 23,880 P 5,775 P29,655
*P26,000 – P6,500 = P19,500
17. d – P5,775 (refer to No. 19 for computation)
18. Seahawks, Inc. had the following consignment transactions during December:
Inventory shipped on consignment to Ashe Company . . . P18,000
Freight paid by Seahawks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Inventory received on consignment from Fenn Company 12,000
Freight paid by Fenn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
No sales of consigned goods were made through December 31. Seahawks' December 31 balance sheet should include
consigned inventory at
a. P18,900 c. P12,500
b. P18,000 d. P12,000
Answer: a – (P18,000 + P900) = P18,900
18. Kerianne paints landscapes, and in late 20x6 placed four paintings with a retail price of P250 each in the Holmstrom Gallery.
Kerianne’s arrangement with Holmstrom is that Holmstrom will earn a 20% commission on paintings sold to gallery patrons.
As of December 31, 20x6, one painting had been sold by Holmstrom to gallery patrons. How much revenue with respect to
these four paintings should Kerianne recognize in 20x6?
a. P 0 c. P250
b. P50 d. None of the above
Answer: c - P250, equal to revenue for the sale of one painting. Kerianne has a consignment arrangement with Holmstrom,
so should not recognize transfer of paintings to Holmstrom as sales. Kerianne would recognize Holmstrom’s commission of
P250 × 20% = P50 as an expense.
GOD BLESS YOU ALWAYS!!!
*The great thing in the world is not so much where you are but in what direction you are going*
*There are only two things in the world to worry over; the things you can control,
and the things you can’t control. Fix the first, forget the second.*

CPA Review Batch 45  May 2023 CPA Licensure Examination
AFAR-06
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ
PFRS 15: Revenue from Contracts

with Customers – OTHER TOPICS
Revenue from Contracts with Customers
Different sectors or industries are affected in many different ways along the 5-step model as introduced by
IFRS (PFRS) 15. There are four (4) important industries that will face probably the biggest challenges:
1. Telecommunications: Identifying individual performance obligations and allocating transaction
price
2. Manufacturers: Contract modifications
3. Software development and technology: Splitting the contract into two (2) separate obligations]
4. Real estate and property development: Revenue over time/at the point of time
IFRS (PFRS) 15 will replace the following standards and interpretations:
• PAS 18 Revenue,
• PAS 11 Construction Contracts
• SIC 31 Revenue – Barter Transaction Involving Advertising Services
• PFRIC 13 Customer Loyalty Programs
• PFRIC 15 Agreements for the Construction of Real Estate and
• PFRIC 18 Transfer of Assets from Customers
The core principle of IFRS (PFRS) 15 is that an entity will recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration (payment) to which the entity
expects to be entitled in exchange for those goods or services.
• PFRS 15 contains guidance for transactions not previously addressed (service revenue, contract
modifications);
• PFRS 15 improves guidance for multiple-element arrangements;
• PFRS 15 requires enhanced disclosures about revenue.
Overview of Revenue Recognition in Relation to PFRS 15
Revenue Recognition
The 5-Step Process (Key: COPAS) Other Revenue Recognition Issues
1. Contract with customers 1. Right of return

2. Bill-and-hold arrangements
2. Separate performance obligations
3. Principal-agent relationships
3. Determining the transaction price 4. Warranties
5. Repurchase agreements
4. Allocating the transaction price 6. Licenses and Royalties (AFAR-05)
5. Satisfying performance obligations 7. Franchise (AFAR-05)
(Installment sales, Construction 8. Non-refundable upfront fees (AFAR-05)
contracts, and Franchise) 9. Consignments (AFAR-05)
Revenue from Contracts with Customers adopts an asset-liability approach. Companies:

• Account for revenue based on the asset or liability arising from contracts with customers.
• Are required to analyze contracts with customers
▪ Contracts indicate terms and measurement of consideration.
▪ Without contracts, companies cannot know whether promises will be met.
However, IFRS (PFRS) 15 requires capitalizing them and recognizing them in profit or loss in line with revenue
recognition.

REVENUE from CONTRACTS with CUSTOMERS – OTHER TOPICS
AFAR-06
A Review: Key Considerations When Applying the Five Steps to Revenue Recognition
A Summary: Fundamental Issues related to Recognizing Revenue.

AFAR-06
Detailed Analysis and their Respective Examples of Revenue Recognition
The five steps of revenue recognition will now be considered in more detail.
Step 1: Identify the contract
A contract can be agreed in writing, orally, or through other customary business practices. An entity can
only account for revenue if the contract meets all of the following criteria:
• the parties to the contract have approved the contract and are committed to perform their
respective obligations
• the entity can identify each party’s rights regarding the goods or services to be transferred
• the entity can identify the payment terms for the goods or services to be transferred
• the contract has commercial substance, and
• it is probable that the entity will collect the consideration to which it will be entitled in exchange for
the goods or services that will be transferred to the customer
Step 2: Identifying the Separate Performance Obligations within a Contract

Performance obligations – a promise to transfer to a customer:
• a good or service (o bundle of goods or services) that is distinct (separable); or
• a series of goods or services that are substantially the same and are transferred in the same way.
The distinct (separable) performance obligations within a contract must be identified.
A good or service is distinct (or separable) if both of the following criteria are met:
1. The customer can benefit from the good or service in its own, or when combined with the
customer’s available resources; and
2. The promise to transfer the goods or service is separately identifiable from other goods or services
in the contract.
A transfer of good or service is not separately identifiable (or inseparable) if the good or service:
• is not integrated with other (not included with other products) goods or services in the contract; or
• does not modify or customize another good or service (cannot modify other product) in the
contract; or
• does not depend (independent to other products) on or relate to other goods or services promised
in the contract.
Therefore, If a promise to transfer a good or service is not distinct (not separable or inseparable) from
other goods or services in a contract, then the goods or services are combined into a single
Some contracts contain more than one performance obligation. For example:
• An entity may enter into a contract with a customer to sell a car, which includes one year’s free
servicing and maintenance
• An entity might enter into a contract with a customer to provide five (5) lectures, as well as to
provide a textbook on the first day of the course.
Step 3: Determining the Transaction Price
Amounts collected on behalf of third parties (such as sales tax or VAT) are excluded.
The consideration promised in a contract with a customer may include fixed amounts, variable amounts,
or both.
• The transfer price does not include amounts collected for third parties (i.e. sales taxes or VAT).
• The effects of the following must be considered when determining the transaction price:
➢ the time value of money (the time value of money does not need to be considered if the length
of the contract is less than one year);
➢ any non-cash consideration is measured at fair value.
➢ estimates of variable consideration
➢ any consideration payable to the customer (is treated as a reduction in the transaction price
unless the payment is entirely unrelated, e.g. for goods or services purchased from the
customer).
Time Value of Money
Financing
If there is a significant financing component, then the consideration receivable needs to be
discounted to present value using the rate at which the customer would borrow.

AFAR-06
Indications of a Financing Component. The following may indicate the existence of a significant
financing component:
▪ The difference between the amount of promised consideration and the cash selling price of the
promised goods or services
▪ The length of time between the transfer of the promised goods or services to the customer and
the payment date.
Non-cash Consideration.
If the fair value of non-cash consideration cannot be estimated reliably then the transaction is
measured using the stand-alone selling price of the good or services promised to the customer.
Variable Consideration.
Refunds/Rebates
If a product is sold with a right to return it then the consideration is variable. The entity must estimate
the variable consideration and decide whether or not to include it is in the transaction price.
The refund liability should equal the consideration received (or receivable) that the entity does not
expect to be entitled to.
• If the consideration promised in a contract includes a variable amount, the variable
consideration must be estimated
• Price dependent on future events
• Examples of variable consideration:
1. Volume discounts
2. Refunds or rebates (e.g., for late completion)
3. Rights of return
4. Incentives (e.g. for early completion)
5. Royalties (AFAR-05) or performance bonuses or customer referral bonuses
6. Entertainment and Media – Royalties (AFAR-05)
7. Health care – Medicare and Medical reimbursements
8. Price concession
9. Telecommunication – rebates
10. Construction – Incentive payments (AFAR-04)
• One of two methods should be used to estimate the amount of variable consideration of
revenue to recognize whichever method gives the best prediction:
1. Expected value
2. Most likely amount
The chosen method should be applied consistently throughout the contract.
• Variable consideration may be attributable to:
1. an entire contract; or
2. a specific part of a contract (e.g., part of the performance obligations or part of the
distinct goods or services promised in a single performance obligation)
Sometimes a transaction price is uncertain because some of the price depends on the
outcome of future events. Contracts that include this variable consideration are
commonplace in many industries, including construction (incentive payments),
entertainment (talent fees) and media (royalties), health care (PhilHealth, Medicard
reimbursements, etc.), manufacturing (volume discounts and product returns), and
telecommunications (rebates).
Estimating Variable Consideration
When an amount to be received depends on some uncertain future event, the seller still
should include the uncertain amount in the transaction price by estimating it.
▪ Expected Value: the sum of possible amounts or probability-weighted amount in a
range of possible consideration amounts:
1. May be appropriate if a company has a large number of contracts with similar
characteristics.
2. Can be based on a limited number of discrete outcomes and probabilities.
▪ Most Likely Amount: The single most likely amount in a range of possible consideration
outcomes.
On the other hand, if only two outcomes are possible, the most likely amount might be the
best indication of the amount the seller will likely receive

AFAR-06
Consideration Payable to the Customer
If consideration is paid to a customer in exchange for a distinct good or service, then it is essentially
a purchase transaction and should be accounted for in the same way as other purchases from
suppliers.
Assuming that the consideration paid to a customer is not in exchange for a distinct good or service,
an entity should account for it as a reduction of the transaction price.
Step 4: Allocate the Transaction Price

Recognition of Revenue - Transaction Price
• Recognize revenue when (or as) a performance obligation is satisfied by transferring a promised
good or service (an asset) to the customer.
• An asset is transferred when (or as) the customer gains control of the asset.
• The entity must determine whether the performance obligation will be satisfied:
1. over time or
2. a point in time.
The total transaction price should be allocated to each or separate performance obligation in proportion
to stand-alone selling price of the goods or services.
Stand-alone selling-price – the price at which entity would sell a promised good or service separately to a
customer.
• The best evidence of stand-alone selling price is the observable price of a good or service when it
is sold separately.
• If a stand-alone selling price is not directly observable, then the entity estimates the stand-alone
selling price.
➢ The allocation is made at the beginning of the contract and is not adjusted for subsequent
changes in the stand-alone selling price.
Allocate the Total Transaction Price:
• Based on the relative fair values of the Separate Performance Obligations in proportion to the stand-
alone selling prices.
• If not available, companies should use their best estimate of what the good or service might sell for
as a standalone unit.
• If a customer is offered a discount (normal) for purchasing a bundle of goods and services, then the
discount should be allocated across all performance obligations within the contract in proportion
to their stand-alone selling prices (unless observable evidence suggests that this would be
inaccurate.)
There are three ways of transaction price allocation:
1. Adjusted market assessment approach – determine how goods or services will be sold and estimate
the price those customers are willing to pay. This may include the price of the competitor’s for similar
goods or services with price adjustments to reflect normal costs and profit.
The seller considers what it could sell the product or services for in the market in which it normally
conducts business, perhaps referencing prices charged by competitors.
2. Estimated cost plus a margin approach – project the estimated costs of satisfying a performance
obligation and add a normal profit.
The seller estimates its costs of satisfying a performance obligation and then adds an appropriate
profit margin.
3. Residual approach – is the standalone selling price is highly variable or uncertain as to its
occurrence, then a company may estimate the standalone sales price by reference to total
transaction price less the sum of the observable standalone selling prices the goods or services
made in the contract.
The seller estimates an unknown (or highly uncertain) stand-alone selling price by subtracting the
sum of the known or estimated stand-alone selling prices from the total transaction price.
The residual approach is allowed only if the stand-alone selling price is highly uncertain, either
because:
a. the seller hasn’t previously sold the good or service and hasn’t yet determined a price for it,
or
b. the seller provides the same good or service to different customers at substantially different
prices.

AFAR-06
Volume Discount
If a customer is offered a discount for purchasing a bundle of goods and services, then the discount should
be allocated across all performance obligations within the contract in proportion to their stand-alone
selling prices (unless observable evidence suggests that this would be inaccurate.)
A discount should only be allocated to a specific component of the transaction if that component is
regularly sold separately at a discount.
Discount
• When a customer buys goods or services and is given an option to acquire additional goods or
services at a discount (a discount voucher).
The option is a separate performance obligation if it provides a material right to the customer that
would not be received without entering into the contract.
• The transaction price should be allocated between the current purchase and the discount voucher
based on relative stand-alone price. If the relative stand-alone price of the option is not directly
observable, it should be estimated, taking into account:
1. any discount the customer would receive without exercising the option; and
2. the likelihood the option will be exercised.
• The discount voucher is an advance payment (i.e., a material right) for future goods or services and
revenue should be recognized when the future goods or services are provided or the option expires.
Step 5: Recognize Revenue (PT/OT)
• Recognize revenue when (or as) a performance obligation is satisfied by transferring a promised
good or service (an asset) to the customer
• An asset is transferred when (or as) the customer gains control of the asset.
• The performance obligation will be satisfied over time or at a point in time.
For each performance obligation identified, an entity must determine at contract inception whether it
satisfies the performance obligation:
• over time (OT), or
• at a point in time/single point in time (PT)
Satisfied Over Time/OT (Key: CCN)
• A performance obligation is satisfied over time if one of the following criteria is met:
1. The customer simultaneously receives and CONSUMES the benefits of the seller’s work as it is
performed of the goods or services (while the contract is being fulfilled e.g., monthly payroll
processing service; routine or recurring service).
2. The customer controls the asset as it is CREATED or enhanced i.e., when the company’s
performance creates or enhances an asset (e.g., work in process or when a contractor builds
an extension into a customer’s existing school building or simply building an asset on a
customer’s site),
3. The seller is creating an asset that has NO ALTERNATIVE use to the seller, and the seller has the
legal right to receive payment for progress to date, as when a company manufactures
customized product (e.g. construction contract or building an asset that only the customer can
use or building an asset to a customer order).
Another company would not need to substantially re-perform the work the company has
completed to date if that other company were to fulfill the remaining obligation to the
customer.
The company has a right to payment for its performance completed to date, and it expects to
fulfill the contract as promised.
• If revenue is recognized over time, we can measure progress towards complete satisfaction of the
performance obligation by using:
1. Input measures. The most common approach is to use the “cost-to-cost” ratio, which is equal
to cost incurred to date divided by estimated total costs.
2. Output measures. Examples include the passage of time and the amount of finished product
delivered.
• Revenue for a performance obligation satisfied over time can only be recognized if progress can
be reasonably estimated.
• Revenue is recognized to the extent of costs incurred if there is no reasonable estimate of progress
but costs are expected to be recoverable.

AFAR-06
Satisfied at a Point in Time/Single Point-in-Time (PT)
• A performance obligation that is not satisfied over time is satisfied at a point-in-time.
• Revenue should be recognized at the point in time when the customer obtains control of the asset.
• Usually transfer of control is obvious, and coincides with delivery.
• Indicators of the transfer of control include: (Key: PAROL)
1. The customer has an obligation to pay for an asset;
2. The customer has legal title to the asset;
3. The entity has transferred physical possession of the asset;
4. The customer has the significant risks and rewards of ownership;
5. The customer has accepted the asset.
Statement of Financial Position Presentation:
• A contract asset or contract liability should be presented in the statement of financial position when
either party has performed in a contract.
• Contract asset =Rights received > Performance obligation
Contract liability =Rights received < Performance obligation
PFRS (IFRS) 15 is not prescriptive about the treatment of contract assets/liabilities.
I – Single Performance Obligation
Assume Kim’s sells a lady’s hat to Dreicy for P1,000 that Kim’s previously purchased from a wholesaler for
P600. How would Kim’s account for the sale to Dreicy?
Step 1: Identify the contract with a customer.
In this case, the contract may not be written, but it is clear - Kim’s delivers the lady’s hat to Dreicy,
and Dreicy agrees to pay P1,000 to Kim.
Step 2: Identify the separate performance obligations within a contract.
Kim’s has only a single performance obligation - to deliver the lady’s hat.
Step 3: Determine the transaction price.
Kim is entitled to receive P1,000 from Dreicy.
Step 4: Allocate the transaction price to the separate performance obligations.
With only one performance obligation, Kim’s allocates the full transaction price of P1,000 to delivery
of the lady’s hat.
Step 5: Recognize revenue when (or as) each performance obligation is satisfied.
Kim’s satisfies its performance obligation when it delivers the lady’s hat to Dreicy, so Kim’s records the
following journal entries at that time:
Cash. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Revenues from sales of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
To record revenue from sales of goods.
Cost of sales . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
To record cost of goods sold.
Revenue recognition gets more complicated when a contract contains more than one performance
obligation.
First, consider a simple contract that includes only one performance obligation and is satisfied at a single
point in time when goods or services are transferred to a customer.
The performance obligation is satisfied when control of the goods or services is transferred from the seller
to the customer, and usually it’s obvious that transfer occurs at the time of delivery.
In Kim’s example above, for instance, the performance obligation is satisfied at the time of the sale (point
in time) when the lady hat is transferred to Dreicy.
II - Multiple Performance Obligations
Assume that on December 1, 20x8, Anton receives an order from a customer for a computer as well as 12
months of technical support. Anton delivers the computer (and transfers its legal title) to the customer on
the same day. The customer paid P50,400 upfront. The computer sells for P36,000 and the technical support
sells for P14,400.
Step 1: Identify the contract with a customer.
There is an agreement between Anton and its customer for the provision of goods and services.
Step 2 – Identify the separate performance obligations within a contract
There are two performance obligations (promises) within the contract:
• The supply of a computer
• The supply of technical support
Step 3 – Determine the transaction price
The total transaction price is P50,400.

AFAR-06
Step 4 – Allocate the transaction price to the performance obligations in the contract
Based on standalone sales prices, P36,000 should be allocated to the sale of the computer and
P14,400 should be allocated to the technical support.
Step 5 – Recognize revenue when (or as) each performance obligation is satisfied.
Control over the computer has been passed to the customer, so the full revenue of P36,000 should be
recognized on December 1, 20x8 (point in time).
The following journal entry - at a POINT in TIME, December 1, 20x8:

Cash. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,400
Revenues from sales. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14,400
To record revenue from sales of goods.
3
The technical support is provided over time, so revenue from this should be recognized over time. In
the year ended December 31, 20x8, revenue of P1,200 (1/12 xP14,400) should be recognized from
the provision of technical support.
In Summary Form:
A. We recognize revenue at a point in time when we don’t qualify for recognizing revenue over
time.
B. The performance obligation is satisfied when control of the goods or services is transferred from
the seller to the customer.
C. Usually transfer of control is obvious, and coincides with delivery.
D. Other indicators of transfer of control: the customer has
1. An obligation to pay the seller.
2. Legal title to the asset.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ow nership.
5. Accepted the asset.
The indicators as mentioned in letter “D” above indicates that control has been transferred from the
seller to the customer (the customer is more likely to control a good or service if the customer has
those indicators).
Sellers should evaluate these indicators individually and in combination to decide whether control
has been transferred and revenue can be recognized.
The following journal entry - to be provided OVER TIME, December 31, 20x8:
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .. . . . 1,200
Revenues from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
To record earned revenue.
In Summary Form:
A. Revenue should be recognized over time if goods and services are transferred over time to the
customer.
B. Revenue can be recognized over time if one of the following criteria is met: (Refer to AFAR-04)
1. The customer simultaneously receives and consumes the benefit of the seller’s work as it is
performed, or
2. The customer controls the asset as it is created or enhanced i.e., when the company’s
performance creates or enhances an asset, (e.g., work in process or when a contractor builds
an extension into a customer’s existing school building), or
3. The seller is creating an asset that has no alternative use to the seller, and the seller has the
legal right to receive payment for progress to date, as when a company manufactures
customized product.
Therefore, in the example above, the performance obligations are satisfied:
• At the time of the sale (point in time), i.e.., December 1 amounted to P36,000 and
• Over time on installment basis, i.e., every end of the month starting December 31 amounted to
P1,200 (P14,400/12 months).
****
**Be not afraid of life. Believe that life is worth living and your belief will help create the fact**
**Attitude is more important than the past, than education, than money, than circumstances, than
what people do or say. It is more important than appearance, giftedness, or skill**

AFAR-06
Application of 5-Step Process and Timing on Recognition of Revenue (Point-in-Time or Over Time)
I – 5-Step Process
1 to 10 are based on the following information:
Globemart, Inc., a telecommunications operator, entered into a contract with Kim Dorothy on March 1,
20x7. In line with the contract, Kim Dorothy subscribes for Globemart's monthly plan for 12 months and in
return Kim Dorothy receives a free Apple I-Phone handset from Globemart. Kim Dorothy will pay a monthly
fee of P1,200. Kim Dorothy gets the handset immediately after contract signature.
Globemart sells the same handsets for P3,600 and the same monthly plans for P800 per month without
handset.
1. Identify the contract with a customer – what kind of contract between Globemart, Inc. and Kim
Dorothy?
a. Oral Contract c. Customary business practice
b. Written contract d. No contract
2. Identify the performance obligations (PO) – how many performance obligations?
a. 1-Performance Obligation: Network services (monthly/installment plan)
b. 1-Performance Obligation: Apple I-Phone Handset
c. 2- Performance Obligations: Network services (monthly/installment plan) and Apple I-Phone
Handset
d. No performance obligation since there is no existing contract
3. Determine the transaction price – the total transaction price?
a. P3,600 c. P13,200
b. P9,600 d. P14,400
Monthly fee…………………………………………………………….. P 1,200
Months of subscription (effective March 31, 20x7)……………... 12
Total transaction price (P1,200 x 12 months)…………………….. P14,400
4. Allocate the transaction price to the performance obligations: the allocated transaction price to
each performance obligations?
a. None, since there is no contract
b. P9,600 network service and P3,600 for Apple I-Phone Handset
c. P0 for network service and P13,200 for Apple I-Phone Handset
d. P10,473 network service and P3,927 for Apple I-Phone Handset
IFRS (PFRS) 15 requires allocating the transaction price to individual performance obligations. In this
case, the telecommunications company must allocate total contract price between the revenue
from the sale of handset and sale of monthly plan.
Billing
Stand-alone Allocated (per
Performance Obligations Selling Price Transaction Price Revenue month)
PO 1: Network services (P800 x 12) (OT) P 9,600 (9.6/13.2) P10,473 *P 872.75 (OT) P1,200
PO 2: Apple I-Phone Handset (PT) __3,600 __3,927 3,927.00 (PT) 0
Total P13,200 P14,400
*P10,473/12 months
5. Recognize revenue when (or as) an entity satisfies a performance obligation: timing of revenue
recognition?
a. None, since there is no contract
b. Network service (PO1) and for Apple I-Phone Handset (PO2) – both overtime
c. Network service (PO1) - over time and for Apple I-Phone Handset (PO2) – point in time
d. Network service (PO1)– point in time and for Apple I-Phone Handset (PO2) – over time
PO1: Network services (monthly plan) - over time, as monthly network services are provided.
PO2: Apple I-Phone Handset - at the point of time, when handset is delivered to Kim Dorothy
6. On March 1, 20x7, the amount of accounts receivable to be recorded
a. None c. P 8,727.50
b. P3,927.00 d. P12,654.50
7. On March 1, 20x7, the revenue from sales of goods amounted to:
a. None c. P 8,727.50
b. P 3,927.00 d. P12,654.50
Solution Guide:
As a result, the timing of revenue recognition changes and another implication of this treatment is that
the revenue recognition does not correspond with monthly billing to customers, as there will be some
deferral accounts involved.

AFAR-06
Journal Entries:
March 1, 20x7
Contract assets*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,927
Revenues from sales of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,927
To record revenue sales of goods ( handset).
* Contract asset =Rights received > Performance obligation

* Contract assets are recognized when the seller has at least partially fulfilled its performance
obligations but not yet been paid, and payment depends on something other than the passage
of time.
* Contract asset – an entity’s right to consideration in exchange for goods or services that the
entity has transferred to the customer (i.e. the entity performs before the customer pays).
* Contract assets are of two types:
➢ Unconditional rights to receive consideration because the company has satisfied
performance obligation with a customer
o Entities should report unconditional rights to received consideration as a receivable
on the statement of financial position.
o A right of consideration is unconditional if only the passage of time is required before
payment is due.
➢ Conditional rights to receive consideration because the company has satisfied one
performance obligation but must satisfy another obligation in the contract before it can bill
the customer
* As alternatives to the term “contract asset”, the standard also allows the terms receivable and work-in-
progress to be used.
* If revenue exceeds cash received, this could be included within trade receivables.
* If costs to date exceed cost of sales, this could be included within inventory, as work-in-progress.
8. On March 31, 20x7, the amount of accounts receivable to be recorded

a. None c. P 1,200.00
b. P 872.75 d. P 8,727.50
9. On March 31, 20x7, the revenue from network services amounted to:
a. None c. P 1,200.00
b. P 872.50 d. P12,654.50
March 31, 20x7
Accounts receivable*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Contract assets* (1/12 x P3,927) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327.25
Revenues from network services . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 872.75
To record revenue from services for first month.
10. On December 31, 20x7, the total revenue amounted to:
a. None c. P 1,200.00
b. P 872.50 d. P12,654.50
Total revenue in 20x7:
Revenues from sales of goods – handset……………............................................... P 3,927.00
Revenues from network services (10 months x P872.75)………………………………__8,727.50
Total revenue……………………………………………………….. P12,654.50
II – Existence of a Contract Asset
1. Which of the following is not true about contract assets?
a. Contract assets are recorded when payment depends on something other than the passage of
time.
b. Contract assets are recognized when the seller has a conditional right to receive payment.
c. Contract assets are recognized when the seller has been paid in advance for at least partially
fulfilling its performance obligations.
d. Contract assets are not the same as accounts receivable.
2. Unconditional rights to receive consideration because a performance obligation has been satisfied are
a. reported as a receivable on the statement of financial position
b. reported as a contract asset on the statement of financial position.
c. reported as a contract liability on the statement of financial position.
d. are not reported on the balance sheet.
3. Partial satisfaction of a multiple performance obligation is reported on the statement of financial
position as
a. contract liability c. contract asset
b. receivable d. unearned service revenue

AFAR-06
4. On July 31, O’Malley Company contracted to have two products built by Taylor Manufacturing for a
total of P185,000. The contract specifies that payment will only occur after both products have been
transferred to O’Malley Company. O’Malley determines that the standalone prices are P100,000 for
Product 1 and P85,000 for Product 2. On August 1, when Product 1 has been transferred, the journal
entry to record this event include a
a. debit to Accounts Receivable for c. debit to Contract Assets for P85,000.
P100,000.
b. debit to Accounts Receivable for d. debit to Contract Assets for P100,000.
P85,000.
III – Existence of a Contract Liability
5. Which of the following is not true about contract liabilities?
a. Contract liabilities are only recognized when the seller has a conditional right to receive payment.
b. Contract liabilities might be called deferred revenue.
c. Contract liabilities are recognized when the seller has been paid in advance of satisfying its
performance obligations.
d. Contract liabilities may be shown on a separate line of the balance sheet.
Answer: (a)- Contract liabilities are not conditional obligations. They are an obligation that arises due to a customer prepayment.
6. Holt Industries received a P2,000 prepayment from the Ramirez Company for the sale of new office
furniture. Holt will bill Ramirez an additional P3,000 upon delivery of the furniture to Ramirez. Upon receipt
of the P2,000 prepayment, how much should Holt recognize for a contract asset, a contract liability,
and accounts receivable?
a. Contract asset: P0; contract liability: P2,000, accounts receivable, P0.
b. Contract asset: P0; contract liability: P0, accounts receivable, P0.
c. Contract asset: P2,000; contract liability: P0, accounts receivable, P0.
d. Contract asset: P0; contract liability: P0, accounts receivable, P2,000.
Answer: (a) - Holt has a contract liability, deferred revenue, of P2,000. It never has a contract asset because it hasn’t satisfied a
performance obligation for which payment depends on something other than the passage of time. It does not have an accounts
receivable for the P3,000 until it delivers the furniture to Ramirez.
IV - Contract Liability and Receivable

On January 1, 2019, Castano enters into a non-cancellable contract with Recio for the sale of an excavator
for P700,000. The excavator will be delivered to Recio on April 1, 2019. The contract requires Recio to pay
the P700,000 in advance on February 1, 2019 and Recio makes the payment on March 1, 2019.
1. On January 1, 2019, the amount of accounts receivable to be recorded:
a. None c. P 700,000
b. P350,000 d. P1,400,000
2. On January 1, 2019, the amount of revenue to be recorded:
a. None c. P 700,000
b. P350,000 d. P1,400,000
3. On February 1, 2019, the amount of accounts receivable to be recorded:
a. None c. P 700,000
b. P350,000 d. P1,400,000
4. On February 1, 2019, the amount of revenue to be recorded::
a. None c. P 700,000
b. P350,000 d. P1,400,000
On February 1, 2019, Castano recognizes a receivable because it has an unconditional right to the
consideration (i.e. the contract is non-cancellable):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .700,000
.
Contract liability*/Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . 700,000
* Contract Liability = Rights received < Performance obligation
* Contract Liability – a company’s obligation to transfer goods or services to a customer for which
the company has received consideration from the customer or consideration is due from the
customer (i.e. the customer pays or owes payment before the entity performs).
If the cash received exceeds the revenue recognized to date, there will be a contract liability
(acting effectively as deferred income).
A contract liability is generally referred to as Unearned Sales Revenue, Unearned Service Revenue,
or any appropriate account title.
If a contract is loss making, there will be a provision recorded to recognize the full loss under the
onerous contract, as per PAS (IAS) 37. This can either be termed as a contract liability or a provision.
On March 1, 2019, when Recio makes the payment Castano recognizes the cash collection:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Accounts receivable. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000

AFAR-06
5. On April 1, 2019, the amount of revenue to be recorded:
a. None c. P 700,000
b. P350,000 d. P1,400,000
On April 1, 2019, Castano recognizes revenue when the excavator is delivered to Recio:
Contract liability*/Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . .700,000
Revenue (Sales) . . . .. . . . . . . . . . . . . . . . . . …. . . . . . . . . . . . . . . . . . . 700,000
V – Existence of a Contract
1. On March 1, 20x7, Giordano Company enters into a contract to transfer a product to Hotter on July 31,
20x7. The contract is structured such that Warmer is required to pay the full contract price of P57,000
on August 31, 20x7.The cost of the goods transferred is P34,200. Giordano delivers the product to Hotter
on July 31, 20x7.The contract exist on?
a. March 1, 20x7 c. August 31, 20x7
b. July 31, 20x7 d. None of the above
Answer: (b) - No entry is required on March 1, 20x7, because neither party has performed on the contract. That is, neither party
has an unconditional right as of March 1, 20x7.
The entry on July 31, 20x7, to record the sale and related cost of goods sold is as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
The entry to record the receipt of cash on August 31, 20x7 is a follows:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
A key attribute of the revenue arrangement is that the signing of the contract by the two parties is not recorded until one or both
of the parties perform under the contract. Until performance occurs, no net asset or net liability occurs.
2. On January 15, 20x5, Bella Vista Company enters into a contract to build custom equipment for ABC
Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered
until March 31. The contract required full payment of P75,000 30 days after delivery. This contract should
be:
a. recorded on January 15, 20x5. c. recorded on March 31, 20x5.
b. recorded on March 1, 20x5. d. recorded on April 30, 20x5.
3. On July 1, 20x5, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to Kickapoo
Landscaping Co. The contract requires Kickapoo to pay the contract price of P2,500 in advance on
July 15, 20x5. Kickapoo pays Ellsbury on July 15, 20x5, and Ellsbury delivers the machine (with cost of
P1,600) on July 31, 20x5. The contract exist on:
a. July 1, 20x5 c. July 31, 20x5
b. July 15, 20x5 d. No contract exist
Answer: (b) July 1, 20x5
No entry – neither party has performed on July 1, 20x5.
July 15, 20x5
Cash ..................................................................................................................................... 2,500
Unearned Sales Revenue .................................................................................. 2,500
July 31, 20x5
Unearned Sales Revenue .................................................................................................. 2,500
Sales Revenue ........................................................................................................... 2,500
Cost of Goods Sold ............................................................................................................. 1,600
Inventory .................................................................................................................... 1,600
4. On November 1, 20x5, Green Valley Farm entered into a contract to buy a P75,000 harvester
(equipment) from John Deere. The contract required Green Valley Farm to pay P75,000 in advance
on November 1, 20x5. The harvester (cost of P55,000) was delivered on November 30, 20x5. The journal
entry for John Deere to record the contract on November 1, 20x5 includes a
a. credit to Accounts Receivable c. credit to Unearned Sales Revenue for
for P75,000. P75,000.
b. credit to Sales Revenue for d. debit to Unearned Sales Revenue for
P75,000. P75,000.
5. In relation to No. 4, the journal entry for John Deere to record the delivery of harvester (equipment) on
November 30, 20x5 includes a:
a. debit to Unearned Sales c. credit to Cost of Goods Sold for
Revenue for P75,000 P55,000.
b. credit to Unearned Sales d. debit to Inventory for P55,000.
Revenue for P75,000.

AFAR-06
6. Pampanga Communications contracted to set up a call center for the City of San Fernando. Under the
terms of the contract, Pampanga Communications will design and set-up a call center with the
following costs:
Design of call center…………………………………………………… P 10,000
Computers, servers, telephone equipment………………………. 275,000
Software………………………………………………………………….. 85,000
Installation and testing of equipment……………………………… 15,000
Selling commission……………………………………………………… 25,000
Annual service contract………………………………………………. 50,000
In addition, Pampanga Communications will maintain and service the equipment and software to
ensure smooth operations of the call center for an annual fee of P90,000. Ownership of equipment
installed remains with the City of San Fernando. The contract costs that should be capitalized is
a. P460,000 c. P360,000
b. P410,000 d. P370,000
Answer: (b) - P10,000 + P275,000 + P85,000 + P15,000 + P25,000 = P410,000.
VI - Time Value of Money:

• If payment happens before or after delivery, transaction has a financing component. If that is
significant, have to account for it.
▪ If payment before delivery, seller is getting a loan, so recognize interest expense.
▪ If payment after delivery, seller is giving a loan, so recognize interest revenue.
▪ Presume not significant if payment and delivery separated by less than one year.
1. Assume a contract for the sale of goods specifies that payment is to be made four months after
delivery of a product. The seller is likely to do which of the following, with respect to the time value
of money over the life of the contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Recognize additional cost of goods sold.
d. Ignore the time value of money.
Answer: (d) - if the payment is made nine months after delivery, the seller is essentially loaning money to the buyer. However,
since the payment is within one year of delivery, the financing component of the contract is viewed as insignificant, so the time
value of money is ignored.
VII – Timing of Revenue Recognition

Service Company
1. On February 1st, H&B Bank originated a loan for P50,000 at an interest rate of 7.2%. On March 15 th, an
interest payment of P300 was received. Which of the following best describes when interest revenue
should be recognized?
a. At a point in time (February 1st) c. At a point in time (March 31st)
b. At a point in time (March 15th d. Over time
Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for P3 million, which was
received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean and
prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 20x6 to July 31, 20x7.
2. When should Lux Hotels recognize revenue?
3. The amount of sales revenue on August 1, 20x6?
a. Zero c. P1,500,000
b. P1,250,000 d. P3,000,000
4. The sales revenue on December 31, 20x6 amounted to:
a. Zero c. P1,500,000
b. P1,250,000 d. P3,000,000
Construction: refer to AFAR-04
Trading/Merchandising
AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens and food service pr
oviders. One of its key customers is Home Kitchen & Co., which provides cafeteria solutions for corporation
s and universities. On January 1, 20x6, AgriFoods obtained a one-year contract to supply a pre-specified a
mount of vegetables to Home Kitchen, and received P600,000 in cash. Then, on March 15, AgriFoods hire
d Home to run one of its employee cafeterias for a period of six months, from April to September, and
paid P70,000 in cash. For similar arrangements, Home usually charged P50,000.

AFAR-06
5. The sales revenue on January 31 amounted to:
a. Zero c. P 70,000
b. P50,000 d. P600,000
Answer: (b) - AgriFoods would record deferred revenue at contract inception, and then fully earn it by the end of the year.
Therefore, the sales revenue for the month of January amounted to P50,000.
January 1
Cash 600,000
Deferred revenue 600,000
January 31
Deferred revenue (600,000 ÷ 12) 50,000
Sales revenue 50,000
6. The sales revenue for the year 20x6 amounted to:
a. Zero c. P580,000
b. P50,000 d. P600,000
Answer: (c) - The cafeteria service fee has a fair value of P50,000, and AgriFoods paid P70,000. The difference of P20,000 is viewed
as a sales refund, reducing revenue for the year 20x6 by that amount. Therefore, the sales revenue amounted to P580,000
(P600,000 – P20,000 refund)
Advertising expense 50,000
Cash 70,000
7. Johnson sells P100,000 of product to Robbins, and also purchases P10,000 of advertising services from
Robbins. The advertising services have a fair value of P8,000. Johnson should record revenue on its sale
of product to Robbins of:
a. P98,000 c. P90,000
b. P92,000 d. Zero
Answer: (a) - Johnson is paying more for advertising services than the fair value of those services, so the excess of P2,000
(computed as P10,000 price paid – 8,000 fair value of the services) is viewed as a refund of part of the P100,000 sale. Therefore,
Johnson records revenue of P98,000 (computed as P100,000 – 2,000).
8. On June 1, 20x5, Johnson & Sons sold equipment to James Landscaping Services. In exchange for a
zero-interest bearing note with a face value of P55,000, with payment due in 12 months. The fair value
of the equipment on the date of sale was P50,000. The amount of revenue to be recognized on this
transaction in 20x5 is
a. P55,000. c. P50,000
b. P5,000 d. P50,000 sales revenue and P2,917
interest revenue
Answer: (d) - (P55,000 − P50,000)  7/12 = P2,917.
9. P & G Auto Parts sells parts to AAA Car Repair during 20x5. P&G offers rebates of 2% on purchases up to
P30,000 and 3% on purchases above P30,000 if the customer’s purchases for the year exceed P100,000.
In the past, AAA normally purchases P150,000 in parts during a calendar year. On March 25, 20x5, AAA
Car Repair purchased P37,000 of parts. The journal entry to record the sale includes a
a. debit to Accounts Receivable for c. credit to Sales Revenue for P35,890
P37,000
b. debit to Accounts Receivable for d. credit to Sales Revenue for P36,260
P36,260.
Answer: (c) - P37,000− (P37,000  .03) = P35,890.
Manufacturing
10. Joey & Co. manufactures various types of golf clubs to third party vendors. On April 1, 20x6, Joey delivers
a large quantity of golf clubs to Aparri Country Club. Under the sales agreement, Aparri is obligated to
pay Joey & Co.P200,000 within six months. On May 1, Joey & Co. purchases for cash the right to
advertise its products during Aparri’s annual golf tournament event for P3,000. Aparri normally charges
P2,500 for such services. On August 15, Aparri pays Joey & Co. all amounts owed. The amount of
revenue that Joey & Co. should recognize on its sale of golf clubs to Aparri:
a. Zero c. P200,000
b. P199,500 d. P203,000
Answer: (b) - At the time of original sale (April 1, 20x6), there was no indication that Joey & Co. would purchase a service from
Aparri at a price higher than its fair value. Hence, the original sale would be recorded based on the full transaction price of
P200,000. Then, onMay 1, Joey & Co.’s overpayment of P500 for the services offered by the buyer (Aparri) reduces the original
transaction price by P500, so Joey & Co. should debited sales revenue as part of the transaction. Thus, Joey & Co. recognizes
revenue of P200,000 – P500 = P199,500.
April 1, 20x6:
Accounts receivable 200,000
May 1, 20x6:
Advertising expense 2,500
Sales revenue 500
Cash 3,000
August 15, 20x6:
Cash 200,000
Accounts receivable 200,000

AFAR-06
11. Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under
the terms of the contract, 12 Banners will pay Rothbart a total of P60,000, and 12 Banners can cancel
the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12
Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and
still make a profit. The manufacturing contract is expected to last six months, and as of December 31,
20x6, the job is 80% complete. How much revenue should Rothbart recognize in 20x6 for this contract?
a. P0 c. P48,000
b. P12,000 d. P60,000
Answer: (a) - This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an
alternative use to it. Therefore, Rothbart must wait until completion of the contract before recognizing revenue.
VIII – Performance Obligation

On July 15, 20x6, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing
system for a price of P90,000. The system included finely tuned scales that fit into EverFresh’s automated
assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s
automated system, and a one-year contract to calibrate the equipment and software on an as-needed
basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If
Ortiz was to provide these goods and services separately, it would charge P60,000 for the scales, P10,000
for the software, and P30,000 for the calibration contract. Ortiz delivered and installed the equipment and
software on August 1, 2016, and the calibration service commenced on that date.
1. How many performance obligations exist in this contract?
a. 0 c. 2
b. 1 d. 3
Answer: (c) - Goods and services must be distinct to qualify as performance obligations. To be distinct, goods and services must
be both capable of being distinct and separately identifiable. The scales and software appear capable of being distinct, as they
could be sold separately, but they are not separately identifiable, as they are integrated with each other and not useable without
each other. The one-year calibration contract is capable of being distinct and separately identifiable, as other vendors could
provide similar services. Therefore, the contract has two performance obligations: the combination of the scales and software,
and the calibration contract.
2. Assume that the scales, software and calibration service are all separate performance obligations. How
much revenue will Ortiz recognize in 20x6 for this contract?
a. 0 c. P74,250
b. P63,000 d. P90,000
Answer: (c) - The scales will be allocated P54,000 of transaction price (computed as P90,000 × (P60,000 ÷ (P60,000 + 10,000 +
30,000). The software will be allocated P9,000 of transaction price (computed as P90,000 × (P10,000 ÷ (P60,000 + 10,000 + 30,000))).
The calibration contract will be allocated P27,000 of transaction price (computed as P90,000 × (P30,000 ÷ (P60,000 + 10,000 +
30,000). The revenue for the scales and software all would be recognized upon delivery on August 1, 20x6. Since the calibration
contract has a one-year duration and commenced on August 1, revenue for five months has been earned in 20x6, equal to
P11,250 (computed as P27,000 × 5/12). Therefore, total revenue recognized in 20x6 is P74,250 (computed as P54,000 + 9,000 +
11,250).
3. Assume that the scales, software and calibration service are viewed as one performance obligation.
How much revenue will Ortiz recognize in 20x6 for this contract?
a. P0 c. P63,000
b. P37,500 d. P90,000
Answer: (b) - If the contract has only one performance obligation, that revenue will be recognized over time as the Ortiz provides
the combination of scales, software and calibration service. No revenue can be recognized upon delivery of the computer or
software. Since the contract has a one-year duration and commenced on August 1, revenue for five months has been earned
in 20x6, equal to P37,500 (computed as P90,000 × 5/12).

Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor also
provides installation service for the windows. The installation process does not involve changes in the
windows, so this service can be provided by other vendors. Windsor enters into the following contract on
June 1, 20x5, with a local homeowner. The customer purchases windows for a price of P3,500 and chooses
Windsor to do the installation. Windsor charges the same price for the windows irrespective of whether it
does the installation or not. The price of the installation service is estimated to have a fair value of P900. The
customer pays Windsor P3,000 (which equals the fair value of the windows, which have a cost of P1,700)
upon delivery and the remaining balance upon installation of the windows. The windows are delivered on
August 1, 20x5, Windsor completes installation on September 15, 20x5, and the customer pays the balance
due. (Round amounts to nearest peso).
4. How many performance obligations exist in this contract on June 1, 20x5?
a. 0 c. 2
b. 1 d. 3
Answer: (a) – on June 1, 20x5 . No entry required since neither party has performed under the contract.

AFAR-06
5. How many performance obligations exist in this contract on August 1, 20x5?
a. 0 c. 2
b. 1 d. 3
Answer: (c) - On August 1, 20x5, Windsor has two performance obligations: (1) the delivery of the windows and (2) the installation
of the windows.
Windows P3,000
Installation 900
Total P3,900
Allocation (round to nearest peso)
Windows (P3,000P3,900) X P3,500 P2,692
Installation (P900 P3,900) X P3,500 808
Revenue recognized P3,500
Windsor makes the following entries for delivery and installation.
August 1, 20x5
Cash .................................................................................................... …………………. 3,000
Accounts Receivable ....................................................................... …………………. 500
Unearned Service Revenue ........................................................ ………………….. 808
Sales Revenue .............................................................................. ………………….. 2,692
Cost of Goods Sold............................................................................ ………………….. 1,700
Inventory........................................................................................ 1,700
(Windows delivered, performance obligation for installation recorded)
September 15, 20x5
Cash ..................................................................................................................................... 500
Unearned Service Revenue .............................................................................................. 808
Service Revenue (Installation) ..................................................................................... 808
Accounts Receivable ................................................................................................... 500
On May 1, 2016, Meta Computer, Inc., enters into a contract to sell 5,000 units of Comfort Office Keyboard
to one of its clients, Bionics, Inc., at a fixed price of P95,000, to be settled by a cash payment on May 1.
Delivery is scheduled for June 1, 2016. As part of the contract, the seller offers a 25% discount coupon to
Bionics for any purchases in the next six months. The seller will continue to offer a 5% discount on all sales
during the same time period, which will be available to all customers. Based on experience, Meta
Computer estimates a 50% probability that Bionics will redeem the 25% discount voucher, and that the
coupon will be applied to P20,000 of purchases. The stand-alone selling price for the Comfort Office
Keyboard is P19.60 per unit.
6. How many performance obligations are in this contract?
a. 0 c. 2
b. 1 d. 3
Answer: (c) - Number of performance obligations in the contract: 2. Delivery of keyboards is one performance obligation. The
special discount coupon is a second performance obligation, as it provides a material right that the customer would not receive
otherwise. In this particular instance, the customer has the right to receive a 25% discount, which is a20% discount in addition to
the normal 5% discount offered to other customers. The coupon is both capable of being distinct, as it could be sold or provided
separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering
keyboards and the seller’s role is not to integrate and customize them to create one product. So, it is distinct and qualifies as a
7. How much of the contract price would be allocated to each performance obligation (stand-alone selling price of
keyboards and discount option, respectively)?
a. P95,000; P0 c. P93,100; P1,900
b. P0; P95,000 d. P1,900 P93,100
Answer: (c) - When two or more performance obligations are associated with a single transaction price, the transaction price
must be allocated to the performance obligations on the basis of respective stand-alone selling prices (estimated if not directly
available). Meta’s estimated stand-alone selling price of the discount option is:
Value of the discount:
(25% discount – 5% normal discount) P20,000 = P 4,000
Estimated redemption  50%
Stand-alone selling price of discount: P 2,000
Stand-alone selling price of the keyboards:
P19.6  5,000 keyboards = 98,000
Total of stand-alone prices P100,000
Meta first must identify each performance obligation’s share of the sum of the stand-alone selling prices of all deliverables:
P2,000
Discount: = 2%
P2,000 + P98,000
P98,000
Keyboards: = 98%
P2,000 + P98,000
100%
Meta then allocates the total selling price based on stand-alone selling prices, as follows:
Transaction Price, P95,000
98% 2%
P93,100 P1,900
5/1/16: The journal entry to record the sale is:
Cash 95,000
Deferred revenue–keyboards 93,100
Deferred revenue–discount option 1,900
The deferred revenue for the keyboards will become earned June 1st. The deferred revenue for the option to exercise the discount
coupon is earned when the coupon either is exercised or expires in six months.

AFAR-06
8. Assume the same facts and circumstances as above, except that Meta gives a 5% discount option to
Bionics instead of 25%. In this case, what would be the amount allocated to keyboards and discount
option on May 1, 20x6?
a. P95,000; P0 c. P93,100; P1,900
b. P0; P95,000 d. P1,900 P93,100
Answer: (a) - All customers are eligible for a 5% discount on all sales. Therefore, the 5% discount option issued to Bionics, Inc.
does not give any material right to the customer, so it is not a performance obligation in the contract, and Meta would account
for both (a) the delivery of keyboards and (b) the 5% coupon as a single performance obligation.
Cash 95,000
Deferred revenue–keyboards 95,000
IX – Variable Consideration
Sanjeev enters into a contract offering variable consideration. The contract pays him P1,000/month for six
months of continuous consulting services. In addition, there is a 60% chance the contract will pay an
additional P2,000 and a 40% chance the contract will pay an additional P3,000, depending on the
outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition
over time.
1. Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of
revenue Sanjeev would recognize for the first month of the contract?
a. P1,000 c. P1,400
b. P1,333 d. P1,200
Answer: (b) - The most likely outcome is that Sanjeev receives the P2,000 bonus (likelihood = 60%), in which case Sanjeev would
be paid a total of (P1,000 × 6 months) + P2,000, or P8,000. Therefore, Sanjeev would recognize P8,000 ÷ 6 = P1,333 each month.
2. Assume Sanjeev estimates variable consideration as the expected value. What is the amount of
revenue Sanjeev would recognize for the first month of the contract?
a. P1,000 c. P1,400
b. P1,333 d. P1,200
Answer: (c) - The expected value of the transaction price is P8,400, computed as P1,000 × 6 months + (60% × P2,000) + (40% ×
P3,000). Therefore, Sanjeev would recognize P8,400 ÷ 6 = P1,400 each month.
3. Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has
recognized revenue for two months of the contract, he changes his assessment of the chance the
contract will pay him P3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account
for that change in estimate?
a. Debit of P1,000 c. Credit of P1,00
b. Debit of P334 d. Credit of P334
Answer: (d) - In the first two months of the contract, the most likely outcome is that Sanjeev receives a P2,000 bonus (likelihood
= 60%), in which case Sanjeev would be paid a total of (P1,000 × 6 months) + P2,000, or P8,000. Therefore, Sanjeev would
recognize P8,000 ÷ 6 = P1,333 each month, and after two months would have recognized P2,666. Then Sanjeev concludes that
the most likely outcome is that Sanjeev receives a P3,000 bonus (likelihood = 70%), in which case Sanjeev would be paid a total
of (P1,000 × 6 months) + P3,000, or P9,000. Therefore, Sanjeev should have recognized P9,000 ÷ 6 = P1,500 each month, and after
two months should have recognized P3,000. The amount of adjustment Sanjeev should record is a credit of P334, calculated as
P3,000 - P2,666.

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings
initiatives. Thomas’ contract specifies that it will receive a flat fee of P50,000 and an additional P20,000 if
Bran reaches a pre-specified target amount of cost savings. Thomas estimates that there is a 20% chance
that Bran will achieve the cost-savings target.
4. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the
transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
Answer: (b) - The most likely amount is the flat fee of P50,000, because there is a greater chance of not qualifying for the bonus
than of qualifying for the bonus, so that is the transaction price.
5. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the
transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
Answer: (c) - The expected value would be calculated as follows:
Possible Amounts Probabilities Expected Amounts
P70,000 (P50,000 fixed fee + 20,000 bonus) × 20% = P14,000
P50,000 (P50,000 fixed fee + 0 bonus) × 80% = 40,000
Expected contract price at inception P54,000
Or, alternatively: P50,000 + (P20,000 × 20%) = P54,000

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6. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain
of that estimate due to a lack of experience with similar consulting arrangements. Calculate the
transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
Answer: (b) - Because Thomas is very uncertain of its estimate, Thomas can’t argue that it is probable that it won’t have to reverse
(adjust downward) a significant amount of revenue in the future because of a change in returns. Therefore, Thomas would not
include the bonus estimate in the transaction price, and the transaction price would be the flat fee of P50,000.
X - Allocation of Transaction Price
1. Sonya, Inc. (SONI) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote,
and onsite installation by SONI staff. The installation includes programming the remote to have the TV
interface with other parts of the customer’s home entertainment system. SONI concludes that the TV,
remote, and installation service are separate performance obligations. SONI sells the 60-inch TV
separately for P17,000, sells the remote separately for P1,000, and offers the installation service
separately for P2,000. The entire package sells for P19,000. How much revenue would be allocated to
the TV, the remote, and the installation service, respectively?
a. P16,150; P950; P1,900 c. P18,050; P950; P 0
b. P17,100; P 0; P1,900 d. P19,000; P 0; P 0
Answer: (a). SONI first must identify each performance obligation’s share of the sum of the stand-alone selling prices of all
performance obligations:
P17,000
TV: = 85%
P17,000 + P1,000 + P2,000
P1,000
Remote: = 5%
P17,000 + P1,000 + P2,000
P2,000
Installation:
P17,000 + P1,000 + P2,000 = 10%
100%
SONI would allocate the total selling price of the package (P19,000) based on stand-alone selling prices, as follows:
TV: P19,000 x 85% = P16,150
Remote: P19,000 x 5% = 950
Installation” P19,000 x 10% 1,900
P19,000
P1,900 Transaction Price
85% 10%
5%
P16,150 P950 P1,900
TV Remote Installation

Sonya, Inc. (SONI) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and
onsite installation by SONI staff. The installation includes programming the remote to have the TV interface
with other parts of the customer’s home entertainment system. SONI concludes that the TV, remote, and
installation service are separate performance obligations. Sonya, Inc. (SONI) sells the 60-inch TV separately
for P17,500 and sells the remote separately for P1,000, and offers the entire package for P19,000. SONI does
not sell the installation service separately. SONI is aware that other similar vendors charge P1,500 for the
installation service. SONI also estimates that it incurs approximately P1,000 of compensation and other costs
for SONI staff to provide the installation service. SONI typically charges 40% above cost on similar sales.
2. Estimate the stand-alone selling price of the installation service using the adjusted market assessment
approach?
a. P 0 c. P1,400
b. P 500 d. P1,500
Answer: (d) - Under the adjusted market assessment approach, SONI would base its estimate of the stand-alone selling price of
the installation service on the prices charged by other vendors for that service, adjusted as necessary. Given that the other
vendors are similar to SONI, no adjustment is necessary. Therefore, SONI would estimate the stand-alone selling price of the
installation service to be P1,500, the amount charged by competitors for that service.
3. Estimate the stand-alone selling price of the installation service using the estimated cost plus a margin
approach?
a. P 0 c. P1,400
b. P 500 d. P1,500
Answer: (c) - Under the expected cost plus margin approach, VP would base its estimate of the stand-alone selling price of the
installation service on the P1,000 cost it incurs to provide the service, plus its normal margin of 40% × P1,000 = P400. Therefore,
VP would estimate the stand-alone selling price of the installation service to be P1,000 + P400 = P1,400.
4. Estimate the stand-alone selling price of the installation service using the residual approach?
a. P 0 c. P1,400
b. P 500 d. P1,500
Answer: (b) - Under the residual approach, SONI would base its estimate of the stand-alone selling price of the installation
service on the total selling price of the package (P19,000) less the observable stand-alone selling prices of the TV (P17,500) and
universal remote (P1,000). Therefore, VP would estimate the stand-alone selling price of the installation service to be P19,000 –
(P17,500 + P1,000) = P500.

AFAR-06
XI - Other Revenue Recognition Issues
Right of Return
• Right of return is granted for product for various reasons (e.g., dissatisfaction with product).
• If a product is sold with a right of return then the consideration is variable. The entity must estimate the
variable consideration and decide whether or not to include it in the transaction price.
• Retailers usually give customers the right to return merchandise if customers are not satisfied or are
unable to resell it.
• The right to return merchandise does not create a performance obligation for the seller. Instead, it
represents a potential failure to satisfy the original performance obligation to provide goods that the
customer wants to keep.
• Economic factors, competition among manufacturers, and rapid obsolescence of the product
motivate these manufacturers to grant the distributors the right of return if they are unable to sell the
semiconductors.
5. Gianne Computer Company sells computers with an unconditional right to return the computer if the
customer is not satisfied. Gianne has a long history selling these computers under this returns policy and
can provide precise estimates of the amount of returns associated with each sale Gianne most likely
should recognize revenue:
a. When Gianne delivers a computer to a customer, ignoring potential returns.
b. When Gianne delivers a computer to a customer, in an amount that is reduced by the expected
returns.
c. When Gianne receives cash from the customer.
d. When a customer returns a computer.
Answer: (b) – Gianne can estimate returns reliably enough for the constraint on recognizing variable consideration to not apply,
so Gianne would adjust the transaction price for expected returns and recognize revenue in that amount upon delivery.

Ralf Laurentiis Perfume, Inc., sold 3,210 boxes of white musk soap during January of 20x6 at the price of P90 per
box. The company offers a full refund for any product returned within 30 days from the date of purchase. Based
on historical experience, Ralf Laurentiis Perfume expects that 3% of sales will be returned.
1. How many performance obligations are there in each sale of a box of soap
a. No contract exist c. 2
b. 1 d. 3
Answer:. (b) - Number of performance obligations in the contract: 1. A right of return is not a performance obligation. Instead,
the right of return represents a potential failure to satisfy the original performance obligation to deliver goods to the cus tomer.
Because the total amount of cash received from the customer depends on the amount of returns, a right of return is a type of
variable consideration.
2. How much revenue should Aria recognize in January?

a. Zero c. P280,233
b. P 8,667 d. P288,900
Answer: (c) - Aria should estimate sales returns and reduce revenue by that amount in order to arrive at “net revenue,” which
would be the transaction price (the amount to be recorded as revenue on the seller’s books). The total net revenue in this situation
is P280,233:
Revenue P288,900 (P90 × 3,210 units)
Sales returns 8,667 (P288,900 × 3%)
Net revenue P280,233

Taster Choice sell natural supplements to customers with an unconditional right of return if they are not
satisfied. The right of returns extends 60 days. On February 10, 20x4, a customer purchases P3,000 of
products (cost P1,500). Assuming that based on prior experience, estimated returns are 20%.
3. The journal entry to record the sale and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of P3,000.
b. credit to Refund Liability of P600 and a credit to Sales Revenue of P2,400.
c. debt to Cost of Goods Sold and credit to Inventory for P1,500.
d. credit to Estimated Inventory Returns of P300
Answer: (b) - P3,000  .2 = P600; P3,000 −P600 = P2,400.
4. The journal entry to record the return of P200 of merchandise includes a

a. credit to Refund Liability for P200.
b. credit to Returned Inventory for P100.
c. credit to Estimated Inventory Returns for P100.
d. debit to Estimated Inventory Returns for P100.
Answer: (c) - P1,500/ P3,000 = 5; P200  .5 = P100.

AFAR-06
Bill-and-Hold Sales Arrangements

A bill-and-hold arrangement exists when a customer purchases goods but requests that the seller not ship
the product until a later date.
• For bill-and-hold arrangements, the key issue is that the customer doesn’t have physical possession of
the asset until the seller has delivered it.
• Remember, physical possession is one of the indicators that control may have been transferred.
• The physical possession indicator normally overshadows other control indicators in a bill-and-hold
arrangement, so sellers usually conclude that control has not been transferred and revenue should not
be recognized until actual delivery to the customer occurs.
• Bill-and-Hold -
▪ Exist when a customer purchases goods but requests that the seller not ship the product until a later
date.
▪ Sellers usually conclude that control has not been transferred so revenue not recognized until
delivery.
▪ Sellers can recognize revenue prior to delivery only if (a) they conclude that the customer controls
the product, (b) there is a good reason for the bill-and-hold arrangement, and (c) the product is
specifically identified as belonging to the customer and is ready for shipment.
5. Which of the following is typically true for a bill-and-hold arrangement?
a. Revenue is recognized when goods are manufactured.
b. Revenue is recognized when the arrangement is made.
c. Revenue is recognized when the delivery of goods is made.
d. Revenue is recognized at the point in time at which payment from the customer is received.
Answer: (c) - Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer.
Prior to that point, control of goods usually is not viewed as having passed to the customer.
6. On June 1st, Joseph & Company received a P500 deposit for 80 cases of wine. On June 10 th the
customer identified specific vintages that are included in Joseph’s inventory, and asked that Joseph
not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those
wines aside for the customer, boxed and ready for shipment to the customer. On June 20 th the wine
was shipped and delivered to the customer. Joseph likely would recognize revenue on:
a. June 20th c. June 1st
b. June 10 th d. Upon consumption of the wine by the
customer
Answer: (b) - Bill-and-hold arrangements normally do not qualify for revenue recognition until delivery is made to the customer.
Prior to that point, control of goods is not viewed as having passed to the customer. However, sellers can recognize revenue prior
to delivery if it is concluded that the customer controls the product (the customer specifically identified the goods), there is good
reason for the bill-and-hold arrangement (the customer needed time to make space for the wine), and the product is specifically
identified as belonging to the customer and is ready for shipment (Joseph has a good faith deposit, the customer selected the
goods, the goods were prepared for shipment and set aside from regular goods for sale).
7. Horowitz Paint Shop sold P3,000 of paint to a local construction company for cash on June 25, 20x6.
Because of a flood in the area, the customer requested that Horowitz not ship the items from its
warehouse until July 3, 20x6, so Horowitz set aside the paint on June 25, packaged and ready to ship
on July 3.For the second quarter ending on June 30, how much revenue should Horowitz recognize for
the sale to the local construction company?.
a. No contract exists c. P1,500
b. Zero d. P3,000
Answer: (d) - P3,000. In a bill-and-hold arrangement, the key issue normally is that the customer does not have physical
possession of the asset until the seller has delivered it. However, since the customer requested that Horowitz hold the goods, has
been paid for the goods, and the goods are separated from Horowitz’s inventory and ready for shipment, Horowitz likely would
be viewed as shifting control to the customer in June.
Principal and Agent Relationship
Agent’s performance obligation is to arrange for principal to provide goods or services to a customer. IFRS
(PFRS) 15 requires an entity to determine whether it is the principal on the transaction or the agent on the
basis of whether it controls the goods or services before they are transferred to the customer.
An entity that is a principal in a contract may satisfy a performance obligation by itself or it may engage
another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf.
‘
An entity is an agent if the entity's performance obligation is to arrange for the provision of goods or services
by another party.
The distinction between a principal and an agent is important because it affects the amount of revenue
that a company can record. If the company is a principal, it records revenue equal to the total sales price
paid by customers as well as cost of goods sold equal to the cost of the item to the company.

AFAR-06
On the other hand, if the company is an agent, it records as revenue only the commission it receives on
the transaction.
When an entity uses another party to provide goods or services to a customer, the entity needs to
determine whether it is acting as a principal or an agent.
Principal The entity controls the good or service Revenue = Gross consideration
before it is transferred to the customer.
Agent The entity arranges for the other party to Revenue = Fee or commission*
provide the good or service.
* the fee or commission may be the net consideration that the entity retains after paying the other party
the consideration received in exchange for the good or service
Indicators that an entity is an agent and does not control the good or service before it is provided to the
customer include another party is responsible for fulfilling the contract; the entity does not have inventory
risk; the entity does not have discretion in establishing prices for the other party’s goods or services; the
consideration is in the form of a commission; and the entity is not exposed to credit risk
We view the seller as a principal if it obtains control of the goods or services before they are transferred to
the customer.
Control is evident if the seller has
▪ primary responsibility for delivering a product or service and
▪ is vulnerable to risks associated with
a. holding inventory,
b. delivering the product or service, and
c. collecting payment from the customer.
8. Which of the following does not apply to a seller who is a principal?
a. Has control over goods or services
b. Primarily responsible for providing goods or services to customer
c. Exposed to risks associated with holding inventory
d. Primary performance obligation is to facilitate the transfer of goods or services
Answer: (d) - an agent’s primary performance obligation is to facilitate the transfer of goods or services.
9. Which of the following applies to a seller who is an agent?

a. Warehouses inventory
b. Liable for the delivery of goods or services to the client
c. Charges a commission for each transaction
d. Records revenue at full transaction price
Answer: (c) - Agents recognize as revenue their commission for facilitating sales.
10. Exploded.com sells fireworks over the Internet. Customers access Exploded’s website and select
particular products, and Exploded refers the customer order to a fireworks manufacturer who fulfills
the order, ships to the customer, and pays Exploded a 20% commission. Which of the following is true
about Exploded?
a. Exploded is an agent in this transaction.
b. Exploded is primarily responsible for providing the product to the customer.
c. Exploded’s income statement would report gross revenue and cost of sales associated with these
transactions.
d. Exploded warehouses inventory.
Answer: (a) - Exploded has the characteristics of an agent. It does not have control of the fireworks that are purchased by
customers, because it doesn’t have primary responsibility for delivering the product, is not vulnerable to risks associated with
holding inventory, and doesn’t collect payment from the customer. Rather, Exploded is an agent, with its primary performance
obligation being to facilitate transactions between fireworks customers and manufacturers

AuctionCo.com sells used products collected from different suppliers. Assume a customer purchases a
used bicycle through AuctionCo.com for P300. AuctionCo.com agrees to pay the supplier P200 for the
bicycle. The bicycle will be shipped to the customer by the original bicycle owner.
11. Assume AuctionCo.com takes control of this used bicycle before the sale and pays P200 to the
supplier. Under this assumption, how much revenue would AuctionCo.com recognize at the time of
the sale to the customer?
a. No contract exists c. P200
b. Zero d. P300
Answer: (d) - When other parties are involved in providing goods or services to a seller’s customer, the seller must determine
whether its performance obligation is to provide the goods or services, making the seller a principal, or the seller arranges for
another party to provide those goods or services, making the seller an agent. That determination affects whether the seller
recognizes revenue in the amount of consideration received in exchange for those goods or services (if principal) or in the
amount of any fee or commission received in exchange for arranging for the other party to provide the goods or services (if
agent).AuctionCo is a principal because it obtained control of the used bicycle before the bicycle was sold. Therefore,
AuctionCo should recognize revenue of P300.

AFAR-06
12. Assume AuctionCo.com never takes control of this used bicycle before the sale. Instead, the bicycle is
shipped directly to the customer by the original bicycle owner, and then AuctionCo.com pays P200
to the supplier. Under this assumption, how much revenue would AuctionCo.com recognize at the
time of the sale to the customer?
b. P100 d. P300
Answer: (b) - AuctionCo is an agent because it never controlled the product before it was sold. Therefore, AuctionCo should
recognize revenue for the commission fees of P100 received upon sending P200 to the original owner.
13. Assume AuctionCo.com promises to pay P200 to the supplier regardless of whether the bicycle is sold,
but the bicycle will continue to be shipped directly from the supplier to the customer. Under this
assumption, how much revenue would Auction.com recognize at the time of the sale to the customer?
b. P100 d. P300
Answer: (d)- If AuctionCo must pay the bicycle owner the P300 price regardless of whether the bicycle is sold, then AuctionCo
would appear to have purchased the bicycle and should be treated as a principal.
Warranties
• Examples of common parts of contracts that are not performance obligations:
 Prepayments (it’s part of the transaction price).
 Right of return (it’s part of the performance obligation to deliver acceptable goods and
services).
 Quality-assurance warranties (it is part of the performance obligation to deliver goods and
services that are free of defects).
• Two types of warranties to customers:
Product meets agreed-upon specifications in contract at time product is sold.
a. (Not a PO) Quality Assurance sometimes called as Assurance-type Warranty. Warranty is included
in sales price of product. A quality-assurance warranty is NOT a performance obligation.
b. (Separate PO) Extended warranty/Service-type Warranty. Warranty not included in sales price of
product. An extended warranty is recorded as a separate performance obligation from delivering
acceptable goods and services.
• An example of common parts of contracts that is considered as a performance obligation is extended
warranty.
• A warranty should be treated as an extended warranty if either:

a. the customer has the option to purchase the warranty separately that provides a material right*
(paying in advance for future goods or services) or
b. the warranty provides a service to the customer beyond quality assurance only assuring that the
seller delivered a product or service that was free from defects.
▪ What is a *“MATERIAL RIGHT” and how do you make this assessment?
If the customer has the option* to purchase the warranty separately and payment was made
for the warranty, then it should be treated as a distinct performance and the option should be
accounted for as a separate performance obligation, as an extended/service-type warranty
since the payment made constitute a “material right”.
▪ Options that provide a material right (a material right is something the customer would not get
otherwise, so the seller is obligated to provide it)
14. In which of the following is the option described not a performance obligation?
a. Customers accumulate points for every peso spent at Madeline’s Book Store. The points can be
redeemed for books once certain levels are met.
b. Customers can get 5% cash back for every P100 spent on eco-friendly products.
c. Customers can “buy two, get one free” at a menswear store.
d. Upon purchase of any name-brand TV, customers can purchase a 5-year extended warranty at a
25% discount.
Answer: (b) - 5% cash back is an adjustment of list price, and therefore must be considered when calculating the
transaction price. It is not a performance obligation.
****
It is better to fail in doing something, than to excel in doing nothing.

For even a flawed diamond is more valuable than a perfect brick.
And people who have no failures also have few victories.
Sometimes a winner is just a dreamer who never gave up.

AFAR-06
Quality Assurance Warranty
15. Vacuums sell the Tornado vacuum cleaner. Each vacuum cleaner has a one-year warranty (quality-
assurance) that covers any product defects. When customers purchase a vacuum cleaner, they also
have the option to purchase an extended three-year warranty that covers any breakage or
maintenance. The extended warranty sells for the same amount regardless of whether it is purchased
at the same time as the vacuum cleaner or at some other time. How many performance obligations?
a. None c. Two
b. One d. Three
Answer: (b) - Number of performance obligations in the contract: 1 - We need to consider three aspects of the vacuum contract:
delivery of the vacuum, the one-year quality-assurance warranty, and the option to purchase the three-year extended warranty.
Delivery of the vacuum cleaner
However, if the option to purchase an extended 3-year warranty is simply providing the customer with the ability to acquire
additional goods or services at a price reflective of the stand-alone selling price, then this option does not provide a “material
right” even though such an option may only be obtained as a result of entering into a contract. The extended warranty sells for
the same amount regardless of whether it is purchased at the same time as the vacuum cleaner or at some other time”. The
option to purchase a three-year extended warranty is not a performance obligation within the contract to purchase a vacuum,
because customers can purchase that warranty for the same amount at other times, so the opportunity to buy it at the sough
such an option may only be obtained as a result of entering into a contract.
Extended Warranty
16. Vacuums sell the Tornado vacuum cleaner. Each vacuum cleaner has a one-year warranty (quality-
assurance) that covers any product defects. When customers purchase a vacuum cleaner, they also
have the option to purchase an extended three-year warranty that covers any breakage or
maintenance. The extended warranty sells for the same amount regardless of whether it is purchased
at the same time as the vacuum cleaner or at some other time. Izzy Peredo pays 20% less for the
extended warranty if they buy it at the same time they buy a Tornado vacuum. How many
performance obligations exist in the implied contract for the purchase of a vacuum cleaner? How
many performance obligations?
a. None c. Two
b. One d. Three
Answer: (c) - Number of performance obligations in the contract: 2 - We need to consider three aspects of the vacuum contract:
delivery of the vacuum, the one-year quality-assurance warranty, and the option to purchase the three-year extended warranty.
Delivery of the vacuum cleaner is a performance obligation. The one-year warranty that is included as part of the purchase (the
quality-assurance warranty) is not a performance obligation, but rather it is part of the obligation to deliver a vacuum of
appropriate quality. The option to purchase the extended warranty, though, is a performance obligation within the contract to
purchase a vacuum. Customers can purchase that warranty at a 20% discount if they do so when they buy the vacuum, so the
opportunity to buy the extended warranty constitutes a material right. Also, the option is capable of being distinct, as it could be
sold or provided separately, and it is separately identifiable, as the vacuum could be sold without the option to purchase an
extended warranty, so the option is distinct, and qualifies as a performance obligation.
17. Which of the following is considered a performance obligation?

a. Up-front registration fees for a gym membership
b. Extended warranties on electronic products
c. Quality-assurance warranties on electronic products
d. A processing fee to obtain a bank loan
Answer:. (b) - An extended warranty represents a performance obligation. An up-front registration fee and processing fee are
prepayments, and a quality-assurance warranty represents a promise to fulfill the performance obligation to deliver goods of
acceptable quality.
18. Which of the following is an example of an extended warranty?

a. Fancy Headphones, Inc. provides assurance that its headphones are defect-free after purchase.
b. Azalea’s Flowers assures clients that its flowers will stay fresh for at least a week.
c. Mark Electronics offers a warranty at an affordable price that provides additional protection after
the customer takes possession of the product.
d. Erickson Electronics promises to make repairs or replace any product found to be defective within
a week of purchase.
Answer: (c) - Answer choices a, b, and d are examples of quality assurance warranties. They are promises to fulfill the
performance obligation to deliver goods of acceptable quality, rather than being performance obligations in their own right.
19. A warranty provided when a customer exercises an option to purchase a warranty is recorded as:
a. an expense in the period the goods or services are sold.
b. a warranty liability for all costs incurred after sale due to correction of defects.
c. revenue in the period that the service-type warranty is in effect.
d. an assurance type warranty which is included in the sales price of the product.
Our business in life is not to get ahead of others, but to get ahead of ourselves to break our own records, to
outstrip our yesterday by our today.
Don’t let your learning lead to knowledge; let your learning lead to action.

AFAR-06
Quality Assurance Warranty and Extended Warranty
20. D and R Computer Inc. manufactures and sells computers that include a warranty to make good on
any defect in its computers for 120 days (often referred to as an assurance warranty). In addition, it sells
separately an extended warranty, which provides protection from defects for three years beyond the
120 days (often referred to as a service warranty). How many performance obligations exist in this
contract?
a. None c. Two
b. One d. Three
Answer:. (c) - Number of performance obligations in the contract: 2 - In this case, two performance obligations exist, one related
to the sale of the computer and the assurance warranty, and the other to the extended warranty (service warranty).The sale of
the computer and related assurance warranty are one performance obligation as they are interdependent and interrelated with
each other. However, the extended warranty is separately sold and is not interdependent.
21. Conrad Appliances offers a contract in which customers receives the following:
• A new Conrad Pro washing machine,
• A warranty that protects against product defects for the first six months of use,
• An option to purchase a Perkins Pro dryer for a 30% discount (Conrad typically discounts that brand
of dryer 10%), and
• A coupon to purchase an extended warranty for P150 (extended warranties regularly sell for
P150).
How many performance obligations are included in the contract?
a. Four c. Two
b. Three d. One
Answer: (c) - The contract has two performance obligations. Delivery of the washing machine is a performance obligation. So
is the option to purchase a dryer, as it includes a discount that is greater than the customer could normally obtain. The quality-
assurance warranty is not a performance obligation, but rather is simply an aspect of fulfilling the obligation to deliver a washing
machine of appropriate quality. The coupon for the extended warranty is not a performance obligation, as it only offers a right
that customers would have absent the coupon.

Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that covers any defects.
When customers make a purchase, they also receive a coupon for 10 free engine oil changes and an
option to change all of the tires for P50 after 30,000 kilometers. Typically, customers pay P25 for an oil
change and P250 for a new set of tires.
22. Given the information above, how many performance obligations exist in the contract to purchase a
vehicle?
a. None c. Two
b. One d. Three
Answer: (d) - In total, there are three performance obligations. We need to consider four aspects of the car purchase contract:
delivery of the vehicle, the one-year quality-assurance warranty, the option to receive 10 oil changes for free, and the option to
change the tires for P50.
Delivery of the vehicle is a performance obligation. The one-year warranty that is included as part of the purchase (the quality-
assurance warranty) is not a performance obligation, but rather is part of the obligation to deliver the vehicle of appropriate
quality.
The option to receive oil changes for free is a performance obligation within the contract to purchase a vehicle, because (1) it
provides a material right to the customer (since there was already a payment of P25) that the customer would not receive
otherwise, and thus counts as a performance obligation; (2) the option is capable of being distinct, as the customer could
purchase oil changes separately, and it is separately identifiable, as the vehicle itself could be sold without free oil changes.
The option to change tires for P50 also constitutes a performance obligation, as it is (1) a material right to the customer (since
there was already a payment of P250) that the customer would not receive otherwise, and thus counts as a performance
obligation; (b) this option is capable of being distinct, as a new set of tires could be sold separately, and it is also separately
identifiable, as the vehicle itself could be sold without a new set of tires.
23. Assume the same contract but that it offers customers an option to change all of the tires for P250 after
30,000 kilometers. How many performance obligations exist in the contract to purchase a vehicle?
a. None c. Two
b. One d. Three
Answer: (c) - There are two performance obligations. The option to change tires for P250 is not a performance obligation, because
customers can purchase the tires for the same amount at other times, so the option itself does not present a material right.
24. Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type
warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan
under which it will repair or replace any defective part for 2 years beyond the expiration of the
assurance-type warranty. The total transaction price for the sale of the stereo system and the extended
warranty is P3,000. The standalone price of each is P2,300 and P800, respectively. The estimated cost of
the assurance-warranty is P350. The accounting for warranty will include a
a. debit to Warranty Expense, P800.
b. debit to Warranty Liability, P350

AFAR-06
c. credit to Warranty Liability, P800
d. credit to Unearned Service Revenue (Warranty), P800
Repurchase Agreements
• A repurchase agreement is where an entity sells an asset but retains a right to repurchase the asset.
This is often not recognized as a sale, but as a secured loan against the asset. Indications that this should
not be recognized as a sale may include:
1. Sale is below fair value
2. Option to repurchase is below the expected fair value
3. Entity continues to use the asset
4. Entity continues to hold the majority of risks and rewards associated with ownership of the asset.
5. Sale is to a bank or financing company
• Transfer control of (sell) an asset to a customer but have an obligation or right to repurchase.
• If obligation or right to repurchase is for an amount greater than or equal to selling price, then
transaction is a financing transaction.
• There are three forms of repurchase agreements:
a. An entity’s obligation to repurchase the asset (a forward);
b. An entity’s right to repurchase the asset (a call option);
c. An entity’s obligation to repurchase the asset at the customer’s request (a put option)
• Forward or Call Option (Buyer)
• When an entity has an option or right to repurchase an asset, the customer does not obtain control
of the asset and the entity accounts for the contract as either:
a. a lease if the entity can or must repurchase the asset for less than the original selling price; or
b. a financing arrangement if the entity can or must repurchase the asset for an amount greater
than or equal to the original selling price.
• If the repurchase agreement is a financing arrangement, the entity will:
1. Continue to recognize the asset;
2. Recognize a financial liability for any consideration received from the customer; and
3. Recognize as interest expense, which increases the financial liability, equal to the
difference between the amount of consideration received from the customer and the
amount of consideration to be paid to the customer.
Repurchase Agreement – Call Option (Financing Arrangement)
On January 1, 20x8 Kim enters into a contract with Dorothy for the sale of an excavator for P42,000,000. The
contract includes a call option the gives Kim the right to repurchase* the excavator for P46,200,000 on or
before December 31, 20x8. Dorothy pays the entity P42,000,000 on January 1, 20x8. On December 31, 20x8
the option lapses unexercised.
Kim should account for the transaction as a financing arrangement because the repurchase price is
greater than the original selling price.
* ENTITY’S right to repurchase ASSET is an indicator of a “Call Option”
25. How much will Kim recognizes a financial liability on January 1, 20x8?
a. Zero c. P42,000,000
b. P4,200,000 d. P46,200,000
26. What is the interest expense for the year 20x8?
a. Zero c. P2,100,000
b. P350,000 d. P4,200,000
27. How much would Kim. sales revenue on December 31, 20x8?
a. Zero c. P42,000,000
b. P4,200,000 d. P46,200,000
Solution:
On 1 January, Kim recognizes a financial liability of P42,000,000;
Cash . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000,000
Liability to Dorothy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000,000
During the year, Kim recognizes interest expense of P4,200,000, the difference between the repurchase
price of P46,200,000 and the cash received of P42,000,0000.
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
Liability to Dorothy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
On December 31, when the option lapses, Kim derecognize the liability and record a sale:
Liability to Dorothy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,200,000
Sales Revenue . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,200,000

AFAR-06
• Put Option (Seller)
• If an entity has an obligation to repurchase the asset at the customer’s request for less than the
original selling price, the entity accounts for the contract as either:
a. A lease, if the customer has a significant economic incentive to exercise the right; or
b. A sale with a right of return, if the customer does not have a significant economic incentive to
exercise the right
• If the repurchase price is equal to or greater than the original selling price, the entity accounts for
the contract as either:
1. A financing arrangement, of the repurchase price is more than the expected market value of
the asset; or
2. A sale with a right of return, if the repurchase price is less than or equal to the expected market
value of the asset and the customer does not have a significant economic incentive to exercise
the right.
Repurchase Agreement – Put Option
28. On January 1, Drei enters into a contract with Cerise for the sale of an excavator for P42,000,000. The
contract includes a put option that obliges Drei to repurchase the excavator at Cerise request* for
P37,800,000 on or before December 31. The market value is expected to be P33,000,000 on 31
December. Cerise pays Drei P42,000,000 on January 1.
* CUSTOMERS’S (Cerise) REQUEST to repurchase is an indicator of “Put Option”
The transaction is accounted for as a:
a. Lease c. Sale with a right of return
b. Financing arrangement d. Unconditional sale
Answer: (a) The transaction should be accounted for as a lease because:
• Drei has an obligation to repurchase the excavator for less than the original selling price; and
• Cerise has a significant economic incentive to exercise the option because the repurchase price is
greater than the market value expected on December 31.
Gift Cards
• Seller records a deferred revenue liability when the card is sold.
• Seller recognizes revenue when the card is used and at the point when it concludes there is only a
“remote likelihood” that customer will use the card.
29. Kim and Drei sells gift cards redeemable for Kimdrei products either Jen skin-store or online. During 20x6,
Kim and Drei sold P6,000,000 of gift cards, and P5,400,000 of the gift cards were redeemed for products.
As of December 31, 20x6, P450,000 of the remaining gift cards had passed the date at which Kim and
Drei concludes that the cards will never be redeemed. How much gift card revenue should Kim and
Drei recognize in 20x6?
a. P5,400,000 c. P5,850,000
b. P5,550,000 d. P6,000,000
Answer: (c) - The sale of a gift card creates deferred revenue, as it is a prepayment by a customer for goods or services to be
delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is
remote. In this case, P5,400,000 were redeemed and another P450,000 were viewed as broken, yielding total revenue of
P5,850,000.
Payments by the Seller to the Customer:
• If the seller is purchasing distinct goods or services from the customer at the fair value of those goods or
services, we account for that purchase as a separate transaction.
• If a seller pays more for distinct goods or services purchased from their customer than the fair value of
those goods or services, those excess payments are viewed as a refund. They are subtracted from the
amount the seller is entitled to receive from the customer when calculating the transaction price of the
sale to the customer.
30. Lewis Co. sold merchandise to AdCo for P60,000 and received P60,000 for that sale one month later.
One week prior to receiving payment from AdCo, Lewis made a P10,000 payment to AdCo for
advertising services that have a fair value of P7,500. After accounting for any necessary adjustments,
how much revenue should Lewis Co. record for the merchandise sold to AdCo?
a. P 7,500 c. P57,500
b. P10,000 d. P60,000
Answer: (c) - If a seller is purchasing distinct goods or services from a customer at the fair value of those goods or services, we
account for that purchase as a separate transaction. Otherwise, excess payments by the seller are treated as a refund of the
customer’s purchase. If the payments are made (or are expected to be made) at the time of the original sale, the transaction
price of the customer’s purchase is reduced immediately by the refund. If payment is not expected at the time of the sale,
revenue is recorded based on the full transaction price, and any subsequent payment by the seller above fair value results in a
reduction of the transaction price at that time. There is no indication that Lewis’ payment to AdCo for P10,000, which is P2,500
more than the fair value of those services (P7,500), was expected at the time of the original sale. Therefore, the original sale
would be recorded based on the full transaction price of P60,000. The overpayment of P2,500 reduces the P60,000 transaction
price of the goods sold by Lewis to AdCo at the time the P10,000 is paid, resulting in a downward adjustment of revenue of P2,500
at that time and net revenue over the period of P60,000 – P2,500 = P57,500.
-END-

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

PFRS 15 – Revenue from Contracts

Revenue recognition depends on the performance obligation(s):

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12. In its December 31 yearly income statement, the gross profit:

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VII – Comparing Input and Output Measures

Using the percentage-of-completion/over time to recognize revenue:

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GOD BLESS as ALWAYS!!!

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Recognized Gross Profit to Date 35,000 81,400 117,500

RGP Each Year – Cost Recovery Method ____-0- _____-0- 117,500

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Or, alternative approach – Cost Recovery Method/Zero-Profit Approach/Point In Time

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Cost (Total Est’d. Cost x % of completion)

Gross Profit (Est’d. Gross Profit x % of completion)

% of Completion Method – Actual Cost Approach (Revenue)

% of Completion Method – Actual Cost Approach (Gross Profit)

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AFAR-06 (Revenue - Franchise and Consignment)

Accounting Systems (University of the Philippines System)

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

AFAR-06: PFRS 15 – Revenue from Contracts

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-06

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-06

Date Collection Interest Principal Unpaid Balance

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V – Initial Franchise Fee

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Note: Bargain Purchases (Point in Time)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-06

A common principal-agent relationship involves consignments. In these cases, manufacturers (or

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2. Consignment transactions not recorded separately – consignment transactions are treated

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RGP Each Year – Cost Recovery Method -0- _-0- 117,500