Chapter 3
Revenue from Contracts with Customers
PROBLEM 1: TRUE OR FALSE
1. FALSE – PFRS 15 applies only to contracts with customers
2. FALSE – A contract can be oral, written, or implied by the entity’s
customary business practices.
3. TRUE
4. TRUE
5. FALSE
6. FALSE – see #9
7. FALSE - A performance obligation that is not satisfied over time
is presumed to be satisfied at a point in time.
8. TRUE
9. TRUE
10. TRUE – e.g., when the consideration is received in advance but
the delivery of the goods or services is deferred beyond
one year.
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
Answer: No. The “probable of collection” criterion under PFRS 15 is not
met because the customer’s ability and intention to pay may be in doubt.
This is evidenced by the following:
a. the customer intends to repay the loan (which has a significant
balance) primarily from income derived from its restaurant business
(which is a business facing significant risks because of high
competition in the industry and the customer’s limited experience);
b. the customer lacks other income or assets that could be used to
repay the loan; and
c. the customer’s liability under the loan is limited because the loan is
non-recourse.
The entity accounts for the non-refundable ₱50,000 payment as a deposit
liability. The entity continues to account for the initial deposit, as well as any
future payments of principal and interest, as a deposit liability, until such time
that the entity is able to conclude that it is probable that the entity will collect
the consideration or one of the following events has occurred.
a. the entity has no remaining obligations to transfer goods or services to
the customer and all, or substantially all, of the consideration promised
by the customer has been received by the entity and is non-refundable;
or
b. the contract has been terminated and the consideration received from
the customer is non-refundable.
1
The entity continues to assess the contract to determine whether the
“probable of collection” criterion is subsequently met or whether the events
above (‘a’ or ‘b’) have occurred.
2.
Answer: Yes, it is a performance obligation. Explicit.
Because the promise of maintenance services is a promise to transfer goods
or services in the future and is part of the negotiated exchange between the
entity and the distributor, the entity determines that the promise to provide
maintenance services is a performance obligation. The entity concludes that
the promise would represent a performance obligation regardless of whether
the entity, the distributor, or a third party provides the service. Consequently,
the entity allocates a portion of the transaction price to the promise to provide
maintenance services.
3.
Answer: Yes, it is a performance obligation. Implicit.
4.
Answer: No, it is not a performance obligation. The maintenance
services shall be accounted for under PAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
5.
Solution:
Product
X
Y
Z
Estimation method
Estimated
stand-alone
selling prices
Allocation
As
allocated
50
(100 x 50/150)
33
25
(100 x 25/150)
17
75
(100 x 75/150)
50
N/A (Stand-alone price)
Adjusted market
assessment
Expected cost plus a
margin (50 x 150%)
Total
6.
150
100
Answer: The performance obligation is satisfied over time because
of the following reasons:
a. The development of the professional opinion does not create an
asset with alternative use to the entity because the professional
opinion relates to facts and circumstances that are specific to the
customer. Therefore, there is a practical limitation on the entity’s
ability to readily direct the asset to another customer.
b. The entity has an enforceable right to payment for its performance
completed to date for its costs plus a reasonable margin, which
approximates the profit margin in other contracts.
The entity recognizes revenue over time by measuring the progress towards
complete satisfaction of the performance obligation.
7.
Solution:
2
Design services - PFRS 15 (40,000 x 6/7)
Amortization of design services (40,000 ÷ 7)
Asset
34,286
5,714
Hardware - PAS 16 (120,000 x 4/5)
Depreciation of hardware (120,000 ÷ 5)
96,000
Software - PAS 38 (90,000 x 4/5)
Amortization of software (90,000 ÷ 5)
72,000
Migration and testing - PFRS 15 (100,000 x 6/7)
Amortization of migration & testing (100,000 ÷ 7)
85,714
24,000
18,000
Employee benefits
Totals
14,286
288,000
8. Solution:
Jan.
1,
No entry
20x8
Jan. Contract asset (₱1,000 x 480/1,200a)
400
3,
Revenue
20x8
Mar. Receivable
1,000
31,
Contract asset
20x8
Revenue (₱1,000 x 720/1,200a)
Apr.
Cash
1,000
8,
Receivable
20x8
a Sum of relative stand-alone selling prices: (480 + 720) = 1,200
Solution:
Stand-alone
Product
prices
A
40
B
55
C
45
Expense
30,000
92,000
400
400
600
1,000
9.
D
N/A
Total
140
Allocation
N/A
(60 x 55/100)
(60 x 45/100)
Residual approach
(130K - 40K - 33K - 27K)
As
allocated
40
33
27
30
130
Discount
22
18
40
The use of the residual approach is appropriate because the ₱30 allocated to
Product D is within the range of its observable selling prices (₱15 - ₱45).
10. Solution:
Date Cash
Revenue (₱10,000 x 97%)
Refund liability (₱10,000 x 3%)
3
10,000
9,700
300
Date
Cost of goods sold (97 x ₱60)
Asset for right to recover product to be
returned (3 x ₱60)
Inventory (100 x ₱60)
11. Solution:
(a) Contract inception:
Jan. 1, 20x1
Cash
Contract liability
5,820
180
6,000
4,000
4,000
(b) During the two years from contract inception until the transfer of the asset, the
entity adjusts the promised amount of consideration (in accordance with paragraph 65
of IFRS 15) and accretes the contract liability by recognizing interest on ₱4,000 at six
per cent for two years:
Dec. 31, 20x1
Interest expense (4,000 x 6%)
Contract liability
240
240
Dec. 31, 20x2
Interest expense [(4,000 + 240) x 6%]
Contract liability
254.4
254.4
(c) Transfer of the asset:
Jan. 1, 20x3
Contract liability (4,000 + 240 + 254.4) 4,494.4
Revenue
4,494.4
PROBLEM 3: COMPUTATIONAL: EXERCISES
1.
Answer: The performance obligation is satisfied over time because of
the following reasons:
a. The customer simultaneously receives and consumes the benefits of
the entity’s performance in processing each payroll transaction as
and when each transaction is processed.
b. The fact that another entity would not need to re-perform payroll
processing services for the service that the entity has provided to
date also demonstrates that the customer simultaneously receives
and consumes the benefits of the entity’s performance as the entity
performs.
The entity recognizes revenue over time by measuring its progress towards
complete satisfaction of that performance obligation. Since the monthly
services are rendered evenly throughout the year, revenue may be
recognized on a straight-line basis (i.e., ₱100,000 per month).
2.
Answer:
4
The performance obligation is satisfied over time because the customer
simultaneously receives and consumes the benefits of the entity’s
performance – which is making the health clubs available for the customer to
use as and when the customer wishes. The extent to which the customer
uses the health clubs does not affect the amount of the remaining goods and
services to which the customer is entitled.
The entity recognizes revenue over time by measuring its progress towards
complete satisfaction of that performance obligation. Since the monthly
services are rendered evenly throughout the year, revenue may be
recognized on a straight-line basis (i.e., ₱500 per month).
3. Solution:
Receivable (100 x ₱150)
15,000a
Revenue (100 x ₱125)
Refund liability (contract liability)
12,500
2,500b
a
Consideration is due when control of the products transfer to the customer.
Therefore, the entity has an unconditional right to consideration (i.e., a
receivable) for ₱150 per product until the retrospective price reduction applies
(i.e., after 1 million products are shipped).
The refund liability represents a refund of ₱25 per product, which is
expected to be provided to the customer for the volume-based rebate (i.e.,
the difference between the ₱150 price stated in the contract that the entity
has an unconditional right to receive and the ₱125 estimated transaction
price).
b
4. Solutions:
March 31, 20x8: (75 units x ₱100) = ₱7,500
June 30, 20x8:
Net revenue from units sold in the 2nd quarter
(500 x ₱90)
Retrospective discount on units sold in the 1st quarter
(75 x ₱10)
Net revenue in 2nd quarter
₱45,000
(750)
₱44,250
5. Solution:
Requirement (a):
The contract includes a discount of ₱40 on the overall transaction (₱140 sum
of stand-alone selling prices less ₱100 transaction price).
Requirement (b):
Product Stand-alone prices
A
40
B
55
C
45
Total
140
a (55 + 45) = 100
Allocation
N/A
(60 x 55/100 a)
(60 x 45/100 a)
5
As allocated
40
33
27
100
Discount
22
18
40
6. Solutions:
(a) When the product is transferred to the customer:
Asset for right to recover product to be returned
Inventory
₱80
₱80
(b) During the three-month right of return period, no interest is recognized
because no contract asset or receivable has been recognized.
(c) When the right of return lapses (the product is not returned):
Receivable
Revenue
₱100
₱100
Cost of sales
₱80
Asset for product to be returned
₱80
Until the entity receives the cash payment from the customer, interest
revenue would be recognized in accordance with PFRS 9. In determining the
effective interest rate in accordance with PFRS 9, the entity would consider
the remaining contractual term.
7. Solutions:
Case A
1,000,000 – the contract price is deemed the cash selling price because the
contractual rate of interest of five per cent reflects the credit characteristics of the
customer.
OR
Monthly cash flow
Multiply by: PV of ordinary annuity @ 0.004167 a, n=6
Sale revenue (answer is rounded-off)
a
5% annual rate ÷ 12 months = 0.004167
Case B
Monthly cash flow
Multiply by: PV of ordinary annuity @ 0.01b, n=6
Sale revenue
b
18,871
52.99020
999,978
12% annual rate ÷ 12 months = 0.01
8.
Solution: (100 shares per week x 52 weeks x ₱20) = ₱104,000
9. Solutions:
Requirement (a): Performance obligations
1. machine
2. spare parts
3. custodial services
6
18,871
44.95504
848,347
Requirement (b): Revenue recognition
The entity allocates the transaction price to the three performance obligations
and recognizes the amounts allocated to each of the machine and spare
parts as revenue on December 31, 20x9. The amount allocated to the
custodial services is recognized over the next 2 to 4 years based on the
entity’s estimates of its progress towards the complete satisfaction of the
performance obligation.
10. Solution:
The contract modification results to the addition of services that are distinct.
However, the price of the additional services does not reflect their standalone selling price. Therefore, the contract modification shall be accounted for
as a termination of the existing contract and the creation of a new
contract.
Accordingly, the entity recognizes revenue of ₱100,000 per year in the 1st
and 2nd years and ₱70,000 per year in the 3rd, 4th, 5th, and 6th years.
Revenue per year after the contract modification is computed as follows:
Modified* price of services from the original contract not yet
rendered (i.e., for the 3rd year of the original contract)
Price of the three additional years of service from the new
contract
Transaction price not yet recognized as revenue
Divide by: Total years of service to be rendered (3rd to 6th)
Revenue per year in the 3rd to the 6th year
80,000
200,000
280,000
4
70,000
* This is the amount of consideration to which ABC Co. expects to be entitled
in exchange for the services. Therefore, the initial agreement of ₱100,000 per
year is ignored.
Summary of answers:
Year
Revenue
100,000
1
100,000
2
70,000
3
70,000
4
70,000
5
70,000
6
480,000
7
PROBLEM 4: CLASSROOM ACTIVITY
ANSWERS
STEP 1: Identify the contract with the customer
PFRS 15 Criteria
a.
The contracting parties have approved the contract and are
committed to perform their respective obligations;
Checklist
(/ X)
(1) 
REASON/INDICATOR:
(2)_Signing of an enforceable contract._
b.
The entity can identify each party’s rights regarding the
goods or services to be transferred;
(3) 
c.
The entity can identify the payment terms for the
goods or services to be transferred;
(4) 
REASON/INDICATOR:
(5) (Make a reference to certain paragraphs
contract)_Paragraphs 1(a) to (c) of the contract
in
the
d. The contract has commercial substance;
(6) 
REASON:
(7) The contract affects ABC’s future cash flows.
e.
The consideration in the contract is probable of
collection.
(8) 
REASON/INDICATORS:
(9) The credit investigation yielded a favorable result.
(10) The contract requires a down payment (earnest money)
and, in case of default, ABC Co. is entitled to a significant
portion of the amounts collected.
CONCLUSION: Does the contract qualify for accounting under PFRS 15?
State your reason.
(11) Yes, because all of the criteria in ‘Step 1’ are complied with
STEP 2: Identify the performance obligations in the contract
(12) Identify the performance obligation(s) in the contract. The promise to
transfer the land to buyer upon the full payment of the consideration.
(13) State whether the performance obligation(s) is/are satisfied over time or
at a point in time. at a point in time
STEP 3: Determine the transaction price
(14) Determine the transaction price. ₱1,000,000
(15) Identify whether the transaction price is fixed or variable. Fixed
8
STEP 4: Allocate the transaction price to the performance obligations
(16) How much is allocated to each of the performance obligations?
₱1,000,000 to the promise to transfer the land to the buyer.
JOURNAL ENTRIES:
(17) Provide the entry at contract inception.
Date
Accounts
10.3.2015 Cash
Contract liability
to record the receipt of the
earnest money (or similar
description)
Debits
300,000
Credits
300,000
(18) Assume that the next entry made by ABC Co. on the contract is on
December 31, 2015. What would be this entry?
Date
Accounts
Debits
Credits
175,000 a
12.31.2015 Cash
Contract liability
175,000
to record the collection of
installment payments for the
months of October,
November and December
(or similar description)
a (58,333.33 x 3) = 175,000
PRESENTATION
How should the contract be presented in ABC Co.’s December 31, 2015
statement of financial position?
Checklist
ACCOUNT
AMOUNT
(/ X)
(19) Contract asset
X

(20) Contract liability
475,000
(21) Receivable
X
(22) Assume that the January 31, 2016 check is dishonored and the contract
is settled on this date, in accordance with the terms of the contract. What is
the journal entry?
Date
Accounts
Debits
Credits
475,000 b
1.31.2016 Contract liability
Cash
17,500 c
Revenue
457,500
to record revenue for the
non-refundable payments
received (or similar
description)
b (300,000 + 175,000) = 475,000
c (175,000 x 10%) = 17,500
9
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
(23) Disregard the assumption in number (18). Assume that the consideration
is fully paid and the land is transferred to the buyer. Provide the compound
journal entries.
Date
Accounts
Debits
Credits
58,333.33
9.30.2016 Cash
Contract liability
941,666.67
Revenue
1,000,000
to record the satisfaction of
the performance obligation
(or similar description)
400,000
9.30.2016 Cost of sales
Inventory
400,000
to record the cost of the land
sold as expense (or similar
description)
PROFIT OR LOSS
Use the assumption in number (23). Determine the effects of the contract in
ABC Co.’s 2015 and 2016 profit or loss, respectively. Disregard taxes and
registration costs.
2015
2016
(24)
(25)
0
1,000,000
Revenue
0
(400,000)
Expenses
0
600,000
Profit
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. A
6. D
11. A
2. A
7. C
12. D
3. C
8. D
13. D
4. D
9. E
14. E
5. A
10. C
15. C
10
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. D PFRS 15 does not apply to non-monetary exchanges. Therefore, no
revenue shall be recognized from such transactions.
Inventory – diesel (FV of asset given up)
₱4M
Inventory – premium (CA of asset given up)
Gain on exchange
₱3.5M
₱ .5M
2. E
Inventory – diesel (CA of asset given up)
₱3.8M
Inventory – premium (CA of asset given up)
₱3.8M
3. B
Solution:
Sale to Customer W
Sale to Customer X
Sales returns (20,000 x 10%)
Sale to Customer Y
Sales returns (10,000 x 5%)
Sale to Customer Z
Sale to Customer Voiz&Gurlz
Total net sales revenues
5,000
20,000
(2,000)
10,000
(500)
18,000
9,500
10,000
42,500
4. A (4,000,000 + 2,000,000) = 6,000,000
5. D The principal recognizes revenue at the gross amount of the
transaction price while the agent recognizes revenue at the commission
the agent is entitled to.
6. A - the cash selling price.
7. B (8,000 x PV of 1 @9%, n= 1) =7,339 – the present value of the
transaction price
8. D – the transaction price
9. A (154,000 x 3 months/ 48 months) = 9,625
In a performance obligation satisfied over time in which efforts or
inputs are expended evenly throughout the performance period,
revenue may be recognized on a straight-line basis.
10. B – the costs incurred to date
Revenue for a performance obligation satisfied over time is
recognized only if the progress towards the complete satisfaction of
the performance obligation can be reasonably measured.
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If the outcome of a performance obligation cannot be reasonably
measured but the entity expects to recover the costs incurred in
satisfying the performance obligation, revenue shall be recognized
only to the extent of the costs incurred until such time that the
outcome of the performance obligation can be reasonably measured.
12