PFRS 15 – REVENUE FROM CONTRACT WITH CUSTOMERS
Theoretical
1. The following contracts with customers shall apply PFRS 15 provisions:
a. Insurance contracts with customer
b. Lease contracts with customers
c. Financial instruments such as Investment in Debt Securities
d. All responses are outside the scope of PFRS 15.
2. ALL criteria should be met to qualify as contract, except:
a. the parties to the contract have approved the contract.
b. the entity can identify each party’s rights regarding the goods or services to be transferred.
c. the entity can identify the payment terms.
d. the contract has commercial substance.
e. the consideration is possible of collection.
3. When a contract with a customer does not meet the criteria in paragraph 9 of PFRS15 and an
entity receives consideration from the customer, the entity shall recognize the consideration
received as
a. revenue
b. receivable
c. asset
d. liability
4. When a contract with a customer does not meet the criteria in paragraph 9 of PFRS15 and an entity
receives consideration from the customer, the entity shall recognize the consideration received as
revenue only when either of the following events has occurred:
a. If 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.
b. If the contract has been terminated and the consideration received from the customer is nonrefundable.
c. Both answers are correct
d. Neither of the two
5. A good or service that is promised to a customer is distinct if both two criteria are met. Which are
they?
a. the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer.
b. the entity’s promise to transfer the good or service to the customer is separately identifiable
from other promises in the contract.
c. Both responses are correct
d. Neither of the responses is correct
6. The following performance obligations are satisfied over time, except:
a. the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b. the entity’s performance creates or enhances an asset that the customer controls as the asset
is created or enhanced.
c. the entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
d. All performance obligations are satisfied over time.
7. Performance obligations are satisfied at a point in time when then there has been a transfer of
control of the asset at a particular point in time. The following are transfer of control indicators,
EXCEPT:
a. The entity has a present right to payment for the asset.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset.
d. The customer has the significant risks and rewards of ownership of the asset.
e. The customer has accepted the asset.
f. All responses are transfer of control indicators.
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8. It 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 and function or
their ultimate purpose or use.
a. Construction contract
b. Installment contract
c. Franchise contract
d. Consignment contract
9. It 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 case is subject to cost escalation clauses.
a. Fixed price contract
b. Cost-plus contract
c. Variable contract
d. Mixed contract
10. It 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.
a. Fixed price contract
b. Cost-plus contract
c. Variable contract
d. Mixed contract
11. Aside from the initial amount of revenue agreed in the long-term construction contract, additional
revenues may be recognized by the contractor (1) to the extent that is probable that they will result
in revenue and (2) they are capable of being reliably measured. Which of the following will not be
considered as additional contract revenue by a contractor?
a. Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
b. Claim that the contractor may seek to collect from the customer for customer caused delays or
errors in specification or design.
c. Incentive payments to be paid to the contractor if specified performance standards are met or
exceeded or for early completion of the contract.
d. Gain on sale of scrap materials from construction.
12. Which of the following costs shall be excluded in the contract costs of construction contract?
a. Costs that relate directly to the specified contract.
b. Costs that are directly attributable to contract activity in general and can be allocated to the
contract.
c. Such other costs as are specifically chargeable to customer under the terms of the contract.
d. Selling costs such as an advertisement expense or commissions of real estate agents or
brokers.
13. The following costs shall be capitalized as part of construction in progress or contract costs,
EXCEPT
a. Costs of hiring and moving of plant and equipment to and from the contract site.
b. Systematically, rationally, and consistently allocated construction overheads and borrowing
costs.
c. Costs that are specifically chargeable to the customer under the terms of the contract may
include some general administration costs and development costs for which reimbursement is
specified in the terms of the contract.
d. General and research and development costs for which reimbursement is not specified in the
contract.
14. When the outcome of a construction contract can be estimated reliably, how shall contract revenue
and contract costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customers also known as by installment method.
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c. They shall be recognized as revenue and expenses respectively by the date of earning revenue
or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
they are incurred also known as cost recovery or zero-profit method.
15. When the outcome of a construction contract cannot be estimated reliably, how shall contract
revenue and contract costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customers also known as by installment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning revenue
or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
they are incurred also known as cost recovery or zero-profit method.
16. When it is probable that total contract costs will exceed total contract revenue, how shall it be
accounted for?
a. The expected loss shall be recognized as an expense immediately regardless of the certainty of
uncertainty of the outcome of a construction contract.
b. The expected loss shall be recognized as an expense immediately only when the outcome of a
construction contract cannot be estimated reliably.
c. The expected loss shall be recognized as an expense by reference to the state of completion of
the contract activity at the end of the reporting period when the outcome of a construction
contract cannot be estimated reliably.
d. The expected loss shall be accounted for based on company’s policy.
17. When the company changes its percentage of completion of the construction project every year,
how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by retrospective application or
with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in accounting estimate by prospective application to the
date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.
18. If the promise to grant the license is distinct from the other promised goods or
services in the contract and, therefore, the promise to grant the license is a
separate performance obligation, an entity shall determine whether the license
transfers to a customer either at a point in time or over time. In making this
determination, an entity shall consider whether the nature of the entity’s
promise in granting the license to a customer is to provide the customer with
either:
a. Right to access
b. Right to use
c. Right to receive
d. Right to payment
e. Either right to access or right to use
19. A license is a promise to provide a right to access if ALL of the following criteria are met, except:
a. The contract requires, or the customer reasonably expects, that the entity will undertake
activities that significantly affect the intellectual property to which the customer has rights.
b. The rights granted by the license directly expose the customer to any positive or negative
effects of the entity's activities.
c. The entity's activities do not result in a transfer of good or a service to the customer as those
activities occur.
d. All responses are criteria to grant the customer the right to access.
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20. Statement 1: Under PFRS 15, revenue cannot be recognized unless the franchise agreement is in
writing.
Statement 2: There can only be exactly one performance obligation per franchise contract.
a. Both statements are true.
b. Both statements are false.
c. Statement 1 is true, statement 2 is false.
d. Statement 1 is false, statement 2 is true.
21. Under PFRS 15, how shall revenue from contracts with customers such as revenue from initial
franchise fee be recognized by the franchisor?
a. Upon receipt of the initial franchise fee by the franchisor.
b. Upon signing of the franchise agreement.
c. When the franchisor satisfies the performance obligation under the franchise
agreement.
d. Applying the legality over the substance of the transaction.
22. Under PFRS 15, how may an entity satisfy a performance obligation in a contract with customers?
a. Satisfaction of performance obligation over time.
b. Satisfaction of performance obligation at a point in time.
c. Either A or B.
d. Neither A nor B.
23. PFRS 15 provides that initial franchise fee shall be recognized as revenue over time (percentage of
completion method) if any one of the following criteria provided below is met. Which of the following
indicator shows that the initial franchise fee shall be recognized as revenue at a point in time instead
over time?
a. When the franchisee simultaneously receives and consumes the benefits provided by the
franchisor’s performance as the franchisor performs.
b. When the franchisor’s performance creates or enhances an asset that the franchisee controls as
the asset is created or enhanced.
c. When the franchisor’s performance does not create an asset with alternative use to the franchisor
and the franchisor has an enforceable right to payment for performance completed to date.
d. When the franchisee has legal title to the franchise and has the significant risks and rewards of
ownership of the franchise.
24. What is the measurement of franchise revenue recognized from franchise agreement?
a. Fair value of the consideration received or receivable.
b. Book value of the consideration received or receivable.
c. Carrying amount of the consideration received or receivable.
d. Nominal amount of the consideration received or receivable.
25. Goods on consignment should be included in the inventory of
a. the consignor but not the consignee.
b. both the consignor and the consignee.
c. the consignee but not the consignor.
d. neither the consignor nor the consignee.
26. Revenue is recognized by the consignor when the
a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.
27. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the
a. Consignor when the goods are shipped to the consignee.
b. Consignee when the goods are shipped to the third party.
c. Consignor when notification is received that the consignee has sold the goods.
d. Consignee when cash is received from the customer.
28. DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize the
revenue from these 1,000 units when
a. The agreement between DEF and ABC is signed.
b. ABC ships the goods to DEF.
c. DEF receives the goods from ABC.
d. DEF sells the goods and informs ABC of the sale.
29. When goods are consigned out, profits should be recognized by the consignor when the
a. Goods are sold by the consignee.
b. Goods are received by the consignee.
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c. Consignee agrees to the terms of the consignment.
d. Goods are shipped by the consignor.
30. Jelly Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor. These
freight costs are to be deducted from Jelly’s payment to Dale when the consignment goods are
sold. Until Jelly sells the goods, the freight costs should be included in Jelly’s
a. Cost of goods sold.
b. Freight-out costs.
c. Selling expenses
d. Accounts receivable
31. Under a bill-and-hold arrangement, control has not been transferred yet to the customer because
possession of the goods remains on the entity’s premises.
Under a bill-and-hold arrangement, revenue should be recognized only upon subsequent actual
delivery to the customer.
a. True, true
b. False, false
c. True, false
d. False, true
Practical
Problem A. A customer signs a contract with a telco company with a lock-in period of 24 months on
September 30, 2023. The agreement calls for a P2,000 monthly payment with the following inclusions for
the 2-year period:
• Wireless service i.e., unlimited internet, call and text
• Cell phone (w/ warranty against hidden defects)
Other customers purchase the following items separately:
Cellphone
P40,000
Unlimited wireless services
20,000
Extended 1-yr warranty
8,000
Apply the 5-Step model in answering the following questions:
1. How many performance obligations does the contract have?
a. 2
b. 3
c. 4
d. 5
2. How much from the transaction price would be allocated to the performance obligation
that is satisfied at a point in time?
a. 32,000
b. 40,000
c. 48,000
d. Some other answer
3. How much revenue would be recognized for the year ended December 31, 2023?
a. 16,000
b. 30,000
c. 32,000
d. 34,000
Problem B. ABC Company is an experienced manufacturer of equipment used in the construction industry.
ABC’s products range from small to large individual pieces of automated machinery to complex systems
containing numerous components. Unit selling prices range from P1,200,000 to P8,000,000 and are quoted
inclusive of installation and training. The installation process does not involve changes to the features of
the equipment and does not require proprietary information about the equipment in order for the installed
equipment to perform to specifications. ABC has the following arrangement with KLM Company.
•
•
•
•
KLM purchases equipment from ABC for a price of P4,000,000 and chooses ABC to do the installation.
ABC charges the same price for the equipment irrespective of whether it does the installation or not.
(Some companies do the installation themselves because they either prefer their own employees to
do the work or because of relationships with other customers.) The price of the installation service
is estimated to have a fair value of P40,000.
The fair value of the training sessions is estimated at P100,000. Other companies can also perform
these training services.
KLM is obligated to pay ABC the P4,000,000 upon the delivery and installation of the equipment.
ABC delivers the equipment and completes the installation of the equipment on November 1, 2022.
Training related to the equipment starts once the installation is completed and lasts for 1 year. The
equipment has a useful life of 10 years.
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•
The equipment has a cost of P3,000,000.
How much revenue should be recognized in 2023 from this transaction?
a. 16,103
b. 38,647
c. 80,516
d. Some other answer
Problem C. XYZ Construction Company enters into a contract with a customer to build a warehouse for
P5,000,000, with a performance bonus of P2,500,000 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 XYZ 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 1 week late, and only a 10% probability that it will be completed 2
weeks late.
1. How much is the total transaction price using most likely outcome approach?
a. 5,000,000
b. 6,500,000
c. 7,500,000
d. Some other answer
2. Determine the total transaction price using the expected value approach.
a. 5,000,000
b. 7,375,000
c. 7,500,000
d. Some other answer
Problem D. The ABCD Construction Company was the lowest bidder on a specialized equipment contract.
The Contract bid was P13,125,000 with an estimated cost to complete the project of P8,000,000. The
contract period was 35 months beginning January 1, 2023. The company uses cost to cost method to
estimate profits. A record of construction activities for the years 2023 to 2025 follows:
2023
2024
2025
Actual cost incurred to date
P6,562,500
P10,968,750
P11,625,000
Estimated cost to complete
4,375,000
1,218,750
---
Progress billings
3,000,000
12,000,000
12,125,000
Cash receipts during the year
2,625,000
6,750,000
2,750,000
It was found out that the entity can estimate the outcome of the project reliably.
1. How much is the revenue recognized in 2024?
a. 0
b. 3,937,500
c. 11,812,500
d. Some other answer
2. How much contract asset (liability) should be presented on financial statements as at
December 31, 2024?
a. 11,812,500
b. (187,500)
c. (468,750)
d. Some other answer
3. Assuming the entity cannot estimate the outcome reliably, how much revenue should be
recognized in 2024?
a. 0
b. 3,937,500
c. 4,406,250
d. Some other answer
4. In relation to the preceding number, determine the contract asset (liability) to be
presented on the financial statements as at December 31, 2024.
a. 0
b. 10,968,750
c. (1,031,250)
d. Some other answer
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Problem E. LSA CONSTRUCTION COMPANY (LCC) is recognizing income from long term construction
contracts. In 2023, LSA entered a fixed contract to construct a fly-over connecting Luzon and Mindanao for
P65,000,000. The entity uses the input measure applicable in determining the stage of completion.
Estimated costs and contract costs incurred up to 2025 were as follows:
Year
Costs incurred
Est. cost at completion
2023
P21,700,000
P62,000,000
2024
24,500,000
66,000,000
2025
16,800,000
63,000,000
1. Assuming the use of POC method, compute the gross profit (loss) reported in 2023.
a. 1,050,000
b. 1,750,000
c. 2,150,000
d. Some other answer.
2. In relation to the preceding number, how much gross profit (loss) should be reported in
2024 and 2025, respectively?
a. (1,750,000); 1,250,000
b. (2,050,000); 3,000,000
c. (2,050,000); 2,700,000
d. None of the choices.
Problem F. On January 1, 2023, McAbee Inc. signed a franchise agreement to grant a license to Donny for
a term of 2 years commencing on the date of contract. The payment terms indicated on the contract called
for a non-refundable P207,000 down payment and a 10% interest-bearing promissory note with face value
of P138,000 and is payable in two equal annual installments, with the first payment due on December 31,
2023.
1. What if the agreement granted Donny the right to use the intellectual property, how
much is the total revenue recognized by McAbee Inc?
a. 379,500
b. 358,800
c. 345,000
d. 0
2. What if the agreement granted Donny the right to access the intellectual property, how
much is the total revenue recognized by McAbee Inc?
a. 358,800
b. 186,300
c. 179,400
d. 0
Problem G. On January 1, 2023, EARLINDA Inc. entered into a franchise agreement with Goergina for
an initial franchise fee of P750,000 payable as follows: P250,000 down payment payable immediately
and two P250,000 annual payments evidenced by a non-interest-bearing note, with the first payment
due on December 31, 2023. With an effective rate of 9%, the present value of the note is P439,750.
The following excerpts were taken from the franchise contract:
•
•
•
The franchise license is granted to Goergina for a term of 5 years. Goergina has the right to any
subsequent modification made by EARLINDA Inc. to the franchise license. The license has an
observable stand-alone selling price of P319,875.
EARLINDA Inc. is to construct a food stall for Goergina. The food stall is fully customized for Goergina;
thus, it has no alternative use for the franchisor. The food stall has no observable stand-alone
selling price but has an estimated cost of P85,300 and a normal profit of 20% based on sales.
EARLINDA Inc. must conduct training for the employees of Goergina.
It was determined that the three performance obligations were separate and distinct from one another.
By the end of the year, the food stall was 80% completed as to construction and the training was 100%
accomplished.
1. Assuming that the stand-alone selling price of the training of the employees was highly
variable, how much is the total revenue from franchise fees recognized by the franchisor
for the year ended December 31, 2023?
a. 319,875
b. 348,550
c. 412,525
d. 689,750
2. Assuming that the stand-alone selling price of the training of the employees amounted to
P639,750 based on the adjusted market assessment approach, how much is the total
revenue from franchise fees recognized by the franchisor for the year ended December
31, 2023?
a. 510,415
b. 523,775
c. 689,750
d. 789,025
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Problem H. On January 1, 2023, Mang Taho Franchising entered into a franchising contract which granted
Arnie Val a franchise license for an initial franchise fee of P5,175,000. The term of the agreement will last
for 4 years from the date of contract. Arnie Val paid a non-refundable down payment amounting to
P1,035,000 and signed a non-interest-bearing note for four annual payments of P1,035,000, with the first
installment due on December 31, 2023. With the effective rate in the market of 16%, the present value of
the note is computed as P2,898,000. In addition, Arnie Val is to pay an annual sum to franchisor equivalent
to 5% of his net sales. Direct costs incurred by Mang Taho Franchising to fulfill the contract amounted to
P1,552,500, while indirect costs totaled P100,000. Net sales of Arnie Val amounted to P2,000,000 for the
year.
1. Assume that the agreement allowed Arnie Val to obtain substantially all of the benefits
from the license at the point in time at which it was granted, how much is the franchisor’s
net income for the year ended December 31, 2023?
a. 595,125
b. 1,058,805
c. 2,380,500
d. 2,844,180
2. Assume that the agreement provides that Arnie Val is granted the right to obtain any
benefits from further modification made to the intellectual property of the franchisor, how
much is the franchisor’s net income for the year ended December 31, 2023?
a. 595,125
b. 1,058,805
c. 2,380,500
d. 2,844,180
Problem I. Belgian Manufacturing Company delivered 100 Magna Ice cream to 7eleview on consignment.
These ice cream cost P250 and sold at P500 each. Belgian Manufacturing Company paid shipment costs of
P4,000 delivering them to 7eleview warehouse.
7eleview submitted an account sale stating that it had returned ten units and remitted P30,000. This amount
represents the total amount due to Belgian Manufacturing after deducting the following items from the
selling price of the ice cream sold:
Commission
10% of the selling price
Advertising
P3,000
Delivery to customers and other charges
P2,000
Cartage on consigned goods
1,000
1. How much is the profit on consignment?
a. 6,900
b. 6,800
c. 6,500
d. Some other answer
2. Compute the costs of inventory in the hands of 7eleview.
a. 2,500
b. 2,600
c. 2,900
d. 3,000
--- END OF HANDOUTS ---
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