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2ND TERM, AY 2018-2019

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Problem 1. ESTIMATING VARIABLE CONSIDERATION

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.

Questions: (a) How should XYZ account for this revenue arrangement? (b) How much is
the total transaction price?

Problem 2. MULTIPLE PERFORMANCE OBLIGATIONS

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, 2017. 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.

 The equipment has a cost of P3,000,000.

Questions: (a) What are the performance obligations for purposes of accounting for the
sale of equipment? (b) If there is more than one performance obligation, how should the
payment of P4,000,000 be allocated to various components?
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Problem 3. TRANSACTION PRICE - REVENUE CONSTRAINT

On May 1, 2017, QRS Construction Company, entered into a contract to construct a

commercial building for a customer on a customer’s property for a consideration of P7,500,000
and a bonus of P1,500,000 if the building is completed within 24 months. On inception date,
the entity expects total construction costs of P5,250,000 to complete the building. The entity
accounts for the promised bundle of goods and services as a single performance obligation
satisfied over time in accordance with IFRS 15 because the customer controls the asset as it is
created or enhanced.

At contract inception, the entity cannot conclude that it is highly probable that a significant
reversal in the amount of cumulative revenue recognized will not occur with respect to
inclusion of bonus to contract price. Completion of the building is highly susceptible to factors
outside the entity’s influence, including weather and regulatory approvals. In addition, the
entity has limited experience with similar types of contracts. The entity determines that the
input measure, on the basis of costs incurred, provides an appropriate measure of progress
towards complete satisfaction of the performance obligation. As of December 31, 2017, the
construction costs incurred to date by QRS Company is P3,150,000.

In the first quarter of the 2018, the parties to the contract agree to modify the contract by
changing the design of the building. As a result, the fixed consideration and expected costs
increase by P1,125,000 and P900,000, respectively. In addition, the allowable time for
achieving the P1,500,000 bonus is extended by 6 months or to 30 months from the original
contract inception date. At the date of the modification, on the basis of its experience and
the remaining work to be performed, which is primarily inside the building and not subject to
weather conditions, the entity concludes that it is highly probable that including the bonus in
the transaction price will not result in a significant reversal in the amount of cumulative
revenue recognized.

Despite the changes, the contractor evaluates that the remaining goods and services to be
provided using the modified contract are not distinct from the goods and services transferred
on or before the date of contract modification; that is, the contract remains a single
performance obligation. For the year ended December 31, 2018, QRS Company incurred
construction costs of P1,462,500.

What is the balance of (1) Construction in Progress as of December 31, 2018 and (2)
realized gross profit to be recognized by QRS Company for the year ended December 31,
2018, respectively?
A. P7,593,750 and P731,250
B. P6,468,750 and P506,250
C. P7,593,750 and P1,631,250
D. P8,100,000 and P956,250

Problem 4. CONTRACT ASSETS – CONDITIONAL RIGHTS TO RECEIVE CONSIDERATION

On January 1, 2017, EFG Company enters into a contract to transfer Product A and Product B
to HIJ Company for P500,000. The contract specifies that payment of Product A will not occur
until Product B is also delivered. In other words, payment will not occur until both Product A
and Product B are transferred to HIJ. EFG determines that standalone prices are P150,000 for
Product A and P350,000 for Product B. EFG delivers the Product A to HIJ on February 1, 2017.
On March 1, 2017, EFG delivers Product B to EFG.

Question: What journal entries should EFG Company make in regards to this contract in
2017?
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Problem 5. CONTRACT LIABILITY – UNEARNED SALES REVENUE

On March 1, 2017, NOP Company enters into a contract to transfer product to RST Inc. on July
31, 2017. It is agreed that RST will pay the full price of P60,000 in advance on April 1, 2017.
The contract is non-cancellable. RST, however does not pay until April 15, 2017, and NOP
delivers the product on July 31, 2017. The cost of the product is P45,000.

Question: What journal entries should NOP Company make in regards to this contract in
2017?

Problem 6. PROBABILITY WEIGHTED METHOD AND MOST LIKELY AMOUNT

On January 1, 2017, JKL Development Corporation entered into a contract with TUV Company
to construct a new corporate headquarters on a property owned by TUV Company. JKL
determines that control of the building is passed to TUV Company as it is constructed.
Therefore, the performance obligation is satisfied over time. The contract price is
P20,000,000, but that amount will be reduced or increased depending on when construction of
the building is completed. For each day before December 31, 2019, that the building is
completed, the promised consideration will increase by P100,000. For each day after
December 31, 2019 that the building is incomplete, the promised consideration will be
reduced by P100,000.

The parties have also agreed that, when the building is complete, it will be inspected and
assigned an international certification level. If the building achieves the international
certification level specified in the contract, the contractor will be entitled to an incentive
bonus of P800,000.

On December 31, 2017, JKL determined that the expected value approach better predicts the
variable consideration it will receive regarding the early completion or delay of the
construction because of the range of possible outcomes based on JKL ’s current construction
schedule and its experience on similar contracts based on past projects. JKL estimates that
there is 50% chance to complete the project 10 days ahead of schedule and receive an
incentive, 25% chance to complete the project on time and 25% chance to complete the
project five days past schedule and incur a penalty.

As of the same date, on the other hand, JKL determined that the “most likely amount ” is the
better predictor to estimate the variable consideration associated with the international
certification bonus because there are only two possible outcomes (P800,000 or P0). Based on
its history of completing building projects that achieve the international certification level
specified in the contract and the absence of factors that may indicate the criteria will not be
met, JKL decided to include the bonus in the transaction price.

On December 31, 2018, JKL did not change its estimate with respect to the international
certification bonus but after evaluation of the construction completed to date and the
remaining project schedule, JKL determines it is now 75% likely to complete the project 10
days ahead of schedule and receive an incentive and 25% likely to complete the project on
time.
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The following construction costs were provided by JKL for the years ended December 31, 2017
and 2018:

December 31, 2017 December 31, 2018

Costs incurred during the year P9,600,000 P3,000,000
Estimated costs to complete P6,400,000 P5,400,000
at the end of the year

Assuming the outcome of construction can be estimated reliably, what is the realized
gross profit/(gross loss) to be recognized by MDC for the year ended December 31, 2018?
A. P(920,000)
B. P(882,500)
C. P(1,000,000)
D. P(620,000)

Problem 7. CONTRACT MODIFICATIONS – “DISTINCT” AND “STANDALONE SELLING PRICE”

WXY Company, has a contract to sell 300 products to a customer for P30,000 at various points
in time over a six-month period. After 180 products have been delivered, WXY modifies the
contract by promising to deliver 60 more products for an additional P5,700. WXY regularly
sells the product separately.

Question: (a) How will the additional 60 products affect the accounting for the original
contract? (b) How much is the total revenue after the modification? (c) What if the
additional products are not priced at the proper standalone selling price or if they are
not distinct – how will the answers in (a) and (b) change?

Problem 8. PERFORMANCE OBLIGATION – SINGLE VS. SEPARATE

Case 1. Aircraft Company signs a contract to sell airplanes to Singapore Airlines for P300
million. Aircraft also agreed to maintain the planes in the amount of P60 million for three
years.

Case 2. Delta Motors sells an automobile to Speed Auto Dealers at a price that includes six
months of telematics services such as navigation and remote diagnostics. These telematics
services are regularly sold on a standalone basis by Delta Motors for a monthly fee. After the
six-month period, the consumer can renew these services on a fee basis with Delta Motors.

Case 3. NovTech Inc. licenses customer-relationship software to XYZ Company. In addition to

providing the software itself, NovTech promises to perform consulting services by extensively
customizing the software to XYZ’s information technology environment, for a total
consideration of P1,800,000.

Case 4. ABC Computer Inc. manufactures and sells computers that include warranty to make
good on any defect in its computers for 120 days. In addition, it sells separately an extended
warranty, which provides protection from defects for 3 years beyond the 120 days.
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Case 5. NOP Company enters into a contract to build, run, and maintain a highly complex
piece of electronic equipment for a period of 5 years, commencing upon delivery of the
equipment. There is a fixed fee for each build, run, and maintenance deliverables, and any
progress payments made are non-refundable. All the deliverables has a standalone value.
There is a verifiable evidence of the selling price for the building and maintenance but not for
running equipment.

Question: In each of the following cases, identify the performance obligation(s)

Problem 9. REVENUE RECOGNITION FOR FRANCHISES (AT A POINT IN TIME vs. OVER A
PERIOD OF TIME)

EFG operates and franchises restaurants around the world. On January 1, 2017, EFG entered
into a franchise agreement with a franchisee. As part of its franchise agreement, EFG requires
the franchisee to pay a non-refundable upfront franchise fee of P570,000 upon opening a
restaurant and ongoing payment of royalties, based on 10% of franchisee ’s sales. As part of the
franchise agreement, EFG provides pre-opening services, including supply and installation of
cooking equipment and cash registers, valued at P180,000, which is the stand-alone selling
price of the pre-opening services.

In addition, the franchise agreement includes a license of Intellectual Property such as EFG ’s
trademark and trade name to the franchisee. EFG has determined that the license provides a
right to access the Intellectual Property over time. EFG has determined the stand-alone
selling price of the license is P420,000.

The franchise agreement has a term of 10 years. On January 1, 2017, the franchisee paid the
non-refundable upfront franchise fee of P570,000 to EFG. The franchisor evaluates the
arrangement and determines it meets the criteria to be accounted for as a contract with a
customer under IFRS 15. EFG determines its pre-opening services and license of Intellectual
Property are each distinct and, therefore, need to be accounted for as separate performance
obligations. As of December 31, 2017, EFG already satisfied its performance obligation to
supply and install cooking equipment and cash registers to the franchisee. For the year ended
December 31, 2017, the franchisee reported sales revenue of P600,000.

How much total revenue shall be recognized by EFG for the year ended December 31,
2017?
A. P570,000
B. P171,000
C. P39,900
D. P270,900

Problem 10. TRANSACTION PRICE – VOLUME DISCOUNT

DEF Company offers its customers a 3% volume discount if they purchase at least P4,000,000
of its product during the calendar year. On March 31, 2017, DEF has made sales of P1,400,000
to JKL Company. In the previous 2 years, DEF sold over P6,000,000 to JKL in the period April 1
to December 31.
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Question: (a) How much revenue should DEF recognize for the first 3 months of 2017? (b)
Prepare the journal entry assuming that DEF’s customer meets the discount threshold (c)
Prepare the journal entry assuming DEF’s customer fails to meet the discount threshold

Problem 11. OTHER REVENUE RECOGNITION ISSUES – RIGHT OF RETURN

ABC Company sells 400 products for P100 each to XYZ Company for cash. ABC allows XYZ to
return any product which is unused or because of dissatisfaction within 30 days and receive a
full refund. The cost of each product is P60. To determine the transaction price, ABC
decides that the approach that is most predictive of the amount of consideration to which it
will be entitled is the most likely amount.

Using the most likely amount, ABC estimates that:

1. Twelve products will be returned.

2. The costs of recovering the products will be immaterial
3. The returned products are expected to be resold at a profit.

Question: (a) How should ABC record this sale? (b) Prepare journal entry when a return
occurs.

Problem 12. OTHER REVENUE RECOGNITION ISSUES – REPURCHASE AGREEMENT

QRS Inc., an equipment dealer, sells equipment on January 1, 2017, to HIJ Company for
P200,000. It agrees to repurchase this equipment from HIJ Company on December 31, 2018,
for a price of P242,000. Assuming interest rate of 10% is imputed from the agreement.

Question: (a) Should QRS Inc., record a sale for this transaction? (b) Prepare journal
entries on January 1, 2017, December 31, 2017 and December 31, 2018.

Problem 13. OTHER REVENUE RECOGNITION ISSUES – BILL AND HOLD ARRANGEMENT

FGH Company sells P900,000 with cost of P560,000 of fireplaces on March 1, 2017, to a local
coffee shop, LMN, which is planning to expand its locations around the city. Under the
agreement, LMN asks FGH to retain these fireplaces in its warehouses until the new coffee
shops that will house the fireplace are ready. Title passes to LMN at the time the agreement
is signed.

Question: (a) When should FGH recognize the revenue from this bill-and-hold
arrangement? (b) Prepare the necessary journal entry (if any) on March 1, 2017.
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Problem 14. OTHER REVENUE RECOGNITION ISSUES – PRINCIPAL-AGENT RELATIONSHIP

OPQ Travel sells airplane tickets for RST Airways to various customers.

Question: What are the performance obligations in this situation and how should
revenue be recognized for both the principal and the agent?

Problem 15. OTHER REVENUE RECOGNITION ISSUES – CONSIGNMENTS

ABC Manufacturing Company ships merchandise costing P72,000 on consignment to XYZ Stores.
ABC pays P7,500 of freight costs, and XYZ pays P4,500 for local advertising costs that are
reimbursable from ABC. By the end of the period, XYZ has sold 2/3 of the consigned
merchandise for P80,000 cash. XYZ notifies ABC of the sales, retains 10% commission, and
remits the cash due to ABC.

Question: What are the journal entries that the consignor and the consignee make to
record this transaction?

Problem 16. OTHER REVENUE RECOGNITION ISSUES – WARRANTIES

ABC Company sold 2,000 industrial fans during 2017 at a total price of P6,000,000, with a
warranty guarantee that the product was free of any defects. The cost of industrial fans sold
is P4,000,000. The term of assurance warranty is 2 years, with an estimated cost of P30,000.
In addition, ABC sold extended warranties related to 800 industrial fans for 3 years beyond the
2-yearperiod for P12,000.

Question: What are the journal entries that ABC should make in 2017 related tio the
sale and the related warranties?

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