118.

2 – Illustrative Examples – IFRS15 Part 2

1. Right of Return. Nathan Company sells 200 units for P100 each to Anne Inc. for cash. Nathan
allows Anne to return any unused product within 30 days and receive a full refund. The cost
of each product is P60. To determine the transaction price, Nathan 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, Nathan estimates that six products will be
returned. What journal entry should Nathan record on sale and on return of the product
(assume four units were actually returned)?

2. Repurchase Agreement. Mylene Inc., an equipment dealer, sells equipment on January 1,

20x7 to Rhea Company for P200,000. It agrees to repurchase this equipment on December 31,
20x8, for a price of P242,000. Assume an explicit interest rate of 10%. What journal entry
should Mylene Inc. record on January 1, 20x7, December 31, 20x7 and December 31, 20x8?

3. Bill and Hold Sales. Gianne Company sells P900,000 (cost P560,000) of products on March 1,
20x7, to a local store, Camille, which is planning to expand its locations around the city. Under
the agreement, Camille asks Gianne to retain these products in its warehouses until the new
stores are ready and operational. Title passes to Camille at the time the agreement is signed.
What journal entry should Gianne record on March 1, 20x7?

4. Warranties. Jack Company sold 2,000 units during 20x7 at a total price of P12 million with a
warranty guarantee that the product was free of any defects. Total cost of sales is P8 million.
The term of the assurance warranty is 2 years, with an estimated cost of P60,000. In addition,
Jack sold extended warranties related to 800 units for 3 years beyond the 2-year period for
P24,000. What journal entry should be recorded by Jack Company on sale?

5. Non-Refundable Upfront Fee. Gor Macariola signs a 1-year contract with Fitness First Gym.
The terms of the contract are that Gor is required to pay a non-refundable initiation fee of
P12,000 and an annual membership fee of P1,000 per month. Fitness First Gym determines
that its customers, on average, renew their annual membership two times before terminating
their membership. How much should be Fitness First’s revenue per month?

6. Contract Assets. On January 1, 20x7, Janine Company enters into a contract to transfer
Product X and Product Y to Darlene Co. for P200,000. The contract specifies that payment of
Product X will not occur until Product Y is also delivered. In other words, payment will not
occur until both Product X and Product Y are transferred to Darlene. Janine determines that
standalone prices are P60,000 for Product X and P140,000 for Product Y. Janine delivers
Product X to Darlene on February 1, 20x7. On March 1, 20x7, Janine delivers Product Y to
Darlene. What entries should be recorded on February 1, 20x7 and March 1, 20x7 by Janine
Company?

7. Contract Liabilities. On March 1, 20x7, Asser Company enters into a contract to transfer a
product to Conrad Inc. on July 31, 20x7. It is agreed that Conrad will pay the full price of
P20,000 in advance on April 1, 20x7. The contract is non-cancellable. Conrad, however does
not pay until April 15, 20x7, and Asser delivers the product on July 31, 20x7. The cost of the
product is P15,000. What are the relevant journal entries for Asser Company for this
transaction?
8. Costs to Fulfil Contract. CPI Outsourcing enters into a contract to operate ReSa Review
School’s information technology data center for 3 years. CPI Outsourcing incurs selling
commission costs of P40,000 to obtain the contract. Before performing the services, CPI
Outsourcing designs and builds a technology platform that interfaces with Resa Review’s
systems. That platform is not transferred to ReSa. ReSa promises to pay a fixed fee of P80,000
per month. CPI Outsourcing incurs the following costs: design services for the platform
P60,000, hardware for the platform P200,000, software P120,000, and migration and testing
of data center P130,000. Which of these costs are capitalized and expensed?

9. Franchise Agreements. Domina’s Pizza Inc. enters into a franchise agreement on November
1, 20x7, giving Doming Corp. the right to operate as a franchisee of Domina’s Pizza for 5 years.
Domina’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. 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 Domino’s at its current
standalone selling prices at the time of purchase. 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 P227,584.5. The discount of P57,415.5 represents
the interest revenue to be accrued by Domina’s Pizza inc. over the payment period.

The following arises based on the given facts:

 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 series that are readily available to the franchises. The down payment
represents the standalone price for these rights.
 Training services and equipment are distinct because similar services and equipment
are sold separately. The equipment’s standalone selling price is estimated to be
P133,000. Cost of the equipment is P95,000.

Training is completed in January 20x8, the equipment is installed in January 20x8 and Doming
holds a grand opening on February 2, 20x8.

What are the relevant journal entries for Domina’s Pizza?