KINGFISHER SCHOOL OF BUSINESS

AND FINANCE

ACCTG 10
ONLINE CLASS
Topic: “Class Orientation &
PFRS 15 – Revenue from
Contract with Customers”
John Leo D. Ambuyoc, CPA
Instructor
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

IX - Contract Assets
On January 1, 20x7, JJ Company enters into a contract to transfer Product X and
Product Y to DD Co. for P240,000. 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 DD.
JJ determines that standalone prices are P72,000 for Product X and P168,000
for Product Y. JJ delivers Product X to DD on February 1, 20x7. On March 1,
2015, JJ delivers Product Y to DD.

Required:
1. Prepare the journal entries on January 1, 20x7.
2. Prepare the journal entries on February 1, 20x7.
3. Prepare the journal entries on March 1, 20x7.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

IX - Contract Assets
On February 1, 20x7, Janine records the following entry:

Contract Asset 72,000

Sales 72,000

On February 1, JJ does not record an accounts receivable because it does not have an
unconditional right to receive the P240,000 unless it also transfers Product Y to DD.

When JJ transfers Product Y on March 1, 20x7, it makes the following entry:

Accounts Receivable 240,000
Contract Asset 72,000
Sales 168,000

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

X - Contract Liabilities
On March 1, 20x7, AA Company enters into a contract to transfer a product to CC
Inc. on July 31, 20x7. It is agreed that CC will pay the full price of P24,000 in
advance on April 1, 20x7. The contract is non-cancelable. Conrad, however, does
not pay until April 15, 20x7, and AA delivers the product on July 31, 20x7. The cost
of the product is P18,000.

Required:
1. Prepare the journal entries on March 1, 20x7.
2. Prepare the journal entries on April 15, 20x7.
3. Prepare the journal entries to record the sale and cost of goods sold on July 31,
20x7.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues
X - Contract Liabilities

1. Prepare the journal entries on March 1, 20x7.

No Journal Entry
2. Prepare the journal entries on April 15, 20x7.
Cash 24,000
Unearned Sales Revenue/Contract Liability 24,000

3. Prepare the journal entries to record the sale and cost of goods sold on
July 31, 20x7.
Unearned Sales Revenue/Contract Liability 24,000
Sales Revenue 24,000

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues
XXIII – Contract Modification
Tucson Financial Services performs bookkeeping and tax-reporting services to
startup companies in the Oconomowoc area. On January 1, 20x5, Tucson entered
in a 3-year service contract with Wigo Tech. Wigo promises to pay P20,000 at the
beginning of each year, which at contract inception is the standalone selling price
for these services. At the end of the second year, the contract is modified and the
fee for the third year of services is reduced to P16,000. In addition, Wigo agrees
to pay an additional P40,000 at the beginning of the third year to cover the
contract for 3 additional years (i.e, 4 years remain after the modification). The
extended contract services are similar to those provided in the first 2 years of the
contract.
Required:
1. Prepare the journal entries for Tucson in 20x7 related to the modified
service contract, assuming prospective approach.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

January 1, 20x7
Cash (P16,000 + P40,000)56,000
Unearned Service Revenue 56,000
December 31, 20x7
Unearned Service Revenue (P56,000 ÷ 4) 14,000
Service Revenue 14,000

In this case, the modification of the contract does not result in new performance obligation. As
a result, the remaining service revenue is recognized evenly over the remaining four years.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues
XXIII – Contract Modification
Tucson Financial Services performs bookkeeping and tax-reporting services to startup companies
in the Oconomowoc area. On January 1, 20x5, Tucson entered in a 3-year service contract with
Wigo Tech. Wigo promises to pay P20,000 at the beginning of each year, which at contract
inception is the standalone selling price for these services. At the end of the second year, the
contract is modified and the fee for the third year of services is reduced to P16,000. In addition,
Wigo agrees to pay an additional P40,000 at the beginning of the third year to cover the contract
for 3 additional years (i.e, 4 years remain after the modification). The extended contract services
are similar to those provided in the first 2 years of the contract.
Required:
1. Prepare the journal entries for Tucson in 20x7 related to the modified service
contract, assuming Tucson and Wigo agree on a revised set of services (fewer bookkeeping
services but more tax services) in the extended contract period and the modification results
in a separate performance obligation.
 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

January 1, 20x7
Cash (P16,000 + P40,000)56,000
Unearned Service Revenue 56,000
December 31, 20x7
Unearned Service Revenue16,000
Service Revenue 16,000

Tucson will recognize P13,333 (P40,000 ÷ 3) per year in the extended period
(20x8–20y0). For 20x7, Tucson makes the following entry.

.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

XXXV – Other Revenue Recognition Issues: Bill and Hold

GG Company sells P1,080,000 (cost, P672,000) of products on March 1, 20x7,
to a local store, CC, which is planning to expand its locations around the city.
Under the agreement, CC asks GG to retain these products in its warehouses
until the new store are ready and be operational. Title passes to Camille at the
time the agreement is signed.

Required:
1. Prepare the journal entries to record the sale.
2. Prepare the journal entries to record the related cost of goods sold.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

Revenue cannot be recognized in a bill and hold arrangement until the customer
obtain the control of the product.
For customer to have obtained control of a product in a bill-and-hold
arrangement, all of the following criteria should be met:
❖ The reason for the bill-and-hold arrangement must be substantive.
❖ The product must be identified separately as belonging to customer.
❖ The product currently must be ready for physical transfer to customer
❖ The entity cannot have the ability to use the product or to direct it to another
customer.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

1. Prepare the journal entries to record the sale.

Accounts Receivable - 1,080,000
Sales - 1,080,000

2. Prepare the journal entries to record the related cost of goods

sold.
Cost of Sales - 672,000
Inventory - 672,000
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

XXXVI - Other Revenue Recognition Issues: Principal or Agent

Assume that Lozada.com sells the MaxBook Pro, a computer brand produced
by Chicken Computers, for a retail price ofP15,000. Lozada arranges its
operations such that customers receive products directly from Chicken
Computers rather than Lozada. Customers purchase from Lozada using
credit cards, and Lozada forwards cash to Chicken equal to the retail price
minus a P1,500 commission that Lozada keeps. In this arrangement, how
much revenue will Lozada recognize for the sale of one MaxBook
Pro?
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

❖ Company is principal if it obtains the control of goods or services before they

are transferred to customers. It records revenue equal to the sales price paid
by the customers as well as cost of goods sold equal to the cost of the item to
the company

❖ Company is an agent if it acts as a facilitator between a principal an a

customer to provide goods or services. It records revenue only to the
commission it receives to the transaction.

✓ Lazada will recognize revenue of P1,500, its commission

on the sale.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

XXXVIII - Other Revenue Recognition Issues: Warranties

JJ Company sold 2,400 units during 20x7 at a total price of P14,400,000, with
a warranty guarantee that the product was free of any defects. The cost of
each unit sold is P9,600,000. The term of the assurance warranty is two
years, with an estimated cost of P72,000. In addition, JJ sold extended
warranties related to 960 units for three years beyond the two-year period
for P28,800.

Required:
1. Prepare the journal entries to record the revenue and liabilities related
to the warranties.
2. Prepare the journal entries to record reduce inventory and recognize
cost of goods sold.
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

XXXVIII - Other Revenue Recognition Issues: Warranties

Required:
1. Prepare the journal entries to record the revenue and liabilities related to the
warranties.
Cash 14,428,800
Sales 14,400,000
Unearned Warranty Revenue 28,800

Warranty Expense 72,000

Warranty Liability 72,000
2. Prepare the journal entries to record reduce inventory and recognize cost of goods
sold.

Cost of Sales 9.6M

Inventory 9.6M