5 Step Process Rev Rec Chapter Dayag Solman

Chapter 7
Problem I – 5-Step Process

Recognize revenue in the accounting period when the performance obligation is satisfied.
Step 1: Identify the contract with customers.
A contract is an agreement between two parties that creates enforceable rights or obligations. In
this case, Maritime Ship Manufacturers contract to deliver cargo ships to Kim and Dreicy Shipping
Lines.
Step 2: Identify the separate performance obligations in the contract.
Maritime Ship Manufacturers has only one performance obligation—to deliver cargo ships to Kim
and Dreicy Shipping Lines. If Maritime Ship Manufacturers also agreed to maintain the cargo ships,
a separate performance obligation is recorded for this promise.
Step 3: Determine the transaction price.
Transaction price is the amount of consideration that a company expects to receive from a
customer in exchange for transferring a good or service. In this case, the transaction price is
straight forward—it is P720,000,000.
Step 4: Allocate the transaction price to the separate performance obligations.
In this case, Maritime Ship Manufacturers has only one performance obligation—to deliver cargo
ships to Kim and Dreicy Shipping Lines.
Step 5: Recognize revenue when each performance obligation is satisfied.
Maritime Ship Manufacturers recognizes revenue of P800 million for the sale of the cargo ships to
Kim and Dreicy Shipping Lines when it satisfies its performance obligation—the delivery of the
cargo ships to Kim and Dreicy Shipping Lines.
Problem II – Revenue Recognition
No entry is required on May 10, 20x5, because neither party has performed on the contract.
That is, neither party has an unconditional right as of May 10, 20x5. On June 15, 20x5, Marc
delivers the product and therefore should recognize revenue as it received an unconditional
right to consideration on that date. In addition, Marc satisfies its performance obligation by
delivering the product to Josh.
The journal entry to record the sale and related cost of goods sold is as follows.
June 15, 20x5
Accounts Receivable.........................................................................4,000
Sales Revenue.................................................................................. 4,000
Cost of Goods Sold...........................................................................2,600
Inventory.......................................................................................... 2,600
After receiving the cash payment on July 15, 20x5, Marc makes the following entry.
July 15, 20x5
Cash ................................................................................................ 4,000
Accounts Receivable........................................................................ 4,000
Problem III – Contracts and Recognition

The entry on July 31, 20x7, to record the sale and related cost of goods sold is as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,00 .
. 0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
...
Cost of34,20
sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
...
The entry to record the receipt of cash on August 31, 20x7 is a follows:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57,00
..... 0
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
......
A key attribute of the revenue arrangement is that the signing of the contract by the two parties is not
recorded until one or both of the parties perform under the contract. Until performance occurs, no
net asset or net liability occurs.
Problem IV – Revenue Recognition
January income...................................................................... P 0
February income (P8,000 – P6,000) X 50%............................ P1,000
March income (P8,000 – P6,000) X 30%)............................... P 600
April income (P8,000 – P6,000) X 20%)................................. P 400
Problem V
In 20x6 AA has transferred the land, and the construction company has an obligation to pay
AA. Apache’s performance obligation has been satisfied, and revenue and a related
accounts receivable of P3,000,000 can be recognized. Under accrual accounting, revenue is
recorded when goods and services are transferred to customers (20x6), not necessarily
when cash changes hands in future periods.
Problem VI – Timing of Revenue Recognition - Point in time when revenue should be

recognized
The following items should be taken into consideration by Cerise Outsourcing Company:
 Cerise Outsourcing Company does not create an asset with an alternative use because it is
prohibited from redirecting the software to another customer.
 Cerise Outsourcing Company is entitled to payments for performance to date and expects
to complete the project.
 Consequently, Cerise Outsourcing Company concludes that the contract meets the criteria
for recognizing revenue over time.
Problem VII
A performance obligation is satisfied over time if at least one of the following three criteria is
met:
1. The customer consumes the benefit of the seller’s work as it is performed,
2. The customer controls the asset as it is created, or
3. The seller is creating an asset that has no alternative use to the seller, and the seller
can receive payment for its progress even if the customer cancels the contract.
Under EE’s construction agreement with AJD, if for any reason EE can’t complete
construction, AJD would own the partially completed building. Therefore, criterion 2 is
satisfied, and revenue should be recognized as the building is being constructed.
Problem VIII
This contract qualifies for revenue recognition over time, because the performance
obligation (to provide technology consulting services upon request) is consumed by the
customer as the seller’s work is performed. Therefore, Shirley should recognize revenue of
P4,000 (P6,000 × 8/12 months) in 20x6.
Journal entries (not required):

May 1, 20x6
Cash 6,000
Deferred revenue 6,000
December 31, 20x6 adjusting entry

Deferred revenue 4,000
Service revenue (P6,000 x 8/12) 4,000
Problem IX – Identifying Separate Performance Obligations

The license and the consulting services are distinct but interdependent, and therefore should
be accounted for as one performance obligation.
Problem X
Number of performance obligations in the contract: 1.
A right of return is not a performance obligation. Instead, the right of return represents a
potential failure to satisfy the original performance obligation to deliver goods to the
customer. Because the total amount of cash received from the customer depends on the
amount of returns, a right of return is a type of variable consideration.
Aria should estimate sales returns and reduce revenue by that amount in order to arrive at
“net revenue,” which would be the transaction price (the amount to be recorded as revenue
on the seller’s books). The total net revenue in this situation is P280,233:
Revenue P288,900 (P90 × 3,210 units)
Sales returns 8,667 (P288,900 × 3%)
Net revenue P280,233
Problem XI – Identifying Separate Performance Obligations

1. The sale of the computer and related assurance warranty are one performance
obligation as they are interdependent (mutually dependent) and interrelated (or
unified) with each other.
2. The extended warranty is separately sold and is not interdependent (independent),
therefore, two performance obligation.
Problem XII
In addition to the subscription, the renewal option is a performance obligation because it

provides a material right that allows the customer to renew at a better price than could be
obtained without the right. The renewed protection is capable of being distinct, as it could
be sold or provided separately, and it is separately identifiable, as the customer can use the
renewed protection on its own. Therefore, the renewed protection is distinct, and qualifies
as a performance obligation.
Problem XIII
Requirement 1
Delivery of gold is one performance obligation. The additional insurance is a second

performance obligation. The insurance service is capable of being distinct because the bank
could choose to receive similar services from another insurance provider, and it is
separately identifiable, as it is not highly interrelated with the other performance obligation
of delivering gold, and the seller’s role is not to integrate and customize them to create one
service or product. So, the insurance qualifies as a performance obligation. The receipt of
cash prior to delivery is not a performance obligation, but rather gives rise to deferred
revenue associated with performance obligations to be satisfied in the future.
Requirement 2
Value of the gold bars:
P14,400/unit 100 units = P 1,440,000
Stand-alone selling price of the insurance:
P600  100 units = ___60,000
Total of stand-alone prices P1,500,000
Fermin first identifies each performance obligation’s share of the sum of the stand-alone selling prices of
all deliverables:
P144,000
Desktop computers: = 96%
P1,440,000 + P60,000
P6,000
Insurance: = 4%
P1,440,000 + P60,000
100%
Fermin then allocates the total selling price based on stand-alone selling prices, as follows:
P1,470,000
Transaction Price
96% 4%
P1,411,200 P5,880
Gold Insurance
Entry on March 1, 20x6:
Cash 147,000
Deferred revenue–gold bars 141,120
Deferred revenue–insurance 5,880
Requirement 3
Entry on March 30, 20x6:
Deferred revenue–gold bars 141,120
Sales revenue 141,120
Fermin recognizes only the portion of revenue associated with passing of the legal title. The
revenue associated with insurance coverage will be earned only when that performance
obligation is satisfied.
Requirement 4
Entry on April 1, 20x6:
Deferred revenue–insurance 5,880
Service revenue 5,880
Problem XIV – Transaction Price

(a) Grey would recognize revenue of P2,000,000 at delivery.
(b) Grey would recognize revenue of P1,600,000 at the point of sale.
(c) Grey would recognize revenue of P928,000 at the point of sale.
Problem XV – Discounted Transaction Price

The following items should be taken into consideration by Toby’s Store:
 As indicated, the standalone price for product 1, 2, 3, and 4 is P21,240, but the bundled price
for all four products is P18,600.
 The discount applies to the performance obligations related to products 1, 3, and 5.
Accordingly, Toby’s Store: allocates the discount to product 1, 3, and 4, and not
to products 2, as follows:
Allocated Amounts
Product 1, 3, and 4…………………………………… P 16,200
Product 2……………………………………………….. 6,000
Total……………………………………………………… P 17,200
Problem XVI – Non-refundable Upfront Fee Considerations

The following items should be taken into consideration by Physical Gym:
1. In this case, the membership fee arrangement may be viewed as a single performance
obligation (similar services are provided in all periods). That is, Physical Gym is providing a
discounted price in the second and third years for the same services, and this should be
reflected in the revenue recognized in those periods.
2. Physical Gym determines the total transaction price to be P144,000 - the upfront fee of
P14,400 and the 3 years of monthly fees of P129,600 (P3,600 x 36 months) - and allocates it
over the 3 years.
3. In relation to No. 2, the Physical Gym would report revenue of P4,000 [(P144,000 / 36
months) each month for 3 years.
Problem XVII
Based on relative stand-alone selling prices, the software comprises 70% of the total fair
values (P70,000 ÷ [P30,000 + P70,000]), and the technical support comprises 30%
(P30,000 ÷ [P30,000 + P70,000]). Therefore, Ging would recognize
P56,000 (P80,000  70%) in revenue when the software is delivered and defer the remaining
P24,000 (P80,000  30%) to be recognized evenly over the next six months as the technical
support service is provided.
P80,000
Transaction Price
70% 30%
P56,000 P24,000
Software Technical Support Service
The journal entry is recorded as follows:
Cash 80,000
Sales revenue(for software) 56,000
Deferred revenue(for tech support) 24,000
Problem XVIII – Allocate Transaction Price

1. The entry to record the sale and related cost of goods sold is as follows.
Accounts Receivable..............................................820,000
Sales Revenue............................................................. 740,000
Unearned Service Revenue.......................................... 80,000
2. First Quarter
Sales revenue..................................................................... P740,000
The revenue for installation will be recognized in the second quarter.
Problem XIX – Allocate Transaction Price

1. January 2, 20x5
Cash......................................................................300,000
Unearned Sales Revenue ............................................ 300,000
(To record upfront payment for sales of products A and B)
December 31, 20x5

Interest Expense (P300,000 X 6%)..........................18,000
Interest Payable........................................................... 18,000
(To record interest on the contract liability)
2, December 31, 20x6

Interest Expense
([P300,000 + P18,000] X 6%)...............................19,084
Interest Payable........................................................... 19,084
(To record interest on the contract liability)
3. January 2, 20x7
Unearned Sales Revenue.........................................75,000
Interest Payable ([P18,000 + P19,080] X 25%)..........9,270
Sales Revenue............................................................. 84,270
(To record revenue on transfer of product A)
Note: Interest will continue to accrue on product B over the next 3 years.
Problem XX
If a seller is purchasing distinct goods or services from a customer at the fair value of those
goods or services, we account for that purchase as a separate transaction. Otherwise,
excess payments by the seller are treated as a refund of the customer’s purchase. If the
payments are made (or are expected to be made) at the time of the original sale, the
transaction price of the customer’s purchase is reduced immediately by the refund. If
payment is not expected at the time of the sale, revenue is recorded based on the full
transaction price, and any subsequent payment by the seller above fair value results in a
reduction of the transaction price at that time.
There is no indication that Aljons’ payment to Ana for P10,000, which is P2,500 more than
the fair value of those services (P7,500), was expected at the time of the original sale.
Therefore, the original sale would be recorded based on the full transaction price of P60,000.
The overpayment of P2,500 reduces the P60,000 transaction price of the goods sold by Aljon
to Ana at the time the P10,000 is paid, resulting in a downward adjustment of revenue of
P2,500 at that time and net revenue over the period of P60,000 – P2,500 = P57,500.
Problem XXI
When a contract includes variable consideration, sellers are constrained to recognize only
the amount of revenue they believe is probable that they won’t have to reverse (adjust
downward) in the future if the variable consideration changes. In this case, factors outside
the seller’s control (stock market volatility) make the seller’s estimate of variable
consideration very uncertain, so the amount of revenue that Asser, Inc. will recognize during
the year is limited to the fixed annual management fee, which is P1.5 million (1% of the
client’s P150 million total assets under management). Therefore, Asser, Inc. would use P1.5
million as its estimate of the transaction price. Any performance bonus earned by Asser,
Inc. will be recognized as revenue if and when it is earned.
Problem XXII - Estimating Variable Consideration

The probability-weighted method is the most predictive approach for the management to
determine the transaction price:
60% chance of P160,000,000………………………………………………………………P 96,000,000
30% chance of P154,000,000[P160,000,000 – (10% x P60,000,000)]..……………… 46,200,000
10% chance of P148,000,000[P160,000,000 – (10% x P60,000,000) x 2]…………… 14,800,000
P157,000,000
Problem XXIII – Variable Consideration
1. Because the arrangement only has two possible outcomes (regulatory approval is
achieved or not), Bai determines the transaction price based on the most likely
approach. Thus, the best measure for the transaction price is P20,000,000.
2. December 20, 20x5
No entry-neither party has performed.
January 15, 20x6
Cash ................................................................10,000,000
License Revenue....................................................... 10,000,000
Problem XXIV – Contract Modification

1. January 1, 20x5
Cash .......................................................................20,000
Unearned Service Revenue....................................... 20,000
December 31, 20x5

Unearned Service Revenue......................................20,000
Service Revenue....................................................... 20,000
January 1, 20x6
Cash .......................................................................20,000
December 31, 20x6

Service Revenue....................................................... 20,000
2. January 1, 20x7
Cash (P16,000 + P40,000).......................................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.
3. Given the change in services in the extended contract period, the services are distinct;
the modification should not be considered as part of the original contract – Tucson
recognizes revenue on the remaining services at different rates. Tucson will recognize
P13,333 (P40,000 ÷ 3) per year in the extended period (20x8–20y0). For 20x7, Tucson
makes the following entry.
January 1, 20x7
Cash (P16,000 + P40,000).......................................56,000
December 31, 20x7

Service Revenue....................................................... 16,000
Problem XXV – Contract Modification

1. Cash .......................................................................18,000
Sales Revenue (90 X P200)....................................... 18,000
Cost of Goods Sold....................................................9,720

Inventory (90 X P108)............................................... 9,720
2. Cash .........................................................................2,000
Sales Revenue (10 X P200)....................................... 2,000
Cost of Goods Sold....................................................1,080

Inventory (10 X P108)............................................... 1,080
In this situation, the contract modification for the additional 90 products is, in effect, a
new and separate contract for future products that does not affect the accounting for
the previously existing contract.
3. In this case, because the new price does not reflect a standalone selling price,
Giordano allocates a modified transaction price (less the amounts allocated to
products transferred at or before the date of the modification) to all remaining
products to be transferred.
Under the prospective approach, Giordano determines the transaction price for
subsequent sales (P195.71) as follows:
Consideration for products not yet delivered

under original contract [P200 X (150-90)] P 12,000
Consideration for products to be delivered
under the contract modification (P190 x 45) 8,550
Total remaining revenue P 20,550
Revenue per remaining unit [P20,550  (150-45)] = P195.71.
As indicated, the numerator includes products not yet transferred under original
contract (P200 X 60) plus products to be transferred under the contract modification
(P190 X 45), which is divided by the remaining 105 products.
The journal entries to record subsequent sales and related cost of goods sold for 10
units is as follows.
Cash (10 X P195.71)..............................................1957.10
Sales Revenue........................................................... 1,957.10
Cost of Goods Sold...............................................1,080.00

Inventory................................................................... 1,080.00
Problem XXVI – Contracts and Recognition

The above new contract, AB recognizes additional total revenue of P63,720,000, computed as follows
Original contract [(120,000 units – 72,000 units) x P900]………………………P 43,200,000
New product (24,000 units x P855)……………………………………………….. 20,520,000
Total revenue after the modification………………………………….…………P 63,720,000
In this situation, the contract modification for the additional 24,000 products is, as a result, a new and
separate contract, which does not affect the accounting for the original contract.
Problem XXVII – Prospective Modification
For AB, the amount recognized as revenue for each of the remaining products would be a blended
price of P885, computed as shown:
Products not delivered under original contract (P900 x 48,000)……………P43,200,000
Products to be delivered under contract modification (24,000 x P855)…. 20,520,000
Total remaining revenue……………………………………………………………P 63,720,000
Revenue per remaining unit (P63,720,000 ÷ 72,000)= P885, blended price
Note: Under the prospective approach, this computation differs from that in the separate
performance obligation approach is that revenue on the remaining units (i.e., 72,000
units) is recognized at the blended price.
Prospective Modification. Under the prospective approach, a blended price (P885) is used
for sales in the periods after the modification.
Revenue Recognized Revenue Recognized Total Revenue
Prior to Modification After Modification Recognized
Separate performance obligation P64,800,000* P 63,720,000 P128,520,000
No separate performance
obligation - prospectively P64,800,000* P 63,720,000 P128,520,000
* 72,000 x P900
Note: As pointed out, whether a modification is treated as a separate performance obligation
or prospectively, the same amount of revenue is recognized before and after the
modification. However, under the prospective approach, a blended price (P885) is used for
sales after the modification.
Problem XXVIII – Revenue Recognition Constraint

The following items should be taken into consideration by Ging and Associates:
1. Recognized the management fee each quarter based on the performance of its services
during the year.
2. The incentive fee should not be recorded until the end of the year. Therefore, this fee is
constrained (not recognized) until the incentive is determinable at the end of the year.
Problem XXIX – Extended Payment Terms

July 1, 20x7: Record the Sale
Notes 894,697.
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000.0
... 0
Unearned Interest income (discount on notes receivable). . . . . . 354,697.8
0
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000.
.
... 00
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000.0
.... 0
December 31, 20x7: Record interest revenue:

Unearned interest income (Discount on notes receivable). . . . . . . . . . 32,400.0 .
... 0
Interest income (12% x ½ x P540,000). . . . . . . . . . . . . . . . . . . . . . . 32,400.00
.....
The revenue that James Company should record on July 1, 20x7 should amount to P540,000. While the
amount of revenue (i.e., interest income) that should be report related to this transaction on December
31, 20x7 also amounted to P32,400.
For practical considerations, companies are not required to reflect the time value of money if
the time period for payment is less than a year.
Problem XXX – Volume Discount
The entries that Samsung recognize as revenue for the first three months of 20x7 (March 31, 20x7) are
as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
....
Sales [P420,000 - (P420,000 x 407,400
3%)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Samsung should reduce its revenue by P12,600 (P420,00 x 3%) because it is probable that it will
provide this rebate.
Assuming Samsung’s customer meets the discount threshold, Samsung makes the following entry:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If Samsung’s customer fails to meet the discount threshold, Samsung makes the following entry upon
payment.
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .420,000
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales discount 12,600
lost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,400
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Problem XXXI
Under the adjusted market assessment approach, O’Hara would base its estimate of the
stand-alone selling price of the club-fitting services on the prices charged by other vendors
for those services, adjusted as necessary. Because O’Hara typically charges 10% more than
what other vendors charge, O’Hara would estimate the stand-alone selling price of the club-
fitting service to be P110 × 110% = P121.
Problem XXXII
Under the expected cost plus margin approach, Espenilla would base its estimate of the
stand-alone selling price of the club-fitting service on the P600 cost it incurs to provide the
services, plus its normal margin of P600 × 30% = P180. Therefore, O’Hara would estimate
the stand-alone selling price of the club-fitting services to be P600 + P180 = P780.
Problem XXXIII
Under the residual approach, Espenilla would base its estimate of the stand-alone selling
price of the club-fitting services on the total selling price of the contract (P15,000) minus the
observable stand-alone selling price of clubs (P14,000). Therefore, Espenilla would estimate
the stand-alone selling price of the club-fitting services to be P15,000 – P14,000 = P1,000.
Problem XXXIV
Requirement 1
The delivery of Flood-Boots is one performance obligation. The discount coupon for
additional future purchases is a second performance obligation because it provides a
material right to the customer that the customer would not receive otherwise. That right to
receive a discount is both capable of being distinct, as it could be could be sold or provided
separately, and it is separately identifiable, as it is not highly interrelated with the other
performance obligation of delivering Flood-Boots, and the seller’s role is not to integrate and
customize them to create one product. So, the discount coupon is distinct and qualifies as a
performance obligation.
Requirement 2
If Balli can’t estimate the stand-alone selling price of Flood-Boots, it will use the residual
method to calculate that price as the amount of the total transaction price minus the value
of the discount.
Cash (1,000 x P700) 700,000
Sales revenue (to balance) 640,000
Deferred revenue (discount option) 60,000*
*(1,000 pairs  P1,000 average purchase price × 30% discount 20% of customers
estimated to redeem coupon)
Problem XXXV – One or Multiple Performance Obligations

The following items should be taken into consideration by Ube Company:
1. The performance obligations relate to building construction, maintenance of the building and
operate the condominium (buildings). Therefore, two performance obligation.
2. As pointed out, Ube Company can determine standalone values for the building, and the
maintenance building.
3. The company then can make a best estimate of the price for operating the condominium
(buildings), using the adjusted market assessment approach or expected cost plus a margin
approach.
4. Ube Company next applies the relative fair value method at the inception of the transaction
to determine the proper allocation to each performance obligation.
5. Once the allocation is been properly determined, Ube Company recognizes revenue
independently for each performance obligation using regular revenue recognition criteria.
6. If, alternatively, the standalone selling price for operating the condominium (building) is highly
variable or uncertain, Ube Company may use a residual approach. In this case, Ube
Company uses the fair values of the high rise building and the maintenance agreements and
subtracts their fair value from the total transaction price to arrive at a residual value for
operating the condominium (buildings):
Total transaction price………………………………………………… P xxx

Less: Fair value of the high rise building…………………………… P xxx
Building maintenance………………………………………….. _xxx _xxx
Residual value – Amount allocated for operating the
condominium (buildings)………………………………………….. P xxx
Problem XXXVI – Multiple Performance Obligations

The following items should be taken into consideration by AA Maritime Industries, Inc.
 The first condition for separation into a standalone unit for the bridge simulator is met. That is,
the bridge simulator, installation, and training are distinct and not interdependent (or
independent) - they are three separate products or services, and each of these items
has a standalone selling price.
 The total revenue of P42,000,000 should be allocated to the three components based on their
relative fair values.
1. The fair value of the bridge simulator should be considered P42,000,000, the installation fee is
P840,000, and the training is P420,000. The total fair value to consider amounted to:
Bridge simulator (P40,740,000/P42,000,000) x P40,740,000……………………...
P39,517,800
Installation (P840,000/P42,000,000) x 814,800
P40,740,000……………………………..
Training (P420,000/P42,000,000) x___407,400
P40,740,000….........................................
Total…………………………………………………………………………………….. P40,740,000
2. AA Maritime Industries, Inc makes the following entry on November 1, 20x7, to record
both sales revenue and service revenue on the installation, as well as unearned service
revenue:
Cash. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .40,740,0
.... 00
Service revenue (installation). . . . . . . . . . . . . . . . . . . . . . . 814,800
....
Unearned service 407,400
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales 39,517,80
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
(Not required)
Assuming the cost of the bridge simulator is P28,518,000 the entry on November 1, 20x7 to
record cost of goods sold is as follows:
Cost of goods sold. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .28,518,0
..... 00
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,518,00
. ... 0
As indicated by the above entries, AA Maritime Industries, Inc recognizes revenue from the
sale of the bridge simulator once the installation is completed on November 1, 20x7. In
addition, it recognizes revenue for the installation fee because these services have been
performed.
3. AA Maritime Industries, Inc recognized the training revenues on a straight-line basis

starting on November 1, 20x7, or P101,000 (P407,400/4 months) per month for four (4) months.
The journal entry on December 31 20x7 to recognize the training revenue of two (2)
months in 20x7 is as follows:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000
..
Service revenue (P101,000 x 2 months). . . . . . . . . . . . . . . 202,000
...
Therefore, AA Maritime Industries, Inc recognizes revenue on December 31, 20x7, in the
amount of P40,534,600 (P39,517,800 + P814,800 + P202,000). AA Maritime Industries, Inc
makes the following journal entry on December 31, 20x7 to recognize the training revenue in
20x8, assuming adjusting entries are made at year-end:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,400
..
Service revenue (P407,400 – P202,000). . . . . . . . . . . . . . . 205,400
...
Problem XXXVII
Geri should recognize P0 of revenue upon delivery to distributors. Given the uncertainty
about estimated returns, Geri can’t argue that it is probable that it won’t have to reverse
(adjust downward) a significant amount of revenue in the future because of a change in
returns. Therefore, Geri won’t recognize revenue until it either can better estimate returns
or sales to end consumers occur. Essentially, because Geri can’t estimate returns, it treats
this transaction as if it is placing those goods on consignment with independent distributors.
Problem XXXVIII – Right of Return

The following entries in relation to the sale are as follows:
1. NN records the sale as follows with the expectation that three products will be returned:
Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
...
Sales (P100 x (240 – 13,400
6)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refund Liability (P100 x 6 600
units). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales (P14,400 – 14,040
P360). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated inventory returns (P60 x 6). . . . . . . . . . . . . . . . . . . . . . . . . . 360
..
Inventory (P60 x 240 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
...
2. When a return occurs, assuming 4 units were returned: NN records the following entries :
Refund Liability (4 units x P100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
...
Accounts 400
Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned Inventory (4 x P60) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
..
Estimated inventory returns . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 240
. ..
Companies record the returned asset in a separate account from inventory to provide transparency.
Problem XXXIX – Sales with Returns
1. January 2, 20x5
Accounts Receivable...........................................3,000,000
Refund Liability (P3,000,000 X 20%)......................... 600,000
Sales Revenue........................................................... 2,400,000
Estimated Inventory Returns........................... 320,000*

Cost of Goods Sold.............................................1,280,000
Inventory................................................................... 1,600,000
* (20% X P1,600,000)
2. March 1, 20x5
Refund Liability......................................................200,000
Accounts Receivable................................................ 200,000
Inventory........................................................ 106,667*
Estimated Inventory Returns..................................... 106,667
* (P1,600,000 ÷ P3,000,000) x P200,000
3. If CPF is unable to estimate returns, it defers recognition of revenue until the return
period expires on May 2, 20x5.
Problem XL – Sales with Discounts

1. The journal entry to record the sale and related cost of goods sold are as follows.
Accounts Receivable...........................................1,200,000
Sales Revenue (P1,220,000 – P20,000) 1,200,000
Cost of Goods Sold.............................................1,000,000

Inventory .................................................................. 1,000,000
2. Cash ..................................................................1,220,000
Sales Revenue........................................................... 20,000
Accounts Receivable................................................. 1,200,000
Problem XLI – Sales with Discounts
1. The journal entries to record sales and related cost of goods sold are as follows.
June 3, 20x5
Accounts Receivable........................................16,000
Refund Liability.............................................. 1,600
Sales Revenue............................................... 14,400
Estimated Inventory Returns.................... 1,120*
Cost of Goods Sold........................................10,,080
Inventory....................................................... 11,200
* (P11,200 ÷ P16,000) x P1,600
The journal entries to record the return is as follows.
June 5, 20x5
Refund Liability............................................................ 600
Accounts Receivable......................................... 600
Returned Inventory *..............................................240
Estimated Inventory Returns.......................... 240
* Because these goods were damaged and might not be sold at a profit, they
likely will be separated from other inventory. A loss may be subsequently
recognized if this inventory is sold or disposed of at an amount lower than cost.
The journal entry to record delivery cost is as follows.
June 7, 20x5
Delivery Expense.....................................................48
Cash.................................................................. 48
The journal entry to record payment within the discount period is as follows.
June 12, 20x5
Cash.................................................................15,092
Sales Discounts (2% X P15,400*).................308
Accounts Receivable (Austin)............................. 15,400
*P16,000 – P600
2. August 5, 20x5
Cash.................................................................14,400
Accounts Receivable (Austin).......................... 15,092
Sales Discounts Forfeited
(2% X P15,400).............................................. 308
Problem XLII – Sales with Repurchase

1. In this case, due to the agreement to repurchase the equipment, Joanna continues to
have control of the asset and therefore this agreement is a financing transaction and
not a sale. Thus the asset is not removed from the books of Joanna. The entries to
record the financing are as follows.
July 1, 20x5
Cash .......................................................................80,000
Liability to Hazel Company........................................ 80,000
2. December 31, 20x5
Interest Expense........................................................2,400
Liability to Hazel Company
(P80,000 X 6%* X 1/2)........................................... 2,400
(*) An interest rate of 6% is imputed from the agreement.
3. June 30, 20x6
Interest Expense........................................................2,400
Liability to Hazel Company
(P80,000 X 6% X 1/2)............................................. 2,400
Liability to Hazel Company......................................84,800

Cash (P80,000 + P2,400 + P2,400)........................... 84,800
Problem XLIII – Repurchase Agreement

1. March 1, 20x5
If the selling price of the ingots was P400,000, Zayn would record the following entry
when it receives the consideration from the customer:
Cash .....................................................................400,000
Liability to Wade Metal Company.............................. 400,000
(To record repurchase agreement with Wade Metal Company)
2. May 1, 20x5
Interest Expense (P400,000 X 2%).............................8,000
Liability to Wade Metal Company...........................400,000
Cash.......................................................................... 408,000
(To record payment plus interest on financing)
Problem XLIV – Repurchase Agreement
MM Inc., an equipment dealer, sells equipment on January 1, 20x7, to RR Company for P200,000. It
agrees to repurchase this equipment on December 31, 20x8, for a price of P242,000.
1. Assuming an interest rate of 10 percent is imputed from the agreement, MM makes the following
entry to record the financing on January 1, 20x7:
Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
...
Liability to RR Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
2. MM Inc. records interest on December 31, 20x8, as follows :

Interest 24,000
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to RR Company (P240,000 x 24,000
10%). . . . . . . . . . . . . . . . . . . . . .
3. MM Inc. records interest and retirement of its liability to RR Company on December 31, 20 x9, as
follows:
Interest 26,400
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to RR Company [P240,000 + P24,000) x 26,400
10%]. . . . . . . . . . . . . . . .
Liability to RR290,400
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .
Cash [P240,000 + P24,000 + P26,400] . . . . . . . . . . . . . . . . . . . . . . 290,400
. . . . ..
Problem XLV - 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, Jack sold extended
warranties related to 800 units for three years beyond the two-year period for P28,800.
1. To record the revenue and liabilities related to the warranties:

Cash (P14,400,000 +14,428,8
P28,800). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00
Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
....
Warranty liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
....
Unearned Warranty Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,800
.....
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000,00
... .. 0
2. To reduce inventory and recognize cost of goods sold:

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,00
.
... 0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,000
....
Problem XLVI – Bill and Hold

GG Company determines when it has satisfied its performance obligation to transfer a product by
evaluating when CC obtains control of that product. For CC 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 CC.
- The product currently must be ready for physical transfer to CC
- Gianne cannot have the ability to use the product or to direct it to another customer.
In this case, it appears that the above criteria were met, and therefore revenue recognition
should be permitted at the time the contract is signed.
GG makes the following entry to record the sale:

Accounts 1,080,00
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000
......
GG makes an entry to record the related cost of goods sold as follows.

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .672,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672,000
....
Problem XLVII
Lazada will recognize revenue of P1,500, its commission on the sale. In this transaction,
Lazada never has primary responsibility for delivering a product or service, and it is not
vulnerable to risks associated with holding inventory or delivering the product or service.
Therefore, Lazada serves as an agent, and will only recognize revenue on the transaction
equal to the amount of the commission it receives.
Problem XLVIII – Variable Consideration

1. Anton determines that the transaction price for the 100 policies is P11,000 [(P200 X
100) + (P20 X 4.5 X 100)].
2. January, 20x5
Cash (100 X P200).................................................... 20,000

Accounts Receivable…………………………....................9,000
Service Revenue (Commissions)................................... 29,000
Because on average, customers renew for 4.5 years, Anton includes that amount in its
estimate for the transaction price. When Anton satisfies its performance obligation by
selling the insurance policy to the customer, it recognizes revenue of P290
(P29,000/100) on each policy because it determines that it is reasonably assured to be
entitled to that amount. Anton concludes that its past experience is predictive, even
though the total amount of commission received depends on the actions of a third
party (that is, policyholder behavior). As circumstances change, Anton updates its
estimate of the transaction price and recognizes revenue (or a reduction of revenue)
for those changes in circumstances.
Problem XLIX - 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 240,000
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract 72,000
Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000
.....
Problem L - Contract Liabilities
There is no entry is required on March 1, 20x7 for the following reasons:
 Neither party has performed on the contract.
 Neither party has an unconditional right as of March 1, 20x7.
On receiving the cash on April 15, 20x7, Asser records the following entry:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 24,000
....
Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
.....
On satisfying the performance obligation on July 31, 20x7, Janine records the
following entry to record the sale:
Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
...
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
.....
In addition, Asser records cost of goods sold as follows:

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
....
Costs to Fulfill a Contract
Companies divide fulfillment costs (contract acquisition costs) into two categories:
 Those that give rise to an asset.
 Those that are expensed as incurred.
Companies recognize an asset for the incremental costs if these costs are incurred to obtain a
contract with a customer. In other words, incremental costs are those that a company would not incur
if the contract had not been obtained, such as:
a. Sales commissions;
b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g.,
costs of contract management and supervision, insurance, and depreciation of tools and
equipment); and;
c. Costs that generate or enhance resources of the company that will be used in satisfying
performance obligations in the future. Such costs include intangible design or engineering
costs that will continue to give rise to benefits in the future.
Other costs that are expensed as incurred include general and administrative expenses (unless those
costs are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or
other resources to fulfill the contract that were not reflected in the price of the contract.
In summary, companies only capitalize costs that are direct, incremental, and recoverable
(assuming that the contract period is more than one year).
Problem LI - Contract Costs

The following items should be taken into consideration by Espi Outsoucing Company:
 The P48,000 selling commission costs related to obtaining the contract are recognized as an
asset.
 The design services cost of P72,000 and the hardware for the platform of P240,000 are also
capitalized.
 As the technology platform is independent of the contract, the pattern of amortization of this
platform may not be related to the terms of the contract.
 The migration and testing costs of P156,000 are expensed as incurred; in general, these costs
are not recoverable.
Appendix:
Problem I
1. Entries in 20x4:
Cash…………………………………………………………………….……….. 3,500
Mortgage Notes Receivable ……………………………………………….. 20,500
Real Estate …………………………………………………………….
9,000
Gain on Sale of Real Estate ………………………………………..
15,000
Cash ……………………………………………………………………………… 500
Mortgage Notes Receivable ………………………………………. 500
Entry in 20x5:
Real Estate ………………………………………………………………………. 16,500
Loss on Repossession of Real Estate ……………………………………….. 3,500
Mortgage Notes Receivable ……………………………………… 20,000
2. Entries in 20x4
Cash ……………………………………………………………………………… 3, 500
Mortgage Notes Receivable ……………………………………………….. 20,500
Real Estate ……………………………………………………………..
9,000
Deferred Gross Profit on Installment Sales ………………............
15,000
Cash ………………………………………………………………………………. 500
Mortgage Notes Receivable …………………………………..….. 500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ………………………………... 2,500

Realized Gross Profit on Installment Sales………………………...
2,500
Gross Profit Percentages
15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
Entry in 20x5
Real Estate………………………………………………………………………... 16,500
Deferred Gross Profit on Installment Sales ………………………………….. 12,500
Mortgage Notes Receivable ……………………………………….. 20,000
Gain in Repossession of Real Estate ………………………………..
9,000
Problem II
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.
20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of
investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales
20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem III
1.
a. Installment Contracts Receivable 19X8………………………………… 250,000
Installment Sales ……………………………………………………
250,000
b. Cash ………………………………………………………………………….. 120,000

Installment Contracts Receivable 19X8 ………………………
120,000
c. Cost of Installment Sales ………………………………………………….. 200,000

Merchandise Inventory …………………………………………..
200,000
d. Merchandise Repossessions ……………………………………………… 14,500

Deferred Gross Profit on Installment Sales 19X8 ……………..
4,000
Loss on Repossession ……………………………………………...
1,500
Installment Contracts Receivable, 19X8 …………….
20,000
Gross Profit Percentages: 50,000/250,000, or 20%
Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise.. P 14,500

Less: Unrecovered cost:
Unpaid balance…………………………P 20,000
Less: Deferred Gross Profit
20% x P20,000…………………… 4,000 16,000
Loss on repossession……………………. P 1,500
e. Expenses ……………………………………………………………………… 16,000

Cash …………………………………………………………………. 16,000
2. Adjustment to Recognize Gross Profit on Installments Sales:
a. To set-up Cost of Installment Sales:

No entry (since perpetual inventory method is used)
b. To set-up Deferred Gross Profit on Installment Sales:

Installment Sales ……………………………………………………… 250,000
Cost of Installment Sales ………………………………….
200,000
Deferred Gross Profit on Installment Sales-20x4.. ………
50,000
c. Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales – 20x4…………..……. 24,000
Realized Gross Profit on Installment Sales – 20x4 ……….
24,000
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
d. Closing of nominal accounts.

Realized Gross Profit on Installment Sales – 20x4………………… 24,000
Expenses ……………………………………………………….
16,000
Loss on Repossessions ……………………………………….
1,500
Income Summary …………………………………………….
6,500
To close the accounts for 20x4.
Problem IV
1.
January to December 31 20x4 20x5
(1) To record regular sales:
1,080,00
Accounts receivable 600,000 0
1,080,00
Sales 600,00 0
(2) To record installment sale:

Cash 60,000 144,000
Installment accounts receivable 300,000 336,000
Installment Sales 360,000 480,000
(3) To record cost of sales:

Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales 480,000 864,000
Merchandise inventory 480,000 864,000
Installment Sales:
Cost of installment sales 252,000 312,000
(4) To record collections:

Regular Sales:
Cash 144,000 360,000
Accounts receivable 144,000 360,000
Installment Sales:
Cash 108,000 204,000
Installment Accounts
receivable –
20x2 72,000 72,000
Installment Accounts
receivable –
20x3 60,000
Interest income 36,000 72,000
(5) to record payment of operating expenses:

Operating expenses 90,000 102,000
Cash 90,000 102,000
2.
Adjusting entries (end of the year):
(6) To recognize accrued interest receivable
Interest receivable 1,440 2,880
(7) To set-up Cost of Sales:

Periodic Method:
Cost of sales 480,000 864,000
Perpetual Method: No entry
(7) To set-up Cost of Installment Sales:

Periodic Method:
Shipment s on installment
sales 252,000 312,000
Perpetual Method: No entry
(8) To set-up Deferred Gross Profit

Installment sales 360,000 480,000
Deferred gross profit – 20x4 108,000
Gross profit rate – 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate – 20x5: P168,000 / P480,000 = 35%.
(9) To record realized gross profit on

installment
sales:
Deferred gross profit – 20x4 39,600 *21,600
Realized gross profit 39,600 93,000
*P72,000 x 30%
20x4: Realized gross profit on installment sales:
Collections applying as to principal..……………………………P132,000
Multiplied by: Gross profit rate……………………………………. 30%
Realized gross profit…………………………………………………P 39,600
20x5: Realized gross profit on installment sales;

20x4 20x5
Collections – P *P204,00
principal…………… 72,000 0
Multiplies by: Gross profit ____35
%.......... ____30% %
Realized gross P P P
profit……………… 21,600 71,400 93,000
*P144,000 + P60,000
Closing entries:
(10) To close realized gross profit account:
Realized gross profit 39,600 93,000
Income summary 39,600 93,000
(11) To close other nominal accounts

1,080,00
Sales 600,000 0
Cost of sales 480,000 864,000
Operating expenses 90,000 102,000
(12) To close results of operations:

Retained earnings 107,040 281,880
Problem V
1.
Ratio to Total
Type of Sale Amount Sales Allocated Cost
Regular Sales:
Cash sales P 225,000 P *146,250
Credit sales ___450,000 **292,500
Total regular sales P 675,000 675/1,800 P 438,750
Installment Sales _ 1,125,000 1,125/1,800 __731,250
Total Sales P 1,800,000 P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of
sale is the same. Normally, the selling prices of the merchandise are not the same for
each type of sales.
2.
Amount based on
Cash Sales Ratio to Total
Type of Sale Amount (100%) Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500
Credit sales 450,000 375,000* 375/1,500 292,500
1,125,00
Installment Sales 0 900,000** 900/1,500 __ 702,000
Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*
Cash sales P 225,000 30% 70% P 157,500
Credit sales 450,000 25% 75% 337,500
1,125,00
Installment Sales 0 40% 60% _ _675,000
Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repossessed merchandise……………………………………...... 68,400
Deferred gross profit – 20x4………………………………............ 48,000
Loss on repossession………………………………………………... 3,600
Installment accounts receivable – 20x4……………………. 120,000
To record repossessed merchandise.
Repossessed merchandise……………………………………...... 12,000

Cash, etc (or various credits)……………………................ 12,000
To record reconditioning costs
The loss on repossession is computed as follows:

Estimated selling price after reconditioning P 108,000
costs..............
Less: Reconditioning costs……………………………………… P 12,000
Costs to sell and dispose…………………………………. 6,000
Normal profit (20% x 108,000) __21,600 __39,600
…………………………….
Market value before reconditioning costs………………….. P 68,400
Less: Unrecovered cost
Installment accounts receivable – 20x4,
unpaid balance……………………………………... P120,000
Less: Deferred gross profit – 20x4 (P120,000 x __48,000 __72,000
40%).....
Loss on repossession……………………………. P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise…………………………………............... 840,000
Over-allowance on trade-in merchandise…………………. 360,000
Cash………………………………………………………………….. 2,400,00
0
Installment accounts receivable – 20x4……………............ 3,360,00
0
Installment sales………………………………………....... 6,960,00
0
To record installment sales with trade-in.
Alternatively, the over-allowance on trade-in merchandise may also be treated as

net of installment sales, the entry would be as follows:
Cash………………………………………………………………….. 2,400,00
0
Installment accounts receivable – 20x4……………............ 3,360,00
0
Installment sales (net of over-allowance)…….............. 6,600,00
0
To record installment sales with trade-in.
The over-allowance is computed as follows:

Trade-in allowance………………………………….................. P1,200,00
0
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs. P1,680,0
00
Less: Reconditioning costs……………………………….. 420,000
Costs to sell (5% x P1,680,000)…………………… 84,000
Normal profit (20% x P1,680,000)……………....... __336,00 __840,00
0 0
Over-allowance…………………………………………………… P
360,000
The gross profit rate on installment sales is computed as follows:
Installment sales……………………………………………………………...... P6,960,000
Less: Over-allowance………………………………………………………… ___360,000
Adjusted Installment Sales…………………………………………………… P6,600,000
Less: Cost of installment sales………………………………………………. __3,920,00
0
Gross profit………………………………………………………………………. P2,680,000
Gross profit rate (P2,680,000/P6,600,000)……………………………….. 40.60%
Further, the entry to record the reconditioning costs is as follows:

Cash, etc (or various credits)…………………….............. 420,000
To record reconditioning costs.
Incidentally, the realized gross profit on installment sales of the new merchandise
for the year 20x4 is computed as follows:
Trade-in merchandise (market value before reconditioning costs)……… P 840,000
Down payment…………………………………………………………………… 2,000,000
Installment collection (March 31 – December 31: P80,000 x 10 months) ___800,000
Total collections………………………………………………………………….. P3,640,000
Multiplied by: Gross profit rate in 20x4……………………………………….. ___40.60%
Realized gross profit on installment sales of new merchandise………… P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid
balance:
Oct. 31 Cash ……………………………………………………………………… 20,000
Mortgage Notes Receivable …………………………………………. 55,000
Real Estate ………………………………………………………. 60,000
Deferred Gross Profit on Installment Sales ………………….
15,000
Nov. 30 Cash ………………………………………………………………………. 1,150
Mortgage Notes Receivable ………………………………… 600
Interest Income ………………………………………………….
550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash ………………………………………………………………………… 1,144

Mortgage Notes Receivable ………………………………….. 600
Interest Income …………………………………………………… 544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales …………………………….. 4,240

Realized Gross Profit on Installment Sales ……………………
4,240
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or
P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance
of the contract:
Dec. 31 Cash ……………………………………………………………………… 20,000.00
Mortgage Notes Receivable ………………………………………… 55,000.00
Real Estate ………………………………………………………
60,000.00
Deferred Gross Profit on Installment Sales ………………..
15,000.00
Nov. 30 Cash ……………………………………………………………………… 600

Mortgage Notes Receivable ………………………………..
50.00
Interest Income …………………………………………………
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-
P550, or P50, is reduction in principal)
Dec. 31 Cash ………………………………………………………………………. 600.00

Mortgage Notes Receivable …………………………………
50.50
Interest Received ………………………………………………
549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction

in principal.
31 Deferred Gross Profit on Installment Sales ………………………… 4,020.10
Realized Gross Profit on Installment Sales …………………
4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3),
or P4,020.10
Problem IX
1. 6/30x4: Cash……………………………………………………………………………. 25,000
Notes Receivable …………………………………………………………… 125,000
Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300
Depreciation Expense (1/2[2% of P90,000]) …………………………… 900
Land …………………………………………………………………… 10,000
Building ……………………………………………………………….. 90,000
Deferred Gross Profit on Sale of Property ……………………… 57,200
Deferred Gross Profit on Sale of Property ………………………………… 9,553
Realized Gross Profit on Sale of Property ………………………...
9,553
Amount realized: (P25,000/150,000) x 57,200
2. 6/30x5: Cash …………………………………………………………………………… 30,000

Notes Receivable …………………………………………………….. 30,000
Deferred Gross Profit on Sale of Property ………………………………. 11,440

Realized Gross Profit on Sale of Property …………………………
11,440
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash …………………………………………………………………………. 50,000
Notes Receivable …………………………………………………… 50,000
Deferred Gross Profit on Sale of Property ……………………………… 19,067

19,067
Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ………………………………………………………………………….. 15,000
Notes Receivable …………………………………………………… 15,000
Deferred Gross Profit on Sale of Property ………………………………. 5,720

5,720
Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable ………………………………………… 200,000
Installment Sales ………………………………………………………
200,000
Cost of Installment Sales …………………………………………………….. 120,000

Merchandise Inventory ……………………………………………… 120,000
Cost of Sales: 60% of P200,000

Installment Sales ……………………………………………………………….. 200,000
Cost of Installment Sales ……………………………………………
120,000
Deferred Gross Profit on Installment Sales ………………………
60,000
Cash ………………………………………………………………………………. 124,000
Installment on Contracts Receivable – 20x4……………………...
30,000
34,000
60,000
Deferred Gross Profit on Installment Sales -20x4 …………………………… 13,800
Deferred Gross Profit on Installment Sales-20x5 …………………………... 14,280
Deferred Gross Profit on Installment Sales -20x6 …………………………... 24,000
Realized Gross Profit on Installment Sales ……………………….…………..
52,080
Realized Gross Profit
20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 ………………………………………………………………………………….
27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 …………………………………………………………………………..
30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts
receivable 20x4 …………………………………………………………………………..
32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………....................
P27,500
Installment Accounts Receivable 20x6 ………………………….. P 55,000
20x5 ………………………….. 12,000
20x4 ………………………….. 3,000
70,000
Accounts receivable ………………………………………………………………………….
17,000
Inventory ………………………………………………………………………………………....
60,000
Other Assets ……………………………………………………………………………………...
40,000
Total Assets ……………………………………………………………………………………… P
214,500
Liabilities
Accounts payable ……………………………………………………………… P 40,000
Deferred Gross Profit 20x6 …………………………… P 15,125
20x5 …………………………… 3,600
20x4 …………………………… 960 19,685
Total Liabilities P
59,685
Stockholders’ Equity
Capital Stock …………………………………………………………………….. P 100,000
Retained Earnings ……………………………………………….. P 68,400
Balance, Jan. 1, 20x6 ………………………………………. 13,585
Balance, Dec. 31, 20x6 ……………………………………………………. 54,185
Total Stockholder’s Equity ………………………………………………………
P154,815
Total Liabilities and Stockholder’s Equity ……………………………………. P
214,500
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P320,000 P125,000 P445,00
0
Cost of goods sold:
Merchandise Inventory, Jan. 1 ………………P
52,000
Purchases …………………………..................
350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31 ………… 232,000 110,000 342,000
60,000
Gross Profit ……………………………………………………….. P88,000 P15,000 P103,00
0
Less: Deferred Gross Profit on 19X34 15,125 15,125
…………………………
Realized Gross Profit on current year’s sales P78,875 P15,000 P87,875
……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) 50,040
……………….
Total Realized Gross Profit ……………………………………. P137,91
5
Operating Expenses …………………………………………... 151,50
0
Net Loss ………………………………………………………….. P
13,585
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% ………………………………………………………… P
15,125
Realized Gross Profit:

20x6 20x5 20x4
Collections on Installment Contracts Receivable ………... P265,000 P138,000
P27,000
Installment sales gross profit percentage ………………….. 27.5% 30%
32%
Realized Gross Profit …………………………………………….. P 72,875 P 41,400
P 8,640
Installment Sales …………………………………………………… 320,000

Cost of Installment Sales …………………………………………. 232,000
Deferred Gross profit -20x6……………………………………………… 88,000
Deferred Gross Profit, 20x6 ……………………………............... 72,875

Realized Gross Profit on Installment sales…………… 122,915
Income Summary ………………………………………………… 170,000

Shipment on Installment of Sales ……………………………… 232,000
Merchandise Inventory, Jan. 1, 20x6 ……………….
52,000
Purchases ……………………………………………… 350,000
Merchandise Inventory, Dec. 31, 20x6 …………………….. 60,000

Income Summary …………………………………… 60,000
Sales ………………………………………………………………. 125,000

Income Summary ……………………………………. 125,000
Realized Gross Profit on Installment Sales………..………... 122,915
Income Summary ……………………………………. 122,915
Income Summary ……………………………………………… 151,500

Operating Expenses ………………………………... 151,500
Retained Earnings …………………………………………….. 13,585
Income Summary …………………………………... 13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 ……………………………………………………………………………………
38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 ………………………………………………………………. 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 ………………………………………………………………. 45%
2.
Deferred Gross Profit, 20x6……………………………… 1,900
Deferred Gross profit, 20x5……………………………… 4,000
Deferred Gross Profit, 20x4……………………………… 3,600
Loss on Repossessions………………………….. 9,500
Cancellation of deferred gross profit,
balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
GG SALES CORPORATION
Income Statement
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P500,000 P192,000 P692,000
Cost of goods sold:
Merchandise Inventory, Jan. 1 …………… P
30,000
Purchases …………………………..................
445,000
Repossessed Merchandise ………………..
10,000
Merchandise Available for sale .................
495,000
Less: Merchandise Inv. Dec. 31 ………… 310,000 150,000 460,000
35,000
Gross Profit ……………………………………………………….. P190,000 P42,000 P103,000
Less: Deferred Gross Profit on 20x6 sales (see 32,300 32,300
schedule)
Realized Gross Profit on current year’s sales P157,700 P42,000 P199,700
……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) 100,650
………………. P300,350
3,500
Deduct loss on repossession ………………………………….
Total Realized Gross Profit ……………………………………. P296,850
Operating Expenses …………………………………………… 300,000
Net Loss ………………………………………………………….. P 3,150
Analysis of Gross Profit on Installment Sales

Schedule to Accompany Income Statement
Deferred gross profit on Installment sales – before defaults, 19X8:
Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% ………………………………………………………. P 32,300
Realized Gross Profit:
20x6 20x5 20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
Installment sales gross profit percentage ……….. 38% 40% 45%
Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………... P
25,000
Installment Accounts Receivable 20x6 …………………P 80,000
20x5 ………………… 20,000
20x4 ………………… 5,000
105,000
Accounts receivable …………………………………………………………………..
40,000
Inventory ………………………………………………………………………………….
35,000
Other Assets ………………………………………………………………………………
52,000
Total Assets ……………………………………………………………………………….P
257,000
Liabilities
Accounts payable ……………………………………………………. P 75,000
Deferred Gross Profit 20x6 ………………………………. P 30,400
20x5 ………………………………. 8,000
20x4 ………………………………. 2,250 40,650
Total Liabilities P
115,650
Stockholders’ Equity
Capital Stock …………………………………………………………. P100,000
Retained Earnings ………………………………………. P 44,500
Balance, Jan. 1, 20x6 ……………………………… 3,150
Balance, Dec. 31, 20x6 …………………………… 41,350
Total Stockholder’s Equity ………………………………………….
141,350
Total Liabilities and Stockholder’s Equity ……………………….. P
257,000
4. Installment Sales ……………………………………………………………….. 500,000

Cost of Installment Sales ……………………………………………….. 310,000
Deferred Gross Profit, 20x6 …………………………………………….. 190,000
Deferred Gross Profit, 20x6 …………………………………………………… 157,500

Realized Gross Profit on Installment Sales… ………………………… 258,350
Income Summary ……………………………………………………………… 185,000
Shipment on Installment Sales ……………………………………………… 310,000
Merchandise Inv, January 1, 20x6 ……………………………………. 30,000
Purchases …………………………………………………………………. 455,000
Repossessed Merchandise …………………………………………….. 10,000
Merchandise Inv, December 31, 20x6……..………………………………. 35,000

Income Summary ……………………………………………………….. 35,000
Sales …………………………………………………………………………….... 192,000

Income Summary ………………………………………………………… 192,000
Realized Gross Profit on Installment Sales…………………………………..258,350

Income Summary ……………………………………………………….. 258,350
Income Summary ……………………………………………………………… 3,500

Loss on Repossession ……………………………………………………. 3,500
Income Summary ……………………………………………………………… 300,000

Operating Expenses …………………………………………………….. 300,000
Retained Earnings ……………………………………………………………… 3,150

Income Summary …………………………………………………………. 3,150
Problem XIII
1. Deferred gross profit – 20x4……….……………………………………. 8,407.00
Deferred gross profit – 20x5……….……………………………………. 93,438.80
Deferred gross profit – 20x6……….……………………………………. 71,006.70
Realized Gross Profit on Installment Sales (20x4 – 20x6)…..
172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%
Calculation of collections in 20x6:

20x4: Beginning balance P 24,020
20x5: P344,460 (beginning balance) – P67,440 (ending balance) –
P2,200 (write-offs on default)
274,820
20x6: P602,000 (sales) – P410,090 (ending balance)
191,910
Calculation of realized gross profit:

20x4: 35% x P24,020 P 8,407.00
20x5: 34% x P274,820
93,438.80
20x6; 37% x P191,910
71,006.70
Total P172,852.50
2. Deferred gross profit 20x5……………………………………………………… 748.00

Inventory of Repossessed Merchandise………………………………. 748.00
To reduce by 20x5 deferred gross profit related to defaulted contract
and requiring cancellation, 34% of P2,200 (P5,400 sales price- P3,200
collections to date); inventory now reported at P2,200 (balance of
installment contract), less P748 or P1,452.
Loss on repossession…………………………………………………………….. 381.00

Inventory of repossessed merchandise……………………………….. 381.00
To reduce inventory to “market” as follows: to realize a gross profit of
37% on a resale estimated at P1,700, the repossessed merchandise
should be reported at a value of 63% of P1,700, or P1,071; the inventory
then requires a further write-down of P381 (P1,452 – P1,071)
Repossessed merchandise could be recorded at its resale value less the usual gross profit
margin on sales. Recording the merchandise at P1,452 will result in the realization of less
than the normal profit margin on the resale of the goods in the subsequent period. if
expenses of the resale exceed P248 (P1,700 – P1,452), the later period would actually
have to absorb a loss as a result of such valuation. Recording the goods at resale value
reduced by the company’s usual profit margin on sales is recommended, for such practice
will charge the next period with no more than the utility of the goods carried forward.
Problem XIV – HH Instruments

1. Installment Contracts Receivable ……………………………………. 1,600.00
Merchandise Inventory (Piano) ……………………………… 1,000.00
Deferred Gross Profit on Installment Sales …………………
600.00
Cash ……………………………………………………….......................... 160.00

Installment Contracts Receivable …………………………… 160.00
2. Cash …………………………………………………………........................ 160.00

Interest Income …………………………………………………… 14.40
Installment Contracts Receivable ……………………………. 145.60
Cash ……………………………………………………………...................... 160.00
Interest Income ……………………………………………………. 11.47
Installment Contracts Receivable ……………………………… 148.53
3. Deferred Gross Profit on Installment of Sales ………………………….. 225.45
Realized Gross Profit on Installment of Sales …………………
225.45
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
4. Merchandise Inventory (piano) …………………………………………... 560.00

Deferred Gross Profit on Installment of Sales ……………………........... 374.55
Loss on Repossessions ………………………………………………………. 64.36
Installment Contracts Receivable ……………………………… 998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
Problem XV – Big Bear

20x4:
Installment receivables 250,000
Inventory 150,000
Deferred gross profit 100,000
Cash 80,000
20x5:
Cash 120,000

Realized gross profit 50,000
20x6:
Cash 50,000

Inventory 210,000
Cash 135,000

Gross profit deferred at sale = 30% x P300,000 = P90,000.

Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XVI – Tappan Industrial

(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year
of the sale.
Determination of selling price:
PVn = R(PVAFn/i) Table IV
PVn = P187,500 x 4.3553 n = 6, i = 10%
PVn = P816,619 (rounded)
Gross profit on sale:

Sales P816,61
9
Cost of sales 637,500
Gross profit P179,119
Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221
Total income for 20x5 = P179,119 + P27,221 = P206,340
(2) No reasonable assurance – assume the use of installment sales method
Installment sale: Gross profit (P179,119/P816,619) = 22% rounded
Gross profit earned in 20x5 (P0 x 22%) P 0
Interest revenue 27,221

Total income for 20x5 P 27,221
Multiple Choice Problems

1. b -
Access to Escape services is one performance obligation. Registration on the website is

not a performance obligation, but rather is part of the activity Escape must provide to
satisfy its performance obligation of providing access to Escap’s on-line services. The
P50 payment is an upfront payment that is part of the total transaction price associated
with the service, and the monthly payments are the other component.
2. b -
We need to consider three aspects of the vacuum contract: delivery of the vacuum, the
one-year quality-assurance warranty, and the option to purchase the three-year
extended warranty. Delivery of the vacuum cleaner is a performance obligation. The
one-year warranty that is included as part of the purchase (the quality-assurance
warranty) is not a performance obligation, but rather is part of the obligation to deliver a
vacuum of appropriate quality. The option to purchase a three-year extended warranty is
not a performance obligation within the contract to purchase a vacuum, because
customers can purchase that warranty for the same amount at other times, so the
opportunity to buy it at the same time that they buy the vacuum does not present a
material right.
3. c -
We need to consider three aspects of the vacuum contract: delivery of the vacuum, the
one-year quality-assurance warranty, and the option to purchase the three-year
extended warranty. Delivery of the vacuum cleaner is a performance obligation. The
one-year warranty that is included as part of the purchase (the quality-assurance
warranty) is not a performance obligation, but rather it is part of the obligation to deliver
a vacuum of appropriate quality. The option to purchase the extended warranty, though,
is a performance obligation within the contract to purchase a vacuum. Customers can
purchase that warranty at a 20% discount if they do so when they buy the vacuum, so
the opportunity to buy the extended warranty constitutes a material right. Also, the
option is capable of being distinct, as it could be sold or provided separately, and it is
separately identifiable, as the vacuum could be sold without the option to purchase an
extended warranty, so the option is distinct, and qualifies as a performance obligation.
4. a-
The amount of revenue Manhattan Today should recognize upon receipt of the
subscription fee: P0.
Even though Manila Today received payments from customers for an annual subscription,
payment of the subscription activity does not transfer goods or services to customers.
Therefore, the annual fee is viewed as a prepayment for future delivery of goods or
services and would be recognized as deferred revenue – subscription (a liability) when
received. Later, when newspapers are delivered, deferred revenue – subscription will be
reduced and revenue recognized.
5. c -
Delivering newspapers is one performance obligation. The coupon for a 40% discount on
a carriage ride qualifies as a second performance obligation. First, it is an option that
conveys a material right to the recipient (as opposed to just a general marketing offer).
Second, it is both capable of being distinct, as it could be sold or provided separately,
and it is separately identifiable, as it is not highly interrelated with the other performance
obligation of delivering newspapers, so it is distinct and qualifies as a performance
obligation. The seller’s role is not to integrate and customize them to create one product.
The seller will record deferred revenue – coupon for that performance obligation and
recognize revenue when either the coupons are exercised or Manhattan Today estimates
that they will not be redeemed.
6. d -
Value of the coupon: 40% discount  P1,250 carriage fee = P 500
Estimated redemption  30%
Stand-alone selling price of coupon P 150
Stand-alone selling price of a normal subscription 1,350
Total of stand-alone prices P1,500
Manila Today must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
P150
Coupon: = 10%
P150 + P1,350
P1,350
Subscription: = 90%
P150 + P1,350
100%
Manila Today allocates the total selling price based on stand-alone selling prices, as
follows:
P1,300
Transaction Price
90% 10%
P1,170 P130
Subscription Coupon
Upon receiving the fee for 10 subscriptions, the journal entry should be:
Cash (P1,300  10) 13,000
Deferred revenue – subscription (P1,170  10) 11,700
Deferred revenue – coupon (P130  10) 1,300
7. c -
Delivery of keyboards is one performance obligation. The special discount coupon is a
second performance obligation, as it provides a material right that the customer would
not receive otherwise. In this particular instance, the customer has the right to receive a
25% discount, which is a 20% discount in addition to the normal 5% discount offered to
other customers. The coupon is both capable of being distinct, as it could be sold or
provided separately, and it is separately identifiable, as it is not highly interrelated with
the other performance obligation of delivering keyboards, and the seller’s role is not to
integrate and customize them to create one product. So, it is distinct and qualifies as a
performance obligation.
8. a -
When two or more performance obligations are associated with a single transaction
price, the transaction price must be allocated to the performance obligations on the
basis of respective stand-alone selling prices (estimated if not directly available).
Chrome’s estimated stand-alone selling price of the discount option is:
Value of the discount:
(25% discount – 5% normal discount)  P20,000 = P 4,000
Stand-alone selling price of discount: P 2,000
Stand-alone selling price of the keyboards:

P19.6  5,000 keyboards = 98,000
Total of stand-alone prices P100,000
Chrome first must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
P2,000
Discount: = 2%
P2,000 + P98,000
P98,000
Keyboards: = 98%
P2,000 + P98,000
100%
Meta then allocates the total selling price based on stand-alone selling prices, as follows:
P95,000
Transaction Price
98% 2%
P93,100 P1,900
Keyboards Discount
The journal entry to record the sale is:
Cash 95,000
Deferred revenue–keyboards 93,100
Deferred revenue–discount option 1,900
The deferred revenue for the keyboards will become earned June 1 st.
The deferred revenue for the option to exercise the discount coupon is earned when
the coupon either is exercised or expires in six months.
9 c-
All customers are eligible for a 5% discount on all sales. Therefore, the 5% discount
option issued to Bionics, Inc. does not give any material right to the customer, so it is not
a performance obligation in the contract, and Meta would account for both (a) the
delivery of keyboards and (b) the 5% coupon as a single performance obligation.
Cash 95,000
Deferred revenue–keyboards 95,000
10. c
11. d
12. d
13. a
14. d
15. a (P900,000  .65) + (P890,000  .25) + (P880,000  .05) + (P870,000  .05) =
P895,000.
16. d (P55,000  P50,000)  7/12 = P2,917.
17. c P37,000  (P37,000  .03) = P35,890.
18. b P6,750,000  .85 = P5,737,500.
19. d P75,000 + P50,000 + P25,000 = P150,000
P75,000/ P150,000  P120,000 = P60,000
P50,000/ P150,000  P120,000 = P40,000
P25,000/ P150,000  P120,000 = P20,000.
20. c P75,000 + P50,000 + P25,000 = P150,000
(P25,000/ P150,000)  P120,000 = P20,000.
21. a P160,000 + P25,000 = P185,000.
P160,000/ P185,000  P180,000 = P155,676
P25,000/ P185,000  P180,000 = P24,324
22. b P3,000  .2 = P600; P3,000  P600 = P2,400
23. c P1,500/ P3,000 = 5; P200  .5 = P100.
24. c
25. a
26. b - P10,000 + P275,000 + P85,000 + P15,000 + P25,000 = P410,000.
27. a -
SONI first must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all performance obligations:
P17,000
TV: P17,000 + P1,000 + P2,000 = 85%
P1,000
Remote: P17,000 + P1,000 + P2,000 = 5%
P2,000
Installation: = 10%
P17,000 + P1,000 + P2,000
100%
SONI would allocate the total selling price of the package ($1,900) based on
stand-alone selling prices, as follows:
TV: P19,000 × 85% = P16,150
Remote: P19,000 × 5% = 950
Installation: P19,000 × 10% = 1,900
P19,000
$1,900
Transaction Price
85%
5% 10%
P16,150 P950 P1,900
TV Remote Installation
28. d -
Under the adjusted market assessment approach, SONI would base its estimate of the
stand-alone selling price of the installation service on the prices charged by other
vendors for that service, adjusted as necessary. Given that the other vendors are similar
to SONI, no adjustment is necessary. Therefore, SONI would estimate the stand-alone
selling price of the installation service to be P1,500, the amount charged by competitors
for that service.
29. c -
Under the expected cost plus margin approach, VP would base its estimate of the stand-
alone selling price of the installation service on the P1,000 cost it incurs to provide the
service, plus its normal margin of 40% × P1,000 = P400. Therefore, VP would estimate
the stand-alone selling price of the installation service to be P1,000 + P400 = P1,400.
30. b -
Under the residual approach, SONI would base its estimate of the stand-alone selling
price of the installation service on the total selling price of the package (P19,000) less
the observable stand-alone selling prices of the TV (P17,500) and universal remote
(P1,000). Therefore, VP would estimate the stand-alone selling price of the installation
service to be P19,000 – (P17,500 + P1,000) = P500.
31. d -
Contract asset: P0.
Contract liability: P20,000.
Accounts receivable: P0.
Cerette has a contract liability, deferred revenue, of P20,000. It never has a contract
asset because it hasn’t satisfied a performance obligation for which payment depends on
something other than the passage of time. It does not have an accounts receivable for
the P30,000 until it delivers the furniture to Jayda.
32. b -
BestBuy should not recognize revenue when it sells the P1,000,000 of gift cards, because
it has not yet satisfied its performance obligation to deliver goods upon redemption of the
cards. BestBuy should recognize revenue of P840,000 for redemptions, as well as
P30,000 for gift cards that it estimates will never be redeemed, totaling P870,000.
33. d -
The expected value would be calculated as follows:
Possible Amounts Probabilities Expected Amounts

P70,000 (P50,000 fixed fee + P20,000 bonus) × 20% = P14,000
P50,000 (P50,000 fixed fee + P0 bonus) × 80% = 40,000
Expected contract price at inception P54,000
Or, alternatively: P50,000 + (P20,000 × 20%) = P54,000
34. c -
The most likely amount is the flat fee of P50,000, because there is a greater chance of
not qualifying for the bonus than of qualifying for the bonus, so that is the transaction
price.
35. c -
Because Mercedes is very uncertain of its estimate, Mercedes can’t argue that it is
probable that it won’t have to reverse (adjust downward) a significant amount of revenue
in the future because of a change in returns. Therefore, Mercedes would not include the
bonus estimate in the transaction price, and the transaction price would be the flat fee of
P50,000.
36. c -
The unlimited access to facilities and classes for one year is one performance obligation.
Because the discount voucher provides a material right to the customer that the
customer would not receive otherwise (a 25% discount rather than a 10% discount), it is
a second performance obligation. The discount voucher is capable of being distinct
because it could be sold or provided separately, and it is separately identifiable, as it is
not highly interrelated with the other performance obligation of providing access to Burn
& Fit’s facilities, and the seller’s role is not to integrate and customize them to create one
product or service. So, the discount coupon qualifies as a performance obligation.
37. b -
To allocate the contract price to the performance obligations, we should first consider
that Burn & Fit would offer a 10% discount on the yoga course to all customers as part of
its normal promotion strategy. So, a 25% discount provides a customer with an
incremental value of 15% (25% – 10%). Thus, the estimated stand-alone selling price of
the course voucher provided by Burn & Fit is P30 (P500 initial price of the course  15%
incremental discount  40% likelihood of exercising the option).
B&F’s estimated stand-alone selling price of the discount option is:

Value of the yoga discount voucher:
(25% discount – 10% normal discount)  P500 = P 75
Stand-alone selling price of yoga discount voucher: P 30
Stand-alone selling price of gym membership: 720
Total of stand-alone prices P750
B&F must identify each performance obligation’s share of the sum of the stand-alone selling prices of
all deliverables:
P30
Yoga discount voucher: = 4%
P30 + P720
P720
Gym membership: = 96%
P30 + P720
100%
B&F then allocates the total selling price based on stand-alone selling prices, as follows:
P700
Transaction Price
96% 4%
P672 P28
Gym membership Yoga discount voucher
38. a -
The journal entry to record the sale is:
Cash 700
Deferred revenue—membership fees 672
Deferred revenue—yoga coupon 28
39. b -
The access to the gym for 50 visits is one performance obligation. The option to pay P15
for additional visits does not constitute a material right because it requires the same fee
as would normally be paid by nonmembers. Therefore, it is not a performance obligation
in the contract.
(Note: It could be argued that the coupon book actually includes 50 performance
obligations – one for each visit to the gym. That would end up producing a very similar
accounting outcome, as the $500 cost of the book would be allocated to the 50 visits
with revenue recognized for each visit.)
40. a -
Since the option to visit on additional days is not a performance obligation, B&F should
not allocate any of the contract price to the option. Therefore, the entire P500 payment
is allocated to the 50 visits associated with the coupon book.
41. b -
Cash 500
Deferred revenue–coupon book 500
42. b –
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000 P390,000
43. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
2,200
20x5 sales: P50,000 x 25%
12,500
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
10,575
P 25,275
Realized Gross Profit on Sales in 20x5 P

10,500
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
5,000
Realized Gross Profit in 20x5 for 20x4 sales P
5,500
Divided by: Collections in 20x5 for 20x4 sales P
25,000
Gross Profit % for 20x4 sales 22%
44. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128 39,375
Realized Gross Profit on Installment Sales P 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25 P384,000
Less: Collections in 20x3 140,000
Collections in 20x4 240,000
Unrecovered Cost, 12/31/20x4 P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item
sold is recovered through cash receipts. All cash receipts, both interest and principal portions, are
applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue.
Because all costs have been recovered, the recognized revenue after the cost recovery represents
income (interest and realized gross profit). This method is used only when the circumstances
surrounding a sale are so uncertain that earlier recognition is impossible.
45. a P0.
46. c
47. e, 20x6 – 0; 20x7 - 0
Unrecovered costs,1/1/20x4 110,000
Less: Collections
1/1//20x4 0
Add: Sales on account 15,000
Total 15,000
Less: 1/1/20x5 10,500
Collections in 20x4 __4,500
1/1//20x5 10,500
Total 40,500
Less: 1/1/20x6 25,500
1/1//20x6 25,500
Total 85,500
Less: 1/1/20x7 40,500
1/1//20x7 40,500
Total 64,500
Less: 1/1/20x8 70,000
Collections in 20x7 ____-0-
48. b
20x4: P150,000 – (P568,620 x 10%) = P93,138.
20x5: (P568,620 – P93,138) x 10% = P47,548.
49. a – refer to No. 44 discussion.

Cost, January 1, 20x4 P 60,000
Less: Collections including interest – 20x4 32,170
Unrecovered Cost, December 31, 20x4 P 27,830
50. c (P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3%

(P3,600,000  .20) + [(3,600,000  .80)  4/12)] = P1,680,000
P1,680,000  33 1/3% = P560,000.
51. b [(P3,600,000  .20) + (P3,600,000  .80 x 8/12] – P2,400,000 = P240,000.
52. b – refer to No. 44 discussion.

Cost, January 1, 20x4…………………………………………………………….P 500,000
Less: Collections including interest – 20x4……………………….P241,269
Collections including interest – 20x5……………………… 241,269 482,538
Unrecovered Cost, December 31, 20x5……………………………………….P 17,462
53. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
54. c P300,000 + P50,000 = P350,000

P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 – P100,000) x 30% = P60,000.
55. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 – (P288,000 ×.4) = P364,800.
56. d – [P225,000 + (P120,000/40%)]
57. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000.
58. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30% P 400,000
20x5 Sales: P440,000/ 40% 1,100,000
P 1,500,000
59. c
Sale: Installment receivables 4,500,000
Inventory
3,600,000
Deferred gross profit
900,000
Payment: Cash 500,000
Installment receivables
500,000
Realized gross profit
100,000
Balance Sheet:
Installment receivables (4,500,000 – 500,000) P
4,000,000
Deferred gross profit (900,000 – 100,000)
800,000
Installment receivables (net) P 3,200,000
60. b
12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000
Installment receivables 2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)] 400,000
Realized gross profit
400,000
Balance sheet:
Deferred gross profit: P800,000 400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
61. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
62. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%

20x4: 50% x P300,000 = P150,000
63. c
20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40%

40% x P400,000 received in 2010 = P160,000
Total: P150,000 + P160,000 = P310,000
64. c
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P
300,000
Deferred gross profit = P450,000 – P150,000 (x4 collections)
- P150,000 (x5 collections) =
150,000
Net installment receivable for 20x4 sales = P
150,000
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)=

P1,000,000
Deferred gross profit = P600,000 – P200,000 (x5 collections) =
400,000
Net installment receivable for 20x5 = P 600,000
Total = P 750,000
65. a - Costs not yet recovered.
66. b
Cost, 20x4 P 30,000
20x4 cost recovery (20,000)
Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000
Gross profit – 20x5 P 5,000
67. d
Cost P 30,000
20x4 cost recovery ( 20,000)
20x5 cost recovery ( 10,000)
Remaining cost 0
The entire P20,000 payment received in 20x6 is recognized as gross profit.

68. a
Sale: Installment receivables 55,000
Inventory 30,000
Payment: Cash 20,000

Balance Sheet:
Installment receivables P55,000 – 20,000 P 35,000
Deferred gross profit ( 25,000)
Installment receivables (net) P 10,000
69. a
Sale: Installment receivables 55,000
Inventory 30,000
2008: Cash 20,000
Cash 15,000
2009: Deferred gross profit 5,000
Balance Sheet:
Installment receivables P 20,000
Deferred gross profit ( 20,000)
Installment receivables (net) P 0
70. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should
be applied. Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553) P816,619
Cost of sales 637,500
Gross profit (realized) P179,119
71. c
Total Income for 20x4:
Gross profit (realized) – No. 51 P179,119
Interest revenue—4 months: P816,619 x 10% x 4/12.. _ 27,221
Total income for 20x4 P206,340
72. b
Gross profit (realized) – already recognized in 20x4 P
0
Interest revenue – 8 months in Year 1 (P81,662* x 8/12) P 54,441
4 months in Year 2 (P71,078* x 4/12) 23,693
78,134
Total Income for 20x5 P
78,134
*Schedule of Discount Amortization/Interest Income computation:

(1) (2) (3) (4)
Face Net Discount
Amount Unamortized Amount Amortization
Year of Note1 Discount (1) – (2) 10%  (3)
1 P1,125,000 P308,3813 P 816,6192 81,6625
2 937,500 226,7194 710,781 71,078
1
P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the
previous balance.
2
The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3
P1,125,000 – P816,619
4
(2) – (4)
5
Discount amortization give rise to recognition of interest revenue/income.
73. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment
sales method should be applied. Also, if the there is high degree of uncertainty as to
collectibility, the cost recovery method may be used.
Installment sale: Gross profit (P179,119/P816,619) 22% (rounded)
Gross profit earned in 20x4 (P0* x 22%) P 0

* no collections in 20x4.
74. a
Gross profit earned in 20x4 (P0* x 22%) P
0
Interest revenue (refer to No. 52 27,221
Total income for 20x4. P 27,221
75. d
Collections in 20x5 (August 31, 20x5) P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
81,662
Collection as to principal P 105,838
x: Gross Profit % (refer to No. 54)
22%
Gross profit realized in 20x5 P 23,284
Add: Interest revenue/income for 20x5 (refer to No. 53)
78,134
Total Income for 20x5 P 101,418
76. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
77. a (P800,000 x .25) – P90,000 = P110,000,
78. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
79. a (P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
80. d (P1,200,000  .30) – P120,000 = P240,000.
81. a P1,050,000  .30 = P315,000

P900,000 – [(P1,200,000 + P1,050,000)  .30] = P225,000.
82. b P24,000 – P7,200 = P16,800

P16,800 – P13,500 = P3,300 loss.
83. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.
84. d- P8,400 – (70% x P8,400) = P2,520

(P3,000 – P300) – P2,520 = P180 gain.
Note: The selling price to be used in determining gain or loss should be more profitable
to the company which is P3,000 instead of P2,400 as repossessed. Theoretically, the gain
is not recognized but since the requirement is gain or loss on repossession, therefore,
P180 is the indicated gain.
85. d
20x4: P24,000 – P0 = P24,000 collections x 39%P
9,360
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42%
96,600
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40%
62,000
Realized gross profit on installment sales in 20x6
P167,960
86. b
20x5 Sales 20x6 Sales
Net
Market Values P 4,500 P 3,500
Less: Unrecovered Cost:
IAR, unpaid balances P10,000 P 5,000
x: Cost Ratio 50% 5,800 60% 3,000
Gain (loss) P (1,300) P 500 P( 800)
87. a
(1) Gain or Loss on repossession:
Estimated selling price P
1,700
Less: Normal profit (37% x P1,700) 629
Market value of repossessed merchandise P 1,071
Less: Unrecovered Cost:
Unpaid balance – 20x3 P 2,200
Less: DGP – x3 (P2,200 x34%) 748
1,452
Loss on repossession P( 381)
(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 – P 0) x 35% P 8,407.0
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34%
93,438.8
20x4 Sales: (P602,000 – P410,090) x 37% 71,006.7
Realized gross profit on installment sales P 172,852.5
88. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
22,929.6
20x4 Sales: (P410,090 x 37%)
151,733.3
P
174,662.9
89. d*
Resale Value P 8,500
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 3,145
Market Value of Repossessed Merchandise P 5,355
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000) P 11,000
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000]
x
P11,000 ___3,740 __7,260
Loss on repossession P( 1,905)
Entry made:
Inventory of RM* 11,000
IAR-20x5 11,000
Correct Entry (Should be):

Inventory of RM (at MV) 5,355
DGP-20x5 3,740
Loss on repossession 1,905
IAR-20x5 11,000
Correcting Entry:
DGP-20x5 3,740
Loss on repossession 1,905
Inventory of RM 5,645**
90. c
Installment Sales P 3,600,000
Less: Over-allowance:
Trade-in allowance P1,500,000
Less: MV of Trade-in Merchandise:
Estimated Resale Price P 1,400,000
Less: Normal profit (25% x P1,400,000) 350,000
Reconditioning costs 150,000 900,000
600,000
Adjusted Installment Sales P
3,000,000
Less: Cost of I/S
2,500,000
Gross Profit P 500,000
Gross profit rate: P500,000/ P3,000,000 16 2/3%
x: Collections –Trade-in merchandise (at MV) P
900,000
RGP on I/S in 20x4 P
150,000
91. c
Trade-in allowance P43,200
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs P36,000
Less: Reconditioning costs 1,800
Normal profit (15% x P36,000) 5,400 28,800
Over-allowance P 14,400
Installment sales P122,400

Less: Over-allowance 14,400
Adjusted Installment Sales P108,000
Less: Cost of Installment Sales 86,400
Gross profit P 21,600
Gross profit rate: P21,600/P108,000 20%
Realized gross profit:

Down payment P 7,200
Trade-in (at market value) 28,800
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600
Total collections in 2008 P 57,600
x: Gross profit rate 20%
Realized gross profit P 11,520
92. d
(Note: For financial accounting purposes, the installment-sales method is not used, and
the full gross profit is recognized in the year of sale, because collection of the receivable
is reasonably assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales P4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) P4,584,000
Payment made on January 1, 20x3 936,000
Balance outstanding at 12/31/x3 3,648,000
Interest rate 9%
Interest Revenue P 328,320
Theories
IFRS 15 Based Theories
1. d 8. b 15. c 22. c 29 a
.
2. c 9. d 16. c 23. b 30 c
.
3. b 10 a 17. b 24. d 31 b
. .
4. d 11 d 18. a 25. a 32 c
. .
5. a 12 b 19. d 26. b 33 b
. .
6. c 13 d 20. b 27. c 34 c
. .
7. b 14 a 21. a 28. d 35 d
. .
Appendix:
1. False 6. True 11. True 16. True 21 True 26. True
.
2. True 7. False 12. False 17. True 22 True 27. True
.
3. False 8. True 13. False 18. False 23 True 28. False
.
4. True 9. False 14. True 19. False 24 True 29. True
.
5. True 10 True 15. True 20. True 25 True
. .
30 c 35 b 40. a 45. b 50 d 55. d

. . .
31 b 36 d 41. e 46. c 51 c 56. b
. . .
32 b 37 d 42. b 47. c 52 b 57. d
. . .
33 b 38 e 43. b 48. c 53 a 58. c
. . .
34 c 39 c 44. d 49. d 54 b 59. c
. . .
60. c 65. b 70. d 75. c 80. b

61. b 66. b 71. c 76. b 81. c
62. b 67. d 72. b 77. b 82. a
63. c 68. d 73. d 78. d
64. d 69. c 74. a 79. a

5 Step Process Rev Rec Chapter Dayag Solman

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

5 Step Process Rev Rec Chapter Dayag Solman

Uploaded by

Copyright:

Available Formats

Chapter 7

Problem I – 5-Step Process

Problem III – Contracts and Recognition

Problem VI – Timing of Revenue Recognition - Point in time when revenue should be

Journal entries (not required):

December 31, 20x6 adjusting entry

Problem IX – Identifying Separate Performance Obligations

Problem XI – Identifying Separate Performance Obligations

In addition to the subscription, the renewal option is a performance obligation because it

Delivery of gold is one performance obligation. The additional insurance is a second

Problem XIV – Transaction Price

Problem XV – Discounted Transaction Price

Problem XVI – Non-refundable Upfront Fee Considerations

Problem XVIII – Allocate Transaction Price

Problem XIX – Allocate Transaction Price

December 31, 20x5

2, December 31, 20x6

Problem XXII - Estimating Variable Consideration

Problem XXIV – Contract Modification

December 31, 20x5

December 31, 20x6

December 31, 20x7

December 31, 20x7

Problem XXV – Contract Modification

Cost of Goods Sold....................................................9,720

Cost of Goods Sold....................................................1,080

Consideration for products not yet delivered

Cost of Goods Sold...............................................1,080.00

Problem XXVI – Contracts and Recognition

Problem XXVIII – Revenue Recognition Constraint

Problem XXIX – Extended Payment Terms

December 31, 20x7: Record interest revenue:

Problem XXXV – One or Multiple Performance Obligations

Total transaction price………………………………………………… P xxx

Problem XXXVI – Multiple Performance Obligations

3. AA Maritime Industries, Inc recognized the training revenues on a straight-line basis

Problem XXXVIII – Right of Return

Estimated Inventory Returns........................... 320,000*

Problem XL – Sales with Discounts

Cost of Goods Sold.............................................1,000,000

Problem XLII – Sales with Repurchase

Liability to Hazel Company......................................84,800

Problem XLIII – Repurchase Agreement

2. MM Inc. records interest on December 31, 20x8, as follows :

Problem XLV - Warranties

1. To record the revenue and liabilities related to the warranties:

2. To reduce inventory and recognize cost of goods sold:

Problem XLVI – Bill and Hold

GG makes the following entry to record the sale:

GG makes an entry to record the related cost of goods sold as follows.

Problem XLVIII – Variable Consideration

Cash (100 X P200).................................................... 20,000

Problem XLIX - Contract Assets

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

In addition, Asser records cost of goods sold as follows:

Problem LI - Contract Costs

Deferred Gross Profit on Installment Sales ………………………………... 2,500

b. Cash ………………………………………………………………………….. 120,000

c. Cost of Installment Sales ………………………………………………….. 200,000

d. Merchandise Repossessions ……………………………………………… 14,500

Fair value of repossessed merchandise.. P 14,500

e. Expenses ……………………………………………………………………… 16,000

2. Adjustment to Recognize Gross Profit on Installments Sales: