PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D
Solution:
7/15/x1 Equipment 100,000
12/31/x1 Franchise (700K ÷ 10 yrs.) x 5/12 29,167
12/31/x1 Franchise (600K x 10%) 60,000
Total revenue in 20x1 189,167

2. B
Solution:
The only performance obligation in the contract is the promise to grant the license. The nature of
the promise is to provide the customer with a “right to access” because the customer would
reasonably expect that Baguio Beans will undertake activities that will affect the intellectual
property (i.e., ‘continue to play games and provide a competitive team’). Accordingly, the
performance obligation is satisfied over time. The revenue in 20x1 is computed as follows:

Fixed consideration (200K ÷ 2

100,000
yrs.)
Royalty (1M x 20%) 200,000
300,00
Total revenue in 20x1 0

3. D
Solution:
The only performance obligation in the contract is the promise to grant the license. The nature of
the promise is to provide the customer with a “right to use” because the intellectual property (i.e.,
the song) will not change. Accordingly, the performance obligation is satisfied at a point in time.
Since the timing of the agreed payments provides the customer with a significant benefit
of financing, the promised consideration is discounted. The discounted amount is recognized as
contract revenue in full on January 1, 20x1. The difference between the undiscounted and
discounted amounts of the promised consideration is recognized as interest revenue over the 2-
year term of the note receivable. The contract revenue revenue in 20x1 is computed as follows:

 10,000 x (PV of ordinary annuity @1%(a), n=24(b))

 10,000 x 21.2434 = 212,434
(a)
12% per annum rate ÷ 12 months in a year
(b)
2 years x 12 months in a year

*The interest revenue in 20x1 is ₱20,117, computed by preparing monthly amortization table.

4. C
Solution:
The only performance obligation in the contract is the promise to provide the secret formula.
By the terms of the agreement, Plankton can direct the use of, and obtain substantially all
of the remaining benefits from, the license at the point in time at which the license is granted
because the intellectual property will not change. (i.e., Mr. Krabs does not continue to be
involved with the secret formula and does not undertake activities that significantly affect the
intellectual property to which the Plankton has rights). Therefore, the license provides the
customer the right to use the entity’s intellectual property. Accordingly, the performance
obligation is satisfied at a point in time.
Since the timing of the agreed payments provides the customer with a significant benefit
of financing, the deferred payments shall be discounted. The transaction price would be the sum
of the cash down payment and the present value of the note. The transaction price is recognized
in full as revenue on Dec. 31, 20x1.

Cash down payment (100,000 x 20%) 20,000

PV of note receivable:
[(100K x 80%) ÷ 4] x PV of ordinary annuity @12%, n=4 60,747
Transaction price (recognized as revenue on Dec. 31, 20x1) 80,747

5. D
Solution:
The nature of the promise to grant the license is to provide the customer with the right to access
the entity’s intellectual property. This is because the intellectual property changes throughout the
license period. Accordingly, the performance obligation is satisfied over time.
The transaction price, which is the sum of the cash down payment and the present value
of the note (i.e., 20,000 + 60,7474 = 80,747) is recognized over the 4-year license period using the
straight-line method. Accordingly, no contract revenue is recognized yet on Dec. 31, 20x1. The
entity starts recognizing revenue in 20x2.

6. B
Solution:
Contract revenue (80,747 ÷ 4 yrs.) 20,187
Interest revenue (60,747 x 12%) 7,290
Total revenue in 20x2 27,477

7. A
Solution:
The initial services are not performance obligations. Accordingly, this case is accounted for
similar to the previous case (i.e., right to access/ satisfied over time).

Contract revenue (80,747 ÷ 10 yrs.) 8,075

Interest revenue (60,747 x 12%) 7,290
Total revenue in 20x2 15,365

8. A
Solution:
The only performance obligation in the contract is the promise to grant the license.
The nature of the promise is to provide the customer with the “right to access” the
entity’s intellectual property as it exists throughout the license period because the intellectual
property to which the customer has rights changes throughout the license period. This is
evidenced by the following:
 new characters are continually created and the images of the characters are continually
changed
 the contract requires the customer to use the latest images of the characters.

 Therefore, the performance obligation is satisfied over time.

The problem states that the contract does not contain significant financing component. Therefore,
the annual payments of ₱1 million per year are recognized as revenue as they become due.

9. D
Solution:
‘Step 1’ of PFRS is not met because the consideration in the contract is not probable of collection.
Accordingly, the consideration received is recognized as a liability. Knock will continue to
assess the contract to determine if the criteria are subsequently met.

10. A
Solution:
Revenues
Franchisee A (20,000 cash down payment + 60,747 PV of note) 80,747
Franchisee B (20K cash down p. + 24,018 adjusted PV of note) 44,018
Franchisee C -
Total revenues 124,765
Costs of franchise
Franchisee A (32,000)
Franchisee B (25,000)
Franchisee C -
Total costs of franchise (57,000)
Gross profit 67,765
Interest income (60,747 + 24,018 + 33,801) x 12% x 6/12 7,114
Profit for the year 74,879