MONICA BENESA B.

ESTONILO BSA 3-A

09760 ACCTG 318- SPECIAL TRANSACTION OCTOBER 13, 202

Revenue from contracts with customers (Long term construction)

Problem on Revenue from contracts with customers

Entity X Sells a lot and constructs houses. Entity X uses a standard contract with customers. A
customer who purchases a lot must purchase a house from entity X. The customer is prohibited
from engaging another contractor to build the house.

The houses are not prebuilt. The customer chooses a design from five designs, all of which are
original and standard designs of Entity X. Minor modifications to the chosen design are
permitted; however, a modification should not deviate from the main theme of the house designs
in teh subdivision. Any design modification should be made and accepted by Entity X and the
customer prior to the commencement of construction activities. During construction, Entity X
retains control over the construction activity and any unfinished structure built on the lot. It takes
a standard time of 1 year to construct a house.

Each contract requires a non-refundable down payment of 20% of the fixed contract price. The
contract price covers the payment for the lot, the design, and the construction of the house. The
contract price varies depending on the type of design chosen by the customer and any minor
modifications made to that designs. The balance is payable in monthly installments over a period
of 12 months. Entity X retains the legal title over the lot and the house until the customer fully
pays the contract price.

Each contract is non-cancellable. In case the customer defaults in paying at least 2 monthly
installments, Entity X shall forfeit in its favor the down payment and all installment payments
made by the customer. In addition, Entity X forfeits in its favor the lot, any unfinished structure
built on the lot, and any unused materials purchased for the construction of the house. In case
Entity X fails to construct the house in accordance with the agreed specifications, Entity X shall
make the necessary remediation at its own cost.

The customer obtains control over the lot and the house (i.e. the customer can start occupying the
property) 1 year after the signing of the contract, at which time the construction is expected to be
complete. This applies even if the customer has not yet paid in full the contract price. In case of
delay in the completion of the house, Entity x shall pay a penalty of 2% for the contract price for
every month of delay. The penalty shall be deducted from any existing balance of the customer.
Entity X does not sell lots, houses designs, and houses separately. In the past, Entity X has been
able to resell forfeited lots and houses to other customers without much modification because the
designs of the houses are standard.

Based on an independent appraisal of properties in neighboring subdivisions, the current fair

values of similar lots, house designs and houses are as follows:

Lot P1,620,000
House Design 270,000
House 3510000

On April 1, 2021, Entity X enters into a standard contract with Customer Y. The contract price is
P6,000,000. At contract inception, Entity X expects to finish the construction of the house within
1 year, in accordance with the agreement, In addition, Entity X expects that the customer will
pursue the contract and will not default in its payment.
As of December 31,2021 a survey of the work performed reveals that that construction work is
80% complete. Entity X expects that upon completion, the constructed house will meet the
specification in the contract.

Requirements:

Perform Steps 1 to 5 of PFRS 15 to answer the following questions.

1. Does the contract qualify for accounting under PFRS 15? State the reason(s) for your answers.

Yes. The agreement has been approved by both parties, has a business foundation, rights
and responsibilities, and the payment is identified, so it is eligible for accounting under PFRS 15.
There is also a chance that Entity X will accept the consideration.

2. What is (are) the performance obligation(s) in the contract?

The performance obligation in the contract is a bundle of distinct goods or activities,

which are the lot, constructed house, and house design.

3. How will Entity X satisfy the performance obligations in the contract?

When control of the goods or services is given to the client, Entity X will fulfill the
performance obligation outlined in the contract. As a result, the performance obligation will be
fulfilled when the customer receives the completed and built house along with the payment of the
consideration is received.

4. How much is the transaction price in the contract?

The transaction price in the contract is P 6,000,000.

• Determine the nature of the transaction price (Fixed or variable) If the transaction price
includes variable consideration, determine how Entity X should account for that variable
consideration.

Because it is unpredictable how the inability to deliver the contract and any delays in
completion will influence the consideration to be paid upon completion, the nature of the
transaction price is variable consideration. When determining the transaction price, the
entity shall account for this by estimating the variable consideration.

• Determine if the transaction price provides significant financing to either the customer or
Entity X.

The transaction price provides significant financing to Entity X for the construction of the
house and to customer by the payment of terms of the consideration.

5. How should Entity X allocate the transaction price to the performance obligation(s) in the
contract?

Entity X should apply a standalone selling price to assign the transaction price to the
contract's performance obligation. The three performance obligations will serve as the
foundation. As a result, the price will be allocated to the aforementioned performance
requirements using the standalone selling price.

6. How should Entity X recognize revenue from the contracts?

Entity X should recognize revenue from the contracts by over time or as the contract is
completed in the form of 20% downpayment to be paid in monthly installments and principal
amount when the contract is completed. Thus, recognize revenue over time as asset is created by
Entity X for the customer.

7. Provide the journal entry on April 1, 2021

Entity X should recognize revenue from contracts using the Point-In-Time method. The
customer doesn’t consume/use any benefit from the seller’s work as houses are fully usable after
completion. Also, it is stated that Entity X will regain control over the asset until the customer
pays in full.