AFAR 3 - Revenue Recognition

Page 1 of 15 | AFAR 03
REVENUE RECOGNITION
MARK ALYSON B. NGINA, CMA, CPA
REVENUE RECOGNITION
Syllabus:
4.0 Revenue Recognition (PFRS 15)
4.1 Revenue from Contracts with Customers
4.1.1 Five-Steps Model Framework
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4.1.2 Other Revenue Recognition Issues
4.1.2.1 Right of return
4.1.2.2 Principal-agent relationships
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4.1.2.3 Non-refundable upfront fees
4.1.2.4 Licensing / Royalties
4.1.2.5 Repurchase arrangements
4.1.2.6 Gift Cards
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4.1.2.7 Consignment arrangements
4.1.2.8 Bill-and-hold arrangements
4.1.2.9 Long – term Construction Contracts
4.1.2.9.1 Percentage of completion method
4.1.2.9.1.1 Input method
4.1.2.9.1.2 Output method
4.1.2.9.2 Contract Asset / Contract Liability
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4.1.2.10 Franchise Operations – Franchisor’s point of view
4.1.2.10.1 Journal entries and determination of revenue, cost, and gross profit
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4.1.2.10.1.1 Initial franchise fee
4.1.2.10.1.2 Continuing franchise fee
4.1.2.11 Accounting for Consignment Sales
4.1.2.11.1 Amount Remitted
4.1.2.11.2 Ending Inventory Valuation
4.1.2.11.3 Determination of Net Income
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4.1.3 Financial Statement Presentation
PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Core Principle
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An entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Five-Step Model Framework

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
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3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation
Other Revenue Recognition Issues

1. Sale with a right of return
2. Warranties
3. Principal versus agent considerations
4. Non-refundable upfront fees (and some related costs)
REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 support@reocpareview.ph OCTOBER 2022 CPA REVIEW SEASON

REVENUE RECOGNITION
5. Licensing
6. Repurchase agreements
7. Consignment arrangements
8. Bill-and-hold arrangements
EXERCISE 1
On 1 July 20x1, Its Depend Inc. entered into a contract to deliver one of its specialty machines to It Depends Landscaping
Co. The contract requires It Depends to pay the contract price of ₱125,000 in advance on 15 July 20x1. It Depends pays
Its Depend on 15 July 20x1, and Its Depend delivers the machine (with cost of ₱80,000) on 31 July 20x1.
Required: Prepare the journal entries on 1 July, 15 July and 31 July for Its Depend.
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EXERCISE 2
Ops Cor Company, a real estate developer, enters into a contract with a customer for the sale of a building for
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₱20,000,000. The customer intends to open a restaurant in the building. The building is located in an area where new
restaurants face high levels of competition and the customer has little experience in the restaurant industry.
The customer pays a non-refundable deposit of ₱1,000,000 at inception of the contract and enters into a long-term
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financing agreement with the entity for the remaining 95% of the promised consideration. The financing arrangement is
provided on a non-recourse basis, which means that if the customer defaults, Ops Cor Company can repossess the
building, but cannot seek further compensation from the customer, even if the collateral does not cover the full value of
the amount owed. The entity’s cost of the building is ₱12,000,000.
entry to record the deposit.
EXERCISE 3
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Required: Determine whether there is a contract in accordance with paragraph 9 of PFRS 15 and prepare the journal
Identify how many performance obligations exists in the following contract:

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1. Of Course Company, a contractor, enters into a contract to build a hospital for a customer. Of Course Company is
responsible for the overall management of the project and identifies various goods and services to be provided,
including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring,
installation of equipment and finishing.
2. Of Course Company, a software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support (online and telephone)
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for a two-year period. Of Course Company sells the license, installation service and technical support separately. The
installation service includes changing the web screen for each type of user (for example, marketing, inventory
management and information technology). The installation service is routinely performed by other entities and does
not significantly modify the software. The software remains functional without the updates and the technical support.
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3. Of Course Company, a software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support (online and telephone)
for a two-year period. Of Course Company sells the license, installation service and technical support separately. The
installation service includes changing the web screen for each type of user (for example, marketing, inventory
management and information technology). As part of the installation service, the software is to be substantially
customized to add significant new functionality to enable the software to interface with other customized software
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applications used by the customer. The customized installation service can be provided by other entities.
EXERCISE 4
Multiples Choi Inc. sells old and new cars. On 2 January 20x1, it entered into a contract with a customer for a sale of a
new Toyota Alphard for ₱4,000,000. The cost of the new Toyota Alphard is ₱1,800,000 and control of the car transfers to
the customer when the contract is signed. Multiples Choi Inc. includes a 2-year assurance-type warranty with the sale of
new cars.


REVENUE RECOGNITION
A used Super Grandia Elite was accepted on the same date as down payment at its fair value of ₱1,500,000. The balance
is to be paid in 36 monthly installments of ₱69,750 starting 31 January 20x1 using a contracted interest rate of 12%. The
cash selling price of the new Toyota Alphard is ₱3,600,000.
Relevant present value factors:
PVOA @ 1%, n = 36 months 30.1075
PVOA @ 12%, n = 3 years 2.4018
Required: Prepare the journal entries in January and answer the following
1. How many performance obligations exist in the contract?
2. How much is the transaction price?
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EXERCISE 5
Multiple Choice, an electronics manufacturer, enters into an arrangement with one of its major retailers, under which the
retailer will receive a 5% discount on all purchases if the purchases by the retailer exceed ₱250,000 for the annual period
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ending 31 December.
At 30 June, purchases by the retailer from Multiple Choice amount to ₱56,000 (inclusive of 12% VAT). Multiple Choice
forecasts that, due to the historic seasonality of the revenues (which peak prior to December in the run up to the year-end
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holidays) and the launch of new products, the annual sales to the retailer will be in the range of ₱260,000 − ₱310,000.
Required: How should Multiple Choice measure the revenue at 30 June?
EXERCISE 6
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Death By Taxation, a bookstore, is offering a promotion whereby a customer who purchases three income taxation books
at ₱500 per book in a single transaction in a store receives an offer for one free income taxation book if the customer fills
out a request form and mails it to them before a set expiration date.
Death By Taxation estimates, based on recent experience with similar promotions, that 75% of the customers will
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complete the mail in rebate required to receive the free income tax book.
Required: Compute the revenue that should be recorded by Death By Taxation upon transfer of control of the three
income taxation books.
EXERCISE 7
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Again The Lights is a high street retailer and has launched a promotional campaign with the following elements:
• Discount coupons are provided to any customers that purchase goods with a total value of over ₱5,000.
• The discount coupons entitle the customer to an additional 50% till discount on selected items during the 90 days
immediately following the campaign.
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Again The Lights has issued 60 of the 50% coupons to high spending consumers and took from them ₱100,000 at the till
during the campaign; and based on historical trends, management expects that:
• 75% of the end consumers receiving 50% discount coupons will use the coupon;
• customers using the coupons will spend on average ₱1,000 at the till; and
• It will still make a positive margin on the transactions when the coupons are used
Required: Prepare the journal entries to record the
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1. Initial purchase by customer of ₱100,000

2. Redemption of 50% discount coupons
EXERCISE 8
Against The Light Company manufactures consumer goods enters into a one-year contract to sell goods to a customer
that is a large global chain of retail stores. The customer commits to buy at least ₱15,000,000 of products during the year.
The contract also requires Against The Light Company to make a non-refundable payment of ₱1,500,000 to the customer
at the inception of the contract which will compensate the customer for the changes it needs to make to its shelving to
accommodate the entity’s products.


REVENUE RECOGNITION
During the first month, Against The Light Company transferred ₱2,000,000 worth of goods and received the
corresponding payment.
Required: Compute for the amount of revenue that will be recognized during the first month.
EXERCISE 9
It’s Really Hurt operates retail stores and a website where customers can buy dresses. There is a customer loyalty
program in place, awarding customers 1 point for every ₱200 spent on buying dresses. Points are only redeemable for
future purchases and cannot be redeemed for cash. It’s Really Hurt expects 5% of points to expire unredeemed, based on
historical trends.
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During the year, Its Really Hurt has sold dresses for ₱200,000.
Required: Prepare the journal entries to record the transaction.
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EXERCISE 10
It Really Hurts has launched a campaign of selling gift cards for the upcoming holiday season:
• Gift cards are valid for up to one year from the date of purchase and only at It Really Hurts outlets; furthermore, the
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customer cannot obtain a cash reimbursement for unspent amounts or unused cards. Unspent amounts after a year
are kept by the company.
• Based on historical trends, It Really Hurts expects 10% of the gift card’s value to expire unused.
• It Really Hurts has no obligation to remit unused gift card amounts to end customers or to a third party (for example,
government).
using the gift cards.

Required: Prepare the journal entry to record
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On 30 August, end-consumers purchase ₱6,000 gift cards. On 1 December, end-customers purchase ₱3,600 of product
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1. Gift card purchase
2. Gift card redemption
EXERCISE 11
EUP Inc. sells a big screen TV package consisting of a Sharp LB-1085 TV, a universal remote, and onsite installation by
EUP Inc. staff. The installation includes programming the remote to have the TV interface with other parts of the
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customer’s home entertainment system. EUP Inc. concludes that the TV, remote, and installation service are separate
performance obligations. EUP Inc. sells the Sharp LB-1085 TV separately for ₱70,000 and sells the remote separately for
₱4,000, and offers the entire package for ₱76,000. EUP Inc. does not sell the installation service separately. EUP Inc. is
aware that other similar vendors charge ₱6,000 for the installation service. EUP Inc. also estimates that it incurs
approximately ₱4,000 of compensation and other costs for EUP Inc. staff to provide the installation services. EUP Inc.
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typically charges 40% above costs on similar sales.

Required: Allocate the transaction price of each performance obligation using the following approach:
1. Adjusted market assessment
2. Estimated cost plus a margin
3. Residual approach
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EXERCISE 12
Wipe It Down regularly sells Products A, B and C individually, thereby establishing the following stand-alone selling prices:
Product Stand-alone
selling price
Product A ₱ 40,000
Product B 55,000
Product C 45,000
Total ₱140,000


REVENUE RECOGNITION
The entity enters into a contract with a customer to sell Products A, B and C in exchange for ₱100,000 cash. The entity
will satisfy the performance obligations upon delivery to the customer.
Required: Determine the transaction price and discounts allocated to each of the products assuming:
1. The entity regularly sells Products A, B and C together.
2. The entity regularly sells Products B and C together for ₱60,000 and Product A for ₱40,000.
EXERCISE 13
Identify the following performance obligation if it is satisfied at a point in time or over time:
1. Phasmophobia Company enters into a contract to provide monthly payroll processing services to a customer for one
year.
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2. Philophobia Company enters into a contract with a customer to provide a consulting service that results in the entity
providing a professional opinion to the customer. The professional opinion relates to facts and circumstances that are
specific to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s
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failure to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus
a 15% margin. The 15% margin approximates the profit margin that the entity earns from similar contracts.
3. Phobophobia Company enters into a contract with a customer, a government agency, to build a specialized satellite.
Phobophobia builds satellites for various customers, such as governments and commercial entities. The design and
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construction of each satellite differ substantially, on the basis of each customer’s needs and the type of technology
that is incorporated into the satellite.
4. Selfiephobia Company enters into a contract with a customer to build an item of equipment. The payment schedule in
the contract specifies that the customer must make an advance payment at contract inception of 10% of the contract
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price, regular payments throughout the construction period (amounting to 50% of the contract price) and a final
payment of 40% of the contract price after construction is completed and the equipment has passed the prescribed
performance tests. The payments are non-refundable unless the entity fails to perform as promised. If the customer
terminates the contract, the entity is entitled only to retain any progress payments received from the customer.
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EXERCISE 14
REO Development Corporation (REODC) is developing a multi-unit residential complex. A customer enters into a binding
sales contract with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a
similar size, but other attributes of the units are different (for example, the location of the unit within the complex).
Required: Assuming the following additional information, identify whether the performance obligation is satisfied over time
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or at a point in time.
1. The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to
complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on
completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the
contract before completion of the unit, the entity only has the right to retain the deposit.
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2. The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during
construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit
to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails
to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments
as and when they are due, the entity would have a right to all of the consideration promised in the contract if it
completes the construction of the unit. The courts have previously upheld similar rights that entitle developers to
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require the customer to perform, subject to the entity meeting its obligations under the contract.
3. The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during
construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit
to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails
to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments
as and when they are due, either the entity can require the customer to perform as required under the contract or the
entity can cancel the contract in exchange for the asset under construction and an entitlement to a penalty of a
proportion of the contract price.


REVENUE RECOGNITION
EXERCISE 15
Phobia Company enters into a service contract to manage a customer’s information technology data center for five years.
The contract is renewable for subsequent one-year periods. The average customer term is seven years.
Phobia Company incurred the following costs to obtain the contract:
External legal fees for due diligence ₱ 300,000
Travel costs to deliver proposal 500,000
Commissions to sales employees 200,000
Total costs incurred ₱1,000,000
Phobia Company expects to recover those costs through future fees for the service contract while the external legal fees
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and travel costs would have been incurred regardless of whether the contract was obtained.
Phobia Company also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall
profitability of the entity and individual performance evaluations. During the year, a total of ₱800,000 performance bonus
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was given to sales supervisors.
Before providing the services, the entity designs and builds a technology platform for the entity’s internal use that
interfaces with the customer’s systems. That platform is not transferred to the customer, but will be used to deliver
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services to the customer.
The initial costs incurred to set up the technology platform are as follows:
Design services ₱ 800,000
Hardware
Software
Migration and testing of data center
Total costs
2,400,000
1,800,000
2,000,000
₱7,000,000
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The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services to the
customer.
Required: Discuss how to account the contract cost (cost to obtain and cost to fulfil).
EXERCISE 16
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On 1 January 2021, RBB Co. enters into a contract to transfer Products Bebe Ko and Bebe Mo to a customer in exchange
for ₱100,000. The contract requires Product Bebe Ko to be delivered first and states that payment for the delivery of
Product Bebe Ko is conditional on the delivery of Product Bebe Mo. In other words, the consideration of ₱100,000 is due
only after the entity has transferred both Products Bebe Ko and Bebe Mo to the customer.
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The entity identifies the promises to transfer Products Bebe Ko and Bebe Mo as performance obligations and allocates
₱40,000 to the performance obligation to transfer Product Bebe Ko and ₱60,000 to the performance obligation to transfer
Product Bebe Mo on the basis of their relative stand-alone selling prices. The entity recognizes revenue for each
respective performance obligation when control of the product transfers to the customer.
Required: Prepare the journal entries when the entity satisfies the performance obligation to transfer
1. Product Bebe Ko
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2. Product Bebe Mo
EXERCISE 17
On 1 January 20x1, Phobos Company enters into a contract with a customer to build a customized asset. The promise to
transfer the asset is a performance obligation that is satisfied over time because the customer controls the asset during
construction. The promised consideration is ₱6,235,000, but that amount will be increased by ₱10,000 for each day
before 30 September 20x3 that the asset is complete.
The entity commonly includes performance bonus in its contracts and based on prior experience, estimates the following
completion outcomes:


REVENUE RECOGNITION
Completed by: Probability

29 September 20x3 65%
In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based on metrics that are
defined in the contract. If the asset receives a specified rating, the entity will be entitled to an incentive bonus of ₱150,000.
Phobos Company determines that based on prior experience, the asset constructed will achieve the specified rating.
Data for the three-year construction period follows:
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20x1 20x2 20x3
Costs incurred each year ₱1,782,000 ₱2,148,000 ₱1,570,000
Estimated costs to complete 3,618,000 1,570,000 -
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Contract billings each year 1,200,000 1,900,000 ?
Cash collections each year 1,000,000 1,800,000 3,615,000
Operating expenses 100,000 90,000 70,000
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Included in the cost incurred in 20x2 is materials (not customized) costing ₱80,000 but was only used during the third
quarter of 20x3.
Upon completion on 27 September 20x3, the third party inspected the asset and determined that the rating was achieved
for the incentive bonus.
Required: R
1. Applying PFRS 15, compute for the revenue, cost and gross profit to be reported in the statement of comprehensive
income of each year using the percentage of completion and cost recovery method (assume the contract does not
include significant financing component)
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2. Prepare the journal entries using the percentage of completion and cost recovery method.
EXERCISE 18
On 1 January 20x1, Achluophobia Company was contracted to do the manufacturing facility of a firm for ₱100M. The
project was estimated to be completed in two years. The promise to transfer the asset is a performance obligation that is
satisfied over time because the customer controls the asset during construction.
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The construction contract provided among other things the following:

a) 5% mobilization fee (deductible from the first billing) payable within 15 days after the signing of the contract
b) Retention provision of 10% on all billings, payable with the final bill after the acceptance of the completed project
c) Progress billings on construction are payable within 7 days from acceptance
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Achluophobia Company estimated its gross margin on the project at 25%. It used the percentage of completion method of
accounting. On 31 December 20x1, 40% of the manufacturing facility was completed based on the estimates of the
company’s architect and civil engineers. Cost incurred during the year amounted to ₱12M.
Achluophobia Company presented progress billings of 45%. The firm accepted all the billings except the last one for 10%,
which was accepted on 10 January 20x2. With the exception of the second to the last billing of 8% accepted in 20x1,
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which was due on 3 January 20x2, all accepted billings were settled.
Required:
1. Prepare the journal entries in the books of Achluophobia Company and compute for the following (ignore the financing
component)
a. Revenue recognized in 20x1
b. Collections from customers in 20x1
2. Prepare the journal entries in the books of the customer


REVENUE RECOGNITION
EXERCISE 19
Arithmophobia Company promises to sell 120 products to a customer for ₱12,000 (₱100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After
Arithmophobia Company has transferred control of 60 products to the customer, the contract is modified to require the
delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were
not included in the initial contract.
Required: Assuming the following additional information, determine whether the contract modification is accounted as a
separate contract or not a separate contract and determine the amount of revenue to be recognized for subsequent
transfer of control of the products.
1. When the contract is modified, the price of the contract modification for the additional 30 products is an additional
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₱2,850 or ₱95 per product. The pricing for the additional products reflects the stand-alone selling price of the products
at the time of the contract modification and the additional products are distinct from the original products. After
contract modification, 10 products (from the additional 30 products) were transferred to the customer.
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2. During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of
₱80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained
minor defects that were unique to those delivered products. The entity promises a partial credit of ₱15 per product to
compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the
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credit of ₱900 (₱15 credit × 60 products) into the price that the entity charges for the additional 30 products.
Consequently, the contract modification specifies that the price of the additional 30 products is ₱1,500 or ₱50 per
product. That price comprises the agreed-upon price for the additional 30 products of ₱2,400, or ₱80 per product, less
the credit of ₱900. After contract modification, additional 10 products were transferred to the customer.
EXERCISE 20 R
Aphenphosmphobia Company, a construction company, enters into a contract to construct a commercial building for a
customer on customer-owned land for promised consideration of ₱1,000,000 and a bonus of ₱200,000 if the building is
completed within 24 months. Aphenphosmphobia accounts for the promised bundle of goods and services as a single
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performance obligation satisfied over time because the customer controls the building during construction. At the inception
of the contract, the entity expects the following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) ₱ 300,000
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At contract inception, Aphenphosmphobia excludes the ₱200,000 bonus from the transaction price because it cannot
conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not
occur. Completion of the building is highly susceptible to factors outside the entity’s influence, including weather and
regulatory approvals. In addition, the entity has limited experience with similar types of contracts.
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By the end of the first year, Aphenphosmphobia reported cost to date ₱420,000 and estimates total expected costs at
₱700,000. Aphenphosmphobia reassesses the variable consideration and concludes that the amount is still constrained.
In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of
the building. As a result, the fixed consideration and expected costs increase by ₱150,000 and ₱120,000, respectively.
Total potential consideration after the modification is ₱1,350,000 (₱1,150,000 fixed consideration + ₱200,000 completion
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bonus). In addition, the allowable time for achieving the ₱200,000 bonus is extended by 6 months to 30 months from the
original contract inception date. At the date of the modification, on the basis of its experience and the remaining work to
be performed, which is primarily inside the building and not subject to weather conditions, the entity concludes that it is
highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of
cumulative revenue recognized and includes the ₱200,000 in the transaction price. In assessing the contract modification,
the entity concludes that the remaining goods and services to be provided using the modified contract are not distinct from
the goods and services transferred on or before the date of contract modification; that is, the contract remains a single
performance obligation.


REVENUE RECOGNITION
By the end of the second year, Aphenphosmphobia reported cost to date ₱656,000 and estimates total expected costs at
₱820,000. Aphenphosmphobia reassesses the variable consideration and concludes that it is highly probable that
including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue
recognized.
Required:
1. Compute for the revenue and cost recognized in the first year
2. Determine the cumulative catch-up adjustment to revenue at the date of modification
3. Compute the revenue and cost to be recognized in the second year
EXERCISE 21
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Pentheraphobia Company enters into 30,000 contracts with customers. Each contract includes the sale of one product for
₱100. Cash is received when control of a product transfers. The entity’s customary business practice is to allow a
customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is ₱60.
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Because the contract allows a customer to return the products, the consideration received from the customer is variable.
To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value
method because it is the method that the entity expects to better predict the amount of consideration to which it will be
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entitled. Using the expected value method, Pentheraphobia Company estimates that 97% of the products will not be
returned.
Pentheraphobia Company determines that although the returns are outside the entity’s influence, it has significant
experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a
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short time frame (i.e. the 30-day return period). Thus, Pentheraphobia Company concludes that it is highly probable that a
significant reversal in the cumulative amount of revenue recognized will not occur as the uncertainty is resolved (i.e. over
the return period).
Pentheraphobia Company estimates that the costs of recovering the products will be immaterial and expects that the
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returned products can be resold at a profit.
Required: Prepare the journal entries in accordance with PFRS 15 assuming the company uses perpetual inventory
system and assuming the following independent scenario:
1. The estimated 3% returned the goods.
2. The estimated 3% did not return any goods.
3. The return period has lapsed.
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4. The customer returned 5% of goods.

5. The customer returned only 1% of the goods.
EXERCISE 22
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On 31 December 20x1, Atychiphobia Company sells equipment to Basiphobia Inc. for ₱2,000,000. Atychiphobia includes
a 2-year warranty for the sale of all of its equipment. The customer receives and pays for the equipment on 31 December
20x1.
Required: Determine how to account for the warranty in each of the following independent scenario.
1. The customer has the option to purchase the warranty separately. The stand-alone selling price of the equipment and
warranty is ₱2,016,000 and ₱84,000, respectively.
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2. The warranty is an assurance-type warranty and the customer does not have the option to purchase it separately. The
company estimates based on prior experience that 3% of sales will avail the warranty.
3. The warranty is a service-type warranty and the customer does not have the option to purchase it separately. The
stand-alone selling price of the equipment and warranty is ₱2,016,000 and ₱84,000, respectively.
4. In addition to the assurance-type warranty, Atychiphobia sold an extended warranty (service type warranty) for an
additional 2 years (20x4–20x5) for ₱50,000.


REVENUE RECOGNITION
EXERCISE 23
Plantdemic operates a website that sells plants produced by a selection of plant nursery. On 1 January 20x1, Plantdemic
enters into a contract with Plantliner to sell Plantliner’s plants on-line. Plantdemic’s website facilitates payments between
Plantliner and the customer. The sales price is established by Plantliner and Plantdemic earns a commission equal to 5%
of the sales price. Plantliner ships the plants directly to the customer and insures for loss/damage during shipment. Legal
title is transferred from Plantliner to Plantdemic when the plants are leaving Plantliners plant nursery. The customer
returns the plants to Plantdemic if they are dissatisfied. Plantdemic has the right to return plants to Plantliner without
penalty if they are returned by the customer.
During January, ₱50,000 worth of plants was sold and the collection (net of commission) was remitted by Plantdemic to
Plantliner.
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Required:
1. Determine if Plantdemic is a principal or an agent
2. Prepare the journal entry in the books of Plantdemic and Plantliner to record the transaction.
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EXERCISE 24
On 1 January 20x1, The Taste of New Normal Inc. granted a franchise right to Covid-19 Inc., a franchisee, for the
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operation of coffee shop using The Taste of New Normal’s trade name for a period of 5 years starting 1 January 20x1.
The franchisee is required to pay nonrefundable initial franchise fee of ₱600,000 and continuing franchise fee of 1% of
franchisee’s annual sales (payable every 31 January of the following year).
The following are considered to be a separate performance obligation and their corresponding stand-alone selling price is
as follows:
Services – training, etc. (costing, ₱50,000)

Machinery and equipment’s, etc. (costing, ₱100,000)
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Rights to the trade name, market area, technical and proprietary know-how. ₱500,000
100,000
_150,000
PA
Total ₱750,000
Training is completed on 1 February 20x1, the equipment is installed on 2 February 20x1, and Covid-19 Inc holds a grand
opening on 5 February 20x1.
The franchisee generated sales of ₱1,000,000 for 20x1.
Required: Applying PFRS 15, prepare all the required journal entries during the year.
C
EXERCISE 25
RBB & Co. is a CPA firm that provides proprietary software to its clients. One of its software packages sells for ₱30,000
and contains pre-programmed tutorials on basic taxation concepts. Another product sells for ₱10,000 and contains RBB &
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Co. archive of revenue regulations, revenue memorandum circulars and articles, which RBB & Co. updates on a weekly
basis and downloads to archive users for the two years following purchase of the product. A customer purchases both
software packages on 1 June 20x1.
Required: Compute the revenue should RBB & Co. recognize for the year 20x1
EXERCISE 26
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Determine how to account the following repurchase agreement:

1. Caligynephobia Inc., an equipment dealer, sells equipment on 1 January 20x1 to Catoptrophobia Company for
₱4,000,000. It agrees to repurchase this equipment on 31 December 20x2 for a price of ₱4,840,000. The imputed
interest rate on the agreement is 10%.
₱4,000,000. The contract includes a put option that obliges Caligynephobia Inc. to repurchase the excavator at
Catoptrophobia request for ₱3,305,785 on 31 December 20x2.


REVENUE RECOGNITION
₱4,000,000. The contract includes a put option that obliges Caligynephobia Inc. to repurchase the excavator at
Catoptrophobia request for ₱4,840,000 on 31 December 20x2.
EXERCISE 27
Obesophobia Co. provides canned goods to a supermarket on a consignment basis. The products are immediately
displayed for sale on a supermarket. Obesophobia Co. retains title to the products until they are sold to the end customer.
The supermarket does not have an obligation to pay Obesophobia Co. until a sale occurs, and any unsold products can
be returned to Obesophobia Co. Obesophobia Co. also retains the right to take back any unsold products, or to transfer
unsold products to another retailer. Once the supermarket sells the products to the end customer, Obesophobia Co. has
no further obligations, and the retailer has no further return rights.
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Required: Determine when does Obesophobia Co. recognize revenue in accordance with PFRS 15?
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EXERCISE 28
On May 1, the Darrel Products Company ships eight (8) of its appliances to the Rhad Company on consignment. Each
unit is to be sold at ₱75,000 payable ₱15,000 in the month of purchase and ₱3,000 per month thereafter. The consignee
is to be entitled to 20% of all amounts collected on consignment sales. Rhad Company sells 3 appliances in May and 1 in
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June. Rhad also returned 1 appliance in June. Regular monthly collections are made by the consignee, and the
appropriate cash remittances are made to the consignor at the end of each month. The cost of the appliances shipped by
the consignor was ₱46,500 per unit. The consignor paid freight and cartage to the consignee totaling ₱18,000. Expenses
paid by the consignee to be charged to the consignor is ₱8,000.
Required: Compute for the following:
1. The total amount remitted to the consignor 104,800
2. The profit on consignment 34,750
3. The cost of the inventory on consignment 146,250
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PA
EXERCISE 29
Dementophobia, a video game company, enters into a contract to supply 1,000 video game consoles at ₱10,000 per
console to a retailer, Ignorophobia, branded with Ignorophobia’s logo, to be delivered by the end of the year. The contract
contains specific instructions from the retailer about where the consoles should be delivered. The retailer expects to have
sufficient shelf space at the time of delivery.
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As of year-end, Dementophobia has shipped 600 units and the remaining 400 inventory of Ignorophobia branded
consoles have been produced, packed and are ready for transport. However, the retailer asks for the shipment to be held,
due to lack of shelf space.
Required: Compute the revenue to be recognized during the year by Dementophobia.
EO
APPENDIX
EXERCISE 1 Construction Contracts (PFRS for SME)
On January 1, 20x1, Kaya Kaya, Inc. won on a bidding to construct a bridge over troubled water. The bridge was to be
built at a total cost of ₱5,400,000 and was scheduled for completion by September 1, 20x3. One clause of the contract
stated that Kaya Kaya, Inc. was to deduct ₱15,000 from the ₱6,600,000 bid price for each week that completion was
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delayed. Completion was delayed six weeks. Data for the three-year construction period follows:
20x1 20x2 20x3
Costs incurred each year ₱1,782,000 ₱2,148,000 ₱1,570,000
Estimated costs to complete 3,618,000 1,570,000 -
Contract billings each year 1,200,000 1,900,000 ?
Cash collections each year 1,000,000 1,800,000 3,710,000
Operating expenses 100,000 90,000 70,000
Included in the cost incurred in 20x2 is materials costing ₱80,000 but was only used during the third quarter of 20x3.


REVENUE RECOGNITION
Required: Prepare all related journal entries using percentage of completion and zero-profit method and compute the
following:
Solution Guide:
Percentage of Completion 20x1 20x2 20x3
Revenue
Cost
Gross Profit (loss)
Construction in Progress
Progress Billings
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CIP, net of PB
Zero-profit Method 20x1 20x2 20x3
Revenue
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Cost
Gross Profit (loss)
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Progress Billings
CIP, net of PB
Journal entries using the Percentage of Completion

20x1 20x2 20x3
Cost incurred
Progress
Construction supplies
Cash
Accounts Receivable
1,782,000
1,200,000
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1,782,000
2,068,000
80,000
1,900,000
2,148,000
1,650,000
3,410,000
80,000
1,570,000
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billings Progress Billings 1,200,000 1,900,000 3,410,000
Billing Cash 1,000,000 1,800,000 3,710,000
Collections Accounts Receivable 1,000,000 1,800,000 3,710,000
Recording of Operating expense 100,000 90,000 70,000
expense Cash 100,000 90,000 70,000
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Revenue Construction in Progress 396,000 374,000 240,000

recognition Cost of Construction 1,782,000 2,068,000 1,650,000
Construction Revenue 2,178,000 2,442,000 1,890,000
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Elimination Progress Billings 6,510,000

of PB and CIP Construction in Progress 6,510,000
Journal entries using the Cost Recovery Method

All other journal entries are the same except for the revenue, cost and gross profit recognition:
Revenue Construction in Progress 1,010,000
recognition Cost of Construction 1,782,000 2,068,000 1,650,000
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Construction Revenue 1,782,000 2,068,000 2,660,000
EXERCISE 2 Installment Sales Method (Old US GAAP)

Kim Appliance Company uses the installment method of recognizing revenues. Pertinent data are as follows:
Year of Sales
20x1 20x2 20x3
Installment sales ₱750,000 ₱937,500 ₱900,000
Cost of installment sales 525,000 750,000 675,000


REVENUE RECOGNITION
Collections during the year:

20x1 270,000
20x2 260,000 597,500
20x3 65,000 160,000 210,000
Required:
1. Prepare the required journal entries including adjusting entries in 20x1, 20x2 and 20x3 using the perpetual and
periodic inventory method.
2. Complete the following table:
20x1 20x2 20x3
Realized gross profit
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Deferred gross profit
Perpetual Inventory System Periodic Inventory System
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Debit Credit Debit Credit
1) Installment Contract Receivable - 20x1 ₱750,000 Installment Contract Receivable - 20x1 ₱750,000
Installment Sales ₱750,000 Installment Sales ₱750,000
2) Cost of Installment Sales ₱525,000 none
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Merchandise Inventory ₱525,00
3) Cash ₱270,000 Cash ₱270,000

Installment Contract Receivable ₱270,000 Installment Contract Receivable ₱270,000
Adjusting entries
1) Installment Sales
2)
Cost of Installment Sales
Deferred Gross Profit
Deferred Gross Profit

₱750,000
₱81,000
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₱525,000
₱225,000
Cost of Installment Sales
Shipments to installment Sales
Installment Sales
₱525,000
₱750,000
₱525,00
PA
Realized Gross Profit ₱81,000 Cost of Installment Sales ₱525,000
Deferred Gross Profit ₱225,000
3) Realized Gross Profit ₱81,000 Deferred Gross Profit ₱81,000

Income Summary ₱81,000 Realized Gross Profit ₱81,000
4) Income Summary ₱81,000 Realized Gross Profit ₱81,000

Retained Earnings ₱81,000 Income Summary ₱81,000
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5) Income Summary ₱81,000

Retained Earnings ₱81,000
EXERCISE 3 Installment Sales Method (Old US GAAP)

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The following trial balance was prepared for the Itaewon Sales Corp. on December 31, 20x3
Cash ₱ 25,000
Installment accounts receivable, 20x3 80,000
Accounts receivable 40,000
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Inventory – December 31, 20x2 30,000

Other assets 52,000
Accounts payable ₱ 75,000
Deferred gross profit, 20x2 96,000
Capital stock 100,000
Retained earnings 44,500
Sales 192,000
Installment sales 500,000


REVENUE RECOGNITION
Purchases 455,000
Repossessed merchandise 10,000
Cost of installment sales 310,000
Shipments on installment sales 310,000
Loss on repossessions 13,000
Operating expenses 300,000 .
Total ₱1,340,000 ₱1,340,000
The following account balances were found in the post-closing trial balance prepared at the beginning of 20x3:
Installment accounts receivable, 20x2 ₱ 240,000
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The inventory of new and repossessed merchandise on Dec. 31, 20x3 was ₱35,000. At the end of December, before
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preparing the trial balance, the bookkeeper made the following incomplete entry:
Repossessed merchandise 10,000
Loss on repossessions 13,000
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Required: Determine the correct amount for 20x3 for the following
1. Total realized gross profit
2. Total deferred gross profit
3. Loss on repossession
4. Net income (loss)
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5. Total assets for 20x3
PA
EXERCISE 4 Franchise (Old US GAAP)

J.Ho Donuts & Coffee Co. charges an initial franchise fee of ₱5,000,000 for the right to operate a franchisee of J.Ho
Donuts & Coffee Co. Of this amount, ₱1,000,000 is payable when the agreement is signed and the balance is payable in
five annual payments of ₱800,000 each. In return for the initial franchise fee, the franchisor will help locate the site,
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negotiate the lease or purchase of the site, supervise the construction activity, and provide the bookkeeping services. The
credit rating of the franchisee indicates that money can be borrowed at 20%.
Required: Prepare the journal entries in each of the following scenario:
1. If there is reasonable expectation that the down payment may be refunded and if substantial future services remain to
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be performed by J.CO Donuts & Coffee Co.

2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to
the franchisee is minimal, collectability of the note is reasonably assured, and substantial performance has occurred.
3. If the initial down payment is not refundable, represents a fair measure of the services already provided, with a
significant amount of services still to be performed by the franchisor in future periods, and collectability of the note is
reasonably assured.
4. If the initial down payment is not refundable and no future services are required by the franchisor, but collection of the
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note is so uncertain that recognition of the note as an asset is unwarranted.

5. Under the same conditions as those listed under 4 except that the down payment is refundable or substantial services
are yet to be performed.
Note: In cases 4 and 5, where collection of the note is extremely uncertain, cash collections may be recognized using the
installment sales method or the cost-recovery method.
EXERCISE 5 Accrual vs Installment Sales Method (Old US GAAP)

On January 2, Bes Pancit Eto entered into a franchise agreement with Kahit Saan, Inc. to sell Kahit Saan products. The
agreement provides of an initial franchise fee of ₱20 million, payable as follows: ₱12 million cash to be paid upon signing


REVENUE RECOGNITION
of the contract, and the balance in four equal annual payments every December 31. Bes Pancit Eto issued 10% interest
bearing note for the balance. The agreement further provides that the Kahit Saan, the franchisor will assist Bes Pancit
Eto, the franchisee in designing and supervision in the construction of the store, and training of employees. The
agreement also provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales.
On July 31, the franchisor completed the initial services required in the contract at a cost of ₱2,000,000. The franchisor
also incurred ₱150,000 of indirect costs. The franchisee commenced business operations on November 2. The gross
sales reported to the franchisor are: November sales, ₱580,000, and December sales, ₱720,000.
Required: Prepare all entries for the year in the books of Kahit Saan, Inc. and compute for the following assuming (1) the
collection of the note is reasonably assured and (2) the collection of the note is not reasonably assured.
Accrual ISM
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1. Realized gross profit
2. Earned franchise fee
3. Unearned franchise fee
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4. Unearned interest income
5. Net income
6. Receivable (net)
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Journal entries:
Accrual Method Debit Credit Installment Method Debit Credit
01/02 Cash 12,000,000 Cash 12,000,000
Notes receivable 8,000,000 Notes receivable 8,000,000
07/31
Unearned Revenue (IFF)
Deferred
Franchises
Cost
Franchise expenses
of 2,000,000
150,000
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20,000,000 Unearned Revenue (IFF)
Deferred
Franchises
Cost
Franchise expenses
of 2,000,000
150,000
20,000,000
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Cash 2,150,000 Cash 2,150,000
11/30 Cash/AR 29,000 Cash/AR 29,000
Revenue from CFF 29,000 Revenue from CFF 29,000
12/31 Cash / AR 36,000 Cash / AR 36,000
Revenue from CFF 36,000 Revenue from CFF 36,000
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Cash 2,800,000 Cash 2,800,000

Notes receivable 2,000,000 Notes receivable 2,000,000
Interest income 800,000 Interest income 800,000
(₱8,000,000 x 10%) (₱8,000,000 x 10%)
AJE
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(1) Cost of franchise revenue 2,000,000 Unearned Revenue (IFF) 20,000,000

Deferred Cost Franc. 2,000,000 Deferred Cost of Franc. 2,000,000
Deferred gross profit 18,000,000
(2) Unearned revenue from IFF 20,000,000 Deferred gross profit 12,600,000
Revenue from IFF 20,000,000 Realized gross profit 12,600,000
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“To be a top performer you have to be passionately committed to what you're doing and insanely confident about your
ability to pull it off."
"You can't change what you have started, but you can change the direction you are going. It's not what you are going to
do, but it's what you're doing now that counts."
“A strong sense of purpose will give us energy and keep us going past the challenges that come along. It will make a
positive difference in everything we do.”
 -- END OF HANDOUT -- 


AFAR 3 - Revenue Recognition

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Page 1 of 15 | AFAR 03

4.1.3 Financial Statement Presentation

PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Five-Step Model Framework

3. Determine the transaction price

Other Revenue Recognition Issues

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

entry to record the deposit.

Identify how many performance obligations exists in the following contract:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

1. Initial purchase by customer of ₱100,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

using the gift cards.

typically charges 40% above costs on similar sales.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Completed by: Probability

The construction contract provided among other things the following:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

4. The customer returned 5% of goods.

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Services – training, etc. (costing, ₱50,000)

Determine how to account the following repurchase agreement:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Journal entries using the Percentage of Completion

Revenue Construction in Progress 396,000 374,000 240,000

Elimination Progress Billings 6,510,000

Journal entries using the Cost Recovery Method

Construction Revenue 1,782,000 2,068,000 2,660,000

EXERCISE 2 Installment Sales Method (Old US GAAP)

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

Collections during the year:

Perpetual Inventory System Periodic Inventory System

2) Cost of Installment Sales ₱525,000 none

3) Cash ₱270,000 Cash ₱270,000

Deferred Gross Profit

3) Realized Gross Profit ₱81,000 Deferred Gross Profit ₱81,000

4) Income Summary ₱81,000 Realized Gross Profit ₱81,000

5) Income Summary ₱81,000

EXERCISE 3 Installment Sales Method (Old US GAAP)

Inventory – December 31, 20x2 30,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CMA, CPA

EXERCISE 4 Franchise (Old US GAAP)

be performed by J.CO Donuts & Coffee Co.

note is so uncertain that recognition of the note as an asset is unwarranted.

EXERCISE 5 Accrual vs Installment Sales Method (Old US GAAP)