ACCOUNTING FOR SPECIAL TRANSACTIONS ILLUSTRATIONS, DAYAD, 2017 ED

7-1 The Application of the Five-Step Process for Revenue Recognition

Assume that Concorde Corporation signs a contrat to sell airplanes to PAL for P 800,000,000

Step 1 Identify the CONTRACT with customers

A contract is an agreement between two parties that creates enforeable rights or obligations.
*** In this case, Concorde has signed a contract to DELIVER AIRPLANES to PAL;

Step 2 Identify the SEPARATE PERFORMANCE OBLIGATION in the CONTRACT

Concorde has only ONE PEROFRMANCE OBLIGATION - TO DELIVER AIRPLANES to PAL
*** If Concorde also agreed to maintain the planes, a separate performance obligation is reorded for this promise;

Step 3 Determine the TRANSACTION PRICE

Transaction is the amount of consideration that a company expects ti receive from a customer in EXCHANGE for
transfering a good or a service
*** In this case, the transaction price is explicityly provided in the case, P 800,000,000.00

Step 4 Allocate the TRANSACTION PRICE to the SEPARATE PERFORMANCE OBLIGATION

*** In this case, Concorde has only ONE PERFORMANCE OBLIGATION - TO DELIVER AIRPLANES to PAL.

Step 5 RECOGNIZE REVENUE when EACH PERFORMANCE OBLIGATION IS SATISFIED

Concorde recognizes revenue of P 800,000,000 for the sale of the airplanes to PAL when it satisfies its performance
obligation - the delivery of the airplanes to PAL

7-2 Assume Kim;s sells a lady hat to Dreicy for P 1,000 that Kim's previously purchased from a wholesaler for P 600.
How would Kim's account for the sale to Dreicy?

Step 1 Identify the CONTRACT with customers

*** In this case, the contract may not be written, but it is clear that - Kim's delivers the lady hat to Dreicy, and
Dreicy agrees to Pay P 1,000 to Kim

Step 2 Identify the SEPARATE PERFORMANCE OBLIGATION in the CONTRACT

*** Kim's has only a single performance obligation - to deliver the lady's hat

Step 3 Determine the TRANSACTION PRICE

*** Kim is entitled to receive P 1,000 from Dreicy

Step 4 Allocate the TRANSACTION PRICE to the SEPARATE PERFORMANCE OBLIGATION

*** With only one performance obligation, Kim's allocates the full transaction price of P 1,000 to delivery
of the lady's hat

Step 5 RECOGNIZE REVENUE when EACH PERFORMANCE OBLIGATION IS SATISFIED

*** Kim;s satisfies its performance obligation when it delivers the lady's hat to Dreicy, so Kim's records the
following journal entries, to wit:

DR Cash 1,000 DR Cost of sales 600

CR Revenues from sales of goods 1,000 CR Inventory 600

*** REVENUE RECOGNITION AT A SINGLE POINT IN TIME

A. We RECOGNIZE REVENUE at a POINT IN TIME when we do not qualify for recognizing revenue over time
B. The performance obligation is satisfied when CONTROL
ACCOUNTING FOR SPECIAL TRANSACTIONS ILLUSTRATIONS, DAYAD, 2017 ED
C. Usually transfer of CONTROL is obvious, and coincides with DELIVERY
D. Other indicators of transfer of control:

The customer has:

1. An OBLIGATION TO PAY the seller
2. LEGAL TITLE to the asset
3. PHYSICAL POSSESSION of the asset
4. Assumed the risks and rewards of OWNERSHIP
5. ACCEPTED the ASSET
ACCOUNTING FOR SPECIAL TRANSACTIONS ILLUSTRATIONS, DAYAD, 2017 ED

7-3 Single Point in Time

Anton Video Tech sells the Play Station (PSP) game box, a gaming console. A PSP game-box is only a gaming
module and includes no other goods or services. When should Anton recognizes revenue for the following
sale of 200 PSP games-boces to Robcom Computers?

Dec 20 20x6 Robcom Computers orders 200 games-boxes at a price of P 7,600 each, promising payment
within 30 days after delivery. Anton Video Tech received the order but hasn't fulfilled its
performance obligation to deliver the PSP game=boxes. Given that situation and other
indicators, Anton's judgment is that control has not been transferred and revenue should
not be recognized;

Jan 01 20x7 Anton delivers 200 PSP game-boxes to Robcom Computers, and title to the PSP game-boxes
transfers to Robcom Computers. Anton has delivered the game-boxes, and Robcom has
accepted deliver. So Rovcom has physical posession, legal title, the risks and rewards of
ownership, and an obligation to pay Anton. Anton's performance obligation has been
satisfied, so Anton can recognize revenue and a related Accounts Receivable of P 1,520,000

DR AR 1,520,000 DR Cost of sales xxx

CR Revenues from sales of goods 1,520,000 CR Inventory xxx

Jan 25 20x7 Anton receives P 1,520,000 from Robcom. This transaction does not affect revenue. We recognize
REVENUE when performance obligations are satisfied, not when CASH is received. Anton simply
records COLLECTION of the accounts receivable…

DR Cash 1,520,000
CR AR 1,520,000

*** REVENUE RECOGNITION OVER A PERIOD OF TIME (OVER TIME)

A. REVENUE shoud be RECOGNIZED OVER TIME if goods and services are transferred over time to the customer

B. REVENUE shoud be RECOGNIZED OVER TIME if one of the following conditions hold:

1. The costumer consumes the benefit of the seller's work as it is PERFORMED

2. The costumer controls the asset as it is created, as when a contractor builds an extention onto a
customer's existing school building, or
3. The seller ius creating an asset that has no alternative use to the seller, and the seller has the legal
right to receive payment for progress to date, as when a company manufactures customized airplanes
Cebu Pacific

C. If revenue is recognized over time, we can measure progress towards completion, by using (Examples and
illustrations for Construction firms ans related - Chapter 9)
Input Measures the most common approach is to the "cost to cost" ratio, which is equal to costincurred
to date by estimated total costs

Output Measures Examples include the passage of time and the amount of finished product delivered

7-4 Over a period of time

Anton Video Tech sells one year subscriptions to the Kimdrei Video Games Center, offering on line internet-based games.

Jan 1, 20x7 Anton sells 105 subscriptions for P 400 each

ACCOUNTING FOR SPECIAL TRANSACTIONS ILLUSTRATIONS, DAYAD, 2017 ED
*** Anton has a single performance obligation - to provide a service to subscribers by allowing them access to the
gaming platform for one year. Because Kimdrei users consume the benefits of access to that service overtime,
(B.1 above) Anton recognizes revenue fromm the subscribers over the ONE-YEAR TIME PERIOD

*** Anton recognizes NO REVENUE on January 1, rather, Anton recognizes a DEFERRED REVENUE (A LIABILITY) for P 42,000
DR Cash (P400x105) 42,000
CR Deferred Revenue 42,000 To record unearned revenue (Liability Method)

*** Anton uses "PROPORTION OF TIME" as its measure a progress toward completion

*** At the end of each 12 months (OVER A PERIOD OF TIME) following the sale, Anton would record the following entry
to recognize Kimdrei's revenue (revenue from Kimdrei) In effect ADJUSTING ENTRY to recognize REVENUE
DR Deferred Revenue 3,500
CR Service/Subscription Revenue 3,500 To record earned service revenue (Income earned)

*** After 12 months, Anton wll have recognized the entire P 42,000 of Kimdrei's subscription revenue and the deferred
revenue will be reduced to ZERO…(used up/all earned periodically )

*** Departure from GAAP - LBC picks up a package and delivers it to its destination within a few days. The company's
summary of significant accounting policies disclosure note that " Revenue is recognized upon delivery of
shipments"

LBC recognizes revenue at THE END OF THE SERVICE period rather than OVER TIME

7-5 Contract containing Multiple Performance Obligations

Anton Video Tech sells the play Station Portable (PSP) game-box, a gaming console that allows users to play video
games individually or multiple player environments over the internet

*** PSP game0box includes the physical PSP game-box module as well as a one-year subscription to the Kimdrei Video
Games Center multiuser platform of Internet-based games and other applications;

*** Anton Video Tech sells individual one-year subscriptions to the Kimdrei Video Games platform for P 400

*** Anton Video Tech sells individual PSP game-box modules for P 7,600

*** As a package deal, Anton Video Tech sells the PSP game-box (module plus subscription) for P 7,700

Jan 1, 20x7 Anton Video Tech delivers 200 PSP game-box to Robcom at a price of P 7,700 per system. Anton Video Tech

Jan 25, 20x7 Anton Video Tech receives P 1,540,000 from Robcom Computers

Step 1 Identify the CONTRACT with customers

*** We'll assume that Anton Video Tech has concluded that it has a contract with Robcom Computers

Step 2 Identify the SEPARATE PERFORMANCE OBLIGATION in the CONTRACT

Sellers account for a promise to provide a good or service as a performance obigation it the good or service is
distinct from other goods or services in the contract

Goods or service that are not distinct are combined and treated as a single performance obligation
A good or service is distinct if it is both:
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1. Capable of being distinct.
The customer could use the good or service on its own or in combination with other goods and services
it could obtain elsewhere, and

2. Separately identifiable from other goods or services in the contract. The goods or service is distinct in the context
of the contract because it is not highly interrelated with other goods and services in the contract

*** The module and subscription are distint so the contract has two performance obligations:
(1) delivery of PSP game-box modules, and
(2) fulfillment of one-year subscriptions

Step 3 Determine the TRANSACTION PRICE

Is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and svcs.

*** The transaction price is P 1,540,000 equal to P 7,700 per system x 200 systems (erratum - 1,000, P 1,500,000)

7-6 Allocating Transaction Price to Performance Obligations Bases on Relative Selling Price

Step 4 Allocate the TRANSACTION PRICE to the SEPARATE PERFORMANCE OBLIGATION

Stand-alone Selling Price - (SAP) is the amount of which the good or servie is sold separately under similar circumstances

*** Because the stand alone price of the PSP game-box (P 7,600) represents 95% of the total
1. 7,700 PSP SUBSC
PSP SUBSC 7,600 400 SAP
95% 5% 8,000 8,000

2. 7,315 385 1,463,000 77,000 Revenue (Step 5)

Step 5 RECOGNIZE REVENUE when EACH PERFORMANCE OBLIGATION IS SATISFIED

*** The timing of revenue recognition for each performance obligation is determined individually

DR Accounts receivable 1,540 DR Cost of sales xxx

CR Revenues from sales of goods 1,463 CR Inventory xxx
CR Deferred revenue 77

7-7 Telecommunications Company

Mar 1, 20x7 Globemart Inc, a telecom operator entered into a contract with Kim Dorothy. In line with the contract, Kim Dorothy
subscribes to Globemart's monthly plan for 12 months and in return Kim Dorothy receives a free Apple I-phone
handset from Globmart. Kim Dorothy will pay a monthly fee of P 1,200. Kim Dorothy gets the nadset immediately
after contract signature.

Globemart, Inc sells the same handsets for P 3,600 and the same monthly plans for P 960 per month without HS
sh be P 800
Step 1 Identify the CONTRACT with customers
*** Written contract betwee Globemart, Inc. and Kim Dorothy

Step 2 Identify the SEPARATE PERFORMANCE OBLIGATION (PO) in the CONTRACT

*** PO No. 1 - Network services (monthly installment plan)
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PO No. 2 - Apple I-Phone Handset

Step 3 Determine the TRANSACTION PRICE

*** Monthly fee (plan) P 1,200
Months of subscriptions (eff Mar 31, 20x7) 12 months
Total transaction price ( P 1,200 x 12 months) P 14,400

Step 4 Allocate the TRANSACTION PRICE to the SEPARATE PERFORMANCE OBLIGATION

Bill per
Performance Obligation (PO) SAP Alloc TP REV month
Network Services P 800 x 12 9,600 0.727 10,472.73 12 873 1,200
Apple I-Phone Handset 3,600 0.273 3,927.27 3,927 -

Total 13,200 14,400 4,800

Step 5 RECOGNIZE REVENUE when EACH PERFORMANCE OBLIGATION IS SATISFIED

the Kimdrei Video Games Center, offering on line internet-based games.
In effect ADJUSTING ENTRY to recognize REVENUE
he good or service on its own or in combination with other goods and services

(erratum - 1,000, P 1,500,000)

Revenue (Step 5)

nto a contract with Kim Dorothy. In line with the contract, Kim Dorothy