Booklet 6 PFRS LTCC Service Concessions Franchise

CRC-ACE The Professional CPA Review School
_________________________________________________________
ADVANCED FINANCIAL
ACCOUNTING & REPORTING
BOOKLET 6
ONLINE REVIEW
TOPICS:
AFAR 0525 PFRS 15

AFAR 0526 LONG TERM CONTRACTS CONSTRUCTION
AFAR 0527 FRANCHISE ACCOUNTING
AFAR 0528 SERVICE CONCESSIONS
PROF. ROEL E. HERMOSILLA

PROF. MARC OLIVER CASTAÑEDA
CRC-ACE The CPA Professional Review School
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PFRS 15
Core Principle
An entity recognizes 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
Revenue is recognized in accordance with that core principle by applying a

five-step model
PFRS 15
How and When to Recognize Revenue from Contracts With Customers:
Single model for performance obligations:
• Satisfied over time
• Satisfied at a point in time
Focuses on the transfer of control over the asset
PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Applies to ALL CONTRACTS with CUSTOMERS except for:
Lease Contracts (IAS 17)
Insurance Contracts (IFRS 4/IFRS 17)
Financial instruments and other contractual rights/obligations within
the scope of IAS 39/IFRS 9, IFRS 10, IFRS 11, IAS 27 IAS 28
Non-monetary exchanges between entities to facilitate sales
5-Step Model for Revenue Recognition

1. Identify the contract with a customer
2. Identify the performance obligation (PO)
3. Determine the transaction price (TP)
4. Allocate the TP to the PO in the contract
5. Recognize revenue as the PO is satisfied
1. IDENTIFY THE CONTRACT WITH A CUSTOMER

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- Revenues cannot be recognized without a contract
- Contract should have Enforceable Rights and Obligations
Attributes for the contract to exist for purposes of Revenue Recognition

1. Parties have approved the contract and are committed to perform
2. Each party’s rights & obligations to goods/services can be identified
3. The contract has commercial substance
4. The payment terms for goods/services can be identified
5. It is probable that an entity will collect the consideration (evaluate
the customer’s ability to pay)
A Contract Does NOT Exist if Both of the Following are TRUE

1. The contract in underperformed
2. Both the seller and the buyer CAN TERMINATE the contract without
any penalty.
Contracts with a Customer may be a:

1. Combination of Contracts
2. Contract Modifications
Change in the scope, or price or both => must be approved by parties

Accounting for the change
=> based on character and price of additional goods/services
=> Create a new contract, or
=> Modify the existing contract
What Creates a New Contract [PFRS 15:20]
1. The scope of the contract increases because of the addition of promised

goods or services THAT ARE DISTINCT.
BOTH of the following criteria are met: [PFRS 15:27]
1. The customer can benefit from the good or service
2. The entity’s promise to transfer the good or service to the
customer is separately identifiable from other promises in the
contract.
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2. The price of the contract increases by an amount of consideration that

reflects the entity’s stand alone selling prices of the additional goods or
services and any appropriate adjustments to that price
2. IDENTIFY THE PERFORMANCE OBLIGATION (PO)

Performance obligations
An enforceable promise in a contract with a customer to
transfer goods/services to the customer.
The entity must evaluate the goods/ services performed to
determine separate performance obligations
PO can be explicit (in the contract) and implicit (based on
practices or policies)
No transfer to customer => NO Performance Obligation
3. DETERMINE THE TRANSACTION PRICE (TP)

Transaction price
Amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods/services
to a customer excluding the amounts collected on behalf of
third parties.
How to determine transaction price?

1. Cash Payment
2. Deferred Payment: Discount to present value
3. Non-cash consideration => at fair value
4. Variable: Consideration is not fixed (estimate the price
discount, rebate)
1. Expected value (large number of contracts with
similar characteristics)
2. Most likely amount (2 possible outcomes)
=> Past experience
5. Determine the Existence of a Significant Financing
component
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4. ALLOCATING THE TP TO THE PO IN THE CONTRACT

Allocation objective
Allocate the transaction price to each performance obligation
in an amount that depicts the amount of consideration for
transferring promised goods/service.
How to allocate the transaction price?

Based on relative stand-alone alone selling prices (Except for:
Allocating Discounts)
Stand-alone selling price- Price at which the entity would sell

promised good or service separately to the customer (at contract
inception)
1. Take observable selling prices
2. If observable selling prices are not available => make
estimates
If the stand-alone selling price of the product is not known, it is allocated

using 3 Methods:
1. Adjusted market assessment approach – refer to prices from
competitors for similar goods/services
2. Expected cost plus margin approach – forecast expected costs
to satisfy a performance obligation, then add a profit margin
3. Residual approach – total transaction price less the sum of the
observable stand-alone selling prices of other goods/services
promised in the contract.
5. RECOGNIZE REVENUE AS THE PO IS SATISFIED

Performance obligation is satisfied when a promised good or service
is transferred to a customer
Change in Control Indicators
1. Company has right to payment for the asset
2. Company has transferred legal title to the asset
3. Company has transferred physical possession of asset
4. Customer has significant risks and rewards of ownership
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5. Customer has accepted the asset.
How can a performance obligation be satisfied?

point in time or over time? => must be from the customers’
perspective
If any of the following is present, recognize revenue OVER TIME

1. The customer receives and consumes the benefits as the seller
performs.
2. The customer controls the asset as it is created or enhanced.
3. The company does not have any alternative use for the assets
created and either (a) the customer receives benefits as the
company performs and therefore the task need not be re-
performed, or (b) the company has a right to payment and this
right is enforceable.
Costs to obtain a contract: Capitalized and amortized

Costs to fulfill a contract:
Expensed if not within IAS 2 (Invty)/IAS 16 (PPE)/ IAS 38
(Intangible Assets)
Capitalize if:
Costs relate directly to contract
Costs generate/enhance resources used in satisfying
performance obligations in the future
Costs are expected to be recovered
Points to Consider
1. Performance of either party gives rise to a contract liability, a
contract asset, or a receivable, depending on the relationship
between the entity’s performance and the customer’s payment.
[PFRS 15:105]
2. If a customer pays, or an entity has a right to an amount of
consideration BEFORE the entity transfers a good or service to the
customer, the entity shall recognize a CONTRACT LIABILITY
[PFRS 15:106]
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3. If an entity performs BEFORE the customer pays any consideration
or BEFORE payment is due, the entity shall recognize a CONTRACT
ASSET excluding any amount presented as receivable [PFRS 15:107]
4. The entity may use alternative descriptions OTHER THAN contract
asset or liability [PFRS 15:109]
CONTRACT ASSET
The entity’s right to consideration IN EXCHANGE for goods or
services transferred to the customer [PFRS 15:107]
CONTRACT RECEIVABLE
The entity’s right to consideration that is UNCONDITIONAL [PFRS
15:108]
Sale with a right of return (PFRS 15)

• Recognize revenue at the amount to which it expects to be entitled
(variable consideration and constraint guidance set out in Step 3 of
the model).
• Recognize a Refund Liability
• Recognize an Asset for any goods or services that it expects to be
returned
Applicable When a Customer Has A Right To:

• A full or partial refund of any consideration paid;
• A credit that can be applied against amounts owed, or that will be
owed, to the entity; or
• another product in exchange (unless it is another product of the
same type, quality, condition and price – e.g. exchanging a red
sweater for a white sweater). [PFRS 15.B20]
The STAND-READY OBLIGATION of the entity to accept returns is NOT

part of the entity’s performance obligation.
The guidance also applies to to services that are provided subject to a

refund.
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Does not apply to:
• EXCHANGES by customers of one product for another of the same
type, quality, condition and price; and
• RETURNS of faulty goods or replacements, which are instead
evaluated under the guidance on warranties. [PFRS 15. b26-27]
When an entity makes a sale with a right of return, it initially

recognizes the following: [PFRS 15.B21, B23, B25]
Reporting
Measurement
line
Gross transaction price, less the expected level of

Revenue
returns
Expected level of returns.

The nature of such a refund liability is DIFFERENT from
Refund liability
contract liabilities and therefore it is not presented as
such.
Carrying amount of the products expected to be

returned less the expected recovery costs.
Include potential decreases in the value to the entity of
Return asset returned product(s).
The nature of this return asset is DIFFERENT from trade
and other receivables and therefore it is not presented
as such.
Cost of goods Carrying amount of the products sold less the return
sold asset as measured above.
Reduction of Measured as the carrying amount of the products

inventory transferred to the customer
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PROBLEMS:
PROBLEM 1
Jose enters into a 12-month telecom plan with the local mobile operator ABC
on July 1, 2022. The terms of plan are as follows:
• Jose’s monthly fixed fee is P1,200.

• Jose receives a free handset at the inception of the plan.
ABC sells the same handsets for P14,000 and the same monthly prepayment
plans without handset for P500/month.
How should ABC recognize the revenues from this plan in line with PFRS 15
for 2022?
PROBLEM 2
PC HUB, a computer manufacturer, enters into a contract with AC University
to deliver 30 computers for total price of P600,000 (P20,000 per computer).
Due to necessary preparation works, PC HUB agrees to deliver the

computers in 3 separate deliveries during the forthcoming 3 months (10
computers in each delivery). AC University takes control over the computers
at delivery.
After the first delivery is made, AC University and PC HUB amend the
contract. PC HUB will supply 20 additional computers (50 in total).
How should PC HUB account for the revenue from this contract for the year
ended December 31 if:
• Scenario 1: The price for additional 20 computers was agreed at

P388,000, being P19,400 per computer. PC HUB provided a volume
discount of 3% for the additional delivery, which reflects the normal
volume discounts provided in similar contracts with other customers.
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• Scenario 2: The price for additional 20 computers was agreed at
P280,000, being P14,000 per computer. PC HUB provided a discount
of 30% for the additional delivery because it hopes for the future
cooperation with AC University (nothing even discussed yet).
As of December 31, PC HUB delivered 40 computers (30 as agreed initially

and 10 under the contract amendment).
Problem 3
ManyBits is a software company who entered into contract with ABC Co on
July 1, 2022. Under the contract, ManyBits is obliged to:
• Provide professional services consisting of customization and

testing of a software product that ABC has purchased from a third
party.
• Provide post-implementation support for 1 year after the
customized software is delivered.
The total contract price is P55,000.

ManyBits assessed its total cost for fulfilling the contract as follows:
• Cost of developers and consultants for customizing and testing the
existing software: P43,000;
• Cost of consultants for post-delivery support: P2,000;
• Total estimated cost of fulfilling the contract: P45,000.
As of December 31, 2022, ManyBits incurred the following costs of fulfilling

the contract:
• Cost of developers and consultants for customizing and testing the
software: P12,900.
How should ManyBits recognize revenue from this contract under PFRS 15
assuming that ManbyBits’ normally charges 10% for support services for the
package price, no matter the package?
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Problem 4
On January 1, 2022, ABC Company enters into a contract to transfer Product
One and Product Two to XYZ Company for P200,000. The contract specifies
that payment of Product One will not occur until Product Two is also
delivered. ABC Company determines that the stand alone prices are
P60,000 for product One and P140,000 for product Two. ABC Company
delivers Product One to XYZ Company on February 1, 2022. Product Two is
delivered on March 1, 2022.
1. On January 1, 2022, how much is the amount of accounts receivable to

be recorded?
2. On February 1, 2022, how much is the amount of accounts receivable

to be recorded?
3. On February 1, 2022, how much is the amount of revenue to be

recorded?
4. On March 1, 2022, how much is the amount of accounts receivable to

be recorded?
5. On March 1, 2022, how much is the amount of revenue to be

recorded?
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Problem 5
YSL sold 3,210 boxes of perfumes on January 20x8 at the price of P90 per
box. The company offers a full refund for any product returned within 30
days from the date of purchase. Based on historical experience, YSL expects
that 3% of sales will be returned.
1. How many performance obligations are there in each sale of a box of

perfume?
2. How much revenue should YSL recognize in January?
Assume FITNESS Inc offers a deal whereby enrolling in a new membership

for P7,000 provides a year of unlimited access to facilities and also entitles
the member to receive a voucher redeemable for 25% off dance classes for
one year. The dance classes are offered to gym members as well as to the
general public. A new membership normally sells for P7,200, and a one-
year enrollment in dance classes sells for an additional P5,000. FITNESS
estimates that approximately 40% of the vouchers will be redeemed.
FITNESS offers a 10% discount on all one-year enrollments in classes as
part of its normal promotion strategy.
1. How many performance obligations are included in the new membership

deal?
2. How much of the contract price would be allocated to each

performance obligation (stand-alone selling price of dance discount
voucher and gym membership, respectively)?
3. What is the journal entry to recognize the sale of a new membership.

Clearly identify revenue or deferred revenue associated with each
performance obligation.
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LONG TERM CONSTRUCTION CONTRACTS
CONSTRUCTION CONTRACTS (LTCC)

A construction contract is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use.
Types of Contracts:
Fixed Price Contract => Price could change if there is a Cost Escalation
Clause
Cost Plus Contract => Construction cost (which are reimbursable) + Profit
margin
Contract with Variation => Changes made to the contract (changes in the
original plan of the project)
CONSTRUCTION REVENUE:
Contract is complete = TOTAL amount of consideration receivable
under the contract.
Contract is NOT complete = Estimate of what the total consideration
will be.
Revenue From the Contract includes:

1. The initial amount of the contract price
2. The variations in the contract work and claims
=> Change orders in the contract.
=> Reduced by any penalties incurred caused by delays in
construction.
=> Incentives/Bonuses the contractor may receive for early
completion.
CONSTRUCTION COSTS: => Expenses incurred by the contractor
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Construction Costs includes:
1. Costs directly related to the contract
2. Costs attributable to the contract activity
3. Costs which are specifically chargeable to the client
All costs which are recoverable from the client.
1. Incremental costs of obtaining a contract.
2. Costs of fulfilling contract.
Accounting for Construction Contracts => Depends on the Reliability

of the Estimates to Complete the Project.
 Contract Price is assured
 Cost can be reliably estimated
 Collection is assured
If Reliable => Percentage of Completion

Not Reliable => Zero Profit Method
Acctg for LTCC applying PFRS 15

Revenue:
=> Is recognized when earned.
=> When we have already fulfilled our performance obligation.
For LTCC:
=> Satisfying their obligation with their client would usually take a
longer period of time and the customer does not control the
asset as it is being created.
=> Satisfaction then of the contractor’s obligation should be evaluated
from the customer’s perspective
=> The satisfaction of a developer’s obligation involves the

creation of an asset with no alternative
=> Contractor has a right to payment for performance completed
to date
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JUSTIFIES RECOGNIZONG REVENUE OVER TIME
=> Percentage of Completion Method:
1. Output Method
2. Input Method
5-STEP MODEL FOR REVENUE RECOGNITION

1. Identify the contract with a customer
=> The Construction Contract between the Contractor and the
Client.
2. Identify the performance obligation (PO)
=> The contractor has only ONE PERFORMANCE
OBLIGATION, the obligation to deliver the specified construction
project in accordance with the approved construction plan.
3. Determine the transaction price (TP)
=> The transaction Price is the Contract Price of the Project
=> Fixed Price Contract, Cost Plus Contract, Contract with Variation
4. Allocate the TP to the PO in the contract
=> NO ALLOCATION needed for LTCC because there is only
ONE PERFORMANCE obligation.
5. Recognize revenue as the PO is satisfied
=> Revenue is to be recognized over time using the POC
=> POC = Cost Incurred to Date (CITD)/ Total Estimated Cost
(TEC)
OR
Construction in Progress (CIP)/ Contract Price (CP)
When the POC is not applicable in construction contracts

Cost Recovery Method/(Zero Profit Method)
1. If the estimates to complete the project are NOT RELIABLE
2. If TEC is > than CP, then:
=> The PROBABALE LOSS is 100% recognized AT ONCE
REGARDLESS of the POC.
=> REVERSE the profits recognized in the prior years.
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LONG TERM CONSTRUCTION CONTRACTS PROBLEMS
1. SMDC Construction signed a contract to build a building over a period of

3 years for a price of P7,000,000. Information relating to the
performance of the contract is summarized as follows:
2021 2022 2023

Construction costs incurred during the year P1,500,000 P 2,420,000 P1,680,000
Estimated costs to complete 3,500,000 1,680,000 -
Billings during the year 1,200,000 2,600,000 3,200,000
Collections during the year 1,000,000 2,700,000 3,300,000
Required: Prepare the entries under the percentage of completion.
2. The SUN Construction signed a contract to build a dam over a period of

3 years for a price of P20,000,000. Information relating to the
performance of the contract is summarized as follows:
2021 2022 2023

Construction costs incurred during the year P 4,000,000 P 8,000,000 P 12,000,000
Estimated costs to complete 12,000,000 12,000,000 -
Billings during the year 3,000,000 7,000,000 10,000,000
Collections during the year 2,600,000 7,200,000 10,200,000
Required: Prepare the entries under the percentage of completion.
3. Sta. Clara Construction Company has used the cost to cost percentage of
completion method of recognizing revenue. In reviewing the records,
Sta. Clara finds the following information regarding a recently completed
building project for which the total contract was P 20,000,000.
Gross profit (loss) Cost incurred

2021 P 400,000 P 3,600,000
2022 1,400,000 ?
2023 ( 200,000) 8,200,000
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Sta. Clara wants to know how effectively the company operated during
the last 3 years on this project and, since the information is not
complete, has asked you to analyze the project as to the amount of
revenue, costs, gross profit and percentage of completion recognized
during the 3 years.
Required:
1. How much is the contract revenue during 2021?
2. What is the percentage of completion in 2021?
3. How much is the cost incurred in 2022?
4. What is the percentage of completion in 2022?
5. How much is the total estimated cost to complete in 2022?
6. How much is the total estimated gross profit in 2022?
4. VILLAR Construction entered into a fixed price contract with CITI LIFE on
July 1, 2021 to construct a medium rise condominium. At that time
VILLAR estimated that it would take between two to three years to
complete the project. The total contract price for constructing the
building is P 4,500,000. VILLAR accounts this contract under the
percentage of completion method. The building was deemed completed
on December 31, 2022. Estimated percentage of completion,
accumulated contract costs incurred, estimated costs to complete the
contract and accumulated buildings under the contract were as follows:
At Dec 31, 2021 At Dec 31, 2022 At Dec 31, 2023
Percentage of Completion 30% 60% 100%
Contract costs incurred P 1,140,000 P 2,820,000 P 4,800,000
Estimated Costs to Complete 2,660,000 1,880,000 0
Progress Billings 1,600, 000 2,700,000 4,500,000
The amount of gross profit to appear on the income statement for the
period ended 2023 is:
A. P(330,000) B. (441,000) C. (P2,920,000) D. (100,000)
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5. Robinsons Land recognizes construction revenue and cost using the

percentage of completion method, During 2021, a single long term
project begun which continue through 2021. Information on the project
follows:
2021 2022
Collections 200,000 600,000
Construction in progress net of billings 44,000 (112,000)
Contract billings 200,000 840,000
Current year gross profit 34,000 100,000
How much is the cost incurred each year?

A. 210,000; 684,000 C. 125,000; 356,000
B. 210,000; 384,000 D. 125,000; 796,000
6. SM Development commenced doing business on January 1, 2021.

Construction activities for the first year of operations are shown below:
All contract costs are with different customers, and any work remaining
at December 31, 2021, is expected to be completed in 2022.
Total Billings Cash Contract Estimated

Project Contract Through Collection Costs Additional
Price 12/31/2021 Through Incurred Costs to
12/31/2021 Through Complete
12/31/2021
A P 3,000,000 P 2,000,000 P 1,800,000 P 2,480,000 P 670,000
B 3,500,000 1,130,000 1,050,000 678,000 2,712,000
C 2,800,000 2,800,000 2,550,000 1,860,000 -0-
D 2,000,000 350,000 250,000 1,230,000 870,000
E 2,400,000 2,050,000 2,000,000 150,000
1,850,000
P13,700,000 P 8,300,000 P 7,650,000 P 8,098,000 P 4,402,000
How much must be shown as current asset (cost of uncompleted contract in
excess of billings) in the balance sheet of SM Development as of
December 31, 2021?
A. P0 B. P880,000 C. P1,280,000 D. P400,000
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7. AYALA LAND, INC. began work on a P 70 million contract in 2022 to

construct an office building. During 2022, AYALA uses the percentage of
completion method. At 12/31/2022, the balance in certain accounts
were: construction in process, P 24.5 million; accounts receivable P 2.4
million; and billings on construction in process, P 12 million. At
12/31/2022, the estimated future costs to complete the project total P
31.85 million.
Prepare the entry to record the income from construction recognized in
year 2022.
A. Construction in Progress P 7,350,000
Construction Costs 24,500,000
Construction Revenue P 31,850,000
B. Construction in Progress P 7,350,000

Construction Costs 17,150,000
C. Construction Costs P 24,500,000

Construction in Progress P 7,350,000
Construction Revenue 17,150,000
D. Construction Costs P 31,850,000
Construction in Progress 7,350,000
8. ACE has two construction jobs, which commenced during 2022:

Project 1 Project 2
Contract Price P 21,000,000 P 7,500,000
Cost incurred during 2022 6,000,000 7,000,000
Estimated cost to complete 3,000,000 1,750,000
Contract billings during 2022 6,250,000 7,250,000
Collections 6,000,000 7,000,000
Expenses 500,000 250,000
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Compute the net income (loss) that ACE would report in its 2022
Statement of Comprehensive Income.
Zero-Profit Percentage of Completion
A. P (1,500,000) P 7,500,000
B. P (1,500,000) P 6,000,000
C. P (1,000,000) P 6,750,000
D. P (2,000,000) P 6,000,000
9. In 2022, GALE Construction began work on a 3-year contract. The

contract price was P6,000,000. GALE uses the percentage-of-completion
method/over time for financial accounting purposes. The financial
statement presentation relating to this contract at December 31, 2022
was as follows:
BALANCE SHEET
Accounts receivable-construction contracts P 129,000
Construction-in-progress P 390,00
Less: Contract Billings 369,000
Cost of uncompleted contract in excess of 21,000
billings
INCOME STATEMENT
Gross profit (before tax) recognized in 109,200
2022
A) How much was collected in 2022?

A. 21,000 C. 240,000
B. 129,000 D. 369,000
B) What is the percentage of completion for the year ended?
A. 6.5% C. 28%
B. 13% D. 100%
C) What was the initial estimated gross profit on the contract?
A. 109,200 C. 390,000
B. 280,800 D. 1,680,000
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10. On January 1, 2021, Easy CO began constructing a P3,500,000
contract. As of year-end, the following are relevant information
provided by the corp.
2021 2022 2023

Construction in Progress P 735,000 P2,248,750 ?
Estimated costs to 2,666,250 1,251,250 -
complete
Cost incurred 708,750 1,615,000 P1,126,250
How much is the (1) realized gross profit/(loss) in 2022 using the
percentage of completion method and (2) realized gross profit/(loss)
in 2023 using the zero profit method?
A. (P48,750); P97,250 C. (P75,000); P125,000
B. (P101,250); P125,000 D. (P101,250); P0
11. ACROP Construction company signs a contract in June 2022 to

refurbish a skyscraper and install new windows for a total contract
price ofP12 million.
ACROP estimates the following total expected contract costs are:
• P6 million for the windows which were purchased from
external suppliers;
• P4 million for labor, materials and other costs related to the
project.
As of 31 December 2022:
• ACROP handed over the windows to the client, although the
installation has not been completed. However, the client
obtained control of windows.
• Other costs incurred to 31 December were P1 million.
Just before the year-end, the client paid the first progress payment
of P8 million to ACROP.
What is the percentage of completion at the end of year 1 if ACROP
uses the input method to determine the POC?
What is the amount of Revenue that ACROP should determine at the
end of the year?
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12. MBC Construction, is a real estate developer is currently developing a
2-tower residential condominium. Tower one will have 20 residential
units while tower 2 will have 30 residential units. Both towers will
share in the common amenities and occupy the same land area. All of
the units have already been sold. MBC estimates to incur the
following costs in the development of the condominium.
TOTAL ESTIMATED COSTS INCURRED

COSTS TO DATE
Land 30,000,000 30,000,000
Development Cost 20,000,000 4,400,000
Tower 1
Tower 2
Common Area 20,000,000 10,000,000
Total 100,000,000 59,400,000
From the data given, determine the percentage of completion at the

end of the year if MBC uses the input method and the common area
is to be prorated based on the condominium’s saleable area.
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13. ABC DEVELOPERS is currently selling a subdivision with 10 residential
houses. The following are the summary of expenses to be incurred
by the company:
TOTAL COSTS PER

ESTIMATED UNIT
COSTS
Subdivision Land 8,000,000 800,000
Subdivision Development 2,000,000 200,000
Commission expense 100,000 10,000
In year 1, the developer incurred the actual costs:

Subdivision Land 8,000,000
Subdivision Development 2,000,000
Development Cost per unit 1,000,000
Commission expense per unit 10,000
Assume that at this time 1 unit is sold. Using the output method and
assuming the company’s project manager determines that the unit is
60% complete, how much is the cost of sales and the operating
expense for year 1?
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FRANCHISE ACCOUNTING
FRANCHISE
A LICENSE establishes a customer’s rights to the intellectual property of an
entity. Licenses of intellectual property may include, but are not limited to
licenses of any of the following:
(a) Software and Technology;
(b) Motion pictures, music and other forms of media and entertainment;
(c) Franchises; and
Patents, trademarks and copyrights. [IFRS 15:B52]
A franchise is a contractual agreement which involves the granting of

business rights by a franchisor to a franchisee that will operate in certain
geographical area or location
2 Types of Franchise:
1. Contractual arrangement between two private entities or individuals.
2. Contractual arrangement between a private entity or an individual
and the government.
Franchises and licenses may be for a definite period of time or for an
indefinite period of time
PFRS 15 identifies TWO sources of Revenue:

1. Sales of the initial franchise
1,000,000 400,000 => right to operate under the name
350,000 => other services provided by the
franchisor
250,000 => support
2. Continuing fees based on the operations of franchises.
* If the franchisor has many deliverables, the entity should consider if the
license is a separate PO or whether it should be combined with other POs
PERFORMANCE OBLIGATIONS of the Franchisor:

Each of the following performance obligations of the franchisor are to be
accounted for SEPARATELY:
Grant a right to open a business
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Allow the franchisee to use the trade name or other intellectual
property of the franchisor
To provide continuing services to the franchisor.
Determine:
If the franchisor will still have a FUTURE OBLIGATION with the
Franchisee.
No Future Obligation with the franchisee
Customer receives Intellectual Property (IP) that does not change
after the license transfers to the customer
POINT IN TIME
A Future Obligation with the franchisee

Provide the customer with access to the IP throughout the contract
period
OVER TIME
No revenue is recognized on a contract if it does not meet the attributes for

the contracts to exist.
Consideration received from such contract is recognized as a liability and
recognized as revenue only when either of the following has occurred:
1. The entity has no longer any obligation to transfer goods or services
to the customer and all, or substantially all, of the consideration has
been received and is non-refundable; or
2. The contract has been terminated and the consideration received is
non-refundable.
The entity need not re-assess the criteria above if they have been met on
contract inception unless there is an indication of a significant change in
facts and circumstances, like when the customer’s ability to pay deteriorates
significantly.
What is the INITIAL FRANCHISE FEE (IFF)?

Cash Down payment PXXX
PV of Future Payments XXX
IFF PXXX
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When is the IFF earned?
When the Performance Obligation is satisfied by the franchisor.
Recognized in time/over time
How is revenue from the CONTINUING FRANCHISE FEE RECOGNIZED?

Recognized using ACCRUAL ACCOUNTING
How is interest income on the note receivable accounted for?

Accounted for using the EFFECTIVE INTEREST METHOD
When are the related expenses recognized?
When the IFF is EARNED, PO=> Satisfied
How is sale of PPE by the franchisor accounted for?
Accounted for as a separate performance obligation
1. On January 1, 2022, Starbucks Company signed an agreement to

operate as a franchisee of Perfect Pizza, Inc. for an initial franchise fee
of P1,600,000 for a period of ten (10) years. Of this amount P600,000
was paid when the agreement was signed and the balance payable in
five annual payments of P200,000 beginning December 31, 2022.
Starbucks signed a non interest- bearing note for the balance.
Starbucks’s rating indicates that it can borrow money at 20% for a loan
of this type. In return for the initial fee, the franchisor agrees to make
market studies, find a location, train the employees, and perform other
related services. The following transactions describe the relationship
with Perfect Pizza, a franchisee:
2022 Jan. 1: Entered into a franchise agreement.
April 1: Completed a market study at a cost of P59,436.
Indirect cost of services (general expenses),
P5,000.
May 15: Found suitable location. Service cost of P280,000.
Nov. 15: Completed training program for employees, cost
P20,000.
Dec. 20: Franchise outlet opened and business operations
started.
Dec. 31: Received the first annual payment.
Required: Prepare all entries on the books of the franchisor for 2022,
assuming the collection of the note is reasonably assured.
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2. ABC School is a franchisor that grants franchisees to operate as a

mathematics enrichment centre. Each franchise agreement gives the
franchisee the right to open an outlet and provide services in the area
for a period of 5-years. Under the contract, ABC also provides the
franchisee with a number of services to support and enhance the
franchise brand including giving consultations on the business
operations; communicating upgrades in the curriculum and teaching
techniques; and providing trainings and materials needed for their
operations.
The franchisees employ instructors will be trained by ABC, are given

instructional modules and are regularly updated for changes, at least
on a monthly basis.
ABC enters into a franchise agreement on December 31, 2022, giving a

franchisee the rights to operate as a franchise for five years. ABC
charges an initial franchise fee of P1,000,000 for the right to operate
as franchisee, payable upon signing the contract. ABC also receives
ongoing royalty payments of 5% of the franchise’s annual
enrolment(payable each January 15, of the following year).
What is the franchise revenue on December 31, 2022?

What is the franchise revenue on December 31, 2023 if the franchisee
reports revenue P15,000,000 for 2023?
3. XYZ Company charges an initial franchise fee of P50,000 for a new

franchise, providing the initial training, equipment and furnishings that
have a stand-alone price of P50,000. The company also receives
P30,000 per year for the continued use of the name and for continuing
services to be provided by XYZ from the purchase of the franchise.
A franchisee purchased the franchise on July 1, 2023 and started

operations on August 1, 2023 after training was completed. How
much revenue will be recognized by XYZ in 2023?
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4. MC Inc charges an initial franchise fee of P1,940,000, with P500,000
paid when the agreement is signed and the balance in five annual
payments. The present value of the future payments discounted at
10% is P1,91,740. The franchisee has the option to purchase a
P240,000 equipment for P190,000. MC Inc has substantially provided
all initial services required and collectability of the payments is
reasonably assured.
What is the amount of revenue from franchise fees?
5. APOL charges an initial franchise fee of P1,600,000, requiring a

P320,000 down payment when the agreement is signed and the
balance is accounted in four annual payments. The present value of
the annual payments, discounted at 10% is P1,014,000. An additional
part of the initial franchise fee is for advertising to be provided by
APOL for the next five years. The value of advertising is P1,000 a
month. Collectability of the payment is reasonably assured and APOL
has performed all the initial services required by the contract.
How much revenue from the franchise fee is to be recognized when

the agreement is signed?
6. MZRT charges an initial franchise fee of P70,000. Upon signing of the

3-year agreement, a payment of P28,000 is due. Thereafter, annual
payments of P14,000 are required. The franchisor can borrow money
at an interest rate of 10%. The franchise agreement is signed on May
1, 2022 and commenced operations on July 1, 2022. The PV of an
annuity of P1 at 10% for three years is 2.48685.
1. Assuming that the franchisor still has substantial services to

perform once the franchise begins operations to maintain the
value of the franchise, determine the amount of franchise revenue
on December 31, 2022.
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2. Assuming that the total franchise fee includes training services
with a value of P2,400 for the period leading up to the franchise
opening and for two months following the opening, Determine the
franchise revenue on July 1, 2022.
3. In relation to the given above, determine the amount of service
revenue to be recognized on July 1, 2022.
7. On January 2, 2022, REH signed an agreement to operate as a

franchisee to SAMGYUPSALAMAT Corp. for an initial franchise fee of P
937,500 for 10 years. Of this amount P 187,500 was paid when the
agreement was signed and the balance was payable in three annual
payments beginning on December 31, 2022. REH signed a non
interest bearing not for the balance. REH’s rating indicates that he can
borrow money at 18% for a loan of this type.
Assume that substantial services amounting to P 292,000 had already
been rendered by SAMGYUPSALAMAT and that indirect franchise cost
of P 25,500 was also incurred. PV is 2.17.
If the collection of the note is not reasonably assured, the net income
for the year ended December 31, 2022 is
a. 334,650 b. 276,060 c. 178,410 d. 237,000
8. Max Company sells a franchise with initial franchise fee of P70,000. A

down payment of P20,000 cash is required, with the balance covered
by issuance of a P50,000, 10% note payable in five equal annual
installments. If all material services have been substantially performed,
collectibility of note is reasonably assured, but the refund period has
not expired, what is the journal entry to record the transaction?
A. Cash P 20,000
Notes Receivable 50,000
Franchise Fees P 70,000
B. Cash P 20,000
Unearned Franchise Fees P 70,000
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C. Cash P 20,000
Unearned Franchise Fees 20,000
D. Cash P 20,000
Unearned Franchise Fees 50,000
9. On January 2, 2022, Penang’s, Inc. signed an agreement to operate as

franchisee of JFC Hauz for an initial franchise fee of P2,343,750 for 10
years. Of this amount, P468,750 was paid when the agreement was
signed and the balance payable in three annual payments beginning on
December 31, 2022. Penang’s signed a non-interest bearing note for
the balance. The implicit interest rate is 18%. Assume that substantial
services amounting to P730,000 had already been rendered by the
franchisor and indirect costs of P53,750 have also been incurred.
If collection of the note is not reasonably assured, calculate the net

income. For the year ended December 31, 2022. Use PV factor 2.17.
A. P753,900 B. P509,776 C. P700,150 D. P456,026
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SERVICE CONCESSIONS
SERVICE CONCESSION ARRANGEMENT

In many countries, infrastructure for public services have traditionally been
constructed, operated and maintained by the public sector and financed
through public budget appropriation.
THE PRIVATE SECTOR ENTITY

* The OPERATOR
* 1. CONSTRUCTS the infrastructure used to provide the public
service or upgrading it (for example, by increasing its capacity) and
2. OPERATING and MAINTAINING that infrastructure for a
specified period of time.
- The operator is paid for its services over the period of the
arrangement.
- The arrangement is governed by a CONTRACT that sets out
performance standards, mechanisms for adjusting prices, and
arrangements for arbitrating disputes.
- Described as a “BUILD-OPERATE-TRANSFER”, (BOT) or a
“REHABILITATE-OPERATE-TRANSFER” or a “PUBLIC-TO-
PRIVATE’ SERVICE CONCESSION ARRANGEMENT”.
Features of a Service Concession Arrangement

The OPERATOR undertakes a public service nature obligation.
Public policy is for the services related to the infrastructure to be provided to

the public, irrespective of the identity of the party that operates the services.
The service arrangement contractually obliges the operator to provide the

services to the public on behalf of the public sector entity.
SERVICE CONCESSION ARRANGEMENT (IFRIC 12)

An arrangement whereby a government or other public sector body
CONTRACTS with a private operator to:
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(1) develop (or upgrade),
(2) operate and
(3) maintain the grantor's infrastructure assets.
GRANTOR:
- grants the service arrangement
- the public sector entity
- controls/regulates:
- What services the operator must provide,
- To whom,
- What price,
- Controls any significant residual interest in
- the assets at the end of the term of the
- arrangement.
- Thru Ownership
OPERATOR
- both receives a RIGHT and incurs an OBLIGATION to provide
public service
- is responsible for at least some of the management of the
infrastructure and related services.
- Does not merely act as an agent on behalf of the grantor.
- OBLIGED to hand over the infrastructure to the grantor in a
SPECIFIED CONDITION at the end of the period of the
arrangement, for little or no incremental consideration,
irrespective of which party initially financed it.
CONTRACT
- sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.
Scope of IFRIC 12
Applies to both:
(a) infrastructure that the operator constructs or acquires from a third
party for the purpose of the service arrangement; and
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(b) existing infrastructure to which the grantor gives the operator
access for the purpose of the service arrangement.
Does not specify the accounting for infrastructure that was held and
recognized as property, plant and equipment by the operator before
entering the service arrangement. The derecognition requirements of PFRSs
(set out in PAS 16) applying to such infrastructure.
Does not specify the accounting by grantors.
Treatment of the operator’s rights over the infrastructure

Infrastructure in a BOT contract under IFRIC 12 shall NOT be recognized as
property, plant and equipment of the OPERATOR.
- CANNOT control the use of public service infrastructure
- CAN ONLY operate the infrastructure to provide public service on
behalf of the grantor.
RECOGNITION AND MEASUREMENT OF ARRANGEMENT

CONSIDERATIONS
1. Operator ACTS AS A SERVICE PROVIDER
1. Construction or Upgrade the infrastructure used to provide
public service, and
2. Operate and maintain the structure for a specified period
of time
2. Revenue for the services the operator performs is in accordance
with PFRS 15
- The nature of the consideration determines its subsequent
accounting treatment
Financial Asset
Intangible Asset
Partly Financial and Intangible Asset
 Construction or Upgrade Services accounted for in accordance

with PFRS 15
 Revenue should be accounted for separately and should be
recognized in accordance with PFRS 15.
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 The nature of the consideration shall be determined by
reference to the contract terms and determines the subsequent
accounting.
 The nature of the consideration determines the subsequent
accounting (par 23-26).
 Considerations are classified initially as contract assets
during the construction or upgrade period.
CONSIDERATION RECEIVED FROM THE GRANTOR (RIGHTS TO:)

1. FINANCIAL ASSET
The operator shall recognize a financial asset to the extent that it has
an unconditional contractual right to receive cash or another financial
asset from or at the direction of the grantor for the construction
services;
The grantor has little, if any, discretion to avoid payment, usually
because the agreement is enforceable by law.
The operator has an unconditional right to receive cash if the grantor
contractually guarantees to pay the operator (a) specified or
determinable amounts or (b) the shortfall, if any, between amounts
received from users of the public service and specified or
determinable amounts, even if payment is contingent on the operator
ensuring that the infrastructure meets specified quality or efficiency
requirements.
 The operator has an unconditional contractual right to
receive cash or another financial asset from the grantor.
 Amount due from the grantor is accounted for in accordance
with PAS 32, PFRS 7 and PFRS 9 and is measured at
 Amortized cost
 Fair value thru comprehensive income (FVOCI)
 Fair value thru profit and loss (FVPL)
Interest shall be calculated using the effective interest
method (PFRS 9)
2. INTANGIBLE ASSET
 Recognized by the operator if the operator receives a right
(a license) to charge users of the public service.
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 The right to charge users of the public service is not an
unconditional right to receive cash because the amounts are
contingent on the extent that the public uses the service.
 Accounted for under PAS 38 to recognize the intangible asset
3. Partly Financial and Intangible Asset

If the operator is paid for the construction services partly by a
financial asset and partly by an intangible asset it is necessary
to account separately for each component of the operator’s
consideration.
The consideration received or receivable for both components shall
be recognized initially in accordance with IFRS 15.
Borrowing Costs Incurred by the Operator

PAS 23 => Borrowing costs attributable to the arrangement shall be
recognized as an EXPENSE in the period incurred
=>If the operator has a contractual right to receive an
Intangible Asset, the borrowing cost is to be CAPITALIZED
during the construction period,
Contractual Obligation to RESTORE the Infrastructure to a

Specified Level of Serviceability
The operator may have contractual obligations it must fulfil as a condition of
its license
(a) to maintain the infrastructure to a specified level of serviceability or
(b) to restore the infrastructure to a specified condition before it is
handed over to the grantor at the end of the service arrangement.
 Should be recognized and measured in accordance with PAS
37 Provisions, Contingent Liabilities and Contingent Assets
 The best estimate of the expenditure that would require to
settle the present obligation at the end of the reporting
period.
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Items provided by the operator for the GRANTOR
The grantor may provide other items to the operator that the operator can
keep.
 If such assets
form part of the consideration payable by the grantor for the
services to be provided by the operator, they are NOT government
grants as defined by PAS 20, instead they are accounted for as
part of the TRANSACTION PRICE
PROBLEMS:
Problem 1
MOC enters into a contract with the government to build a parking lot,
operate it for three years and finally turn it over to the government at the
end of three years. MOC estimated that the building will take 2 years to
build, would costs a total of P40M. MOC would spend operating expenses of
P10M each year.
MOC charges a 25% mark-up on cost for construction costs and a 30%
mark-up on cost for the operating costs.
The government is to pay MOC 34,111,000 every December 31, starting

year 3 for the partial payment of the loan and for the operations of the
parking lot. MOC is to wholly finance the project and determines an imputed
interest rate is 10% to reflect the timing of cash receipts.
From the Given data, determine:

1. The total revenue to be recognized in Year 1, assuming the parking
lot is 50% complete.
2. The total revenue to be recognized in Year 2, assuming the parking
lot is 100% complete.
3. The total revenue to be recognized in year 3.
4. Assuming MOC entered into a P40M, 5-year loan to finance the
construction of the parking lot with an imputed 5% interest. MOC is
to pay P9,239,000 every December 31, determine the net income for
years 1-3.
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Problem 2
MC CO, a private contractor, wins a bid to construct a subway for the
government. The terms of the agreement are as follows:
a. MC CO is to construct the subway within 2 years and operate the
subway for 6 years following the completion of the construction.
b. In exchange for the services, the government grants MC the right to
collect fees from the subway users in years 3 to 8. In addition,
the grantor guarantees the operator a minimum amount of
P630M with an imputed interest rate of 3.95% to reflect the
timing of cash receipts. The operator forecasts that collection
from customers per year would amount to P200M per year
starting year 3.
At contract inception, the operator estimates the following costs:

a. Construction services of P300M per year during the 2-year period.
b. Operation services of P15M per year in years 3 to 8.
c. The operator estimates the stand-alone selling price of the
construction services at 40% above costs.
At the commencement of the construction, MC Co entered into a 5-year

bank loan of P400M with an imputed interest of 10%. Except for the loan,
cash flows are assumed to take place at the end of the year.
Determine the net income for years 1-3 assuming that collection from
customers who used the subway in year 3 amount to P200M.
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QUIZZER 1
1. Which of the following is not a criterion of a contract under PFRS 15?

A. It is virtually certain that the entity will collect the consideration
B. The contract has commercial substance
C. The parties to the contract have approved the contract
D. The entity can identify each party’s rights regarding the goods or
services to be transferred.
2. Which of the following must be met in order for a promised good or

service to be considered as a distinct performance obligation?
A. The customer can benefit from the good or service either on its
own or together with other resources that are readily available to
the customer
B. The entity’s promise to transfer the good or service to the
customer is separately identifiable from other promises in the
contract.
C. The promised good or service is separately stated in the
contract.
D. Both A and B must be met
3. Which of the following is not a factor that indicate that two or more
performance obligations are not separately identifiable?
A. The entity provides a significant service of integrating the goods
or services with other goods or services promised in the contract
into a bundle of goods or services that represent the combined
output or outputs for which the customer has contracted.
B. One or more of the goods or services significantly modifies or
customizes; or are significantly modified or customized by, one
or more of the other goods or services promised in the contract.
C. The goods or services are highly interdependent or highly
interrelated.
D. All of the following are factors to be considered.
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4. Cameron Company entered into a contract to build a small bridge for
Agdao. The contract price for the bridge was P7,500,000 and
Cameron estimated a total costs of P6,900,000 in 2021. The company
incurred P2,300,000 of costs during 2021. By the end of 2022 it was
apparent that Cameron had underestimated the real costs. The
estimated total cost of project skyrocketed to P7,800,000.
Construction cost incurred in 2022 totalled P4,000,000. The project
was completed in 2022 at a final costs of P7,800,000. No progress
billings were made under the contract and no cash was collected by
the end of 2022.
The amount of gross profit (loss) that must be recognized in 2022

must be:
A. P300,000 loss
B. P200,000 profit
C. P500,000 loss
D. P100,000 loss
5. Clarence Construction has consistently used the percentage-of-

completion method. On January 10, 2021, Clarence began work on
P3,000,000 construction contract. At the inception date, the estimated
cost of construction was P2,250,000. The following data relate to the
progress of the contract:
Income recognized at December 31, 2021 P 300,000

Costs incurred January 10, 2021 through Dec. 31, 1,800,000
2022
Estimated cost to complete, December 31, 2022 600,000
In its income statement for the year ended Dec. 31, 2022, what
amount of gross profit should Clarence report?
A. P450,000
B. P300,000
C. P262,500
D. P150,000
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6. Jason Construction, Inc. has consistently used the percentage-of-
completion method of recognizing income. During 2022 Jason started
work on a P3,000,000 fixed-price construction contract. The
accounting records disclosed the following data for the year ended
December 31, 2022:
Cost incurred P 930,000

Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Jason have recognized in 2022?

A. P230,000
B. P100,000
C. P30,000
D. P0
7. CDE Company agreed to build an office building for a contract price of

P100,000,000 on January 1, 2021. Expected costs to complete the
contract amounted to P 80,000,000. Both parties have agreed that the
customer will make annual payments to CDE, provided that it will not
exceed the costs incurred by CDE during the year. Pertinent
information regarding the project is a follows:
2021 2022 2023

Cost incurred during P 35,000,000 P 20,000,000 P 30,000,000
the year
complete
Progress billings 16,000,000 28,000,000 56,000,000
during the year
Payments received 14,000,000 25,000,000 61,000,000
during the year
CDE Company determines that the performance obligation is satisfied

overtime and elected to use the input method in measuring progress.
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How much is the realized gross profit for 2021?
A. P8,750,000
B. P8,000.000
C. P8,250,000
D. 43,750,000

2021 2022 2023

Cost incurred during the P 35,000,000 P 20,000,000 P 30,000,000
year
complete
Progress billings during the 16,000,000 28,000,000 56,000,000
year
Payments received during 14,000,000 25,000,000 61,000,000
the year

How much is the receivable balance as of December 31, 2021

applying View 1 of PIC Q & A 2020-03?
A. P2,000,000
B. P16,000,000
C. P14,000,000
D. P8,750,000
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9. On December 31, 2021, Turks Company signed an agreement to
operate as franchisee of Wendy’s for a franchise fee of P80,000. Of
this amount, P30,000 was paid upon signing of the agreement and the
balance is payable in five annual payments of P10,000 each
beginning December 31, 2022. The present value of the five payment,
at an appropriate rate of interest, is P56,000 at December 31, 2021.
The agreement provides that the down payment is not refundable and
no future services are required of the franchisor. The collection of note
receivable is reasonably certain. Wendy’s Company should report
unearned revenue from franchise fee in its December 31, 2022
balance sheet at:
A. P80,000
B. P30,000
C. P66,000
D. P 0
10. Each of the Shakeys Pizza Company’s 21 new franchisees contracted

to pay an initial franchise fee of P30,000. By December 31, 2021,
each franchise had paid a nonrefundable P10,000 fee and signed a
note to pay P10,000 principal plus the market rate of interest on
December 31, 2022, and December 31, 2022. Experience indicates
that five franchisees will default on the additional payments.
What amount of earned franchise fees would Shakeys Pizza Company

report at December 31, 2021:
A. P400,000
B. P610,000
C. P600,000
D. P530,000
11. Mel’s Pizza Hot, Inc. grants a franchise to Mr. AA for an initial
franchise fee of P1,000,000. The agreement provides that Mel’s Pizza
Hot, Inc. has the option within the one year to acquire franchisee’s
business and its seems certain that Pizza Hot, Inc. will exercise the
option. On Pizza Hot, Inc. books, how should the initial franchise fee
be recognized?
A. Deferred revenue and to be amortized.
B. Realized revenue.
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C. Extraordinary revenue.
D. Deferred revenue and treated as a reduction from Pizza’s
investment when the option is exercise.
12. On Dec. 29, 2022, ELIMINA FISHING VILLAGE signed a franchising

agreement for the operation of an outlet in Dagupan City by CSI
Company. The franchising agreement required the franchisee, CSI
Co., to make an initial payment of P200,000 upon signing of the
contract and three payments each of P100,000 beginning one year
from the agreement date and yearly thereafter. The franchisor agrees
to prepare market studies, find a suitable location, train employees,
and perform some other related services. The location, train
employees, and perform some other related services.
The initial payment is refundable until substantial performance is

affected. In 2022, ELIMINA FISHING VILLAGE should report
franchise fee revenue of:
A. P-0- B. P200,000 C. P125,000 D. P500,000
13. Jollibee, franchisor, entered into a franchising agreement with Jo

Levy, franchisee, on October 31, 2022. The total franchise fee is
P500,000, of which P100,000 is payable upon signing of the
agreement with the balance payable in four equal annual installments.
The down payment is refundable in the event the franchisor fails to
render stipulated services and, thus far, none has been performed.
When Jollibee prepares its October 31, 2022 financial statements, the
franchise fee revenue to be reported is:
A. - 0 - B. P400,000 C. P100,000 D. P500,000
14. Croley Snack granted a franchise to Eat N Eat for the Ortigas area.
Eat N Eat was to pay franchise fee of P100,000 payable in five equal
annual installments starting with the payment upon signing of the
agreement. The franchise was to pay monthly 1% of gross sales of
the preceding month. Should the operations of the outlet prove to be
unprofitable, the franchise may be cancelled with whatever obligations
owing Croley Snack in connection with the P100,000 franchise fee
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waived. The first year generated a gross sales of P500,000. Croley
Snack earned franchise fee for the first year amounted to
A. P5,000 B. P25,000 C. P105,000
15. On December 31, 2022, Mc Dowell Inc. signed an agreement

authorizing MN Co. to operate as a franchise for an initial franchise
fee of P50,000. Of this amount, P20,000 was received upon signing of
the agreement and the balance is due in 3 equals annual payments
beginning December 31, 2021. The agreement provides that the down
payment (representing a fair measure of services already performed
by Mc Dowell) is not refundable and no substantial future services are
required to be performed. MN Co.’s credit rating is such that collection
of the note is reasonably assured. The implicit interest rate on this
type of loan is 14%. On December 31, 2022, Mc Dowell should record
unearned franchise fees of
A. P23,220 B. P42,220 C. P30,000
16. Coney Island Inc. sells franchises for ice cream outlets in Metro
Manila. One contract has been signed on January 15, 2021. The
agreement calls for an initial franchise fee of P6,000,000 to be paid by
the franchise upon signing of the contract. The franchisor initial cost of
services is P2,250,000 to be incurred uniformly over the 6 month
period / prior to the scheduled opening date of July 15, 2022. No
return payments are to be made by the franchisor, although there will
be continuing costs of P180,000 per year for services rendered during
the 10 year term of contract. The normal return for the franchisor on
continuing operation involving franchise outlets is 10%. How much net
income would be recognized by the franchisor on July 15, 2022?
A. P3,750,000 B. P6,000,000 C. P5,750,000 D. P1,750,000
17. On January 1, 2022 Dokito Inc. authorized Mr. T to operate as

franchise for an initial franchise fee of P150,000. Of this amount,
P60,000 was received upon signing the agreement and the balance,
represented by a note, is due in a 3 annual payments of P30,000 each
beginning December 31, 2022. The present value on January 1, 2022,
for three annual payments appropriately discounted is P72,000.
According to the agreement, the non-refundable down payment
44
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represents a fair measure services already performed by Dokito and
substantial future services are still to be rendered. However,
collectibility of the note is reasonably certain. Dokito’s December 31,
2022 balance sheet, unearned franchise fees from Mr. X franchise
should be reported as
A. P132,000 B. -- 0 -- C. P100,000 D. P72,000
18. Each of Potter Pie Co’s. 21 new franchisees contracted to pay an
initial franchise fee of P30,000. By December 31, 2020, each
franchise had paid a non- refundable P10,000 fee and signed a note
to pay P10,000 principal plus the market rate of interest on December
31, 2021 and 2022. Experience indicates that one franchise will
default on the additional payments. Services for the initial fee will be
performed in 2020. What amount of net unearned franchise fees
would Potter report at Dec. 31, 2019?
A. P400,000 B. P600,000 C. P610,000 D. P630,000
19. PIZZA HOT, franchisor, entered into a franchising agreement with Jo
Levy, franchisee, on October 31, 2022. The total franchise fee is
P500,000, of which P100,000 is payable upon signing of the
agreement with the balance payable in four equal annual installments.
The down payment is refundable in the event the franchisor fails to
render stipulated services and, thus far, none has been performed.
When PIZZA HOT prepares its Oct. 31, 2021 financial statements, the
franchise fee revenue to be reported is:
A. -- 0 -- B. P400,000 C. P100,000 D. P500,000
20. Salas Inc. granted Alvarez Inc. a franchise on January 2, 2022. The
agreement provided an initial franchise fee of P2,000,000 payable as
follows: P400,000 down payment and the balance payable in four
annual instalments starting December 31, 2022. The prevailing
interest rate for a similar note of 20% and the present value of an
annuity of 1 for 4 periods is P2.5887. The agreement also provides for
45
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a continuing franchise fee of 5% of gross sales of the franchise
payable 10 days the following month. The collectability of the note is
reasonably assured. The franchisee commenced operation on July 1,
2022 and reported gross sales of P4,000,000 from July to December
2022.
What is the other income related to the franchise agreement (not from
franchise fees) to be reported by Alvarez Inc. for the year ended
December 31, 2022?
A. P207,096
B. P210,000
C. P208,096
D. P210,096
QUIZZER 2
1. How will performance bonuses, incentives and penalties be accounted

for under PFRS 15?
A. Such items will be included in the transaction price once the
requirements are met or underlying conditions have occurred.
B. Such items will be included in the transaction price only to the
extent that it is highly probable that a significant reversal in the
amount of cumulative revenue recognized will not occur
C. Such items will be included in the transaction price only to the
extent that it is likely that a significant reversal in the amount of
cumulative revenue recognized will not occur
D. Such items are not included in the scope of PFRS 15
2. If the contract includes a significant financing component, which of the

following statements are true?
A. The entity shall always adjust the promised consideration for the
effects of the time value of money, regardless of the payment
term.
46
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B. The entity shall not recognize the financing component and
disregard the effects of the time value of money, regardless of
the payment term
C. The entity need not adjust the promised amount for the effects of
the time value of money if it is expected at date of transfer, at
date of satisfaction of performance obligation, the customer will
pay for the consideration within one year
D. None of the above
3. Which is not a scenario where revenue is recognized over time?

A. The customer simultaneously receives and consumes the
benefits by the entity’s performance.
B. The entity’s performance creates or enhances an asset that will
be transferred to the customer at a future date
C. The entity’s performance does not create an asset with an
alternative use to the entity and the entity has an enforceable
right to payment for performance completed to date
D. All of the above scenarios wherein revenue is recognized over
time
4. Which of the following is not an indicator of the transfer of control to

the customer?
A. The customer has legal title to the asset
B. The entity has transferred physical possession of the asset to the
customer
C. The entity retains significant risks and rewards of ownership of
the asset
D. The customer has accepted the asset
5. Which of the following costs are generally expensed as incurred?

A. Costs for which an entity cannot distinguish whether the costs
relate to unsatisfied performance obligations or to satisfied
performance obligations.
47
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B. Costs of wasted materials, labor or other resources to fulfil the
contract that were clearly reflected in the price of the contract.
C. General and administrative costs that are explicitly chargeable to
the customer under the contract.
D. All of the above are generally expensed as incurred
6. The following information pertain to the building contract of DMCI

Construction Company, wherein the fixed contract price is P80 million.
2020 2021 2022

Estimated costs P20.1 million P30.15 million P16.75 million
Progress billings 10 million 25 million 45 million
Cash collection 8 million 23 million 49 million
Assume that all costs are incurred, all billings to customers are made,
and all collections from customers are received within 30 days of billing,
as planned. Under the percentage-of- completion method of revenue
recognition is used, how much is the income from construction for the
year 2022?
A. P3,900,000
B. P3,250,000
C. P9,750,000
D. P5,850,000
7. The Stonerich Construction had two projects for which it reported the
following as of the end of 2022.
Quezon City Mandaluyong

Contract Price P 4,800,000 P 960,000
48
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2021: Costs incurred 3,500,000 -
Percent completed 75% -
2022: Costs incurred 1,240,000 140,000
Percent completed 100% 15%
The company used the percentage of completion method of accounting

revenue.
How much is income from construction for 2022?
A. P51,000 loss
B. P40,000 loss
C. P36,000 loss
D. P100,000 income
8. Villar’s Construction is in its fourth year of business. Villar performs

long-term construction projects and accounts for them using the
percentage of completion method. Villar built an apartment building at
a price of P1,000,000. The costs and billings for this contract for the
first three years are as follows:
2020 2021 2022

Cost incurred to date P 320,000 P600,000 P 790,000
Estimated costs yet to 480,000 200,000 -0-

be incurred
Customer billings to 150,000 410,000 1,000,000
date
Collections of billings to 120,000 340,000 950,000
date
Determine the income from construction in 2021?

A. P150,000
B. P80,000
C. P70,000
D. P60,000
9. Jessica Construction has consistently used the percentage-of-

completion method. On January 10, 2021, Jessica began work on
P3,000,000 construction contract. At the inception date, the estimated
49
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cost of construction was P2,250,000. The following data relate to the
progress of the contract:
Income recognized at December 31, 2021 P 300,000

Costs incurred January 10, 2021 through Dec. 1,800,000
31, 2022
Estimated cost to complete, December 31, 2022 600,000
What percent was completed in 2022?

A. 75%
B. 40%
C. 35%
D. cannot be determined
10. In 2022, Carmela Construction Company was contracted to do private

road network of Courtney Corporation for P100 million. The project
was estimated to be complete in two years.
The construction contract provided among other things the following:
a. 5% mobilization fee (to be deducted from the last billing)
payable within 15 days after the signing of the contract;
b. Retention provision of 10% on all billings;
c. Progress billings on construction are payable within seven
days from date of acceptance.
Carmela estimated its gross margin on the project at 25% and used the
percentage of completion method of accounting. By the end of the year,
Carmela presented progress billings corresponding to 50% completion.
Courtney Corp. accepted all the bills presented except the last one for
10% which was accepted on 10 January.
With the exception of the last billing of 8% accepted in 2022, which was
due on 3 January 2022 all accepted billings were settled in 2022.
The gross profit recognized by Carmela Construction Company for 2022
is:
A. P50 million
B. P25 million
C. P12.5 million
50
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D. Not determinable
2021 2022 2023

the year
complete
Progress billings during 16,000,000 28,000,000 56,000,000
the year
during the year

How much is the contract asset (liability) balance as of December 31,
2021 applying View 1 of PIC Q & A 2020-03?
A. P27,750,000
B. P43,750,000
C. P16,000,000
D. P10,750,000
51
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2021 2022 2023

Cost incurred during the P 35,000,000 P 20,000,000 P 30,000,000
year
complete
Progress billings during 16,000,000 28,000,000 56,000,000
the year
during the year

A. P 5,000,000
B. P7,000,000
C. P13,750,000
D. P12,500,000
2021 2022 2023

the year
complete
Progress billings 16,000,000 28,000,000 56,000,000
during the year
during the year

52
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A. P1,250,000
B. P14,250,000
C. P15,000,000
D. P10,000,000
14. On January 1, 2021, JKL Company accepted a long-term construction

contract to construct a building with an initial contract price of
P100,000,000. The outcome of the construction project can be
estimated reliably. During 2023, an increase in the contract price due
to change in project design was agreed upon. Cost data are provided
below:
12/31/2021 12/31/2022 12/31/2023

Cumulative costs incurred P10,000,000 ? P108,000,000
as of the end of the year
Realized gross profit (loss) ? P350,000 (P1,600,000)
for the year
Percentage completion as 12.5% 60% 100%
of the end of the year
How much is the revised contract price as a result of the change in

project design?
A. P109,250,000
B. P110,000,000
C. P120,000,000
D. P110,250,000
15. On January 1, 2021, JKL Company accepted a long-term construction

contract to construct a building with an initial contract price of
P100,000,000. The outcome of the construction project can be
estimated reliably. During 2023, an increase in the contract price due
to change in project design was agreed upon. Cost data are provided
below:
53
__________________________________________________________________
12/31/2021 12/31/2022 12/31/2023
Cumulative costs incurred P10,000,000 ? P108,000,000
as of the end of the year
Realized gross profit (loss) ? P350,000 (P1,600,000)
for the year
Percentage completion as 12.5% 60% 100%
of the end of the year
How much is the contract costs charged to profit or loss in 2023?

A. P50,850,000
B. P54,625,000
C. P52,500,000
D. P56,850,000
16. Annabelle, franchisor, entered into a franchise agreement with

Pepper, franchisee, on July 1, 2022. The total franchise fee agreed
upon is P550,000, of which P50,000 is payable upon signing and the
balance is covered by a non-interest-bearing note payable in four
equal annual instalments. It was agreed that the downpayment is not
refundable. The direct franchise cost incurred was P325,000. The
management of Pepper has estimated that they can borrow a loan of
this type at the rate of 12%. The franchisee commenced its
operations on July 31, 2022. The contract provides that the franchisee
has the right to use the entity’s intellectual property as it exists at the
point in time at which the franchise is granted.
How much is the net income (loss) to be reported on July 31, 2022.
(Use PV factor of 3.04)?
A. 108,800
B. 110,800
C. 110,000
D. 125,600
17. Annabelle, franchisor, entered into a franchise agreement with
Pepper, franchisee, on July 1, 2022. The total franchise fee agreed
upon is P550,000, of which P50,000 is payable upon signing and the
balance is covered by a non-interest-bearing note payable in four
equal annual instalments. It was agreed that the downpayment is not
refundable. The direct franchise cost incurred was P325,000. The
management of Pepper has estimated that they can borrow a loan of
this type at the rate of 12%. The franchisee commenced its
54
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operations on July 31, 2022. The contract provides that the franchisee
has the right to use the entity’s intellectual property as it exists at the
point in time at which the franchise is granted.
Assuming the collection is not reasonably assured. How much is the

total revenue of the franchisor?
A. 60,800
B. 53,800
C. 55,000
D. 54,800
18. The initial franchise fee for a Coffee Project is set in the franchise
agreement at P5,000,000. Review of the franchise agreement
indicates that Coffee Project promises to train 3 employees, assist the
franchisee with site selection and provide a footprint layout of the
Coffee Project to be used in the construction buildout. The initial
franchise term agreement is for a period of 10 years.
Coffee Project allows the franchisee to bring additional trainees at a

discounted rate of P333,333 per person. Review of the training
materials indicates that 70% of the training course is considered
distinct with the remaining 30% focused on brand specific processes
and procedures. The site selection process is generally handled by
Coffee Project’s real estate department, but they also have a contract
with a national firm that provides this service at a rate of P1,000,000
per site. The footprint layout is also provided by Coffee Project’s real
estate department, however in a few cases they have outsourced this
to a firm at the rate of P1,200,000.
If X company has successfully provided the training, site selection,

and footprint layout services at contract inception, how much revenue
should X company recognized for the provided services.
A. P1,900,000
B. P2,900,000
C. P3,000,000
D. P3,200,000
55
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19. The initial franchise fee for a Coffee Project is set in the franchise
agreement at P5,000,000. Review of the franchise agreement
indicates that Coffee Project promises to train 3 employees, assist the
franchisee with site selection and provide a footprint layout of the
Coffee Project to be used in the construction buildout. The initial
franchise term agreement is for a period of 10 years.
Coffee Project allows the franchisee to bring additional trainees at a

discounted rate of P333,333 per person. Review of the training
materials indicates that 70% of the training course is considered
distinct with the remaining 30% focused on brand specific processes
and procedures. The site selection process is generally handled by
Coffee Project’s real estate department, but they also have a contract
with a national firm that provides this service at a rate of P1,000,000
per site. The footprint layout is also provided by Coffee Project’s real
estate department, however in a few cases they have outsourced this
to a firm at the rate of P1,200,000.
How much of the initial franchise fee would be recognized throughout

the life of the franchise agreement.
A. P1,200,000
B. P2,100,000
C. P3,100,000
D. P2,400,000
20. Salas Inc. granted Alvarez Inc. a franchise on January 2, 2022. The
agreement provided an initial franchise fee of P2,000,000 payable as
follows: P400,000 down payment and the balance payable in four
annual instalments starting December 31, 2022. The prevailing
interest rate for a similar note of 20% and the present value of an
annuity of 1 for 4 periods is P2.5887. The agreement also provides for
a continuing franchise fee of 5% of gross sales of the franchise
56
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payable 10 days the following month. The collectability of the note is
reasonably assured. The franchisee commenced operation on July 1,
2022 and reported gross sales of P4,000,000 from July to December
2022.
What is the total revenue from franchise fees to be reported by

Alvarez Inc. for the year ended December 31, 2022?
A. P1,635,480
B. P1,365,480
C. P1,565,480
D. P1,655,400
reh/moc/cde
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Booklet 6 PFRS LTCC Service Concessions Franchise

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CRC-ACE The Professional CPA Review School

AFAR 0525 PFRS 15

PROF. ROEL E. HERMOSILLA

Revenue is recognized in accordance with that core principle by applying a

PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

5-Step Model for Revenue Recognition

1. IDENTIFY THE CONTRACT WITH A CUSTOMER

Attributes for the contract to exist for purposes of Revenue Recognition

A Contract Does NOT Exist if Both of the Following are TRUE

Contracts with a Customer may be a:

Change in the scope, or price or both => must be approved by parties

What Creates a New Contract [PFRS 15:20]

1. The scope of the contract increases because of the addition of promised

2. The price of the contract increases by an amount of consideration that

2. IDENTIFY THE PERFORMANCE OBLIGATION (PO)

3. DETERMINE THE TRANSACTION PRICE (TP)

How to determine transaction price?

4. ALLOCATING THE TP TO THE PO IN THE CONTRACT

How to allocate the transaction price?

Stand-alone selling price- Price at which the entity would sell

If the stand-alone selling price of the product is not known, it is allocated

5. RECOGNIZE REVENUE AS THE PO IS SATISFIED

How can a performance obligation be satisfied?

If any of the following is present, recognize revenue OVER TIME

Costs to obtain a contract: Capitalized and amortized

Sale with a right of return (PFRS 15)

Applicable When a Customer Has A Right To:

The STAND-READY OBLIGATION of the entity to accept returns is NOT

The guidance also applies to to services that are provided subject to a

When an entity makes a sale with a right of return, it initially

Gross transaction price, less the expected level of

Expected level of returns.

Carrying amount of the products expected to be

Reduction of Measured as the carrying amount of the products

• Jose’s monthly fixed fee is P1,200.

Due to necessary preparation works, PC HUB agrees to deliver the

• Scenario 1: The price for additional 20 computers was agreed at

As of December 31, PC HUB delivered 40 computers (30 as agreed initially

• Provide professional services consisting of customization and

The total contract price is P55,000.

As of December 31, 2022, ManyBits incurred the following costs of fulfilling

1. On January 1, 2022, how much is the amount of accounts receivable to

2. On February 1, 2022, how much is the amount of accounts receivable

3. On February 1, 2022, how much is the amount of revenue to be

4. On March 1, 2022, how much is the amount of accounts receivable to

5. On March 1, 2022, how much is the amount of revenue to be

1. How many performance obligations are there in each sale of a box of

2. How much revenue should YSL recognize in January?

Assume FITNESS Inc offers a deal whereby enrolling in a new membership

1. How many performance obligations are included in the new membership

2. How much of the contract price would be allocated to each

3. What is the journal entry to recognize the sale of a new membership.

LONG TERM CONSTRUCTION CONTRACTS

CONSTRUCTION CONTRACTS (LTCC)

Revenue From the Contract includes:

CONSTRUCTION COSTS: => Expenses incurred by the contractor

Accounting for Construction Contracts => Depends on the Reliability

If Reliable => Percentage of Completion

Acctg for LTCC applying PFRS 15

=> The satisfaction of a developer’s obligation involves the

5-STEP MODEL FOR REVENUE RECOGNITION

When the POC is not applicable in construction contracts

LONG TERM CONSTRUCTION CONTRACTS PROBLEMS

1. SMDC Construction signed a contract to build a building over a period of