SOL._MAN. CHAPTER 3 REVENUE FROM CONTRACTS WITH CUSTOMERS PDF

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Chapter 3Revenue from Contracts with CustomersPROBLEM 1: TRUE OR FALSE1. FALSE – PFRS 15 applies only to contracts with customers2. FALSE – A contract can be oral, written, or implied by the entity’scustomary business practices.3. TRUE4. TRUE5. FALSE6. FALSE – see7. FALSE - A performance obligation ...

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Chapter 3 Revenue from Contracts with Customers PROBLEM 1: TRUE OR FALSE 1. FALSE – PFRS 15 applies only to contracts with customers 2. FALSE – A contract can be oral, written, or implied by the entity’s customary business practices. 3. TRUE 4. TRUE 5. FALSE 6. FALSE – see #9 7. FALSE - A performance obligation that is not satisfied over time is presumed to be satisfied at a point in time. 8. TRUE 9. TRUE 10. TRUE – e.g., when the consideration is received in advance but the delivery of the goods or services is deferred beyond one year. PROBLEM 2: FOR CLASSROOM DISCUSSION 1. Answer: No. The “probable of collection” criterion under PFRS 15 is not met because the customer’s ability and intention to pay may be in doubt. This is evidenced by the following: a. the customer intends to repay the loan (which has a significant balance) primarily from income derived from its restaurant business (which is a business facing significant risks because of high competition in the industry and the customer’s limited experience); b. the customer lacks other income or assets that could be used to repay the loan; and c. the customer’s liability under the loan is limited because the loan is non-recourse. The entity accounts for the non-refundable ₱50,000 payment as a deposit liability. The entity continues to account for the initial deposit, as well as any future payments of principal and interest, as a deposit liability, until such time that the entity is able to conclude that it is probable that the entity will collect the consideration or one of the following events has occurred. a. the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or b. the contract has been terminated and the consideration received from the customer is non-refundable.

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The entity continues to assess the contract to determine whether the “probable of collection” criterion is subsequently met or whether the events above (‘a’ or ‘b’) have occurred. 2. Answer: Yes, it is a performance obligation. Explicit. Because the promise of maintenance services is a promise to transfer goods or services in the future and is part of the negotiated exchange between the entity and the distributor, the entity determines that the promise to provide maintenance services is a performance obligation. The entity concludes that the promise would represent a performance obligation regardless of whether the entity, the distributor, or a third party provides the service. Consequently, the entity allocates a portion of the transaction price to the promise to provide maintenance services. 3. Answer: Yes, it is a performance obligation. Implicit. 4. Answer: No, it is not a performance obligation. The maintenance services shall be accounted for under PAS 37 Provisions, Contingent Liabilities and Contingent Assets. 5. Solution:

Product X Y Z

Estimation method N/A (Stand-alone price) Adjusted market assessment Expected cost plus a margin (50 x 150%)

Estimated stand-alone selling prices 50 25 75

Total

150

Allocation (100 x 50/150) (100 x 25/150) (100 x 75/150)

As allocated 33 17 50 100

6. Answer: The performance obligation is satisfied over time because of the following reasons: a. The development of the professional opinion does not create an asset with alternative use to the entity because the professional opinion relates to facts and circumstances that are specific to the customer. Therefore, there is a practical limitation on the entity’s ability to readily direct the asset to another customer. b. The entity has an enforceable right to payment for its performance completed to date for its costs plus a reasonable margin, which approximates the profit margin in other contracts. The entity recognizes revenue over time by measuring the progress towards complete satisfaction of the performance obligation. 7. Solution:

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Design services - PFRS 15 (40,000 x 6/7) Amortization of design services (40,000 ÷ 7)

Asset 34,286

Expense 5,714

Hardware - PAS 16 (120,000 x 4/5) Depreciation of hardware (120,000 ÷ 5)

96,000

Software - PAS 38 (90,000 x 4/5) Amortization of software (90,000 ÷ 5)

72,000

Migration and testing - PFRS 15 (100,000 x 6/7) Amortization of migration & testing (100,000 ÷ 7)

85,714

24,000

18,000

Employee benefits Totals

14,286

288,000

8. Solution: Jan. 1, No entry 20x8 400 Jan. Contract asset (₱1,000 x 480/1,200a) Revenue 3, 20x8 Mar. Receivable 1,000 31, Contract asset Revenue (₱1,000 x 720/1,200a) 20x8 Apr. Cash 1,000 8, Receivable 20x8 a Sum of relative stand-alone selling prices: (480 + 720) = 1,200

30,000 92,000

400

400 600 1,000

9. Solution:

A B C

Stand-alone prices 40 55 45

D

N/A

Total

140

Product

Allocation N/A (60 x 55/100) (60 x 45/100) Residual approach (130K - 40K - 33K - 27K)

As allocated 40 33 27 30 130

Discoun t 22 18 40

The use of the residual approach is appropriate because the ₱30 allocated to Product D is within the range of its observable selling prices (₱15 - ₱45). 10. Solution: Dat Cash Revenue (₱10,000 x 97%) e Refund liability (₱10,000 x 3%)

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10,000 9,700 300

Dat e

Cost of goods sold (97 x ₱60) Asset for right to recover product to be returned (3 x ₱60) Inventory (100 x ₱60)

11. Solution: (a) Contract inception: Jan. 1, 20x1 Cash Contract liability

5,820 180 6,000

4,000 4,000

(b) During the two years from contract inception until the transfer of the asset, the entity adjusts the promised amount of consideration (in accordance with paragraph 65 of IFRS 15) and accretes the contract liability by recognizing interest on ₱4,000 at six per cent for two years: Dec. 31, 20x1 Interest expense (4,000 x 6%) Contract liability

240 240

Dec. 31, 20x2 Interest expense [(4,000 + 240) x 6%] Contract liability

254.4 254.4

(c) Transfer of the asset: Jan. 1, 20x3 Contract liability (4,000 + 240 + 254.4) 4,494.4 Revenue

4,494.4

PROBLEM 3: COMPUTATIONAL: EXERCISES 1. Answer: The performance obligation is satisfied over time because of the following reasons: a. The customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed. b. The fact that another entity would not need to re-perform payroll processing services for the service that the entity has provided to date also demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. The entity recognizes revenue over time by measuring its progress towards complete satisfaction of that performance obligation. Since the monthly services are rendered evenly throughout the year, revenue may be recognized on a straight-line basis (i.e., ₱100,000 per month). 2. Answer:

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The performance obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the entity’s performance – which is making the health clubs available for the customer to use as and when the customer wishes. The extent to which the customer uses the health clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity recognizes revenue over time by measuring its progress towards complete satisfaction of that performance obligation. Since the monthly services are rendered evenly throughout the year, revenue may be recognized on a straight-line basis (i.e., ₱500 per month). 3. Solution: Receivable (100 x ₱150) 15,000a Revenue (100 x ₱125) Refund liability (contract liability)

12,500 2,500b

a

Consideration is due when control of the products transfer to the customer. Therefore, the entity has an unconditional right to consideration (i.e., a receivable) for ₱150 per product until the retrospective price reduction applies (i.e., after 1 million products are shipped). b

The refund liability represents a refund of ₱25 per product, which is expected to be provided to the customer for the volume-based rebate (i.e., the difference between the ₱150 price stated in the contract that the entity has an unconditional right to receive and the ₱125 estimated transaction price). 4. Solutions: March 31, 20x8: (75 units x ₱100) = ₱7,500 June 30, 20x8: Net revenue from units sold in the 2nd quarter (500 x ₱90) Retrospective discount on units sold in the 1st quarter (75 x ₱10) Net revenue in 2nd quarter

₱45,000 (750) ₱44,250

5. Solution: Requirement (a): The contract includes a discount of ₱40 on the overall transaction (₱140 sum of stand-alone selling prices less ₱100 transaction price). Requirement (b): Produc Stand-alone t prices A 40 B 55 C 45 Total 140

Allocation N/A (60 x 55/100 a) (60 x 45/100 a)

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As allocated 40 33 27 100

Discoun t 22 18 40

a

(55 + 45) = 100

6. Solutions: (a) When the product is transferred to the customer: Asset for right to recover product to be returned Inventory

₱80 ₱80

(b) During the three-month right of return period, no interest is recognized because no contract asset or receivable has been recognized. (c) When the right of return lapses (the product is not returned): Receivable Revenue

₱100 ₱100

Cost of sales ₱80 Asset for product to be returned

₱80

Until the entity receives the cash payment from the customer, interest revenue would be recognized in accordance with PFRS 9. In determining the effective interest rate in accordance with PFRS 9, the entity would consider the remaining contractual term. 7. Solutions: Case A 1,000,000 – the contract price is deemed the cash selling price because the contractual rate of interest of five per cent reflects the credit characteristics of the customer. OR Monthly cash flow Multiply by: PV of ordinary annuity @ 0.004167 a, n=6 Sale revenue (answer is rounded-off) a

5% annual rate ÷ 12 months = 0.004167

Case B Monthly cash flow Multiply by: PV of ordinary annuity @ 0.01b, n=6 Sale revenue b

18,871 52.99020 999,978

18,871 44.95504 848,347

12% annual rate ÷ 12 months = 0.01

8. Solution: (100 shares per week x 52 weeks x ₱20) = ₱104,000 9. Solutions: Requirement (a): Performance obligations 1. machine 2. spare parts

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3.

custodial services

Requirement (b): Revenue recognition The entity allocates the transaction price to the three performance obligations and recognizes the amounts allocated to each of the machine and spare parts as revenue on December 31, 20x9. The amount allocated to the custodial services is recognized over the next 2 to 4 years based on the entity’s estimates of its progress towards the complete satisfaction of the performance obligation. 10. Solution: The contract modification results to the addition of services that are distinct. However, the price of the additional services does not reflect their standalone selling price. Therefore, the contract modification shall be accounted for as a termination of the existing contract and the creation of a new contract. Accordingly, the entity recognizes revenue of ₱100,000 per year in the 1st and 2nd years and ₱70,000 per year in the 3rd, 4th, 5th, and 6th years. Revenue per year after the contract modification is computed as follows: Modified* price of services from the original contract not yet rendered (i.e., for the 3rd year of the original contract) Price of the three additional years of service from the new contract Transaction price not yet recognized as revenue Divide by: Total years of service to be rendered (3rd to 6th) Revenue per year in the 3rd to the 6th year

80,000 200,00 0 280,000 4 70,000

* This is the amount of consideration to which ABC Co. expects to be entitled in exchange for the services. Therefore, the initial agreement of ₱100,000 per year is ignored. Summary of answers: Year Revenue 1 100,000 2 100,000 3 70,000 4 70,000 5 70,000 6 70,000 480,00 0

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PROBLEM 4: CLASSROOM ACTIVITY ANSWERS STEP 1: Identify the contract with the customer PFRS 15 Criteria a.

The contracting parties have approved the contract and are committed to perform their respective obligations;

Checklis t (/ X) (1) 

REASON/INDICATOR: (2)_Signing of an enforceable contract._ b.

The entity can identify each party’s rights regarding the goods or services to be transferred;

(3) 

c.

The entity can identify the payment terms for the goods or services to be transferred;

(4) 

REASON/INDICATOR: (5) (Make a reference to certain paragraphs in the contract)_Paragraphs 1(a) to (c) of the contract d. The contract has commercial substance; REASON: (7) The contract affects ABC’s future cash flows. e.

The consideration in the contract is probable of collection.

(6) 

(8) 

REASON/INDICATORS: (9) The credit investigation yielded a favorable result. (10) The contract requires a down payment (earnest money) and, in case of default, ABC Co. is entitled to a significant portion of the amounts collected.

CONCLUSION: Does the contract qualify for accounting under PFRS 15? State your reason. (11) Yes, because all of the criteria in ‘Step 1’ are complied with STEP 2: Identify the performance obligations in the contract (12) Identify the performance obligation(s) in the contract. The promise to transfer the land to buyer upon the full payment of the consideration. (13) State whether the performance obligation(s) is/are satisfied over time or at a point in time. at a point in time STEP 3: Determine the transaction price (14) Determine the transaction price. ₱1,000,000 (15) Identify whether the transaction price is fixed or variable. Fixed

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STEP 4: Allocate the transaction price to the performance obligations (16) How much is allocated to each of the performance obligations? ₱1,000,000 to the promise to transfer the land to the buyer. JOURNAL ENTRIES: (17) Provide the entry at contract inception. Date Accounts Cash 10.3.201 5 Contract liability to record the receipt of the earnest money (or similar description)

Debits 300,000

Credits

300,000

(18) Assume that the next entry made by ABC Co. on the contract is on December 31, 2015. What would be this entry? Date Accounts Debits Credits Cash 175,000 a 12.31.201 5 Contract liability 175,000 to record the collection of installment payments for the months of October, November and December (or similar description) a (58,333.33 x 3) = 175,000 PRESENTATION How should the contract be presented in ABC Co.’s December 31, 2015 statement of financial position? Checklist AMOUNT ACCOUNT ( / X) X (19) Contract asset  475,000 (20) Contract liability (21) Receivable X (22) Assume that the January 31, 2016 check is dishonored and the contract is settled on this date, in accordance with the terms of the contract. What is the journal entry? Date Accounts Debits Credits 1.31.201 Contract liability 475,000 b 6 Cash 17,500 c Revenue 457,500 to record revenue for the non-refundable payments received (or similar description) b (300,000 + 175,000) = 475,000

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c

(175,000 x 10%) = 17,500

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation (23) Disregard the assumption in number (18). Assume that the consideration is fully paid and the land is transferred to the buyer. Provide the compound journal entries. Date Accounts Debits Credits Cash 58,333.33 9.30.201 6 Contract liability 941,666.67 Revenue 1,000,000 to record the satisfaction of the performance obligation (or similar description) Cost of sales 400,000 9.30.201 6 Inventory 400,000 to record the cost of the land sold as expense (or similar description) PROFIT OR LOSS Use the assumption in number (23). Determine the effects of the contract in ABC Co.’s 2015 and 2016 profit or loss, respectively. Disregard taxes and registration costs. 2015 2016 (24) (25) 0 1,000,000 Revenue Expenses 0 (400,000) Profit 0 600,000

PROBLEM 5: MULTIPLE CHOICE - THEORY 1. A 6. D 11. A 2. A 7. C 12. D 3. C 8. D 13. D 4. D 9. E 14. E 5. A 10. C 15. C

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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL 1.

D PFRS 15 does not apply to non-monetary exchanges. Therefore, no revenue shall be recognized from such transactions.

Inventory – diesel (FV of asset given up) ₱4M Inventory – premium (CA of asset given up) Gain on exchange

₱3.5M ₱ .5M

2. E Inventory – diesel (CA of asset given up) ₱3.8M Inventory – premium (CA of asset given up)

₱3.8M

3. B Solution: Sale to Customer W Sale to Customer X Sales returns (20,000 x 10%) Sale to Customer Y Sales returns (10,000 x 5%) Sale to Customer Z Sale to Customer Voiz&Gurlz Total net sales revenues

5,000 20,000 (2,000) 10,000 (500)

18,000 9,500 10,000 42,500

4.

A (4,000,000 + 2,000,000) = 6,000,000

5.

D The principal recognizes revenue at the gross amount of the transaction price while the agent recognizes revenue at the commission the agent is entitled to.

6.

A - the cash selling price.

7.

B (8,000 x PV of 1 @9%, n= 1) =7,339 – the present value of the transaction price

8.

D – the transaction price

9.

A (154,000 x 3 months/ 48 months) = 9,625

In a performance obligation satisfied over time in which efforts or inputs are expended evenly throughout the performance period, revenue may be recognized on a straight-line basis. 10. B – the costs incurred to date

Revenue for a performance obligation satisfied over time is recognized only if the progress towards the complete satisfaction of the performance obligation can be reasonably measured. 11

If the outcome of a performance obligation cannot be reasonably measured but the entity expects to recover the costs incurred in satisfying the performance obligation, revenue shall be recognized only to the extent of the costs incurred until such time that the outcome of the performance obligation can be reasonably measured.

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