Chapter 39

Revenue from Contracts with Customers

PROBLEM 39-1: 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 39-2: 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

PROBLEM 39-3: THEORY

1. D 6. D
2. C 7. C
3. D 8. D
4. C 9. C
5. B 10. A

PROBLEM 39-4: THEORY

1. B 6. C
2. C 7. D
3. B 8. D
4. C 9. D
5. B 10. D

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PROBLEM 39-5: COMPUTATIONAL
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.

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.

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5. Solution:

Estimated
stand-alone As
Product Estimation method selling prices Allocation allocated
X N/A (Stand-alone price) 50 (100 x 50/150) 33
Adjusted market
Y assessment 25 (100 x 25/150) 17
Expected cost plus a
Z margin (50 x 150%) 75 (100 x 75/150) 50
Total 150 100

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:
Asset Expense
Design services - PFRS 15 (40,000 x 6/7) 34,286
Amortization of design services (40,000 ÷ 7) 5,714

Hardware - PAS 16 (120,000 x 4/5) 96,000

Depreciation of hardware (120,000 ÷ 5) 24,000

Software - PAS 38 (90,000 x 4/5) 72,000

Amortization of software (90,000 ÷ 5) 18,000

Migration and testing - PFRS 15 (100,000 x 6/7) 85,714

Amortization of migration & testing (100,000 ÷ 7) 14,286

Employee benefits 30,000

Totals 288,000 92,000

8. Solution:
Jan.
1, No entry
20x8
Jan. Contract asset (₱1,000 x 480/1,200a) 400

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 3, Revenue 400
20x8
Mar. Receivable 1,000
31, Contract asset 400
20x8 Revenue (₱1,000 x 720/1,200a) 600
Apr. Cash 1,000
8, Receivable 1,000
20x8
a Sum of relative stand-alone selling prices: (480 + 720) = 1,200

9. Solution:
Stand-alone As
Product Allocation Discount
prices allocated
A 40 N/A 40 -
B 55 (60 x 55/100) 33 22
C 45 (60 x 45/100) 27 18
Residual approach
D N/A -
(130K - 40K - 33K - 27K) 30
Total 140 130 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:
Date Cash 10,000
Revenue (₱10,000 x 97%) 9,700
Refund liability (₱10,000 x 3%) 300
Date Cost of goods sold (97 x ₱60) 5,820
Asset for right to recover product to be
returned (3 x ₱60) 180
Inventory (100 x ₱60) 6,000

11. Solution:
(a) Contract inception:
Jan. 1, 20x1
Cash 4,000
Contract liability 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%) 240
Contract liability 240

Dec. 31, 20x2

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Interest expense [(4,000 + 240) x 6%] 254.4
Contract liability 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 39-6: COMPUTATIONAL: MULTIPLE CHOICE

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) ₱3.5M
Gain on exchange ₱ .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 5,000
Sale to Customer X 20,000
Sales returns (20,000 x 10%) (2,000) 18,000
Sale to Customer Y 10,000
Sales returns (10,000 x 5%) (500) 9,500
Sale to Customer Z -
Sale to Customer Voiz&Gurlz 10,000
Total net sales revenues 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

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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.

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.

11. A Revenue = 108,000 cash selling price; Interest income =

(120,000 – 108,000) = 12,000

12. C
Satisfac-
tion of
perfor-
Performance Allocation Allocation of mance
obligations method transaction price obligation Revenue
After-sales Expected cost (120,000 x 150%) =
support plus a margin 180,000 50%a 90,000

Computer (800,000 - 180,000)

system Residual = 620,000 100% 620,000
710,000
a (6 mos. over 12 mos.)

13. B (50,000 gallons delivered in 20x3 x ₱3 per gallon) = 150,000

14. D (1,500,000 x 20%) = 300,000

15. A No revenue is recognized because the control over the

machine is not transferred.

16. C ₱40M – [(₱40M ÷ 400) x ₱4)] = 39,600,000

17. A [(₱40M ÷ ₱400) x ₱4] = 400,000

18. A
Royalty revenue for Jan. to June, 20x3 17,000
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 (received on Sept. 20x3)
Royalty revenue for July to Dec., 20x3 (60,000 x 15%) 9,000
Total royalty revenue 26,000

19. C
Solution:
December 1, 20x2 - May 31, 20x3 400,000
December 1, 20x2 - December 31, 20x2 (50,000)
June 1, 20x3 - November 30, 20x3 325,000
December 1, 20x3 - December 31, 20x3 70,000
Oil sales in 20x3 745,000
Multiply by: 20%
Royalty revenue in 20x3 149,000

20. C 1,000 – the dividend from the 1% investment. The dividend

from the 30% investment is not dividend income but rather a
deduction to the carrying amount of the investment in associate
(significant influence is presumed to exist).

21. D
Solution:
Royalty revenue for Jan. to June, 20x3
(received on Sept. 20x3) 7,000
Royalty revenue for July to Dec., 20x3 (20,000 x 10%) 2,000
Total royalty revenue 9,000

22. C
Solution:
Annual rental 48,000
Amortization of nonrefundable deposit (50K ÷ 10 yrs.) 5,000
Total rental revenue 53,000

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PROBLEM 39-7: 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:
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) 12,500
Refund liability (contract liability) 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 ₱45,000
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 (500 x ₱90)
Retrospective discount on units sold in the 1st quarter
(75 x ₱10) (750)
Net revenue in 2nd quarter ₱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):
Product Stand-alone prices Allocation As allocated Discount
A 40 N/A 40 -
B 55 (60 x 55/100 a) 33 22
C 45 (60 x 45/100 a) 27 18
Total 140 100 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 ₱80

Inventory ₱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 ₱100
Revenue ₱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 18,871
Multiply by: PV of ordinary annuity @ 0.004167 a, n=6 52.99020
Sale revenue (answer is rounded-off) 999,978

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a 5% annual rate ÷ 12 months = 0.004167

Case B
Monthly cash flow 18,871
Multiply by: PV of ordinary annuity @ 0.01b, n=6 44.95504
Sale revenue 848,347

b 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
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 stand-
alone 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) 80,000
Price of the three additional years of service from the new
contract 200,000
Transaction price not yet recognized as revenue 280,000
Divide by: Total years of service to be rendered (3rd to 6th) 4
Revenue per year in the 3rd to the 6th year 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.

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Summary of answers:
Year Revenue
1 100,000
2 100,000
3 70,000
4 70,000
5 70,000
6 70,000
480,000

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PROBLEM 39-8: CLASSROOM ACTIVITY

ANSWERS
STEP 1: Identify the contract with the customer
Checklist
PFRS 15 Criteria
(/ X)
a. The contracting parties have approved the contract and are (1) 
committed to perform their respective obligations;

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

b. The entity can identify each party’s rights regarding the (3) 
goods or services to be transferred;

c. The entity can identify the payment terms for the (4) 
goods or services to be transferred;

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; (6) 

REASON:
(7) The contract affects ABC’s future cash flows.

e. The consideration in the contract is probable of (8) 

collection.

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 Debits Credits
10.3.2015 Cash 300,000
Contract liability 300,000
to record the receipt of the
earnest money (or similar
description)

(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
12.31.2015 Cash 175,000 a
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
ACCOUNT AMOUNT
(/ X)
(19) Contract asset X -
(20) Contract liability  475,000
(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
1.31.2016 Contract liability 475,000 b
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
c (175,000 x 10%) = 17,500

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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
9.30.2016 Cash 58,333.33
Contract liability 941,666.67
Revenue 1,000,000
to record the satisfaction of
the performance obligation
(or similar description)
9.30.2016 Cost of sales 400,000
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)
Revenue 0 1,000,000
Expenses 0 (400,000)
Profit 0 600,000

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