118.

2 – Illustrative Examples – IFRS15 Part 1

1. Contract Modification. SMB had a contract to sell 100k products to a customer for P90
million (P900 per product) at various points in time over a 6-month period. After 60k
products have been delivered, SMB modifies the contract by promising to deliver 20k more
products for an additional P17.1 million, or P855 per product (which is the standalone selling
price of the products at the time of the contract modification). SMB regularly sells the
products separately.

2. Performance Obligations. Anton Computers licenses customer-relationship software to GMA

Company. In addition to providing the software itself, Anton Computers promises to provide
consulting services by extensively customizing the software to GMA’s information technology
environment, for a total consideration of P2.88 million. How many performance obligations
should be accounted for? What are they?

3. Performance Obligations. Nigel Computers manufactures and sells computers that include a
warranty to make good on any defect in its computers for 150 days (often referred to as an
assurance warranty). In addition, it sells separately an extended warranty, which provides
protection from defects for 3 years beyond 150 days (often referred to as a service warranty).
How many performance obligations should be accounted for? What are they?

4. Variable Consideration. DJ Builders Construction Company enters into a contract with a

customer to build a 50km road for P100 million with a performance bonus of P50 million that
will be paid based on the timing of completion. The amount of the performance bonus
decreases by 10% per week for every week beyond the agreed-upon completion date. The
contract requirements are similar to contracts that DJ Builders has performed previously, and
management believes that such experience is predictive for this contract. Management
estimates that there is a 60% probability that the contract will be completed by the agreed-
upon completion date, a 30% probability that it will be completed one week late, and only a
10% probability that it will be completed two weeks late. What should be the transaction
price?

5. Variable Consideration Constraints. On January 3, Aljon and Associates, an Accounting

Services Company enters into a contract with Gorski International to perform advisory
services regarding the financials and investment in a group of companies concerns for 12
months. Aljon receives a quarterly management fee based on a percentage of Gorski’s
investment in the group companies at the end of each quarter. In addition, Aljon receives a
performance based incentive fee of 20% of the investment’s return in excess of the return of
an observable value at the end of the year. Aljon has had a numerous of these types of
contracts with customers in the past. How should we recognize the management fee and the
incentive fee?

6. Time Value of Money. On July 1, 20x7, Elerie Company sold goods to Aranas Company for
P450k in exchange for a 4-year non-interest-bearing note with a face amount of P708,083.7,
payable after the 4-year period. The goods have a cost on Elerie’s books of P295k. What are
the journal entries to record the sale on July 1, 20x7 and the entry to record the interest
income on December 31, 20x7?
 7. Reductions to Original Consideration. Nokia Company offers its customers a 3% volume
discount if they purchase at least P1 million of its products during the calendar year. On
March 31, 20x7, Nokia has made sales of P350k to Georgie Store. In the previous two years,
Nokia sold over P1.5 million to Georgie in the period April 1 to December 31. What journal
entry should be recorded on the following: sale, collection of AR (meeting threshold),
collection of AR (not meeting threshold)?

8. Allocation of Transaction Price. Asser Maritime Industries, Inc. is a manufacturer of bridge

simulator used in the maritime school. The company’s products range from varied range of
machineries and equipment. The selling price of their units varies depending on the unit
involved with a range of P5 million to P50 million and are quoted inclusive of installation and
training, if there is a need. The installation does not involve any modification as to the
original specifications. Asser, Inc. has the following arrangement with Tamayo’s Maritime
College:

 Tamayo purchases bridge simulator from Asser at a price of P33.95 million and prefer
Asser to do the installation and Tamayo agreed on such arrangements. The price of
the installation service is estimated to have a fair value of P700k.
 The fair value of the training sessions is estimated at P350k.
 Tamayo is obligated to pay Asser, Inc. the P33.95 million upon the delivery and
installation of the bridge simulator.
 Asser delivers the bridge simulator on September 1, 20x7, and completes the
installation on November 1, 20x7. Training related to the bridge simulator starts once
the installation is completed and lasts for 4 months. The bridge simulator has a
useful life of 15 years.
 Cost of the bridge simulator is P23.765 million

How should you allocate the transaction price of P33.95 million? What are the relevant
journal entries for revenue recognition?

9. Discounted Transaction Price. Columbia Store provides the following information relative to
the following four items being sold as package:

SP Bundled SP Standalone
Product 1 P2k P2.2k
Product 2 P5k P5k
Product 3 P4k P5k
Product 4 P4.5k P5.5k
Total P15.5k P17.7k

How should you allocate the P15.5k bundled SP between the 4 products?

10. Timing of Revenue Recognition. CPI Outsourcing Company does not create an asset with an
alternative use because it is prohibited from redirecting the source program to another
customer since it is a customer specified product. In addition, CPI Outsourcing is entitled to
payments for performance to date and expects to complete the project. When should CPI
recognize its revenue?
11. Comprehensive Example. On New Year’s eve (Dec 31, 2016), Ben was walking around UP
Town Center when suddenly, a saleslady from the leading telephone company in the country
(her name is Deng) approached Ben for a post-paid line offer. For as low as P3,600 per
month, Ben will be able to get an iPhone7. Ben does not really care about the iPhone7. But
because he was mesmerized by the beauty of Deng, he immediately asked for a contract and
signed it. He did not realize that he would be locked in for 2 years for that post-paid line.
Well, Ben does not really mind paying that amount. He is rich and has excellent credit
standing. Payments should also begin on that date when Ben signed the contract. The
iPhone7’s fair value is P40,000 and the telco company got it for P35,000. Cost of money is
12%. What would be the relevant journal entries on New Year’s eve and on Jan 31, 2017 for
the telephone company?