Revenue Questions For Review of Key Topics: Question 5-1

Chapter 5: Revenue
Chapter 5: Revenue
Questions for Review of Key Topics

Question 5-1
Under IFRS 15, the five key steps to apply the core revenue recognition principle are:
1. Identify the contract with a customer
2. Identify the performance obligation(s) in the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognize revenue when (or as) each performance obligation is satisfied
Question 5-2
A performance obligation is satisfied at a single point in time when control is transferred to the
buyer at a single event. This often occurs at delivery. Control is the ability to direct (make key
decisions) the use of the asset so as to obtain substantially the benefits of that asset, in its present
form and condition. The transfer of the control is the overriding principle. However, IFRS 15 also
provides five key indicators to help the entity evaluate if control has been transferred at a point in
time. Five key indicators suggest that the customer is more likely to control a good or service if the
customer has:
1. an obligation to pay the seller;
2. legal title to the asset;
3. physical possession of the asset;
4. assumed the risks and rewards of ownership, and
5. accepted the asset.
Management should evaluate these indicators individually and in combination to decide

whether control has been transferred.
Question 5-3
A performance obligation is satisfied over time if at least one of the three criteria specified in
IFRS 15 paragraph 35 is met. They are:
1. Simultaneous receipt and consumption of benefits by the customer as the seller provides
the benefits.
2. The seller is involved in the process of creating or enhancing an asset that the customer
controls.
3. The seller creates an asset that has no alternative use to the seller and the seller has an
enforceable right to payment for the work done to date on the asset from the customer.
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Chapter 05 – Revenue
Question 5-4
For revenue recognized at a point in time, revenue is only recognized when control is
transferred to the customer, that is, on the fulfillment of the performance obligation by the seller or
service provider. However, in many service contracts, the performance obligations are continuously
satisfied over time (e.g., professional services). In this scenario, the income statement would not
fairly report each period’s accomplishments when a project or service spans over more than one
reporting period, and revenue is recognized at the end of the project. Since net income should
provide a measure of periodic accomplishment to help predict future accomplishments, service
revenue recognition over a period of time helps company report revenue on a progressive basis as
the performance obligations are satisfied. IFRS 15 requires revenue to be recognized progressively if
one of the following three criteria is met:
1. Simultaneous receipt and consumption of benefits by the customer as the seller provides
the benefits.
2. The seller is involved in the process of creating or enhancing an asset that the customer
controls.
3. The seller creates an asset that has no alternative use to the seller, and the seller has an
enforceable right to payment for the work done to date on the asset from the customer.
A service contract often results in benefits that are simultaneously provided by the seller and
consumed by the customer. Hence, the seller must recognize revenue over time. However, there may
be cases when the customer does not consume the benefits simultaneously (e.g., provision of market
research that is not exclusively for the use of the customer). If none of the three criteria is met, the
seller recognizes revenue at a point in time, which is typically at a time when the contract is
completed.
Question 5-5
Performance obligations are contractual promises that the seller makes to the customer. Sellers
account for a promise to provide a good or service as a performance obligation if the good or service
promised is distinct from other goods and services in the contract. The idea is to separate contracts
into parts or units that can be viewed on a stand-alone basis. Each unit is called a “separate
performance obligation.”
A good or service is distinct if:
1. a buyer could use the good or service on its own or in combination with goods or
services the buyer could readily obtain elsewhere and
2. the promise is separately identifiable in the contract.
Financial statements can better reflect the timing of the transfer of separate goods and services
and the profit when revenue is recognized on the fulfillment of each separate performance
obligation. When performance obligations are distinct, sellers are required to account for them
separately.
Question 5-6
If a contract has more than one separate performance obligation, the seller allocates the
transaction price to the separate performance obligations in proportion to the stand-alone selling
price of the foods or services underlying those performance obligations.
When the stand-alone selling price of a good or service underlying a performance obligation is
uncertain, a seller may estimate the stand-alone selling price of that performance obligation using the
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Chapter 5: Revenue
residual method. Residual method is done by subtracting the stand-alone selling prices of the other
performance obligations from the total contract price.
Other approaches of estimating stand-alone selling prices includes:
1. Adjusted market assessment approach where the seller considers what it could sell the
product or services for in the market in which it normally conducts its business.
2. Expected cost plus margin approach where the seller estimates its costs of satisfying a
performance obligation then adds an appropriate profit margin.
Question 5-7
For the purpose of applying revenue recognition criteria in IFRS 15, a contract needs to meet
the following criteria:
1. Commercial substance: The contract is expected to affect the seller’s future cash flows.
2. Approval: Each party to the contract has approved the contract and is committed to
satisfying their respective obligations.
3. Rights: Each party’s rights are specified with regard to the goods or services to be
transferred.
4. Payment terms: The terms and manner of payment are specified.
5. Collectibility: Collection must be probable.
We normally think of a contract as being specified in a written document, but contracts can be
oral rather than written. Contracts also can be implicit based on the typical business practices that a
company follows. The key is that, implicitly or explicitly, the arrangement must be substantive and
must specify the legal rights and obligations of a seller and a customer.
Question 5-8
The term “probable” is defined by the United States Accounting Standards Update (ASU) No
2014-09 as “likely to occur.” Similarly, US GAAP’s Statement of Financial Accounting Concept
(SFAC) No. 6 defines “probable” as “reasonably be expected or believed on the basis of available
evidence or logic but is neither certain nor proved” which implies a relatively high likelihood of
occurrence.
While IFRS did not define the term “probable” quantitatively, in IAS 37 Provision, Contingent
Liabilities and Contingent Assets, “probable” is interpreted as being “more likely that not” to occur
which implies a probability greater than 50 percent. This is a significantly lower threshold as
compared to the US GAAP. Hence, some contracts might not meet the threshold under US GAAP
while complying with IFRS if the definition of “probable” used is consistent with IAS 37. The term
“probable” is particularly important in the estimation of variable consideration. When significant
reversal of recognized revenue is “highly probable,” the seller should defer recognizing revenue until
the uncertainty is resolved.
Question 5-9
An option to purchase additional goods or services would constitute a performance obligation
if it provides a “material right” to the buyer that the buyer would not have received otherwise. What
is “material” is undefined by IFRS 15. However, one can expect that for an option to be a material
right, it must be attractive to the customer. If the option provides a material right, the customer in
effect pays the seller in advance for future goods or services, and the seller recognizes revenue when
those future goods or services are transferred or when the option expires.
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Question 5-10
Variable consideration should be included in the transaction price of a contract. The amount of
variable consideration can be estimated using either the expected value (probability-weighted
amount) or the most likely amount. The choice depends on which better predicts the amount that the
seller will receive. If there are many possible outcomes, the expected value will be more appropriate.
On the other hand, if there are only two outcomes, the most likely amount might be the best
indication of the amount the seller will likely receive. The estimation process is highly subjective. If
there are significant constraints to estimating the amount (i.e., significant reversal of revenue is
highly probable), the seller should defer recognizing revenue until the uncertainty is resolved.
Question 5-11
Factors that may cause a highly probable reversal of a significant amount of revenue from
variable consideration are considered as “constraining factors” in IFRS 15. A seller is constrained to
recognize only the amount of revenue for which the seller believes it is highly probable that a
significant amount of revenue will not have to be reversed (adjusted downward) in the future
because of a change in that variable consideration. Indicators that variable consideration could be
constrained include lack of experience of the seller in estimating outcomes, higher number and
broader range of outcomes, seller’s own differences in pricing, terms and conditions for similar
contracts, dependence of the variable consideration on factors outside the seller’s control, and a long
delay between the timing of estimation and the actual outcomes.
Question 5-12
Right of return is not a separate performance obligation. Instead, it represents a failure to
satisfy the performance obligation to deliver satisfactory goods. We view a right of return as a
particular type of variable consideration. The sellers need to estimate the expected value
(probability-weighted consideration) or the most likely amount after considering the likelihood of
returns. As a result, sellers need to estimate the amount of product that will be returned and account
for those returns as a reduction in revenue and as a refund liability. However, if a seller can’t
estimate returns with reasonable accuracy, the constraint on variable consideration applies, and the
seller must postpone recognizing any revenue until returns can be estimated. The seller also needs to
adjust the cost of sales to reflect only the cost of sales for the estimated consideration.
Question 5-13
A principal has the primary responsibility for delivering a product or service and has control of
the goods or services before they are transferred to the customer. If the entity is a principal, it records
revenue equal to the total sales price paid by customers as well as cost of goods sold equal to the cost
of the item to the company. An agent doesn’t primarily deliver goods or services but acts as a
facilitator or intermediary that earns a commission for helping sellers to transact with buyers and
recognizes as revenue only the commission it receives for facilitating the sale. IFRS 15 provides
indicators to determine if an entity is a principal or an agent. Indicators include the responsibility for
fulfilling the performance obligations to the customer, exposure to inventory and credit risk, the right
to set prices and the nature of the revenue (commission or gross revenue).
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Chapter 5: Revenue
Question 5-14
IFRS 15 requires interest to be recognized separately from revenue if the financing component
in a revenue contract is significant. IFRS 15 provides a few indicators to determine if the financing
component is significant.
If the cash price of the goods or service is significantly different from the contractual price paid
by the customer, the evidence suggests that there is an implicit interest charge built into the contract.
Another indicator is the interval between delivery and payment. If payment occurs either before or
after delivery, conceptually the arrangement includes a financing component. In general, the “time
value of money” refers to the fact that money to be received in the future is less valuable than the
same amount of money received now. If you have the money now, you can invest it to earn a return,
so the money can grow to a larger amount in the future. Hence, the financing component depends on
the duration of time and the prevailing interest rate.
However, when delivery and payment occur relatively near each other, the financing
component is not significant and can be ignored. As a practical matter, sellers can assume the
financing component is not significant if the period between delivery and payment is less than a
year. However, if the financing component is significant, sellers must take it into account, both when
a prepayment occurs and when an account receivable occurs. The third factor relates to the
prevailing interest rate. IFRS 15 requires the seller to consider the combined effect of the duration
between delivery and payment and the prevailing interest rate in evaluating the significance of the
financing component.
Question 5-15
IFRS 15 requires the seller to consider if there is a transfer from the customer to the seller for
distinct goods or services. There are three possible scenarios. First, if there is no transfer from the
customer to the seller for distinct goods or services, the payment is deemed as a refund of the price
paid by the customer for the seller’s goods or services. Second, if the customer transfers distinct
goods or services to the seller at fair value, the payment by the seller is not a refund to the customer
but a payment for the distinct goods or services purchased. Third, if the seller purchases distinct
goods or services from their customer and pays more than the fair value for those goods or services,
the excess payments are viewed as a refund of part of the price of the goods and services that the
customer purchased from the seller.
The excess payments in the first and third situations are subtracted from the amount the seller
is entitled to receive from the customer when calculating the transaction price of the sale to the
customer. The payment in the second situation is recorded as an expense or purchase by the seller for
goods or services that is transferred to the seller from the customer.
Question 5-16
The three methods for estimating stand-alone selling prices of goods and services are:
1. Adjusted market assessment approach: Under this approach, the seller estimates what it could
sell the product or services for in the market in which it normally sells products. The seller
likely would consider prices charged by competitors for similar products.
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2. Expected cost plus margin approach: Under this approach, the seller estimates its costs of
satisfying the performance obligation and then adds an appropriate profit margin to determine
the revenue it would anticipate receiving for satisfying the performance obligation.
3. Residual approach: Under this approach, the seller subtracts from the total transaction price the
sum of the known or estimated stand-alone selling prices of the other performance obligations
that are included in the contract to arrive at an estimate of an unknown or highly uncertain
stand-alone selling price.
Question 5-17
When a license is not distinct from other goods and services in the contract, it is not considered
to be a separate performance obligation, and revenue is recognized when control of the other goods
and services is transferred to the customer.
However, when the license is distinct from other goods and services, there is a need to
determine if the performance obligation is satisfied over time or at a point in time. For right of use
licenses where it has significant stand-alone functionality, revenue is typically recognized at the
point in time when customer can start using the license.
On the other hand, a right of access license would require ongoing activities during the license
period by the seller to benefit the customer. The revenue for these licenses is recognized over time
because they satisfy their performance obligation through ongoing activities to maintain or enhance
the product.
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Chapter 5: Revenue
Question 5-18
In a franchise arrangement, a franchisor performance obligations typically includes initial start-
up services (such as identifying locations, remodeling our constructing facilities, selling equipment,
and providing training to the franchisee) as well as ongoing products and services (such as franchise-
branded products, advertising, and administrative services). Hence, a franchise involves a license to
use the franchisor’s intellectual property and also involves initial sales of products and services as
well as ongoing sales of products and services. Performance obligations are satisfied at a point in
time as well as continuously over time.
Question 5-19
A bill-and-hold arrangement exists when a customer purchases goods but requests that the
seller retains physical possession until a later date. The key criterion is to determine whether control
of the asset has passed from the seller to the customer for bill-and-hold arrangements. Since the
customer does not have physical possession of the goods in a bill-and-hold arrangement, the
customer isn’t normally viewed as controlling the goods. However, if the goods are specifically
identified as the customer’s, and are ready for physical transfer, and the seller can’t use the goods or
sell them to another customer, then revenue would be recognized despite the customer not having
taken physical possession of the goods. Sellers are required by IFRS 15 to answer some questions as
follows:
1. Was there a genuine reason for the bill-and-hold arrangement? Fundamentally, was it the
customer who initiated this arrangement?
2. Is the product ready to be delivered to the customer?
3. Does the seller have the ability to use the product or to direct it to another customer?
If the answer to any of the question is “no,” the seller has to conclude that control has not been
transferred and revenue should not be recognized.
Question 5-20
In a sale and repurchase agreement, control is not transferred to the customer as the customer
has to “resell” the equipment to the seller at some future date. The customer is not able to control the
use of the asset as the asset has to be returned to the seller. As such, IFRS 15 requires seller to
analyze the real nature of the transaction as follows:
1. If the discounted value of the repurchase price is higher than the sale price, the
arrangement is a financing arrangement, with the difference between the two prices
being a financing cost.
2. If the discounted value of the repurchase price is lower than the sale price, the
arrangement is a leasing arrangement, with the difference between the two prices being
the lease rental for the item.
Question 5-21
Sometimes a company arranges for another company to sell its product under consignment. The
“consignor” physically transfers the goods to the other company (the consignee), but the consignor
retains legal title. If the consignee can’t find a buyer within an agreed-upon time, the consignee
returns the goods to the consignor. However, if a buyer is found, the consignee remits the selling
price (less commission and approved expenses) to the consignor.
The consignee does not have control of the asset but is holding the asset only as an agent. The
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considerations for principal–agent relationship apply to the consignor and the consignee. The
inventory and credit risk does not rest with the consignee; the consignee does not also have the
ability to set prices. Because the consignor retains the risks and rewards of ownership of the product
and title does not pass to the consignee, the consignor does not record revenue (and related costs)
until the consignee sells the goods and title passes to the eventual customer.
Question 5-22
Sometimes companies receive nonrefundable prepayments from customers for some future good
or service. That is what occurs when a company sells a gift card. The seller does not recognize
revenue at the time the gift card is sold to the customer. Instead, the seller records a contract liability
in anticipation of recording revenue when the gift card is redeemed. If the gift card isn’t redeemed,
the seller recognizes revenue when it expires or when, based on past experience, the seller has
concluded that customers will not redeem it.
Question 5-23
Cumulative catch-up adjustment is not required to be shown as an income statement
disclosure. However, a significant cumulative catch-up adjustment must be shown as part of the
movement in contract asset or contract liability during the year.
Question 5-24
If the customer makes payment to the seller before the seller has satisfied performance
obligations, the seller records a contract liability. If the seller satisfies a performance obligation
before the customer has paid for it, the seller records either a contract asset or a receivable. The
seller recognizes an account receivable if the seller has an unconditional right to receive payment,
which is the case if only the passage of time is required before the payment is due. If instead the
seller satisfies a performance obligation but its right to payment depends on something other than the
passage of time (e.g., the seller satisfying other performance obligations yet to be completed), the
seller recognizes a contract asset.
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Chapter 5: Revenue
Question 5-25
Under IFRS 15, revenue for contract recognized over time is done on a progressive basis
commonly known as the percentage-of-completion method. Percentage-of-completion method
requires the estimations of total costs and the final profit on the contract through the following
steps:
1. identify the contract price
2. identify the contract costs
3. determine the progress to date for each period
4. determine the contract revenue and contract expenses for each period: Current revenue
for the period is calculated by taking difference between the cumulative revenue at the
start and at the end of the period.
However, when the seller has difficulty to reliably estimate the total contract costs or the
progress of the contract, revenue is only recognized to the extent of contract costs incurred. This
method is commonly referred to as the cost recovery method. The net income effect is zero during
the period of the contract. At the end of the contract, the remaining revenue and profit is
recognized in full.
Question 5-26
Progress billings are not a basis to recognize revenue. Hence, progress billings have no income
statement effect; it has only a balance sheet effect. At the point of progress billing, the contractor
should recognize the asset as an account receivable. The asset is transformed from a contract asset to
accounts receivable. At the end of the contract after all billings have been made, the contract asset
will be zero.
Question 5-27
When an estimated loss is foreseeable, the contract is likely to meet the criteria of an “onerous”
contract under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. An estimated loss on a
contract that is “onerous” must be fully recognized in the first period the loss becomes evident,
regardless of the revenue recognition method used .
Question 5-28
Variation order are amendments to the original contract. To account for these variation order
we have to determine if these contract modifications are extensions of the existing contract or the
start of a new contract. If the contract modification relates to the same goods or services stated in the
original contract, they are considered as extensions of the original contract, and changes in prices or
costs are adjusted on a “cumulative catch-up” basis to the current and future revenue and profit of
existing contract.
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Brief Exercises
Brief Exercise 5-1
In 2018, Apache has transferred the land, and the construction company has an
obligation to pay Apache. Apache’s performance obligation has been satisfied, and
revenue and a related account receivable of $3,000,000 can be recognized.
Under accrual accounting, revenue is recorded when goods or services are

transferred to customers (2018), not necessarily when cash changes hands in future
periods.
Brief Exercise 5-2
A performance obligation is satisfied over time if at least one of the following

three criteria is met:
1. Simultaneous receipt and consumption of benefits by the customer as the
seller provides the benefits.
2. The seller is involved in the process of creating or enhancing an asset that
the customer controls
3. The seller creates an asset that has no alternative use to the seller and the
seller has an enforceable right to payment for the work done to date on the
asset from the customer
Since CyberB is receiving/consuming the benefits as Estate Construction is

constructing the building by agreeing to own any partially completed building, it
satisfied the criteria in IFRS 15 paragraph 35 of simultaneous receipt and
consumption of benefits by the customer as the seller provides the benefits. CyberB
does not need the work provided to date to be re-performed by another contractor
should Estate Construction fail to complete the work. As such, revenue should be
recognized as the building is being constructed.
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Chapter 5: Revenue
Brief Exercise 5-3

Consulting contract with Shaffer Holdings spans over one year, hence Varga
Tech services should recognize revenue as it satisfies its performance obligations over
the year.
Revenue for 2018 = $6,000 × 8/12 = $4,000
Journal entries (not required):
May 1, 2018
Cash 6,000
Contract liability (Deferred revenue) 6,000
December 31, 2018 adjusting entry

Contract liability (Deferred revenue) 4,000
Service revenue ($6,000 × 8/12) 4,000
Brief Exercise 5-4

Since the stand-alone prices of the separate performance obligations is known,
we allocate the transaction price based on relative selling prices.
Price of software = $80,000 × 70,000/100,000 = $56,000

Price of six-month technical support = $80,000 × 30,000/100,000 = $24,000
To record contract sales

Cash................................................................................ 80,000
Revenue (Software).................................................... 56,000
Contract liability (Support services)........................... 24,000
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Brief Exercise 5-5

$100,000: Under IFRS, “probable” is inferred (from IAS 37) as a likelihood that
is more likely than not (greater than 50 percent). Therefore, assuming this implied
meaning, this contract would qualify for revenue recognition under IFRS. (However,
Tulane also would recognize a large impairment loss expense associated with the
contract, given concern that it might not be paid.)
Brief Exercise 5-6

$0: Under US GAAP, “probable” is defined as “likely to occur” or as
“reasonably expected or believed on the basis of available evidence or logic but is
neither certain nor proved,” which implies a relatively high likelihood of occurrence.
Therefore, this contract would not qualify for revenue recognition under US GAAP.
Brief Exercise 5-7

Number of performance obligations in the contract: 1.
Access to eLean services is one performance obligation. Registration on the

website is not a performance obligation, but rather is part of the activity eLean must
provide to satisfy its performance obligation of providing access to eLean’s online
services. The $50 payment is an upfront payment that is part of the total transaction
price associated with the service, and the monthly payments are the other component.
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Chapter 5: Revenue
Brief Exercise 5-8

We need to consider three aspects of the vacuum contract: delivery of the

vacuum, the one-year quality-assurance warranty, and the option to purchase the
three-year extended warranty. Delivery of the vacuum cleaner is a performance
obligation. The one-year warranty that is included as part of the purchase (the quality-
assurance warranty) is not a performance obligation, but rather it is part of the
obligation to deliver a vacuum of appropriate quality. The option to purchase a three-
year extended warranty is not a performance obligation within the contract to purchase
a vacuum because customers can purchase that warranty for the same amount at other
times, so the opportunity to buy it at the same time that they buy the vacuum does not
present a material right.
Brief Exercise 5-9

We need to consider three aspects of the vacuum contract: delivery of the

vacuum, the one-year quality-assurance warranty, and the option to purchase the
three-year extended warranty. Delivery of the vacuum cleaner is a performance
obligation. The one-year warranty that is included as part of the purchase (the quality-
assurance warranty) is not a performance obligation, but rather it is part of the
obligation to deliver a vacuum of appropriate quality. The option to purchase the
extended warranty, though, is a performance obligation within the contract to
purchase a vacuum. Customers can purchase that warranty at a 20 percent discount if
they do so when they buy the vacuum, so the opportunity to buy the extended
warranty constitutes a material right. Also, the option is capable of being distinct, as it
could be sold or provided separately, and it is separately identifiable, as the vacuum
could be sold without the option to purchase an extended warranty, so the option is
distinct and qualifies as a performance obligation.
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Brief Exercise 5-10

In addition to the subscription, the renewal option is a performance obligation because

it provides a material right that allows the customer to renew at a better price than
could be obtained without the right. The renewed protection is capable of being
distinct, as it could be sold or provided separately, and it is separately identifiable, as
the customer can use the renewed protection on its own. Therefore, the renewed
protection is distinct, and qualifies as a performance obligation.
Brief Exercise 5-11

The separate goods and services that Precision Equipment has agreed to provide
(equipment, customized software package, and consulting services) might be capable
of being distinct, but they are not separately identifiable. In the context of the contract,
the goods and services are highly dependent on and interrelated with each other. The
contractor’s role is to integrate and customize them to create one automated assembly
line.
Brief Exercise 5-12

Lego enters into a contract to design and construct a specific building. Each
smaller component of the construction contract, though capable of being distinct, is
not separately identifiable because each component is highly interrelated with each
other, and providing them to the customer requires the seller to integrate the
components into a combined item (garage).
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Chapter 5: Revenue
Brief Exercise 5-13

A right of return is not a performance obligation. Instead, the right of return

represents a potential failure to satisfy the original performance obligation to deliver
goods to the customer of a satisfactory quality. Because the total amount of cash
received from the customer depends on the amount of returns, a right of return is a
type of variable consideration.
Aria should estimate sales returns and reduce revenue by that amount in order to
arrive at “net revenue,” which would be the transaction price (the amount to be
recorded as revenue on the seller’s books). The total net revenue in this situation is
$280,233:
Revenue recognized in Jan 2018 = $90 × 3,210 × 97% = $280,233
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Brief Exercise 5-14

The expected value would be calculated as follows:
Possible Amounts Probabilities Expected Amounts

$35,000 ($25,000 fixed fee + 10,000 bonus) × 50% = $17,500
$25,000 ($25,000 fixed fee + 0 bonus) × 50% = 12,500
Expected contract price at inception $30,000
Or, alternatively:
$25,000 + ($10,000 × 50%) = $30,000
Brief Exercise 5-15
When a contract includes variable consideration, sellers are constrained to recognize

only the amount of revenue they believe is probable that they won’t have to reverse
(adjust downward) in the future if the variable consideration changes. If there is a
likelihood of significant reversal of revenues, the seller recognizes revenue only after
the uncertainty is resolved. In this case, factors outside the seller’s control (stock
market volatility) make the seller’s estimate of variable consideration very uncertain,
so the amount of revenue that Continental will recognize during the year is limited to
the fixed annual management fee, which is $1.5 million (1 percent of the client’s $150
million total assets under management). Therefore, Continental would use $1.5
million as its estimate of the transaction price. Any performance bonus earned by
Continental will be recognized as revenue if and when it is earned.
Brief Exercise 5-16
Finerly should recognize $0 of revenue upon delivery to distributors. Given the

uncertainty about estimated returns, Finerly can’t argue that it is probable that it won’t
have to reverse (adjust downward) a significant amount of revenue in the future
because of a change in returns. Therefore, Finerly won’t recognize revenue until it
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Chapter 5: Revenue
either can better estimate returns or sales to end consumers occur. Essentially, because
Finerly can’t estimate returns, it treats this transaction as if it is placing those goods on
consignment with independent distributors.
Brief Exercise 5-17
Amazon is acting as an agent on behalf of Apple Stores. This is because Amazon

does not deliver the product or control the product but merely facilitates the
transaction between the buyer and Apple Stores.
Amazon should recognize as revenue only the amount of commission received
for arranging sales for Apple Stores which is at $150.
Brief Exercise 5-18
If a seller is purchasing distinct goods or services from a customer at the fair

value of those goods or services, we account for that purchase as a separate
transaction. Otherwise, excess payments by the seller are treated as a refund of the
customer’s purchase. If the payments are made (or are expected to be made) at the
time of the original sale, the transaction price of the customer’s purchase is reduced
immediately by the refund. If payment is not expected at the time of the sale, revenue
is recorded based on the full transaction price, and any subsequent payment by the
seller above fair value results in a reduction of the transaction price at that time.
There is no indication that Lewis’ payment to AdCo for $10,000, which is $2,500
more than the fair value of those services ($7,500), was expected at the time of the
original sale. Therefore, the original sale would be recorded based on the full
transaction price of $60,000. The overpayment of $2,500 reduces the $60,000
transaction price of the goods sold by Lewis to AdCo at the time the $10,000 is paid,
resulting in a downward adjustment of revenue of $2,500 at that time and net revenue
over the period of $60,000 − 2,500 = $57,500
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Brief Exercise 5-19

Using the adjusted market assessment approach,
Stand-alone selling price of club-fitting services = $110 × 1.1 = $121
Brief Exercise 5-20

Using the expected cost plus margin approach,
Stand-alone selling price of club-fitting services = $60 × 1.3 = $78
Brief Exercise 5-21

Using the residual approach,
Stand-alone selling price of club-fitting services = $1,500 − 1,400 = $100
Brief Exercise 5-22

The proprietary management software is a right-of-use license to which customer
can immediately benefit and do not require on-going activity by Saar Associates.
Hence, revenue for this license can be recognized immediately in 2018.
For the advertising rights, Saar should recognize revenue as it performed its
performance obligations over three years. The customer has a right-of-access license
to the brand name. As such as at 2018 the revenue recognize for this service is:
Revenue for right-of-access advertising services in 2018 = $90,000 × 4/36 = $10,000

Revenue recognized for 2018 = $100,000 + $10,000 = $110,000
5-18
Chapter 5: Revenue
Brief Exercise 5-23
$190,000: The software is intellectual property, and the license transfers a right
of use of the software, since Saar’s ongoing activities during the license period (which
for this software does not have an end date) will not affect the value of the software to
Kim. Therefore, Saar can recognize the entire $100,000 upon transfer of the right. The
seller does not provide advertising services which benefit the customer during the
license period. Saar would view this license as conveying a right of use rather than a
right of access and could recognize $90,000 of revenue for the license to use the Saar
Associates name at the start of the license. In total, Saar recognizes revenue of
$100,000 + 90,000 = $190,000 in 2018.
Brief Exercise 5-24

$110,000: The software is functional intellectual property, and the license
transfers a right of use, since Saar’s activities during the license period (which for this
software does not have an end date) will not affect the value of the software to Kim.
Therefore, Saar can recognize the entire $100,000 upon transfer of the right. However,
the Saar Associates name is symbolic intellectual property, so the license to use the
Saar name is an access right, with Saar’s ongoing activity affecting the benefit that
Kim receives, so Saar should recognize revenue as that access is consumed over 36
months. Under US GAAP, it is not relevant that Saar will not provide any services
with respect to the access right over the license period—it only matters that the license
is classified as involving symbolic intellectual property. Since Kim uses the Saar
name for four months in 2018 (September through December), Saar should recognize
revenue of 4 ÷ 36 = 1/9 of $90,000, or $10,000, for that access right in 2018. In total,
Saar recognizes revenue of $100,000 + 10,000 = $110,000 in 2018.
Brief Exercise 5-25
Franchising fee constitutes two components which are (1) initial franchising fees
for initial training, equipment, and furnishing at $50,000 and (2) continuing
franchising fee for the right to use TopChop name at $30,000 per year.
Since performance obligation of providing initial training, equipment, and
furnishing is completed in 2018, TopChop is able to recognize the full $50,000 of
revenue in 2018. As for the continuing franchising fee, TopChop can only recognize
5-19
the fees as revenue as it completes the performance obligation.
Revenue recognized for 2018 = $50,000 + $30,000 × ½ = $65,000
Brief Exercise 5-26
In order for Dowell Fishing Supply to recognize the sale of the rods as revenue in
2018, control of the rods must have been transferred to Bassadrome. In applying the
five indicators provided by IFRS 15, we note that with inventory in Dowell’s
warehouse, Bassadrome has
1. no physical possession of the asset,
2. no legal title to the asset,
3. not assumed the risks and rewards of ownership
4. not accepted the asset
5. no obligation to pay Dowell.
Hence control has not been transferred to the customer and Dowell should not
recognize any revenue associate with this sale in 2018.
Brief Exercise 5-27
Although asset has been transferred to Holmström Gallery (consignee), Kerianne

still retains control of the paintings. As per IFRS 15, revenue for consignment
arrangement should only be recognized when control is transferred to the ultimate
customer. In this case, Kerianne should recognize $250 as revenue and $250 × 20% =
$50 as commission/selling cost in 2018.
Brief Exercise 5-28
GoodBuy should not recognize revenue when it sells the $1,000,000 of gift cards
because it has not yet satisfied its performance obligation to deliver goods upon
redemption of the cards. GoodBuy should recognize revenue for gift cards that has
been utilized and for gift cards that it estimates will never be redeemed.
Revenue for 2018 = $840,000 + 30,000 = $870,000
5-20
Chapter 5: Revenue
Brief Exercise 5-29
Contract asset: $0.
Contract liability: $2,000.
Accounts receivable: $0.
Holt has a contract liability, of $2,000. It never has a contract asset because it
hasn’t satisfied a performance obligation for which payment depends on something
other than the passage of time. It does not have an accounts receivable for the $3,000
until it delivers the furniture to Ramirez.
Brief Exercise 5-30
For long-term contracts, we view a company as having a contract asset if there is

unbilled revenue, that is, cumulative revenue > progress billings, so Cady has a
contract asset for the first construction job of $6,000 ($20,000 cumulative revenue less
$14,000 billings). For long-term contracts, we view a company as having a contract
liability if billings is in excess of revenue, that is, progress billings > cumulative
revenue, so Cady has a contract liability for the second construction job of $2,000
($5,000 billings less $3,000 CIP).
Brief Exercise 5-31
Using the percentage of completion method,

Percentage of completion in year 1= $6 million/($6 million + $9 million) = 40%
Revenue recognized in year 1 = 40% × $20 million = $8 million
Gross profit recognized in year 1 = $8 million − $6 million = $2 million
5-21
Brief Exercise 5-32
Contract asset = Cumulative revenue − Progress billings

= $8 million − $7 million = $1 million
Accounts receivable = Progress billings − Cash received
=$7 million − $5 million = $2 million
Assets:
Contract asset $1,000,000
Accounts receivable 2,000,000
Brief Exercise 5-33
No revenue or gross profit recognized until project completed in year 2.
Year 2 revenue $20,000,000

Less: Costs in year 1 (6,000,000)
Costs in year 2 (10,000,000)
Year 2 gross profit $ 4,000,000
Note to instructors: The question states the revenue recognition basis which is
to recognize revenue on completion. This may arise when any one criterion in IFRS
15 paragraph 35 is not met. Hence, revenue has to be recognized at a point in time
rather than continuously over time. This scenario is different from inability to estimate
reliably the progress of the project. When estimates are not reliably determinable, the
cost recovery method is used (not the completed contracts). Hence, in this scenario,
the issue is not about unreliable estimates but inability to meet the conditions specified
in IFRS 15 paragraph 35.
Brief Exercise 5-34
The anticipated loss of $3 million ($30 million contract price less total estimated
costs of $33 million) must be recognized in the first year under either situation
because an onerous contract exists.
5-22
Chapter 5: Revenue
Exercises
Exercise 5-1
Requirement 1
Regarding the five steps used to apply the revenue recognition principle, the
appropriate citation from IFRS 15 Revenue from Contracts with Customers
1. Identify the contract with a customer (paragraphs 9–21)

2. Identify the performance obligation(s) in the contract (paragraphs 22–30)
3. Determine the transaction price (46–72, 87–90)
4. Allocate the transaction price to each performance obligation (73–86)
5. Recognize revenue when (or as) each performance obligation is satisfied
(31–45)
Requirement 2
Regarding indicators that control has passed from the seller to the buyer, such
that it is appropriate to recognize revenue at a point in time, the appropriate citation is:
IFRS 15 Revenue from Contracts with Customers paragraph 38
Regarding indicators that control has passed from the seller to the buyer, such
that it is appropriate to recognize revenue over time, the appropriate citation is:
Requirement 3
IFRS 15 Revenue from Contracts with Customers paragraphs 35–37, 39–45 and
“Appendix B—Performance obligations satisfied over time.”
Exercise 5-2
Requirement 1
Ski West should recognize revenue over the ski season as it fulfils its
performance obligation over time. The fact that the $450 price is nonrefundable is not
relevant to the revenue recognition decision. Revenue should be recognized as it is
earned, in this case as the services are provided during the ski season.
5-23
Requirement 2
November 6, 2018 To record the cash collection

Cash................................................................................ 450
Contract liability......................................................... 450
December 31, 2018 To recognize revenue earned in December (no

revenue earned in November, as season starts on December 1).
Contract liability ($450 × 1/5).......................................... 90
Revenue...................................................................... 90
Requirement 3
$90 is included in revenue in the 2018 income statement. The $360 remaining
balance in contract liability (unearned revenue) is included in the current liability
section of the 2018 statement of financial position.
5-24
Chapter 5: Revenue
Exercise 5-3
Requirement
VP first must identify each performance obligation’s share of the sum of the stand-
alone selling prices of all performance obligations:
$1,700
TV: $1,700 + 100 + 200 = 85%
$100
Remote: $1,700 + 100 + 200 = 5%
$200
Installation: = 10%
$1,700 + 100 + 200
100%
VP would allocate the total selling price of the package ($1,900) based on stand-
alone selling prices, as follows:
TV: $1,900 × 85% = $1,615
Remote: $1,900 × 5% = 95
Installation: $1,900 × 10% = 190
$1,900
$1,900
Transaction
Price 10%
85%
5%
$1,615 $95 $190
TV Remot Installation
e
5-25
Exercise 5-4
Requirement 1
Regarding the basis upon which a contract’s transaction price allocated to its
performance obligations, the appropriate citation is:
IFRS. (2015). IFRS 15 Revenue from Contracts with Customers Paragraphs 73–
86.
Requirement 2
Regarding indicators that a promised good or service is separately identifiable,

the appropriate citation is:
IFRS. (2015). IFRS 15 Revenue from Contracts with Customers Paragraph 29.
Requirement 3
Regarding circumstances under which an option is viewed as a performance

obligation, the appropriate citation is:
IFRS. (2015). IFRS 15 Revenue from Contracts with Customers, Paragraph 26(j)
and Appendix B—Customer options for additional goods or services Paragraphs B39–
B43.
5-26
Chapter 5: Revenue
Exercise 5-5
Requirement 1
Delivery of gold is one performance obligation. The additional insurance is a

second performance obligation. The insurance service is capable of being distinct
because the bank could choose to receive similar services from another insurance
provider, and it is separately identifiable, as it is not highly interrelated with the other
performance obligation of delivering gold, and the seller’s role is not to integrate and
customize them to create one service or product. So, the insurance qualifies as a
performance obligation. The receipt of cash prior to delivery is not a performance
obligation but rather gives rise to a contract liability (deferred revenue) associated
with performance obligations to be satisfied in the future.
Requirement 2
Revenue allocation to individual performance obligation,

Revenue for Gold bar delivery = ($1,440 × 100) / 150,000 × 147,000 = $141,120
Revenue for insurance service = ($60 × 100) / 150,000 × 147,000 = $5,880
March 1 To record sales

Cash................................................................................ 147,000
Contract liability (Gold bars)...................................... 141,120
Contract liability (Insurance)...................................... 5,880
Requirement 3
March 30 To record successful shipment

Contract liability (Gold bars) ......................................... 141,120
Revenue...................................................................... 141,120
5-27
Gold Examiner recognizes only the portion of revenue associated with passing of
the legal title. The revenue associated with insurance coverage will be earned only
when that performance obligation is satisfied.
Requirement 4
April 1 To record delivery

Contract liability (insurance) ......................................... 5,880
Revenue...................................................................... 5,880
5-28
Chapter 5: Revenue
Exercise 5-6
Requirement 1
The delivery of Sun-Boots is one performance obligation. The discount coupon

for additional future purchases is a second performance obligation because it provides
a material right to the customer that the customer would not receive otherwise. That
right to receive a discount is both capable of being distinct, as it could be sold or
provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligation of delivering Sun-Boots, and the seller’s role is
not to integrate and customize them to create one product. So, the discount coupon is
distinct and qualifies as a performance obligation.
Requirement 2
Total price of “Sun-Boots” $70

Estimated price of discount coupon 100 × 30% ×
20%
Estimated stand-alone selling price of “Sun-Boots” $64
To record sales of Sun-Boots

Cash ............................................................................... 70,000
Revenue (64 × 1,000)................................................. 64,000
Contract liability ........................................................ 6,000
5-29
Exercise 5-7
Requirement 1
Manhattan Today should not recognize any revenue upon receipt of the subscription
price because it has not fulfilled any of its performance obligations with regard to the
subscription fee paid.
Even though Manhattan Today received payments from customers for an annual
subscription, payment of the subscription activity does not transfer goods or services
to customers. Therefore, the annual fee is viewed as a prepayment for future delivery
of goods or services and would be recognized as deferred revenue—subscription (a
liability) when received. Later, when newspapers are delivered, deferred revenue—
subscription will be reduced and revenue recognized.
Requirement 2
Delivering newspapers is one performance obligation. The coupon for a 40 percent

discount on a carriage ride qualifies as a second performance obligation. First, it is an
option that conveys a material right to the recipient (as opposed to just a general
marketing offer). Second, it is both capable of being distinct, as it could be sold or
with the other performance obligation of delivering newspapers, so it is distinct and
qualifies as a performance obligation. The seller’s role is not to integrate and
customize them to create one product. The seller will record deferred revenue—
coupon for that performance obligation and recognize revenue when either the
coupons are exercised or Manhattan Today estimates that they will not be redeemed.
Requirement 3
Estimated price for discount coupon = $125 × 40% × 30% = $15

Revenue allocated to subscription = $135/150 × 130 = $117
Revenue allocated to discount coupon = $15/150 × 130 = $13
5-30
Chapter 5: Revenue
To record sales of 10 subscriptions

Cash ............................................................................... 1,300
Contract liability for subscription (117 × 10)............. 1,170
Contract liability for discount coupon........................ 130
Exercise 5-8
Requirement 1
Delivery of keyboards is one performance obligation. The special discount coupon

is a second performance obligation, as it provides a material right that the customer
would not receive otherwise. In this particular instance, the customer has the right to
receive a 25 percent discount, which is a 20 percent discount in addition to the normal
5 percent discount offered to other customers. The coupon is both capable of being
distinct, as it could be sold or provided separately, and it is separately identifiable, as
it is not highly interrelated with the other performance obligation of delivering
keyboards, and the seller’s role is not to integrate and customize them to create one
product. So, it is distinct and qualifies as a performance obligation.
5-31
Requirement 2
When two or more performance obligations are associated with a single transaction
price, the transaction price must be allocated to the performance obligations on the
basis of respective stand-alone selling prices (estimated if not directly available).
Meta’s estimated stand-alone selling price of the discount option is:
Value of the discount:

(25% discount − 5% normal discount)  $20,000 = $ 4,000
Estimated redemption  50%
Stand-alone selling price of discount: $ 2,000
Stand-alone selling price of the keyboards:
$19.6  5,000 keyboards = 98,000
Total of stand-alone prices $100,000
Meta first must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
$2,000
Discount: $2,000 + 98,000 = 2%
$98,000
Keyboards: = 98%
$2,000 + 98,000
100%
To record sales of keyboards

Cash ............................................................................... 95,000
Contract liability for keyboards (95,000 × 98%)........ 93,100
Contract liability for discount coupon........................ 1,900
Requirement 3
All customers are eligible for a 5 percent discount on all sales. Therefore, the 5
percent discount option issued to Bionic Co does not give any material right to the
customer, so it is not a performance obligation in the contract, and Meta would
account for both (a) the delivery of keyboards and (b) the 5 percent coupon as a single
performance obligation.
5-32
Chapter 5: Revenue
To record sales of keyboards

Cash ............................................................................... 95,000
Contract liability for keyboards ................................. 95,000
Exercise 5-9
Requirement 1
The expected value would be calculated as follows:

$70,000 ($50,000 fixed fee + 20,000 bonus) × 20% = $14,000
$50,000 ($50,000 fixed fee + 0 bonus) × 80% = 40,000
Expected contract price at inception $54,000
Or, alternatively: $50,000 + ($20,000 × 20%) = $54,000
Requirement 2
The most likely amount is the flat fee of $50,000 because there is a greater chance
of not qualifying for the bonus than of qualifying for the bonus, so that is the
transaction price.
Requirement 3
When there are uncertainties in the providing accurate estimates, IFRS 15

requires the revenue to be reported after the uncertainty is resolved. Hence,
actual and not expected revenue will be reported which means that Thomas
will not include the bonus estimate in the transaction price, and the transaction
price would be the flat fee of $50,000.
5-33
Exercise 5-10
Requirement 1
Using the most likely value method,

Expected transaction price = $1,000 × 10 = $10,000
July 15 Revenue from July 1 to July 15

Accounts receivable ....................................................... 10,000
Revenue ..................................................................... 10,000
Requirement 2
During the July 16 to July 31 period, Rocky earns guide revenue of another 15
days × $1,000 per day = $15,000. In addition, because Rocky estimates a greater than
50 percent chance it will earn the bonus, using the “most likely amount” approach, it
estimates a bonus receivable of $100 per day × (10 days + 15 days) = $2,500.

Accounts receivable ..................................................... 15,000
Bonus receivable .......................................................... 2,500
Revenue ..................................................................... 17,500
Requirement 3
On August 5, Rocky learns that it won’t receive a bonus, and receives only the
$25,000 balance in accounts receivable. Rocky must reduce its bonus
receivable to zero and record the offsetting adjustment in revenue.
August 5
Cash ............................................................................. 25,000
Revenue ......................................................................... 2,500
Accounts receivable ................................................... 25,000
Bonus receivable ........................................................ 2,500
5-34
Chapter 5: Revenue
Exercise 5-11
Requirement 1
Rocky’s normal guide revenue is 10 days × $1,000 per day = $10,000. Rocky
also estimates that there is a 30 percent chance it will earn the bonus, so its estimate of
the expected value of the bonus revenue earned to date is:

$1,000 ($100 bonus × 10 days) × 30% = $300
$0 ($0 bonus × 10 days) × 70% = -0-
Expected bonus as of July 15 $300
Or, alternatively: $100 × 10 days × 30% = $300

Accounts receivable ....................................................... 10,000
Bonus receivable ............................................................ 300
Revenue ..................................................................... 10,300
Requirement 2
During the July 16 to July 31 period, Rocky earns another 15 days × $1,000/day
= $15,000 of its normal guiding revenue. In addition, because Rocky now believes
there is an 80 percent chance it will earn the bonus, its estimate of the expected value
of the bonus revenue earned to date (based on all 25 days guided during July) is:

$2,500 ($100 bonus × 25 days) × 80% = $2,000
$0 ($0 bonus × 25 days) × 20% = -0-
Expected bonus as of July 31 $2,000
Or, alternatively: $100 × 25 days × 80% = $2,000.
With $300 of bonus receivable and revenue already recognized, Rocky must
recognize an additional $2,000 − $300 = $1,700 of bonus receivable and bonus
revenue. Rocky’s July 31 journal entry would be:
5-35

Bonus receivable ($2,000 − 300) ................................. 1,700
Revenue ..................................................................... 16,700
Requirement 3
On August 5, Rocky learns that it won’t receive a bonus, and receives only the
$25,000 balance in accounts receivable. Rocky also must reduce its bonus
receivable to zero and record the offsetting adjustment in revenue.
August 5
Cash ............................................................................. 25,000
Revenue ......................................................................... 2,000
Bonus receivable ........................................................ 2,000
5-36
Chapter 5: Revenue
Exercise 5-12
Requirement 1
June 1 To record sales of fur garments

Sales revenue .............................................................. 150,000
Requirement 2
Because the advertising services have a fair value ($5,000) that is less than the
amount paid by Furtastic to Willett ($12,000), the remaining amount ($7,000) is
viewed as a refund, reducing revenue by that amount.
June 15 To record refund

Advertising expenses ..................................................... 5,000
Sales revenue ................................................................. 7,000
Cash ............................................................................ 12,000
Requirement 3
June 30 To record receipt of cash

Cash ............................................................................... 150,000
Requirement 4
It is probable that Willett will pay Furtastic, so the relatively low likelihood of
impairment losses (bad debts) does not affect Furtastic’s recognition of revenue on the
Willet sale. If Furtastic had considered it less than probable that it would collect its
receivable from Willet, it would not have a contract on June 1 for purposes of revenue
recognition and would not recognize revenue until payment actually occurred on June
30. Payment must be probable for a contract to exist (IFRS 15 paragraph ((e)).
5-37
Exercise 5-13
Requirement 1
Under the adjusted market assessment approach, VP would base its estimate of the
stand-alone selling price of the installation service on the prices charged by other
vendors for that service, adjusted as necessary. Given that the other vendors are
similar to VP, no adjustment is necessary. Therefore, VP would estimate the stand-
alone selling price of the installation service to be $150, the amount charged by
competitors for that service
Requirement 2
Under the expected cost plus margin approach, VP would base its estimate of the
stand-alone selling price of the installation service on the $100 cost it incurs to
provide the service, plus its normal margin of 40% × $100 = $40. Therefore, VP
would estimate the stand-alone selling price of the installation service to be $100 + 40
= $140.
Requirement 3
Under the residual approach, VP would base its estimate of the stand-alone
selling price of the installation service on the total selling price of the package
($1,900) less the observable stand-alone selling prices of the TV ($1,750) and
universal remote ($100). Therefore, VP would estimate the stand-alone selling price
of the installation service to be $1,900 − ($1,750 + 100) = $50
5-38
Chapter 5: Revenue
Exercise 5-14
Requirement 1
Regarding the alternative approaches that can be used to estimate variable
consideration, the appropriate citation is:
IFRS 15 Revenue from Contracts with Customers. Paragraph 53
Requirement 2
Regarding the alternative approaches that can be used to estimate the stand-alone
selling price of performance obligations that are not sold separately, the appropriate
citation is:
IFRS 15 Revenue from Contracts with Customers. Paragraph 79
Requirement 3
Regarding the timing of revenue recognition with respect to licenses, the
appropriate citation is:
IFRS 15 Revenue from Contracts with Customers. Appendix B, paragraphs B52–
B63B.
Requirement 4
Regarding indicators for assessing whether a seller is a principal, the appropriate
citation is:
IFRS 15 Revenue from Contracts with Customers. Appendix B, paragraph B37.
5-39
Exercise 5-15
Requirement 1
Total price of contract $600,000
Less: Stand-alone price of training and (15,000)
certification
Less: Stand-alone price of equipment and building (450,000)
Estimated stand-alone price of five-year right $135,000
Requirement 2
As of July 1, 2018, Monitor has not fulfilled any of its performance obligations, so
the entire $600,000 franchise fee is recorded as contract liability
July 1
Cash ............................................................................. 75,000
Note receivable .............................................................. 525,000
Requirement 3
On September 1, 2018, Monitor has satisfied its performance obligations with

respect to training and certifying Perkins and delivering an equipped Monitor Muffler
building. Therefore, Monitor should recognize revenue of $15,000 + 450,000 =
$465,000 on that date. In addition, by December 31, 2018, Monitor has earned four
months of revenue (September–December) associated with the five-year right it
granted to Perkins, so Monitor should recognize revenue of $135,000 × (4 ÷ (5 × 12))
= $9,000 associated with that right. Total revenue recognized for the year ended
December 31, 2018, is $465,000 + 9,000 = $474,000
December 31
Revenue ($450,000 + 15,000 + 9,000) ...................... 474,000
5-40
Chapter 5: Revenue
Exercise 5-16
Requirement 1
Regarding disclosures that are required with respect to performance obligations
that the seller is committed to satisfying but that are not yet satisfied, the appropriate
citation is:
IFRS 15 Revenue from Contracts with Customers. Paragraph 116 (contract
liability) and Paragraph 119 (performance obligation in general).
Requirement 2
Regarding disclosures that are required with respect to contract assets and
contract liabilities, the appropriate citation is:
IFRS 15 Revenue from Contracts with Customers. Paragraph 116.
Exercise 5-17
Requirement 1
2018 2019
Contract price $2,000,000 $2,000,000
Actual costs to date 300,000 1,875,000
Estimated costs to complete 1,200,000 -0-
Total estimated costs 1,500,000 1,875,000
Gross profit (estimated in 2018) $ 500,000 $ 125,000
Revenue recognition:
2018: $300,000
= 20% × $2,000,000 = $400,000
$1,500,000
2019: $2,000,000 − 400,000 = $1,600,000
Gross profit recognition:

2018: $ 300,000
= 20% × $500,000 = $100,000
$1,500,000
5-41
2019: $125,000 − $100,000 = $25,000
Requirement 2
2018 $ -0-
2019 $125,000
Requirement 3
Statement of Financial Position

as of December 31, 2018
Current assets:
Accounts receivable $ 130,000
Contract asset ($400,000* − 380,000) 20,000
*$2,000,000 × 20%
5-42
Chapter 5: Revenue
Exercise 5-17 (concluded)
Requirement 4

Current assets:
Current liabilities:
Contract liability ($380,000 − 300,000) $ 80,000
Exercise 5-18
Requirement 1
($ in millions) 2018 2019 2020
Contract price $220 $220 $220
Actual costs to date 40 120 170
Estimated costs to complete 120 60 -0-
Total estimated costs 160 180 170
Estimated gross profit (actual in 2020) $ 60 $ 40 $ 50
2018: $40
= 25% × $220 = $55
$160
2019: $120
= (66.67% × $220) − $55 = $91.67
$180
2020: $220 − ($55 + $91.67) = $73.33
5-43
Gross profit (loss) recognition:
2018: $55 − 40 = $15
2019: $91.67 − 80 = $11.67
2020: $73.33 − 50 = $23.33
Note: We also can calculate gross profit directly using the percentage of
completion:
2018: $40
= 25% × $60 = $15
$160
2019: $120
= 66.67% × $40 = $26.67 − 15 = $11.67
$180
2020: $220 − 170 = $50 − (15 + 11.67) = $23.33
Requirement 2
Year Revenue Gross profit (loss)

recognized recognized
2018 -0- -0-
2019 -0- -0-
2020 $220 $50
Requirement 3
2019 Revenue recognition:
$120
=(60% × $220) − $55 = $77
$200
5-44
Chapter 5: Revenue
2019 Gross profit (loss) recognition:
$77 − 80 = $(3)
Note: Also can calculate gross profit directly using the percentage of completion:
$120
= 60% × $20* = $12 − 15 = $(3) loss
$200
*$220 − ($40 + 80 + 80) = $20
5-45
Exercise 5-19
Requirement 1
2018 2019 2020
Contract price $8,000,000 $8,000,000 $8,000,000
Actual costs to date 2,000,000 4,500,000 8,300,000
Estimated costs to complete 4,000,000 3,600,000 -0-
Total estimated costs 6,000,000 8,100,000 8,300,000
Estimated gross profit (loss)
(actual in 2020) $2,000,000 $ (100,000) $ (300,000)
2018: $2,000,000
= 33.3333% × $8,000,000 = $2,666,667
$6,000,000
2019: $4,500,000
= (55.5556% × $8,000,000) – $2,666,667 = $1,777,778
$8,100,000
2020: $8,000,000 – ($2,666,667 + 1,777,778) = $3,555,555
2018:
Percentage of completion = $2,000,000/6,000,000 = 33.33%
Gross profit: 33.3333% x $2,000,000 = $666,667
2019: $(100,000) – 666,667 = $(766,667)
2020: $(300,000) – (100,000) = $(200,000)
5-46
Chapter 5: Revenue
Exercise 5-19 (continued)

Requirement 2
2018 2019
Contract expense 2,000,000 2,544,444
Various accounts 2,000,000 2,500,000
Provision for onerous contract 44,444
To record contract costs.
Accounts receivable 2,500,000 2,750,000

Contract asset 2,500,000 2,750,000
To record progress billings.
Cash 2,250,000 2,475,000

To record cash collections.
Contract asset 2,666,667

Revenue from long-term contracts 2,666,667
To record contract revenue.

Revenue from long-term contracts 1,777,778
To record contract revenue.
Percentage completed (2019) = $4,500,000 ÷ $8,100,000 = 55.5556%*

Revenue recognized to date:
55.5556% x $8,000,000 = $4,444,444
Less: Revenue recognized in 2018 (above) (2,666,667)
Revenue recognized in 2019 1,777,778 (Requirement 1)
Provision for onerous contract (ignoring penalty costs):

Estimated total loss $100,000
Remaining % on total loss (44.4444% x $100,000) $44,444
Provision of $44,444 is the excess of estimated future costs over future revenue.
If termination for penalty is given, we need to consider the lower of estimated
future costs (fulfilment costs) and the penalty.
5-47
*There are rounding up differences due to decimal points applied

Requirement 3
Statement of Financial Position 2018 2019
Current assets:
Accounts receivable $250,000 $525,000
Contract asset ($2,666,667- $2,500,000) 166,667
Contract liability ($5,250,000 - $4,444,444) $805,556
Provision for onerous contract $44,444
5-48
Chapter 5: Revenue
Exercise 5-20
Requirement 1
Year Gross profit (loss) recognized
2018 -0-
2019 $(100,000)
2020 (200,000)
Total project loss $(300,000)
In this question, the project fails to meet the criteria in IFRS 15

paragraph 35 for revenue to be recognized on a continuous basis; hence,
revenue is recognized only at a point in time. The cost recovery method
does not apply in this situation as the issue is not one of reliable
estimation. However, given that a loss is expected on the contract, the loss
must be recognized in full as the contract is onerous (IAS 37
requirements).
Requirement 2
2018 2019
Contract asset 2,000,000 2,500,000
Various accounts 2,000,000 2,500,000
To record construction costs.

Contract asset 2,500,000 2,750,000
To record progress billings.
Cash 2,250,000 2,475,000

To record cash collections.
Construction expense 100,000

To record an expected loss.
Provision for onerous contract (ignoring penalty costs):

Estimated total loss $100,000
5-49
Provision of $100,000 for onerous contract must be recognized in full.

If termination for penalty is given, we need to consider the lower of estimated
future costs (fulfillment costs) and the penalty.
Requirement 3

Current assets:
Accounts receivable $250,000 $525,000
Contract liability ($2,500,000 − $2,000,000) $500,000
Contract liability ($5,250,000 − $4,500,000) $750,000
Provision for onerous contract $100,000
5-50
Chapter 5: Revenue
Exercise 5-21
SUMMARY
Gr. Profit Recognized Over Time Gr. Profit Recognized Upon

Completion
Situation 2018 2019 2020 2018 2019 2020
1 $166,667 $233,333 $100,000 $0 $0 $500,000
2 $166,667 $(66,667) $100,000 $0 $0 $200,000
3 $166,667 $(266,667) $(100,000) $0 $(100,000) $(100,000)
4 $125,000 $375,000 $0 $0 $0 $500,000
5 $125,000 $(125,000) $200,000 $0 $0 $200,000
6 $(100,000) $(100,000) $(100,000) $(100,000) $(100,000) $(100,000)
Situation 1—Revenue Recognized Over Time
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
Estimated costs to complete 3,000,000 900,000 -0-
Estimated gross profit
(actual in 2020) $ 500,000 $ 500,000 $ 500,000
Gross profit (loss) recognized:
2018: $1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2019: $3,600,000
= 80.0% × $500,000 = $400,000 − 166,667 = $233,333
$4,500,000
2020: $500,000 − 400,000 = $100,000
5-51
Situation 1—Revenue Recognized Upon Completion
Year Gross profit recognized

2018 -0-
2019 -0-
2020 $500,000
Total gross profit $500,000
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2020) $ 500,000 $ 200,000 $ 200,000
2018: $1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2019: $2,400,000
= 50.0% × $200,000 = $100,000 − 166,667 = $(66,667)
$4,800,000
2020: $200,000 − 100,000 = $100,000
Situation 2—Upon completion

2018 -0-
2019 -0-
5-52
Chapter 5: Revenue
2020 $200,000
5-53
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2020) $ 500,000 $ (100,000) $ (200,000)
2018: $1,500,000
= 33.3333% × $500,000 = $166,667
$4,500,000
2019: $(100,000) − 166,667 = $(266,667)
2020: $(200,000) − (100,000) = $(100,000)

2018 -0-
2019 $(100,000)
2020 (100,000)
5-54
Chapter 5: Revenue
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
Actual costs to date 500,000 3,500,000 4,500,000
Estimated costs to complete 3,500,000 875,000 -0-
(actual in 2020) $1,000,000 $ 625,000 $ 500,000
2018: $ 500,000
= 12.5% × $1,000,000 = $125,000
$4,000,000
2019: $3,500,000
= 80.0% × $625,000 = $500,000 − 125,000 = $375,000
$4,375,000
2020: $500,000 − 500,000 = $ - 0 -

2018 -0-
2019 -0-
2020 $500,000
5-55
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2020) $1,000,000 $
$ 200,000
2018: $ 500,000
= 12.5% × $1,000,000 = $125,000
$4,000,000
2019: $ 0 − 125,000 = $(125,000)
2020: $200,000 − 0 = $200,000

2018 -0-
2019 -0-
2020 $200,000
5-56
Chapter 5: Revenue
2018 2019 2020

Contract price $5,000,000 $5,000,000 $5,000,000
(actual in 2020) $ (100,000) $ (200,000) $ (300,000)
2018: $(100,000)
2019: $(200,000) − (100,000) = $(100,000)
2020: $(300,000) − (200,000) = $(100,000)

2018 $(100,000)
2019 (100,000)
2020 (100,000)
Exercise 5-22
Requirement 1
Cumulative revenue = Costs incurred + Profit recognized
$100,000 = ? + $20,000
Actual costs incurred in 2018 = $80,000
5-57
Requirement 2
Billings = Cash collections + Accounts Receivable
$94,000 = ? + $30,000
Cash collections in 2018 = $64,000

Requirement 3
Let A = Actual cost incurred + Estimated cost to complete
Actual cost incurred

× (Contract price − A) = Profit recognized
A
$80,000
($1,600,000 − A) = $20,000
A
$128,000,000,000 − 80,000A = $20,000A
$100,000A = $128,000,000,000
A = $1,280,000
Estimated cost to complete = $1,280,000 − 80,000 = $1,200,000

Requirement 4
$80,000
= 6.25%
$1,280,000
5-58
Chapter 5: Revenue
Exercise 5-23
Requirement 1
The additional pots required to be transferred by Green Meadows are considered a

distinct good and the increase in contract price corresponds to the stand-alone prices
of additional pots, thus the contract modification will be accounted for as a separate
contract.
Revenue in December 2020 = (600 + 350) × $15 = $14,250
Revenue in January 2021 = 150 × $15 + 400 × $13 = $7,450
Exercise 5-24
Requirement 1
The additional pots required to be transferred by Green Meadows are considered a

distinct good. However the contracted price is lower than the stand-alone selling price.
Hence, an implicit discount must be spread over the remaining units of the old
contract and the new units.
Total remaining and new units at December 20, 2020 = 350 + 150 + 400 = 900
Blended price per unit = (500 × $15 + 400 × $13) /900 = $14.11
Revenue in December 2020 = 600 × $15 + 350 × $14.11 = $13,939

Revenue in January 2021 = 550 × $14.11 = $7,761
5-59
Exercise 5-25
Requirement 1
The additional phones required to be transferred by Magi-Phone are considered a

distinct good and the increase in contract price corresponds to the stand-alone prices
of additional phones, thus the contract modification will be accounted for as a separate
contract.
Revenue in December 2020 = (100 + 50) × $315 = $47,250
Revenue in January 2021 = 200 × $365= $73,000
Exercise 5-26
Requirement 1
The additional phone required to be transferred by Magi-Phone are considered a

distinct good; however, the contracted price is lower than the stand-alone selling
price. Hence, an implicit discount must be spread over the remaining units of the old
contract and the new units.
Total remaining and new units at December 3, 2020 = 150 + 200 = 350
Blended price per unit = (150 × $315 + 200 × $365)/350 = $343.57
Revenue in December 2020 = (100 + 50) × $343.57 = $51,536

Revenue in January 2021 = 200 × $343.57= $68,714
Exercise 5-27
Requirement 1
Additional fee of $15,000 to cover cost overruns due to delays does not
represent a distinct performance obligation. Hence, total transaction price is adjusted
and allocated progressively to the remaining obligations. Adjustment is based on a
cumulative catch-up basis.
2019 2020 2021
Contract price $110,000 $125,000 $125,000
Actual costs to date 52,000 90,000 105,000
Total estimated costs 100,000 105,000 105,000
5-60
Chapter 5: Revenue

(actual in 2021) $ 10,000 $20,000 $ 20,000
2019:
Revenue recognized = $110,000 × 52,000/100,000 = $57,200
2020:
Revenue recognized = ($125,000 × 90,000/105,000) – 57,200 = $49,943
2021:
Revenue recognized = $125,000 − 57,200 − 49,943= $17,857
Exercise 5-28
Requirement 1
Additional fee of $15,000 for data analysis is seen as a distinct performance

obligation and hence should be accounted for as a separate contract.
2019 2020 2021
Contract price $110,000 $110,000 $110,000
Actual costs to date 52,000 90,000 105,000
Total estimated costs 100,000 105,000 105,000
(actual in 2021) $ 10,000 $5,000 $ 5,000
2019:
Revenue recognized = $110,000 × 52,000/100,000 = $57,200
2020:
Revenue recognized = ($110,000 × 90,000/105,000) − 57,200 + 15,000 = $52,086
2021:
Revenue recognized = $110,000 − 57,200 − 37,086 = $15,714
5-61
Exercise 5-29
Requirement 1
Flush-with-Funds does not have control over the inventory since it has to resell
the inventory back to Trim-Sails eventually. Hence, this should be treated as a single
contract. The sale and repurchase agreement is effectively a financing arrangement.
The selling price is effectively a loan given to Trim-Sails from Flush-with-Funds. The
difference in the repurchase price and the selling price is effectively the finance cost
on the financing transaction.
Requirement 2—Books of Trim-Sails
December 15, 2020

Cash................................................................................ 600,000
Loan payable............................................................... 600,000
December 31, 2020

Interest expense.............................................................. 2,500
Accrued interest.......................................................... 2,500
January 14, 2021

Loan payable................................................................... 600,000
Accrued interest.............................................................. 2,500
Interest expense.............................................................. 2,500
Cash............................................................................ 605,000
5-62
Chapter 5: Revenue
Requirement 3—Books of Flush-with-Funds
December 15, 2020

Loan receivable............................................................... 600,000
Cash............................................................................ 600,000
December 31, 2020

Interest receivable........................................................... 2,500
Interest income............................................................ 2,500
January 14, 2021

Cash................................................................................ 605,000
Loan receivable........................................................... 600,000
Interest receivable....................................................... 2,500
Interest income............................................................ 2,500
5-63
Problems
Problem 5-1
Requirement 1
a. Number of performance obligations in the contract: 2.
The unlimited access to facilities and classes for one year is one performance
obligation. Because the discount voucher provides a material right to the customer
that the customer would not receive otherwise (a 25 percent discount rather than a
10 percent discount), it is a second performance obligation. The discount voucher
is capable of being distinct because it could be sold or provided separately, and it is
separately identifiable, as it is not highly interrelated with the other performance
obligation of providing access to Fit & Slim’s facilities, and the seller’s role is not
to integrate and customize them to create one product or service. So, the discount
coupon qualifies as a performance obligation.
b. To allocate the contract price to the performance obligations, we should first

consider that Fit & Slim would offer a 10 percent discount on the yoga course to all
customers as part of its normal promotion strategy. So, a 25 percent discount
provides a customer with an incremental value of 15 percent (25 percent −10
percent). Thus, the estimated stand-alone selling price of the course voucher
provided by Fit & Slim is $30 ($500 initial price of the course  15 percent
incremental discount  40 percent likelihood of exercising the option).
F&S’s estimated stand-alone selling price of the discount option is:

Value of the yoga discount voucher:
(25% discount − 10% normal discount)  $500 = $ 75
Stand-alone selling price of yoga discount voucher: $ 30
Stand-alone selling price of gym membership: 720
Total of stand-alone prices $750
5-64
Chapter 5: Revenue
Problem 5-1 (continued)

c. F&S must identify each performance obligation’s share of the sum of the
$30
Yoga discount voucher: $30 + 720 = 4%
$720
Gym membership: = 96%
$30 + 720
100%
F&S then allocates the total selling price based on stand-alone selling prices, as
follows:
$700
Transaction
Price
96% 4%
$672 $28
Gym Yoga discount voucher

membership
The journal entry to record the sale is:
Cash 700
Contract liability—membership fees 672
Contract liability—yoga coupon 28
5-65
Problem 5-1 (concluded)
Requirement 2
a. Number of performance obligations in the contract: 1.
The access to the gym for 50 visits is one performance obligation. The option to
pay $15 for additional visits does not constitute a material right because it requires
the same fee as would normally be paid by nonmembers. Therefore, it is not a
performance obligation in the contract.
(Note: It could be argued that the coupon book actually includes 50 performance
obligations—one for each visit to the gym. That would end up producing a very
similar accounting outcome, as the $500 cost of the book would be allocated to the
50 visits with revenue recognized for each visit.)
b. Since the option to visit on additional days is not a performance obligation, F&S
should not allocate any of the contract price to the option. Therefore, the entire
$500 payment is allocated to the 50 visits associated with the coupon book.
c. Cash 500
Contract liability–coupon book 500
5-66
Chapter 5: Revenue
Problem 5-2
Requirement 1
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50 percent discount is a second performance
obligation because it provides a material right to the customer that the customer would
not receive otherwise. The option is capable of being distinct because it could be sold
or provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligation of delivering a Protab computer, and the seller’s
role is not to integrate and customize them to create one product. So, the discount
coupon qualifies as a performance obligation.
The six-month quality assurance warranty is not a performance obligation. It is not
sold separately and is simply a cost to assure that the product is of good quality. The
seller will estimate and recognize an expense and related contingent warranty liability
in the period of sale.
The coupon providing an option to purchase an extended warranty does not
provide a material right to the customer because the extended warranty costs the same
whether or not it is purchased along with the Protab. Therefore, that option does not
constitute a performance obligation within the contract to purchase a Protab package.
5-67
Requirement 2
Allocation of purchase price to performance obligations:
Allocation of
Percentage of the sum total
Stand-alone of the stand-alone transaction
selling price of selling prices of the price to each
Performance the performance performance performance
obligation: obligation: obligations: obligation:
Protab tablet $76,000,0001 95%3 $74,100,0005
Option to
purchase a 4,000,0002 5%4 3,900,0006
Probook
Total $80,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount
coupons issued × 20% probability of redemption.
3
95% = $76,000,000 ÷ $80,000,000
4
5% = $4,000,000 ÷ $80,000,000
5
$74,100,000 = 95.00% × ($780 × 100,000 units)
6
$3,900,000 = 5.00% × ($780 × 100,000 units)
5-68
Chapter 5: Revenue
Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices, as
follows:
$78,000,000
Transaction
Price
95% 5%
$74,100,000 $3,900,000
Protab Probook discount vouchers

computers
Cash ($780 × 100,000 units) 78,000,000
Sales revenue 74,100,000
Contract liability—discount option 3,900,000
5-69
Problem 5-3
Requirement 1
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50 percent discount is a second performance
obligation because it provides a material right to the customer that the customer would
not receive otherwise. The option is capable of being distinct because it could be sold
or provided separately, and it is separately identifiable, as it is not highly interrelated
with the other performance obligations in the contract, so the discount coupon
qualifies as a performance obligation.
The six-month quality assurance warranty is not a performance obligation. It is not
sold separately and is simply a cost to assure that the product is of good quality. The
seller will estimate and recognize an expense and related contingent warranty liability
in the period of sale.
The option to purchase the extended warranty provides a material right to the
customer, as the extended warranty costs less when purchased with the coupon that
was included in the Protab Package ($50) than it does when purchased separately
($75), so it is a third performance obligation. The option is capable of being distinct
because it could be sold or provided separately, and it is separately identifiable, as it is
not highly interrelated with the other performance obligations in the contract, and the
seller’s role is not to integrate and customize them to create one product or service.
So, the discount coupon qualifies as a performance obligation.
5-70
Chapter 5: Revenue
Requirement 2
Allocation of purchase price to performance obligations:
Percentage of the Allocation of

sum of the stand- total transaction
Stand-alone alone selling prices price to each
selling price of of the performance performance
Performance the performance obligations (to two obligation:
obligation: obligation: decimal places):
Protab tablet $76,000,0001 93.83%4 $73,187,4007
Option to purchase
Probook 4,000,0002 4.94%5 3,853,2008
Option to purchase
extended warranty 1,000,0003 1.23%6 959,4009
Total $81,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount
coupons issued × 20% probability of redemption.
3
$1,000,000 = ($75 price of warranty sold separately minus $50 price of warranty
sold at time of software purchase) × 100,000 units sold × 40% probability of exercise
of option.
4
93.83% = $76,000,000 ÷ $81,000,000
5
4.94% = $4,000,000 ÷ $81,000,000
6
1.23% = $1,000,000 ÷ $81,000,000
7
$73,187,400 = 93.83% × ($780 × 100,000 units)
8
$3,853,200 = 4.94% × ($780 × 100,000 units)
9
$959,400 = 1.23% × ($780 × 100,000 units)
5-71
Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices, as
follows:
$78,000,000
Transaction
Price
93.83% 4.94% 1.23%
$73,187,400 $3,853,200 $959,400
Protab Probook discount vouchers Extended

computers warranty

Cash ($800 × 100,000 units) 78,000,000
Sales revenue 73,187,400
Contract liability—discount option 3,853,200
Contract liability—extended warranty 959,400
5-72
Chapter 5: Revenue
Problem 5-4
Requirement 1
The delivery of Supply Club’s normal products is one performance obligation. The
promise to redeem loyalty points represents a material right to customer that they
would not receive otherwise, so that loyalty points represent a second performance
obligation. The loyalty program really provides customers with a discount option on
future purchases. That option is capable of being distinct because it could be sold or
with the other performance obligation of delivering products under normal sales
agreements (the customer can redeem loyalty points for future purchases). Therefore,
the promise to redeem loyalty points qualifies as a performance obligation.
Because there are two performance obligations associated with a single transaction
price ($135,000), the transaction price must be allocated between the two performance
obligations on the basis of stand-alone prices.
Supply Club’s estimated stand-alone selling price of the loyalty points is:
Value of the loyalty points:
125,000 points  $0.20 discount per point = $ 25,000
Stand-alone selling price of loyalty points: $ 15,000
Stand-alone selling price of purchased products: 135,000
Total of stand-alone prices $150,000
Supply Club must identify each performance obligation’s share of the sum of the
$15,000
Loyalty points: $15,000 + 135,000 = 10%
$135,000
Purchased products: = 90%
$15,000 + 135,000
100%
5-73

Supply Club then allocates the total selling price based on stand-alone selling
prices, as follows:
$135,000
Transaction
Price
90% 10%
$121,500 $13,500
Purchased products Loyalty points
The journal entry to record July sales would be:
Cash ($135,000 × 80%) 108,000

Accounts receivable ($135,000 × 20%) 27,000
Sales revenue 121,500
Deferred revenue—loyalty points 13,500
Requirement 2
Cash ($60,000 × 75% × 80%)* 36,000
Accounts receivable ($60,000 × 25% × 80%)* 12,000
Deferred revenue—loyalty points** 10,800
Sales revenue (to balance) 58,800
*
Sales are discounted by 20 percent when points are redeemed, so only 80 percent
of each dollar sold is received. Seventy-five percent of sales are for cash, and 25
percent are on credit.
**
Supply Club expected that 60 percent of the 125,000 awarded points would
eventually be redeemed. 60% × 125,000 = 75,000. Therefore, the 60,000 August
redemptions constitute 60,000 ÷ 75,000 = 80% of total redemptions expected.
Because Supply Club assigned $13,500 of deferred revenue to the July loyalty
points, Supply Club should recognize revenue of $13,500 × 80% = $10,800.
5-74
Chapter 5: Revenue
Problem 5-5
Requirement 1
The contract requires six payments of $20,000, plus or minus $10,000 at the end of
the contract. So the contract will provide either [(6  $20,000) + $10,000] =
$130,000, or [(6  $20,000) − $10,000] = $110,000.
Revis would estimate the expected value of the transaction price as follows:
Possible Expected
Prices Probability Consideration
$130,000 ([$20,000  6] + $10,000) 80% $104,000

$110,000 ([$20,000  6] − $10,000) 20% 22,000
Expected value of contract price at inception $126,000
Each month Revis will recognize $21,000 ($126,000 ÷ 6) of revenue, recording the
following journal entry:
Cash 20,000
Bonus receivable 1,000
Service revenue 21,000
Requirement 2
After six months, the bonus receivable will have accumulated to $6,000 (6 
$1,000). If Revis receives the bonus, it will record the following entry:
Cash 10,000
5-75
Requirement 3
If Revis pays the penalty, it will record the following entry:

Cash 10,000
5-76
Chapter 5: Revenue
Problem 5-6
Requirement 1
Cash 80,000
Contract liability 80,000
Because Super Rise believes that unexpected delays are likely and that it will not
earn the $40,000 bonus, Super Rise is not likely to receive the bonus. Thus, the
$40,000 is not included in the transaction price, and only the fixed payment of
$80,000 is recognized as contract liability.
Requirement 2
Contract liability ($80,000 ÷ 10) 8,000

Bonus receivable ($40,000 ÷ 10) 4,000
Super Rise earns revenue of $12,000 associated in the month of January. Because
Super Rise believes it is likely to receive the bonus, it will estimate the transaction
price to be $120,000 ($80,000 fixed payment + $40,000 bonus), and will recognize
1/10 of that amount each month.
Requirement 3

Bonus receivable [($40,000 ÷ 10) × 5] 20,000
Super Rise earns revenue of $8,000 in each month, including May, based on the
original transaction of $80,000 ($80,000 ÷ 10 months). However, no bonus receivable
had been recognized prior to May because unexpected delays were considered likely
and thus no bonus was expected. In May, Super Rise concludes it is likely to receive
the bonus, so it will revise the transaction price to $120,000 ($80,000 fixed payment +
$40,000 contingent bonus). This means Super Rise must record additional revenue of
$20,000 to adjust revenue to the appropriate amount [($40,000 bonus receivable ÷ 10
months) × 5 months] and recognize a receivable for that amount.
Problem 5-7
Requirement 1
5-77
Cash 80,000
Because Super Rise has high uncertainty about its bonus estimate, it can’t argue
that it is probable that it won’t have to reverse (adjust downward) a significant amount
of revenue in the future because of a change in its estimate. Therefore, the $40,000 is
not included in the transaction price, and only the fixed payment of $80,000 is
recognized as deferred revenue.
Requirement 2

Bonus receivable [($40,000 ÷ 10) × 5] 20,000
Super Rise earns revenue of $8,000 in the month of May based on the original
transaction of $80,000 ($80,000 ÷ 10 months). In addition, now that Super Rise can
make an accurate estimate, it can argue that it is probable that it won’t have to reverse
(adjust downward) a significant amount of revenue in the future because of a change
in its estimate. Therefore, Super Rise will revise the transaction price to $120,000
($80,000 fixed payment + $40,000 contingent bonus). This means Super Rise must
record additional revenue of $20,000 to adjust revenue to the appropriate amount
[($40,000 bonus receivable ÷ 10 months) × 5 months] and recognize a receivable for
that amount.
5-78
Chapter 5: Revenue
Problem 5-8
Requirement 1
At the contract’s inception, Velocity calculates the transaction price to be the
expected value of the two possible eventual prices:
Possible Expected
Prices Probabilities Consideration
$500,000 ([$60,000  8] + $20,000) 80% $400,000

$460,000 ([$60,000  8] – $20,000) 20% 92,000
Expected value at contract inception: $492,000
Because its consulting services are provided evenly over the eight months,
Velocity will recognize revenue of $61,500 ($492,000 ÷ 8 months = $61,500).
Because Velocity is guaranteed to receive only $60,000 per month ($1,500 less than
the revenue recognized), it will recognize a bonus receivable of $1,500 in each month
to reflect the expected value of the bonus amount to be received at the end of the
contract. Therefore, Velocity’s journal entry to record the revenue each month for the
first four months is as follows:
Accounts receivable 60,000

5-79

Requirement 2
By the end of the fourth month, the bonus receivable account would have a balance
of $6,000 (4  $1,500), equal to half of the expected value of the bonus of $12,000
($492,000 − [8  $60,000]). After four months, the estimated likelihood of receiving
the bonus is revised so the estimated transaction price decreases:
Possible Expected
Prices Probabilities Consideration
$500,000 ([$60,000  8] + $20,000) 60% $300,000

$460,000 ([$60,000  8] − $20,000) 40% 184,000
Transaction price after four months: $484,000
So, after four months, the bonus receivable account should have a balance of
$2,000, which is half of the new expected value of the bonus of $4,000 ($484,000 − [8
 $60,000]). Because the bonus receivable account was increased to $6,000 in the first
four months, an adjustment of $4,000 is needed to reduce the bonus receivable down
to $2,000:

This entry reduces the bonus receivable from $6,000 to $2,000, with the offsetting
debit being a reduction in revenue. Over the remaining four months, the bonus
receivable will increase by $500 each month, accumulating to $4,000 by the end of
the contract.
5-80
Chapter 5: Revenue

Requirement 3
Because services are provided evenly over the eight months, Velocity would
recognize revenue of $60,500 ($484,000 ÷ 8 months) in each of months five through
eight. Because Velocity received $60,000 per month ($500 less than the revenue
recognized), Velocity would recognize a bonus receivable of $500 each month to
reflect the additional service revenue in excess of its unconditional right to $60,000.
The journal entry would be:
Accounts receivable 60,000

Bonus receivable 500
Requirement 4
At the end of contract, Velocity learns that it will receive the bonus of $20,000. It
already has recognized revenue of $4,000 associated with the bonus. Therefore, when
Velocity receives the cash bonus, it will recognize additional revenue of $16,000.
Cash 20,000
5-81
Problem 5-9
Requirement 1
Regarding accounting for variable consideration arising from sales-based

royalties on licenses of intellectual property, the specific citation is:
IFRS 15 Revenue from Contracts with Customers. Paragraph B63.
Tran recognizes revenue from sales-based royalties on licenses of intellectual

property at the later of the two events:
(a) subsequent sale or usage;
(b) performance obligation relating to the allocated royalty has been satisfied.
Therefore, Tran can’t recognize revenue for sales-based royalties on the Lyon license
until sales have actually occurred.
Requirement 2
If Tran accounts for the Lyon license of the intellectual property as a right of use*
that is conveyed on April 1, 2018, Tran can recognize revenue of $500,000 on that
date because that is the date upon which Tran transfers to Lyon the right to use its
intellectual property. The journal entry would be:
Cash 500,000
License revenue 500,000
*Corrigendum: The license is a right of use; hence Tran’s actions subsequent to April
1, 2018, will not substantially affect the benefits that Lyon receives from access to
Tran’s intellectual property.
Requirement 3
Tran recognizes revenue for sales-based royalties in the period of the sales, which
is the latter of the subsequent sales by Lyon and the satisfaction of the performance
obligation (transfer of the right of use). Tran earned $1,000,000 of royalties on Lyon’s
sales in 2018, so it should recognize revenue in that amount. The journal entry would
be:
Cash 1,000,000
License revenue 1,000,000
5-82
Chapter 5: Revenue
Requirement 4
If Tran accounts for the Lyon license of intellectual property* as right of access for
the period from April 1, 2018, through March 31, 2023, Tran cannot recognize any
revenue on April 1, 2018, because it fulfills its performance obligation over the access
period and no time has yet passed. Instead, Tran must recognize contract liability of
$500,000. The journal entry would be:
Cash 500,000
As of December 31, 2018, Tran has partially fulfilled its performance obligation to
provide access to its intellectual property*. Given that the right of access covers a
five-year period (from April 1, 2018, through March 31, 2023), and Tran provided
access for nine months of 2018 (from April 1, 2018, through December 31, 2018),
Tran has provided 15% [9 ÷ (5 × 12)] of the access right during 2018 and should
recognize 15% × $500,000 = $75,000 of revenue. Tran also should recognize revenue
for the $1,000,000 of royalties arising from Lyon’s sales in 2018. So, total revenue
recognized in 2018 is $75,000 + 1,000,000 = $1,075,000. The journal entry would be:
Cash 1,000,000
License revenue 1,075,000
(*In US GAAP, these intellectual properties would be described as symbolic intellectual

property.)
5-83
Problem 5-10
Requirement 1
2018 2019 2020
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2020) $ 2,000,000 $ 2,000,000 $ 1,800,000
2018: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2019: $6,000,000
= 75.0% × $10,000,000 − 3,000,000 = $4,500,000
$8,000,000
2020: $10,000,000 − 7,500,000 = $2,500,000

2018: $3,000,000 − 2,400,000 = $600,000
2019: $4,500,000 − 3,600,000 = $900,000
2020: $2,500,000 − 2,200,000 = $300,000
Note: Also can calculate gross profit directly using the percentage of completion:
2018: $2,400,000
= 30.0% × $2,000,000 = $600,000
$8,000,000
2019: $6,000,000
5-84
Chapter 5: Revenue
= 75.0% × $2,000,000 = $1,500,000 − 600,000 = $900,000

$8,000,000
2020: $1,800,000 − 1,500,000 = $300,000
5-85
Requirement 2
2018 2019 2020
Contract expense 2,400,000 3,600,000 2,200,000

Various accounts 2,400,000 3,600,000 2,200,000
To record contract expense
Accounts receivable 2,000,000 4,000,000 4,000,000

Contract asset 2,000,000 4,000,000 4,000,000
To record progress billings
Cash 1,800,000 3,600,000 4,600,000

To record cash collections
Contract asset 3,000,000 4,500,000 2,500,000

Revenue from long-term 3,000,000 4,500,000 2,500,000
contracts
To record contract revenue
Requirement 3
Statement of Financial 2018 2019

Position
Current assets:
Accounts receivable $ 200,000 $600,000
Contract asset 1,000,000 1,500,000
5-86
Chapter 5: Revenue
Note: Construction revenue in excess of billings is a contract asset;

Billings in excess of construction revenue is a contract liability.
2018: Contract asset = Construction revenue ($3,000,000) − Progress billings

($2,000,000) = $1,000,000
2019: Contract asset, January 1, 2019 ($1,000,000) + Construction revenue

($4,500,000) − Progress billings ($4,000,000) = $1,500,000
5-87
Requirement 4
2018 2019 2020
Costs incurred during the year $2,400,000 $3,800,000 $3,200,000
Estimated costs to complete
as of year-end 5,600,000 3,100,000 -
2018 2019 2020
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2020) $ 2,000,000$ 700,000 $ 600,000
2018: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2019: $6,200,000
= 66.6667% × $10,000,000 − 3,000,000 = $3,666,667
$9,300,000
2020: $10,000,000 − 6,666,667 = $3,333,333
2018: $3,000,000 − 2,400,000 = $600,000
2019: $3,666,667 − 3,800,000 = $(133,333)
2020: $3,333,333 − 3,200,000 = $133,333
5-88
Chapter 5: Revenue

Note: We can also calculate gross profit directly using the percentage of completion:
2018: $2,400,000
= 30.0% × $2,000,000 = $600,000
$8,000,000
2019: $6,200,000
= 66.6667% × $700,000 = $466,667 − 600,000 = $(133,333)
$9,300,000
2020: $600,000 − 466,667 = $133,333
Requirement 5
2018 2019 2020
as of year-end 5,600,000 4,100,000 -
2018 2019 2020
Contract price $10,000,000 $10,000,000 $10,000,000
(actual in 2020) $ 2,000,000 $ (300,000) $ (100,000)
2018: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
$8,000,000
2019: $6,200,000
= 60.19417% × $10,000,000 − 3,000,000 = $3,019,417
$10,300,000
2020: $10,000,000 − 6,019,417 = $3,980,583
5-89
2018: $3,000,000 − 2,400,000 = $600,000
2019: $(300,000) − 600,000 = $(900,000)
2020: $(100,000) − (300,000) = $200,000
5-90
Chapter 5: Revenue
Problem 5-11
Requirement 1
Year Revenue Gross profit

2018 -0- -0-
2019 -0- -0-
2020 $10,000,000 $1,800,000
Total $10,000,000 $1,800,000
In this question, the project fails to meet the criteria in IFRS 15
paragraph 35 for revenue to be recognized on a continuous basis; hence,
revenue is recognized only at a point in time. The cost recovery method
does not apply in this situation as the issue is not one of reliable
estimation.
Requirement 2
2018 2019 2020

Contract asset 2,400,000 3,600,000 2,200,000
Various accounts 2,400,000 3,600,000 2,200,000
To record construction costs

Contract asset 2,000,000 4,000,000 4,000,000
Cash 1,800,000 3,600,000 4,600,000

Contract expense 8,200,000

To recognize contract expense

Revenue from long-term 10,000,000
contracts
To recognize contract revenue
5-91
Requirement 3
Statement of Financial 2018 2019

Position
Current assets:
Accounts receivable $ 200,000 $ 600,000
Contract asset 400,000 -0-
Note: Construction revenue in excess of billings is a contract asset.
Requirement 4
2018 2019 2020
as of year-end 5,600,000 3,100,000 -
Year Revenue Gross profit
2018 -0- -0-
2019 -0- -0-
2020 $10,000,000 $600,000
Total $10,000,000 $600,000
Requirement 5
2018 2019 2020
as of year-end 5,600,000 4,100,000 -
Year Revenue Gross profit (loss)

2018 -0- -0-
2019 -0- $(300,000)
2020 $10,000,000 200,000
Total $10,000,000 $(100,000)
5-92
Chapter 5: Revenue
Problem 5-12
Requirement 1 (assuming recognition at a point in time)
2018 2019 2020
Contract price $4,000,000 $4,000,000 $4,000,000
(actual in 2020) $ 500,000 $ (200,000) $ (250,000)
2018 -0-
2019 $(200,000)
2020 (50,000)
Requirement 2 (assuming recognition over time)

2018: Revenue: (10% × $4,000,000) − 350,000 cost = $50,000
2019: $(200,000) − 50,000 = $(250,000)
2020: $(250,000) − (200,000) = $(50,000)
Requirement 3 (assuming recognition over time)

Current assets:
Contract asset ($2,714,286* − $2,170,000) $544,286
Contract liability ($720,000 − $400,000) $ 320,000
Provision for onerous contract** $64,286
5-93
*Cumulative revenue as of December 31, 2019

= $2,850,000/$4,850,000 × $4,000,000
= 67.8571% × $4,000,000
= $2,714,286 (Rounding up)
**Remaining percent to complete as of December 31, 2019 × Estimated total loss

= 32.1429% × $200,000
= $64,286 (Rounding up)
Problem 5-13
Requirement 1
Recognizing revenue upon completion of long-term construction contracts is
equivalent to recognizing revenue at the point in time at which delivery occurs.
Recognizing revenue over time requires assigning a share of the project’s expected
revenues and costs to each construction period. The share is estimated based on the
project’s costs incurred each period as a percentage of the project’s total estimated
costs.
Requirement 2
2018 2019
Contract price $20,000,000 $20,000,000
Actual costs to date 4,000,000 13,500,000
Estimated costs to complete 12,000,000 4,500,000
Estimated gross profit $ 4,000,000 $ 2,000,000
a. Revenue recognition: If revenue is recognized upon project completion, Citation

would not report any revenue in the 2018 or 2019 income statements.
b. Gross profit recognition:

If revenue is recognized upon project completion, Citation would not report gross
profit until the project is completed. Citation would have to report an overall
gross loss on the contract in whatever period it first revises the estimates to
5-94
Chapter 5: Revenue
determine that an overall loss will eventually occur. Citation never estimates the
Altamont contract will earn a gross loss, so never has to recognize one.
c.

Current assets:
Contract asset ($4,000,000* − $2,000,000)
2,000,000
* If revenue is recognized upon project completion, this account would only

include costs of $4,000,000.
Requirement 3
2018 2019
Contract price $20,000,000 $20,000,000
Estimated gross profit $ 4,000,000 $ 2,000,000
a. Revenue recognition:
2018:
$ 4,000,000
Revenue: = 25% × $20,000,000 = $5,000,000
$16,000,000
2019:
$13,500,000
Revenue: = 75% × $20,000,000 = $15,000,000
$18,000,000
Less: 2018 revenue 5,000,000
2019 revenue $10,000,000
5-95
2018: Gross Profit: $5,000,000 − 4,000,000 = $1,000,000

2019: Gross Profit: $10,000,000 − 9,500,000 = $500,000
c. Statement of Financial Position

Current assets:
Contract asset ($5,000,000* − $2,000,000)
3,000,000
* Cumulative revenue as of December 31, 2018

Contract asset is the excess of contract revenue over progress billings.
Requirement 4
2018 2019
Contract price $20,000,000 $20,000,000
Estimated gross profit $ 4,000,000 ($ 2,500,000)
a. Revenue recognition:
Total revenue recognized to date = (percentage complete) × (total revenue)

= ($13,500,000 ÷ 22,500,000) × ($20,000,000)
= (60%) × ($20,000,000)
= $12,000,000
Revenue recognized in 2019 = total − revenue recognized in prior periods
5-96
Chapter 5: Revenue
= $12,000,000 − 5,000,000 = $7,000,000

2019: Overall loss of ($2,500,000) − previously recognized gross profit of

$1,000,000 = $3,500,000.
c. Statement of Financial Position

as oft December 31, 2019
Current assets:
Accounts receivable $ 1,600,000
Contract asset* $3,000,000
Provision for onerous contract $1,000,000
* Contract asset is the excess of cumulative revenue over progress billings

= Cumulative revenue $15,000,000 less progress billings $12,000,000
= $3,000,000
**Provision for onerous contract = 40% × overall loss of $2,500,000 = $1,000,000
Requirement 5
Citation should recognize revenue at the time of delivery, when the homes are
completed and title is transferred to the buyer. Recognizing revenue over time is not
appropriate in this case, because the criteria for revenue recognition over time are not
met. Specifically, the customers are not consuming the benefit of the seller’s work as
it is performed (criterion 1 in IFRS 15 paragraph 35), the customer does not control
the asset as it is created (criterion 2 of the above paragraph), and the homes have an
alternative use to the seller and the seller does not have the right to receive payment
for progress to date (criterion 3 of the above paragraph). Until completion of the
home, transfer of title does not occur and the full sales price is not received, so control
of the homes has not passed from Citation to the buyers.
5-97
Requirement 6
Income statement:
Sales revenue (3 × $600,000) $1,800,000
Cost of goods sold (3 × $450,000) 1,350,000
Gross profit $ 450,000
Statement of Financial Position:

Current assets:
Inventory (work in process) $2,700,000
Contract liability (or deferred revenue) $300,000*
*$600,000 × 10% = $60,000 × 5 = $300,000
5-98
Chapter 5: Revenue
Problem 5-14
2018 2019 2020
Contract price 10,000,000 10,000,000 10,000,000
Construction costs incurred during the year 4,800,000 2,200,000 1,800,000

Construction costs incurred during prior years - 4,800,000 7,000,000
Cumulative construction costs 4,800,000 7,000,000 8,800,000
Costs incurred during the year 4,800,000 2,200,000 1,800,000

Estimated costs to complete as of year-end 4,200,000 2,050,000 -
Total estimated and actual construction costs 9,000,000 9,050,000 8,800,000
Total estimated contract profit 1,000,000 950,000 1,200,000
Requirement 1
Percentage of completion:
2018: $4,800,000/9,000,000 = 53.33%

2019: $7,000,000/9,050,000 = 77.35%
2020: $8,800,000/8,800,000 = 100%
Requirement 2
Revenue recognized in respective years:
2018: 53.33% × $10,000,000 = $5,333,333

2019: 77.35% × $10,000,000 − 5,333,333 = $2,401,473
2020: $10,000,000 − 5,333,333 − 2,401,473 = $2,265,193
Requirement 3
Gross profit recognized in respective years:
2018: 53.33% × $1,000,000= $533,333

2019: 77.35% × $950,000 − 533,333 = $201,473
2020: $1,200,000 − 533,333 − 201,473 = $465,193
5-99
Requirement 4
2018 2019 2020

Contract asset 5,333,333 2,401,473 2,265,193
contract

Cash 4,800,000 2,200,000 1,800,000

Contract asset 3,300,000 3,200,000 3,500,000
Cash 2,800,000 3,000,000 3,700,000

Requirement 5
Income Statement
(extracts) 2018 2019 2020
5,33 2,40 2,26
Contract revenue 3,333 1,473 5,193
(4,80 (2,20 (1,80
Contract expense 0,000) 0,000) 0,000)
53 20 46
Contract profit 3,333 1,473 5,193
5-100
Chapter 5: Revenue
Requirement 6

(extracts) 2018 2019 2020
2,0 1,2
Contract asset 33,333 34,807 -
5 7 5
Accounts receivable 00,000 00,000 00,000
(2,0 (1,2 7
Cash 00,000) 00,000) 00,000
5 7 1,2
Net assets 33,333 34,807 00,000
Equity
5 7 1,2
Retained earnings 33,333 34,807 00,000
5-101
Problem 5-15
Requirement 1
Type 2018 2019 2020
15,00 15,00 15,00
Contract price 0,000 0,000 0,000
Current costs
Design and architectural Contract* 8
costs cost 00,000 24,000
Sales commissions to procure Deferred 1
contract cost 00,000
Direct Contract 1,20 2,30 2,60
materials cost 0,000 0,000 0,000
Direct labor and Contract 3 4 5
overheads cost 90,000 20,000 20,000
Construction-related Contract
insurance cost 90,000 90,000 90,000
Construction site office Contract 1 1 1
costs cost 20,000 45,000 40,000
Depreciation of construction Contract 5 5 5
equipment cost 20,000 20,000 20,000
Subcontractor Contract 9 1,45 2
costs cost 00,000 0,000 30,000
General and 6 7 7
administration costs Expense 90,000 20,000 60,000
Interest on loans to finance Contract
construction cost 30,000 40,000 35,000
Interest on other loans Expense 56,000 60,000 60,000
Contract costs incurred during the year 4,050,000 4,989,000 4,135,000
Contract costs incurred during prior years - 4,050,000 9,039,000
Cumulative contract costs 4,050,000 9,039,000 13,174,000
*or fulfillment costs
5-102
Chapter 5: Revenue
Requirement 2
2018 2019 2020
4,0 9,0 13,1
Cumulative contract costs 50,000 39,000 74,000
12,9 11,0 13,1
Total estimated construction costs 50,000 89,000 74,000
2018: $4,050,000/12,950,000= 31.27%

2019: $9,039,000/11,098,000 = 81.51%
2020: $13,174,000/13,174,000 = 100%
Requirement 3
2018: 31.27% × $15,000,000 = $4,691,120

2019: 81.51% × $15,000,000 − 4,691,120 = $7,535,862
2020: $15,000,000 − 4,691,120 − 7,535,862 = $2,773,018
Requirement 4
2018 2019 2020
Estimated costs to 8,90 2,05
complete 0,000 0,000 -
Total estimated and actual 12,95 11,08 13,17
construction costs 0,000 9,000 4,000
Total estimated contract 2,05 3,91 1,82
profit 0,000 1,000 6,000
2018: 31.27% × $2,050,000= $641,120

2019: 81.51% × $3,911,000 − 641,120 = $2,546,862
2020: $1,826,000 – 641,120 – 2,546,862 = ($1,361,982)
5-103
Requirement 5
2018 2019 2020

Contract asset 4,691,120 7,535,862 2,773,018
contract

Cash 4,050,000 4,989,000 4,135,000

Contract asset 4,000,000 4,200,000 6,800,000
Cash 3,200,000 4,800,000 6,000,000

Deferred costs 100,000

Cash 100,000
Incremental costs of obtaining
contract
Amortization of deferred cost 33,333 33,333 33,334

Deferred costs 33,333 33,333 33,334
Amortization of deferred costs
5-104
Chapter 5: Revenue
Requirement 6
Income Statement
(extracts) 2018 2019 2020
Revenue from long-term 4,69 7,53 2,77
contracts 1,120 5,862 3,018
(4,0 (4,9 (4,1
( ( (
Amortization of deferred costs 33,333) 33,333) 33,334)
6 2,51 (1,3
Contract profit 07,786 3,529 95,316)
Requirement 7

(extracts) 2018 2019 2020
4,02
3
Deferred costs 66,667 3,333
20 1,
(1,13
Other net assets (950,000) 9,000) 726,000
3,12 1,
Net assets 607,786 1,315 726,000
Equity
3,12 1,
Retained earnings 607,786 1,315 725,999
5-105
Problem 5-16
Requirement 1
2018 2019 2020

25,000, 25,000, 25,000,
Contract price 000 000 000
Current costs
Demolition of old structures and site Contract 368,
clearance cost* 000
1,050,
Design and architectural costs Contract cost 000
2,500, 2,908, 3,904,
Direct materials Contract cost 000 000 000
2,563, 2,170, 2,200,
Direct labor and overheads Contract cost 000 000 000
100, 100, 100,
Construction-related insurance Contract cost 000 000 000
Construction supervisors’ 156, 150, 178,
costs Contract cost 000 000 000
500, 500, 450,
Depreciation of construction equipment Contract cost 000 000 000
320, 390, 320,
Rental of construction equipment Contract cost 000 700 000
General and administration 720, 756, 745,
costs Expense 000 000 000
156, 140, 135,
Interest on loans to finance construction Contract cost 000 000 000
45, 120, 160,
Interest on other loans Expense 000 000 000
7,713, 6,358, 7,287,

Contract costs incurred during the year 000 700 000
7,713, 14,071,
Contract costs incurred during prior years - 000 700
7,713, 14,071, 21,358,
Cumulative contract costs 000 700 700
*or fulfillment costs
5-106
Chapter 5: Revenue
Requirement 2
2018 2019 2020
7,71 14,07 21,35
Cumulative contract costs 3,000 1,700 8,700
23,61 23,03 21,35
Total estimated contract costs 3,000 8,700 8,700
2018: $7,713,000/23,613,000= 32.66%

2019: $14,071,000/23,038,700 = 61.08%
2020: $21,358,700/21,358,700 = 100%
Requirement 3
2018: 32.66% × $25,000,000 = $8,166,053

2019: 61.08% × $25,000,000 − 8,166,053 = $7,103,581
2020: $25,000,000 − 8,166,053 − 7,103,581 = $9,730,367
Requirement 4
2018 2019 2020
Total estimated contract costs 23,613,000 23,038,700 21,358,700
1,3 1,9 3,64
Total estimated contract profit 87,000 61,300 1,300
2018: 32.66% × $1,387,000= $453,053

2019: 61.08% × $1,961,300 − 453,053 = $744,881
2020: $3,641,300 − 453,053 − 744,881 = $2,443,367
5-107
Requirement 5
2018 2019 2020

Contract asset 8,166,053 7,103,581 9,730,367
contract

Net assets 7,713,000 6,358,700 7,287,000

Contract asset 5,600,000 6,700,000 12,700,000
Cash 5,200,000 7,000,000 10,300,000

Requirement 6
Income Statement
(extracts) 2018 2019 2020
Revenue from long-term 8,16 7,10 9,73
contracts 6,053 3,581 0,367
(7,71 (6,35 (7,28
4 7 2,44
Contract profit 53,053 44,881 3,367
5-108
Chapter 5: Revenue
Requirement 7
(extracts) 2018 2019 2020
2, 2,
2,500,00
Accounts receivable 400,000 100,000 0
(2, (1, 1,141,30

Other net assets 513,000) 871,700) 0
1, 3,641,30
Net assets 453,053 197,933 0
Equity
1, 3,641,30
Retained earnings 453,053 197,933 0
5-109
Problem 5–17
Requirement 1
2018 2019 2020
6,500, 6,500, 7,500,
Contract price 000 000 000
1,000,
Variation order 000
Issued in 2019
Approved in 2020
800,
Inventory purchased in 2018 but used in 2019 000
2,600, 1,500, 1,900,
Contract costs incurred during the year 000 000 000
Front-end loading costs (800, 800,
adjusted 000) 000
1,800, 4,100,
Contract costs incurred during prior years - 000 000
1,800, 4,100, 6,000,
Cumulative contract costs 000 000 000
Estimated costs to complete as 3,600, 2,000,
of year end 000 000 -
5,400, 6,100, 6,000,
Total estimated and actual contract costs 000 000 000
2018: $1,800,000 /5,400,000= 33.33%*

2019: $4,100,000/6,100,000 = 67.21%*
2020: $6,000,000/6,000,000 = 100%
Requirement 2
2018: 33.33%* x $6,500,000 = $2,166,667

2019: 67.21%* x ($6,500,000+$1,000,000**) – 2,166,667 = $2,874,317
2020: $7,500,000 – 2,166,667 – 2,874,317 = $2,459,016
*The untruncated % is applied to arrive at the revenue

** Variable consideration is included as deemed as most likely outcome
5-110
Chapter 5: Revenue
Requirement 3
2018 2019 2020

3,60 2,00
Estimated costs to complete as of year end 0,000 0,000 -
5,40 6,10 6,00
Total estimated and actual contract costs 0,000 0,000 0,000
1,10 40 1,50
Total estimated contract profit 0,000 0,000 0,000
2018: 33.33% x $1,100,000= $366,667

2019: 67.21% x $400,000 + 1,000,000– 366,667 = $574,317
2020: $7,500,000 – 366,667 – 574,317 = $559,016
5-111
Requirement 4
2018 2019 2020

Contract asset 2,166,667 2,874,317 2,459,016
contract

Inventory 800,000
Cash 2,600,000 1,500,000 1,900,000
Inventory 800,000

Contract asset 1,200,000 2,000,000 4,300,000
Cash 800,000 1,900,000 3,200,000

Accounts receivable 800,000 1,900,000 3,200,000
Requirement 5
Income Statement
(extracts) 2018 2019 2020
Revenue from long- 2,1 2,8 2,4
term contracts 66,667 74,317 59,016
(1,8 (2,3 (1,9
Contract profit 366,667 574,317 559,016
5-112
Chapter 5: Revenue
Requirement 6
(extracts) 2018 2019 2020
1,84
Inventory 800,000
5 1,
(1,8 (1,40
Cash 00,000) 0,000) (100,000)
9 1,
Net assets 366,667 40,984 500,000
Equity
Retained earnings 366,667 940,984 1,500,000
5-113
Problem 5-18
Requirement 1
2018 2019 2020
7, 7, 7,2
Contract price 200,000 200,000 00,000
Construction costs incurred during 3, 2, 2,1

the year 200,000 000,000 00,000
Construction costs incurred during 3, 5,2
prior years - 200,000 00,000
Cumulative 3, 5, 7,3
Cumulative 3,2 5,2 7,3

Total estimated and actual 5,8 8,4 7,3
2018: $3,200,000/5,870,000= 54.51%

2019: $5,200,000/8,400,000 = 61.90%
2020: $7,300,000/7,300,000 = 100%
Requirement 2
2018: 54.51% × $7,200,000 = $3,925,043

2019: 61.90% × $7,200,000 − 3,925,043 = $532,100
2020: $7,200,000 − 3,925,043 − 532,100 = $2,742,857
5-114
Chapter 5: Revenue
Requirement 3
2018 2019 2020

Estimated costs to
complete 2,670,000 3,200,000 -
Total estimated and actual
construction costs 5,870,000 8,400,000 7,300,000
Total estimated contract (1,200,000
profit/(loss) 1,330,000 ) (100,000)
Penalty for failure to
complete 5,000,000
2018: 54.51% × $1,330,000= $725,043

2019: ($1,200,000) − 725,043 = $(1,925,043)
2020: $(100,000) + 1,200,000 = $1,100,000
5-115
Requirement 4
2018 2019 2020

Contract asset 3,925,043 532,100 2,742,857
Revenue from long-term 3,925,043 532,100 2,742,857
contract
Contract expense 3,200,000 2,457,143

Cash 3,200,000 2,000,000
Contract expense 1,642,857

Cash 2,100,000
and closure of provision for
onerous contract

Contract asset 1,800,000 2,500,000 2,900,000
Cash 1,500,000 2,200,000 2,600,000

Requirement 5
Income Statement
(extracts) 2018 2019 2020
Revenue from long- 3,9 2,7
term contracts 25,043 532,100 42,857
(3,2 (2,4 (1,6
(1,9 1,1
Contract profit 725,043 25,043) 00,000
5-116
Chapter 5: Revenue
Requirement 6
Statement of Financial
Position (extracts) 2018 2019 2020
2,

(1, (1, (1,
Cash 700,000) 957,143) 000,000)
(1, (
Net assets 725,043 200,000) 100,000)
Equity
(1, (
Retained earnings 725,043 200,000) 100,000)
5-117
Chapter 5: Revenue
Problem 5-19
Total Probability Probability Most

variable weighted
fee fee likely fee
At contract inception, July 1, 2021
≥ 1 million clicks 100,000 15% 15,000
≥ 200,000 and < 1 million 50,000 60% 30,000 50,000
< 200,000 clicks 0 25% 0
45,000

On December 31, 2021
≥ 1 million clicks 100,000 55% 55,000 100,000
≥ 200,000 and < 1 million 50,000 40% 20,000
< 200,000 clicks 0 5% 0
75,000

On June 30, 2022
≥ 1 million clicks 100,000 100% 100,000 100,000
≥ 200,000 and < 1 million 50,000 0% 0
< 200,000 clicks 0 0% 0
100,000
Requirement 1 Requirement 2
5-1
Probability-weighted Most likely

July 1, 2021
Dr Cash 10,000 10,000
Cr Contract Liability 10,000 10,000
Receipt of deposit.
From July 1, 2021 to December 31, 2021

Dr Contract Asset 22,500 25,000
Cr Revenue 22,500 25,000
Contract revenue for the period*
December 31, 2021

Cr Revenue 15,000 25,000
Adjustment of contract revenue for the period.
From January 1, 2022 to June 30, 2022

Cr Revenue 62,500 50,000
Contract revenue for the period.*
Dr Cash 90,000 90,000

Dr Contract Liability 10,000 10,000
Cr Contract Asset 100,000 100,000
Final settlement and closure of accounts
*Prorated by months
5-2
Chapter 5: Revenue
Problem 5-20
Probability-weighted Most likely
April 16, 2021
Dr Cash 10,000 10,000
Cr Contract Liability* 10,000 10,000
Receipt of deposit. * Offset in balance sheet against contract
asset with same customer for same contract
April 16, 2021

Cr Revenue 60,000 100,000
Estimated variable consideration (since this is a right-of-use asset, the estimated
proceeds are recognized in full).
On May 15, 2021

Dr Contract Asset 25,000 0
Cr Revenue 25,000 0
Adjustment of estimated variable consideration.
On June 15, 2021

Dr Contract Asset 15,000 0
Cr Revenue 15,000 0
Adjustment of estimated variable consideration.
On June 15, 2021

Dr Cash 90,000 90,000
Dr Contract Liability* 10,000 10,000
Cr Contract Asset 100,000 100,000
Final settlement and closure of accounts.
5-3
Chapter 5: Revenue
Cases
Research Case 5-1
(Note: This case requires the student to reference a journal article.)
1.
Abuse Explanation
1. Cutoff manipulation The company either closes their books early (so some
current-year revenue is postponed until next year) or
leaves them open too long (so some next-year
revenue is included in the current year).
2. Deferring too much The company has an arrangement under which
or too little revenue revenue should be deferred, but it doesn’t defer the
revenue. Or, a company could defer too much
revenue to shift income into future periods.
3. Bill-and-hold sale The company records sales even though it hasn’t yet
delivered the goods to the customer.
4. Right-of-return sale The company sells to distributors or other customers
and can’t estimate returns with sufficient accuracy
due to the nature of the selling relationship.
2. Manipulating estimates of percentage complete in order to manipulate gross

profit recognition.
3. These abuses tended to increase income (75 percent of the time), consistent with
management generally having an incentive to increase income.
4. The auditors tended to require adjustment (56 percent of the time), consistent
with auditors being concerned about income-increasing earnings management.
5-1
Judgment Case 5-2

Determining whether Toys4U satisfies the performance obligation requires
the company to consider indicators of whether McDonald’s has obtained
control of the dolls. Management should evaluate these indicators individually
and in combination to decide whether control has been transferred. The
indicators include, but are not limited to the following:
1. The customer has accepted the asset. There is no acceptance provision

indicated, but given that McDonald’s returns unsold dolls to Toys4U, it does
not appear that McDonald’s has irrevocably accepted the dolls.
2. The customer has legal title. The facts do not state whether title transfers.
3. The customer has physical possession of goods. McDonald’s has possession

of the dolls.
4. The customer has the risks and rewards of ownership. Given that
McDonald’s returns unsold dolls to Toys4U, McDonald’s does not appear to be
holding the risks of ownership.
5. The customer has an obligation to pay the seller. In this case, McDonald’s
does not pay Toys4U until the dolls are sold, so McDonald’s is conditionally
(not unconditionally) obliged to pay for the toys.
In this case, Toys4U has not transferred control upon delivery because
McDonald’s has not accepted the asset, does not have the risks and rewards of
ownership, and does not have an obligation to pay Toys4U unless the dolls are
sold. Therefore, Toys4U has not satisfied its performance obligation. This is
essentially a consignment arrangement, and Toys4U should not recognize
revenue until McDonald’s sells dolls to customers.
5-2
Chapter 5: Revenue
Judgment Case 5-3

In this case, Kerry obtained the access code for level I on December 1,
meaning that Kerry has obtained the control of the right to use the software for
level I on that date. On that date, Cutler should recognize $50 of revenue for
level I.
Tom passed the level I test on December 10 and Kerry purchased access to level
II on the same day. However, Kerry received the access code for level II on December
20, so control over the level II software was not transferred to Kerry until December
20. Cutler should recognize $30 of revenue for level II on December 20.
Ethics Case 5-4

Discussion should include these elements.
Facts:
Horizon Corporation, a computer manufacturer, reported profits from 2013
through 2016, but reported a $20 million loss in 2017 due to increased competition.
The chief financial officer (CFO) circulated a memo suggesting the shipment of
computers to J.B. Sales, Inc., in 2018 with a subsequent return of the merchandise to
Horizon in 2019. Horizon would record a sale for the computers in 2018 and avoid an
inventory write-off that would place the company in a loss position for that year.
The CFO is clearly asking Jim Fielding to recognize revenue in 2018 that he
knows will be reversed as a sales return in 2019.
Ethical Dilemma:
Is Jim’s obligation to challenge the memo of the CFO and provide useful
information to users of the financial statements greater than the obligation to prevent a
company loss in 2018 that may lead to bankruptcy?
Who is affected?
Jim Fielding
CFO and other managers
Other employees
Shareholders
Potential shareholders
Creditors
Auditors
5-3
Judgment Case 5-5

Scenario 1: The terms of the contract and all the related facts and circumstances
indicate that Star controls the room as it is built. Crown is entitled to receive
payments throughout the contract as evidenced by the required progress payments
(with no refund of payment for any work performed to date) and by the requirement
to pay for any partially completed work in the event of contract termination.
Consequently, Crown’s performance obligation is to provide Star with construction
services, and Crown would recognize revenue over time throughout the
construction process.
indicate that Star does not obtain control of the gym until it is delivered. If the
contract is terminated prior to completion, Crown retains the equipment, suggesting
that Crown retains control of the equipment throughout the job. Consequently,
Crown’s performance obligation is to provide Star with a completed gym, and
Crown would recognize revenue upon contract completion.
indicate that Coco has the ability to direct the use of, and receive the benefit from,
the consulting services as they are performed. The restaurant has an unconditional
obligation to pay throughout the contract as evidenced by the nonrefundable
progress payments, and the right to a report regardless of contract termination.
Also, the report has no alternate use to CostDriver. Therefore, the CostDriver
Company’s performance obligation is to provide the restaurant with services
continuously during the three months of the contract, and CostDriver should
recognize revenue over the life of the contract.
indicate that Edwards, the customer, obtains control of the apartment upon
completion of the contract. Edwards obtains title and physical possession of the
apartment only on completion of the contract. Consequently, the Tower’s
performance obligation is to provide the customer with a completed apartment, and
the Tower should not recognize revenue until delivery of the apartment.
5-4
Chapter 5: Revenue
Judgment Case 5-6

The license granted by Pfizer is viewed as having significant stand-alone
functionality, so you might be tempted to recognize revenue upon the date of
transfer. However, the license is not a performance obligation, because it is
not separately identifiable. The only way to exploit the license is by utilizing
ongoing R&D services from Pfizer. The license does not provide utility on its
own or together with other goods or services that HealthPro has received
previously from Pfizer or that are available from other entities. Rather, the
license requires Pfizer’s R&D services and proprietary expertise to be
valuable. Therefore, Pfizer would combine the license with the R&D services
to HealthPro and account for them as a single performance obligation, with
revenue recognized over time as Pfizer provides R&D services
5-5
Communication Case 5-7

The critical question that student groups should address is how to account
for punches in the punch card and the option to possibly receive a free ice-
cream cone that it provides. Students should benefit from participating in the
process, interacting first with other group members, then with the class as a
whole.
The preferred solution should include the idea that the sale of an ice-cream
cone to a person who has a card involves two performance obligations:
1. providing the ice-cream cone
2. eventually providing an additional ice-cream cone, if and when a customer
reaches ten punches on a card and redeems the card for the free cone.
Students should recognize that each punch on the punch card contributes to
an option to receive a future ice-cream cone. That option is capable of being
distinct because it could be sold or provided separate from selling a cone, and
it is separately identifiable, as it is not highly interrelated with selling a cone
(e.g., cones certainly could be sold without offering the punch card program,
and in fact that is how Jerry’s currently does business). Therefore, each punch
on the punch card is distinct from the cone that is sold at the same time, and
each punch qualifies as a performance obligation.
Students also should recognize that not all cards will be redeemed for ice-
cream cones. Some may be lost, and some may never fill up with the required
ten punches. Therefore, Jerry must estimate the chance that a punch results in
a future ice-cream cone. He likely would come up with some estimate. For
example, he might conclude that half of all punches end up unused, such that a
punch on average leads to Jerry providing 1/20 of a free future cone. In that
case, the revenue for each cone should be allocated to the two performance
obligations based on their stand-alone selling prices, and a journal entry is
recorded upon sale of a cone as follows:
Cash xxx
Sales revenue xxx
Contract liability, punch cards xxx
5-6
Chapter 5: Revenue
Case 5-7 (concluded)
In the future, when a card is redeemed, the contract liability (deferred

revenue) account would be reduced and revenue recognized for the contract
liability related to ten punches.
Sales of ice-cream cones to people who do not have cards have only a
single performance obligation—to deliver the ice-cream cone—and so can be
accounted for in the same manner as they were previously.
Other solutions that are likely to emerge:
1. Treat providing the occasional free cone as a cost of doing business and don’t
view provision of that cone as a separate performance obligation. The idea
here is that the deferral of revenue associated with the free cones is time-
consuming and is not likely to provide a material amount of additional
information to financial statement users. This approach would be an
immaterial departure from IFRS.
2. Ignore revenue recognition and instead accrue an estimated cost. This solution
views the free ice-cream cone as a promotional expense. The estimated cost of
the free cone should be expensed as the ten required cones are sold. A
corresponding liability is recorded which should increase to an amount equal
to the cost of the free cone. When the free cone is awarded, the liability and
inventory are reduced. This approach ignores the idea that there is a revenue-
recognition aspect to the promise of free cones, so is not correct.
It’s important that each student actively participate in the process. Domination
by one or two individuals should be discouraged. Students should be encouraged
to contribute to the group discussion by (a) offering information on relevant
issues, (b) clarifying or modifying ideas already expressed, or (c) suggesting
alternative direction.
5-7
Judgment Case 5-8

When other parties are involved in providing goods or services to a seller’s
customer, the seller must determine whether its performance obligation is to
provide the goods or services, making the seller a principal, or the seller
arranges for another party to provide those goods or services, making the
seller an agent. That determination affects whether the seller recognizes
revenue in the amount of consideration received in exchange for those goods
or services (if principal) or in the amount of any fee or commission received
in exchange for arranging for the other party to provide the goods or services
(if agent).
Requirement 1
AuctionCo is a principal because it obtained control of the used bicycle
before the bicycle was sold. Therefore, AuctionCo should recognize revenue
of $300.
Requirement 2
AuctionCo is an agent because it never controlled the product before it was
sold. Therefore, AuctionCo should recognize revenue for the commission fees
of $100 received upon sending $200 to the original owner.
Requirement 3
If AuctionCo must pay the bicycle owner the $200 price regardless of
whether the bicycle is sold, then AuctionCo would appear to have purchased
the bicycle and should be treated as a principal.
5-8
Chapter 5: Revenue
Real World Case 5-9

Requirement 2
Excerpt from Expedia’s 2015 Annual Report:
Merchant Hotel. Our travelers pay us for merchant hotel transactions prior to
departing on their trip, generally when they book the reservation. We record the
payment in deferred merchant bookings until the stay occurs, at which point we record
the revenue. In certain nonrefundable, nonchangeable transactions where we have no
significant postdelivery obligations, we record revenue when the traveler completes
the transaction on our website, less a reserve for charge-backs and cancellations based
on historical experience. Amounts received from customers are presented net of
amounts paid to suppliers.
5-9
Case 5-9 (continued)

Excerpt from Priceline Group’s 2015 Annual Report:
The Name Your Own Price® service connects consumers that are
willing to accept a level of flexibility regarding their travel itinerary with
travel service providers that are willing to accept a lower price in order to sell
their excess capacity without disrupting their existing distribution channels or
retail pricing structures. The Company’s Name Your Own Price® services use
a pricing system that allows consumers to “bid” the price they are prepared to
pay when submitting an offer for a particular leisure travel service. The
Company accesses databases in which participating travel service providers
file secure discounted rates, not generally available to the public, to determine
whether it can fulfill the consumer’s offer. The Company selects the travel
service provider and determines the price it will accept from the consumer.
Merchant revenues and cost of revenues include the selling price and cost,
respectively, of the Name Your Own Price® travel services and are reported
on a gross basis.
Merchant revenues for the Company’s merchant retail services are
derived from transactions where consumers book accommodation reservations
or rental car reservations from travel service providers at disclosed rates
which are subject to contractual arrangements. Charges are billed to
consumers by the Company at the time of booking and are included in
deferred merchant bookings until the consumer completes the accommodation
stay or returns the rental car. Such amounts are generally refundable upon
cancellation, subject to cancellation penalties in certain cases. Merchant
revenues and accounts payable to the travel service provider are recognized at
the conclusion of the consumer’s stay at the accommodation or return of the
rental car. The Company records the difference between the reservation price
to the consumer and the travel service provider cost to the Company of its
merchant retail reservation services on a net basis in merchant revenue.
Agency revenues are derived from travel-related transactions where the
Company is not the merchant of record and where the prices of the travel
services are determined by third parties. Agency revenues include travel
commissions, global distribution system (GDS) reservation booking fees
related to certain travel services, travel insurance fees, and customer
processing fees and are reported at the net amounts received, without any
associated cost of revenue. Such revenues are generally recognized by the
Company when the consumers complete their travel.
5-10
Chapter 5: Revenue
Case 5-9 (continued)
Requirement 3
a) Expedia’s “merchant hotel” revenues:
This is reported net: “Amounts received from customers are presented net of
amounts paid to suppliers..”
b) Priceline’s “‘Name Your Own Price®’ services”:
This is reported gross: “Merchant revenues and cost of merchant revenues include
the selling price and cost, respectively, of the Name Your Own Price travel
services and are reported on a gross basis.”
c) Priceline’s “merchant retail services”:
This is reported net: “The Company records the difference between the
reservation price to the consumer and the travel service provider cost to the
Company of its merchant retail reservation services on a net basis in merchant
revenue.”
d) Priceline’s agency revenues:
This is reported net: “Agency revenues . . . are reported at the net amounts
received, without any associated cost of revenue.”
5-11
Case 5-9 (concluded)
Requirement 4
Students might argue this point both ways, as Priceline’s “Name your own
Price®” service has characteristics that differ from Expedia’s merchant hotel model.
Yet, both services are fundamentally offering hotel reservations, so it appears that
relatively similar services can be accounted for as gross or net depending on how they
are structured. Priceline’s “Name your own Price ®” service appears similar to services
that Expedia might offer under its merchant hotel model, yet Priceline would
recognize revenue gross and Expedia would recognize revenue net. If similar items
are treated differently, comparability is reduced.
5-12
Chapter 5: Revenue
Research Case 5-10

Requirement 1
Regarding requirements for assessing whether a seller is a principal, the

appropriate citation is IFRS 15 Revenue from Contracts with Customers,
paragraphs B34–B38.
IFRS 15 identifies the principal as the party that has control over the
goods or services before they are transferred to a customer. Obtaining legal
title momentarily before transferring the title to a customer may not
necessarily indicate control. The customer is a party who has contracted to
obtain the goods or services from the entity in exchange for consideration.
Requirement 2
Regarding specific indicators for assessing whether a seller is a principal,

the appropriate citation is:
IFRS 15 Revenue from Contracts with Customers . Appendix B, paragraph B37.
The following indicators suggest that the entity is a principal:
1. The entity is primarily responsible for fulfilling the promises in the contract.
2. The entity has inventory risk before or after the goods have been ordered by a
customer, during shipping, or on return.
3. The entity has discretion in establishing prices for the goods or services.
Requirements 3 and 4
For their AdSense program, Google’s 2013 10K states: “We recognize as
revenues the fees charged to advertisers each time a user clicks on one of the
ads that appears next to the search results or content on our websites or our
Google Network Members’ websites. For those advertisers using our cost-per-
impression pricing, we recognize as revenues the fees charged to advertisers
each time their ads are displayed on our websites or our Google Network
Members’ websites. We report our Google AdSense revenues on a gross basis
principally because we are the primary obligor to our advertisers.” That is
5-13
consistent with the first indicator listed above, so Google’s reasoning appears
appropriate.
5-14
Chapter 5: Revenue
Real World Case 5-11

Requirement 1
A bill and hold strategy accelerates the recognition of revenue. In this case, sales
that would normally have occurred in 1998 were recorded in 1997. Assuming a
positive gross profit on these sales, earnings in 1997 is inflated.
Requirement 2
A customer would probably not be expected to pay for goods purchased using
this bill and hold strategy until the goods were actually received. Receivables would
therefore increase.
Requirement 3
Sales that would normally have been recorded in 1998 were recorded in 1997.
This bill and hold strategy shifted sales revenue and therefore earnings from 1998 to
1997.
Requirement 4
Earnings quality refers to the ability of reported earnings (income) to predict a
company’s future earnings. Sunbeam’s earnings management strategy
produced a 1997 earnings figure that was not indicative of the company’s
future profit-generating ability.
5-15
Research Case 5-12

Alisha’s argument is that recognizing revenue upon project completion is
preferable because it is analogous to point of delivery revenue recognition.
That is, no revenue is recognized until the completed product is delivered.
Johan’s argument is that the important factor is the process of satisfying the
performance obligation and that revenue should be recognized as the process
takes place.
Johan’s argument is correct. In situations when the earnings process
takes place over long periods of time, like long-term construction contracts, it
is preferable to recognize revenue over time, rather than to wait until the
contract has been completed.
5-16
Chapter 5: Revenue
Communication Case 5-13

Suggested Grading Concepts and Grading Scheme:
Content (70%)
_________ 25 Income differences.
 Revenue recognition over time recognizes gross profit during construction
based on an estimate of percent complete.
 If a project doesn’t qualify for revenue recognition over time, no gross profit
is recognized until project completion.
 Estimated losses are fully recognized in the first period, and overall loss is
anticipated.
_________ 20 Balance sheet differences.
 The two approaches are similar. However, for profitable projects, the
construction in progress account during construction will have a higher
balance when revenue is recognized over time due to the inclusion of gross
profit.
__________ 25 According to generally accepted accounting principles, revenue should be
recognized over time if:
1. the customer consumes the benefit of the seller’s work as it is performed,
2. the customer controls the asset as it is created, or
3. the seller is creating an asset that has no alternative use to the seller, and the
seller can receive payment for its progress even if the customer cancels the
contract.
The second and third of these situations likely apply to Willingham’s construction
contracts, so those contracts probably require revenue recognition over time.
_________
70 points
Writing (30%)
_________ 6 Terminology and tone appropriate to the audience of a company
controller.
_________ 12 Organization permits ease of understanding.
 Introduction that states purpose.
 Paragraphs that separate main points.
_________ 12 English
 Sentences grammatically clear and well organized, concise.
 Word selection.
 Spelling.
 Grammar and punctuation.
_________
30 points_
5-17
Real World Case 5-14
Orascom Telecom Media and Technology Holding S.A.E., headquartered in Cairo,

Egypt, is a mobile telecommunications business operating in the Middle East, Africa,
and Asia.
Separate performance obligations Timing of revenue

recognition
Provision of access, connections, Actual usage

roaming services, and other
telephone-related services to its
subscribers and operators.
Provision of telecommunication services to buyers of Actual usage

prepaid cards and recharging
Unused portion at period
end is included under
Deferred Income
Activation and/or substitution services for mobile
phones Recognized in full at the
moment of activation
(independent of when
the actual services
under the plan are used)
Provision of bandwidth capacity Recognized over the period of the

contract on the basis of usage of
bandwidth by customers. Advances for
unused services are disclosed as
deferred revenue
5-18
Chapter 5: Revenue
Case 5-15
Requirement 1
Target reports Sales revenue of $73,785 million for the 2015 fiscal year, which ended
January 30, 2016.
Requirement 2
Recording revenue at the point of sale indicates that Target records revenue at the
point in time that customers receive goods or services. That is the point in time that
Target has fulfilled its performance obligation to deliver goods to customers.
Requirement 3
Target estimates returns as a percentage of sales based on historical return patterns,
and only includes net sales (reduced for estimated returns) in its income statement.
Therefore, estimated returns reduce revenue and net income. Those estimates will be
adjusted to reflect actual returns over time.
Requirement 4
It appears likely that Target is accounting for those arrangements as an agent because
it is including “commissions earned on sales generated by leased departments” within
sales. If Target were accounting for those arrangements as a principal, it would
include gross revenue for those arrangements in sales.
Requirement 5
When a gift card is sold, Target recognizes a deferred revenue liability rather than
revenue because it has not yet delivered goods or services to a customer. Target will
reduce the deferred revenue liability and recognize revenue either when the gift card is
redeemed or when, based on historical experience, Target judges it to be “broken,”
meaning that Target does not believe the gift card will ever be redeemed.
5-19
Target Case (concluded)

Requirement 6
Target indicates that “Vendor income reduces either our inventory costs or SG&A
expenses based on the provisions of the arrangement. Under our compliance
programs, vendors are charged for merchandise shipments that do not meet our
requirements (violations), such as late or incomplete shipments. These allowances are
recorded when violations occur. Substantially all consideration received is recorded as
a reduction of cost of sales.” Thus, vendor income is really a refund of some of the
amount that Target is paying for goods or services. It reduces Target’s costs, and so
does not affect Target’s revenue. Likewise, because Target’s cost is the same as the
vendor’s revenue, these refunds serve to reduce vendors’ revenue.
5-20
Chapter 5: Revenue
Case 5-16
Requirement 1
a. AF’s statement of financial position indicates current deferred revenue on
ticket sales of €2,515 million as of December 31, 2015.
b. The journal entry would be:

Deferred revenue on ticket sales 2,515
Sales revenue 2,515
Requirement 2
a. From note 4.7: “In accordance with the IFRIC 13, these “miles” are
considered as distinct elements from a sale with multiple elements and one
part of the price of the initial sale of the airfare is allocated to these “miles”
and deferred until the Group’s commitments relating to these “miles” has been
met.
The deferred amount due in relation to the acquisition of miles by members is

estimated:
– According to the fair value of the “miles,” defined as the amount at which the
benefits can be sold separately.
– After taking into account the redemption rate, corresponding to the
probability that the miles will be used by members, using a statistical
method.”
b. Per the statement of financial position, AF has a liability for “Frequent flyer
programs” of €760 million.
c. AF’s approach is consistent with IFRS 15, in that the transaction price for
airfare is allocated to the performance obligations of (1) providing the airfare
and (2) providing future airfare or other goods and services upon redemption
of miles. The revenue associated with AF miles is deferred and recognized
separately from the revenue associated with the flights that customers use to
earn the miles.
5-21

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Chapter 5: Revenue

Questions for Review of Key Topics

Management should evaluate these indicators individually and in combination to decide

Under accrual accounting, revenue is recorded when goods or services are

Brief Exercise 5-2

A performance obligation is satisfied over time if at least one of the following

Since CyberB is receiving/consuming the benefits as Estate Construction is

Brief Exercise 5-3

Revenue for 2018 = $6,000 × 8/12 = $4,000

Journal entries (not required):

December 31, 2018 adjusting entry

Brief Exercise 5-4

Price of software = $80,000 × 70,000/100,000 = $56,000

To record contract sales

Brief Exercise 5-5

Brief Exercise 5-6

Brief Exercise 5-7

Access to eLean services is one performance obligation. Registration on the

Brief Exercise 5-8

We need to consider three aspects of the vacuum contract: delivery of the

Brief Exercise 5-9

We need to consider three aspects of the vacuum contract: delivery of the

Brief Exercise 5-10

In addition to the subscription, the renewal option is a performance obligation because

Brief Exercise 5-11

Brief Exercise 5-12

Brief Exercise 5-13

A right of return is not a performance obligation. Instead, the right of return

Brief Exercise 5-14

Possible Amounts Probabilities Expected Amounts

Brief Exercise 5-15

When a contract includes variable consideration, sellers are constrained to recognize

Brief Exercise 5-16

Finerly should recognize $0 of revenue upon delivery to distributors. Given the

Brief Exercise 5-17

Amazon is acting as an agent on behalf of Apple Stores. This is because Amazon

Brief Exercise 5-18

If a seller is purchasing distinct goods or services from a customer at the fair

Brief Exercise 5-19

Stand-alone selling price of club-fitting services = $110 × 1.1 = $121

Brief Exercise 5-20

Stand-alone selling price of club-fitting services = $60 × 1.3 = $78

Brief Exercise 5-21

Stand-alone selling price of club-fitting services = $1,500 − 1,400 = $100

Brief Exercise 5-22

Revenue for right-of-access advertising services in 2018 = $90,000 × 4/36 = $10,000

Brief Exercise 5-23

Brief Exercise 5-24

Brief Exercise 5-25

the fees as revenue as it completes the performance obligation.

Revenue recognized for 2018 = $50,000 + $30,000 × ½ = $65,000

Brief Exercise 5-26

Brief Exercise 5-27

Although asset has been transferred to Holmström Gallery (consignee), Kerianne

Brief Exercise 5-28

Brief Exercise 5-29

Contract asset: $0.

Contract liability: $2,000.

Accounts receivable: $0.

Brief Exercise 5-30

For long-term contracts, we view a company as having a contract asset if there is

Brief Exercise 5-31

Using the percentage of completion method,