Gabriel Jay M.

Mendoza OCTOBER 3, 2016

AT3A – ADVONE MS. JANINE ABU

Requirement (a): YES, the contract qualifies for accounting under PFRS 15 because all
of the requirements of “Step 1” are met.
a. The contract is approved and the parties are committed to perform their respective
obligations;

b. Each party’s rights regarding the goods or services to be transferred can be identified
from the contract;

c. The payment terms for the goods or services to be transferred can be identified from the
contract;

d. The contract has commercial substance; and

e. The consideration in the contract is probable of collection.

Step 2: Identify the performance obligation of the contract

The performance obligation to be fulfilled by entity Y are: to completely construct the house
inclusive of architectural design, engineering analyses and computations, electrical, plumbing
and other necessary designs.

This promises to be performed are considered as a bundle of goods and services that are
distinct because:

a. The customer can benefit from the goods or service either on its own or together with
other resources that are readily available to the customer. Moreover, Entity Y does
not provide these goods and services are separately.

b. The promise to transfer the good or service is separately identifiable evidence by the
fact that:

i. Each good or service is not an input to a combined output specified by

the customer
ii. Each goods or service does not significantly modify another good or
service promised in the contract
iii. Each good or service is not highly interrelated with the other goods or
services promised in the contract

Requirement (C): The performance obligation is satisfied over time due to the following criteria:
 a. The entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.

 Evidenced by the fact that Entity Y retains its ownership over any structure built on the lot,
any unused construction materials and any equipment purchased that are included in the
“bill materials”.
 Entity Y has an enforceable right to payment for it is a stated fact that he has a right to
consideration equal to the progress made on the construction plus a 10% penalty of the
contract price.

Step 3: Determine the Transaction Price

Requirement (d): The transaction price is P8,000,000

 The transaction price is considered to be a fixed price. Accordingly, an effect on the

contract price may exist (stipulated in Article 4 Section 4 of the contract) if:

a. The owner will require the contractor to perfrom work oever and above those
required by the agreement. The additional cost shall be added to the
Contract Price.
b. The contractor be ordered to omit work as required by the agreement. The
work omission shall be deducted from the Contract Price.

Step 4: Allocate the transaction price to the performance obligation

Requirement (e): The whole transaction price of P8,000,000 is allocated in the single performance
obligation based on the relative-stand-alone prices of constructing the house on a lot together
along with other necessary design since the obligation is a distinct bundle of goods and services

Step 5: Recognize Revenue when (or as) the entity satisfies a performance obligation.

Requirement (f): Since the performance obligation is satisfied over time, Entity Y shall recognize
revenue over time as it progresses towards the complete construction of the house. Use the “cost-
to-cost’ method, an application of the input method.

Requirement (g)

09/01/20X1 Cash 1,200,000

Receivable 6,800,000
Contract Liability 8,000,000

12/31/20X1 Cash 2,179,800

Receivable 2,179,800

Contract Liability 2,800,000

Revenue 2,800,000
Requirement (h.1)
Entity Y
Statement of Financial Position
As of December 31, 20X1

Current Assets
Cash P3,378,000
Receivable 4,620,200

Total Current Assets P7,998,200

Current Liabilities
Contract Liability P5,200,000

Total Current Liabilities P5,200,000

Requirement (h.2)

Entity Y
Statement of Profit or Loss
As of December 31, 20X1

Contract Revenue P8,000,000

Less: Materials
Site Development Plan P400,000
Masonry work 1,212,000
Formworks and scaffolding 800,000
Waterproofing works 31,200
Electrical works 80,000
Plumbing and sanitary works 76,800
Doors and windows 80,000
Tiles, railing, painting and other finishing works 1,320,000

Total cost of materials P4,000,000

Less: Labor cost (50% of materials) P2,000,000

Equipment 100,000
Permits and license processing, including soil test 20,000
Contingencies 200,000
Contractor package fee 600,000

Total contract cost P6,920,000

Gross Profit P1,080,000

Multiply by: Percentage of completion 35%
NET PROFIT FOR THE YEAR P378,000