CHAPTER 12 - RR REVENUES from Contracts with Customers

Part II - Other Revenue Recognition Issues

Problem 32 - Sales with Returns

1.) Jan 02, 20x5:
Accounts Receivable 3,000,000.00
Refund Liability (P3,000,000 X 20%) 600,000.00
Sales Revenue 2,400,000.00

Estimated Inventory Returns (P1.6M x 20%) 320,000.00

Cost of Goods Sold 1,280,000.00
Mdse. Inventory 1,600,000.00

2.) March 01, 20x5:

Refund Liability 200,000.00
Accounts Receivable 200,000.00

Mdse. Inventory(P1.6M / P3.0M) x (P200,000) 106,666.67

Estimated Inventory Returns 106,666.67

Note: Some Companies record the returned asset in a separate account from inventory to provide
transparency.

3.) If CPF is unable to estimate returns, it defers recognition of revenue until the return period expires on

Problem 33: Sales with Discount

1.) Jan 01, 20x5:
Accounts Receivable 1,200,000.00
Sales Revenue (P1,220,000 – P20,000) 1,200,000.00

Cost of Goods Sold 1,000,000.00

Mdse. Inventory 1,000,000.00

2.) Jan 31, 20x5:

Cash 1,220,000.00
Sales Revenue 20,000.00
Accounts Receivable 1,200,000.00
Problem 34: Sales with Returns and Discounts
1.) June 3, 20x5:
Accounts Receivable 16,000.00
Refund Liability 1,600.00
Sales Revenue 14,400.00

Estimated Inventory Returns*** 1,120.00

Cost of Goods Sold 10,080.00
Mdse. Inventory 11,200.00
***(P11,200 / P16,000) x P1,600

June 05, 20x5:

Refund Liability 600.00
Accounts Receivable 600.00
To record the return

Returned Inventory * 240.00

Estimated Inventory Returns 240.00

* Because these goods were damaged and might not be sold at a profit, they likely will be separated fr
A loss may be subsequently recognized if this inventory is sold or disposed of at an amount lower t

June 7, 20x5:
Delivery Expense 48.00
Cash 48.00
To record the delivery cost

June 12, 20x5:

Cash (P15,400 - P308) 15,092.00
Sales Discounts (2% X P15,400*) 308.00
Accounts Receivable-Austin (P16,000 - P600) 15,400.00
To record the payment within the discount period

Refund Liability 1,000.00

Sales 1,000.00

Cost of Goods Sold (P1,120 x 1,000/1,600) 700.00

Estimated Inventory Returns 700.00
2.) August 5, 20x5:
Cash 15,400.00
Accounts Receivable- Austin 15,400.00
To record the payment beyond the discount period

Refund Liability 1,000.00

Sales 1,000.00

Cost of Goods Sold (P1,120 x 1,000/1,600) 700.00

Estimated Inventory Returns 700.00

Problem 35: Bill and Hold

GG Company determines when it has satisfied its performance obligation to transfer a product
by evaluating when CC obtains control of that product. For CC to have obtained control of
a product in a bill-and-hold arrangement, all of the following criteria should be met:
** The reason for the bill-and-hold arrangement must be substantive.
** The product must be identified separately as belonging to CC.
** The product currently must be ready for physical transfer to CC
** GG cannot have the ability to use the product or to direct it to another customer.

In this problem, it appears that the above criteria were met, and therefore revenue recognition
should be permitted at the time the contract is signed.

1.) Accounts Receivable 1,080,000.00

Sales 1,080,000.00
To records sales

2.) Cost of Goods Sold 672,000.00

Mdse. Inventory 672,000.00
To record Cost of sales

Problem 36: Principal or Agent

Lazada will recognize revenue of P1,500, its commission on the sale. In this transaction, Lazada never h
primary responsibility for delivering a product or service, and it is not vulnerable to risks associate
with holding inventory or delivering the product or service. Therefore, Lazada serves as an agent,
will only recognize revenue on the transaction equal to the amount of the commission it receives.
Problem 42: Sales with Repurchase
In this case, due to the agreement to repurchase the equipment, Joanna continues to have control of t
and therefore this agreement is a financing transaction and not a sale. Thus the asset is not remov
the books of Joanna. The entries to record the financing are as follows:

1.) July 01, 20x5:

Cash 80,000.00
Liability to Hazel Company 80,000.00

2.) Dec 31, 20x5:

Interest Expense 2,400.00
Liability to Hazel Company 2,400.00
   (P80,000 X 6%* X 1/2)

3.) June 30, 20x6:

Interest Expense 2,400.00
Liability to Hazel Company 2,400.00
   (P80,000 X 6% X 1/2)

Liability to Hazel Company 84,800.00

Cash (P80,000 + P2,400 + P2,400) 84,800.00

Problem 44: Repurchase Agreement

MM Inc., an equipment dealer, sells equipment on January 1, 20x7, to RR Company for P240,000.
It agrees to repurchase this equipment on December 31, 20x9, for a price of P290,400.

Assuming an interest rate of 10 percent is imputed from the agreement, MM makes

the following entry to record the financing on January 1, 20x7:
1.) Cash 240,000.00
Liability to RR Company 240,000.00

2.) Dec 31, 20x8:

Interest Expense 24,000.00
Liability to RR Company 24,000.00

3.) MM Inc. records interest and retirement of its liability to RR Company on December 31, 20x9, as follow
Interest Expense 26,400.00
Liability to RR Company 26,400.00
(240,000 + 24,000) x 10%

Liability to RR Company 290,400.00

Cash 290,400.00
[P240,000 + P24,000 + P26,400]
om inventory to provide

he return period expires on May 2, 20x5.

 420.00

ey likely will be separated from other Inventory.

osed of at an amount lower than cost.
to transfer a product
e obtained control of
should be met:

r customer.

e revenue recognition

s transaction, Lazada never has

vulnerable to risks associated
e, Lazada serves as an agent, and
f the commission it receives.
 ontinues to have control of the asset
e. Thus the asset is not removed from

Company for P240,000.

price of P290,400.

MM makes

December 31, 20x9, as follows:

CHAPTER 12 - REVENUE FROM CONTRACTS WITH CUSTOMERS

Other Revenue Recognition issues

1.) Right of Return

According to revenue recognition regulations, when a Right of Return exists, a seller may or may not b
to recognize all of the revenue at the time of sale. Generally, the seller can record the sales revenue a
time of sale if the seller is able to estimate the rate of product returns.

The estimated product return allowances should then be recorded at the time of sale as well.
However, if the seller is unable to make a reasonable estimate of the amount of future product return
seller should wait to record revenue until the loss can be estimated or the return privilege expires.

2.) Bill and Hold Arrangement

Bill-and-hold basis is a method of revenue recognition whereby revenue is recognized at the point of
but the goods aren't delivered to the buyer until a later date.
For example, a customer may request a company to enter into such a contract because of the custome
lack of available space for the product or because of delays in the customer’s production schedules.

3.) Principal-Agent Relationship

The principal-agent relationship is an arrangement in which one entity legally appoints another to act
behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have
a conflict of interest in carrying out the act.
Under IFRS 15, a principal recognizes revenue and expenses in gross amounts, and an agent recognize

4.) Repurchase Agreement

A repurchase agreement is a contract in which an entity sells an asset and also promises or has the opti
(either in the same contract or in another contract) to repurchase the asset.

Forward contracts and call options

If an entity has an obligation or a right to repurchase the asset (a forward contract or a call option), a c
does not obtain control of the asset because the customer is limited in its ability to direct the use of, a
substantially all of the remaining benefits from, the asset even though the customer may have physica
of the asset. Therefore, the contract is accounted for as either:

(a) a lease in accordance with IFRS 16

if the entity has an obligation or a right to repurchase the asset for an amount that is less than its orig
unless the contract is part of a sale and leaseback transaction. If the contract is part of a sale and lease
the entity continues to recognize the asset and recognizes a financial liability for any consideration rec
(b)a financing arrangement if the entity has an obligation or a right to repurchase the asset for
an amount that is equal to or more than its original selling price

Put Option
If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a price
than the original selling price of the asset

(a) lease in accordance with IFRS 16

the customer has a significant economic incentive to exercise the put option, the agreement is accoun

(b) Sale with a right of return - if the customer does not have the significant economic incentive to exe
 ller may or may not be able
d the sales revenue at the

sale as well.
uture product returns, the
privilege expires.

nized at the point of sale,

cause of the customer’s

duction schedules.

oints another to act on its

and should not have

d an agent recognizes only fees or commissions

omises or has the option

t or a call option), a customer

o direct the use of, and obtain
mer may have physical possession

at is less than its original selling price,

art of a sale and leaseback transaction,
any consideration received from the customer.
e the asset for

put option) at a price that is lower

agreement is accounted for as a lease

omic incentive to exercise the right.