Module 10 - Revenue

PFRS 15 - Revenue from Contracts with Customers d. Allocate the transaction price to each
It specifies how and when an PFRS reporter will performance obligation.
recognize revenue as well as requiring such entities to e. Recognized revenue when each performance
provide users of financial statements with more obligation is satisfied.
informative, relevant disclosures. The standard provides
a single, principles based five-step model to be applied to Step 1 - Identify the Contract
all contracts with customers.
Features of a Contract
Scope of PFRS 15 Contracts, and approval of contracts, can be
It applies to all contracts with customers, except: written, oral or implied by an entity’s customary business
a. Lease contracts (PAS 17) practices.
b. Insurance contracts (PFRS 4) PFRS 15 requires contracts to have all of the
c. Financial instruments and other contractual rights following attributes:
or obligations (PFRS 9/PAS 39, PFRS 10, PFRS a. The contract has been approved;
11, PAS 27 and PAS 28) b. The rights and payment terms regarding goods
d. Certain non-monetary exchanges and services to be transferred can be identified;
c. The contract has commercial substance; and
Definition of Terms d. It is probable that the consideration will be
received (considering only the customer’s ability
Contract and intention to pay).
It is an agreement between two or more parties
that creates enforceable rights and obligations. If each party to the contract has a unilateral
enforceable right to terminate a wholly unperformed
Customer contract without compensating the other party (or parties),
It is a party that has contracted with an entity to no contract exists under PFRS 15.
obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration. Combining Multiple Contracts
Contracts are combined if they are entered into at
Revenue (or near) the same time, with the same customer, if either:
It refers to income arising in the course of an a. The contracts are negotiated as a package with a
entity’s ordinary activities. single commercial objective;
b. The consideration for each contract is
Income interdependent on the other, or
It refers to increases in economic benefits in the c. The overall goods or services of the contracts
form of inflows or enhancements of assets or decreases represent a single performance obligation.
of liabilities that result in an increase in equity (other than
those from equity participants). Contract Modifications
A change in enforceable rights and obligations
Stand-Alone Selling Price (i.e. scope and/or price) is only accounted for as a
It is the price at which a good or service would be contract modification if it has been approved, and creates
sold separately to a customer. new or changes existing enforceable rights and
obligations.
Performance Obligation Contract modifications are accounted for as a
It is a promise to transfer to the customer either: separate contract if, and only if:
a. A distinct (bundle of) good(s) or service(s); or a. The contract scope changes due to the addition
b. A series of substantially the same distinct goods of distinct goods or services, and
or services that have the same pattern of transfer b. The change in contract price reflects the
to the customer, and the pattern of transfer is both standalone selling price of the distinct good or
over time and represents the progress towards service.
complete satisfaction of the performance
obligation. Contract modifications that are not accounted for
as a separate contract are accounted for as either:
The ‘Five Step’ Model a. Replacement of the original contract with a new
Revenue from contracts with customers is contract (if the remaining goods or services under
recognized based on the application of a principle-based the original contract are distinct from those
‘five step’ model: already transferred to the customer);
a. Identify the contract. b. Continuation of the original contract (if the
b. Identify the performance obligation(s). remaining goods or services under the original
c. Determine the transaction price. contract are not distinct from those already
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 Module 10 - Revenue

transferred to the customer, and the performance If the timing of payments specified in the contract
obligation is partially satisfied at modification provides either the customer or the entity with a significant
date). benefit of financing the transfer of goods or services.
c. Mixture of (a) and (b) (if elements of both exist). The transaction price is adjusted to reflect the
cash selling price at the point in time control of the goods
Step 2 - Identify the Performance Obligations or services is transferred.
A significant financing component can either be
Performance Obligations explicit or implicit.
These are the contractual promise by an entity, Factors to consider include:
to transfer to a customer, distinct goods or services, either a. Difference between the consideration and cash
individually, in a bundle, or as a series over time (Refer to selling price; and
the ‘Definitions’ section above). b. Combined effect of interest rates and length of
Activities of the entity that do not result in a time between transfer of control of the goods or
transfer of goods or services to the customer (e.g. certain services and payment.
internal administrative ‘set-up activities’) are not
performance obligations of the contract with the customer A significant financing component does not exist
and do not give rise to revenue. when:
a. Timing of the transfer of control of the goods or
Definition of ‘Distinct’ (Two Criteria to Be Met) services is at the customer’s discretion;
b. The consideration is variable with the amount or
The Customer can ‘Benefit’ from the Good or Service timing based on factors outside of the control of
Benefit from the good or service can be through the parties; and
either: c. The difference between the consideration and
a. Use, consumption, or sale (but not as scrap); or cash selling price arises for other non-financing
b. Held in a way to generate economic benefits. reasons (i.e. performance protection).

Benefit from the good or service can be either: Discount Rate to Be Used
a. On its own; or It must reflect credit characteristics of the party
b. Together with other readily available resources receiving the financing and any collateral/security
(i.e. those which can be acquired by the customer provided.
from the entity or other parties).
Practical Expedient
The Promise to Transfer a Good or Service is If the period between transfer and payment is 12
Separable from Other Promises in the Contract months or less, do not account for any significant
The assessment requires judgement, and financing component.
consideration of all relevant facts and circumstances.
A good or service may not be separable from Accounting for Variable Consideration
other promised goods or services in the contract, if: Examples: Discounts, rebates, refunds, credits,
a. There are significant integration services with concessions, incentives, performance bonuses,
other promised goods or services; penalties, and contingent payments.
b. It modifies/customises other promised goods or Variable consideration must be estimated using
services; and either:
c. It is highly dependent/interrelated with other a. Expected value method: based on probability
promised goods or services. weighted amounts within a range (i.e. for large
number of similar contracts); or
Step 3 - Determine the Transaction Price b. Single most likely amount: the amount within a
range that is most likely to arise. (e.g. where the
Transaction Price contract has only two possible outcomes).
It is the amount of consideration an entity expects
to be entitled to in exchange for transferring the promised Constraining (Limiting) the Estimates of Variable
goods or services ( not amounts collected on behalf of Consideration
third parties, e.g. sales taxes or value added taxes). Variable consideration is only recognized if it is
The transaction price may be affected by the highly probable that a subsequent change in its estimate
nature, timing, and amount of consideration, and includes would not result in a significant revenue reversal (i.e. a
consideration of significant financing components, significant reduction in cumulative revenue recognized).
variable components, amounts payable to the customer
(e.g. refunds and rebates), and non-cash amounts. Accounting for Consideration Payable to the
Customer
Accounting for a Significant Financing Component
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 Module 10 - Revenue

It includes cash paid (or expected to be paid) to obligation (or transferring the distinct good or
the customer (or the customer’s customers) as well as service within the performance obligation); and
credits or other items such as coupons and vouchers. b. The allocation of the variable consideration is
It is accounted for as a reduction in the consistent with the principle that the transaction
transaction price, unless payment is in exchange for a price is allocated based on what the entity
good or service received from the customer in expects to receive for satisfying the performance
which case no adjustment is made – except where: obligation (or transferring the distinct good or
a. The consideration paid exceeds the fair value of service within the performance obligation).
the goods or services received (the difference is
set against the transaction price); and/or Step 5 - Recognize Revenue as Each Performance
b. The fair value of the goods or services cannot be Obligation Is Satisfied
reliably determined (full amount taken against the
transaction price). Recognition of Revenue
The transaction price allocated to each
Accounting for Non-Cash Consideration performance obligation (determined in Step 4) is
It is accounted for at fair value (if not reliably recognized as/when the performance obligation is
determinable, it is measured indirectly by reference to satisfied, either
stand-alone selling price of the goods or services). a. Over time, or
b. At a point in time.
Step 4 - Allocate the Transaction Price to Each
Performance Obligation Satisfaction occurs when control of the promised
good or service is transferred to the customer:
Allocation of the Transaction Price a. Ability to direct the use of the asset
The transaction price (determined in Step 3) is b. Ability to obtain substantially all the remaining
allocated to each performance obligation (determined in benefits from the asset.
Step 2) based on the stand-alone selling price of each
performance obligation. Factors to consider when assessing transfer of
If the stand-alone selling price(s) are not control:
observable, they are estimated. Approaches to estimate a. Entity has present right to payment for the asset
may include: b. Entity has physically transferred the asset
a. Adjusted market assessment approach c. Legal title of the asset
b. Expected cost plus a margin approach d. Risks and rewards of ownership
c. Residual approach (i.e. residual after observable e. Acceptance of the asset by the customer.
stand-alone selling prices of other performance
obligations have been deducted). Criteria for Recognizing Revenue Over Time
Note that restrictive criteria must be met (It applies if any of the following are met.)
for approach (b) to be applied.
Customer Simultaneously Receives and Consumes
Allocating a ‘Discount’ all of the Benefits
A discount exists where the sum of the stand- Example: many recurring service contracts (such
alone selling price of each performance obligation as cleaning services).
exceeds the consideration payable. If another entity would not need to substantially
Discounts are allocated on a proportionate basis, re-perform the work already performed by the entity in
unless there is observable evidence that the discount order to satisfy the performance obligation, the customer
relates to one or more specific performance obligation(s) is considered to be simultaneously receiving and
after meeting all of the following criteria: consuming benefits.
a. The goods or services (or bundle thereof) in the
performance obligation are regularly sold on a The Entity’s Work Creates or Enhances an Asset
stand-alone basis, and at a discount; and Controlled by the Customer
b. The discount is substantially the same in amount The asset being created or enhanced (e.g. a work
to the discount that would be given on a stand- in progress asset) could be tangible or intangible.
alone basis.
The Entity’s Performance Does Not Create an Asset
Allocating Variable Consideration with an Alternative Use to the Entity, and the Entity
Variable consideration is allocated entirely to a Has an Enforceable Right to Payment for
performance obligation (or a distinct good or service Performance Completed to Date
within a performance obligation), if both: a. Alternate use
a. The terms of the variable consideration relate Assessment requires judgment and
specifically to satisfying the performance consideration of all facts and circumstances.
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 Module 10 - Revenue

An asset does not have an alternate use a. Are specifically identifiable and directly relate to
if the entity cannot practically or contractually the contract (e.g. direct labour, materials,
redirect the asset to another customer, such as: overhead allocations, explicitly on-charged costs,
● Significant economic loss, i.e. through other unavoidable costs (e.g. sub-contractors));
rework, or reduced sale price (practical) b. Create (or enhance) resources of the entity that
● Enforceable rights held by the customer to will be used to satisfy performance obligation(s)
prohibit redirection of the asset (contractual). in the future; and
Whether or not the asset is largely c. Are expected to be recovered.
interchangeable with other assets produced by
the entity should also be considered in Costs that Are Recognized as an Expense as Incurred
determining whether practical or contractual a. General and administrative expenses
limitations occur. b. Wastage, scrap, and other (unanticipated) costs
not incorporated into pricing the contract
b. Enforceable right to payment c. Costs related to (or can’t be distinguished from)
Consider both the specific contractual past performance obligations.
terms and any applicable laws or regulations.
Ultimately, other than due to its own failure to Amortization and Impairment of Contract Assets
perform as promised, an entity must be entitled to a. Amortization is based on a systematic basis
compensation that approximates the selling price consistent with the pattern of transfer of the goods
of the goods or services transferred to date. or services to which the asset relates.
The profit margin does not need to equal b. Impairment exists where the contract carrying
the profit margin expected if the contract was amount is greater than the remaining
fulfilled as promised. For example, it could be a consideration receivable, less directly related
proportion of the expected profit margin that costs to be incurred.
reflects performance to date.
*** Licensing of an Entity’s Intellectual Property

Methods Used in Recognizing Revenue Over Time If the License Is Not Distinct from Other Goods or
Revenue that is recognized over time is Services
recognized in a way that depicts the entity’s performance a. It is accounted for together with other promised
in transferring control of goods or services to customers. goods or services as a single performance
Methods include: obligation
a. Output methods: (e.g. Surveys of performance b. A licence is not distinct if either:
completed to date, appraisals of results achieved, ● It is an integral component to the functionality
milestones reached, units produced/delivered of a tangible good, or
etc.) ● The customer can only benefit from the
b. Input methods: (e.g. Resources consumed, licence in conjunction with a related service.
labour hours, costs incurred, time lapsed,
machine hours etc.), excluding costs that do not If the License Is Distinct from Other Goods or
represent the seller’s performance. Services
a. It is accounted for as a single performance
Recognizing Revenue at a Point in Time obligation.
Revenue is recognized at a point in time if the b. Revenue from a distinct licence is recognised
criteria for recognising revenue over time are not met. over time (refer Step 5) if, and only if:
Revenue is recognized at the point in time at ● The entity (is reasonably expected to)
which the entity transfers control of the asset to the undertakes activities that will significantly
customer (see adjacent box). affect the IP to which the customer has rights
● The customer’s rights to the IP expose it to
Application Guidance within PFRS 15 the positive/negative effects of the activities
that the entity undertakes in (bullet 1).
Contract Costs ● No goods or services are transferred to the
Only incremental costs of obtaining a contract customer as the entity undertakes the
that are incremental and expected to activities in (bullet 1).
be recovered can be recognised as an asset. c. Revenue from a distinct licence is recognised at
If costs to fulfil a contract are within the scope of a point in time (refer to Step 5) if the criteria for
other IFRSs (e.g. IAS 2, IAS 16, IAS recognition over time (above) are not met. The
38 etc.) apply those IFRSs. right is over the IP in its form and functionality at
If not, a contract asset is recognized under IFRS the point at which the licence is granted to the
15 if, and only if, the costs: customer.
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 Module 10 - Revenue

d. Revenue is recognised at the point in time at Contract Revenue

which control of the licence is transferred to the It is measured at the fair value of the
customer. consideration received or receivable under the long-term
construction contract.
Non-Refundable Upfront Fees
These include additional fees charged at (or near) Contract Stipulations that May Increase or Decrease
the inception of the contract (e.g. joining fees, Contract Revenue
activation fees, set-up fees etc.). a. Changes in the specifications design of the asset
Treatment dependents on whether the fee relates to be constructed;
to the transfer of goods or services to the customer (i.e. a b. Changes in the duration of the contract;
performance obligation under the contract): c. Cost escalation clauses (increase revenue);
a. Yes: Recognise revenue in accordance with IFRS d. Penalties arising from delays caused by the
15 (as or when goods or services transferred) contractor in the completion of the contract
b. No: Treated as an advance payment for the (decrease revenue);
performance obligations to be fulfilled. e. Increase in the number of units when the contract
(Note: Revenue recognition period may price involves a fixed price per unit of output
in some cases be longer than the contractual (increases revenue); and
period if the customer has a right to, and is f. Incentive payments to the contractor for early
reasonably expected to, extend/renew the completion of the contract or when the contract is
contract). sufficiently advanced that it is probable that the
specified performance standards will be met or
Presentation exceeded (increase revenue).

Statement of Financial Position Contract Costs

a. Contract assets and contract liabilities from These are costs that relate directly to the specific
customers are presented separately. contract; are attributable to the contract activity in general
b. Unconditional rights to consideration are and can be allocated to the contract; and are specifically
presented separately as a receivable. chargeable to the customer under the terms of the
contract.
Statement of Profit or Loss and Other Comprehensive Examples.
Income a. Site labor costs, including site supervision;
Line items (revenue and impairment) are b. Costs of materials used in construction;
presented separately in accordance with the c. Depreciation of plan and equipment used on the
requirements of IAS 1 Presentation of Financial contract;
Statements. d. Costs of moving plant, equipment and materials
to and from the contract site; etc.
Construction Contract
It is a contract specifically negotiated for the Types of Contract Costs
construction of an asset or a combination of assets that
are closely interrelated or interdependent in terms of their Costs Incurred to Date
design, technology or their ultimate purpose or use. These include precontract costs (e.g., costs of
architectural designs, cost of securing the contract, etc.)
Long-Term Construction Contracts and costs incurred after contract acceptance.
These are construction projects that extend thru
more than one accounting period. Estimated Costs to Complete
These are the anticipated cost of materials, labor,
Classifications of Construction Contract subcontracting costs and indirect costs (overhead)
required to complete a project at a scheduled time.
Fixed Price Contract ***
It is a construction contract in which the contractor
agrees to a fixed contract price, or a fixed rate per unit of Subcontractor Costs
output, which in some cases is subject to cost escalation These are costs incurred as result of
clauses. subcontracting or the hiring by the principal contractor of
other contractors or individuals to perform part of the
Cost Plus Contract construction project.
It is a construction contract in which the contractor
is reimbursed for allowable or otherwise defined costs, Cost of Materials Purchased in Advance of Their Use
plus a percentage of these costs or a fixed fee. Such costs should not be treated as costs
*** incurred for the purposes of computing the percentage of
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 Module 10 - Revenue

completion ratio until the materials have been physically

used in production. Methods Used to Measure the Progress of the
Construction
Methods Used to Account for Long-Term
Construction Contracts Input Measures (Cost to Cost Method)
Under this method, the degree of completion is
Percentage-of-Completion Method determined by computing the ratio of the costs already
This method is to be used when the outcome of incurred to the total estimated costs to complete the
the construction contract can be estimated reliably, that project. The percentage of completion is then applied to
is, the estimate of costs to complete and the extent of the estimated gross profit (contract price less total
progress toward completion of long-term contracts are estimated costs) to determine the gross profit to be
reasonably dependable. recognized to date.

Zero-Profit Method Output Measures (Units of Delivery Method)

Under this method, revenue is recognized in an Under this method, revenue is recognized when
amount exactly equal to costs incurred until reasonable certain phases of the project are completed.
objective estimates of percentage of completion are
available.

Computation of Gross Profit to Be Realized for the Year

Percentage-of-Completion Method
Zero-Profit Method
Cost to Cost Method Units of Delivery Method
Cost incurred to date Number of phases of the a. Year that ended with the project
/ Total estimated costs (cost project completed still incomplete:
Incurred to date + / Total number of phases under the • Cost incurred this year =
Estimated costs to project Construction revenue
complete) = Percentage of completion • Gross profit earned this year =
= Percentage of completion 0
Total contract price b. Year when the project is
- Total estimated costs completed:
= Expected gross profit Contract price
* Percentage of completion - Construction revenue
= Gross profit earned to date recognized in prior
- Gross profit earned in prior years years
= Gross profit earned (loss incurred) this year = Construction revenue this
Alternate procedure: Year
Contract price - Cost incurred this year
* Percentage of completion = Gross profit earned this
= Value of contract earned year
- Cost incurred to date
= Gross profit earned to date
- Gross profit earned in prior years
= Gross profit earned (loss incurred) this year

Journal Entries Relevant to Long-Term Construction f. Elimination of inventory upon completion of the
Contracts project - Dr. Contract billings; Cr. Construction in
a. Contract signed - no entry required. progress
b. Cost incurred - Dr. Construction in progress; Cr.
Cash Effects of Revision of Estimated Cost
c. Progress billings - Dr. Accounts receivable; Cr. The increase in total estimated costs may result
Contract billings to:
d. Billing collections - Dr. Cash; Cr. Accounts a. A loss in the year the estimated costs was
receivable increased, but overall, the contract will still result
e. Revenue recognition - Dr. Construction in in profit (Contract price is still > Total estimated
progress (gross profit earned this year), Cost of costs)
construction; Cr. Construction revenue • Percentage of completion method - The
result of operations would be a gross loss for
the current year.
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 Module 10 - Revenue

• Zero-profit method - The gross profit would Item Formula

still be zero if the project is still incomplete Deferred gross profit, Selling price - Cost of sale
b. A loss on the entire contract (Contract price < initial amount
Total estimated costs) Realized gross profit Cash collection this year,
• Percentage of completion method - The for this year including down payment if any
entire loss to be recognized in the year it is * Deferred gross profit, initial
first anticipated must be the cumulative amount / Selling price
recognized revenue plus the total anticipated Deferred gross profit, Deferred gross profit, initial
loss. ending balance amount - Cumulative realized
• Zero-profit method - The overall anticipated gross profit
loss is to be recognized immediately at the Monthly installment Selling price
end of the year when the revision of with interest - Cash down payment
estimated costs occurred. = Balance payable by
installment
Contract Retention / Present value of
It refers to a part of the billings that is agreed not annuity of 1 for the
to be paid to the contractor until the project is completed number of installment
and accepted to ensure the completion of the project periods at a specified
satisfactorily. It is presented in the statement of financial interest rate
position as a current asset.
Journal entry: Billing collection - Dr. Cash Journal Entries Relevant to Installment Sales
(billings), Contract retention; Cr. Accounts receivable a. Regular sales - Dr. Accounts receivable; Cr.
Sales
Mobilization Fee b. Installment sales - Dr. Cash (down payment),
It is an amount advanced to the contractor for the Installment contracts receivable - 20XX
purpose acquiring the assets required to carry on the (balancing figure); Cr. Installment sales (selling
contract. These are recognized as a current liability by the price)
contractor. c. Cost of sales (perpetual method) - Dr. Cost of
Journal entry: Collection of mobilization fee - Dr. sales (for the regular sales), Cost of installment
Cash; Cr. Mobilization fee sales; Cr. Merchandised inventory
d. Cost of sales (periodic method) - Dr. Cost of
Installment Sales Contract installment sales; Cr. Shipments on installment
It is a special type of credit arrangement which sales
provides for a series of payments over a period of months e. Collection of accounts receivable - Dr. Cash; Cr.
or years. Accounts receivable
f. Collection of installment contracts receivable - Dr.
Methods of Gross Profit Recognition on Installment Cash; Cr. Installment contracts receivable -
Sales 20XX, Interest income
a. Gross profit is recognized at the time of sale g. Payment of operating expenses - Dr. Operating
b. Gross profit is recognized in the period in which expenses; Cr. Cash
cash is collected: h. Recognition of accrued interest receivable
• Cost recovery method - Gross profit is not (adjusting entry) - Dr. Accrued interest receivable;
recognized until collections are equal to the Cr. Interest income
amount of cost of goods sold. i. Setting up of deferred gross profit - Dr. Installment
• Gross profit realization method - First sales; Cr. Cost of installment sales, Deferred
collections are regarded as realization of gross profit - 20XX (balancing figure)
gross profit. j. Recording of realized gross profit on installment
• Installment method - It is frequently used in sales - Dr. Deferred gross profit - 20XX; Cr.
practice and is acceptable for income tax Realized gross profit
purposes.
Note: The entries to Installment Contract
Installment Method Receivable and Deferred Gross Profit accounts are
Under this, the difference between the selling recorded separately based on the year on which the
price and the cost of sale is recorded as deferred gross related installment sale occurred because the gross profit
profit or unrealized gross profit. This account is decreased may not be the same each year.
periodically for the amount recognized as revenue in
proportion that the cash collection bears to the sales price.
Formulas:

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 Module 10 - Revenue

Allocation of Cost of Goods Sold When Periodic Trade-In

Inventory Method Is Used It refers to the acceptance by the seller of
a. In general: Cost of installment sales = [Installment merchandise from the buyer as part of the down payment
sales / (Cash sales + Charge sales + Installment (e.g., car traded-in).
sales)] * Total cost of goods sold
b. If the selling price for charge and installment sales Formulas:
are higher than cash sales price by 20% and 25%, Estimated resale value of merchandise
respectively (percentages assumed): Cost of traded-in
installment sales = {(Installment sales / 125%) / - Reconditioning cost expected to be incurred
[Cash sales + {Charge sales / 120%) + - Normal profit margin (estimated resale value
(Installment sales / 125%)]} * Total cost of goods of merchandise traded-in * gross profit
sold rate based on sales)
c. Other pricing policies such as the gross profit = Net realizable value of the merchandise
percentage for each type of sale may affect the traded-in
allocation of the total cost of goods sold.
Trade-in value allowed to customer
Repossession - Net realizable value of the merchandise
It is the taking back of the product sold by traded-in
installment sales caused by the default or failure of the = Over allowance on trade-in
buyer to make timely installment payments.
Installment sales
Procedures to Record Repossession - Over allowance on trade-in
a. Record the repossessed merchandise in an = Net installment sales
appropriate inventory account at its fair value - Cost of installment sales
(estimated selling price less reconditioning cost = Gross profit
and normal profit margin) at date of repossession. / Net installment sales
b. Cancel the uncollected installment receivable = Gross profit rate
balance of the defaulted contract.
c. Write-off the balance of the deferred gross profit Journal entries:
relating to the above receivable. a. Over allowance is charged to the Over Allowance
d. Recognize the resulting gain or loss on on Trade-In account - Dr. Merchandise inventory
repossession. - traded-in (net realizable value of merchandise
traded-in), Over allowance on trade-in,
Formula: Installment contracts receivable (balancing
Estimated selling price of repossessed figure); Cr. Installment sales (gross)
Merchandise b. Over allowance is treated as reduction from
- Reconditioning cost Installment Sales Account - Dr. Merchandise
- Normal gross profit on resale (estimated inventory - traded-in (net realizable value of
selling price of repossessed merchandise traded-in), Installment contracts
merchandise * gross profit rate based on receivable (balancing figure); Cr. Installment
sales) sales (net)
= Fair market value of repossessed
Merchandise
- Installment contract receivable Consignment establishes the transfer of possession of
+ Deferred gross profit merchandise or inventory without the transfer of
= Loss on repossession ownership from the owner, called the consignor, to
another person, called consignee. The consignee acts as
Journal entry: Repossession - Dr. Repossessed
an agent in behalf of the consignor for the purpose of
merchandise (fair value), Deferred gross profit (balance to
be written-off), Loss on repossession (balancing figure); selling the goods for a commission.
Cr. Installment contracts receivable (balance to be The transfer of goods to the consignee is not
cancelled)
treated as a sale. Even though a transfer of goods has
Reconditioning costs which relate to repossessed
not taken place, there was no intention of either the
merchandise should be charged to the Repossessed
Merchandise account. consignor or the consignee that sale and purchase
transactions take place. The title of the goods remains
with the consignor and recognition of the sale is deferred
until goods are transferred to an outside party by the
consignee.
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 Module 10 - Revenue

It is still part of the inventory of the consignor as • Debited when remittance is made to the
Merchandise Inventory on Consignment. Upon sale of the consignor.
merchandise, the consignee has liability of the net amount
The following costs and expenses for the consignment
due to the consignor.
transcations:
The consignee accepts the merchandise and
Items to be allocated between sold and unsold items:
agrees to exercise due diligence in caring for and selling
it. Consignee remits to the consignor the cash received • Freight cost paid by the consignor shipment
from customers after deducting sales commission and
any chargeable expenses. • Freight and cartages paid by the consignee upon
receipt of the shipment
Accounting by the Consignor.
• Insurance freight of consigned goods
o No revenue is recognized until a sale is
• Packaging costs of consigned goods
made by the consignee. Upon shipment
of the merchandised by the consigned an • Costs and fees such as repairs, installation of
inventory account is established to devices paid by the consignor and/or consignee
identify the consigned merchandise. related to the consigned goods
• Any expenses paid by the consignor are added to
Items chargeable to the sold units
the inventory balance as added costs. For the
consignee, only a memorandum is made after • Commissions
receiving the consigned goods.
• Any reimbursable expense paid by the consignee • Delivery and installation
is charged to the receivable account of the • Advertising
consignee and added to the inventory balance of
the consignor. • Reconditioning on delivered units to customers

Inventory on Consignment account is debited for: • Insurance in freight for the delivery of goods to
the customers
• Cost of goods shipped to the consignee
• Expenses related to returned units delivered
• Expenses related to consignment incurred by the Formula:
consignor
Total remittance =
• Reimbursable expenses related to consignment
paid by the consignee Sales (consignor payable)

Inventory on Consignment account is credited for: Less Related expenses paid by the consignee

• Returned goods by the consignee; and Advances to Consignor

• Cost of consignment sales and expenses relating Consignee’s commission

to consignment.
Net Income:
Accounting by the Consignee
Sales (Sold units x unit price)
The consigned receivable account is:
Less Cost of consigned goods (Sold units x Cost)
• Debited for the reimbursable expenses related to
Related expenses paid by the Consignor
consignment paid by the consignee but
(Expenses incurred except for freight and the freight
chargeable to the consignor
shall be allocated with the numerator consisting of
• Credited when remittance is made to the sold units and units returned)
consignor
Related expenses paid by the Consignee
The consigned payable account is:
Consignee’s commission (percentage of sales)
• Credited for the sales by the consignee

Property of PREMIERE CPA Review and Professional Development Center – October 2020