VIII - Performance Obligation

SHOW DETAILED EXPLANATION AND SOLUTION. ASAP

Items 1 to 3 are based on the following information:

On July 15, 20x6, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing

system for a price of P90,000. The system included finely tuned scales that fit into EverFresh's automated

assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's

automated system, and a one-year contract to calibrate the equipment and software on an as-needed

basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If

Ortiz was to provide these goods and services separately, it would charge P60,000 for the scales, P10,000

for the software, and P30,000 for the calibration contract. Ortiz delivered and installed the equipment and

software on August 1, 2016, and the calibration service commenced on that date.

1. How many performance obligations exist in this contract?

a. 0 c. 2

b. 1 d. 3

2. Assume that the scales, software and calibration service are all separate performance obligations. How

much revenue will Ortiz recognize in 20x6 for this contract?

a. 0 c. P74,250

b. P63,000 d. P90,000

3. Assume that the scales, software and calibration service are viewed as one performance obligation.

How much revenue will Ortiz recognize in 20x6 for this contract?

a. P0 c. P63,000

b. P37,500 d. P90,000

Items 4 and 5 are based on the following information:

Windsor Windows manufactures and sells custom storm windows for enclosed porches. Windsor also

provides installation service for the windows. The installation process does not involve changes in the

windows, so this service can be provided by other vendors. Windsor enters into the following contract on

June 1, 20x5, with a local homeowner. The customer purchases windows for a price of P3,500 and chooses

Windsor to do the installation. Windsor charges the same price for the windows irrespective of whether it

does the installation or not. The price of the installation service is estimated to have a fair value of P900. The

customer pays Windsor P3,000 (which equals the fair value of the windows, which have a cost of P1,700)

upon delivery and the remaining balance upon installation of the windows. The windows are delivered on

August 1, 20x5, Windsor completes installation on September 15, 20x5, and the customer pays the balance

due. (Round amounts to nearest peso).

4. How many performance obligations exist in this contract on June 1, 20x5?

a. 0 c. 2

b. 1 d. 3

5. How many performance obligations exist in this contract on August 1, 20x5?

a. 0 c. 2

b. 1 d. 3

Items 6 to 8 are based on the following information:

On May 1, 2016, Meta Computer, Inc., enters into a contract to sell 5,000 units of Comfort Office Keyboard

to one of its clients, Bionics, Inc., at a fixed price of P95,000, to be settled by a cash payment on May 1.

Delivery is scheduled for June 1, 2016. As part of the contract, the seller offers a 25% discount coupon to

Bionics for any purchases in the next six months. The seller will continue to offer a 5% discount on all sales

during the same time period, which will be available to all customers. Based on experience, Meta

Computer estimates a 50% probability that Bionics will redeem the 25% discount voucher, and that the

coupon will be applied to P20,000 of purchases. The stand-alone selling price for the Comfort Office

Keyboard is P19.60 per unit.

6. How many performance obligations are in this contract?

a. 0 c. 2

b. 1 d. 3

7. How much of the contract price would be allocated to each performance obligation (stand-alone selling price of

keyboards and discount option, respectively)?

a. P95,000; P0 c. P93,100; P1,900

b. P0; P95,000 d. P1,900 P93,100

8. Assume the same facts and circumstances as above, except that Meta gives a 5% discount option to

Bionics instead of 25%. In this case, what would be the amount allocated to keyboards and discount

option on May 1, 20x6?

a. P95,000; P0 c. P93,100; P1,900

b. P0; P95,000 d. P1,900 P93,100