Solution Chapter 7
Solution Chapter 7
Solution Chapter 7
Problems
Problem I
1. Entries in 20x4:
Cash...
3,500
20,500
Real Estate .
9,000
Gain on Sale of Real Estate ..
15,000
Cash
500
500
Entry in 20x5:
Real Estate .
16,500
3,500
20,000
2. Entries in 20x4
Cash
3, 500
20,500
9,000
Real Estate ..
500
500
2,500
Or P2,500
Entry in 20x5
Real Estate... 16,500
Deferred Gross Profit on Installment Sales .. 12,500
Mortgage Notes Receivable ..
20,000
Problem II
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
Problem III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales
250,000
b. Cash ..
120,000
200,000
Merchandise Inventory ..
200,000
d. Merchandise Repossessions
14,500
P 14,500
4,000
Loss on repossession.
16,000
P 1,500
e. Expenses
Cash .
2. Adjustment to Recognize Gross Profit on Installments Sales:
16,000
16,000
Installment Sales
250,000
200,000
50,000
24,000
24,000
Expenses .
16,000
Loss on Repossessions .
1,500
Income Summary .
6,500
Problem IV
1.
January to December 31
20x4
20x5
1,080,00
0
600,000
1,080,00
0
600,00
60,000
300,000
144,000
336,000
360,000
480,000
Regular Sales:
Cost of Sales
Merchandise inventory
480,000
Installment Sales:
Cost of installment sales
Merchandise inventory
252,000
864,000
480,000
864,000
312,000
252,000
144,000
312,000
360,000
144,000
108,000
360,000
204,000
Installment Accounts
receivable
20x2
72,000
72,000
36,000
60,000
72,000
Installment Accounts
receivable
20x3
Interest income
(5) to record payment of operating expenses:
Operating expenses
Cash
90,000
102,000
90,000
102,000
2.
Adjusting entries (end of the year):
(6) To recognize accrued interest receivable
Interest receivable
1,440
Interest income
2,880
1,440
2,880
480,000
Merchandise inventory
864,000
480,000
864,000
252,000
sales
312,000
252,000
312,000
360,000
480,000
252,000
108,000
312,000
168,000
realized
gross
profit
on
39,600
*21,600
71,400
39,600
93,000
*P72,000 x 30%
20x4
P
72,000
profit
gross
____30%
P
21,600
20x5
*P204,00
0
____35
%
P
71,400
P
93,000
*P144,000 + P60,000
Closing entries:
(10) To close realized gross profit account:
Realized gross profit
39,600
Income summary
93,000
39,600
93,000
600,000
1,080,00
0
37,440
74,880
Cost of sales
480,000
864,000
Operating expenses
90,000
102,000
Income summary
67,440
188,880
107,040
Retained earnings
281,880
107,040
281,880
Problem V
1.
Type of Sale
Regular Sales:
Cash sales
Credit sales
Total regular sales
Installment Sales
Total Sales
Amount
P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000
Ratio to Total
Sales
675/1,800
1,125/1,800
Allocated Cost
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000
The allocation above was based on the assumptions that the markup for each type of
sale is the same. Normally, the selling prices of the merchandise are not the same for
each type of sales.
2.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
P 225,000
450,000
1,125,00
0
P 1,500,000
Amount based on
Cash
Sales
(100%)
P 225,000
375,000*
Ratio to Total
Sales
225/1,500
375/1,500
Allocated Cost
P
175,500
292,500
900,000**
P 1,250,000
900/1,500
__ 702,000
P 1,170,000
Cost ratio
70%
75%
Allocated Cost*
P 157,500
337,500
40%
60%
_ _675,000
P 1,170,000
3.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
225,000
450,000
1,125,00
0
P 1,800,000
P
Problem VI
The entries are required under the periodic method:
Repossessed merchandise......
Deferred gross profit 20x4............
Loss on repossession...
Installment accounts receivable 20x4.
68,400
48,000
3,600
120,000
Repossessed merchandise......
Cash, etc (or various credits)................
12,000
12,000
P 108,000
__39,600
P 68,400
__72,000
P( 3,600)
840,000
360,000
2,400,00
0
3,360,00
0
6,960,00
0
840,000
2,400,00
0
3,360,00
0
6,600,00
0
P1,200,00
0
P1,680,0
00
420,000
84,000
__336,00
0
__840,000
Over-allowance
P
360,000
P6,960,000
___360,000
P6,600,000
__3,920,00
0
P2,680,000
40.60%
420,000
420,000
Incidentally, the realized gross profit on installment sales of the new merchandise
for the year 20x4 is computed as follows:
Trade-in merchandise (market value before reconditioning costs)
Down payment
Installment collection (March 31 December 31: P80,000 x 10 months)
Total collections..
Multiplied by: Gross profit rate in 20x4..
Realized gross profit on installment sales of new merchandise
840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid
balance:
Oct. 31 Cash 20,000
Mortgage Notes Receivable . 55,000
Real Estate .
60,000
1,150
600
Interest Income .
550
Interest Received: P55,00 at 12% for 1 month, or P550
600
Interest Income
544
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance
of the contract:
Dec. 31 Cash 20,000.00
Mortgage Notes Receivable 55,000.00
Real Estate
60,000.00
Deferred Gross Profit on Installment Sales ..
15,000.00
Nov. 30 Cash
Mortgage Notes Receivable ..
50.00
Interest Income
550.00
600
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600P550, or P50, is reduction in principal)
Dec. 31 Cash .
600.00
50.50
Interest Received
549.50
4,020.10
6,300
900
Land
10,000
Building ..
90,000
57,200
9,553
9,553
30,000
6/30/x6 Cash .
Notes Receivable
50,000
19,067
50,000
19,067
15,000
5,720
15,000
5,720
120,000
Merchandise Inventory
120,000
200,000
Cash . 124,000
30,000
34,000
60,000
14,280
24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 .
27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 ..
30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts
receivable 20x4 ..
32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ....................
P27,500
Installment Accounts Receivable 20x6 .. P 55,000
70,000
20x5 ..
12,000
20x4 ..
3,000
Accounts receivable .
17,000
Inventory ....
60,000
Other Assets ...
40,000
Total Assets P
214,500
Liabilities
Accounts payable
Deferred Gross Profit
P 40,000
20x6 P 15,125
20x5
3,600
20x4
960
19,685
Total Liabilities
59,685
Stockholders Equity
Capital Stock .. P 100,000
Retained Earnings .. P 68,400
Balance, Jan. 1, 20x6 .
13,585
54,185
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Sales ............
Cost of goods sold:
Merchandise Inventory, Jan. 1 P
52,000
Purchases ..................
350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31
60,000
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
110,000
Total
P445,00
0
342,000
Gross Profit ..
P88,000
15,125
P78,875
P15,000
P103,00
0
15,125
P15,000
P87,875
50,040
P137,91
5
151,50
0
P
13,585
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% P
15,125
20x5
27.5%
20x4
P138,000
30%
32%
Realized Gross Profit .. P 72,875
P 8,640
232,000
P 41,400
72,875
41,400
8,640
122,915
Income Summary
170,000
232,000
350,000
60,000
Income Summary
Sales .
60,000
125,000
Income Summary .
Realized Gross Profit on Installment Sales.....
125,000
122,915
Income Summary .
Income Summary
122,915
151,500
Retained Earnings ..
151,500
13,585
13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6
38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 . 40%
2.
Deferred Gross Profit, 20x6
1,900
4,000
3,600
Loss on Repossessions..
9,500
Sales ............
Cost of goods sold:
Merchandise Inventory, Jan. 1 P
30,000
Purchases ..................
445,000
Repossessed Merchandise ..
10,000
Merchandise Available for sale .................
495,000
Less: Merchandise Inv. Dec. 31
35,000
Gross Profit ..
Less: Deferred Gross Profit on 20x6 sales (see
schedule)
Realized Gross Profit on current years sales
.
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule)
.
Deduct loss on repossession .
Installment
Sales
P500,000
Regular
Sales
P192,000
Total
P692,000
310,000
150,000
460,000
P190,000
32,300
P42,000
P103,000
32,300
P157,700
P42,000
P199,700
100,650
P300,350
3,500
P296,850
300,000
P 3,150
P 32,300
20x5
20x4
P210,000 P 37,000
38%
40%
45%
P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ...
25,000
Installment Accounts Receivable 20x6 P 80,000
20x5 20,000
105,000
20x4
5,000
Accounts receivable ..
40,000
Inventory .
35,000
Other Assets
52,000
Total Assets .P
257,000
Liabilities
Accounts payable .
P 75,000
8,000
2,250
40,650
Total Liabilities
115,650
Stockholders Equity
Capital Stock .
P100,000
3,150
41,350
310,000
190,000
84,000
16,650
Income Summary
258,350
185,000
30,000
455,000
Repossessed Merchandise ..
10,000
35,000
Income Summary ..
Sales ....
35,000
192,000
Income Summary
192,000
Income Summary
258,350
3,500
Loss on Repossession .
Income Summary
3,500
300,000
Operating Expenses ..
Retained Earnings
300,000
3,150
Income Summary .
3,150
Problem XIII
1.
P 24,020
274,820
191,910
8,407.00
P172,852.50
748.00
748.00
Loss on repossession..
381.00
381.00
Repossessed merchandise could be recorded at its resale value less the usual gross profit
margin on sales. Recording the merchandise at P1,452 will result in the realization of less
than the normal profit margin on the resale of the goods in the subsequent period. if
expenses of the resale exceed P248 (P1,700 P1,452), the later period would actually
have to absorb a loss as a result of such valuation. Recording the goods at resale value
reduced by the companys usual profit margin on sales is recommended, for such practice
will charge the next period with no more than the utility of the goods carried forward.
1,600.00
1,000.00
2.
3.
4.
Cash ..........................
Installment Contracts Receivable
160.00
Cash ........................
Interest Income
Installment Contracts Receivable .
160.00
Cash ......................
Interest Income .
Installment Contracts Receivable
Deferred Gross Profit on Installment of Sales ..
Realized Gross Profit on Installment of Sales
225.45
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
160.00
Installment receivables
20x5:
Cash
11.47
148.53
225.45
250,000
150,000
100,000
80,000
80,000
120,000
Installment receivables
14.40
145.60
160.00
Installment receivables
Installment receivables
Inventory
Deferred gross profit
Cash
120,000
50,000
50,000
50,000
300,000
50,000
210,000
90,000
135,000
Installment receivables
135,000
40,500
40,500
P816,61
9
637,500
P179,119
_ 27,221
P206,340
22% rounded
P
27,221
P 27,221
Recognize revenue in the accounting period when the performance obligation is satisfied.
Step 1: Identify the contract with customers.
A contract is an agreement between two parties that creates enforceable rights or obligations. In
this case, Maritime Ship Manufacturers contract to deliver cargo ships to Kim and Dreicy Shipping
Lines.
Step 2: Identify the separate performance obligations in the contract.
Maritime Ship Manufacturers has only one performance obligationto deliver cargo ships to Kim
and Dreicy Shipping Lines. If Maritime Ship Manufacturers also agreed to maintain the cargo ships,
a separate performance obligation is recorded for this promise.
Step 3: Determine the transaction price.
Transaction price is the amount of consideration that a company expects to receive from a
customer in exchange for transferring a good or service. In this case, the transaction price is
straight forwardit is P720,000,000.
Step 4: Allocate the transaction price to the separate performance obligations.
In this case, Maritime Ship Manufacturers has only one performance obligationto deliver cargo
ships to Kim and Dreicy Shipping Lines.
The entry on July 31, 20x7, to record the sale and related cost of goods sold is as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,00
.
.
0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,000
...
Cost
of34,20
sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...
The entry to record the receipt of cash on August 31, 20x7 is a follows:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57,00
.....
0
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
......
34,200
57,000
A key attribute of the revenue arrangement is that the signing of the contract by the two parties is not
recorded until one or both of the parties perform under the contract. Until performance occurs, no
net asset or net liability occurs.
The above new contract, AB recognizes additional total revenue of P63,720,000, computed as follows
Original contract [(120,000 units 72,000 units) x P900]P 43,200,000
New product (24,000 units x P855).. 20,520,000
Total revenue after the modification.P 63,720,000
In this situation, the contract modification for the additional 24,000 products is, as a result, a new and
separate contract, which does not affect the accounting for the original contract.
For AB, the amount recognized as revenue for each of the remaining products would be a blended
price of P885, computed as shown:
Products not delivered under original contract (P900 x 48,000)P43,200,000
Products to be delivered under contract modification (24,000 x P855). 20,520,000
Total remaining revenueP 63,720,000
Revenue per remaining unit (P63,720,000 72,000)= P885, blended price
Note: Under the prospective approach, this computation differs from that in the separate
performance obligation approach is that revenue on the remaining units (i.e., 72,000
units) is recognized at the blended price.
Prospective Modification. Under the prospective approach, a blended price (P885) is used
for sales in the periods after the modification.
Revenue Recognized
Prior to Modification
Separate performance obligation
P64,800,000*
No separate performance
obligation - prospectively
P64,800,000*
Revenue Recognized
After Modification
P 63,720,000
Total Revenue
Recognized
P128,520,000
P 63,720,000
P128,520,000
* 72,000 x P900
Note: As pointed out, whether a modification is treated as a separate performance obligation
or prospectively, the same amount of revenue is recognized before and after the
modification. However, under the prospective approach, a blended price (P885) is used for
sales after the modification.
The license and the consulting services are distinct but interdependent, and therefore should
be accounted for as one performance obligation.
1. The sale of the computer and related assurance warranty are one performance
obligation as they are interdependent and interrelated with each other.
2. The extended warranty is separately sold and is not interdependent.
The probability-weighted method is the most predictive approach for the management to
determine the transaction price:
60% chance of P160,000,000P 96,000,000
30% chance of P154,000,000[P160,000,000 (10% x P60,000,000)].. 46,200,000
10% chance of P148,000,000[P160,000,000 (10% x P60,000,000) x 2] 14,800,000
P157,000,000
Problem XXIII Revenue Recognition Constraint
The following items should be taken into consideration by Ging and Associates:
1. Recognized the management fee each quarter based on the performance of its services
during the year.
2. The incentive fee should not be recorded until the end of the year. Therefore, this fee is
constrained (not recognized) until the incentive is determinable at the end of the year.
540,000.0
0
354,697.8
0
354,000.0
0
32,400.00
The revenue that James Company should record on July 1, 20x7 should amount to P540,000. While the
amount of revenue (i.e., interest income) that should be report related to this transaction on December
31, 20x7 also amounted to P32,400.
For practical considerations, companies are not required to reflect the time value of money if
the time period for payment is less than a year.
The entries that Samsung recognize as revenue for the first three months of 20x7 (March 31, 20x7) are
as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
....
Sales
[P420,000
(P420,000
x
407,400
3%)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Samsung should reduce its revenue by P12,600 (P420,00 x 3%) because it is probable that it will
provide this rebate.
Assuming Samsungs customer meets the discount threshold, Samsung makes the following entry:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
. . . . ..
Accounts
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
407,400
If Samsungs customer fails to meet the discount threshold, Samsung makes the following entry upon
payment.
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .420,000
. . . . ..
Accounts
407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales
discount
12,600
lost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,400
. . . . ..
Accounts
407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P xxx
_xxx
P xxx
The following items should be taken into consideration by AA Maritime Industries, Inc.
The first condition for separation into a standalone unit for the bridge simulator is met. That is,
the bridge simulator, installation, and training are distinct and not interdependent - they are
three separate products or services, and each of these items has a standalone selling price.
The total revenue of P42,000,000 should be allocated to the three components based on their
relative fair values.
1. The fair value of the bridge simulator should be considered P42,000,000, the installation fee is
P840,000, and the training is P420,000. The total fair value to consider amounted to:
Bridge simulator (P40,740,000/P42,000,000) x P40,740,000...
P39,517,800
Installation
(P840,000/P42,000,000)
x 814,800
P40,740,000..
Training
(P420,000/P42,000,000)
x___407,400
P40,740,000.........................................
Total.. P40,740,000
2.
AA Maritime Industries, Inc makes the following entry on November 1, 20x7, to record
both sales revenue and service revenue on the installation, as well as unearned service
revenue:
Cash. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .40,740,0
....
00
Service revenue (installation). . . . . . . . . . . . . . . . . . . . . . .
....
Unearned
service
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
814,800
407,400
39,517,80
0
(Not required)
Assuming the cost of the bridge simulator is P28,518,000 the entry on November 1, 20x7 to
record cost of goods sold is as follows:
Cost of goods sold. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .28,518,0
.....
00
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. ...
28,518,00
0
As indicated by the above entries, AA Maritime Industries, Inc recognizes revenue from the
sale of the bridge simulator once the installation is completed on November 1, 20x7. In
addition, it recognizes revenue for the installation fee because these services have been
performed.
3. AA Maritime Industries, Inc recognized the training revenues on a straight-line basis
starting on November 1, 20x7, or P101,000 (P407,400/4 months) per month for four (4) months.
The journal entry on December 31 20x7 to recognize the training revenue of two (2)
months in 20x7 is as follows:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000
..
Service revenue (P101,000 x 2 months). . . . . . . . . . . . . . .
...
202,000
Therefore, AA Maritime Industries, Inc recognizes revenue on December 31, 20x7, in the
amount of P40,534,600 (P39,517,800 + P814,800 + P202,000). AA Maritime Industries, Inc
makes the following journal entry on December 31, 20x7 to recognize the training revenue in
20x8, assuming adjusting entries are made at year-end:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,400
..
Service revenue (P407,400 P202,000). . . . . . . . . . . . . . .
...
205,400
As indicated, the standalone price for product 1, 2, 3, and 4 is P21,240, but the bundled price
for all four products is P18,600.
Problem XXIX Timing of Revenue Recognition - Point in time when revenue should be
recognized
The following items should be taken into consideration by Cerise Outsourcing Company:
Cerise Outsourcing Company does not create an asset with an alternative use because it is
prohibited from redirecting the software to another customer.
Cerise Outsourcing Company is entitled to payments for performance to date and expects
to complete the project.
Consequently, Cerise Outsourcing Company concludes that the contract meets the criteria
for recognizing revenue over time.
13,400
6)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refund
Liability
(P100
x
6
600
units). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost
of
sales
(P14,400
14,040
P360). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated inventory returns (P60 x 6). . . . . . . . . . . . . . . . . . . . . . . . . .
360
..
Inventory (P60 x 240 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...
14,400
2. When a return occurs, assuming 4 units were returned: NN records the following entries:
Refund Liability (4 units x P100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400
...
Accounts
400
Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned Inventory (4 x P60) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
Estimated inventory returns . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .
. ..
240
240
Companies record the returned asset in a separate account from inventory to provide transparency.
MM Inc., an equipment dealer, sells equipment on January 1, 20x7, to RR Company for P200,000. It
agrees to repurchase this equipment on December 31, 20x8, for a price of P242,000.
1. 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:
Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
...
Liability to RR Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
240,000
2. MM Inc. records interest on December 31, 20x8, as follows:
Interest
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability
to
RR
Company
(P240,000
10%). . . . . . . . . . . . . . . . . . . . . .
24,000
x
24,000
3. MM Inc. records interest and retirement of its liability to RR Company on December 31, 20x9, as
follows:
Interest
26,400
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to RR Company [P240,000 + P24,000) x
26,400
10%]. . . . . . . . . . . . . . . .
Liability
to
RR290,400
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .
Cash [P240,000 + P24,000 + P26,400] . . . . . . . . . . . . . . . . . . . . . .
. . . . ..
290,400
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
Gianne cannot have the ability to use the product or to direct it to another customer.
In this case, it appears that the above criteria were met, and therefore revenue recognition
should be permitted at the time the contract is signed.
GG makes the following entry to record the sale:
Accounts
1,080,00
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
......
GG makes an entry to record the related cost of goods sold as follows.
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .672,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....
1,080,000
672,000
JJ Company sold 2,400 units during 20x7 at a total price of P14,400,000, with a warranty guarantee
that the product was free of any defects. The cost of each unit sold is P9,600,000. The term of the
assurance warranty is two years, with an estimated cost of P72,000. In addition, Jack sold extended
warranties related to 800 units for three years beyond the two-year period for P28,800.
1. To record the revenue and liabilities related to the warranties:
Cash
(P14,400,000
+14,428,8
P28,800). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
00
Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
....
Warranty liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....
Unearned Warranty Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.....
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
... ..
2. To reduce inventory and recognize cost of goods sold:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,00
.
...
0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....
72,000
28,800
14,000,00
0
9,600,000
2.
3.
discounted price in the second and third years for the same services, and this should be
reflected in the revenue recognized in those periods.
Physical Gym determines the total transaction price to be P144,000 - the upfront fee of
P14,400 and the 3 years of monthly fees of P129,600 (P3,600 x 36 months) - and allocates it
over the 3 years.
In relation to No. 2, the Physical Gym would report revenue of P4,000 [(P144,000 / 36
months) each month for 3 years.
72,000
On February 1, JJ does not record an accounts receivable because it does not have an unconditional
right to receive the P240,000 unless it also transfers Product Y to DD.
When JJ transfers Product Y on March 1, 20x7, it makes the following entry:
Accounts
240,000
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract
Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.....
72,000
168,000
24,000
On satisfying the performance obligation on July 31, 20x7, Janine records the following
entry to record the sale:
Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
...
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,000
.....
In addition, Asser records cost of goods sold as follows:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
....
18,000
b.
c.
Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g.,
costs of contract management and supervision, insurance, and depreciation of tools and
equipment); and;
Costs that generate or enhance resources of the company that will be used in satisfying
performance obligations in the future. Such costs include intangible design or engineering
costs that will continue to give rise to benefits in the future.
Other costs that are expensed as incurred include general and administrative expenses (unless those
costs are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or
other resources to fulfill the contract that were not reflected in the price of the contract.
In summary, companies only capitalize costs that are direct, incremental, and recoverable
(assuming that the contract period is more than one year).
The following items should be taken into consideration by Espi Outsoucing Company:
The P48,000 selling commission costs related to obtaining the contract are recognized as an
asset.
The design services cost of P72,000 and the hardware for the platform of P240,000 are also
capitalized.
As the technology platform is independent of the contract, the pattern of amortization of this
platform may not be related to the terms of the contract.
The migration and testing costs of P156,000 are expensed as incurred; in general, these costs
are not recoverable.
P390,000
2. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
2,200
12,500
10,575
Realized Gross Profit on Sales in 20x5
10,500
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
5,000
Realized Gross Profit in 20x5 for 20x4 sales
5,500
Divided by: Collections in 20x5 for 20x4 sales
25,000
Gross Profit % for 20x4 sales
3. a
P 25,275
P
P
P
22%
P384,000
140,000
240,000
P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item
sold is recovered through cash receipts. All cash receipts, both interest and principal portions, are
applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue.
Because all costs have been recovered, the recognized revenue after the cost recovery represents
income (interest and realized gross profit). This method is used only when the circumstances
surrounding a sale are so uncertain that earlier recognition is impossible.
4. a
P0.
5. c
6. e, 20x6 0; 20x7 - 0
Unrecovered costs,1/1/20x4
Less: Collections
1/1//20x4
Add: Sales on account
Total
Less: 1/1/20x5
Collections in 20x4
Unrecovered costs,1/1/20x5
1/1//20x5
Add: Sales on account
Total
Less: 1/1/20x6
Collections in 20x5
Unrecovered costs,1/1/20x6
1/1//20x6
Add: Sales on account
Total
Less: 1/1/20x7
Collections in 20x6
Unrecovered costs,1/1/20x7
1/1//20x7
Add: Sales on account
Total
Less: 1/1/20x8
Collections in 20x7
Unrecovered costs,1/1/20x8
110,000
0
15,000
15,000
10,500
__4,500
105,500
10,500
30,000
40,500
25,500
15,000
90,500
25,500
60,000
85,500
40,500
45,000
45,500
40,500
24,000
64,500
70,000
____-045,500
7. b
20x4: P150,000 (P568,620 x 10%) = P93,138.
20x5: (P568,620 P93,138) x 10% = P47,548.
8. a refer to No. 3 for discussion.
Cost, January 1, 20x4
Less: Collections including interest 20x4
Unrecovered Cost, December 31, 20x4
9. c
60,000
32,170
P 27,830
4,500,000
500,000
100,000
P 3,200,000
19. b
12/15/x5 Cash [(P4,500,000 P500,000)/2 = P2,000,000]
2,000,000
Installment receivables
2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)]
400,000
Realized gross profit
400,000
Balance sheet:
Deferred gross profit: P800,000
400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
22. a
23. c
24. c
20x4 Sales:
300,000
150,000
20x5 Sales:
Installment receivables = P1,500,000 P500,000 (x5 collections)=
P1,000,000
Deferred gross profit
= P600,000 P200,000 (x5 collections) =
400,000
Net installment receivable for 20x5
= P 600,000
Total
= P 750,000
25. a - Costs not yet recovered.
26. b
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit 20x5
27. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
(20,000)
P 10,000
15,000
P 5,000
P 30,000
( 20,000)
( 10,000)
0
28. a
Sale:
Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
55,000
30,000
25,000
20,000
20,000
Balance Sheet:
Installment receivables P55,000 20,000
Deferred gross profit
Installment receivables (net)
P 35,000
( 25,000)
P 10,000
29. a
Sale:
Installment receivables
Inventory
Deferred gross profit
2008: Cash
Installment receivables
Cash
Installment receivables
2009: Deferred gross profit
Realized gross profit
Balance Sheet:
Installment receivables
Deferred gross profit
Installment receivables (net)
55,000
20,000
15,000
30,000
25,000
20,000
15,000
5,000
5,000
P 20,000
( 20,000)
P
0
30. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should
be applied. Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553)
P816,619
Cost of sales
637,500
Gross profit (realized)
P179,119
31. c
Total Income for 20x4:
Gross profit (realized) No. 51
Interest revenue4 months: P816,619 x 10% x 4/12..
Total income for 20x4
32. b
Total Income for 20x5:
Gross profit (realized) already recognized in 20x4
0
Interest revenue 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
78,134
Total Income for 20x5
78,134
*Schedule of Discount Amortization/Interest Income computation:
P179,119
_ 27,221
P206,340
P
P 54,441
23,693
P
Year
1
2
(1)
Face
Amount
of Note1
P1,125,000
937,500
(2)
Unamortized
Discount
P308,3813
226,7194
(3)
Net
Amount
(1) (2)
P 816,6192
710,781
(4)
Discount
Amortization
10% (3)
81,6625
71,078
27,221
P 27,221
35. d
Collections in 20x5 (August 31, 20x5)
P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
81,662
Collection as to principal
P 105,838
x: Gross Profit % (refer to No. 54)
22%
Gross profit realized in 20x5
P
23,284
Add: Interest revenue/income for 20x5 (refer to No. 53)
78,134
Total Income for 20x5
P 101,418
36. d (P2,000,000 P1,500,000) P2,000,000 = 25%
37. a (P800,000 x .25) P90,000 = P110,000,
38. d
39. a
40. d
41. a
47. a
20x5 Sales
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
20x6 Sales
P 4,500
P10,000
50%
5,800
P (1,300)
P 3,500
P 5,000
60%
P
P( 800)
P
629
P 1,071
P 2,200
3,000
500
748
P( 381)
P
8,407.0
71,006.7
P 172,852.5
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
22,929.6
20x4 Sales: (P410,090 x 37%)
151,733.3
P
174,662.9
49. d*
Resale Value
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 P1,896,300)/P3,010,000] x 8,500
Market Value of Repossessed Merchandise
Less: Unrecovered Costs 20x5
Defaulted balance* (P27,000 P16,000)
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000]
x
P11,000
Loss on repossession
Entry made:
Inventory of RM*
IAR-20x5
Correct Entry (Should be):
Inventory of RM (at MV)
DGP-20x5
Loss on repossession
IAR-20x5
Correcting Entry:
DGP-20x5
Loss on repossession
Inventory of RM
50. c
Installment Sales
Less: Over-allowance:
Trade-in allowance
Less: MV of Trade-in Merchandise:
Estimated Resale Price
Less: Normal profit (25% x P1,400,000)
Reconditioning costs
600,000
Adjusted Installment Sales
3,000,000
Less: Cost of I/S
2,500,000
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections Trade-in merchandise (at MV)
900,000
RGP on I/S in 20x4
150,000
P 8,500
3,145
P 5,355
P 11,000
___3,740
11,000
5,355
3,740
1,905
3,740
__7,260
P( 1,905)
11,000
11,000
1,905
5,645**
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000
900,000
P
500,000
16 2/3%
P
P
51. c
Trade-in allowance
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs
Less: Reconditioning costs
Normal profit (15% x P36,000)
Over-allowance
Installment sales
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of Installment Sales
Gross profit
Gross profit rate: P21,600/P108,000
P43,200
P36,000
1,800
5,400
28,800
P 14,400
P122,400
14,400
P108,000
86,400
P 21,600
20%
Theories
1.
False
6.
2.
True
7. False
3.
False
8. True
4.
True
9. False
5.
True
30
.
31
.
32
.
33
.
34
.
60.
61.
62.
63.
64.
c
b
b
c
d
b
b
b
c
True
10.True
11.
True
12 False
.
13 False
.
14 True
.
15.True
16.
True
True
26.
True
17 True
.
18 False
.
19 False
.
20.True
22 True
.
23 True
.
24 True
.
25.True
27.
True
28.
False
29.
True
50
.
51
.
52
.
53
.
54
.
55.
56.
57.
58.
59.
80.
81.
82.
b
c
a
35
.
36
.
37
.
38
.
39
.
40.
45.
41.
46.
42.
47.
43.
48.
44.
49.
65.
66.
67.
68.
69.
b
b
d
d
c
70.
71.
72.
73.
74.
d
c
b
d
a
75.
76.
77.
78.
79.
c
b
b
d
a
21
.