FEU MAKATI

Advanced Financial Accounting and Reporting

Preliminary Examination
SET D
Theories (1 point each)

1. The primary issue in accounting for construction contracts is:

a. The determination of percentage of completion and proper determination of revenue to be recognized
during the period.
b. The allocation of contract revenue and contract costs to the accounting periods in which construction work
is performed.
c. The determination of rate at which physical performance has been made during the reporting period and the
future performance on which future revenues will be allocated.
d. The allocation of costs of a long-lived asset to permit the proper matching of costs with revenues.
2. Which of the following is correct regarding the provisions of PAS 11?
I. PAS 11 is applied separately to each construction contract
II. A group of contracts is treated as a single construction contract when the group of contracts is negotiated as
a single package, the contracts are so closely interrelated, and are performed concurrently or in a
continuous sequence
a. I only
b. II only
c. I and II
d. Neither I nor II
3. According to PAS 11, contract revenue is measured at
a. Cost
b. The fair value of the consideration received or receivable
c. The present value of future cash flows
d. Cost plus a percentage based on physical performance
4. Which of the following represent the realized gross profit under the installment method?
a. Collection divided by gross profit rate
b. Total collection less collection pertaining to interest
c. Decrease in deferred gross profit
d. Decrease in installment account receivable less defaulted receivable
5. The accounting records of a trustee in a corporation liquidation are maintained:
a. Under the accrual basis of accounting
b. Under the cost basis of accounting
c. Under an accountability technique
d. In accordance with the bankruptcy courts order
6. The collection in Year 2 from an installment sale in Year 2 can be computed as
a. Year 2 installment sale less Year 2 installment account receivable, December 31
b. (Year 2 installment sale less Year 2 installment account receivable, December 31) less defaulted contracts
from Year 2
c. Decrease in Year 2 installment accounts receivable plus defaulted contracts from Year 2
d. All of these
7. Under the installment method, when merchandise previously sold is repossessed, the repossessed merchandise
is recorded at
a. Fair value
b. Original cost
c. Current cost
d. Any of these
8. The equivalent of cost reimbursable contracts is frequently termed
a. Back charge contracts
b. Fixed price contracts
c. Progress payment contracts
d. Cost plus contracts
9. Gain or loss on repossession is computed as
a. The fair value of the repossessed property less the sum of the balance in deferred gross profit and the
balance in the defaulted installment account receivable
b. The sum of the fair value of the repossessed property and the balance in the defaulted installment account
receivable less the balance in deferred gross profit
c. The difference between the fair value of the repossessed property and the balance in deferred gross profit
d. The sum of the fair value of the repossessed property and balance in deferred gross profit less the balance
in the defaulted installment account receivable
10. Insolvency in a corporation means:
a. Book value of assets is greater than liabilities
b. Fair values of assets is less than liabilities
c. Inability to meet financial obligations as they come due
d. Liabilities are greater than book value of assets
11. According to PAS 11 Construction contracts, which of the following projects undertaken by an entity should be
accounted for as a construction contract?
a. A warehouse being constructed for the enterprises own use
b. An office block being constructed as an investment property
c. An item of plant and machinery being constructed to be sold as inventory
d. A bridged constructed for a third party under a specifically negotiated contract
12. Under the installment method, gross profit from an installment sales is
a. Recognized in full at the point of sale
b. Initially deferred and amortized over the period of settlement using the effective interest method
c. Initially deferred and periodically recognized as the installment payments are received by multiplying the
gross profit rate by the installments received
d. Recognized only when collections exceed the cost of goods sold
13. According to PAS 11, which of the following are excluded from costs of construction?
I. General administration costs for which reimbursement is not specified in the contract
II. Selling costs
III. R&D costs for which reimbursement is not specified in the contract
IV. Depreciation of idle plant and equipment that is not used on a particular contract
a. II and II
b. I and II
c. I, II and III
d. I, II, III and IV
14. Unsecured creditors with priority are paid in what order:
I. Taxes
II. Administrative expenses
III. Salaries and Wages
a. I II III
b. I III II
c. II III I
d. II I III
15. Deferred gross profit may be computed as
a. Installment sales less cost of goods sold
b. Total unrealized gross profit less realized gross profit
c. Installment account receivable multiplied by gross profit rate
d. Any of these
16. The excess of the trade-in value over the fair value of a trade-in merchandise in a sale accounted for under the
installment method represents
a. Over allowance
b. Under allowance
c. No allowance
d. Small allowance
17. A construction signed a contract to build a theater over a period of two years and with this contract also signed a
maintenance contract for five years. Both the contracts are negotiated as a single package and are closely
interrelated to each other. The two contracts should be:
a. Combined and treated as a single contract
b. Segmented and considered two separate contracts
c. Recognized under the completed contracted method
d. Treated differently the building contract under the completed contract method and maintenance contract
under the percentage of completion method
18. A category of assets that typically has zero in the Free Assets column of a statement of affairs is:
a. Factory supplies inventory
b. Tools
c. Short-term prepayments
d. None of the above
19. The estimated amount available for free assets in a statement of affairs for a company undergoing liquidation is
equal to the assets:
a. Carrying amount less current fair values
b. Current fair values less carrying amounts
c. Carrying amounts plus gain or less loss on realization
d. Current fair values plus gain or less loss on realization
20. When the collectability of contract revenue already recognized in previous periods becomes uncertain, the
uncollectible amount is
a. Recognized as an adjustment of the amount of contract revenue rather than as expense.
b. Recognized as a deferred charge to be allocated to profit or loss over the remaining construction period.
c. Recognized as a deferred charge to be allocated to other comprehensive income over the remaining
construction period.
d. Recognized as expense rather than as an adjustment of the amount of contract revenue.
21. Changes in estimates of the expected outcome of construction contracts are accounted for:
a. Prospectively
b. Retrospectively
c. A or B
d. Neither A nor B
22. Under the zero profit method,
a. Profit is recognized each year corresponding to the percentage completed during the year
b. No profit is recognized until the construction is completed. Contract revenue recognized each year prior to
completion of contract is limited to the costs of construction incurred during the year that are probable of
recovery
c. A or B
d. Neither A or B
23. Why is construction in progress increased by the annual recognized profit on long-term construction contracts?
a. Because the contract price has increased
b. Because the cost of the project is reduced
c. Because work has been done
d. Because the projects value is increased above cost
24. According to PAS11 Construction Contracts, which of the following could be valid reasons why the expected
revenue from a fixed price construction contract has increased from the original contract value?
I. The costs in the contract have increased and the contract includes cost escalation clauses
II. The contractor has incurred additional costs due to errors made by its employees
III. The contractor has agreed variations to the contract with the client
IV. The contractor would receive an incentive payment if work continues at the present rate for the next two
years
a. I and III
b. II and IV
c. I, III and IV
d. I, II, III, and IV
25. The excess of the construction in Progress over the Contract Billings is treated as:
a. Current liability
b. Current asset
c. Non-current liability
d. Current asset and current liability
26. Under the cost recovery method,
a. The initial collections on the sale are treated as recovery of the cost of the inventory sold. Thus no gross
profit or interest income is recognized until total collections from the sale equals the cost of inventory sold.
b. The initial collections on the sale are treated as recovery of the cost of the inventory sold. Thus, no gross
profit is recognized until total collections from the sale equals the cost of inventory sold. However, interest
income may nonetheless be recognized.
c. A or B
d. None of these
27. In accounting for a long-term construction contract using the percentage of completion method, the progress
billings on contract account is a:
a. Contra current asset account
b. Contra non-current asset account
c. Non-current liability account
d. Revenue account
28. Under the installment method, an over allowance is
a. Treated as addition to the installment sale price when computing for the gross profit rate
b. Treated as reduction to the installment sale price when computing for the gross profit rate
c. Not accounted for
d. None of these
29. Before the year of completion, under the percentage of completion method, the year-end balance of the
Construction in Progress account equal to:
a. Cost incurred to date
b. Cost incurred this year
c. Cost incurred to date plus gross profit earned to date
d. Gross profit earned to date
30. Which of the following is not a difference between the percentage-of-completion and zero-profit methods of
accounting for long term construction contracts?
a. One requires estimates of completion during the construction period and other does not
b. One records profit each period during the construction period and the other does not
c. They report different amounts of gross amount due from (due to) customers for contract work during the
construction period
d. They cause a different cash inflow during the construction period

Problem Solving (2 points each)

The following data were taken from the records of Mari Company who is in the process of liquidation:

Stockholders equity, per books:

Capital stock P 350,000
Deficit 54,250
Estimated gain on realization of land and building 78,750
Estimated loss on realization of assets:
Accounts receivable 23,100
Inventories 84,000
 Prepaid expenses 2,100
Equipment 170,000
Goodwill 57,500
Estimated claims requiring settlement
Liquidation Expense 17,500
Contingent Liabilities 26,250

1. What is the estimated deficiency to unsecured creditors?

For numbers 2 to 4:
Pau Enterprises uses the cost recovery method for all installment sales. Complete the following table to be able to
answer the requirement of this question.

2014 2015 2016

Installment sales P74,000 P90,000 ???
Cost of Installment sales 51,800 ??? 73,600
Gross profit percentage ??? 32% 36%
Cash collection:
2015 sales 22,400 37,100 ???
2016 sales 27,800 49,000
2017 sales 22,500
Realized gross profit on installment sales ??? ??? 16,050

2. How much is the realized gross profit in 2015?

3. How much is the total cash collection in 2016?
4. How much is the total installments receivables to be reported in 2016?

For numbers 5 and 6:

The following amounts were taken from the statement of affairs for Bag Sack Company

Unsecured liabilities without priority P 114,500

Stockholders equity 36,000
Loss on Realization of assets 45,000
Estimated administrative expenses that have not
been entered in the accounting records 4,500
Secured liability to an asset with FV of P 8,500 10,000

5. How much is the estimated payment for the unsecured liabilities without priority?
6. How much will the secured liability received upon liquidation?

For numbers 7 and 8:

Camil Company sold on January 1, 2015 a reconditioned dumped truck to Angel Inc. for P1,200,000 which resulted
in a gain to Luis of P420,000. Angel paid P300,000 and covered the balance with a non-interest bearing note payable
at 10% interest per annum. The note is payable in five equal annual amortizations starting January 1, 2016. Angel
does not default in any payment of the note. Camil is appropriately uses the installment method.

7. The deferred gross profit to be reported by Luis on December 31, 2015 is:
8. The deferred gross profit to be reported by Luis on December 31, 2017 is:

For numbers 9 and 10:

Since there is no reasonable basis for estimating the degree of collectability, Nicole Company uses the installment
method of revenue recognition for the following sales:

2016 2015
Sales P765,000 P480,000
Collections from
2015 sales 80,000 160,000
2016 sales 255,000 -
Account Defaulted
2015 sales 120,000 40,000
2016 sales 42,500
Value assigned to repossessed items
2015 sales 76,000 22,000
2016 sales 21,250
Gross profit rate 40% 30%

9. What amount should Nicole report as deferred gross profit for December 31, 2016?
10. How much is the net gain or loss on repossession in 2016?
For numbers 11 and 12:
Tony Inc., a dealer of gold plated fountain pens, sells on installment basis. One of its customers, Mr. Tiangco,
bought a fountain pen for P22,400 in January 15, 2015. The costs to Tony is P10,080. After making the initial
payment of P5,600, Mr. Tiangco stopped paying and defaulted on all subsequent payments. Tony lost no time in
repossessing the fountain pen. By then, it has an appraised value of P8,635 after incurring additional expenses of
P1,450 on repairs and remodeling. In December 1, 2015, Tony was able to sell the motorcycle to Mr. Sangco on
installment for P15,700 and initial down payment of P3,140.

11. How much is the total realized gross profit in 2015?

12. How much is the net effect in net income or loss of the following transactions?

For numbers 13 and 14:

The Moon Company has the following data in connection to its bankruptcy petition with the Securities and
Exchange Commission.
Unsecured creditors P 230,000
Liabilities with priority 110,000
Secured Liabilities:
Debt 1, (value of pledged asset P 180,000) P210,000
Debt 2, (value of pledged asset P 100,000) P170,000
Debt 3, (value of pledged asset P 140,000) P120,000

The Company has no cash but has a number of other non-cash assets that are not pledged in any way.

13. For how much do these other non-cash assets have to be sold so that Debt 2 would receive exactly
P142,000?
14. If instead the company has a cash balance of P50,000 and the other non-cash assets were sold P143,000,
how much is the estimated payment to Debt 1?

Lagare Construction Company has entered into a fixed price contract to construct an apartment building for
P12,000,000.

The details of the costs incurred to date in the fixed year are:
Site of labor cost P 1,000,000
Cost of construction materials 3,000,000
Depreciation of plant and equipment being used in project 500,000
Marketing and selling costs to get the exposure needed 200,000
Total P 4,700,000

Estimated additional cost to complete the building P 5,500,000

15. How much should Lagare recognize as profit in the first year of construction activities?

The following selected accounts appeared in the trial balance of Setup Corp. as of December 31, 2016:

Debit Credit
Installment Receivable 2015 sales 15,000
Installment Receivable 2016 sales 200,000
Inventory, December 31, 2015 70,000
Purchases 555,000
Repossession 3,000
Installment Sales 425,000
Sales (regular) 385,000
Unrealized gross profit-2015 54,000

Additional information:
Installment receivables 2015 sales, as of December 31,
2015, P120,000.
Inventory of new and repossessed merchandise as of
December 31, 2015, P95,000.
Gross profit percentage of regular sales during the year,
30% on sales.
Repossession was made during the year. It was a 2015 sale
and the corresponding uncollected account at the time of repossession was P7,750.

16. The gain or (loss) on repossession in 2016 amounts to:

For numbers 17 and 18:
Bato Company recognize construction revenue and expenses using the percentage of completion method. During
2014, a single long-term project was begun which continued through 2016. Information on the project were as
follows:

2014 2015 2016

Accounts receivable from construction contract P 100,000 P 300,000 P 320,000
Construction expenses each year 105,000 192,000 ?
Construction in progress 122,000 364,000 610,000
Partial billings on contract 100,000 420,000 500,000
Gross profit (loss) recognized for the year ? ? 20,000

17. How much is the profit (loss) recognized from the long-term construction contract in 2015?
18. How much is the construction expense in 2016?

For numbers 19 and 20:

Because of inability to pay its debts, the Nopera Manufacturing Company has been forced into bankruptcy as of
April 1, 2016. The balance sheet on the date shows:

Assets Liabilities
Cash P 2,700 Accounts Payable P 52,500
Accounts Receivable 39,350 Notes Payable - Bank 15,000
Notes Receivable 18,500 Notes Payable Suppliers 51,250
Merchandise Inventory 87,850 Accrued Wages 1,850
Prepaid Insurance 950 Accrued Taxes 4,650
Land and Buildings 61,250 Mortgaged Bonds Payable 90,000
Equipment 48,800 Common Stock 100 par 75,000
_______ Retained Earnings (30,850)
Total P259,400 Total P259,400

Additional information:
(a) Accounts receivable of P16,950 and notes receivable of P12,500 are expected to be collectible. The good notes
are pledged to the bank.
(b) Merchandise inventory are expected to bring in P45,100 when sold under bankruptcy conditions.
(c) Land and buildings have an appraised value of P95,000. They serve as security on the bonds.
(d) The current value of the equipment, net of disposal cost is P9,000.

19. The estimated payment to the bank:

20. Disregarding additional information (c), how much is the appraised value of the land if the building has
an appraised value of P35,000 and the note payable to supplier has an estimated payment of P32,800.

For numbers 21 and 22:

Aklan Company began its operations on January 2, 2016. During the year, the company entered into a contract with
TEAM Company to construct a manufacturing facility. At that time Aklan estimated that it would take five years to
complete the facility at a cost of P3,080,000. The total contract price for the construction of the facility is
P4,375,000. During the year, the company incurred P770,000 in construction costs related to the construction
project. The estimated cost to complete the contract is P2,730,000. TEAM billed and paid 30% of the contract price
subject to a 10% retention.

21. How much is the excess of Construction in Progress over Progress Billing or (excess of Progress
Billings over Construction in Progress) to be reported in December 31, 2016? Use ( ).
22. If in 2019 percentage of completion is already 80% and the Progress Billing amounted to P3,587,500, how
much cash should be collected in 2020?

For numbers 23 to 25:

Alonzo Construction Company uses the Percentage of Completion of accounting. The company started work on two
job sites in the year 2015. Data relating to the two jobs are given below:

Contract Actual Cost Est. cost to

Price for the year Complete
Contract 1 480,000 140,000 140,000
Contract 2 360,000 50,000 250,000

In 2016, Contract 3 was started with a contract price of P720,000. As of December 31, 2016, the following data are
given.
Actual Cost Est. cost to
for the year Complete
Contract 1 238,000 42,000
Contract 2 175,000 75,000
Contract 3 195,000 455,000

23. As of December 31, 2016, the balance of Construction in Progress account is?
24. How much is the profit (loss) to be recognized in Contract 1 on December 31, 2016?
25. How much is the profit (loss) to be recognized in Contract 2 on December 31, 2016?

For numbers 26 to 28:

The following selected accounts were taken from the trial balance on December 31, 2016 of Mabini Company.
Debit Credit
Accounts Receivable 75,000
Installment Receivable-2014 15,000
Installment Receivable-2015 45,000
Installment Receivable-2016 270,000
Merchandise Inventory 52,500
Purchases 390,000
Freight in 3,000
Repossessed Merchandise 15,000
Repossession Loss 24,000
Cash sales 90,000
Charge sales 180,000
Installment sales 446,400
Deferred Gross Profit-2014 22,200
Deferred Gross Profit-2015 39,360

Additional information:
a. Gross profit rate on 2014 installment sales was 30% and for 2015, the rate was 32%.
b. Installment sales prices exceed charge sales prices by 24%.
c. Charge sales prices exceed cash sales prices by 20%.
d. The entry for repossessed goods was:
Repossessed Merchandise 15,000
Repossession Loss 24,000
Installment receivable-2014 18,000
Installment receivable-2015 21,000
e. Merchandise on hand at the end of 2016 (new and repossessed) was P70,500.
f. Accounts receivable on January 1, 2016 amounted to P65,000.

26. How much is the cost of goods sold on installment sales in 2016?
27. How much is cash collected in 2016?
28. How much is the TOTAL deferred gross profit to be reported in 2016?

Because of inability to pay its debts, the Nosalapi Manufacturing Company has been forced into bankruptcy as of
May 1, 2016. The balance sheet on the date shows:
Assets Liabilities
Cash P 2,700 Accounts Payable P 52,500
Accounts Receivable 39,350 Notes Payable - Bank 15,000
Notes Receivable 18,500 Notes Payable Suppliers 51,250
Merchandise Inventory 87,850 Accrued Wages 1,850
Prepaid Insurance 950 Accrued Taxes 4,650
Land and Buildings 61,250 Mortgaged Bonds Payable 90,000
Equipment 48,800 Common Stock 100 par 75,000
_______ Retained Earnings (30,850)
Total P259,400 Total P259,400

Additional information:
(a) Accounts receivable of P16,950 is expected to be collectible.
(b)The good notes are pledged to the bank.
(c) Merchandise inventory are expected to bring in P45,100 when sold under bankruptcy conditions.
(d) Land and buildings have an appraised value of P95,000. They serve as security on the bonds.
(e) The current value of the equipment, net of disposal cost is P9,000.

29. How much is the liquidation value of the note receivable if the company expect to pay the bank by
P12,500 and note to suppliers by P31,775?

On August 31,2008, KFC, Inc. entered into franchise agreements with two
franchisees. The agreements required an initial franchise fee payment of P700,000
plus four P300,000 payments due every four months, the first payment is due on
December 31,2008. The market interest rate is 12%. The initial
deposit is refundable until substantial performance has been completed. The
following date describes each agreement:
Probability of Full Services Performed by Total Costs
Incurred to
Franchisee Collection Franchisor 12/31/08 Dec. 31, 2008
Juan Jose Likely Substantially P700,000
Pedro Pablo Doubtful 25% N/A

The present and future value tables at 4% for four (4) periods were as follows:

Present value of P1 0.8548

Present Value of an annuity of P1 3.6299
Future Value of P1 1.1699
Future value of an ordinary annuity of P1 4.2465

30. What amount of net income is to be reported by KFC in 2008,

assuming P1,000,000 was received from each franchisee during the
year. Juan Jose ____________; Pedro Pablo ______________.
_____________________________________________________________________________________

KC Fried Chicken Inc. granted a franchise to Manuel Villa. Manuel was to pay
P1,000,000 payable in five annual installments starting with the payment upon
signing of the franchise agreement. The franchisee was to pay monthly 5% of gross
sales of the preceding month. Should the operation of the outlet prove to be
unprofitable, the franchise may be cancelled with whatever obligation owing KC, in
connection with the P1,000,000 franchise fee, waived.

The first year of operations generated a generated a gross sales of P500,000.

31. For the first year, KC Fried Chicken, Inc. should report revenue from
franchise fee of _____________.
_____________________________________________________________________________________

On January 2, 2008, David, Inc. signed an agreement authorizing Jose Pidal to

operate as a franchisee for an initial franchise fee of P5,000,000. Of this amount,
P2,000,000 was received upon signing of the agreement and the balance evidence
by a 12% promissory note which is due in three annual installment payments of
P1,000,000 each beginning December 31, 2008. Pidal started franchise operations
on September 1, 2008, after David rendered the required initial services at a total
cost of P500,000. Although the first installment was collected on due date,
collection of the balance was not reasonably assured.

32. What is the realized gross profit on franchise fee to be recognized by

David at December 31, 2008?

The Brownout, Inc. began operating at the start of the calendar year 2008 uses the
installment method of accounting:

Installment sales 400,000

Gross margin based on cost 66.67%
Inventory, Dec. 31, 2008 80,000
General and administrative expenses 40,000
Accounts receivable, Dec. 31, 2008 320,000
33. The balance of the deferred gross profit account at December 31,
2008 should be ____________.
____________________________________________________________________________________

East Builders works on a P70 million contract in 2008to construct in 2008 to

construct a shopping mall for SM Inc. During 2008, East Builders uses the
percentage of completion method of revenue recognition. At December 31, 2008,
the account balances were:

Construction in progress P24.55 million

Accounts receivable 2.40 million
Contract billings 12.00 million
Estimated cost to complete 31.85 million

34. How much is the actual cost incurred in 2008?

_____________________________________________________________________________________

Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts

taken from the books of Mahiyain and its branch show balances as of December
21,2008 as follows:

Home Office Branch

Merchandise inventory, January 1 P12,000 P8,000
Purchases 150,000 30,000
Shipments from home office - 93,750
Shipments to Branch 75,000 -
Branch inventory allowance 19,750 -
Sales 115,000 176,500
Merchandise inventory, December 31 14,000 10,350

The ending inventory of the branch includes items costing P4,350 which were
acquired from suppliers other than the home office.

35. As far as the home office is concerned, the cost of sales of the Iloilo
City branch was ____________.
____________________________________________________________________________________

I pray that if during the test I become so wrapped up in distractions either inside my head
or outside as I watch the clock or compare myself to other students who seem to be
breezing through the test that you will remind me to pray, Lord, keep my mind on track.
ANSWER KEY
THEORIES

1. B 11. A 21. C
2. D 12. D 22. D
3. A 13. D 23. D
4. B 14. A 24. C
5. D 15. C 25. C
6. B 16. D 26. D
7. A 17. B 27. D
8. D 18. B 28. B
9. B 19. B 29. A
10. D 20. A 30. C
31.
32. PROBLEMS
33.
1. 5,950 11. 4,493 21. (350,000)
2. 7,700 12. 4,118 22. 1,146,250
3. 71,500 13. 288,000 23. 918,000
4. 119,750 14. 189,364 24. (46,000)
5. 104,400 15. 900,000 25. 23,000
6. 9,850 16. 1,262.50 26. 280,800
7. 291,735 17. 50,000 27. 663,000
8. 191,386 18. 226,000 28. 126,900
9. 211,000 19. 14,200 29. 8,421
10. 12,250 20. 55,750
30.
31.
32.