RESA

MULTIPLE CHOICE
QUESTIONS

Prepared by:

Partnership – Wendelyn R.Tutor

Corporate Liquidation – Jojie Lea Mae J. Ansa
Installment Sales – Angelica D. Segura
Construction Accounting - Kris Andrea Habla
Franchise Accounting – Ciarra Ngilay
PARTNERSHIP - PROBLEMS

1. CC, PP and AA, accountants agree to form a partnership and to share profits in the
ratio of 5:3:2. They also agree that AA is to be allowed a salary of P28,000 and that PP
is to be granted P21,000 as his share of the profits. During the first year of operation,
income from fees are P180,000 while expenses total P96,000. What amount of net
income should be credited to each partner’s capital account?

A.) CC, P28,000; PP, P16,800; AA, P11,200

B.) CC, P25,000: PP, P21,000; AA, P38,000
C.) CC, P24,000; PP, P22,000; AA, P38,000
D.) CC, P25,000; PP, P21,000; AA, P39,000

SOLUTION:

Revenue P 180,000
Expenses (96,000)
Net income P 84,000

CC PP AA Total
28,000 28,000
28,000 16,800 11,200 56,000
( 3,000) 4,200 ( 1,200) 0
25,000 21,000 38,000 84,000

2. On June 30, 2017, the condensed balance sheet of the partnership DD, FF, and GG,
together with their respective profit and loss sharing percentage was as follows:

Assets, net of liabilities P 320,000

DD, capital (50%) P 160,000
FF, capital (30%) 96,000
GG, capital (20%) 64,000
P 320,000

DD decided to retire from the partnership and by mutual agreement is to be paid

P180,000 out of partnership funds for his interest. Total goodwill or adjustment of assets
implicit in the agreement is to be recorded. After DD’s retirement, what are the capital
balances of the other partners?

A.) FF GG
84,000 56,000
B.) FF GG
102,000 68,000
 C.) FF GG
108,000 72,000
D.) FF GG
120,000 80,000

SOLUTION:

Agreed payment to DD 180,000

Book Value (50%) (160,000)
20,000
divided by 50%
40,000

FF: 40,000 * 30% = 12,000 + 96,000 = 108,000

GG: 40,000 * 20% = 8,000 + 64,000 = 72,000

3. A balance sheet for partnership of KK, LL, and MM who share profits 2:1:1
respectively, show the following balances just before liquidation:

Cash P 48,000
Other assets 238,000
Liabilities 80,000
KK, capital 88,000
LL, capital 62,000
MM, capital 56,000

In the first month of liquidation, P128 000 was received in the sell of certain assets.
Liquidation expenses of P4,000 were paid and additional liquidation expenses of P3,200
are anticipated before liquidation is completed. Creditors were paid P22,400. Available
cash were distributed to the partners. The cash to be received by each partner based
on the above data:

A.) KK, P56,600; LL, P21,300; MM, P28,300

B.) KK, P86,000; LL, P61,000; MM, P55,000
C.) KK, P29,400; LL, P32,700; MM, P26,700
D.) KK, P88,000; LL, P62,000; MM, P56,000
SOLUTION:

Cash Balance P 48,000

Sale 128,000
Expenses: ( 4,000)
(80,000)
( 3,200)
P 88,800

KK LL MM Total
88,000 62,000 56,000 200,000
(58,600) (24,300) (24,300) (117,200)
29,400 32,700 26,700 88,800

4. – 5.
Rosa, Susan and Tina are partners sharing profits on a 5:3:2 ratio. On January 1, 2017,
Vida was admitted into the partnership with a 20% share in the profits. The old partners
continue to participate in their original ratios.

For the year 2017, the partnership book showed a net income of 25,000. It was
disclosed, however, that the following errors were committed:

2016 2017
1. Accrued expenses not recorded at yearend 1,200
2. Inventory overstated 3,100
3. Purchases not recorded, for which goods
have been received and inventories. 2,000
4. Income received in advance not adjusted 1,500
5. Unused supplies not taken up at yearend 900

4. The new profit and loss ratio of Rosa, Susan, Tina, and Vida respectively for 2017 is

A.) 40%, 25%, 15%, 20%

B.) 50%, 20%, 10%, 20%
C.) 45%, 30%, 15%, 20%
D.) 40%, 24%, 16%, 20%
SOLUTION:

Rosa: 50% * 80% = 40%

Susan: 20% * 80% = 24%
Tina: 20% * 80% = 16%
Vida: 20%
100%

5. The share of partner Rosa in the 2017 corrected net income is:

A.) P9,400
B.) P10,000
C.) P11,750
D.) P12,500

SOLUTION:

NI per books P 25,000

Add (deduct): adjustments
Accrued expenses 1,200
Inventory overstatement (3,100)
Purchase not recorded (2,000)
Income received in advance (1,500)
Unused supplies (900)
Adjusted NI 23,500
P/L Ratio 40%
Profit share or Rosa P 9,400

6. – 7.

AA admits BB as a partner in business. Accounts in the ledger for AA on November 20,

2017, just before the admission of BB, show the following balances:

Cash P 6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
AA, capital 33,000
It is agreed that for the purpose of establishing AA’s interest the following adjustments
shall be made:

1. An allowance for doubtful accounts of 3% of accounts receivable is to be

established.
2. The merchandise inventory is to be valued at P 23,000.
3. Prepaid salary expenses of P600 and accrued rent expense of P800 is to be
recognized.

6. BB is to invest sufficient cash to obtain 1/3 interest in the partnership. AA’s adjusted
capital before admission of BB is

A.) P28,174
B.) P35,347
C.) P35,374
D.) P36,374

7. The amount of cash invested by BB

A.) P11,971
B.) P14,087
C.) P17,687
D.) P18,487

SOLUTION:

33,000 – (3%*14,200) + (23,000 – 20,000) + 600 – 800 = 35,374

35,374 * 2/3 = 53,061 – 35,374 = 17,687

8. A partnership begins first year with the following capital balances:

Arthur, capital P 60,000

Baxter, capital 80,000
Cartwright, capital 100,000

The articles of partnership stipulate that profits and losses be assigned in the following
manner:

1. Each partner is allocated interest equal to 10 percent of the beginning capital

balance.
2. Baxter is allocated compensation of P20,000 per year.
3. Any remaining profits and losses are allocated on a 3:3:4 basis respectively.
 4. Each partner is allowed to withdraw up to P5,000 cash per year.

Assuming that the net income is P50,000 and that each partner withdraws the maximum
amount allowed, what is the balance in Cartwright’s capital account at the end of the
year?

A.) P105,800
B.) P106,200
C.) P106,900
D.) P107,400

SOLUTION:

Arthur Baxter Cartwright Total

Interest – 10% 6,000 8,000 10,000 24,000
Salary 20,000 20,000
Remainder(3:3:4) 1,800 1,800 2,400 6,000
Total 7,800 29,800 12,400 50,000

9. UU and VV drafted a partnership agreement that lists the following assets contributed
at the partnership’s formation:

UU VV
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & Equipment 15,000

The building is subject to a mortgage of P 10,000, which the partnership has assumed.
The partnership agreement also specifies that profits and losses are to be distributed
evenly. What amounts should be recorded as capital for UU and VV at the formation of
the partnership?

UU VV
A.) 35,000 85,000
B.) 35,000 75,000
C.) 55,000 55,000
D.) 60,000 60,000
SOLUTION:

UU: 20,000 + 15,000 = P35, 000

VV: 30,000 + 15,000 + 40,000 – 10,000 = P75,000.

10. Fea, Gina and Hana are partners with average capital balances during 2010 of 120
000, 60 000 and 40 000, respectively. Partners receive 10% interest on their average
capital balances. After deducting salaries of 30 000 to Fea, and 20 000 to Hana, the
residual P/L is divided equally. In 2017, the partnership sustained a 33 000 loss before
interest and salaries to partners. By what amount should Fea’s capital change?

A.) 7 000 increase

B.) 11 000 increase
C.) 35 000 decrease
D.) 42 000 increase

SOLUTION:

Fea: 12 000 + 30 000 – 35 000 = 7 000

11. Victor and Victoria are partners with capital balances of P30, 000 and P70, 000,
respectively. Victor has a 30% interest in profits and losses. All assets of the partnership
are at fair market value except equipment with book value of P300, 000 and fair market
value of P320, 000. At this time, the partnership has decided to admit Wendy and Yvon
as new partners. Wendy contributes cash of 55, 000 for 20% interest in capital and 30%
interest in profits and losses. Yvon contributes cash of P10, 000 and equipment with a
fair value of P50, 000 for a 25% interest in capital and 35% interest in profits and losses.
Yvon is also bringing special expertise and client contacts into the new partnership.

Using the bonus method, what is the amount of bonus?

A.) 24, 750
B.) 18, 250
C.) 14, 000
D.) 7, 500
SOLUTION:
Contributed Capital Agreed Capital Increase (Decrease)
Old Partners P 100, 000 P 118, 250 P 18, 250
New Partners 115, 000 (45%) 96, 750 (18, 250)
Total P 215, 000 P 215, 000

12. Anthony and Benjie formed a partnership and agreed to divide initial capital equally,
even though Anthony contributed P500,000 and Benjie contributed P74,000 in
identifiable assets. Under the bonus method, to adjust capital accounts, Benjie's
intangible assets should be debited for:

A.) 0
B.) 16,000
C.) 8,000
D.) 46,000

EXPLAINATION:

Zero, because under the bonus method, a transfer of capital is only required.

13. The XYZ partnership reports net income of P60000. If partners X, Y, and Z have
income ratio of 50%, 30%, and 20%, respectively. What is the share of Partner Z from
the net income of the partnership, if he was given a capital ratio of 25%?

A.) 30000
B.) 12000
C.) 18000
D.) 15000

SOLUTION:
60,000 x20% = 12,000
14. Partnership A has an existing capital of P70,000. Two partners currently own the
partnership and split profits 50/50. A new partner is to be admitted and will contribute
net assets with a fair value of P90,000. For no goodwill or bonus (depending on
whichever method is used) to be recognized, what is the interest in the partnership
granted the new partner?

A.) 33.33%
B.) 50.00%
C.) 56.25%
D.) 75.00%

SOLUTION:
Capital contributed by the new partner 90,000
Divide by total contributions (70,000+90,000) 160,000
New partner’s interest 56.25%

15. – 16.
As of December 31, the books of MKI Partnership showed capital balances of M =
40,000, K = 25,000 and I = 5,000. The partner’s profit and loss ratio was 3:2:1,
respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for 37,000 cash. After settlement of all liabilities amounting to 12,000, they still
have 28,000 cash left for distribution.

15. The loss on the realization of the non-cash assets was

A.) 40,000
B.) 42,000
C.) 44,000
D.) 45,000

SOLUTION:
Total capital before liquidation (40,000+25,000+5,000) 70,000
Less: Cash left for distribution 28,000
Loss on realization of the non-cash assets 42,000
16. Assuming that any partner’s capital debit balance is uncollectible, the share of M in
the 28,000 cash for distribution would be

A.) 19,000
B.) 18,000
C.) 17,800
D.) 40,000

SOLUTION:
M K I
Capital balances before Liquidation 40,000 25,000 5,000
Loss on Realization (21,000) (14,000) (7,000)
Balances 19,000 11,000 (2,000)
Absorption of I (3:2) (1,200) (800) 2,000
Cash Payment to M & K 17,800 10,200

17. In the VW partnership, Vallen's capital is P140,000 and Waren's is P40,000 and
they share income in a 3:1 ratio, respectively. They decide to admit David to the
partnership. Vallen and Waren agree that some of the inventory is obsolete. The
inventory account is decreased before David is admitted. David invests P40,000 for a
one-fifth interest. What is the amount of inventory written down? 

A.) P4,000
B.) P20,000
C.) P15,000
D.) P10,000

SOLUTION:

Total Agreed Capital after admission of David:

(40,000*5) 200,000
Less: Contribution/Investment of David 40,000
Capital Balances of AD before admission of David 160,000
Capital Contribution (140,000+40,000) 180,000
Reduction of inventory 20,000
18. On May 1, 2017, Aww and Meow formed a partnership and agreed to share profits
and losses in the ratio of 3:7, respectively. Aww contributed a parcel of land that cost
her P10,000. Meow contributed P40,000 cash. The land has a fair value of P15,000.
Aww insisted that the value of the land should be P18,000. The partners agreed to
value the land at P18,000. What amount should be recorded in Aww’s capital account
on formation of the new partnership?

A.) P18,000
B.) P17,400
C.) P15,000
D.) P10,000

19. – 20.

In the first year of the operation, Elisan and Company, a partnership, made a net
income of P20,000, before providing for a salaries of P5,000 and P3,000 per annum for
Elisan and Kapalit, respectively, as stipulated in the partnership agreement. Capital
contributions and profit-sharing are as follows:

Capital Profit share

Elisan P30,000 40%
Kapalit P20,000 30%
Bakus P10,000 30%
P60,000 100%

19. How much profit share would Bakus be entitled to?

A.) P6,000
B.) P4,500
C.) P3,600
D.) None of the above

SOLUTION:

Elisan(40%) Kapalit(30%) Bakus(30%) Total

Salaries P5,000 P3,000 P8,000
Remainder P4,800 P3,600 P3,600 P12,000
 Total P9,800 P6,600 P3,600 P20,000

20. Assuming no profit and loss ratio provided in the partnership agreement and that
there has been no change in the capital contribution during the year, how much profit
share would Elisan be entitled to receive?

A.) P6,000
B.) P4,500
C.) P3,600
D.) None of the above

SOLUTION:

Elisan(3/6) Kapalit(2/6) Bakus(1/6) Total

Salaries P5,000 P3,000 P8,000
Remainder P6,000 P4,000 P2,000 P12,000
Total P11,000 P7,000 P2,000 P20,000
ReSA: CORPORATE LIQUIDATION

1.) Part Corporation is a parent, having purchased 80% of Sand Company’s common stock
at par value for P800,000. Sand company is in a financial difficulty. The parent granted
an unsecured loan of P400,000 to the subsidiary. And accounting statement of affairs for
Sand Company shows a dividend of 40%. Part Corporation can expect to receive
payment for its investment in Sand Company approximately:
A.) P640 000 C.)P150 000
B.) P320 000 D.)P 0
Since there is a parent and a subsidiary relationship, any intercompany accounts are
eliminated from consolidated point of view.
2.) The following items were displayed in the statement of affairs of AA Company:
Unsecured liabilities without priority……………………. P 90 000
Stockholders’ equity……………………………………… 36 000
Loss on realization of assets……………………………. 45 000
Estimated administrative costs that have been entered
in the accounting records………………………………… 4 500
Unsecured liabilities with priority…………………………. 10 000

Based on the foregoing information, what percentage of their claims should unsecured,
non-priority creditors expect to receive on the liquidation of AA Company?

A.) 85% C.) 79.50%

B.) 100% D.) 86.50%
Unsecured liabilities without priority……………….. P 45 000
Stockholders’ equity…………………………………. 36 000
Unsecure liabilities with priority…………………….. 10 000
Loss on realization of assets………………… …….. ( 45 000)
Total estimated amount available………………….. 91 000
Less: Estimated administrative costs…… 4 500
Unsecured liabilities with priority… 10 000 (14 500)
Estimated amount available for unsecured,
non-priority creditors 76,500
(76,500/91,000) 85%
3.) Amounts related to the statement of affairs of Windup Company, in bankruptcy
liquidation as of April 1, 20x2, were as follows:
Assets pledged for fully secured liabilities…………… P 90 000
Assets pledged for partially secured liabilities………. 50 000
Free assets……………………………………………… 272 000
Fully secured liabilities………………………………… 60 000
Partially secured liabilities…………………………….. 80 000
Unsecured liabilities with priority……………………... 40 000
Unsecured liabilities without priority………………….330 000
 Compute the cost per peso that unsecured creditors may expect to receive from Windup
Company.

A.) P.61 C.) P. 76

B.) .70 D.) .81
Estimated deficiency to unsecured creditors:
Free assets:
Assets pledged to fully secured liabilities
(80 000 – 60 000)…………………………………………… P 20 000
Free assets…………………………………………………….. 272 000
Total free assets………………………………………………………….P 292 000
Less: Unsecured liabilities with priority…………………… ……… 40 000
Net free assets……………………………………………………… ….P 252 000
Less: Unsecured liabilities without priority:
Partially secured liabilities (80 000 – 50 000)…………P30 000
Add: Unsecured liabilities without priority…………… 330 000 360 000
Estimated deficiency to unsecured liabilities……………………………. P180 000

Expected recovery % of Unsecured liabilities (252 000/360 000) 70% or P.70

4.) Zero Na Corp. has been undergoing liquidation since January 1. As of March 31, its
condensed statement of realization and liquidation is presented below:
Assets:
Assets to be realized…………………………………………….P 1 375 000
Assets acquired…………………………………………………… 750 000
Assets realized…………………………………………………… 1 200 000

Assets not realized………………………………………………… 1 375 000

Liabilities:
Liabilities liquidated………………………………………… …P 1 875 000
Liabilities not liquidated……………………………………………… 1 700 000
Liabilities to be liquidated……………………………………………… 2 250 000
Liabilities assumed…………………………………………………… 1 625 000
Revenues and Expenses:
Supplementary charges/debits………………………...........P 3 125 000
Supplementary credits…………………………………………… 2 800 000

Compute the ending cash account assuming that common stock and deficits are P1 500
000 and P500 000, respectively:

A.) P425 000 C.) P1 325 000

B.) P 575 000 D.) P1 375 000
Total liabilities (refer to Liabilities not liquidated)……………………P 1 700 000
Add: Stockholders’ equity (1 500 – 500 000)……………………… 1 000 000
Total LSHE = Total Assets…………………………………………….P 2 700 000
Less: Non-cash assets (refer to Assets not liquidated)…………… 1 375 000
Cash balance, ending………………………………………………….P 1 325 000
Items 5 and 6 are based on the following information:

A company enters into bankruptcy proceedings on April 30. Its balance sheet on that date is as
follows:

Cash P 25 000 Accounts payable P 70 0000

Merchandise 60 000 Loan payable 150 000
Plant and equipment, net 100 000 Stockholders’ equity (35 000)
Total P 185 000 Total P 185 000
None of the liabilities are secured. The following transactions occur between April 30 and
August 31:

 Merchandise with a book value of P45 000 was sold for P30 000.
 Plant and equipment with a book value of P40 000 was sold for P25 000.
 Wages and administrative expenses of P10 000 were accrued.
 An initial payment of 30 cents per peso of indebtedness was paid to the
unsecured creditors.
5.) The statement of realization and liquidation would show a total (1) “assets to be realized”
and (2) assets not realized of:
A.) (1) P160 000; (2) P105 000 C.) (1) P105 000; (2) P75 000
B.) (1) P105 000; (2) P160 000 D.) None of the above.
(1)P160 000; (2)P75 000
6.) The statement of realization and liquidation would show (1) “liabilities not liquidated” and
(2) “liabilities not liquidated” of
A.) (1) P154 000; (2) P230 000 C.) (1) P220 000; (2) P164 000
B.) (1) P164 000; (2) P220 000 D.) None of the above.
7.) Lakeside Bank holds a P100 000 note secured by a building owned by Fly-By –Night
Manufacturing, which has filed for bankruptcy. If the property has a book value of P120
000 and a fair market value of P90 000, what is the best way to describe the note held
by Second Bank and Trust Company? The bank has a(n):
A.) A secured claim of P100 000
B.) Unsecured claim of P100 000
C.) Secured claim of P90 000 and an unsecured claim of P10 000
D.) Secured claim of P100 000 and an unsecured claim of P20 000
It is a partially secured liability.
8.) Rap Company is insolvent and its statement of affairs shows the following information:
Estimated gains on realization of assets…………………………P 1 440 000
Estimated losses on realization of assets……………………….. 2 000 000
Additional assets…………………………………………………… 1 280 000
Additional liabilities………………………………………………… 960 000
Capital stock……………………………………………………….. 2 000 000
Deficit……………………………………………………………….. 1 200 000

The pro-rate payment on the peso to stockholders (estimated amount to be recovered by

stockholders) is:

A.) P.30 C.) P.57

B.) P.43 D.) P.70
 Estimated gains on realization of assets P (1 440 000)

Estimated losses on realization of assets 2 000 000

560 000

Capital stock P 2 000 000

Deficit (1 200 000)

800 000

(560 000/800 000) 70% or .7

9.) Second City bank holds a P50 000 note secured by a building owned by Desk Drawer
Software, which has filed for bankruptcy under the Insolvency Law. If the property has a
book value of P60 000 and a fair market value of P45 000, what is the best way to
describe the note held by Second City Bank? The bank has:
A.) Secured claim of P50 000
B.) Unsecured claim of P50 000
C.) A secured claim of P5 000 and unsecured claim of P45 000
D.) A secured claim of P45 000 and unsecured claim of P5 000
10.) S and L owes the Merlin Corporation P6 000 on account, which is secured by
accounts receivable with a book value of P5 000. Its statement of affairs lists the
accounts receivable securing the Merian account with an estimated realizable value of
P4 500. If the dividend to general unsecured creditors is 80%, how much can Merian
expect to receive?
A.) P6 000 C.) P5 700
B.) P5 800 D.) P4 800
4 500 + (1 500 x 80%) = P5 700

Items 11 to 15 are based on the following information:

11.) NG Company filed a voluntary bankruptcy petition, and the settlement of affairs
reflected the following amounts:
Assets Book Value Estimated Current Value
Assets pledged with
fully secured creditors P 450 000 P 550 000
Assets pledged partially
secured creditors 270 000 180 000
Free assets 630 000 480 000
P1 350 000 P1 215 000

Liabilities

Liabilities with priority P 105 000

Fully secured creditors 390 000

Partially secured creditors 300 000

 Unsecured creditors 810 000

P1 605 000

Assume the assets are converted to cash to their estimated current values. What
amount of cash will be available to pay unsecured, non-priority claims?

A.) P380 000 C.) P480 000

B.) P400 000 D.) P540 000
(555 000 – 390 000) + 480 000 = 645 000 – 105 000 = P540 000
12.) The following data were taken from the statement of affairs for Liquo Company:
Asset pledged for fully secured liabilities
(fair value, P75 000)…………………………P 90 000
Assets pledged to partially secured liabilities
(fair value, P52 000)…….……………………P74 000
Free assets (fair value, P40 000)……………………..P70 000
Unsecured liabilities with priority……………………...P7 000
Fully secured liabilities…………………………………P30 000
Partially secured liabilities……………………………..P60 000
Unsecured liabilities without priority………………….P112 000

The total estimated deficiency to unsecured creditors amounted to:

A.) P27 000 B.) P34 000 C.) P35 000 D.) P42 000
(40 000 + 45 000 + 7000) = 78 000 – 120 000 = P42 000
13.) AA Corporation was forced into bankruptcy and is in the process of liquidating
assets and paying claims. Unsecured claims will be paid at the rate of 30 cents on the
peso. CC holds a note receivable from AA for P90 000, collateralized by an asset with a
book value of P60 000 and a liquidation value of P30 000. The amount to be realized by
CC on this note is:
A.) P48 000 C.) P60 000
B.) P90 000 D.) P30 000
30 00 + [30% x (90 000 – 30 000)] = P48 000
14.) OTG Co., filed a bankruptcy petition and liquidated its non-cash assets. OTG
was paying forty cents on the dollar for unsecured claims. GG Co., held a mortgage of
P150 000 on land that was sold for P110 000. The total amount of payment that GG
should have received is calculated to be:
A.) P110 000 C.) P60 000
B.) P126 000 D.) P134 000
[110 000 + (150 000 – 110 000) X 40%] = P126 000
15.) Happy Corporation was forced into bankruptcy and is in the process of
liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty
cents on the peso. Unhappy holds a note receivable from Happy collateralized by an
asset with a book value of P50 000 and a liquidation of P25 000. The amount to be
realized by Unhappy on this note is:
A.) P25 000 C.) P75 000
B.) P40 000 D.) P50 000
25 000 + [30% x (75 000 – 25 000)] = P40 000
 16.) Splat Company filed a voluntary bankruptcy petition, and the statement of affairs
reflected the following amounts:
Assets Estimated Book Value Current Value
Assets pledged with
fully secured creditors P900 000 P1 10 000
Assets pledged
partially secured creditors 540 000 360 000
Free assets 1 260 000 960 000
P2 700 000 P2 430 000

Liabilities

Liabilities with priority P210 000

Fully secured creditors 780 000

Partially secured creditors 600 000

Unsecured creditors 1 620 000

P3 210 000

Assume that the assets are converted to cash at their estimated current values. What
amount of cash will be available to pay unsecured non-priority claims?

A.) P720 000 C.) P960 000

B.) P840 000 D.) P1 080 000
[(1 110 000 – 780 000) + 960 000] – 210 000 = P1 080 000

Items 17 to 19 are based on the following information:

Ruby Company recently petitioned for bankruptcy and is now in the process of preparing a
statement of affairs. The carrying values and estimated fair values of the assets of Ruby
Company are as follows:

Carrying Value Fair Value

Cash…………………… P20 000 P20 000

Accounts receivable…. 45 000 30 000

Inventory……………… 60 000 35 000

Land…………………… 75 000 70 000

Building, net………….. 180 000 100 000

Equipment, net………. 170 000 80 000

P550 000 P335 000

Debits of Ruby are as follows:

Accounts payable P 60 000

Wages payable (all have priority) 10 000

Taxes payable 10 000

Notes payable (secured by receivable and inventory) 120 000

Interest on Notes payable 6 000

Bonds payable (secured by land and building) 150 000

Interest on bonds payable 7 000

P 363 000

17.) What is the total amount of unsecured claims?

A.) P93 000 C.) P121 000
B.) P113 000 D.) P126 000
60 000 + [(120 000 + 6000) – (30 000 + 35 000) = 121 000
18.) What estimated amount will be available for general unsecured creditors upon
liquidation?
A.) P28 000 C.) P113 000
B.) P93 000 D.) P121 000
20 000 + 80 000 + [170 000 – (150 000 + 7 000)] = 113 000 – (10 000 + 10 000) =
93 000
19.) What is the estimated dividend percentage?
A.) 23% C.) 77%
B.) 93% D.) 68%
93 000/121 000 = 77%
20.) Eagle Corporation was forced into bankruptcy and is in the process of liquidating
assets and paying claims. Thirty cents is the rate that will be paid on unsecured claims.
Hawk hold a note receivable from Eagle for P100 000 collateralized by an asset with a
book value of P50 000, with a liquidation value of P50 000. The amount to be realized by
Hawk on this note is:
A.) P65 000 C.) P55 000
B.) P70 000 D.) P35 500
50 000 + [.30 x (100 000 – 50 000) = P65 000
Chapter 4

Installment Sales

1. On December 15, 2016, Andreé Sales Co. sold a tract of land that cost ₱3,600,000 for
₱4,500,000. Andreé appropriately uses the installment sales method of accounting for this
transaction. Terms called for a down payment of ₱500,000 with the balance in two equal
annual installments payable on December 15, 2017 and December 15, 2018. Ignore interest
charges. Andreé has a December 31 year-end.

In its December 31, 2016 Statement of Financial Position, Andreé would report:

A. Realized gross profit of ₱100,000.

B. Deferred gross profit of ₱100,000.

C. Installment receivables (net of deferred) of ₱3,200,000

D. Installment receivables (net of deferred) of ₱4,000,000.

ANSWER: C

Sale:

Installment receivables 4,500,000

Inventory 3,600,000

Deferred gross profit 900,000

Payment:

Cash 500,000

Installment receivables 500,000

Deferred gross profit 100,000

Realized gross profit 100,000

Balance Sheet: Installment receivables (4,500,000 – 500,000) P 4,000,000
Deferred gross profit (900,000 – 100,000) 800,000
Installment receivables (net) P 3,200,000

2. At December 31, 2017, Andreé would report in its Statement of Financial Position:

A. Realized gross profit of ₱500,000.

B. Deferred gross profit of ₱400,000

C. Realized gross profit of ₱400,000.

D. Cost of installment sales of ₱1,600,000.

ANSWER: B

December 15, 2017

Cash [(₱4,500,000 - ₱500,000)/2] 2,000,000

Installment receivables 2,000,000

Deferred gross profit [₱2,000,000 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.

3. On January 1, 2016, Oslo Co. sold a used machine to Kiev Co. for ₱350,000. On this date, the
machine had a depreciated cost of ₱245,000. Kiev paid ₱50,000 cash on January 1, 2016 and
signed a ₱300,000 note bearing interest at 10%. The note was payable in three annual
installments of ₱100,000 beginning January 1, 2017. Oslo appropriately accounted for the sale
under the installment method. Kiev made a timely payment of the first installment on January
1, 2016 of ₱130,000, which included interest of ₱30,000 to date of payment. At December 31,
2017, Oslo has deferred gross profit of
A. ₱70,000

B. ₱66,000

C. ₱60,000

D. ₱51,000

ANSWER: C

₱300,000 + ₱50,000 = ₱350,000

₱350,000 – ₱245,000 = ₱105,000 gross profit (30% GP rate)

(₱300,000 – ₱100,000) x 30% = ₱60,000.

4. On January 1, 2016 Sumugat Co. sold land that cost ₱210,000 for ₱280,000, receiving a note-
bearing interest at 10%. The note will be paid in three annual installments of ₱112,595 starting
on December 31, 2015. Because collection of the note is very uncertain, Sumugat will use the
cost-recovery method. How much revenue from this sale should she recognize in 2016?

A. ₱ 0

B. ₱21,000

C. ₱28,000.

D. ₱70,000.

ANSWER: A

5. During 2016, Perry Corporation sold merchandise costing ₱2,100,000 on an installment basis
for ₱3,000,000. The cash receipts related to this sales were collected as follows: 2016,
₱1,200,000; 2017, ₱1,050,000; 2018. ₱750,000. What is the rate of gross profit on the
installment sales made by De Pedro Corporation during 2016?

A. 30%
B. 40%

C. 60%

D. 70%

ANSWER: A

(P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.

6. On January 1, 2016, RORO sells 20 acres of farmland for 12,000,000 taking in exchange a
12% interest-bearing note, RORO purchased the farmland in 1992 at cost of 8,000,000. The note
will be paid in three (3) equal annual payments inclusive of 12% interest each December 31,
2016, 2017, 2018.

How much must be the realized gross profit for the year 2016 under the installment method of
recognizing revenue?

A. 3,556,253
B. 1,185,418
C. 1,333,333
D. 2,814,582

Equal annual payments:

12,000,000/pv of annuity of 1 for 3 periods at 12%
12,000,000/2.4018=4,996,253
Collection 2013 4,996,253
Less: interest for 2013 1,440,000
Amount applicable to principal 3,556,253
Gross profit rate (4,000,000/12,000,000)= 1//3 or x 33 1/3%
Realized gross profit for 2013 1,185,418
7. MaydayParade Corporation sells on installment basis and accounts for it using the installment
method. Some information related to its operaton below:
2016 2017 2018
Cost of Sales 70,500.00 427,680.00 568,890,00
Gross Profit Rate on Sales 35% 34% 37%
Beginning and Ending balance of Receivables
Jan. 1, 2018 December 31, 2018
Installment Receivable-2016 36,030.00
Installment receivable- 2017 516,690.00 104,160.00
Installment receivable- 2018 615,135.00
During 2016, the company reposed an inventory which had been sold in 013 for 8,100 and
4,800 had been collected prior to default. MaydayParade values the repossessed goods at market
value. The resale price of the repossessed merchandise amounted to 2,550 after incurring
reconditioning cost of 500.
Compute for the deferred gross profit for the year 2016.

A. 261,382
B. 263,014
C. 264,136
D. 260,260

2016 2017 2018 TOTAL

Inst. Rec., end 0 104,160.00 615,135.00
X 35% 34% 37%
35,414.40 227,599.95 263,014.35

9-11. These data pertain to installment sales of FM’s Store:

Down payment, 20%
Installment sales: 545,000 in Year1; 785,000 in Year 2; and 968,000 in Year 3
Mark-up on cost, 35%
Collections after down payment: 40% in the year of sale, 35% in the year after sale, and 25% in
the third year.
The realized gross profit in Year1 is:
A. 109,357
B. 73, 474
C. 99,190
D. 114,825
The unrealized gross profit for installment sales made during Year 2, as of end of Year 2 is:
A. 97, 689
B. 131,880
C. 141,112
D. 114,063
The unrealized gross profit at the end of Year 3 is:
A. 211,047
B. 161,166
C. 198,574
D. 217,574
For #3:
Down payment (20%x545,000) 109,000
Installments (545,000x80%x40%) 174,440
Total collections in Year1 283,400
Multiply by gross profit rate 35/135
Realized gross profit in Year 1 73,474
For #4:
Installment sales- Year 2 785,000
 Less: down payment (20%) 157,000
Balance 628,000
Less: collections Year of sale (40%x628,000) 251,200
Receivable balance- Year 2 sales at the end of Year 2 376,800
Multiply by gross profit rate 35/135
Unrealized gross profit at the end of Year 2 97,689
For #5
Installment A/R, end of Year 3 621,640
Multiply by gross profit rate on sales 35/135
Unrealized gross profit, end of Year 3 161,166
12. The books of Harry Co show the following balances on december 31, 2016:

Accounts receivable.....................................................313,750

Deferred Gross profit(before adjustments).................38,000

Analysis of the accounts receivable reveal te following:

Regular accounts...............................................207,500

2015 installment accounts.................................16,250

2016 installment accounts...................................90,000

Sales on an installment basis in 2011 were made at 30% above cost; in 2016, at 33 1/3 above
cost. Expenses paid was 1,500 relating to installments sales. How much is the net income on
installment sales?

A. 11,000

B. 11,500

C. 16,000

D. 10,250

13-14. Baba Co. a 2 year old company, sells merchandise on an installment basis and cash basis.
The trial balance as of Dec. 31, 2016, shows the following information:
 Debit Credit

Accounts Receivable 5,375,000

Inventory – Jan. 1, 2016 1,750,000

Purchases 13, 875,000

Sales 20,250,000

Additional Information:

Inventory – Dec. 31, 2016 (new and repossessed) amounted to 2,375,000.

Gross profit rate on each cash sales during the 2 year period was constant at 30%.

Cash sales during the year was reported at 9,625,000.

An aged schedule of receivables revealed that 375,000 of the accounts receivable were one
year and older.

A customer defaulted an account amounting to 193,750 from sale of 2014 accrued during 2016.
The related inventory was repossessed during the year.

Independent computations revealed that the unadjusted deferred gross profit for 2015 sales
amount to 1,262,810.

Total collections on receivable during 2015 amounted to 8,056,250.

How much is the total realized gross profit in 2016?

a. 1,446,375

b. 6,119,063

c. 8,188,713

d. 5,948,875

How much is the loss on repossession?

45,125
31,163

60,625

56,750

Thunder Paradise Corporation began selling goods on the installment basis on January 1, 2016.
During 2016, Thunder Paradise had balance on installment sales of 150,000, Cash
collections 54,000, cost of installment sales of 105,000.

15. What is the entry to record installment sales?

a. Installment Receivable 150, 000
Installment Sales 150, 000
b. Installment Receivable 105, 000
Installment Sales 105, 000
c. Installment Receivable 154, 000
Installment Sales 154, 000
d. Installment Receivable 109, 000
Installment Sales 109, 000

16. What is the entry to record the cost of installment sales?

a. Cost of Sale 105, 000
Inventory 105, 000
b. Cost of Installment Sale 105, 000
Inventory 105, 000
c. Cost of Installment Sale 105, 000
Cash 105, 000
d. Installment Sale 105, 000
Cost of Installment Sale 105, 000

17. What is the entry to record cash collections?

a. Installment receivable 54, 000
Installment Sales 54, 000
b. Cash 54, 000
Installment Sales 54, 000
c. Cash 54, 000
Installment Receivable 54, 000
d. Cash 94, 000
Installment Receivable 94, 000
18. What is the entry to record deferral of gross profit?
a. Installment Sales 150, 000
Cost of Installment Sales 105, 000
Deferred Gross Profit 45, 000
b. Installment Sales 150, 000
Inventory 105, 000
Deferred Gross Profit 45, 000
c. Installment Sales 204000
Installment Cost of Sales 150, 000
Deferred Gross Profit 54, 000
d. Installment Receivable 150, 000
Cost of Installment Sales 105, 000
Deferred Gross Profit 54, 000
19. What is the entry to record the gross profit recognized using installment sales method?
a. Deferred Gross profit 16, 200
Realized Gross Profit 16, 200
b. Deferred Gross Profit 13, 500
Realized Gross Profit 13, 500
c. Deferred Gross Profit 19, 440
Realized Gross Profit 19, 440
d. Deferred Gross Profit 16, 200
Installment Sales 16, 200

20. The Marcus Plains Subdivision sells residential subdivision lots in instalments. The
following information was taken from the accounting records of Marcus Palains Subdivision as
at December 31, 2016:

Instalment Accounts receivable,1/1/16 755,000

Instalment accounts receivable,12/31/16 840,000
Unrealized gross profit,1/1/16 339,750
Instalment sales 950,000

How much is the realized gross profit in 2016?

A. 427,500
B. 339,750
C. 378,000
D. 389,250

Solution:
755,000 + 950,000 = 1,705,000 – 840,000 = 865,000(collections in 2016)
865,000 x *45% = 389,250
*gross profit rate on sale 339,750/755,000 = 45%
Long- term Construction Contracts

1. The Power construction was the low bidder on a specialized equipment contract. The
contract bid was ₱12,000,000 with an estimated cost to complete the project of ₱
5,300,000. The contract period was 33 months, beginning January 1, 2014. The company
uses cost- to-cost method to estimate profits.

A record of construction activities for the years 2014- 2017 follows:

Year Actual Cost- Current Year Progress Billings CashReceipts

2014 ₱6,800,000 ₱6,400,000 ₱6,000,000

2015 5,100,000 4,000,000 4,000,000

2016 400,000 1,600,000 1,200,000

2017 0 0 800,000

The estimated cost to complete the contract at the end of each accounting period is:

2014 ₱4,200,000

2015 300,000

2016 0

Requirement:

What are the revenue, cost, and gross profit recognized for each of the years 2014-2016 under
the percentage of completion method.
2014 2015 2016
Revenue ₱7,418,400 ₱4,286,400 ₱295,200
Costs (6,800,000) (5,104,800) 395,200
Gross Profit ₱ 618,400 ₱ ( 818,400) ₱ (100,000)

2014 2015 2016

a) Actual costs incurred to date ₱6,800,000 ₱11,900,000

₱12,300,000
b) Estimated cost to complete contract 4,200,000 300,000 -0-
c) Total estimated cost ₱11,000,000 ₱12,200,000₱12,300,000
Percentage of completion to date 61.82% 97.54%
100%
[(a)/(c)]
*Results in contract loss of ₱200,000.
 To DateRecognized in Prior Yrs.Recognized in Current Yr.
2014 (62.82% completed):
Recognized revenue
(₱12,000,000 x 61.82%) ₱ 7,418,400 -- ₱ 7,418,400
Cost (actual cost) 6,800,000 ---- (6,800,000)
Gross profit ₱ 618,400 ₱ 618,400

2015 (97.54% completed):

Recognized revenue
(₱12,000,000 x 97.54%) ₱ 11,704,800 ₱ 7,418,400 ₱ 4,286,400
Cost (recognized revenue plus
anticipated loss) (11,904,800) (6,800,000) (5,104,800)
Gross profit (loss) ₱ (200,000) ₱ (618,400)₱ (818,400)

2016 (100% completed):

Recognized revenue ₱ 12,000,000₱11,704,800 ₱295,000
Cost (actual cost) (12,300,000)(11,904,800) 395,200
Gross profit ₱(300,000)₱( 200,000) ₱(100,000)

2. Seattle Boatbuilders was recently awarded a ₱28,000,000 contract to construct a luxury

liner for Cruiseliners Inc. Seattle estimates it will take 42 months to complete the
contract. The company uses the cost-to-cost method to estimate profits.

The following information details the actual and estimated costs for the year ended 2014-
2017

Year Actual cost- Current Year Estimated cost to complete

2014 ₱ 13,000,000 ₱13,600,000

2015 6,600,000 7,800,000

2016 4,800,000 3,800,000

2017 3,400,000 0

Compute the revenue, cost, and gross profit recognized for each of the years 2014-2017 under
the percentage of completion method.
2014 2015 2016 2017
Revenue ₱13,683,600 ₱6,344,800 ₱4,197,200 ₱3,774,400
Costs (13,000,000) (6,600,000) (4,825,600) (3,374,400)
Gross Profit ₱ 683,600 ₱ ( 255,200) ₱ (628,400) 400,000
 2014 2015 2016 2017

Contract price ₱14,000,000₱ 14,000,000₱14,000,000₱14,000,000

Costs incurred to date ₱ 6,500,000 ₱9,800,000 ₱12,200,000 ₱13,900,000

Estimated cost to complete 6,800,0003,900,0001,900,000 0

Total estimated costs ₱13,300,000 ₱13,700,000 ₱14,100,000 ₱13,900,000

Total expected profit ₱ 700,000₱ 300,000₱ (100,000)₱ 100,000

Percentage of completion to date 48.87% 71.53% 86.52% 100%

To DateRecognized in Prior Yrs.Recognized in Current Yr.

2014
Recognized revenue
(₱28,000,000 x 48.87%) ₱ 13,683,600 -- ₱13,683,600
Cost (actual cost) 13,000,000 ---- (13,000,000)
Gross profit ₱ 683,600 ₱ 683,600

2015
Recognized revenue
(₱28,000,000 x 71.53%) ₱ 20,028,400 ₱ 13,683,600 ₱ 6,344,800
Cost (actual cost) (19,600,000) (13,000,000) (6,600,000)
Gross profit (loss) ₱ (428,400) ₱ (683,600) ₱ (255,200)

2016
Recognized revenue
(₱28,000,000 x 86.52%) ₱24,225,600 ₱20,028,400 ₱4,197,200
Cost (recognized revenue plus
anticipated loss) (24,425,600) (11,600,000) (4,845,600)
Gross profit ₱ (200,000) ₱( 428,400) ₱ (628,400)

2017
Recognized revenue ₱ 28,000,000 ₱24,225,600 ₱3,774,400
Cost (actual cost) (27,800,000) (24,425,600) 3,374,400
Gross profit ₱ 200,000 ₱( 200,000) ₱ 400,000

3. In 2015, Golden Engineering entered into an agreement to construct an office building at

a contract price of P5,100,000. Construction data were as follows:

2015 2016 2017

Construction costsincurred P  750,000 P2,700,000 P  630,000 
Estimated costs tocomplete  3,000,000    862,500        --

Progress billings    570,000  3,600,000   930,000

Collections from client    450,000  3,300,000 1,350,000

Prepare the necessary entries for each year, assuming the firm uses the:
(1)completed-contract method
(2percentage-of-completion method.

(1)
2015
Construction in Progress 750,000
Materials, Cash, etc. 750,000

Accounts Receivable 570,000

   Progress Billings on Construction Contracts 570,000

Cash 450,000
   Accounts Receivable 450,000

2016
Construction in Progress 2,700,000
   Materials, Cash, etc. 2,700,000

Accounts Receivable 3,600,000

   Progress Billings on Construction Contracts 3,600,000

Cash 3,300,000
   Accounts Receivable 3,300,000

2017
Construction in Progress 630,000
   Materials, Cash, etc. 630,000
Accounts Receivable 930,000
   Progress Billings on Construction Contracts 930,000

Cash 1,350,000
   Accounts Receivable 1,350,000

Progress Billings on Construction Contracts 5,100,000

   Revenue from Long-Term Construction
   Contracts 5,100,000

Cost of Long-Term Construction Contracts 4,080,000

   Construction in Progress 4,080,000

(2)
2015
Construction in Progress 750,000
   Materials, Cash, etc. 750,000

Accounts Receivable 570,000

   Progress Billings on Construction Contracts 570,000

Cash 450,000
   Accounts Receivable 450,000

Cost of Long-Term Construction Contracts 750,000

Construction in Progress 270,000
   Revenue from Long-Term Construction Contracts
1,020,000

2016
Construction in Progress 2,700,000
   Materials, Cash, etc. 2,700,000

Accounts Receivable 3,600,000

   Progress Billings on Construction Contracts
3,600,000

Cash 3,300,000
  Accounts Receivable 3,300,000

Cost of Long-Term Construction Contracts 2,700,000

Construction in Progress 360,000
   Revenue from Long-Term Construction
   Contracts 3,060,000

2017
Construction in Progress 630,000
   Materials, Cash, etc. 630,000 

Accounts Receivable 930,000

   Progress Billings on Construction Contracts 930,000

Cash 1,350,000
   Accounts Receivable 1,350,000

Cost of Long-Term Construction Contracts 630,000

Construction in Progress 390,000
   Revenue from Long-Term Construction
  Contracts 1,020,000

Progress Billings on Construction Contracts 5,100,000

   Construction in Progress 5,100,000

4. Sealand Construction entered into a contract to construct a floating bridge across a lake.
The contract price for the bridge is P7,500,000. During 2016, costs of P1,800,000 were
incurred representing 30% of total expected costs.

Prepare the necessary entries for 2016 to recognize gross profit for the year assuming the
firm uses the:
(1) completed-contract method.
(2) percentage-of-completion method.

(1)
Using the completed-contract method, no gross profit is recognized on the contract until the
bridge is completed. Thus, no entry is needed.

(2)
Cost of Long-Term Construction Contract 1,800,000
Construction in Progress 450,000
Revenue from Long-Term Construction
 Contracts 2,250,000

 P1,800,000 / 30% = P6,000,000

 P7,500,000 - P6,000,000 = P1,500,000
 P1,500,000 ´ 30% = P450,000
Use the following to answer questions 5-6
Ed Strongwoman Homes constructed a subdivision of upscale homes north of the
mountains of Islamabad, Pakistan, during 2016 and 2017 under contract with Starbucks
Realty Development. Relevant data are summarized below:
Contract Amount ₱2,000,000

2016 2017
Cost 800,000 600,000
Gross Profit 350,000 250,000
Contract Billings 1,000,000 1,000,000
Ed Strongwoman uses the percentage-of-completion method to recognize revenue.

5. What would be the journal entry made in 2016 to record revenue?

a. Accounts receivable ₱1,000,000
Revenue from long-term contracts ₱1,000,000
b. Accounts receivable ₱1,350,000
Gross profit ₱350,000
Revenue from long-term contracts 1,000,000
c. Construction in progress ₱350,000
Cost of construction 800,000
Revenue from long-term contracts ₱1,150,000
d. Accounts receivable ₱1,000,000
Billings in excess of cost 350,000
Revenue from long-term contracts ₱1,350,000

6. What would be the journal entry to record revenue in 2017?

a. Accounts receivable 1,000,000
Revenue for long-term contracts 1,000,000
b. Construction in progress 250,000
Cost of construction 600,000
Revenue for long-term contracts 850,000
c. Cost of construction 1,400,000
Gross profit 600,000
Revenue for long-term contracts 2,000,000
d. Accounts receivable 1,000,000
Cost of construction 600,000
Gross profit 250,000
Deferred revenue 150,000

Use the following to answer questions 7-9

LOB Builders, Inc. entered into a contract to install a pipeline for a fixed price of
₱2,200,000. LOB uses the completed contract method of revenue recognition.
Cost incurred Est. cost to complete
2015 ₱ 250,000 ₱ 1,550,000
2016 1,600,000 500,000
2017 450,000

7. In 2015, LOB would report (rounded to the nearest thousand) gross profit (loss) of:
a. ₱ 0
b. (₱100,000)
c. ₱56,000
d. ₱73,000

Total estimated gross profit (₱2,200,000 - 250,000 - 1,550,000 )=₱(400,000), so don't

need to recognize any contract loss.

8. In 2016, LOB would report (rounded to the nearest thousand) gross profit (loss) of:
a. (₱223,000)
b. (₱150,000)
c. (₱206,000)
d. ₱ 0

₱2,200,000 - (₱250,000 + 1,600,000 + 500,000) = ₱(150,000) gross loss.

9. In 2017, Burj al Dub would report (rounded to the nearest thousand) gross profit (loss) of:
e. (₱100,000)
f. ₱50,000
g. ₱123,000
h. ₱2,000

₱2,200,000 - (₱250,000 + 1,600,000 + 450,000) = ₱(100,000)

₱(100,000) - (150,000) =₱50,000

10. The following data relates to a construction job started by Santos Inc.:
Total Contract Price P1,000,000

Actual Cost Incurred in 2015 200,000

Estimated Remaining Cost 400,000

Billings to customers in 2015 300,000

 Collections from customers in 2015 100,000

How much gross profit is to be recognized by Santos Inc?

Percentage of Completion Zero Profit Method

(A.) P333,333 P100,000

(B.) P266,667 P200,000
(C.) P133,333 -0-
(D.) P133,333 P200,000

Percentage of Completion Method:

Contract Price P1,000,000
Less: Total estimated cost
Cost incurred P 200,000
Estimated remaining cost _400,000 __600,000
Gross profit estimated 400,000
% of completion (200,000/600,000) __33 1/3%
Gross profit to be recognized P    133,333

Zero Profit Method:

-0-

Use the following to answer questions 11-14

Gon Construction Co. has used the cost-to-cost percentage-of-completion method of
recognizing revenue, Gon assumed the presidency of the company after the death of his
father, Gin. In reviewing the records, Gon finds that the following information regarding
a recently completed building project for which the total contract was P2,000,000.

2015 2016 2017

Gross Profit/Loss P40,000 P140,000 P(20,000)

Cost incurred each year 360,000 ? 820.000

Gon wants to know how effectively the company operated during the three (3) years on this
project and, since the information is not complete,

11. How much cost was incurred in 2016?

(A.) P660,000
(B.) P600,000
(C.) P560,000
(D.) P500,000
Gross profit (loss) earned in 2017 (P   20,000)
Gross profit earned in prior years _180,000
Gross profit earned to date - 2017 160,000
Divide by percentage of completion - 2017 ___100%
Estimated gross profit - 2017 160,000
Less: Contract price 2,000,000
Total estimated cost 1,840,000
Less: Cost incurred - 2017 _820,000
Cost incurred to date - 2016 1,020,000
Less: Cost incurred - 2015 __360,000

Cost incurred in 2016 P    660,000

12. What percentage of the project was completed by the end of 2016?
(A.) 65%
(B.) 60%
(C.) 55%
(D.) 79%
Gross profit earned to date - 2016 (P40,000 + P140,000) P  180,000
Divide by estimated gross profit - 2016:
Contract price P2,000,000
Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15% __300,000
Percentage of completion - 2016 60%
13. What was the total estimated gross profit on the project by the end of 2016?
(A.) P350,000
(B.) P180,000
(C.) P250,000
(D.) P300,000
Contract price P2,000,000
Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15%
Total estimated gross profit- 2016 P _300,000
14. What was the estimated cost to complete the project at the end of 2016?
(A.) P660,000
(B.) P500,000
(C.) 680,0000
(D.) P650,000
Contract price P2,000,000
Estimated gross profit - 2016 __300,000
Total estimated cost 1,700,000
Less: Cost incurred to date - 2016 1,020,000
Estimated cost to complete - 2016 P    680,000
15. Ali Company uses the percentage of completion method of accounting. During 2016, DC
contracted to build an apartment house for ATL for 10,000,000. Ali estimated that total
costs would amount to 8,000,000 over the period of construction. In connection with this
contract, Ali incurred 1,000,000 of construction costs during 2016. Ali billed and
collected 1,500,000 from ATL in 2016.
How much gross profit should Ali recognize in 2016?
a. 300,000
b. 250,000
c. 187,500
d. 125,000
Contract price P10,000,000
Total estimated costs 8,000,000
Total gross profit 2,000,000
 Percentage of completion (1,000,000/8,000,000) 12.5%
Gross profit-2016 P    250,000

16. Heavenly Construction Company entered into two construction jobs which both
commenced in 2016 (in thousands).
Project 1 Project 2
Contract price 52,500 37,500
Costs incurred during 2016 30,000 35,000
Estimated cost to complete 15,000 8,700
General and administrative expenses 2,500 1,250
Billings for clients during 2016 31500 30,000
Collections during 2016 28,000 25,000
Based on the information given, how much is the gross profit would Heavenly Construction
report its 2016 income statement?
Percentage of completion Zero profit
a. (6,200,000) (1,200,000)
b. 5,000,000 (6,200,000)
c. (1,200,000) (6,200,000)
d. 1,300,000 (1,200,000)
Percentage of completion method:
Project 1: 30,000/45,000= 66.67% x (52,500,000-45,000,000)= P 5,000,000
Project 2: 37,500,000-35,000,000-8,700,000= (6,200,000)
Total P    1,200,000

*zero profit method will only recognized gross profit upon completion but losses will be
recognized immediately in profit or loss.

17. Marty Construction Company has consistently used the percentage-of-completion

method. On Janauary 10, 2015, Marty began work on a P 6,000,000 construction
contract. At the inception date, the estimated cost of construction was P 4,500,000. The
following data relate to the progress of the contract:
Income recognized at 12/31/15 P 600,000
Cost Incurred 1/10/15 through 12/31/16 3,600,000
Estimated Cost to Complete at 12/31/16 1,200,000

How much income should Marty recognize for the year ended December 31, 2016?
a. P 300,000
b. P 525,000
c. P 600,000
d. P 900,000

Contract Price P6,000,000

Loss Value estimated costs:
Cost to date 3,600,000
Cost to complete 1,200,000 4,800,000
Estimated Gross Profit 1,200,000
% of completion (3,600,000/4,800,000) 75%
Income recognized to date 900,000
Income recognized at 2015 600,000
Income recognized in 12/31/2016 P 300,000
18. Hansen Construction, Inc. has consistently used the percentage-of-completion method of
recognizing income. During 2016 Hansen started work on a P 3,000,000 fixed-price
construction contract. The accounting records disclosed the following data for the year
ended December 31,2016:

Costs incurred P 930,000

Estimated cost to complete 2,170,000
Progress Billings 1,100,000
Collections 700,000

How much loss should Hansen have recognized in 2016?

a. P 230,000
b. P 100,000
c. P 30,000
d. P 0

The requirement is to determine the amount of loss to recognize in 2016 on a long-

term, fixed-price construction contract. Under both the percentage-of-completion
method and the completed-contract method, an expected loss on a contract must be
recognized in full in the period in which the expected loss is discovered. Therefore,
Hanson must recognize a loss of P 100,000 in 2016.

Expected Revenue P 3,000,000

Expected Contract Costs (930,000/2170,000) 3,100,000

Expected Loss P (100,000)

19. The following data relating to a construction job started by CC co. during 2016:

Total Contract Price P 100,000

Actual costs during 2016 20,000
Estimated remaining costs 40,000
Billed to customer during 2016 30,000
Received from customer during 2016 10,000

How much gross profit would CC Co. recognize for 2016 under the hybrid method and
the percentage-of-completion method?
a. P 0 and P 13,333
b. P 0 and P 26,667
c. P 4,000 and P 13,333
d. P 12,000 and P 33,333
 Under the hybrid method no gross profit is to be recognized since the project is not
yet completed, under the percentage-of-completion method the gross profit to be
recognized in 2016 is computed below:

Contract Price P100,000

Estimated Cost:
Cost to date 20,000
Cost to complete 40,000 60,000
Estimated Gross Profit 40,000
% of completion (20,000/60,000) 33.33%
Gross profit recognized P13,333

20. The Robert Construction Corporation uses the percentage-of-completion method of

accounting in 2016, Robert began work on a contract it had received which provided for a
contract price of P 8,000,000. Other details follow:
2016
Costs incurred during the year P 1,200,000
Estimated costs to complete as of December 31 4,800,000
Billings during the year 1,440,000
Collections during the year 1,000,000
What should be the gross profit recognized in 2015?
a. P 160,000
b. P 240,000
c. P 400,000
d. P1,600,000

Contract price P8,000,000

Estimated Cost:
Cost incurred during the year 1,200,000
Cost to complete 4,800,000 6,000,000
Estimated Gross Profit 2,000,000
% of completion (1,200,000/6,500,000) 20%
Gross Profit earned in 2015 P 400,000
Franchise Accounting

1. Alamo Company has two merchandise outlet, its main store and its bonomo branch. All
purchases are made by the main store and shipped to the branch at cost plus 10%. On
January 1 2011, the main store and bonomo inventories were 17,000 and 4 950 respectively
. during 2011 the main store purchased merchandise costing P 50,000 and shipped 40% of
it to bonomo, at December 31 2011 bonomo made the following closing entry:

Sales ----------------------40,000
Inventory ----------------6,050
Shipments from main store------------22,000
Expenses-----------------------------------13,100
Inventory----------------------------------4,950
Main store---------------------------------6000
Compute the (1)actual branch income for 2017 on a cont basis assuming generally accepted
accounting principles and (2) the combined cost of goods main store inventory at December
31, 2011 is P14,000.

Solution:
1)
Sales P40000
Less: cost of good sold:
Inventory,1/1/2011(4950/110%) P4500
Add: shipments (22,000/110%) P 20000
COGAS P24,000
Less: inventory 12/31/2011 5500 P19000
6060/110%
Gross profit P21500
Less: Expenses P13100
Net income from own operations PP7900
2) Combined of goods sold:
Merchandise inventory 1/1/2011-----------------------P17,000
Of branch cost P4950/110%---------------------------------P4500 P21,000
Add: purchases-----------------------------------------------------------P50,000
COGAS-------------------------------------------------------------------------P 71500
Less:Merchandise Inventory12/31/2011----------------P 14,000
Of Branch costP 6050/100%------------------------------- 5000 P19,500
Cost of Good Sold P 52,000
2. The franchise agreement between hunger Queen and Geri ehich was signed out at the
beginning of the year requested a P 5,000,000 franchise for payable P1,000,000
Upon signing of the franchise and the balance in four annual instalments starting the end of
the current year. At the time of granting of the franchise, the present value using 12% as
discount rate of the four instalments would approximate P1,996,500. The fees once paid are
not refundable. The franchise may be cancelled subject to the provisions of the agreement.
 Should there be unpaid franchise fees attributed to the balance of the main fee( 5,000,000),
same would become due and demandable upon cancellation.As of the signing of the
franchise agreement Burger Queen unearned franchise fee amounted to :

Solution:

Cash Notes receivable

Services YES YES
Period of Refund YES YES
Collectibility not reasonably assured
P1,000,000 P1, 996,500
Status Revenue liability

3. Speed Racer, Inc. charges an initial franchise fee of P75,000 for the right to operate as a
franchisee of speed racer. Of this amount, 25,000 is collected immediatedly. The remainder
is collected in four equal annual payments instalments of 12, 500 each. These instalments
have a present value of P 39, 623. There is reasonable expectation that the down payment
may be refunded and substatntial future be performed by Speed RACER Inc.

Solution:

Cash Notes Receivable

Services No No
Period of refund No No
Collectability reasonably assured P 50,000

Status Liability/ Unearned Liability/Unearned

4. Dj builders enterprises, a franchisor, charges franchisees a ‘ franchisees a “franchise fee” of
500,000 of this amount, a non refundable P 200,000 is paid upon the signing of the contract
with the balance payable in three equal instalments after each year thereafter. Dj builders
will assist in locating a suitable business site conduct a market study oversee the
construction of facilities , and provide initial training of employees.

On December 1, 2018 ,dj builders signed a franchising agreement for the U-belt area. By the
end of 2018, it was determinded that the substantial performance of the initial services had
cost Dj builders a total of a P150,000 And that collection of the balnce of the Franchise fee
has been reasonably assured. In its 2018 income statement ,Dj builder should report
franchise revenue and Net income :

Solution:

Cash N/R

Services YES YES

 Period of refund YES YES

Collectibility REASSURED

200,000 300,000

STATUS REVENUE REVENUE

THE NET INCOME THEN WOULD BE AS FOLLOWS :

FRANCHISE REVENUE P 500.,000

LESS: COST OF Franchise P 150,000

Net income: P 350,000

5. During 2016, de pedro corporation sold merchandise costing P 2,100,000 on an instalment

basis for 3,000,000. The cash receipts related to this sales were collected as follows 2016 P
1, 200,000 2017 P750,000 2018 1050,000 2019 P750,000. What is the rate of gross profit
on the install ment sales made by de Pedero Corporation during 2016?

Solution: 9P3,000,000-2,100,000)/3000,000= 30%

6. On January 1, 2015 Finding Memo, Inc. entered into a franchise agreement with a
company allowing the company to do business under Finding Memo’s name. Finding
Memo had performed substantially all required services by January 1, 2015, and the
franchisee paid the initial franchise fee of ₱105,000 in full on that date. The
franchise agreement specifies that the franchisee must pay a continuing franchise
fee of ₱9,000 annually, of which 20% must be spent on advertising by Finding
Memo. What entry should Finding Memo make on January 1, 2015 to record receipt
of the initial franchise fee and the continuing franchise fee for 2015?

a. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 9,000
b. Cash 114,000
Unearned Franchise Fees 114,000
c. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 7,200
Unearned Franchise Fees 1,800
d Prepaid Advertising 1,800
. Cash 114,000
Franchise Fee Revenue 105,000
 Revenue from Continuing Franchise Fees 9,000
Unearned Franchise Fees 1,800

7. On January 1, 2018 Sumugat Co. sold land that cost ₱210,000 for ₱280,000, receiving a
note-bearing interest at 10%. The note will be paid in three annual installments of
₱112,595 starting on December 31, 2015. Because collection of the note is very uncertain,
Sumugat will use the cost-recovery method. How much revenue from this sale should she
recognize in 2018?
a. ₱ 0
b. ₱21,000.
c. ₱28,000.
d. ₱70,000

Answer is A.

8.
On Jan 1 ,2016 finding Memo INC. entered into a franchise agreement with a company
allowing the company to do business under finding memo’s name. finding memo had
performed substantially all required services by January 1, 2016 and the franchise paid
initially franchise fee of P 105 000 in full on that date . the franchisee must pay a continuing
franchise fee of P 9000 annually, of which 20% must be spent on advertising by finding
Memo. What entry should finding memo make on January 1 2016 to record receipt of the
initial franchise fee and the continuing franchise fee for 2016?

Answer:

Cash 114,000

Franchise fee revenue 105,000

Revenue from continuing franchise fee 7,200

Unearned franchise fees 1,800

9. blue ball co. charges P 90000 for a franchise, with P18,000 paid when the agreement is
signed and the balance in four annual payments. The present value of annual payments
discounted at 9% is P 58, 315. The franchise has the right to purchase P20,000 of
equipment for 16,000 of collectability of the payments is reasonably assured and
substantial performance by blue ball has occurred, what is the amount of revenue from
franchise fee that should be recognize?

Down payment 18,000

Add:Present value of equal annual payments(200,000*2.91) 582,000

Total franchisefee, 76,315

Less: loss on sale of equipment 4000

Net revenue from franchise fee 72,315 answer

10. On January 1, 2010, crimson red co. purchased a franchise with a useful life of ten years
or 50,000. An additional franchise fee of 3% of franchise operation revenues must be paid
each year to the franchisor. Revenues from franchise operations amounted to 400,000
during 2010. In its December 31, 2009 balance sheet what amount should crimson red
report as an intangible asset- franchise?

Answer: 45,000

Acquisition cost 50, 000

Less: franchise amortization (50000/10) 5,000

Franchise, Dec.31, 2010 45,000

11. On May 1, 2016, Baliwag’slechon Inc. a franchisor entered into a franchise agreement with
Mr. Godobe. The initial franchise fee is 500,000 of which 100,000 is payable in cash upon
signing of the franchise agreement and the balance evidence by 12% promissory note. As of
December 31, 2016. the franchisor falls to render substantial services and none thus far had been
rendered to franchisee. When the entity prepares its financial statements the revenue from
franchisee’s fee to be reported is:
Answer is 0.
No revenue is to be reported. Because the franchisor falls to render substantial services to the
franchisee as of Dec 31, 2016.

12. On September 1, 2017 KFC sells a franchise for 5,000,000. on September, the contract was
signed and paid in full. On October, franchisee commenced operations after substantial services
were rendered at a cost of 50,000. What is the net income by the franchisor on Dec. 31?
Answer: 4,950,000
Solution:
Initial franchise fee P500,000
Less: cost of franchise 50,000
Net income: 4,950,000
13. On July 1, 2007 Cotton candy corp. signed an agreement to operate as a franchise of ace
printers for an initial franchise of P1,200,000. On the same date , cotton candy paid P 400,000
amd agreed to pay the balance in four equal annual installments of 200,000 beg. July 1.
Present value of P1 a 14% 4 periods 0.59
Present value of an annuity of P1 at 14% for 4 periods 2.91
Future amount of 1 at 14% for 4 periods 1.69
Answer: 982,000
Down payment 400,000
Present value of equal annual payment 582,000
Amount of franchise date of acquisition 982,000

14. on June 6 2010, crimson red co. purchased a franchise with a useful life of ten years or
50,000. An additional franchise fee of 3% of franchise operation revenues must be paid each
year to the franchisor. Revenues from franchise operations amounted to 400,000 during 2009, in
its December 31,2010 balance sheet, what amount should crimson red report as an intangible
asset franchise?
Answer: 45,000
Acquisition cost 50,000
Less: franchise amortization (50000/10) 5,000
Franchise Dec. 31 2010 45,000

15. Assume that Jollibee Inc. chargers an initial franchise fee of P5,000,000for the right to
operate a franchise of Jollibee of the amount P1,000,000 is payable when the agreement is signed
and the balance is payable in five annual payments of 800,000 each. in return for that annual
franchise fee the franchisor will help locate the sale, negotiable the lease of the sale supervise the
construction activity and provide the bookkeeping services. The credit rating of the franchise
indicates that money can be borrowed at 24%.

If there is reasonable expectation that the down payment may be refunded and if substantial
future services remained to be performed by Jollibee Inc. the unearned interest income receivable
would be:
Answer: 1,803,600
Pv of ordinary annuity of P1 at 24%for 5 periods
=1-1.24/ 24
=2,7454
PV of an ordinary annuity of five annual receipts of 600,000 at 24%
=800,000*2.7454
= 2916,000
Unearned interest income discount on notes receivable
=4,000,000*2196,320
=1,803,600

16.Robins Inc. sells franchise for Ice Cream outlets in Metro Manila. One contract has been singed on
January 15, 2015. The agreement calls for an initial franchise fee of P 6,000,000. By the franchise at the
signing of the contract. The franchisor’s initial cost of services is P 2,250,000, to be incurred uniformly
over the six-month period prior to the scheduled opening date of July 15, 2015. No future payments are
to be made by the franchisee, although there will be continuing costs of P 180,000 per year for services
rendered during the ten year term of contract. The normal return for the franchisor on continuing
operations involving and franchise outlets is 10%.

How much net income would be recognized by the franchisor on July 15, 1996?

P 3,750,000

P 5,750,000

P 6,000,000

P 1,750,000

ANSWER:

Initial Franchise Fee 6,000,000

Less: Value of continuing 2,000,000
costs(180,000/90%)x10
Adjusted franchise fee 4,000,000
Less: Initial expenses 2,250,000
Net Income 1,750,000
17. Mr. Villa is about to purchase a franchise from Pizza, Inc. The standard contract provides for a 10-
year term and an initial franchiser fee of P 450,000, payable as follows: P 150,000 at the date of signing.
The expected date of signing is January 1, 2016. A continuing fee of 2% of gross sales is also to be paid to
the franchisor. Monthly gross sales are expected to be P 200,000 for the first four years and P 375,000
for the remainders of the contract. An additional P 50,000 for initial services are insured on January
17,2016. There are no associated continuing costs.

The net income to the recognized by Pizza Inc. for the fiscal year ending December 31, 1996 is:

P 444,000

P 140,400

P 240,400

P 440,800

ANSWER:

Initial Franchise Fee 450,000

Continuing fee (P200,000x2%)x 11 months 44,000
Total 494,000
Initial Expenses 50,000
Net Income 444,000

18.

On July 2015, Tiam signed to operate as franchisee of Andok’s Company for 50,000. 100,000
was paid upon signing and the rest were evidenced by a 12% note payable in two annual
payments of 200,000 each beginning December 31,2015. Tiam commenced operations on
November 2, the first installment was collected on due date. If the note is assured to be
collected, what is the revenue from franchise fee to be reported by Andok in its financial
statements on December 31?

(a.) 100,000

(b.) 400,000

(c.) 500,000
 (d.) 0

Solution:

The total initial franchise fee of P500,000 is to be recognized as earned because the
collectability of the note for the balance is reasonably assured.

19.) From the previous question, assuming collectability is not assured, using cash basis of
revenue recognition, what will be the revenue from initial franchise fee?

(a.) 0

(b.) 100,000

(c.) 300,000

(d.) 500,000

Solution:

Cash down payment P 100,000

Collection of note applying to principal __200,000

Revenue from initial franchise fee P 300,000

20.) Mr. Roxas signed an agreement with Hotdog,Inc. for an initial franchise fee of 1,200,000.
Upon signing, he paid 400,000 and agreed to pay the balance in 4 equal annual payments
starting July 1, 2016. Mr. Roxas can borrow at 14% for a loan of this type. On July 1, 2015, when
the initial franchise fee is received, what is the unearned interest income recorded by
Hotdog,Inc. ?

(a.) 0

(b.) 200,000

(c.) 218,000

(d.) 290,000
Solution:

Face value of the note (P1,200,000 - P400,000) P 800,000

Present value of the note (P200,000 X 2.91) __582,000

Unearned interest income, July 1, 2008 P 218,000