Identify The Choice That Best Completes The Statement or Answers The Question
Identify The Choice That Best Completes The Statement or Answers The Question
Identify The Choice That Best Completes The Statement or Answers The Question
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. Deryl Builders Company began operations on January 1, 2012. During the year, Deryl Builders Company
entered into a contract with Jovi Company to construct a manufacturing facility. At that time, Deryl
Builders estimated that it would take five years to complete the facility at a total cost of P4,800,000. The
contract price for construction of the facility is P5,800,000.
During 2012, Deryl Builders incurred P1,250,000 in construction costs related to the project. Because of
rising material and labor costs, the estimated cost to complete the contract at the end of 2012 is
P3,750,000. Jovi Company was billed for and paid 30% of the contract price in accordance with the
contract agreement. It is further agreed, that any costs incurred is expected to be recoverable.
Compute the amount of construction in progress (net)-due from customers or progress billings (net) -
due to customers using Percentage of Completion method:
a. P490,000 due from c. P290,000 due from
b. P290,000 due to d. 0
2. Compute the amount of construction in progress (net)-due from customers or progress billings (net)-
due to customers using Zero Profit method:
a. 0 c. 490,000 due to
b. 290,000 due to d. 490,000 due from
3. On January 1, 20x1, Iza Co. was contracted by JD, Inc. under a fixed price contract for the construction of a
gymnasium. The contact price is P36M. Construction was started in 20x1 and was completed early in 20x3.
The following transactions occurred during the construction period.
20x1
a. Incurred total contract costs of P11,040,000.
b. Billed JD, Inc. for 50% of the contract price.
c. Collected 90% of the progress billing; 10% was retained by JD, Inc. to be reverted to Iza Co. upon
completion of the contract. The amount retained shall be used to rectify any unsatisfactory work to be
determined at the completion of the contract.
d. Estimated costs to complete as of December 31, 20x1 are P16,560,000.
20x2
a. Incurred total contract costs of P14,160,000.
b. Billed JD, Inc. for 30% of the contract price.
c. Collected 90% of the progress billings after a 10% retention by Iza.
d. Estimated costs to complete as of December 31, 20x2 are P2,800,000.
20x3
a. Incurred total contract costs of P2,000,000
b. Billed JD for the remaining 20% of the contract price. All receivables from JD were collected.
c. The construction contract was completed and ownership over the completed gymnasium was transferred to
JD.
Using the percentage of completion method, how much is the gross profit in 20x1?
a. 3,600,000 c. 3,360,000
b. 3,840,000 d. 4,020,000
4. How much are the total collections on 20x1, 20x2 and 20x3, respectively?
a. 16,200,000; 10,080,000; 9,720,000 c. 18,000,000; 7,200,000; 10,800,000
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b. 18,000,000; 10,800,000; 7,200,000 d. 16,200,000; 9,720,000; 10,080,000
5. Assuming that the outcome of the project cannot be estimated reliably, how much is the contract revenue for
20x2?
a. 0 c. 14,160,000
b. 25,200,000 d. 18,000,000
6. Under the percentage of completion method contract revenue for the period is computed
a. by multiplying the percentage of completion to the contract price
b. by dividing the contract price by the percentage of completion and deducting revenues
already recognized in the prior periods
c. by multiplying the percentage of completion to the contract price and deducting revenues
already recognized in the prior periods
d. by multiplying the percentage of completion to the contract price and adding revenues
already recognized in the prior periods
7. On September 30,2012, Mica Co. was awarded the contract to build a 1,000-room hotel for P240
million. Among others, the parties agreed to the following:
* 20 % mobilization fee (deductible from final billing) payable within ten days from the signing of the
contract.
* Retention of 20% on all billings (to be paid with the final billing, upon completion and acceptance of
the project).
*Progress billings are to be paid within 2 weeks upon acceptance.
By the end of 2012, the company had presented one progress billing, corresponding to 20% completion,
which was evaluated and accepted by the client on December 29, 2012 for payment in January next
year. In 2012, assuming use of the percentage of completion method of accounting, Mica Co. received
cash a total fee
a. 4,800,000 c. 48,000,000
b. 23,760,000 d. 52,800,000
9. In its December 31, 2013 balance sheet, Lawrence Builders would report :
a. The current asset, cost and profits in excess of billings (gross amount due from
customers), P190,000.
b. The current liability, billings in excess of cost (gross amount due to customers),
P110,000.
c. The current asset, contract amount in excess of billings, of P690,000.
d. The current assets, deferred profit of P130,000.
10. In its December 31, 2014 balance sheet, Lawrence Builders would report in relation to the Construction
in Progress and Construct Billings Account:
a. The current asset, P2,000,000
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b. The current liability , P2,000,000
c. The Construction-In-Progress Account of P2,000,000 and Contract Billings of
P1,570,000.
d. None
11. In its December 31, 2012 income statement, the recognize revenue would be:
a. 0 c. 560,000
b. 160,000 d. 640,000
12. On April 1, 2012, VDC Construction Company entered into a fixed cotract to construct a Mini-Dam for
P12,000,000. VDC Construction appropriately accounts this contract under the percentage of
completion method. Information relating to the contract is as follows:
2012 2013
Percentage of completion 20% 60%
Estimated total costs at completion P9,000,000 P9,600,000
Gross profit earned to date 600,000 1,440,000
What is the amount of contract costs incurred during the year ended December 31, 2012?
a. 1,800,000 c. 3,960,000
b. 2,400,000 d. 5,760,000
13. What is the amount of contract costs incurred during the year ended December 31, 2013?
a. 2,400,000 c. 3,960,000
b. 3,840,000 d. 5,760,000
14. Each of Pizza Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of P30,000. By
December 31, 2011, each franchisee had paid a non-refundable P10,000 fee and signed a note to pay P10,000
principal plus the market rate of interest on December 31, 2012, and December 31, 2013. Experience
indicates that one franchise will default on the additional payments. Services for the initial fee will be
performed in 2011. What amount of net unearned franchise fees would Pizza report on December 31, 2011?
a. 400,000 c. 610,000
b. 600,000 d. 630,000
15. Lovely Construction Co. was engaged on October 1, 2011 to construct a building for a contract price of
P8,400,000 payable in 5 installments. One-fifth of the contract price was to be paid upon completion of each
quarter of the work (as defined in detail by the terms of the contract), the final payment being due within 10
days after acceptance of the completed project.
By December 29, 2011, 3/4 of the building had been completed whereupon the third billing was made in
accordance with the terms of the contract (cash had been received on the previous billings). During 2011, a
total of P4,200,000 had been disbursed by Lovely for costs incurred and, at year-end, outstanding accounts
payable for materials purchases totaled P1,000,000. Lovely expected that an additional P1,800,000 would be
required to complete the project.
Using percentage of completion method on output basis proportional method, the gross profit to be
recognized in the 2011 income statement would be:
a. 950,000 c. 1,050,000
b. 1,040,000 d. 1,100,000
16. Jenny Construction Co. has two projects for which it reported, as of December 31, 2012, the following
information:
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Using percentage of completion method of revenue recognition, gross profit on project A to be recognized in
2011 would be
a. 200,000 c. 400,000
b. 300,000 d. 900,000
17. A construction contract has a fixed price contract of P9,000. The initial amount of revenue agreed in the
contract is P9,000. The contractor’s initial estimate of contract costs is P8,000. It will take 3 years to build the
bridge.
By the end of year 1, the contractor’s estimate of contract costs has increased to P8,050.
In year 2, the customer approves a variation resulting in an increase in contract revenue of P200 and estimated
additional contract costs of P150. At the end of year 2, costs incurred include P100 for standard materials
stored at the site to be used in year 3 to complete the project.
The contractor determines the stage of completion of the contract by calculating the proportion that contract
costs incurred for work performed to date bear to the latest estimated total contract costs. A summary of the
financial data during the construction period is as follows:
Yr.1 Yr.2 Yr.3
Contract costs incurred to date 2,093 6,168 8,200
The amounts of revenue, expenses and profit recognized in the statement of comprehensive income in year 2
are:
a. 6,808; 6,068;740 c. 4,468; 3,975; 493
b. 2,340; 2,093; 247 d. 4.468; 6,768; 493
18. Zoe Corporation, sells a franchise for an initial fee of P700,000. A down payment of P200,000 is required,
with the balance covered by a P500,000, 10% note payable in five equal annual installments. If all the
material services have been performed and collectability of the notes is reasonably assured, but the refund
period has not yet expired, what journal entry is needed to record the transaction?
a. Cash 200,000
Notes Receivable 500,000
Franchise Fees 700,000
b. Cash 200,000
Notes Receivable 500,000
Unearned Franchise Fees 700,000
c. Cash 200,000
Notes Receivable 500,000
Franchise Fee 200,000
Unearned Franchise Fees 500,000
d. Cash 200,000
Notes Receivable 500,000
Franchise Fees 500,000
Unearned Franchise Fees 200,000
19. Lazy Builders has entered into a very profitable fixed price contract for constructing a high-rise building over
a period of three years. It incurs the following costs relating to the contract during the first year.
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a. 33% b. 28% c. 25% d. 39%
20. Dante Construction Company uses the percentage-of-completion method of accounting. During 2011, Dante
contracted to build an apartment house for Rizza for P10,000,000. Dante estimated that total costs would
amount to P8,000,000 over the period of construction. In connection with this contract, Dante incurred
P1,000,000 of construction costs during 2011. Dante billed and collected P1,500,000 from Rizza in 2011.
23. Which of the following may be used to compute for the contract revenue in a construction contract?
a. Contract price c. Escalation clauses
b. Change orders d. All of these
24. If the outcome of a construction contract cannot be estimated reliably, which method is used to account for the
construction contract?
a. Percentage of completion method c. Sales type method
b. Zero profit method d. a or b as an accounting policy choice
25. If the construction in progress account has a balance of P2,000,000 while the Progress Billings on
Contracts account’s balance is P1,600,000, how should these accounts be reflected on the balance
sheet?
a. Construction in Progress will be shown as a current asset.
b. Progress billings on contracts will be shown as a current liability.
c. The difference between the two accounts will be reflected as a current asset.
d. The difference between the two accounts will be reflected as a current liability.
26. Which of the following would be used in the calculation of the income recognized in the fourth and final
year of a contract accounted for by the percentage of completion method?
Actual Total costs Income previously recognized
a. YES YES
b. YES NO
c. NO YES
d. NO NO
27. Cherry, Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed
and the balance in five annual payments. The present value of the future payments, discounted at 10% is
P68,234. The franchisee has the option to purchase P15,000 of equipment for P12,000. Cherry has
substantially provided all initial services required and collectability of the payments is reasonably assured.
The amount of the revenue from the franchise fees is:
a. 25,000 c. 93,234
b. 90,234 d. 115,000
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28. Jolibi, Inc. enters into an agreement with Ronald’s Co., clothing the later with full authority to operate as its
franchisee for a period of ten years. An initial franchise fee of P275,000, among others, was stipulated in the
contract and was promptly paid during the year 2011.
Assuming that Jolibi was able to perform the initial services during 2011, what is the franchise revenue to be
recognized in its year-end income statement?
a. 0 c. 137,500
b. 27,500 d. 275,000
29. On September 30, 2011, Criselda’s, Inc., received from Ambo P550,000 representing franchise fee. Franchise
services were immediately started by Criselda’s and these were completed on October 31, 2011 at a cost
amounting to P330,000. The franchise fee revenue to be reported by Criselda’s in its October 31, 2011 income
statement is:
a. 0 b. 137,500 c. 220,000 d. 550,000
30. Saisaki Corporation grants a franchise to Mity for an initial franchise fee of P1,000,000. The agreement
provides that Saisaki has the option within one year to acquire franchisee’s business, and it seems certain that
Saisaki will exercise this option. On Saisaki’s books, how should the initial fee be recorded?
a. Deferred and treated as reduction in Saisaki’s investment when the option is exercised.
b. Realized revenue.
c. Extraordinary revenue.
d. Deferred revenue to be amortized.
31. On September 1, 2011, Cindy Company entered into franchise agreements with two franchisees. The
agreements required an initial fee payment of P700,000 plus four P300,000 payments due every four months,
the first payment due December 31, 2011.The market interest rate is 12%. The initial deposit is refundable
until substantial performance has been completed. The following table describes each agreement:
The present value and future value tables at 4% for four (4) periods were as follows:
What amount of net income is to be reported in 2011, assuming P1,000,000 was received from each
franchisee during the year?
Franchisee A Franchisee B
a. P1,088,970 P 0
b. 1,788,970 0
c. 1,132,529 0
d. 1,132,529 43,559
32. On January 2, 2011, RR Enterprises, Inc. authorized XX Company to operate as a franchisee over a twenty-
year period for an initial franchise fee of 60,000 received on signing the agreement. XX started operations on
June 30, 2011, by which date RR had performed all of the required initial services. In its income statement for
the six months ended June 30, 2011, what amount should RR report as revenue from franchise fees in
connection with XX franchise?
a. 0 b. 1,500 c. 30,000 d. 60,000
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III. The commercial viability of the business
a. I only c. I, II and III
b. I and II d. I and III
34. When collectability is reasonably assured, revenue from franchise fee is recognized
a. Under the accrual basis of accounting
b. As cash installments are received
c. evenly over the contract period
d. none of these
36. In the absence of evidence to the contrary, it shall be presumed that substantial performance by the franchisor
occurs when
a. The franchise fee is substantially collected.
b. The franchisee commences its operations.
c. Any uncollected franchise fee is probable of collection.
d. All of these.
37. If the franchise agreement provides for the sale of equipment, inventories or other tangible assets at a price
lower than that charged to others or a price that does not provide a reasonable profit on those sales,
a. A service liability is recognized at fair value.
b. A servicing asset is recognized at fair value.
c. Part of the initial fee, sufficient to cover costs in excess of the bargain purchase price and
provide a reasonable profit on the sale, is deferred and recognized over the period the
goods are likely to be sold to the franchisee.
d. a or b.
38. On January 1, 2011, Brownie Delight, Inc. entered into a franchise agreement with a company allowing the
company to do business under Brownie Delight’s name. Brownie Delight had performed substantially all
required services by January 1, 2011, and the franchisee paid the initial franchise fee of P70,000 in full on that
date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of P6,000
annually, at which 20% must be spent on advertising by Brownie Delight. What entry should Brownie Delight
make on January 1, 2011 to the record the receipt of the initial franchise fee and the continuing franchise fee
for 2011?
a. Cash 76,000
Franchise Fee Revenue 70,000
Revenue from Continuing Franchise Fee 6,000
b. Cash 76,000
Unearned Franchise Fees 76,000
c. Cash 76,000
Franchise Fee Revenue 70,000
Revenue from Continuing Franchise Fee 4,800
Unearned Franchise Fee 1,200
d. Prepaid Advertising 1,200
Cash 76,000
Franchise Fee Revenue 70,000
Revenue from Continuing Franchise Fee 6,000
Unearned Franchise Fee 1,200
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39. Nena’s Lechon, Inc. franchiser, entered into franchise agreement with Aling Nena, franchisee, On March 1,
2011. The total franchise fee is P500,000, of which P100,000 is payable upon signing and the balance in four
equal annual installments. The down payment is refundable in the event the franchiser fails to render services
and none thus far had been rendered. When Nena’s prepares its financial statements on March 31, 2011, the
franchise fee revenue to be reported is:
a. P 0 c. P 500,000
b. P 100,000 d. P 400,000
40. Ferragamo’s entered into a franchise agreement with Rusty. As per agreement on July 1, 2011, Rusty is to pay
Ferragamo an up-front franchise fee of P1,000,000 and subsequent annual franchise fees of P50,000 over the
next four years. Cost of initial franchise services rendered by Ferragamo’s during the year is P250,000 which
is substantial, and it estimates the cost of subsequent annual services to be P10,000. Rusty paid the annual
franchises fee for 2012, and Ferragamo’s rendered the services for the year. In its December 31, 2012 Income
Statement, the amount of realized franchise fee revenue to be reported by Ferragamo’s
a. P25,000 c. P250,000
b. P50,000 d. P300,000
Prepared by:
_____________________________
JOHN LYNDON D. RAYOS, CPA
Instructor
______________________________
JEFFREY P. FRANCO, CPA, MBA
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Dean, CAAT DepartmentAnswer Section
MULTIPLE CHOICE
1. ANS: B PTS: 1
2. ANS: C PTS: 1
3. ANS: A PTS: 1
4. ANS: A PTS: 1
5. ANS: C PTS: 1
6. ANS: B
Page 239 No. 59
PTS: 1
7. ANS: B
Page 240 No. 59
PTS: 1
8. ANS: D
Page 218 N. 6
PTS: 1
9. ANS: B
Page 220 No. 12
PTS: 1
10. ANS: C
245-68
PTS: 1
11. ANS: A PTS: 1
12. ANS: C PTS: 1
13. ANS: D PTS: 1
14. ANS: B PTS: 1
15. ANS: C PTS: 1
16. ANS: A PTS: 1
17. ANS: D PTS: 1
18. ANS: C PTS: 1
19. ANS: C PTS: 1
20. ANS: C PTS: 1
21. ANS: B PTS: 1
22. ANS: B PTS: 1
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23. ANS: D PTS: 1
24. ANS: C PTS: 1
25. ANS: A PTS: 1
26. ANS: C PTS: 1
27. ANS: B PTS: 1
28. ANS: C PTS: 1
29. ANS: A PTS: 1
30. ANS: C PTS: 1
31. ANS: C
nO. 35
PTS: 1
32. ANS: A PTS: 1
33. ANS: D
No 31
PTS: 1
34. ANS: B
No. 32
PTS: 1
35. ANS: B
No. 33
PTS: 1
36. c
37. a
38. a
39c
40. D
41. C
42. a
43. b
44. c
45. a
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