QUIZ

ACCOUNTING FOR SPECIAL TRANSACTIONS

Instructions: Choose the letter of your answer. Write your answers in a ¼ sheet of paper.

1. At contract inception, PFRS 15 requires an entity to determine how the performance obligations
identified in the contract will be satisfied. According to PFRS 15, how does an entity satisfy a
performance obligation in a long-term construction contract?
a. over time
b. at a point in time
c. any time
d. either a or b

2. Which of the following statements is correct?

a. Long-term construction contracts are unique from other contracts with customers. Therefore,
PFRS 15 excludes from its scope the accounting for long-term construction contracts.
b. Long-term construction contracts are unique from other contracts with customers. Therefore,
PFRS 15 requires an entity to recognize revenue from long-term construction contracts using
either the percentage of completion method or the zero-profit method.
c. PFRS 15 does not provide a special distinction between long-term construction contracts from
other types of contracts with customers. Therefore, an entity shall apply the same principles
in accounting for long-term construction contracts as those applied to other types of contracts
with customers.
d. PFRS 15 does not exclude long-term construction contracts from its scope. However, because
of the unique nature of long-term construction contracts, PFRS 15 requires an entity to
recognize revenue from a long-term construction contract that is expected to be completed
within 3 years or more using the percentage of completion method. For those that are expected
to be completed within a shorter period, revenue shall be recognized when construction is
complete.

Use the following information for the next two questions:

PARAMOUR Co. was contracted by LOVER, Inc. for the construction of a flyover in 20x1. The contract
price is ₱10M. Information on costs is as follows:
20x1 20x2
Total costs incurred to date 1,600,000 6,000,000
Estimated costs to complete 6,400,000 1,500,000

3. How much revenue is recognized in 20x2?

a. 8M
b. 6M
c. 4M
d. 0

4. What is the percentage of the progress completed in 20x2?

a. 80%
 b. 60%
c. 40%
d. 16%

5. VALEDICTION Construction Co. entered into a ₱80M fixed price contract for the construction of
a private road for FAREWELL SPEECH, Inc. The performance obligation on the contract is
satisfied over time. VALEDICTION measures its progress on the contract using the “cost-to-cost”
method. The estimated total contract cost is ₱40M. The following were the actual costs incurred
by VALEDICTION during the first year of the construction:

Costs of negotiating the contract (charged immediately as expense) 400,000

Costs of materials used in construction 12,000,000
Costs of materials purchased but not yet used in construction 2,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Depreciation of idle construction equipment 240,000
Costs of moving plant, equipment and materials to and from the contract site 160,000
Costs of hiring plant and equipment 560,000
Advance payments to subcontractors (subcontracted work is not yet started) 80,000

What is the percentage of completion of the contract as of the end of the first year?
a. 42%
b. 45%
c. 46%
d. 50%

6. On Oct. 1, 20x1, ABC Co. enters into a construction contract with a customer. The performance
obligation in the contract will be satisfied over time. ABC Co. uses the “cost-to-cost” method in
measuring its progress. The estimated total contract cost is ₱10M. In 20x1, ABC Co. incurred a
total cost of ₱6M, which includes ₱2M advance payment to a subcontractor (the subcontracted
work is not yet started) and ₱200,000 cost of materials not yet installed. ABC Co. does not regard
the cost of the unused materials as significant in relation to the expected total contract costs.
Moreover, ABC Co. retains control over the unused materials because it can use them in a contract
with another customer. The contract price is ₱20M. How much is the revenue recognized in 20x1?
a. 7,600,000
b. 12,000,000
c. 8,200,000
d. 11,600,000

7. On January 1, 20x1, ABC Co. enters into a contract with a customer for the construction of a
building. The contract price is ₱1,000,000. The following are the transactions during 20x1:
• At contract inception, the customer makes an advance payment of ₱100,000 as facilitation fee.
• ABC Co. incurs total contract costs of ₱300,000 during the period.
• The estimated costs to complete as of year-end amounts to ₱500,000.
 • ABC Co. collects the billing, net of 10% retention by the customer to be used to rectify any
unsatisfactory work determined at the completion of the contract.

How much is the gross profit earned from the contract in 20x1?
a. 75,000
b. 82,000
c. 375,000
d. 482,000

Use the following information for the next three questions:

In 20x1, ABC Co. enters into a construction contract with a customer. The contract price is ₱10,000,000.
Information on the contract follows:
20x1 20x2 20x3
Costs incurred to date 2,400,000 4,500,000 6,000,000
Estimated costs to complete 3,600,000 1,500,000 -

8. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation that is satisfied over time. ABC Co. determines that the
measure of progress that best depicts its performance on the contract is “cost-to-cost” method.
How much is the revenue recognized in 20x1?
a. 4,200,000
b. 4,000,000
c. 2,800,000
d. 0

9. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation that is satisfied over time. However, ABC Co.
determines that the outcome of the performance obligation cannot be reasonably measured but
expects to recover the contract costs incurred. How much is the gross profit recognized in 20x3?
a. 5,500,000
b. 1,500,000
c. 4,000,000
d. 0

10. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation. In its determination of the satisfaction of the
performance obligation, ABC Co. identifies that, during the construction period, ABC Co. retains
control over the asset created in the contract. This precludes the customer from simultaneously
receiving and consuming the benefits provided by ABC Co.’s performance as ABC Co. performs.
Moreover, the asset created in the contract has an alternative use to ABC Co. because, in case the
contract is cancelled, ABC Co. retains ownership over any asset created and can direct that asset
for another use without significant modification or cost. Accordingly, ABC Co. concludes that the
performance obligation is satisfied at a point in time. ABC Co. determines the point in time when
the performance obligation is satisfied using the principles in PFRS 15 and concludes that the
 performance obligation is satisfied only when the construction is completed and the control over
the promised good is transferred to the customer. How much is the revenue recognized in 20x1?
a. 4,200,000
b. 4,000,000
c. 2,400,000
d. 0

11. You are an accountant. Your client, a franchisor, asked you for an advice regarding the recognition
of revenue from a franchise contract. Your advice to your client would most certainly be based on
which of the following standards?
a. FAS No. 45 (US GAAP)
b. PFRS 15
c. PAS 15
d. PFRS 18

12. If the promise to grant a license is distinct and that the license provides the customer the “right to
access” the entity’s intellectual property, how is revenue recognized from the initial fee in the
contract?
a. in full upon the signing of the contract
b. in full when the customer obtains and starts using the license
c. in full when the initial services to setup the contract are substantially performed
d. deferred and amortized over the license period

Use the following information for the next two questions:

On Jan. 1, 20x1, Pane Co. entered into a franchise agreement with Hero Co. The franchise contract
gives Hero Co. the right to use Pane’s trademark and proprietary processes for a period of 4 years.
The franchise requires payment of an upfront fee of ₱1,000,000, payable at contract inception, and 5%
monthly royalty based on sales. Aside from the granting of the license, the franchise agreement also
requires Pane Co. to undertake pre-opening activities to setup the contract and post-commencement
activities, such as research and development and marketing campaigns, to support the intellectual
property. Although the activities do not result in the direct transfer of a good or service to Hero Co.
as the activities occur, it is expected that Hero Co. will benefit from them. All the necessary
preparations were completed and Hero Co. started business operations on January 31, 20x1.

13. How should Pane Co. recognize revenue from the initial franchise fee?
a. in full on January 1, 20x1
b. in full on January 31, 20x1
c. deferred and amortized over 4 years starting Jan. 1, 20x1
d. deferred and amortized over 4 years starting Jan. 31, 20x1

14. How should Pane Co. recognize revenue from the continuing franchise fee?
a. Pane Co. shall estimate the variable consideration and amortize it as revenue in full on Jan. 1,
20x1.
b. Pane Co. shall estimate the variable consideration and amortize it as revenue over the license
period.
 c. Pane Co. shall estimate the variable consideration, discount it to present value, subject it to
“Constraining estimates of variable consideration,” and amortize it to revenue over the license
period.
d. Pane Co. shall recognize revenue equal to 5% of the franchisee’s sales as the sales occur.

15. On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a
fixed fee of ₱100,000 payable as follows:
• 20% payable upon signing of contract.
• 80% due in four equal annual installments starting December 31, 20x2. The appropriate
discount rate is 12%.

The license provides Customer X rights over Entity A’s patented processes. Customer X continues to
operate using its trade name and has the discretion of developing a new product name for the
products it will produce using the patented processes. The license does not explicitly require Entity A
to undertake activities that will significantly affect the intellectual property to which Customer X has
rights. Neither does Customer X expect that Entity A will undertake such activities. Entity A grants
the license to Customer X on December 31, 20x1. How much revenue from the franchise contract will
Entity A recognize in 20x1?
a. 80,747
b. 21,187
c. 20,000
d. 0

16. On October 20, 20x1, Grimm Co. consigned 40 freezers to Holden Co. for sale at ₱1,000 each and
paid ₱800 in transportation costs. On December 30, 20x1, Holden reported the sale of 10 freezers
and remitted ₱8,500. The remittance was net of the agreed 15% commission. What amount should
Grimm recognize as sales revenue for 20x1?
a. 7,700
b. 8,500
c. 9,800
d. 10,000

17. On January 1, 20x1, DEF Co. paid ₱5,000 for the freight insurance of consigned goods shipped to
a consignee, and ₱7,000 for the freight. In addition, DEF Co. advanced ₱5,000 as part of the
commission that will be due when the consignee sells the goods. The consigned goods costs DEF
₱50,000 and will be sold for a total amount of ₱80,000. What is the total amount of inventory should
DEF report for the consigned goods?
a. 50,000
b. 62,000
c. 67,000
d. 97,000

18. Stone Co. had the following consignment transactions during December 20x1:
Inventory shipped on consignment to Beta Co. 18,000
Freight paid by Stone 900
Inventory received on consignment from Alpha Co. 12,000
 Freight paid by Alpha 500

No sales of consigned goods were made through December 31, 20x1. Stone’s December 31, 20x1
balance sheet should include consigned inventory at
a. 12,000
b. 12,500
c. 18,000
d. 18,900

Use the following information for the next two questions:

CR Manufacturing Co. consigned to CE Trading Corp. twelve (12) Sony colored TV sets which cost
₱9,000 each. Freight out was paid by the consignor in the amount of ₱600. CE Trading sold eight (8)
sets, rendered an account sales, and remitted the amount of ₱82,600 after deducting the following
from the selling price of the sets sold:

Commission on selling price 12%

Selling expenses 1,200
Cost of antennae given free 1,400
Delivery and installation 2,800

19. The total selling price of the eight (8) sets sold by CE Trading Corp. is
a. 100,000
b. 88,000
c. 98,560
d. 78,571.43

20. The net profit of CR Manufacturing Co. on the eight (8) sets sold by CE Trading Corp. is:
a. 40
b. 9,332.80
c. 10,200
d. 10,600

Use the following information for the next two questions:

Stainless Works Mfg. Co. consigned 5 dozens of stainless chairs to Urban Furniture Co. on April 1,
20x1. Each chair cost ₱120 and the consignor paid ₱600 for the shipment to the consignee. On August
15, 20x1, 36 were already sold and the consignee rendered an account sales, and remitted the balance
due the consignor in the amount of ₱5,580 after deducting the following:

Commission at 15% of the selling price

Selling expenses ₱360
Delivery and installation 180

21. How much is Stainless Works Mfg. Co.’s profit on the consignment?
a. 660
b. 900
c. 1,000
 d. 1,260

22. The cost of the inventory on consignment in the hands of Urban Furniture Co. is
a. 2,880
b. 3,120
c. 3,480
d. 4,320

Use the following for the next two questions:

On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 pieces of bread toasters.
Pete was to sell these on consignment at 50% above original cost, for a 15% commission on the selling
price. After selling 200 pieces, Pete had the remaining unsold units repaired for some electrical defects
for which he spent ₱2,000. Marion subsequently increased the selling price of the remaining units to
₱330 per unit. On January 31, 20x1, Pete remitted ₱64,980 to Marion after deducting the 15%
commission, ₱850 for delivery expenses of sold units, and ₱2,000 for the repair of 100 units. The
consigned goods cost Marion Trading ₱200 per unit, and ₱900 had been paid to ship them to Pete
Electrical Shop. All expenses in connection with the consignment were reimbursable to the consignee.

23. The consignment profit on the units sold was

a. 12,200
b. 12,880
c. 13,000
d. None of these

24. The value of inventory on consignment was

a. 8,120
b. 8,800
c. 8,920
d. None of these

25. In September 20x1, DEF Co. consigned 3,200 books costing ₱60 and retailing for ₱100 each to GHI
Co., debiting Accounts Receivable and crediting Sales for the retail sales price. Freight cost of
₱3,200 was debited to Freight Expenses by the consignor. On September 30, 20x1, DEF Co. received
from GHI Co. the amount of ₱142,020 in full settlement of the balance due, and Accounts
Receivable was credited for this amount. The consignor deducted a commission of ₱20 for each
book sold, a total of ₱180 for delivery expenses and a total of ₱200 for advertising expense. How
many books were actually sold by GHI. Co.?
a. 1,424
b. 1,780
c. 2,064
d. 3,200

26. Leaf Co. began operations on January 1, 20x1. Leaf uses the “installment sales method” of
accounting. Data for 20x1 are as follows:
 Installment accounts receivable, Dec. 31, 20x1 500,000
Installment sales 900,000
Cost ratio 60%

How much is the realized gross profit in 20x1?

a. 148,000
b. 152,000
c. 160,000
d. 162,000

27. BUCOLIC RURAL Co. uses the “installment sales method.” Information on BUCOLIC’s
transactions during 20x1 and 20x2 is shown below:
20x1 20x2
Installment sales 2,000,000 2,400,000
Cost of sales 1,200,000 1,320,000
Gross profit 800,000 1,080,000
Cash collections from:
20x1 sales 800,000 400,000
20x2 sales 960,000

How much is the total realized gross profit in 20x2?

a. 160,000
b. 432,000
c. 592,000
d. 642,000

28. Banana Co. began operations on January 2, 20x1. Banana uses the “installment sales method” of
accounting. Banana’s records on December 31, 20x1 show the following information:

Installment accounts receivable, Dec. 31, 20x1 800,000

Deferred gross profit, before year-end adjustment 560,000
Gross profit on sales 40%

How much is the realized gross profit in 20x1?

a. 240,000
b. 248,000
c. 256,000
d. 260,000

Use the following information for the next three questions:

Bell Co. uses the “installment sales method.” In 20x1, Bell Co. sells an inventory costing ₱450,000 for
an installment sale price of ₱600,000. Bell makes the following collections:
20x1 ₱400,000
20x2 ₱150,000
20x3 ₱ 50,000
29. How much are the realized gross profits in 20x1, 20x2 and 20x3, respectively?
20x1 20x2 20x3
a. 89,000 29,200 8,600
b. 92,000 37,500 10,500
c. 100,000 26,800 12,500
d. 100,000 37,500 12,500

30. How much are the balances of installment accounts receivable at the end of 20x1, 20x2 and 20x3,
respectively?
20x1 20x2 20x3
a. 200,000 42,000 10,000
b. 200,000 50,000 0
c. 180,000 50,000 10,000
d. 180,000 30,000 0

31. How much is the deferred gross profit at the end of 20x1, 20x2 and 20x3, respectively?
20x1 20x2 20x3
a. 48,000 12,500 6,000
b. 50,000 10,000 0
c. 40,000 10,000 2,000
d. 50,000 12,500 0

32. Garden Co. uses the installment sales method. Garden Co. sells a good costing ₱10,000 for an
installment sale price of ₱16,000. Garden Co. accepts old merchandise as down payment and gives
the customer a trade-in value of ₱4,000 for this merchandise. The fair value of the old merchandise
is ₱4,000. Subsequent cash collections during the period amount to ₱6,000. How much is the
realized gross profit recognized in the year of sale?
a. 3,750
b. 5,966
c. 6,333
d. 6,667

33. ABASE HUMILIATE Co. is currently preparing its combined financial statements for the year
ended December 31, 20x1. As of this date, the “Investment in branch” account has a balance of
₱380,000 while the “Home office” account has a balance of ₱528,000. The following information has
been gathered:
(a) The home office allocated unpaid utilities expenses amounting to ₱40,000 to the branch which the
branch did not record in full. Instead, the branch sent a wrong adjusting memo to the home office
reducing the charge by ₱10,000 and setting up a liability for the remaining amount.
(b) The home office erroneously credited the branch for a return of shipment of merchandise worth
₱100,000. The branch did not make any return of merchandise.
(c) The branch mistakenly received a copy of the home office correcting entry for item (b) above dated
January 3, 20x2 and entered a credit in favor of the home office on December 31, 20x1.
(d) The branch mistakenly sent the home office a debit memo amounting to ₱12,000 for an apparent
remittance of collections which did not happen. The home office did not record the debit memo.

How much is the net adjustment to the “Investment in branch” account? increase (decrease)
a. 100,000
b. 48,000
c. (48,000)
d. (52,000)

Use the following information for the next eleven questions:

The following information was taken from the records of a branch:
Sales by branch 2,800,000
Beginning inventory -
Billings to branch by home office 2,500,000
Operating expenses 400,000
Ending inventory at billed price 1,000,000

The following information was taken from the records of the home office:
Branch current account 2,600,000
Shipments to branch 2,000,000
Allowance for markup - Unadjusted 500,000

34. What is the billing rate based on cost?

a. 20%
b. 25%
c. 120%
d. 125%

35. What is markup percentage based on cost?

a. 20%
b. 25%
c. 120%
d. 125%

36. How much is the sales of branch to be included in the combined financial statements?
a. 2,800,000
b. 2,240,000
c. 2,333,333
d. 0

37. How much is the realized markup of the branch?

a. 300,000
b. 240,000
c. 380,000
d. 270,000
38. How much is the cost of goods sold of the branch to be included in the combined financial
statements?
a. 1,500,000
b. 1,800,000
c. 1,200,000
d. 900,000

39. How much is the ending inventory of the branch to be included in the combined financial
statements?
a. 1,000,000
b. 8333,333
c. 1,250,000
d. 800,000

40. How much is the unrealized markup in ending inventory?

a. 200,000
b. 166,667
c. 230,000
d. 266,667

41. How much is the ending balance of the “allowance for markup” account before combining the
financial statements?
a. 200,000
b. 166,667
c. 230,000
d. 266,667

42. How much is the individual profit of the branch?

a. 880,000
b. 900,000
c. 920,000
d. 1,020,000

43. How much is the true profit of the branch?

a. 1,200,000
b. 1,400,000
c. 1,250,000
d. 1,266,667

44. How much is the adjusted balance of the branch current account immediately prior to combining
the financial statements?
a. 3,800,000
b. 3,400,000
c. 3,500,000
 d. 3,666,667

45. The home office transfers inventory worth ₱600,000 to Branch #1. Freight paid by the home office
is ₱40,000. Later on, the home office instructs Branch #1 to transfer the merchandise to Branch #2.
Branch #1 pays freight of ₱12,000. If the merchandise had been shipped directly from the home
office to Branch #2, the freight cost would have been ₱56,000. The entries to record the transactions
described includes
a. a credit to savings on freight of ₱4,000 in the books of Branch #1.
b. a credit to savings on freight of ₱4,000 in the books of Branch #2.
c. a credit to savings on freight of ₱4,000 in the books of the home office.
d. none of these

46. Which of the following is a characteristic of an insurance contract?

a. transfer of insignificant insurance risk from the policyholder to the issuer
b. the policyholder pays the issuer in exchange for the transfer of financial risk
c. the issuer indemnifies the policyholder for losses when the insured event occurs
d. transfer of significant insurance risk from the issuer to the policyholder

Use the following information for the next two questions:

Mr. X obtains life insurance from Entity A (an insurance company). Entity A cedes 40% of the
insurance risk in the insurance contract with Mr. X to Entity B, another insurance company.

47. The contract between Entity A and Entity B is a

a. direct insurance contract.
b. indirect insurance contract.
c. reinsurance contract.
d. retrocession.

48. The 40% insurance risk transferred to Entity B is called the

a. cession.
b. retention limit.
c. net retention.
d. session road.

49. The legal principle that precludes you from obtaining fire insurance on your neighbor’s house
with you as the beneficiary is
a. Principle of Proximate Cause.
b. Principle of Utmost Good Faith.
c. Principle of Insurable Interest.
d. Principle of Subrogation.

50. Which of the following is not one of the groupings of insurance contracts under PFRS 17?
a. those that are onerous at initial recognition
b. those that, at initial recognition, have no significant possibility of becoming onerous in
subsequent periods
 c. those that are not onerous at initial recognition but can become onerous in subsequent periods
d. those that pay premiums at initial recognition which are to be measured using the simplified
approach

51. According to PFRS 17, insurance service result is recognized in

a. profit or loss.
b. other comprehensive income.
c. a or b
d. partly a and partly b

Use the following information for the next two questions:

Entity A obtains life insurance for its key employee from Entity B (an insurance company). Entity B
cedes the insurance contract with Entity A to Entity C, another insurance company.

52. The contract between Entity A and Entity B is

a. direct insurance contract
b. indirect insurance contract
c. reinsurance contract
d. retrocession

53. How should Entity B account for the insurance contract with Entity C?
a. using the general model
b. using the premium allocation approach
c. using the modified version of the general model applicable for onerous insurance contracts
d. using a modified version of (a) or (b) applicable to reinsurance contracts held

54. Under the general model of PFRS 17, a group of insurance contracts is initially measured at
a. the fulfillment cash flows.
b. the contractual service margin.
c. a or b, as an accounting policy choice
d. sum of a and b

55. According to PFRS 17, insurance finance income or expenses are

a. recognized in profit or loss.
b. disaggregated into amounts recognized in profit or loss and in other comprehensive income.
c. a or b
d. recognized directly in equity.

Use the following information for the next six questions:

Rainy August Afternoon Co. (RAA) enters into a service concession arrangement whereby RAA
undertakes to build a public infrastructure, operate that infrastructure over a specified period, and
thereafter transfer it to the government (the grantor). In addition, RAA is obligated to recondition the
infrastructure a year before it is handed over to the government. This is regardless of the
infrastructure’s condition and level of usage. In return, the government promises to pay RAA a fixed
amount of cash plus interest in each year during the operation period.

56. What standard should RAA apply in recognizing and measuring the revenue from the contract?
a. IFRIC 15
b. PFRS 12
c. PFRS 9
d. PFRS 15

57. How many performance obligations are there in the contract?

a. one
b. two
c. three
d. four

58. The revenue recognized in Year 3 is equal to

a. the collection during that year.
b. the fair value of the consideration received in that year.
c. the transaction price allocated to the performance obligation(s) satisfied during that year.
d. This is preposterous! How can I know? There are no monetary amounts given in the problem.

59. How should RAA account for the resurfacing services in the contract?
a. as a separate performance obligation that is accounted for under PFRS 15
b. as a provision that is accounted for under PAS 37
c. partly a and partly b
d. not accounted for

60. During the construction period, RAA recognizes an asset that is reported in the financial
statements as
a. contract asset.
b. receivable (a financial asset).
c. intangible asset.
d. property, plant and equipment.