ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART 1

On June 1 ,2012, Gilas Company obtained a contract to construct a building. The building was estimated to
be built at a total of P 2,625,000 and is scheduled for completion on December 1, 2014. The construction
contains a penalty clause to the effect that other party was to deduct P8,750 from the contract price each
week of delay. Completion was delayed for 3 weeks. Below are the data pertaining to the construction
period. In 2013, there was an increase in the contract price in the amount of P100,000 per cost escalation
clause. Gilas Company uses percentage of completion method.
2012
2013
2014
Cost incurred each year
P
262,500
P
966,000
P 162,750
Estimated cost to complete
1,050,000
136,500
---Billings to customers each year
210,000
2,283,750
630,000
On the same date, Gilas Company established an agency in PUP, sending samples costing P2,100,000
which are useful until May 31, 2013 and have a salvage value of 20% of cost. A working fund of
P1,706,250 is to be maintained using the imprest basis. During 2012, the agency submitted to the home
office sales order amounting to P17,718,750. Sales per invoice were P13,781,250, which were duly
approved by the home office. Collections during the year amounted to P7,392,000 net of 4% sales discount.
The cost of merchandise sold during 2012 is equal to 70% of the gross selling price. Vouchers for expenses
amounted to P918,750.
1. How much net income would be reported by the Gilas Company on December 31, 2012?
a. P2,498,125
b. P2,579,625
c. P2,275,125
d. P2,190,125
2. How much is the excess of construction in progress over progress billings or progress billings over
construction in progress in 2012?
a. P400,000 due from customers
c. P315,000 due to customers
b. P315,000 due from customers
d. P355,000 due to customers
Super Moon Inc. Will sell a franchise to any franchise under the following agreement:
(a) A P2,500,000 initial franchise fee is to be made by the franchise upon signing of the franchise
contract.
(b) The contract states that the franchisor will provide personnel for the opening of the franchise and
for a period of 6 months thereafter, during which time they agree to train local personnel for
takeover at the end of the period. The cost to the franchisor of this program is estimated to be
P700,000.
(c) Continuing franchise fee are to be 2% of the gross sales per year, while estimated continuing costs
are P200,000 per year for the first 3 years and P100,000 per year for the remaining 7 years of the
contract. The yearly sales are to be P11,000,000 for the first 5 years P7,500,000 for the next 3
years, and P4,500,000 for the remaining 2 years. The break-even point for an operation like this is
approximately P4,000,000 of sales per year.
Generally, the companys experience indicates that the continuing costs represent 80% of their fair
market value. The market rate of interest for operations of this kind is currently 10%.
3. How much should be deferred in the initial franchise fee as deficiency in continuing franchise fee?
a. P90,000
b. P160,000
c. P125,000
d. P105,000
4. What is the amount of initial franchise fee after deducting deficiency in continuing franchise fee?
a. P2,410,000
b. P2,340,000
c. P2,375,000
d. P2,395,000
GCs Corporation maintains a branch in Czechoslovakia. Selected account balances taken from the books of

ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART 1

GCs and its Czechoslovakia branch as of December 31, 2011 are as follows:
Home Office
Branch
Merchandise Inventory, 1/1/11
P 12,000.00
P 18,000.00
Purchases
150,000.00
30,000.00
Freight-in
8,437.50
Shipments from Home Office
?
Shipments to branch (at cost), excluding in-transit
75,000.00
Sales
515,000.00
376,500.00
Merchandise Inventory, 12/31/11:
(excluding freight-in from shipments)
14,000.00
17,850.00
Expenses
23,750.00
34,950.50
P 4,350 of the branchs ending inventory came from purchases/supplies other than the Home Office. A
home office ships inventory to its branch at a mark-up of 125% above cost. As of December 31, 2011, a
shipment with a billing price of P22,500 was in transit to the branch. Freight cost, typically 5% of the
billing price, is inventoriable.
5. As far as the Home Office is concerned, the net income of the branch must be:
a. P102,577
b. P134,887
c. P168,467
d.

None of these

Home Office bills its branch for the merchandise shipments at 30% above cost. The following are some of
the account balances in the books of home office and its branch as of December 31, 2014:
Home Office
Branch
Inventory, January 1
P 5,000
P 14,500
Shipments from Home Office
37,700
Purchases
225,000
50,000
Shipments to Branch
36,250
Branch Inventory Allowance
13,125
Sales
300,000
180,000
Operating Expenses
72,500
27,500
Per physical count, the ending inventory of the branch is P10,500 including goods from outside purchases
of P6,925; the ending inventory of the home office is P30,000.
6. What is the combined net income for the year?
a. P136,850
b. P134,675

c.

P135,771

d.

P124,550

The Easy-han Mo Lang Company, a construction company, has a 31 December year-end. It is to build a
factory for a client and has schedules its works as follows:
20 March 2012
Contract to be awarded and signed
25 April 2012
Construction work to commence
27 November 2012
Principal construction work to be completed
30 December 2012
Final completion of contract
7. In accordance with PAS 11, Construction Contracts, the maximum expected period over which the cost
attributable to the contract should accumulate is
a. 20 March 2012 to 30 December 2012
c. 25 April 2012 to 27 November 2012
b. 25 April 2012 to 27 November 2012
d. 20 March 2012 to 27 November 2012

ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART 1

Latax Corporation opened a sales agency in Calamba, Laguna. The following is a summary of the
transactions of the sales agency:
List price
P1,368,000
Volume discount
10% and 10%
Freight on shipment of agency
28,000
Collections, net of 7.5% discount
999,000
Selling expenses paid from the agency revolving fund
68,000
Administrative expenses allocated to agency
8% of net sales
Samples shipped to agency:
Cost
Inventory, end

96,000
63,700

Remaining receivables are 95% collectible. The company's gross profit rate based on invoice price is 35%
excluding the freight cost on shipments to agency.
8. What is the net income of the agency for 2013?
a. P83,056
b. P90,140

c.

P91,336

d.

P94,958

On June 1, 2013, Conti Inc. entered into a franchise agreement with Dummy Co. to sell their products. The
agreement provides for an initial franchise fee of P3M which is payable as follows: P1M cash to be paid
upon the signing the contract, and the balance in 4 equal annual installments every December 1, starting in
2013 as evidenced by a non-interest bearing note for the said balanced signed by Conti Inc. Prevailing
market rate is 10% on June 1, 2013. The agreement further provides that Conti Inc. must pay a continuing
franchise fee equal 5% to its monthly gross sales. Dummy Company incurred direct cost of P930,564 and
indirect cost of P167,400. Conti Inc. started operations on July 1, 2013 and was able to generate sales of
P1,240,000. The first installment payment was made in due date.
9. Assuming collectability of the note not reasonably assured, how much is the net income of the
franchisor for the year ended December 31, 2013? (Round off PV factors to 4 decimal places and GP% to
whole %)
a. P883,128
b. P892,829
c. P898,657
d. P887,884
On 12/31/2013, Empanada Company authorized P-Nya Company to operate as a franchise for an initial
franchise fee of P3.40 million(M). Upon signing the contract, P0.90M was received and the balance is paid
by a note, due in 5 equal annual installments inclusive of interest, beginning 12/31/2014. The prevailing
market rate is 12%. The down payment is nonrefundable and it represents a fair measure of the services
already performed by Empanadas and substantial future services are still required.
10. How much is the total deferred revenue to be recognized as of 12/31/2013?
a. P1,518,667
b. P1,802,390
c. P2,500,000

d.

P2,702,390

On June 1, 2013, Janet Construction Corp. Contracted to build an office building for Napoles Inc.
Estimated total contract costs id P180,000,000. It incurs the following costs relating to the contract during
the first year:
Cost of direct materials used
P 25,000,000.00
Site labor cost
20,000,000.00

ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART 1

Cost of indirect materials used

Half year depreciation of plant & equipment used on the contract
Payroll of design & technical department allocated to the contract
Insurance costs allocable to the contract
Depreciation of idle equipment that is not used on a particular contract
Marketing costs for selling apartments when they are ready
Agreed administrative costs per contract to be reimbursed by the customer
Borrowing cost incurred during the construction period

5,000,000,00
4,285,714.29
2,500,585.55
1,499,414.45
500,000.00
10,000,000.00
4,555,500.00
1,444,500.00

11. Using cost-to-cost method of PAS 11 in determining the stage of completion, the percentage of
completion of this contract at year end is:
a. 30.80%
b. 32.94%
c. 33.33%
d. 36.11%
The following pertains to Forehead Inc. Home office and its branch:
Home Office
Inventory, January 1- From outside purchases
P 480,000
Inventory, January 1- From Home office, at 110% of cost
Purchases from outsiders
1,200,000
Shipments to Branch
360,000
Shipments from Home Office
Inventory, December 31- From outside purchases
300,000
Inventory, December 31- From Home office, at 110% of cost
12. What is the combined cost of sales for the year?
a. P532,000
b. P1,020,000

c.

P1,552,000

Branch
P 32,000
132,000
320,000
372,000
160,000
130,000
d.

P2,048,000

D, E and F formed a joint venture to sell personalized shirts during the campaign period. Their transaction
during the 2-month period are summarized below in the books of F being the manager is used by the joint
venture.
January
12 Investment of merchandise by D
P595,000
14 Investment of cash by E
225,000
17 Investment of cash by F
150,000
19 Investment of merchandise by E
490,000
20 Freight-in
45,000
20 Cash sales
1,425,000
21 Cash sales
390,000
29 Withdrawal of merchandise by E
90,000
February
5
Purchases
245,000
10 Withdrawal of cash by D
80,000
21 Selling expenses
35,000
28 Unsold merchandise charged to D
50,000
13. The contractual arrangements include distribution of gains and losses as follows: D-25%, E-35% and
F-40%. The venture is computed and terminated on February 28, 2012. In the final settlement, how much
would D receive?
a. P651,250
b. P815,750
c. P368,000
d. P601,250