SPECIAL REVENUE RECOGNITION

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INSTALLMENT SALES
PROBLEM 1
The following selected accounts were taken from the trial balance of Survival
Company as of December 31, 2013:
Accounts Receivable
Installment Receivable 2011
Installment Receivable 2012
Installment Receivable 2013
Merchandise Inventory
Purchases
Freight-in
Repossessed Merchandise
Repossession Loss
Cash Sales
Charge Sales
Installment Sales
Deferred Gross Profit 2011
Deferred Gross Profit 2012
Operating Expenses
Shipment on Installment Sales

P750,000
150,000
450,000
2,700,000
525,000
3,900,000
30,000
150,000
240,000
900,000
1,800,000
4,460,000
222,000
393,600
150,000
2,787,500

Additional information:

Gross Profit rates for 2011 and 2012 installment sales were 30% and 32%,
respectively.
The entry for repossessed goods was:
Repossessed Merchandise
150,000
Repossession Loss
240,000
Installment Receivable 2011
180,000
Installment Receivable 2012
210,000
Merchandise on hand at the end of 2013 (new & repossessed) was P282,000

Required: Compute for the following

1. Total Realized Gross Profit in 2013
A. P965,400
B. P2,129,900
C. P2,011,100
D. P2,251,100
2. Balance of Deferred Gross Profit as of December 31, 2013
A. P1,201,500
B. P1,080,300
C. P2,366,000
D. P1,628,100
3. Net income in 2013
A. P1,979,900
B. P1,739,900
C. P1,982,300
D. P1,861,100
PROBLEM 2
Achievement Company which began operations on January 1, 2013 appropriately
uses the instalment method of accounting. The following data pertain to
Achievements operations for year 2013:
Installment sales (before over/under-allowance)

SPECIAL REVENUE RECOGNITION

P3,150,000

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Operating expenses
Regular Sales
Total collections for the year (excluding interest of
P84,000)
Cost of regular sales
Cost of instalment sales
Accounts receivable 12/31/2013
Installment receivable written-off (no provision was
made)
Estimated resale value of repossessed merchandise
Profit usual on the sale of repossessed merchandise
Repossessed accounts
Actual value of trade-in Merchandise
Trade-in allowance
Reconditioning cost of the repossessed merchandise

367,500
1,312,500
2,088,000
752,500
2,205,000
512,500
154,000
290,000
15%
350,000
280,000
490,000
57,500

How much is the deferred gross profit at December 31, 2013? What is the net
income for the year ended December 31, 2013?
A.
B.
C.
D.

P353,500;
P353,500;
P287,000;
P287,000;

P455,000
P640,500
P441,000
P525,000

PROBLEM 3
The following account balances appear on the books of Fulfilment Company as of
December 31, 2013:
Cash
Receivables
Merchandise Inventory
Accounts Payable
Deferred Gross Profit 2011
Sales
Purchases
Expenses

P 150,000
800,000
75,000
30,000
261,250
1,250,000
640,000
425,000

The Receivables account is a controlling account for three subsidiary ledgers

which show the following totals:
2012 installment contracts
150,000
2013 installment contracts
600,000
Charge accounts (terms, 30 days, net) 50,000
The Gross profit on sales on installment contract for 2012 was 55%, on
installment contracts for 2013, 50%.
Collections on installment contracts for 2012 total P300,000 for the year just
closed; on installment contracts for 2013, P400,000; on charge accounts,
P200,000.
Account balances from installment sales made prior to 2012 were also collected.
Repossession for the year was on installment contracts for 2012 on which the
uncollected balance at the time of repossession amounted to P50,000.
Merchandise repossessed was erroneously debited as a newly acquired
merchandise equal to the amount defaulted by the customer.
Appraisal reports show that this repossessed merchandise has a true worth of
P20,000 at the time of repossession and remain unsold at year end.
The final inventory of the merchandise (new) valued at cost amounted to
P45,000.

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Required: Compute for the following

1. Total Realized Gross Profit in 2013
A. P626,250
B. P756,250
C. P495,000
D. P365,000
2. Net Income in 2013
A. P331,250
B. P301,250
C. P328,750
D. P382,500
PROBLEM 4
Confidence Corporation sells goods on the installment basis. For the year just
ended, the following were reported: Cost of installment sales, P8,400,000; Loss on
repossession, P202,500; Wholesale value of repossessed merchandise, P1,687,500;
Repossessed account, P2,700,000; Deferred gross profit after adjustment,
P1,620,000.
How much was the collections for the year?
A.
B.
C.
D.

P5,850,000
P6,600,000
P3,900,000
P3,150,000

LONG-TERM CONSTRUCTION CONTRACTS

PROBLEM 1
On July 1, 2012, GB Construction Corp. contracted to build an office building for RX,
Inc. for a total contract price of P1,825,000.
Contract cost incurred
Estimated costs to complete the
contract
Billings to RX, Inc

2012
P 350,000
1,050,000

2013
P 930,000
685,000

2014
P670,000
0

192,500

1,420,000

212,500

Which of the following statements is true?

A. The inventory account, net at December 31, 2013, assuming no dependable
estimates are available amount to P386,250 due to customer.
B. The inventory account balance at December 31, 2013, using cost to cost
method is P1,140,000
C. The recognized loss in 2013 using zero profit method is P246,250
D. The realized gross profit in 2014 using percentage of completion method is
P15,000 and the recognized loss in 2014 using zero profit method is
P125,000.
PROBLEM 2
DM, Inc. works on a P10,500,000 contract in 2013 to construct an office building.
During 2013, DM, Inc. uses the cost to cost method. At December 31, 2013, the
balances in certain accounts were: Construction in progress P3,780,000; Accounts
receivable P360,000; and Billings on construction in progress P1,800,000;
Contract retention P180,000; Mobilization fee P140,000. At December 31, 2013,
the estimated cost at completion is P7,350,000.
The realized gross profit in 2013.
A. P1,102,500
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B. P1,062,500
C. P1,242,500
D. P1,134,000
PROBLEM 3
On January 1, 2012, Brave Construction Corp. began constructing a P2,100,000
contract. The following are relevant information provided by the corporation: Brave
uses percentage of completion method. For the year ended December 31, 2013,
Brave Construction billed its client an additional 55% of the contract price.
Construction in Progress
Estimated cost to complete
Costs incurred
Excess of CIP over Billings

2012
P 441,000
?
425,250
P84,000
current liability

2013
?
?
969,000
P330,750
current
liability

2014
?
675,750
-

Required: Compute for the following:

1. How much is the estimated remaining cost in 2012?
A. P1,599,750
B. P1,155,000
C. P1,680,000
D. P1,584,000
2. How much is the realized gross profit (loss) in 2013?
A. P(45,000)
B. P15,750
C. P(60,750)
D. P30,000
3. How much is the balance of construction in progress in 2013?
A. P1,680,000
B. P2,010,750
C. P1,349,250
D. P1,365,000
PROBLEM 4
On July 1, 2012, Great Corp. obtained a contract to construct a building. The
building was estimated to be built at a total cost of P5,250,000 and is scheduled for
completion on October 2014. The contract contains a penalty clause to the effect
that the other party was to deduct P17,500 from the contract price each week of
delay. Completion was delayed for three weeks. Below are data pertaining to the
construction period. In 2013, there was an increase in the contract price in the
amount of P200,000 per cost escalation clause. Great Corp. uses percentage of
completion method.
Required: Compute for the following
1. How much is the excess of construction in progress over progress billings or
progress billings over construction in progress in 2012? (current asset or
current liability)
A. P840,000 current asset
B. P840,000 current liability
C. P800,000 current liability
D. P800,000 current asset
2. How much is the excess of construction in progress over progress billings or
progress billings over construction in progress in 2013? (current asset or
current liability)
A. P682,500 current liability
B. P682,500 current asset
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C. P635,250 current liability

D. P635,250 current asset

FRANCHISE
PROBLEM 1
On April 30, 2013, Date and Dine entered into a franchise agreement with Food Trip
Inc. to sell their products. The agreement provides for an initial franchise fee of
P1,200,000 which is payable as follows: P400,000 cash to be paid upon signing the
contract, and the balance in five equal annual instalments every December 1,
starting in 2013. Date and Dine signs a non-interest bearing note for the balance.
The credit rating of the franchisee indicates that the money can be borrowed at
10%. The present value factor of an ordinary annuity at 10% for 5 periods is 3.7908.
The agreement further provides that the franchisee must pay a continuing franchise
fee equal to 5% of its monthly gross sales. Food Trip Inc. incurred direct cost of
P540,000, of which P170,000 is related to continuing services and indirect costs of
P72,000, of which 18,000 is related to continuing services. The franchisee started
business operations on September 2, 2013 and was able to generate sales of
P950,000 for 2013. The first installment payment was made in due date.
Assuming that the collectability of the note is not reasonably assured, how much is
the net income of the franchisor for the fiscal year ended December 1, 2013?
A.
B.
C.
D.

P252,206
P174,508
P172,650
P254,935

PROBLEM 2
Spiral Restaurant sold a fine dining restaurant franchise to Circles Hotel. The sale
agreement signed on January 1, 2013 called for a P875,000 down payment plus
three P437,500 annual payments (covered by a non-interest bearing note)
representing the value of initial franchise services rendered by Spiral restaurant. In
addition, the agreement required the franchisee to pay 6% of its gross sales to the
franchisor. The restaurant operated in July and its sales for the year amounted to
P6,562,500. Assuming a 15% interest rate is appropriate, PV of annuity of P1 at 15%
for three periods is 2.28.
How much is the franchisors total revenue for the year ended 2013 income
statement?
A.
B.
C.
D.

P2,266,250
P2,415,875
P2,022,125
P2,403,405

PROBLEM 3
On August 1, 2013, Holiday Inc. entered into a franchise agreement with intense
franchisee. The initial franchise fees agreed upon is P246,900, of which P46,900 is
payable upon signing and the balance to be covered by a non-interest bearing note
payable in four equal annual installments. The down payment is refundable within
75 days. Intense Inc. has a high credit rating, thus, collection of the note is
reasonably assured. Out-of-pocket costs of P125,331 and P12,345 were incurred for
direct expenses and indirect expenses respectively. Prevailing market rate is 9%. PV
factor is 3.2397.

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On the fiscal year ended September 30, 2013, how much revenue from franchise
fee will the franchisor recognize?
A.
B.
C.
D.

P208,885
P246,900
P0
P83,554

PROBLEM 4
On December 1, 2013, Zach, Inc. authorized Movers Company to operate as a
franchisee for an initial franchise fee of P600,000. Of this amount, P240,000 was
received upon signing the agreement and the balance, represented by a note, is
due in three annual payments of P120,000 each beginning December 31, 2014. The
present value on December 1, 2013, for three annual payment appropriately
discounted at P288,000. According to the agreement, the non-refundable down
payment represents a fair measure of the services already performed by Zach and
substantial future services are still to be rendered. However, collectability of the
note is reasonably certain.
On December 31, 2013 Statement of Financial Position how much should Zach
report as unearned franchise fee from Movers Company?
A.
B.
C.
D.

P528,000
P360,000
P400,000
P288,000

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SPECIAL REVENUE RECOGNITION

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