Calamba Review Center - Laguna (LCRC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang, Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2020 Batch)
AFAR Marc Oliver Castañeda, CPA MBA

INSTALLMENT SALES
1. Under IAS 18, what is the measurement of sales revenue from installment sales?
a. Book value of the consideration received or receivable.
b. Fair value of the consideration received or receivable.
c. Cost of the consideration received or receivable.
d. Carrying amount of the consideration received or receivable.

2. Under IAS 18, if the company receives long-term non-interest bearing note receivable as
consideration for the sale of its inventories on an installment basis, what is the
measurement of sales revenue from installment sales?
a. Face value of the note receivable.
b. Maturity value of the note receivable.
c. Present value of the note receivable.
d. Undiscounted value of the note receivable.

3. How shall the difference between the fair value and the nominal amount of the long-term
note received as consideration in an installment sale be accounted for?
a. It shall be recognized as expense on the date of sale.
b. It shall be recognized as gain on exchange on the date of sale.
c. It shall be recognized as interest revenue over the term of the note
using effective interest method.
d. It shall be recognized as interest revenue over the term of the note
using straight-line method.

4. In an installment sales, if the collection of the note receivable is not remote and not
reasonable, how shall the gross profit be recognized?
a. It shall be recognized on the date of sale using accrual basis.
b. It shall be recognized in proportion to the amount of collection under
installment method.
c. It shall not be recognized.
d. It shall be recognized fully only on the year the receivable is
completely collected.

5. Under generally accepted accounting principles, what is the proper presentation of

deferred gross profit from installment sales?
a. It shall be presented as current liability.
b. It shall be presented as equity.
c. It shall be presented as deferred revenue.
d. It shall be presented as contra-installment receivable account.

6. If the fair value of the repossessed inventory cannot be estimated reliably at the date
of repossession, what shall be the basis of initial measurement of repossessed
inventory?
a. Estimated selling price less reconditioning cost less cost to sell.
b. Estimated selling price less reconditioning cost.
c. Estimated selling price less cost to sell.
d. Estimated selling price less reconditioning cost less cost to sell less
normal profit.

7. If the initial measurement of repossessed inventory is lower than the net of defaulted
installment receivable and its corresponding deferred gross profit, the difference shall
be recognized as
a. Loss on repossession to be resented as part of income from continuing
operation before tax.
b. Deferred loss on repossession to be presented as current asset.
c. Gain on repossession to be presented as part of other comprehensive
income.
d. Deferred gain on repossession to be presented as current liability.

8. Under the installment method, when interest is charged, each cash collection made after
the sale is composed of:
a. Cost and profit c. Interest and profit
b. Cost and interest d. Cost, interest and profit

9. The installment method of recording profit for accounting purposes is acceptable if

a. An unrealized profit account is credited
b. Collection of the sales price is not reasonable assured
c. The method is consistently used for all sales of similar merchandise
d. Collection in the year of sale do not exceed 30% of the total sales price.

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10. Under the installment method of accounting for installment sales
a. Gross profit is not recognized until the amount of cash received exceeds
the cost of the item sold
b. Revenue, costs and gross profit are recognized proportionate to the cash
that is received from the sale of the product
c. Gross profit is deferred proportionate to cash uncollected from sale of
the product, but total revenues and costs are recognized at the point of
sale
d. Revenues and costs are recognized proportionate to the cash received from
the sale of the product, but gross profit is deferred until all cash is
received.

11. The installment method of accounting violates the general rule on revenue recognition
because
a. Revenue is recognized at the point of sale
b. Revenue is recognized at the point of collection
c. Revenue is recognized proportionately on the basis of “percentage of
completion”
d. Revenue is not recognized at all

12. The method most commonly used to report defaults and repossessions is
a. Provide no basis for the repossessed asset, thereby recognizing a loss
b. Record the repossessed merchandise at book value, recording no gain or
loss
c. Record the repossessed merchandise at fair value, without recognizing a
gain or loss
d. Record the repossessed merchandise at fair value, recording a gain or loss
if appropriate

PROBLEM 1
INSTALLMENT COMPANY reports beginning inventory of P25,000 and reported purchases for the year
amounting to P500,000. The company also reported the following transactions related to their
sales on account and installment sales for the year:

1. Sold goods costing P75,000 for P150,000 on account. During the year P90,000 was
collected for the transaction.
2. Sold goods costing P200,000 for P500,000 on installment. During the year, P400,000 was
collected for the transaction.
3. Sold goods costing P100,000 by accepting a used machine given a trade in allowance of
P60,000, a P25,000 cash payment was also accepted and the balance of P135,000 is to be
paid on installment. The Machine could be sold for P70,000. The normal profit for the
machine is P20,000 after reconditioning costs of P10,000.
4. Sold goods costing P48,000 for P80,000 on installment. During the year, P30,000 was
collected for the transaction, after which the buyer defaulted on his payments. The
item was repossessed and it is estimated that the item could be resold for P25,000. The
normal profit for reconditioned items is a 20% mark-up on the sales price.
5. Sold goods costing P20,000 for P50,000 on installment. During the year, P10,000 was
collected for the transaction, after which the buyer defaulted and the account was
written-off.

Operating expenses paid by the company for the year amounted to P25,000.

Prepare the journal entries for each of the above transactions and determine the company’s net
income for the year.

PROBLEM 2
SJ Company, which began business on January 1, 2020, appropriately uses the installment sales
method of accounting. The following data are available for 2020
Installment accounts receivable, 12/31 800,000
Deferred gross profit, (before adjustment) 560,000
Gross profit rate 40%

Determine the cash collections and the realized gross profit on installment sales for the year
ended December 31, 2020.
Cash Realized Cash Realized
Collection Gross Collection Gross
Profit Profit
A. 400,000 320,000 C. 600,000 320,000
B. 400,000 240,000 D. 600,000 240,000

PROBLEM 3
Lanie Company, which began operations on January 1, 2021, appropriately uses the
installment method of accounting. The following information pertains to Lanie's
operations for the year 2021:
Installment sales 2,000,000 Cost of regular sales 600,000
Regular sales 1,200,000 Gen. & adm. exp. 200,000
Cost of inst. sales 1,000,000 Collections-inst. sales 400,000

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Determine Lanie’s December 31, 2021 deferred gross profit account balance:
A. 1,000,000 C. 640,000
B. 800,000 D. 300,000

PROBLEM 4
Gie Corporation started operations on January 1, 2021 selling home appliances and
furniture sets both for cash and on installment basis. Data on the installment sales
operation of the company gathered for the years ending December 31, 2021 and 2022 were as
follows:
2021 2022
Installment sales P800,000 P1,000,000
Cost of installment sales 480,000 700,000
Cash collected on installment sales
2021 installment contracts 420,000 300,000
2022 installment contracts 600,000

Additional information:
On January 5, 2023 an installment sale in 2021 was defaulted and the merchandise with
an appraised value of P10,000 was repossessed.
Related installment receivable balance on January 5, 2023 was P16,000.
Determine (1) the balance of Deferred Gross Profit on December 31, 2021, and (2) the gain or
(loss) on repossession in 2022.
A. (1) 260,000; (2) P400 C. (1) 152,000; (2) P3,600
B. (1) 152,000; (2) 400 D. (1) 260,000; (2) (400)

PROBLEM 5
Jill Enterprises uses the installment method of accounting and it has the following data
at the year-end:
Gross margin on cost .................... 66-2/3%
Unrealized gross profit ................. P384,000
Cash collections including down payments 720,000

What was the total amount of sales on installment basis?

A. 1,680,000 C. 1,104,000
B. 1,296,000 D. 960,000

PROBLEM 6
The following data are available for INSTALLMENT COMPANY on January 1, 2021:
Deferred Gross profit-2020 75,000 Installment rec-2020 250,000
Deferred Gross profit-2019 37,500 Installment rec-2019 100,000

On December 31, 2021, the trial balance of the company reflects the following balances:
Regular Sales 750,000 Installment rec-2021 200,000
Installment Sales 480,000 Installment rec-2020 100,000
Inventory beg 10,000 Installment rec-2019 10,000
Net Purchases 800,000 GP on regular sales 1/3%
Additional information:
1. The ending inventory of new and used goods based on an inventory count on December 31
amounted to P50,000
2. Goods given a trade-in value of P30,000 by the company was not recorded. It is
estimated that the goods could be resold for P40,000 after reconditioning costs of
P5,000 and P15,000 normal profit margin.
3. The company repossessed an item sold in 2020. The item repossessed had an
uncollected balance of P70,000, could be resold on a cash basis for P60,000 after
incurring reconditioning costs of P20,000. The repossession was recorded by the
company.
4. The company is to write-off a P20,000 installment sale made in 2019. No entry had
yet been made for this transaction.
5. Cash operating expenses of the company for 2021 amount to P250,000.
Determine the 2021 installment sales gross profit.
A. 40% C. 35%
B. 37.5% D. 1/3%

Determine the loss on repossession.

A. 49,000 C. 29,000
B. 40,000 D. 20,000

Determine the total gross profit for 2021.

A. 416,500 C. 391,250
B. 409,000 D. 380,000

Determine the net income for the year.

A. 137,500 C. 128,750
B. 130,000 D. 120,000

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CONSIGNEMENT SALES
Problem 1
Jenny Corporation consigned 400 dresses to Berna Company at a retail price of P1,000 each.
Berna paid shipping costs of P4,200 reimbursable expenses. Jenny and Berna agreed that any
sales in excess of the selling price will accrue to the later. Berna submitted an account
that 215 dresses were sold, 40% of which were sold for P1,160 and the rest at P1,280 each.
Jenny has a gross profit ratio of 25% on sales.

How much must Berna remit to Jenny?

A. 264,880 C. 215,000
B. 260,680 D. 210,800

Using the same information above, the commission of the consignee is?
A. 99,600 C. 47,720
B. 49,880 D. None of the above

Problem 2
Nate Co consigned 10 TV sets to Video Co. manufacturing costs amount to P40,000 per set and
consignment profits are not recorded separately by the company. At the end of the month, the
dealer reported the sale of 4 sets at P70,000 each and remitted the net proceeds after
deducting the following: 20% commission on sets sold and P16,000 freight paid upon receipt of
the 10 sets.

The entry on the books of Nate to record the shipment assuming consignment profits are
calculated separately includes
a. A debit to Consignment Out of P700,000
b. A debit to Consignment In if P400,000
c. A credit to Merchandise Shipment on Consignment of P400,000
d. A credit to Merchandise Inventory of P400,000

Using the same information above, the cash remitted to the consignor was
A. 200,000 C. 216,000
B. 208,000 D. 224,000

The balance of the consignor’s inventory relative to consigned goods is

A. 249,600 C. 240,000
B. 246,400 D. 192,000

Net profit on consignment sales was

A. 41,600 C. 51,200
B. 48,000 D. 57,600

Problem 3
NCC Consigned 10 construction machines to Mitsu Co. the machines cost P450,000 each. Freight
on the shipment which was paid by NCC amounted to P300,000.
Mitsu Sales Co submitted a sales account stating that they had sold 6 units and remitted
P3,412,500 balance due to NCC after the following deductions:
Commission 15% of selling price
Marketing expenses P225,000
Delivery of items sold 150,000
Cartage cost paid upon receipt of consignment 37,500

The consignee sold the 6 construction machines for a total of:

A. 2,700,000 C. 3,825,000
B. 2,880,000 D. 4,500,000

The commission earned on the sale of the six machines by Mitsu was
A. 405,000 C. 625,000
B. 450,000 D. 675,000

The consignor’s profit from the sale of the consigned goods was
A. 1,500,000 C. 712,500
B. 825,000 D. 547,500

Problem 4
EPZA Co consigned 5 electronic appliances costing P4,000 each to PEZA Co, which was to sell
them for a 15% commission on the selling price. Any accounts receivable arising form the sale
of the consigned goods were to be the property of EPZA Co.

EPZA Co paid freight cost of P1,000 and reimbursed PEZA P850 for local delivery to customers.
By December 31, PEZA had sold three appliances, two of which were for cash at P7,500 each and
one on credit at P9,000 of which it had collected 25% as a downpayment.

Assuming that PEZA makes an interim settlement as of December 31, it should remit cash to EPZA
of
A. 13,650 C. 17,250
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B. 16,400 D. 20,400

The profit to date of EPZA resulting from the consignment amounts to

A. 6,100 C. 6,950
B. 6,550 D. 8,450

Problem 5
Basti Co delivered 150 portable gas stoves to Sarah Co on consignment. These stoves cost
P2,700 each and could be sold for P4,500. The consignee is to be allowed a commission of 15%
of the selling price. The agreement for the consignment contract stated that Basti would draw
a sight draft on the consignee for 60% of the cost of the stoves and the advance shall be
recovered periodically by monthly deductions (in proportion to units sold) from the
remittances which accompany the account sales. All expenses of the consignee are to be
deducted monthly as incurred.

The consignee rendered an account sales at the end of the first month showing among others,
the following information:

Advertising P6,750
Delivery expense 3,375
Commission 10,125

How many units were sold by Sarah during the first month?
A. 15 C. 25
B. 20 D. 30

How much is the amount remitted by Sarah to Basti for the first month?
A. 67,500 C. 22,950
B. 47,250 D. 20,250

The consignment profit (loss) to Basti is

A. 20,250 C. 10,125
B. 16,875 D. 6,750

Problem 6
The Consignment Out account of Jackie Department Store is shown below:
Consignment Out
For goods shipped to consignee: For account sales submitted by
consignee
Cost of 24 pcs. boys’ clothes P4,800 20 pcs. boys’ clothes P6,300
Cost of 48 pcs. underwear 7,680 30 pcs. underwear 7,500
Freight and handling costs
Boys’ clothes 1,080
Underwear 2,000

The commission on both types o goods was 15% of the selling price. All of the account sales
were accompanied by checks for correct amounts. There is one account sale on hand which had
not been recorded on the books of Jackie. It shows that no consigned goods had been sold but
the freight and handling costs of P150 applicable to underwear had been incurred by the
consignee.

The profit/loss on consignment on underwear is

A. 180 C. 870
B. 350 D. 1,300
The cost of the inventory in the hands of the consignee is:
A. 3,630 C. 4,610
B. 3,680 D. 6,760

Problem 7
On August, 2019, HBO consigned to GEO 10 laptops costing P15,000 each, paying freight charge
of P15,000. At the end of the month, GEO reported sales of 6 handbags at P30,000 each and
incurred expenses of P12,500 and remitted the net proceeds due to HBO after deducting a 20%
commission on the sales price.

How much net income did HBO realize in August on the consignment?
A. 37,500 income C. 33,500 loss
B. 32,500 income D. 32,500 loss
What is the total cost of inventory of the unsold handbags?
A. 60,000 C. 71,000
B. 66,000 D. 75,000

Problem 8
On October 1, CLARK Co shipped 25 cameras to KENT Inc on consignment. The cameras are to be
sold at list price of P20,000 each. The cost of each camera to the consignor is P10,000. The
cost of shipment paid by the consignor was P7,500. The consignor agreed to absorb the
consignee’s expenditure for freight and also to allow the consignee P1,000 for delivery and

Page 5 of 22
installation for each set. Commission is to be 25% of the sales price. On October 31, KENT
submitted the following summary of consignment sales:
Sets received 25
Sets sold 8
Sets returned to consignor 2 10
(defective)
Sets on hand 15

October 2-30 Sales, 8 cameras @ P20,000 P 160,000

Charges:
Freight-in P 5,000
Deliveries and Installation 8,000
expenses
Commissions 40,000 53,000
Total P 107,000
Remittance 25,000
Balance owed (collections from customers
not yet made) 82,000
What is the inventory value of the units unsold in the hands of the consignee?
A. 150,000 C. 154,500
B. 153,000 D. 157,500
What is the profit of the consignor for the units sold?
A. 24,000 C. 27,000
B. 26,000 D. 70,000

Problem 9
On August, 2019, HBO consigned to GEO 10 laptops costing P15,000 each, paying freight charge
of P15,000. At the end of the month, GEO reported sales of 6 laptops at P30,000 each and
incurred expenses of P12,500 and remitted the net proceeds due to HBO after deducting a 20%
commission on the sales price.
1. How much net income did HBO realize in August on the consignment?
A. 37,500 income C. 33,500 loss
B. 32,500 income D. 32,500 loss
2. What is the total cost of inventory of the unsold handbags?
A. 60,000 C. 71,000
B. 66,000 D. 75,000

Problem 10
On October 1, CLARK Co shipped 25 cameras to KENT Inc on consignment. The cameras are to be
sold at list price of P20,000 each. The cost of each camera to the consignor is P10,000. The
cost of shipment paid by the consignor was P7,500. The consignor agreed to absorb the
consignee’s expenditure for freight and also to allow the consignee P1,000 for delivery and
installation for each set. Commission is to be 25% of the sales price. On October 31, KENT
submitted the following summary of consignment sales:
Sets received 25
Sets sold 8
Sets returned to consignor 2 10
(defective)
Sets on hand 15

October 2-30 Sales, 8 cameras @ P20,000 P 160,000

Charges:
Freight-in P 5,000
Deliveries and Installation expenses 8,000
Commissions 40,000 53,000
Total P 107,000
Remittance 25,000
Balance owed (collections from customers
not yet made) 82,000
1. What is the inventory value of the units unsold in the hands of the consignee?
A. 150,000 C. 154,500
B. 153,000 D. 157,500
2. What is the profit of the consignor for the units sold?
A. 24,000 C. 27,000
B. 26,000 D. 70,000

LONG TERM CONSTRUCTION CONTRACTS

1. It is a contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent in terms of their
design, technology and function or their ultimate purpose or use.
a. Construction contract
b. Installment contract
c. Franchise contract
d. Consignment contract

Page 6 of 22
2. It is a construction contract in which the contractor agrees to a fixed contract price,
or a fixed rate per unit of output, which in some cases is subject to cost escalation
clauses.
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

3. It is a construction contract in which the contractor is reimbursed for allowable or

otherwise defined costs, plus a percentage of these costs or a fixed fee.
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

4. Aside from the initial amount of revenue agreed in the long-term construction contract,
additional revenues may be recognized by the contractor (1) to the extent that it is
probable that they will result in revenue and (2) they are capable of being reliably
measured. Which of the following will not be considered as additional contract revenue?
a. Variation in contract work as instructed by the customer regarding the
scope of work to be performed.
b. Claim that the contractor may seek to collect from the customer for
customer caused delays or errors in specification or design.
c. Incentive payments to be paid to the contractor if specified performance
standards are met or exceeded or for early completion of contract.
d. Gain on sale of scrap materials from construction.

5. Which of the following costs shall be excluded in the contract costs of construction
contract?
a. Costs that relate directly to the specific contract.
b. Costs that are directly attributable to contract activity in general and
can be allocated to the contract.
c. Such other costs as are specifically chargeable to the customer under the
terms of the contract.
d. Selling costs such as advertisement expense or commissions of real estate
agents or brokers.

6. The following costs shall be capitalized as part of construction in progress or contract

costs, except
a. Cost of hiring and moving of plant and equipment to and from the contract
site.
b. Systematically, rationally and consistently allocated construction
overheads and borrowing costs.
c. Costs that are specifically chargeable to the customer under the terms
of the contract may include some general administration costs and
development costs for which reimbursement is specified in terms of the
contract.
d. General and research and development costs for which reimbursement is not
specified in the contract.

7. When the outcome of a construction can be estimated reliably, how shall contract revenue
and contract costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference
to the state of completion of the contract activity at the end of the
reporting period also known as by percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by
reference to the percentage of collection of receivables from customers
also known as installment method.
c. They shall be recognized as revenue and expenses respectively by the date
of earning of revenue or incurring of expenses also known as accrual
method.
d. Revenue shall be recognized only to the extent of contract cost incurred
that it is probable will be recoverable and the contract cost shall be
recognized as an expense in the period in which there are incurred also
known as the cost recovery or zero-profit method.

8. When the outcome of a construction contract cannot be estimated reliably, how shall
contract revenue and contract costs associated with the contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference
to the state of completion of the contract activity at the end of the
reporting period also known as by percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by
reference to the percentage of collection of receivables from customers
also known as installment method.
c. They shall be recognized as revenue and expenses respectively by the date
of earning of revenue or incurring of expenses also known as accrual
method.

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d. Revenue shall be recognized only to the extent of contract cost incurred
that it is probable will be recoverable and the contract cost shall be
recognized as an expense in the period in which there are incurred also
known as the cost recovery or zero-profit method.

9. When it is probable that total contract costs will exceed total contract revenue, how
shall it be accounted for?
a. The expected loss shall be recognized as an expense immediately
regardless of the certainty or uncertainty of the outcome of a
construction contract.
b. The expected loss shall be recognized as an expense immediately only when
the outcome of a construction contract cannot be estimated reliably.
c. The expected loss shall be recognized as an expense by reference to the
state of completion of the contract activity at the end of the reporting
period when the outcome of a construction contract cannot be estimated
reliably.
d. The expected loss shall be accounted for based in company’s policy.

10. When the company decides to change its accounting for construction contract from
percentage of completion to cost recovery method, how shall the accounting change be
treated?
a. It shall be accounted for as a change in accounting policy treated by
retrospective application or with cumulative effect in the beginning
retained earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by
prospective application to date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by
retrospective restatement or with cumulative effect in the beginning
retained earnings at the date of discovery of error.
d. It shall be accounted for as an entity transaction to be adjusted in the
share premium or other comprehensive income as the case may be.

11. When the company changes its percentage of completion of the construction project every
year, how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by
retrospective application or with cumulative effect in the beginning
retained earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by
prospective application to date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by
retrospective restatement or with cumulative effect in the beginning
retained earnings at the date of discovery of error.
d. It shall be accounted for as an entity transaction to be adjusted in the
share premium or other comprehensive income as the case may be.

12. How shall the contractor present in its statement of financial accounts the accounts
related to construction contract?
a. It shall present as an assets the gross amount due from customers for
contract work which is the net amount of cost incurred plus recognized
profits less the sum of recognized losses and progress billings for all
contracts in progress for which costs incurred plus recognized profits or
less recognized losses exceeds progress billings. (Meaning: It is
presented as an asset if Construction-in-Progress exceeds Progress
Billings)
b. It shall present as a liability the gross amount due to customers for
contract work is the net amount of cost of cost incurred plus recognized
profit less the sum of recognized losses and progress billings for all
contracts in progress for which progress billings exceeds cost incurred
plus recognized profits or less recognized losses. (Meaning: It is
presented as a liability of Progress Billings exceeds Construction-in-
Progress)
c. Either A or B but the liabilities and assets resulting from the
difference for Construction-in-Progress and Progress Billings shall not
be netted or offset in the Statement of Financial Position.
d. Both A and B but the liabilities and assets resulting from the difference
for Construction-in-Progress and Progress Billings shall be netted or
offset in the Statement of Financial Position.

13. Which of the following accounting changes shall be treated retrospectively instead of
prospectively by the long-term construction contractor?
a. Change in construction revenue.
b. Change in the estimated costs to complete the contract.
c. Change in the estimate of the outcome of the contract.
d. Change from percentage of completion to cost recovery method or vice
versa.

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14. Under the percentage of completion method, the Construction-in-Progress account normally
includes
a. Construction costs only c. Construction costs and profit
b. Construction profit only d. Construction cost, profit and
progress billings

15. The percentage-of-completion method may be used when reliable estimates are available
for each of the following, except
a. Costs c. Cash flows
b. Revenues d. Progress towards completion

16. What is the most popular input measures used to determine the progress toward completion
in the percentage-of-completion method?
a. Cost-to-cost basis c. Progress completion basis
b. Cost percentage basis d. Revenue percentage basis

17. Under PAS 11, when it is probable that total contract costs on a fixed price
construction contract will exceed total contract revenue, the expected loss should be
a. Apportioned to the years of the contract according to the percentage of
completion
b. Recognized as expense immediately, unless revenue to date exceeds cost to
date
c. Set off against profit of other construction contract where available
d. Recognized as an expense immediately

18. In construction contracts, the effect of a change in the estimate of contract revenue
and contract cost is accounted for as
a. Prior period error c. Change in accounting policy
b. Component of equity d. Change in accounting estimate

PROBLEM 1
MARY COMPANY is in the construction business. In March 1, 2016, the company entered into a
three-year construction project with a contract price of P5,000,000. The following were the
transactions of the company for years 2016-2018.

2016 2017 2018

Construction costs per year P1,000,000 P1,400,000 P1,400,000
Estimated cost to complete 3,000,000 1,600,000 0
Billings per year 900,000 2,100,000 2,000,000
Collections per year 800,000 2,000,000 2,200,000

1. From the data given above, determine the gross profit on the construction to be reported each year and the journal entries to be
prepared by the company for each year.

2. Assume that the total cost to complete project in 2017 amounts to P4,800,000, determine the gross profit on the construction to
be reported each year.

3. Assume that the total cost to complete the project in 2017 amounts to P5,200,000, determine the gross profit on the construction
to be reported each year.

PROBLEM 2
CONSTRUCTION COMPANY is executing a construction project, which is expected to take three
years. The company has signed a fixed price contract for P12,000,000. The details of the
costs incurred to date 2020 are as follows:
Site labor costs 1,000,000
Costs of construction material 3,000,000
Depreciation of PPE used in construction 500,000
Marketing and selling costs 1,000,000
Total 5,000,000
Total contract costs estimated to complete 5,500,000

Determine the revenue, costs and profits to be recognized overtime in 2020.

GROSS
REVENUE COSTS PROFIT/(LOSS)
A. 5,400,000 4,500,000 900,000
B. 5,400,000 5,500,000 (100,000)
C. 6,000,000 4,500,000 1,500,000
D. 6,000,000 5,500,000 900,000

PROBLEM 3
BUILDERS Construction is constructing an office building under contract. The contract calls
for progress billings and payments of P1,240,000 each quarter. The total contract price is
P14,880,000 and the company estimates total costs of P14,200,000. The company estimates that
the building will take three years to complete and construction commences on 2022.

Page 9 of 22
At December 31, 2023 BUILDERS Construction estimates that it is 75% complete with their
current construction project; however, the estimate of total costs to be incurred has risen to
P14,400,000 due to unanticipated price increases.

How is the difference, debit/(credit) between the construction in progress and the billings on
construction in progress reported?
A. (3,380,000) C. 880,000
B. 1,240,000 D. (1,240,000)

If the building was 30% completed by the end of 2022, what is the total amount of expenses to
be reported for 2023?
A. 10,800,000 C. 6,390,000
B. 6,540,000 D. 6,300,000

PROBLEM 4
On March 1, 2022, AGGREGATES Company enters a contract to build a hotel which is estimated to
cost P31,200,000. The company recognizes construction revenue over time. Data on this
project for 2022-2024 follow:
Contract Costs Est’d Costs
Billings incurred to Complete
2022 10,500,000 5,460,000 20,540,000
2023 12,500,000 9,984,000 13,156,000
2024 14,440,000 15,756,000 -
The contract contains a penalty clause that penalizes the company a reduction of P70,000 from
the contract price for every week of delay. In 2024, the contract was delayed for 8 weeks

What is the gross profit for 2024?

A. 1,164,000 C. 1,724,000
B. 1,466,400 D. 1,824,000

PROBLEM 5
MOC Construction Company started work on three job sites during the current year. Any costs
incurred are expected to be recoverable. Data relating to the three jobs are given below:
Site Contract Cost Estimated Costs Billings on Collections
Price Incurred to Complete Contract on Billings
1 5,000,000 3,750,000 - 5,000,000 5,000,000
2 7,000,000 1,000,000 4,000,000 900,000 900,000
3 2,500,000 1,000,000 1,000,000 1,500,000 1,000,000

If the company records revenue over time, how much must be shown as current asset in the
balance sheet of MOC Construction Company as of December 31?
A. 5,500,000 C. 250,000
B. 500,000 D. 100,000

If the company records revenue at a point in time, how much must be shown as current asset in
the balance sheet of MOC Construction Company as of December 31?
A. 5,100,000 C. 250,000
B. 500,000 D. 100,000

PROBLEM 6
LUGI Company is building two construction projects. The following information relate to these
projects during the year. Any costs incurred are expected to be recoverable.
Project 1 Project 2
Contract Price 10,500,000 7,500,000
Costs incurred to date 6,000,000 7,000,000
Est’d costs to complete 3,000,000 1,000,000
Billings during the year 7,000,000 1,000,000
Collections during the year 6,000,000 1,000,000

What amount of gross profit/(loss) should the company report in its income statement for the
year?
OVER TIME POINT IN TIME
A. 562,500 (500,000)
B. 500,000 (500,000)
C. 500,000 0
D. (500,000) 500,000

PROBLEM 7
LAKE Corporation began construction work under a three-year contract. The contract price is
P4,800,000. The company uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred
to total estimated costs for completing the contract. The financial statement presentations
relating to this contract at December 31 follow:
Statement of Financial Position
Accounts receivable-Construction contracts 200,00
Construction in progress 600,000
Contract Billings 480,000
Page 10 of 22
 Costs and recognized profit in excess of billings 120,000
Income statement
Income (before tax) on the contract recognized 120,000

How much cash was collected during the year?

A. 40,000 C. 280,000
B. 200,000 D. 480,000
What was the initial estimated income before tax on the contract?
A. 600,000 C. 800,000
B. 640,000 D. 960,000

PROBLEM 8
UNSURE Company specializes in the construction of commercial and industrial buildings. The
contractor is experienced in bidding long-term construction projects of this type, with the
typical project lasting fifteen to twenty-four months. The contractor uses the percentage of
completion method of revenue recognition since, given the characteristics of the contractor’s
business and contracts; it is the most appropriate method. Progress toward completion is
measured on a cost-to-cost basis. The company began work on a lump-sum contract at the
beginning of the year. As bid, the statistics were as follows:
Lump-sum Price (contract price) 4,000,000
Estimated costs
Labor 850,000
Materials 1,750,000
Indirect cost 400,000 3,000,000
Estimated gross profit 1,000,000

At the end of the first year, the following was the status of the contract:
Billings to date 2,250,000
Cost incurred to date
Labor 464,000
Materials 648,000
Indirect cost 193,000 1,305,000
Latest forecast of total cost 3,000,000

Included in the above costs incurred to date were standard electrical and mechanical materials
stored on the job site, but not yet installed, costing P105,000. These costs should not be
considered in the cost incurred to date.

Compute the percentage of completion on the contract at the end of the year.
A. 35% C. 43.50%
B. 40% D. 46.67%

Compute the amount of gross profit that would be reported on this contract at the end of the
year.
A. 200,000 C. 540,000
B. 400,000 D. 667,000

PROBLEM 9
On January 1, 2017, Build Company entered into a construction contract with an owner to build
an oil refinery. The contract has the following characteristics; the oil refinery is highly
customized to the owner’s specifications and changes to these specifications by the owner are
expected over the contract term. The oil refinery does not have an alternative use to the
contractor. Non-refundable, interim progress payments are required as a mechanism to finance
the contract. The owner can cancel the contract at any time (with a termination penalty); any
work in process is the property of the owner. As a result, another entity would not need to
re-perform the tasks performed to date. Physical possession and title do not pass until
completion of the contract. The contractor determines that the contract has a single
performance obligation to build the refinery. The majority of evidences suggests that the
contractor’s performance creates an assets that the customer controls and control is being
transferred over time. Build concludes that input method (cost to cost method) instead of
output method is a more reasonable method for measuring the progress toward satisfying its
performance obligation.

The contract duration is 3 years with total estimated contract revenue of P300M. The total
estimated contract cost as of December 31, 2017 is P200M. The cost incurred during year 2017
as 120M including P20M related to contractor-caused inefficiencies which do not
represent/depict the transfer of goods or services to the customer. As of December 31, 2018,
the total estimated contract cost becomes 250M due to increase in cost of raw materials. The
cost incurred during 2018 is P105M including P5M related to contractor-caused inefficiencies
which do not represent/depict the transfer of goods or services to the customer.

Under IFRS 15, what is the net income/(loss) to be reported by the company for the years ended
December 31, 2017 and 2018?

PROBLEM 10
Flordy Company entered into a long-term construction contract in January 1, 2017 to construct
a building at a fixed price of P10M. Flordy determined that the outcome of the construction
Page 11 of 22
cannot be estimated reliably. Flordy normally bills its customers 50% at the middle of the
first year, 20% at the middle of the second year and the balance at the date of completion of
project. A mobilization fee of 10% of the contract price (deductible from the final bill) is
payable 30 days after the contract signing. The contract provides that the customer shall pay
80% of the amount billed during the year on or before December 31 subject to retention
provision/withholding by customer of 5% of amount to be paid by the customer, which is
intended to protect the customer from the contractor failing to adequately complete its
obligation under the contract. The customer satisfactorily complied with the contractual
provision. Flordy’s accountant provide the following data for the years ended December 31,
2017 and 2018:
2017 2018
Cost incurred to date P4,000,000 P7,000,000
Estimated cost to complete as of this date 9,000,000 4,000,000

What is the 12/31/2018 (1) Due from/(to) Customer, (2) excess of construction in progress over
progress billings and (3) realized gross profit/(loss), respectively?

FRANCHISE
1. Under IFRS 15, how shall revenue from contracts with customers such as revenue from initial franchise fee be
recognized by the franchisor?

a. Upon receipt of the initial franchise fee by the franchisor.

b. Upon signing of the franchise agreement.

c. When the franchisor satisfies the performance obligation under the franchise agreement.

d. Applying the legality over the substance of the transaction.

2. Under IFRS 15, how may an entity satisfy a performance obligation in a contract with customers?

a. Satisfaction of performance over time.

b. Satisfaction of performance obligation at a point in time.

c. Either A or B.

d. Both A and B.

3. IFRS 15 provides that initial franchise fee shall be recognized as revenue over time (percentage of completion method)
if any of the following criteria provided below is met. Which of the following indicators shows that the initial franchise
fee shall be recognized as revenue at a point in time instead of over time?

a. When the franchise simultaneously receives and consumes the benefits provided by the
franchisor’s performance as the franchisor performs.

b. When the franchisor’s performance creates or enhances an asset that the franchisee controls as
the asset is created or enhanced.

c. When the franchisor’s performance does not create an assets with alternative use to the
franchisor and the franchisor has an enforceable right to payment for performance completed to
date.

d. When the franchise has legal title to the franchise and has the significant risks and rewards of
ownership of the franchise.

4. Under IFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or revenue for a sales-based
royalty?

a. When the sales of the franchisee occurs.

Page 12 of 22
b. When the performance obligation to which some or all of the contingent franchise fees or sales-
based royalty has been satisfied or partially satisfied.

c. When both A and B events occur.

d. When either A or B events occur.

5. Under PFRS 15, franchise fees are recognized

a. On the date the contract is signed

b. On the date the franchise is opened for business

c. On the date the franchise fee is paid to the franchisor

d. When performance of obligations have been satisfied

6. Types of franchising arrangements include all of the following except

a. Service sponsor-retailer

b. Wholesaler-service sponsor

c. Manufacturer-wholesaler

d. Wholesaler-retailer

7. Continuing franchise fees should be recorded by the franchisor

a. As revenue when received

b. As revenue when earned and receivable from the franchisee

c. As revenue only after the balance of the initial franchise fee has been collected

d. In accordance with the accounting procedures specified in the franchise contract or agreement

PROBLEM 1

BU WANG sells a franchise that requires an initial franchise fee of P70,000. A downpayment of P20,000 cash is required with
the balance covered by issuance of a P50,000, 10% note payable by the franchise in five (5) annual equal installments.

Required: Prepare the entry(ies), assuming:

1. If all the material services have been substantially performed by the franchisor, the
refund period has expired, and the collectibility of the note is reasonably assured.
2. If the refund period has expired and the collectibility of the note is reasonably
assured, but all material services have not been substantially performed by the
franchisor.
3. If all the material services have been substantially performed by the franchisor and the
collectibility of the note is reasonably assured, but the refund period has not expired.
4. The downpayment is not refundable, no future services are required by the franchisor,
and collection of the note is reasonably assured.
5. The downpayment is not refundable, collection of the note is reasonably certain, the
franchisor has yet to perform a substantial amount of services, and the down payment
represents a fair measure of the services already performed.
6. The initial downpayment is not refundable and no future services are required by the
franchisor, but collection of the note is so uncertain that recognition of the note as
an asset is unwarranted.

Page 13 of 22
 7. The franchisor has substantial services to perform, the down payment is refundable, and
the collection of the note is very uncertain or extremely uncertain.

Problem 2

On December 31, 2021, RAP, Inc. authorized JIN to operate as a franchisee for an initial franchise fee of P150,000. Of this
amount, P60,000 was received upon signing the agreement, and the balance, represented by a note, is due in three
annual payments of P30,000 each, beginning December 31, 2022. The present value on December 31, 2021 of the
three annual payments appropriately discounted is P72,000. According to the agreement, the nonrefundable
down payment represents a fair measure of the services already performed by RAP, however, substantial future services
are required of RAP. Collectability of the note is reasonably certain.

On December 31, 2021, RAP should record unearned franchise fees in respect of the JIN franchise of

A. 150,000 C. 72,000

B. 90,000 D. -0-

Problem 3

Hope Corp. sells a franchise for an initial fee of P1,400,000. A down payment of P400,000 is required, with the balance
covered by a P1,000,000, 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 400,000
Notes Receivable 1,000,000
Franchise Fees 1,400,000
B. Cash 400,000
Notes Receivable 1,000,000
Unearned Franchise Fees ................ 1,400,000
C. Cash 400,000
Notes Receivable 1,000,000
Franchise Fees 400,000
Unearned Franchise Fees ................ 1,000,000
D. Cash 400,000
Notes Receivable 1,000,000
Franchise Fees 1,000,000
Unearned Franchise Fees ................ 400,000

Problem 4

Kami, Inc. charges an initial franchise fee of P500,000 for the right to operate to operate as a franchise of Kami. Of this
amount, P100,000 is payable when the agreement was signed and the balance is payable in a noninterest bearing note in
five annual payments of P80,000 each. In return for the initial franchise fee, the franchisor will help locate the site,
negotiate the lease or purchase of the site, supervise the construction activity, and provide the bookkeeping services.
The credit rating of the franchisee indicates that money can be borrowed at 8%. The present value of an ordinary
annuity of five annual receipts of P80,000 each discounted at 8% is P319,416.80. The discount represents the interest
revenue to be accrued by the franchisor over the payment period.

If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to
the franchisee is minimal, collectability of the note is reasonably assured and substantial performance has occurred:

The earned and unearned franchise fees would be as follows:

Earned Unearned
A. P -0- P500,000.00
Page 14 of 22
 B. -0- 419,416.80
C. 419,416.80 -0-
D. 319,416.80 100,000.00

Problem 5

SAPPHIRE CO. charges new franchisees an initial fee of P5,000,000. Of this amount, P2,000,000 is payable in cash when the
agreement is signed, and the remainder is to be paid in three equal annual installments which are evidenced by an
interest-bearing promissory note. In consideration therefore, SAPPHIRE CO. will assist in locating the business site,
conduct a market study to estimate earnings potential, supervise construction of a building, and provide initial training
to employees.

On December 3, 2021, Sapphire Co. entered into a franchising agreement with EMERALD, INC. by the end of the year,
SAPPHIRE CO. has completed about 25% of the initial services at a cost of P300,000 and it has ascertained that collection
of the notes is reasonably assured.

For 2021, SAPPHIRE CO. should recognized franchise revenue of:

A. 5,000,000 C. 1,700,000

B. 2,000,000 D. -0-

Problem 6

SHAWARMA Inc. sells franchises to independent operators. The contract with the franchise includes the
following provisions:

1. The franchise is charged an initial franchise fee of P120,000. Of this amount,

P200,000 is payable when the agreement is signed and a P20,000, zero-interest
bearing note, payable at the end of 5 subsequent years.
2. All of the initial franchise fee collected by the company is to be refunded and
the remaining obligation cancelled if, for any reason, the franchise becomes
unprofitable.
3. In return, for the initial franchise fee, the franchisor agrees to (a) assist
the franchisee in selecting the location for the business, (b) negotiate the
lease of the land, (c) obtain financing and assist with building design, (d)
supervise construction, establish accounting and tax records, and (f) provide
expert advice over a 5-year period relating to such matters as employee and
management training, quality, control and promotion. This continuing
involvement by the franchisor helps maintain the brand value for the franchise.
4. In addition to the initial franchise fee, the franchisee is required to pay the
franchisor a monthly fee of 2% of sales for continuing services.
5. Management of the franchisor estimates that the value of the services rendered
to the franchisee at the time the contract is signed amounts to at least
P20,000. All franchisees to date have opened their locations at the scheduled
time, and none have defaulted on any of the notes receivable. The credit
ratings of all franchisees would entitle them to borrow at the current interest
rate of 10%. The present value of an ordinary annuity of five annual receipts
of P20,000, each discounted at 10% is P75,816.
What is the amount of franchise revenue assuming the franchise agreement is signed at the beginning of the
year?

A. Zero C. 100,000

B. 95,816 D. 120,000

If the franchisor completes the franchise startup tasks and the franchise opens on July 1 of the current year,
what is the current year’s amount of franchise revenue?

A. Zero C. 95,816

Page 15 of 22
B. 20,000 D. 100,000

Problem 7

At the beginning of the year, Drin got the franchise of Vin, a known steak house of upscale patronage. The
franchise agreement required a P1,000,000 franchise fee payable P200,000 upon signing of the franchise and the
balance in four annual installments starting the end of the current year. At present value using 12% as discount rate, the
four installments would approximate P399,300. The fees once paid are refundable. The franchise may be cancelled
subject to the provisions of the agreement. Should there be unpaid franchise fee attributed to the balance of the main
fee (P1,000,000), same would become due and demandable upon cancellation. Further, the franchisor is entitled to
a 5% fee on gross sales payable monthly within the first ten days of the following month.

The Credit Investigation Bureau rated Drin as AAA credit rating. The balance of the franchise fee was guaranteed by a
commercial bank.

The first year of operations yielded gross sales of P18,000,000, PIZZA's earned franchise fees for the first year is:

A. 900,000 C. 1,499,300

B. 1,100,000 D. 1,900,000

Problem 8

DJ Builders Enterprises, a franchisor, charges franchisees a "franchise fee" of P1,000,000. Of this amount, a nonrefundable
P400,000 is paid upon the signing of the contract with the balance payable in three equal installments 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 for employees.

On December 1, 2021, DJ Builders signed a franchising agreement for the U-belt area. By the end of 2021, it was
determined that the substantial performance of the initial services had cost DJ Builders a total of P300,000 and that
collection of the balance of the franchise fee has been reasonably assured. In its 2021 income statement, DJ Builders should
report franchise revenue and net income:

Franchise Revenue Net Income

A. P1,000,000 P700,000
B. 1,000,000 1,000,000
C. -0- -0-
D. 700,000 700,000

Problem 9

On September 1, 2021, ACE 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 (4) months, the first payment due
December 31, 2021. The market interest rate is 12%. The initial deposit is refundable until substantial performance has been
completed. The following table describes each agreement:

Services
Performed Total Costs
Probability of by Franchisor Incurred to
Franchisee Full Collection Dec. 31, 2021 Dec. 31, 2021
A Likely Substantially P700,000
B Doubtful 25% N/A

Page 16 of 22
The present and future value tables at 4% for four (4) periods were as follows:

Present value of P 1 0.8548

Present value of an ordinary annuity of P1 ................... 3.6299
Future value of P 1 1.1699
Future value of an ordinary annuity of P1 ...................... 4.2465

What amount of net income to be reported in 2021, 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

Problem 10

On April 1, 2021, Motorola, Inc. entered into a franchise agreement with a local businessman. The franchisee paid
P90,000 and gave a P60,000, 8%, 3 year note payable with interest due annually on March 31. Motorola recorded the
P150,000 initial franchise fee as revenue on April 1, 2021. On December 30, 2021, the franchisee decided not to open the
outlet under Motorola's name. Motorola cancelled the franchisee's note and refunded P48,000 less accrued interest on the
note, of the P90,000 paid on April 1.

What entry should Motorola make on December 30, 2021?

A. Loss on Repossessed Franchise 48,000

Cash 48,000
B. Loss on Repossessed Franchise 44,400
Cash 44,400
C. Loss on Repossessed Franchise 104,400
Cash 44,400
Notes Receivable 60,000
D. Revenue from Franchise Fees 150,000
Interest Income 3,600
Cash 44,400
Notes Receivable 60,000
Revenue from Repossessed Franchise 42,000

HOME OFFICE AND BRANCH ACCOUNTING

1. In the separate statement of financial position of the home office, the investment in
branch account shall be presented as
a. Liability
b. Equity
c. Asset
d. Income

2. In the separate statement of financial position of the branch, the home office account
shall be presented as
a. Liability
b. Equity
c. Asset
d. Income

3. In the combined statement of financial position prepared by the company, the inventory
of the branch shall be measured and presented at
a. Lower of cost or net realizable value.
b. Cost.
c. Billed price.
Page 17 of 22
d. Fair value.

4. The main difference between the net income reported in the separate income statement of
the branch and the net income reported by the home office for the branch’s operation is
the
a. Overstatement of beginning and ending inventory reported by the branch.
b. Overstatement of total goods available for sale reported by the branch.
c. Overstatement of cost of goods sold reported by the branch.
d. Overstatement of shipment from home office reported by the branch.

5. If the home office receives a debit memo from the branch, the home office shall record
it in its separate statement of financial position by
a. Increasing investment in branch account
b. Decreasing investment in branch account
c. Debiting the investment in branch account
d. Disclosure

6. If the branch receives a credit memo from the home office, the branch shall record it
in its separate statement of financial position by
a. Increasing the home office account.
b. Crediting the home office account
c. Debiting the home office account
d. Disclosure

7. Which of the following transactions will increase the home office account in the
branch’s separate statement of financial position?
a. Net loss of the branch.
b. Collection by the home office of branch’s receivable.
c. Debit memo received from the home office.
d. Payment by the branch of home office’s liability.

8. Which of the following transactions will decrease the investment in branch’s account in
the home office’s separate statement of financial position?
a. Net income of the branch.
b. Payment of branch’s liability by the home office.
c. Credit memo received from the branch.
d. Return by branch to home office of merchandise shipped.

9. Happy Inc has a branch operation located in Davao. On the home office financial record, Happy reports
Investment in Davao Branch account with a P117,000 debit balance. At the same time, the branch operation is
reporting Home Office account with a P121,500 credit balance. Which of the following statements is true?
a. Cash may have been collected by the home office for the branch but not yet
reported to the branch
b. The difference indicates that cash may be in transit from the branch to
the home office
c. The difference indicates that inventory may ne in transit from the branch
to the home office
d. The difference indicates that the home office might have assigned an
expense allocation to the branch

10. The Home Office account of a branch is a/an

a. Asset Account c. Liability Account
b. Asset and Capital Account d. Equity Account

11. When the home office ships merchandise to the branch above its cost, the cost of goods sold on the branch
income statement is
a. Overstated by the overvaluation of the branch inventory acquired from
outsiders
b. Overstated by the difference between the unadjusted and post-closing
balance in the allowance for overvaluation in the branch inventory account
of the home office books
c. Overstated by the overvaluation of the branch inventory acquired from home
office
d. Understated by the overvaluation of the inventory

PROBLEM 1
The HOME Company ships and bills merchandise to its provincial branch at cost. The branch
carries its own accounts receivable and makes its own collections. The branch also pays
its expenses.
The transactions for 2021 are reflected in the branch trial balance that follows:
Debit Credit
Cash 23,800
HOME Co. Current P180,000
Shipments from National Home Co. 240,000
Accounts Receivable 125,000
Page 18 of 22
 Expenses 16,200
Sales 225,000
Total P405,000 P405,000
December 31 inventory P 60,000

Compute the (1) net profit of the branch, and (2) the Branch Current Account in the home
office books:
(1) (2) (1) (2)
A. 45,000 180,000 C. 28,800; 208,800
B. 42,600 268,800 D. 28,800; 180,000

PROBLEM 2
A branch store in Caloocan was established by Carla Company on March 1. Merchandise was
billed to the branch at 125% of cost. Shipments of merchandise were as follows:
(At billed price)
March 5 240,000
March 10 100,000
March 20 70,000

On March 22, the branch returned defective merchandise worth P6,100. On March 31, the branch
reported a net loss of (P12,400) and merchandise inventory of P170,000.
In the home office books, the cost of merchandise sold by branch was:
A. 323,900 C. 233,900
B. 323,120 D. 187,120

PROBLEM 3
The Aparri Branch of Cagayan Products, Inc. buys merchandise from third parties and
receives merchandise from the home office for which it is billed at 20% above cost. Below
are excerpts from the trial balances and data on the home office and Aparri branch for
the month just ended:
Home Office Books:
Cr. Allowance for overvaluation of branch
merchandise .................... P 1,480,000
Cr. Shipment to branch ............. 3,400,000
Branch Books:
Dr. Beginning inventory ............ P5,760,000
Shipments from home office ...... 4,080,000
Purchases ............................. 1,640,000
Month-end additional data:
Ending inventory of branch ........... P5,840,000
From home office at BP, ......... P4,680,000
From outsiders, at cost ............ 1,160,000

For the month just ended:

The total cost of goods sold The amount of allowance
of Aparri Branch at cost for overvaluation that was
realized from branch sales
A. 5,640,000 800,000
B. 4,940,000 700,000
C. 5,540,000 1,480,000
D. 4,940,000 780,000

PROBLEM 4
The Clark branch of Freeport Corporation submitted the following trial balance as of 30 June
2021:
Debit Credit
Cash P 28,600
Accounts receivable 173,800
Shipments from home office 462,000
Home office - Current P324,500
Sales 369,600
Expenses 29,700
Total P694,100 P694,100
Clark reported an ending inventory of P138,600. Shipments are billed at a mark-up of 40%
on cost.

What is the real net income of Clark branch?

A. 138,600 C. 92,400
B. 108,900 D. 70,600

PROBLEM 5
Tan Textile Company has a single branch in Bulacan. On March 1, 2021, the home office
accounting records included an Allowance for Overvaluation of Inventories - Bulacan Branch

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ledger account with a credit balance of P64,000. During March, merchandise costing P72,000
was shipped to the Bulacan Branch and billed at a price representing a 40% markup on the
billed price. On March 31, 2021, the branch prepared an income statement indicating a net
loss of P 23,000 for March and ending inventories at billed prices of P50,000.

What is the amount of adjustment for Allowance for Overvaluation of Inventories to reflect
the true branch net income?
A. 78,513 debit C. 92,000 debit
B. 78,667 debit D. 92,000 credit

PROBLEM 6
The account balances shown below were taken from the trial balances submitted to BIG
Corporation by its related branch:
2021 2022
Petty cash fund P3,000 P3,000
Accounts receivable 87,600 98,280
Inventory 74,340 82,740
Sales 346,360 390,240
Shipments from home (140% of cost) 214,900 272,160
Expenses 102,520 115,860
Accounts written off 2,440 3,840

All branch collections are remitted to the home office. All branch expenses are paid out
of the petty cash fund. When the petty cash fund is replenished, the branch debits
appropriate expense accounts and credits Home Office Current. The petty cash is counted
every December 31, and its composition was as follows:
12/31/21 12/31/22
Currency and coins ................... P1,160 P1,720
Expense vouchers ..................... 1,840 1,280

The branch inventory on December 31, 2022 was P82,740. The correct branch net income for 2022
was:
A. 7,340 C. 82,700
B. 6,780 D. 82,140

PROBLEM 7
The Manila branch of the High Company is billed for merchandise by the home office at 20%
above cost. The branch in turn prices merchandise for sales purposes at 25% above billed
price. On February 16 all of the branch merchandise is destroyed by fire. No insurance was
maintained. Branch accounts show the following information:
Merchandise inventory, January 1(at billed price) 52,800
Shipments from home office (Jan. 1 - Feb. 16) 40,000
Sales 30,000
Sales returns 4,000
Sales allowances 2,000

What was the cost of the merchandise destroyed by fire?

A. 73,600 C. 61,333
B. 72,000 D. 60,000

PROBLEM 8
Trial balances for the home office and the branch show the following accounts before
adjustment, on December 31, 2021. The home office policy of billing the branch for
merchandise is 20% above cost.
Home Office Branch
Unrealized intercompany profit 21,600
Shipments to branch 48,000
Purchases (outsiders) 15,000
Shipments from Home Office 51,600
Merchandise Inventory beg 90,000

What part of the branch inventory as of December 1, 2021 represent purchases from outsiders
and what part represents goods acquired from the home office?
Outsiders Home Office
A. P24,000 P66,000
B. 33,000 57,000
C. 30,000 60,000
D. 18,000 72,000

If the ending inventory of the branch per inventory count on December 31, is P18,000 (P6,000
fr.om local purchases), determine the ending inventory of the branch at cost.
A. 24,000 C. 18,000
B. 21,000 D. 16,000

PROBLEM 9

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Selected balances from the Legaspi Company's Branch A and Branch B are as follows:
Branch A Branch B
Inventory, Jan. 1, 2021 P21,000 P19,000
Imprest Branch Fund 2,000 1,500
Inventory, Dec. 31, 2021 19,000 12,000
A/Receivable, Jan. 1, 2021 55,000 43,500
Merchandise from Home Office 61,000 47,000
A/Receivable, Dec. 31, 2021 70,000 53,500
Cash Collections 85,000 70,000
Sales 100,000 80,000
Cash Expenses 21,000 14,300

All sales, collections, and expenses are handled at the branch. All cash received from sales
and collections are sent directly to the Home Office. Expenses are paid by the branch
from the imprest fund and immediately reimbursed by the Home Office and credited to the
Home Office account. All expenses paid by the branch are recorded in the books of the
branch.

Compute the balance of the Home Office account on January 1, 2021.

Branch 1 Branch 2 Branch 1 Branch 2

A. 78,000 67,000 C. 64,000 78,000
B. 75,000 64,000 D. 78,000 64,000

PROBLEM 10
The Home Office operates a branch in Cebu. Operating data for the home office and the
branch for 2021 are as follows:
Home Office Branch
Sales P730,000 P349,000
Shipment to branch 180,000
Purchases from outsiders 440,000 70,000
Advertising expenses 27,400 5,000
Salaries & commission expense .. 70,000 19,000
Rent Expense 20,000 4,000
Miscellaneous expense 6,600 1,000
Shipment from home office 225,000
Inventories, Jan. 1:
Home Office 170,000
Branch:
Acquired from outsiders . 19,000
Acquired from office at billed price
which is 20% above cost 84,000
Inventories, Dec. 31:
Home Office 130,000
Branch:
Acquired from outsider . s 13,000
Acquired from home office
at 2021 billed price 60,000

Compute the combined net income of the home office and its related branch:
A. 126,000 C. 348,000
B. 222,000 D. 501,000

PROBLEM 11
Swift Corporation, operates a number of branches in Metro Manila. On June 30, 2021, its Sn.
Lorenzo branch showed a Home Office Account balance of P54,700 and the Home Office books
showed a Sn. Lorenzo branch account balance of P51,100. The following information may help in
reconciling both accounts:
1. A P24,000 shipment, charged by Home Office to Sn. Lorenzo branch, was actually sent to
and retained by Sto. Tomas branch.
2. A P 30,000 shipment, intended and charged to Sn Jose branch was shipped to Sn. Lorenzo
branch and retained by the latter.
3. A P4,000 emergency cash transfer from Sto. Tomas branch was not taken up in the Home
Office books.
4. Home office collects a Sn. Lorenzo branch accounts receivable of P7,200 and fails to
notify the branch.
5. Home office was charged for P2,400 for merchandise returned by Sn. Lorenzo branch on
June 28. The merchandise is in transit.
Home office erroneously recorded Sn. Lorenzo's net income for May, 2021 at P32,550. The branch
reported a net income of P25,350.

What is the reconciled amount of the Home Office and Sn. Lorenzo branch reciprocal accounts?
A. 40,300 C. 47,500
B. 43,500 D. 54,700

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PROBLEM 12
On December 31, 2021, the Investment in Branch account on the home office's books has a
balance of P204,000. In analyzing the activity in each of these accounts for December, you
find the following differences:
1. A P24,000 branch remittance to the home office initiated on December 27, 2021,
was recorded on the home office books on January 3, 2022.
2. A home office inventory shipment to the branch on December 28, 2021, was recorded by
the branch on January 4, 2012; the billing of P48,000 was at cost.
3. The home office incurred P28,800 of advertising expenses and allocated P12,000 of
this amount to the branch on December 15, 2021. The branch has not recorded this
transaction.
4. A branch customer erroneously remitted P7,200 to the home office. The home office
recorded this cash collection on December 23, 2021. Meanwhile, back at the branch, no
entry has been made yet.
5. Inventory costing P103,200 was sent to the branch by the home office on December 10, 2021. The
billing was at cost, but the branch recorded the transaction at P81,600.
Compute the following balances as of December 31, 2021:
Unadjusted balance of the Home Adjusted balance of the
Office Account reciprocal account
A. 253,600 228,000
B. 105,600 1187,200
C. 302,400 278,400
D. 105,600 180,000

PROBLEM 13
During 2019 goods were shipped to a branch at 120% above cost. The reciprocal account in the
income statement of the home office amounted to P237,000. The balance of the contra branch
current account reports a balance of P375,000 before adjustment. The beginning inventory of
the branch from the home office at cost is P360,000 and from outsiders, P93,000. The branch
purchased goods from outsiders during the year amounting to P125,200.

If the ending inventory of the branch as reported in the combined statement of financial
position is P345,000, 20% of which are purchased from outside suppliers, how much is the cost
of goods sold to be reported in the branch’s income statement for the year ended December 31,
2019?
a. P550,985 b. P514,500 c. P514,000 d. P431,700

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