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Cebu Institute of Technology - University College of Management Business and Accountancy Department of Accountancy FINAL EXAMINATION SET B GENSBERGH G. RAGO, CPA ACCTG311| A01 7:00-8:30 INSTRUCTOR -----------------------------------------------------------------------------------------------Instructions: Write the CAPITAL letter of your answers on the first page of your examination booklet. You may use the succeeding pages for your solutions. Strictly no erasures.

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. dismissal time c. at a point in 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 contracts with customers. Therefore, an entity shall apply the same principles in accounting for long-term construction contracts as those applied to other 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

c. 40%

d. 16%

B Solution: 6M / (6M + 1.5M) = 80% x 10M = 8M revenue to date; 1.6M / (1.6M + 6.4M) = 20% x 10M = 2M revenue in 20x1; (8M – 2M) = 6M revenue in 20x2 4. What is the percentage completed in 20x2? a. 60% b. 50% A (80% completion to date – 20% completion in 20x1) = 60% 5. VALEDICTION Construction Co. entered into a P80M 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 P40M. 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) Costs of materials used in construction Costs of materials purchased but not yet used in construction Site labor costs Site supervision costs Depreciation of equipment used in construction Depreciation of idle construction equipment Costs of moving plant, equipment and materials to and

400,000 12,000,000 2,000,000 4,000,000 800,000 480,000 240,000 160,000 1

from the contract site Costs of hiring plant and equipment Advance payments to subcontractors (subcontracted work is not yet started) How much revenue is recognized as of the end of the first year? a. 25M b. 36M c. 45M

560,000 80,000

d. 46M

Solution: The total costs incurred to date are computed as follows: Costs of materials used in construction Site labor costs Site supervision costs Depreciation of equipment used in construction Costs of moving plant, equipment and materials to and from the contract site Costs of hiring plant and equipment Total costs incurred to date

12,000,000 4,000,000 800,000 480,000 160,000 560,000 18,000,000

The percentage of completion as of the end of the first year is computed as follows: Total costs incurred to date = Percentage of completion Estimated total contract costs Percentage of completion = 18,000,000 ÷ 40,000,000 Percentage of completion = 45% 90M x 45% = 36M 6. DELETERIOUS Construction Co. entered into a fixed price contract for the construction of a building for HARMFUL, Inc. DELETERIOUS determines the stage of completion of construction contracts using the “cost-to-cost” method. The estimated total costs of the contract are as follows: Estimated costs of design and technical assistance that are directly related to the contract Estimated costs of design and technical assistance that are not directly related to a specific contract (properly allocated) Estimated costs of materials to be used in the construction Estimated costs of construction labor Estimated costs of rectification and guarantee work, including expected warranty costs Estimated administrative costs expected to be reimbursed in accordance with contractual agreement Estimated insurance costs during construction Estimated construction overheads Estimated marketing costs for selling condominium units Estimated total contract costs

800,000

200,000 22,000,000 11,200,000 1,200,000 520,000 80,000 4,000,000 400,000 40,400,000

The following were the actual costs incurred by DELETERIOUS during the first year of the construction: Costs of design and technical assistance that are directly related to the contract Costs of design and technical assistance that are not directly related to a specific contract (properly allocated) Costs of materials used in the construction Costs of construction labor Administrative costs expected to be reimbursed in accordance with contractual agreement. Administrative costs not expected to be reimbursed Research and development costs for which reimbursement is not specified in the contract Insurance costs during construction Construction overheads

400,000 100,000 12,000,000 6,000,000 480,000 120,000 7,200,000 60,000 960,000 2

Marketing costs Total costs incurred to date

800,000 28,120,000

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

d. 51%

C (28.12M – .120M - 7.2M - .8M) ÷ (40.4M - .4M) = 50% Use the following information for the next two questions: On September 1, 20x1, ABC Co. enters into a contract with a customer to remodel a plant’s electrical wirings and install a new generator for a total consideration of ₱12M. The remodeling and the installation are treated as a single performance obligation satisfied over time. The expected contract costs are as follows: Generator Other costs Expected total contract costs

4,000,000 5,000,000 9,000,000

Additional information: • ABC Co. uses the cost-to-cost method in measuring its progress towards the complete satisfaction of the performance obligation. • ABC Co. incurs total costs of ₱6,000,000 in 20x1, including the cost of the generator. • The customer obtains control of the generator when it is delivered to the site in December 20x1. However, the generator will not be installed until March 20x2. • ABC Co. regards the cost of the generator as significant in relation to the expected total contract costs (i.e., 4M ÷ 9M = 44.44%). • Although ABC Co. acted as a principal in procuring the generator, ABC Co. is not involved in designing or manufacturing the generator. 7. How much revenue is recognized in 20x1? a. 7,200,000 b. 3,200,000

c. 4,000,000

d. 5,600,000

A Solution: Percentage of completion

=

Total costs incurred to date Estimated total contract costs

= (6M total costs incurred – 4M cost of generator) ÷ (9M expected total contract costs – 4M cost of generator) = 2M ÷ 5M Percentage of completion = 40% Total contract price Less: Cost of generator Total Multiply by: Percentage of completion Total Add back: Cost of generator Revenue

8. How much profit is recognized from the contract in 20x1? a. 1,200,000 b. 1,800,000 c. 2,400,000 A Solution: Expected total contract cost Less: Cost of generator Total Multiply by: Percentage of completion Total Add back: Cost of generator Cost of goods sold Revenue Cost of goods sold

12,000,000 (4,000,000) 8,000,000 40% 3,200,000 4,000,000 7,200,000

d. 5,600,000 9,000,000 (4,000,000) 5,000,000 40% 2,000,000 4,000,000 6,000,000 7,200,000 (6,000,000) 3

Profit

1,200,000

9. 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. What is the percentage of completion in 20x1? a. 38% b. 40% c. 42% d. 56% A Solution: Percentage of completion

Total costs incurred to date Estimated total contract costs

=

Percentage of completion = (6M – 2M – 200K) ÷ 10M Percentage of completion =(3.8M ÷ 10M) = 38% 10. 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 cost of construction that is recognized as expense in 20x1? a. 175,000 b. 375,000 c. 300,000

d. 285,000

C Solution: Total contract price (a) Costs incurred to date Estimated costs to complete (b) Estimated total contract costs Expected gross profit from contract Multiply by: Percentage of completion (a) ÷ (b) Gross profit earned to date Less: Gross profit earned in previous years Gross profit for the year

1,000,000 300,000 500,000 800,000 200,000 37.50% 75,000 75,000

Total contract price Multiply by: Percentage of completion Revenue to date Less: Revenue recognized in previous yrs. Revenue for the year Cost of construction (squeezed)* Gross profit for the year (see computation above)

1,000,000 37.50% 375,000 375,000 (300,000) 75,000

11. ABC Co. started work on two separate projects during 20x1. Information on these projects is shown below:

Project A B

Contract price 9,000,000 8,000,000

Costs incurred 4,000,000 5,000,000

Estimated costs to complete 2,000,000 -

Progress billings 5,000,000 8,000,000

How much is the total balance of the “construction in progress” accounts as of December 31, 20x1 under zero-profit method? a. 4,000,00 b. 6,000,000 c. 14,000,000 d. 0 4

A Solution: Project A – CIP = 4,000,000 costs incurred Since Project B is 100% complete, it is assumed that the completed project was turned over to the customer. 12. The primary issue in accounting for construction contracts is a. the determination of percentage of completion and proper determination of revenue to be recognized during the period. b. the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. c. the determination of the rate at which physical performance has been made during the reporting period and the future performance on which future revenues will be allocated. d. the allocation of costs of a long-lived asset to permit the proper matching of costs with revenues. 13. A construction contract may be a. fixed price contract b. cost plus contract.

c. a combination of a and b d. any of these

14. VALEDICTION Construction Co. entered into a P80M 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 P40M. 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) Costs of materials used in construction Costs of materials purchased but not yet used in construction Site labor costs Site supervision costs Depreciation of equipment used in construction Depreciation of idle construction equipment Costs of moving plant, equipment and materials to and from the contract site Costs of hiring plant and equipment Advance payments to subcontractors (subcontracted work is not yet started)

400,000 12,000,000 2,000,000 4,000,000 800,000 480,000 240,000 160,000 560,000 80,000

What is the percentage of completion of the contract as of the end of the first year? a. 42% b. 45% c. 50% d. 46% 15. 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 16. 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 cases (three questions per case): 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 5

Estimated costs to complete

3,600,000

1,500,000

-

Case #1: 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. 17. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000

c. 2,800,000

d. 3,500,000

18. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000

d. 1,500,000

19. How much is the gross profit recognized in 20x3? a. 1,000,000 b. 1,500,000

d. 2,800,000

c. 2,100,000

Case #2: 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. 20. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000

c. 2,400,000

d. 0

21. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000

d. 0

22. How much is the gross profit recognized in 20x3? a. 5,500,000 b. 1,500,000

d. 2,100,000

c. 4,000,000

Case #3: 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. 23. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000

c. 2,400,000

d.0

24. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000

d. 0

25. How much is the gross profit recognized in 20x3? a. 5,500,000 b. 1,500,000

d. 2,100,000

c. 4,000,000

26. ABC Co. started work on two separate projects during 20x1. Information on these projects is shown below:

Project A B

Contract price 9,000,000 8,000,000

Costs incurred 4,000,000 5,000,000

Estimated costs to complete 2,000,000 -

Progress billings 5,000,000 8,000,000

How much is the total balance of the “construction in progress” accounts as of December 31, 20x1 under percentage of completion method? 6

a. 4,000,000

b. 6,000,000

c. 14,000,000

d. 0

27. State the correct sequence of the following steps of revenue recognition under PFRS 15. I. Determine the transaction price II. Recognize revenue when (or as) the entity satisfies a performance obligation III. Identify the performance obligations in the contract IV. Allocate the transaction price to the performance obligations in the contract V. Identify the contract with the customer a. V, IV, II, I, III b. V, III, I, IV, II

c. V, I, IV, III, II d. V, I, III, IV, II

28. 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 29. The consideration received from a contract with a customer that does not meet the criteria under ‘Step 1’ of PFRS 15 is a. recognized as liability. b. recorded through memo entry only. b. disclosed only. d. b and c 30. Entity A enters into a franchise contract with Customer X. The agreement provides Customer X the right to access Entity A’s intellectual property. How should Entity A recognize revenue from the franchise agreement? a. over time, as Customer X receives and consumes the benefit from Entity A’s performance of providing access to its intellectual property. b. at a point in time when Entity A transfers control over the promised license to Customer X. c. a or b as a matter of an accounting policy choice d. when there is “substantial performance” by Entity A in accordance with US GAAP. Use the following information for the next two cases: 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% is payable upon signing of contract. • 80% is represented by a note receivable collectible in 4 equal annual installments starting December 31, 20x2. The appropriate discount rate is 12%. Case #1: 31. The license provides Customer X the right to use 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 A 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 Case #2: 32. The license provides Customer X the right to use Entity A’s patented processes. The agreement requires Customer X to discontinue using its trade name and instead use Entity A’s trade name. Customer X is bound by the terms of the contract to abide with Entity A’s policies on the use of the processes but is given the right to any subsequent modifications to the processes. How much revenue from the franchise contract will Entity A recognize in 20x1? a. 80,747 b. 20,187 c. 20,000 d. 0 33. PFRS 15 requires how many steps in recognizing revenue from contracts with customers? a. 2 b. 3 c. 5 d. 7 34. If the promise to transfer a license is distinct, a. the entity treats all the promises in the contract as a single performance obligation. b. the entity applies the general principles of PFRS 15 to determine whether the performance obligation is satisfied over time or at a point in time. c. the entity applies the specific principles of PFRS 15 to determine the nature of the entity’s promise to transfer the license as either a “right to access” or a “right to use” the entity’s intellectual property. d. b and c 35. According to PFRS 15, if the nature of the entity’s promise to grant franchise rights in a franchise agreement is to provide the franchisee the right to use the entity’s intellectual property as it exists at the point in time at which the license is granted, the initial franchise fee is recognized as revenue 7

a. when there is substantial performance which is indicated by the commencement of the franchisee’s business b. at a point in time when the franchise rights are transferred to the franchisee and the franchisee obtains the ability to use those rights c. over time, throughout the license period, starting from the time the franchise rights are transferred to the franchisee and the franchisee obtains the ability to use those rights d. b or c depending on the substance of the agreement 36. If a franchise contract requires the franchisor to undertake activities that would affect the franchisor’s intellectual property to which the franchisee has rights, the performance obligation is satisfied a. at a point in time c. under time b. over time d. anytime 37. Which of the following does not indicate that the nature of an entity’s promise to transfer a license is to provide the customer the right to access the entity’s intellectual property as it exists throughout the license period? a. The intellectual property to which the customer has rights changes throughout the license period. b. The entity continues to be involved with its intellectual property c. The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights and the customer is exposed to any positive or negative effects of those activities. d. The customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted. 38. Entity A enters into a franchise contract with Customer X. The agreement provides Customer X the right to use Entity A’s intellectual property. How should Entity A recognize revenue from the franchise agreement? a. over time, as the customer receives and consumes the benefit from Entity A’s performance of providing access to its intellectual property to Customer X. b. at a point in time when Entity A transfers control over the promised license to Customer X. c. a or b as a matter of an accounting policy choice d. when there is “substantial performance” by Entity A in accordance with US GAAP. 39. On January 1, 20x1, ABC Co. enters into a contract with a customer to transfer a license. • The initial franchise fee is ₱100,000 payable as follows: 20% cash down payment upon signing of the contract and the balance is payable in 4 equal annual installments starting December 31, 20x1. The appropriate discount rate is 12%. • The contract also requires ABC Co. to transfer equipment to the customer. The equipment has a cost of ₱30,000 and a stand-alone selling price of ₱40,000. • The license has a stand-alone selling price of ₱38,000. • ABC Co. regularly sells the license and the equipment separately. • The license provides the customer the right to use the entity’s intellectual property as it exists at the point in time at which the license is granted. • The equipment is transferred to the customer on January 15, 20x1 while the license is transferred to the customer on February 1, 20x1. How much revenue is recognized on February 1, 20x1? a. 80,747 b. 41,409 c. 39,338

d. 0

On December 1, 20x1, CANOROUS Co. granted a 5-year franchise right to MELODIOUS, Inc. for an initial franchise fee of ₱400,000. The non-refundable initial franchise fee was collected in full upon signing of the contract. As of December 31, 20x1, CANOROUS has no remaining obligation or intent to refund any of the cash received, all of the services pertaining to pre-opening activities to set-up the contract have been performed and there are no other material conditions or obligations required of CANOROUS under the franchise agreement. 40. If the promise to grant the franchise right is not distinct, how should CANOROUS account for the transaction? a. CANOROUS should use only the general principles of PFRS 15 to determine whether the performance obligation is satisfied over time or at a point in time. b. CANOROUS should use the general principles of PFRS 15 first then the specific principles to determine whether the grant of license provides the customer the right to access or the right to use the intellectual property granted. c. CANOROUS should use only the specific principles of PFRS 15 d. CANOROUS should use the old GAAP (FAS No. 45), i.e., “substantial performance.” 41. If the promise to grant the franchise right is not distinct and that the performance obligation is satisfied at a point in time, how much revenue shall CANOROUS recognize in December 20x1? a. 400,000 b. 0 c. 80,000 d. None of these 42. If the promise to grant the franchise right is distinct and that the grant of franchise provides the customer the right to use the entity’s intellectual property, how much revenue shall CANOROUS recognize in December 20x1? 8

a. 400,000

b. 0

c. 80,000

d. 6,667.67

43. If the promise to grant the franchise right is distinct and that the grant of franchise provides the customer the right to access the entity’s intellectual property, how much revenue shall CANOROUS recognize in December 20x1? a. 400,000 b. 0 c. 80,000 d. 6,667.67 Use the following information for the next two questions: On January 1, 20x1, Franchisor Co. enters into a contract with Franchisee Co. The franchise contract gives Franchisee Co. the right to use Franchisor’s trade name and the right to sell Franchisor’s products for a period of 4 years. The franchise requires payment of an upfront fee of ₱1,000,000, payable at contract inception, and 5% of future sales of the products, payable at each month-end. The franchise contract requires Franchisor Co. to undertake activities that would further improve its brand and its products, to which Franchisee Co. has rights, by continuously undertaking research and development projects and marketing and promotional activities. Although those activities do not result in the transfer of a good or a service to Franchisee Co. as those activities occur, it is expected that Franchisee Co. will benefit from those activities. All of the necessary preparations were completed, and TIPPLE Co. started operations, on January 31, 20x1. 44. How should Franchisor Co. recognize revenue from the ₱1,000,000 initial franchise fee? a. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 1, 20x1. b. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 31, 20x1. c. Recognize the ₱1,000,000 initial franchise fee as revenue throughout the license period. d. Any of the above, as a matter of accounting policy choice. 45. How should Franchisor Co. recognize revenue from the 5% of sales continuing franchise fee? a. Franchisor Co. shall estimate the variable consideration and amortize it as revenue over the license period. b. Franchisor Co. shall estimate the variable consideration, subject the estimate to the “Constraining estimates of variable consideration” principle of PFRS 15 and amortize it as revenue over the license period. c. Franchisor Co. shall discount the amount determined in Choice (b) above and amortize it as revenue over the license period. d. Franchisor Co. shall recognize revenue equal to 5% of Franchisee’s sales as and when those sales occur. 46. Direct cost of franchise incurred by a franchisor that are within the score of PFRS 15 are recognized as expense using the a. Matching concept c. effective interest method b. b. immediate recognition principle d. concept of conservatism or prudence 47. On November 1, 2018, Fallacious Co. obtained franchise rights from Misleading Co. The initial franchise fee included consideration for inventory and equipment to be delivered to Fallacious. All of the necessary preparations were completed and Fallacious co. started operations, on January 31, 2019. The inventory and equipment were delivered to Fallacious on December 1, 2018. How would misleading Co. recognize revenue for the supply of inventory and equipment? a. Recognize in full on November 1, 2018 b. Recognize in full on December 1, 2018 c. Recognize in full on January 31, 2019 d. Deferred and amortize over the franchise term starting January 31, 2019 48. The third step in the recognition of revenue under PFRS 15 is to identify the contract with the customer. True or False 49. If the intellectual property to which the customer has rights will change over the license period because the entity continues to be involved with its intellectual property, the nature of entity’s promise to transfer the license is most likely a “right to use”. True or False 50. If the nature of an entity’s promise to transfer a license is to provide the customer the right to use the entity’s intellectual property as it exists at the point at which the license is granted, revenue from the franchise contract shall be recognized at the point in time when the license is transferred to the customer. True or False

***END OF FINAL EXAMIANATION***

9

Bonus Questions: 51. A and B agreed to form a partnership. The contributions of the partners are as follows: A Cash Inventory Land Equipment

B 600,000 20,000 400,000 50,000

Additional information: • Half of the inventory is unpaid. The partnership agreed to assume the related accounts payable. • The land has a fair value of ₱700,000 and is subject to a mortgage of ₱100,000. However, B agreed to settle the mortgage personally. How much are the adjusted capital contributions of A and B, respectively? a. 670,000; 690,000 c. 670,000; 700,000 b. 660,000; 700,000 d. 670,000; 600,000 52. A and B formed a partnership. The partnership agreement stipulates the following: • Annual salary allowances of ₱80,000 for A and ₱40,000 for B. • The partners share in profits and losses equally. The partnership earned profit of ₱100,000. How much is the share of B? a. 70,000 c. 48,000 b. 30,000 d. 52,000 53. A and B formed a partnership. The partnership agreement stipulates the following: • Annual salary allowances of ₱10,000 for A and ₱40,000 for B. • Bonus to A of 10% of the profit after partner’s salaries but before bonus. • The partners share profits and losses on a 60:40 ratio. During the period the partnership incurred a loss of ₱20,000 before deduction for salaries. By what amount did B’s capital account change? a. Increased by ₱12,000 c. Increased by ₱32,000 b. Decreased by ₱12,000 d. Decreased by ₱32,000 54. A and B decided to liquidate their partnership business. The statement of financial position of the business shows the following information: Assets 100,000

Liabilities 20,000

A, Capital (50%) 40,000

B, Capital (50%) 40,000

The partners were able to convert all assets into ₱90,000 cash. How much did B receive from the final settlement of his interest? a. 30,000 c. 28,000 b. 35,000 d. 36,667 55. Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s statement of financial position is shown below: Cash Noncash assets Total

50,000 1,200,000 1,250,000

Accounts payable Payable to A A, Capital (40%) B, Capital (40%) C, Capital (20%) Total

100,000 50,000 400,000 450,000 250,000 1,250,000

10

Three-fourths (3/4) of the noncash assets were sold for ₱920,000. The partnership paid ₱5,000 transaction costs on the sale. How much cash did C receive from the settlement of the partners’ interests? a. 163,000 c. 193,000 b. 186,000 d. 206,000 Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s statement of financial position is shown below: Cash Noncash assets Total

50,000 1,200,000 1,250,000

Accounts payable Payable to A A, Capital (50%) B, Capital (30%) C, Capital (20%) Total

100,000 50,000 540,000 360,000 200,000 1,250,000

56. If a cash priority program is prepared, which partner is paid first and how much is the total payments to that partner before all partners will share on the available cash based on their profit or loss ratios? a. A, ₱20,000 c. B, ₱96,000 b. B, ₱90,000 d. B, ₱60,000 57. Three-fourths (3/4) of the noncash assets were sold for ₱920,000. The partnership paid ₱5,000 transaction costs on the sale. How much cash did A receive from the settlement of the partners’ interests under the cash priority program? a. 447,500 c. 493,500 b. 386,500 d. 306,500 58. Bye-bye Corporation is undergoing liquidation. Relevant information as of January 1, 20x1 is shown below: ASSETS Cash Accounts receivable Equipment - net Land TOTAL ASSETS LIABILITIES Accounts payable Salaries payable Notes payable Loan payable Total liabilities EQUITY Share capital Deficit

Carrying amounts 200,000 500,000 600,000 1,000,000 2,300,000

Net realizable values 200,000 450,000 150,000 1,300,000 2,100,000

700,000 800,000 500,000 750,000 2,750,000

700,000 800,000 500,000 750,000 2,750,000

1,000,000 (1,450,000)

Capital deficiency

(450,000)

TOTAL LIABILITIES & EQUITY

2,300,000

Additional information: • Administrative expenses expected to be incurred during the liquidation process is ₱180,000. • The equipment is pledged as collateral security for the notes payable. • The land is pledged as collateral security for the loan payable. Assuming all the assets were sold, and all the liabilities were settled, equal to their realizable values, how much would Mr. A, an unsecured non-priority creditor, would expect to receive from his ₱500,000 claim from Bye-bye Corporation? a. 98,312.24 b. 104,761.90 11

c. 130,912.34 d. 214,711,24 A, B, and C formed a joint operation. The joint operators shall make initial contributions ₱40 each. Profit and loss shall be divided equally. The following data relate to the joint operation’s transactions: A B C Joint operation 32 Cr. 40 Cr. 48 Cr. Expenses paid from JO cash 20 8 12 Value of inventory taken 20 24 16 59. How much is the joint operation’s sales? a. 280 b. 40 c. 80 d. 76 60. How much is the cash settlement to B? a. ₱80 receipt b. ₱80 payment c. ₱32 receipt d. ₱76 receipt Trumpet Co. consigned eight heavy machineries to Cold Breeze Co. Each machine costs ₱1,000,000 and has a suggested retail price of ₱2,100,000. Trumpet paid ₱200,000 in transporting the machines to the consignee’s place of business. At the end of the period, Cold Breeze reported three unsold machines and remitted the collections on sales during the period, after deducting the following: Commission (based on sales net of commission) 20% Finder’s fee (based on commission) 5% Delivery, installation and testing (on each unit sold) ₱50,000 Materials generated from the testing were sold for ₱5,000 and included in the remittance to Trumpet Co. 61. How much profit is earned by the consignor from the sale? a. 3,292,500 b. 5,375,000 c. 1,025,000 d. 3,412,500 62. How much was the net remittance to the consignor? a. 9,182,500 b. 8,417,500 c. 8,850,500 d. 7,891,500 63. How much is the cost of the unsold machineries? a. 3,075,000 b. 2,987,000 c. 1,025,000 d. 1,000,000 64. RIBALD OFFENSIVE Co. uses the installment method. On December 31, 20x3, RIBALD Co.’s records show the following balances: Deferred gross profit (before year-end adjustments) 2,252,000 Installment receivable - 20x2 960,000 Installment receivable - 20x3 2,400,000 Gross profit rate in 20x2 is 24% based on sales while gross profit rate in 20x3 is 33 1/3% based on cost. How much is the realized gross profit in 20x3? a. 982,600 b. 1,014,200 c. 1,291,600 d. 1,421,600 The following information was taken from the records of a branch: 12

Sales by branch Billings to branch by home office Operating expenses Ending inventory at billed price

2,800,000 2,500,000 400,000 1,000,000

The following information was taken from the records of the home office: Branch current account Shipments to branch Allowance for markup - Unadjusted 65. What is the billing rate based on cost? a. 20% b. 25% c. 120%

d. 125%

66. What is markup percentage based on cost? a. 20% b. 25% c. 120%

d. 125%

2,600,000 2,000,000 500,000

67. 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 68. How much is the realized markup of the branch? a. 300,000 b. 240,000 c. 380,000

d. 270,000

69. 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 70. 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 **END OF BONUS QUESTIONS**

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