Chapter7aa1sol

CHAPTER 7

SUGGESTED ANSWERS Exercise 7-1 1 . Contract price Cost incurred to date Est. cost to complete

2006

2007

2008

P50,000,000 P 7,500,000 30,000,000

P50,000,000 P34,500,000 8,625,000

Total estimated cost Total estimated gross profit Percentage of completion

37,500,000 P12,500,000 20%

P43,125,000 P 6,875,000 80%

P50,000,000 P40,800,000 __________ P40,800,000 P 9,200,000 100%

2006 - Recognized revenue Cost of revenue Gross profit

To Date P10,000,000 7,500,000 P 2,500,000

Recognized in prior year/s -

To be recognized this year P10,000,000 7,500,000 P 2,500,000

2007 - Recognized revenue Cost of revenue Gross profit

P40,000,000 34,500,000 P 5,500,000

P10,000,000 7,500,000 P 2,500,000

P30,000,000 27,000,000 P 3,000,000

2008 - Recognized revenue Cost of revenue Gross profit

P50,000,000 40,800,000 P 9,200,000

P40,000,000 34,500,000 P 5,500,000

P10,000,000 6,300,000 P 3,700,000

2006

2007

2008

2 . a. Construction in progress Cash, Materials, etc.

7,500,000

b. Accounts Receivable 8,000,000 Progress Billings on Const. Contracts

27,000,000 7,500,000

6,300,000 27,000,000

36,000,000 8,000,000

6,300,000 6,000,000

36,000,000

6,000,000

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c. Cash Accounts Receivable

5,500,000

d. Cost of LTCC Construction in Progress Revenue from LTCC

7,500,000 2,500,000

33,000,000 5,500,000

11,500,000 33,000,000

27,000,000 3,000,000 10,000,000

2

11,500,000 6,300,000 3,700,000

30,000,000

10,000,000

d. Progress Billings on Construction Contracts Construction In Progress

50,000,000 50,000,000

3 . Statement of Financial Position Current Assets: Accounts Receivable

P5,500,000

Current Liabilities: Progress Billings on Construction Contracts Less Construction in Progress

P44,000,000 40,000,000

P4,000,000

Exercise 7-2 2006 a. Construction in Progress Cash, Materials, etc.

32,000,000

b. Accounts Receivable Progress Billing on Const. Contract

33,000,000

c. Cash Accounts Receivable

31,000,000

2007 43,000,000

32,000,000

15,500,000 43,000,000

45,000,000 33,000,000

15,500,000 22,000,000

45,000,000 40,000,000

31,000,000

2008

22,000,000 29,000,000

40,000,000

29,000,000

AA1 - Chapter 7 (2008 edition)

Cost of LTCC Construction in Progress Revenue from LTCC e. Progress Billing on Const. Contracts Construction in Progress Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion

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23,000,000 2,000,000

45,250,000 4,750,000 25,000,000

2006 P100,000,000 P 32,000,000 60,000,000 P 92,000,000 P 8,000,000 25%

22,250,000 2,750,000 50,000,000

2007 P100,000,000 P 75,000,000 16,000,000 P 91,000,000 P 9,000,000 75%

2008 P100,000,000 P 90,500,000 ___________ P 90,500,000 P 9,500,000 100%

2006 - Recognized revenue Cost of revenue Gross profit

To date P25,000,000 23,000,000 P 2,000,000

Recognized in prior year/s -

To be recognized this year P25,000,000 23,000,000 P 2,000,000

2007 - Recognized revenue Cost of revenue Gross profit

P75,000,000 68,250,000 P 6,750,000

P25,000,000 23,000,000 P 2,000,000

P50,000,000 45,250,000 P 4,750,000

2008 - Recognized revenue Cost of revenue Gross profit

P100,000,000 90,500,000 P 9,500,000

P75,000,000 68,250,000 P 6,750,000

P25,000,000 22,250,000 P 2,750,000

Exercise 7-3 1 .

25,000,000 100,000,000 100,000,000

Contract price Total estimated cost: Cost incurred to date Estimated cost to complete

P25,000,000 P 4,400,000 15,600,000

20,000,000

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Total estimated gross profit Percentage of completion ( P 400,000/20,000,000) Gross profit to be recognized in 2008

P 5,000,000 22% P 1,100,000

Accounts Receivable

(P25,000,000 x 30% x 10%)

P 750,000

Construction in Progress Progress Billings on Construction Contracts

(P4,400,000 + P1,100,000) (P25,000,000 x 30%)

P5,500,000 P7,500,000

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Exercise 7-4 Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion

2006 P35,000,000 P17,500,000 10,500,000 P28,000,000 P 7,000,000 62.5%

2007 P35,000,000 P29,250,000 3,250,000 P32,500,000 P 2,500,000 90%

2008 P35,000,000 P31,000,000 P31,000,000 P 4,000,000 100%

2006 - Recognized revenue Cost of revenue Gross profit

To date P21,875,000 17,500,000 P 4,375,000

Recognized in prior year/s -

To be recognized this year P21,875,000 17,500,000 P 4,375,000

2007 - Recognized revenue Cost of revenue Gross profit

P31,500,000 29,250,000 P 2,250,000

P21,875,000 17,500,000 P 4,375,000

P 9,625,000 11,750,000 P(2,125,000)

2008 - Recognized revenue Cost of revenue Gross profit 2. Journal entries

P35,000,000 31,000,000 P 4,000,000

P31,500,000 29,250,000 P 2,250,000

P 3,500,000 1,750,000 P 1,750,000

2006 a. Construction in Progress

17,500,000

2007 11,750,000

2008 1,750,000

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Cash, Materials, etc.

17,500,000

b. Accounts Receivable Progress Billing on Const. Contracts c. Cash Accounts Receivable

16,000,000

d. Cost of LTCC Construction in Progress Construction in Progress Rev. from LTCC

17,500,000 4,375,000

11,750,000

1,750,000

12,000,000 16,000,000

15,000,000

7,000,000 12,000,000

7,000,000

10,000,000 15,000,000

10,000,000 10,000,000

10,000,000

11,750,000 21,875,000

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1,750,000 1,750,000 2,125,000 9,625,000

3,500,000

e. Progress Billing on Const. Contract Construction in Progress

35,000,000 35,000,000

3. 2006 - Recognized revenue Cost of revenue Gross profit

To date P17,500,000 17,500,000 ==========

Recognized in prior year/s ============

To be recognized this year P17,500,000 17,500,000 ==========

2007 - Recognized revenue Cost of revenue Gross profit

P31,500,000 29,250,000 P 2,250,000

P17,500,000 17,500,000 ----------------

P14,000,000 11,750,000 P 2,250,000

2008 - Recognized revenue Cost of revenue Gross profit

P35,000,000 31,000,000 P 4,000,000

P31,500,000 29,250,000 P 2,250,000

P3,500,000 1,750,000 P1,750,000

Exercise 7-5 Revenue recognized in 2008

(P26,000,000 x 40%)

P10,400,000

AA1 - Chapter 7 (2008 edition)

Gross profit/income recognized in 2008 Cost incurred in 2008

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(P3,120,000 - P1,300,000)

1,820,000 P 8,580,000

Binondo Project P12,000,000 12,400,000 P (400,000)

Pasig Project P1,290,000 1,400,000 P( 110,000)

Exercise 7-6 Revenue (CP x % of work done in 2007) Cost of revenue Gross profit (loss) Exercise 7-7 1. Contract revenue/price Less Total profit Total cost incurred Less Cost incurred in 2006 and 2008 Cost incurred in 2007

P10,000,000 800,000 P 9,200,000 5,900,000 P 3,300,000

2. Gross profit to date, 12.31.07 Cost incurred to date, 12.31.07 (P1,800,000 + P3,300,000) Revenue to date, 12.31.07 Percentage-of-completion (6,000,000/10,000,000)

P 900,000 5,100,000 P6,000,000 60%

3. Gross profit to date, 12.31.07 Percentage of completion Total estimated gross profit

P 900,000 ÷ 60% P1,500,000

4. Contract price Less Total estimated gross profit Total estimated cost Less Cost incurred to date Estimated cost to complete

P10,000,000 1,500,000 P 8,500,000 5,100,000 P 3,400,000

Exercise 7-8 Cash

500,000

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AA1 - Chapter 7 (2008 edition)

Notes Receivable Discount on Notes Receivable Unearned Franchise Fees

Exercise 7-9 1. Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fees

page

1,000,000 207,540 1,292,460

4,000,000 3,000,000 513,200 6,486,800

2. Cash Notes Receivable Discount on Notes Receivable (3,000,000-(2.48685 x 1,000,000) Revenue from Franchise Fees

4,000,000 3,000,000

3. Cash Unearned Franchise Fees

4,000,000

513,200 6,486,800 4,000,000

4. Cash 4,000,000 Notes Receivable 3,000,000 Discount on Notes Receivable Revenue from Franchise Fees Unearned Franchise Fees (1,000,000 x 2.48685) Exercise 7-10 2007 July 1 - Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fee P800,000 x 3.1699 = P2,535,900 P3,200,000 - P2,535,900 = P664,100

513,200 4,000,000 2,486,800

1,200,000 3,200,000 644,100 3,735,900

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Sept. 1 - Deferred Franchise Cost Cash

100,000 100,000

Nov. 15 - Deferred Franchise Cost Cash Dec. 31 - Discount on Notes Receivable Interest Revenue P2,535,900 x 10% x 6/12 = P126,795

60,000 126,795

2008 Jan. 10 - Deferred Franchise Cost Cash

100,000

60,000 126,795

100,000

15 - Unearned Franchise Fee Franchise Fee Revenue

3,735,900 3,735,900

15 - Cost of Franchise Fee Revenue Deferred Franchise Cost

260,000 260,000

July 1 - Cash Notes Receivable

800,000 800,000

1 - Discount on Notes Receivable Interest Revenue

126,795 126,795

Problem 7-1 2007 a. Construction in Progress Cash, Materials, etc.

11,000,000

b. Accounts Receivable Progress Billing on Const. Contract

10,800,000

c. Cash

10,000,000

2008 4,800,000

11,000,000

4,800,000 9,200,000

10,800,000

9,200,000 10,000,000

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Accounts Receivable

10,000,000

d. Cost of LTCC Construction in Progress Revenue from LTCC e. Progress Billing on Construction Contracts Construction in Progress

11,000,000 2,750,000 13,750,000

20,000,000

Statement of Financial Position Receivable: 2007 2008

P 800,000 -

Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion

Income (loss) Recognized 1,000,000 1,000,000 1,000,000

6,250,000 20,000,000

P2,750,000 1,450,000

Problem 7-3 Year 2006 2007 2008

10,000,000 4,800,000 1,450,000

Problem 7-2 Statement of Recognized Income and Expenses: Income: 2007 2008

Inventory - CIP, net of billings 2007 (13,750,000 - 10,800,000) 2008

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P2,950,000 Rec’l ending balance 380,000 940,000 2006 P15,000,000 P 4,000,000 8,000,000 P12,000,000 P 3,000,000 33 1/3%

CIP Invty. ending balance 5,000,000 12,000,000 2007 P15,000,000 P10,000,000 2,500,000 P12,500,000 P 2,500,000 80%

Cost in excess of billings 1,200,000 2,600,000 2008 P15,000,000 P12,000,000 ---------------P12,000,000 P 3,000,000 100%

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Gross profit to date Less Gross profit recognized in prior year/s Gross profit to be recognized this year

P 1,000,000 _____-______ P 1,000,000

P 2,000,000 1,000,000 P 1,000,000

PROJECT A 2007 2008 P29,000,000 P29,000,000 P16,800,000 P26,400,000 11,200,000 ------------P28,000,000 P26,400,000 P 1,000,000 P 2,600,000 60% 100% P 600,000 P 2,600,000 ------600,000

PROJECT B 2007 2008 P34,000,000 P34,000,000 P14,400,000 P21,200,000 17,600,000 13,000,000 P32,000,000 P34,200,000 P 2,000,000 P( 200,000) 45% P 900,000 P( 200,000)* -----900,000

PROJECT C 2007 2008 P17,000,000 P17,000,000 P 3,200,000 P11,830,000 9,600,000 1,170,000 P12,800,000 P13,000,000 P 4,200,000 P 4,000,000 25% 91% P 1,050,000 P 3,640,000 ---1,050,000

P

P 900,000

P 1,050,000

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P 3,000,000 2,000,000 P 1,000,000

Problem 7-4 Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit (loss) Percentage of completion Gross profit (loss) to date Less gross profit recognized in prior year Gross profit - current year

600,000

P 1,000,000

P(1,100,000)

* The entire loss should be recognized immediately (1) Percentage of completion method Gross profit Operating expenses Net income

2007 P2,550,000 1,200,000 P1,350,000

Problem 7-5 1. (a) Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit

2006 P120,000,000 P 24,000,000 76,000,000 P100,000,000 P 20,000,000

2008 P3,890,000 1,200,000 P2,690,000 2007 P120,000,000 P60,500,000 49,500,000 P110,000,000 P 10,000,000

2008 P120,000,000 P90,000,000 10,000,000 P100,000,000 P 20,000,000

2009 P120,000,000 P105,000,000 -------P105,000,000 P 15,000,000

P 2,590,000

PROJECT D 2008 P2,000,000 P 5,600,000 10,400,000 P16,000,000 P 4,000,000 35% P 1,400,000 ----P 1,400,000

AA1 - Chapter 7 (2008 edition)

Percentage of completion

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24%

55%

90%

Recognized in 2006-Revenue Cost of revenue Gross profit

To date P28,800,000 24,000,000 P 4,800,000

prior year ----------------

2007-Revenue Cost of revenue Gross profit

To date P66,000,000 60,500,000 P 5,500,000

Recognized in prior year P28,800,000 24,000,000 P 4,800,000

2008-Revenue Cost of revenue Gross profit

P108,000,000 90,000,000 P 18,000,000

P66,000,000 60,500,000 P 5,500,000

2009-Revenue Cost of revenue Gross profit

To date P120,000,000 105,000,000 P 15,000,000

Recognized in prior year P108,000,000 90,000,000 P 18,000,000

2. a b.

Construction in Progress Cash, Materials, etc. Accounts Receivable Progress Billings on Const. Contract

2006 24,000,000 26,000,000

P42,000,000 29,500,000 P12,500,000 To be recognized in current year P 12,000,000 15,000,000 P( 3,000,000) 2008 29,500,000

36,500,000 31,000,000

26,000,000

100%

To be recognized in current year P28,800,000 24,000,000 P 4,800,000 To be recognized in current year P37,200,000 36,500,000 P 700,000

2007 36,500,000 24,000,000

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2009 15,000,000 29,500,000

34,000,000 31,000,000

15,000,000 29,000,000

34,000,000

29,000,000

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d.

e.

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Cash Accounts Receivable

24,000,000

Cost of LTCC Construction in Progress Construction in Progress Revenue from LTCC

24,000,000 4,800,000

27,000,000 24,000,000

30,000,000 27,000,000

36,500,000 700,000 28,800,000

30,000,000 30,000,000

29,500,000 12,500,000 37,200,000

3,000,000 12,000,000 42,000,000

120,000,000 120,000,000

Problem 7-6 2006 P14,000,000 P 5,000,000 7,500,000 P12,500,000 P 1,500,000 40% P 600,000 -----P 600,000

2007 P14,000,000 P11,475,000 1,275,000 P12,750,000 P 1,250,000 90% P 1,125,000 600,000 P 525,000

2008 P13,000.000 P12,295,000 ------P12,295,000 P 705,000 100% P 705,000 1,125,000 P (420,000)

Problem 7-7 1. Recognized revenue Cost of revenue Gross Profit (loss) 2. Contract-price Cost incurred to date Estimated cost to complete Total estimated cost

30,000,000

15,000,000

Progress Billings on Const. Contracts Construction in Progress

Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion Gross profit to date Less Gross profit recognized in prior year Gross profit - current year

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2006 P 1,100,000 1,000,000 P 100,000 – (1)

2007 P1,300,000 (2) 1,250,000 P 50,000 2006 P3,500,000 1,000,000 P2,250,000 P3,250,000

2008 P1,100,000 (3) 1,150,000 (4) P (50,000) 2007 P3,500,000 2,250,000 P 950,000 P3,200,000

Total P3,500,000 3,400,000 –(5) P 100,000

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Total estimated gross profit 250,000 Percentage of completion 30.77% Gross profit to date P 76,925 Less GP recognized in prior year/s GP to be recognized this year P 76,925 Problem 7-8 Franchise A: The circumstances imply that the full accrual method could be used. Franchise revenue P3,578,000* Franchise cost 1,400,000 Interest revenue (P2,178,000 x 4%) Income from Franchise A *Initial deposit PV of four payments [4% for 4 periods (P600,000 x 3.6299)]

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300,000 70.3125% P 210,938 76,925 P 134,013

P2,178,000 87,200 P2,265,200

P 1,400,000 2,178,000 P 3,578,000

Franchise B: Because of the doubtful collection and only partial completion, the deposit method should be used. No revenue or income would be recognized in 2008 from the franchise fee. However, because the first payment of P600,000 was made, interest revenue of P87,200 would be recognized. Franchise C: Because of the doubtful collection but substantial completion, either the installment sales or cost recovery method could be used. If the installment sales method is used, gross profit of P843,600* would be recognized in 2008 plus interest revenue of P87,200. *Franchise revenue Franchise cost Franchise gross profit Gross profit percentage: P1,578,000 ÷ P3,578,000 Collections in 2008: Initial fee

P3,578,000 2,000,000 P1,578,000 44.1% P1,400,000

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First payment: Interest P 87,200 Principal 512,800 512,800 Total P 600,000 P1,912,800 Gross profit recognized – 2008: P1,912,800 x 44.1% = P843,600 If the cost recovery method is used, no revenue or income would be recognized, because the P2,000,000 collections are exactly offset by the P2,000,000 costs. Problem 7-9 2007 July 1 Cash Notes Receivable Unearned Franchise Fee Aug. 15 Sept. 15 Dec. 31 2008 Jan. 1

15 31

7,000,000 8,000,000 15,000,000

Deferred Franchise Cost Cash

800,000

Deferred Franchise Cost Cash

500,000

Interest Receivable Interest Revenue

400,000

800,000 500,000 400,000

Cash Notes Receivable Interest Receivable

2,400,000

Deferred Franchise Cost Cash

1,000,000

Unearned Franchise Fee Cost of Franchise Revenue Franchise Fee Revenue Deferred Franchise Cost

2,000,000 400,000 1,000,000 15,000,000 2,300,000 15,000,000 2,300,000

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Dec.

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Cash Notes Receivable Interest Revenue P6,000,000 x 10% x 6/12 Interest Receivable Interest Revenue

2,300,000 2,000,000 300,000 200,000 200,000

Problem 7-10 1. Downpayment made on 1/1/ 07 Present value of an ordinary annuity (P240,000 x 3.69590) Total revenue recorded by Triple Eight

P 800,000.00 887,016.00 P1,687.016.00

e. Cost of acquisition

P 1,687,016

3. Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fees

f.

800,000.00 1,200,000.00 312,984.00 1,687,016.00

a.

P800,000 cash received from downpayment. (P887,016.00 is recorded as unearned revenue from franchise fees). g. P800,000 cash received from downpayment h. None. (P 800,000 is recorded as unearned revenue from Franchise fees).

MULTIPLE CHOICE

1. 2. 3. 4. 5.

C B D A C

6. 7. 8. 9. 10.

B D D D C

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D

P20,000,000 x (3,000,000/15,000,000) =

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A

Contract price Less Total estimated cost: Cost incurred to date Est. cost to complete Total estimated income % of completion (3150/9450) Income to be recognized in 2007

13 .

14 .

15

B

C

B

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P4,000,000

P10,500,000 P3,150,000 6,300,000

9,450,000 P 1,050,000 33 1/3% P 350,000

Contract price

P9,000,000

Total estimated cost Total estimated income Percentage-of-completion (27/81) Income recognized last year

8,100,000 P 900,000 33 1/3% P 300,000

Contract price

P15,000,000

Total estimated cost (P4,650,000 + P10,850,000) Total estimated loss – to be recognized in full

15,500,000 P 500,000

Contract price Total estimated cost (P4M + P4M + P2M) Total estimated gross profit Percentage-of-completion (8M/10M)

P14,000,000 10,000,000 P 4,000,000 80%

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Gross profit to date Less Gross profit recognized in 2006 (P14M –P8M = P6M x 4/8) Gross profit to be recognized in 2007

P 3,200,000

P3,000,000 1,800,000 P1,200,000 33 1/3% P 400,000

3,000,000 P 200,000

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B

Contract price Total estimated cost Total estimated gross profit Percentage-of-completion (600/1,800) Gross profit to be recognized in 2007

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B

Contract price

P12,000,000

Total cost incurred Gross profit Gross profit percentage (1,200/12,000)

10,800,000 P 1,200,000 10%

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A Contract price Total estimated cost Total est. gross profit Percentage-of-completion Gross profit to date Less GP recognized in 2007 GP to be recognized In 2008 Total GP = P750,000 + P228,000

19.

20,000,000/24,000,000

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Contract price Total estimated cost Total estimated gross profit Percentage-of-completion

Cubao P16,200,000 14,400,000 P 1,800,000 83 1/3% P 1,500,000 750,000 P 750,000

Marikina P25,200,000 23,100,000 P 2,100,000 100% P 2,100,000 1,872,000 P 228,000 P 978,000 83.33% P30,000,000 24,000,000 P 6,000,000 83.33%

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GP to date GP recognized in prior years (P30M - P22M = P8M x 50%) GP to be recognized in 2008

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P 5,000,000 4,000,000 P 1,000,000

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Total amount billed Less Balance of accounts receivable Total collections Amount deposited Cash collected not yet deposited

22 23

P150,000 ÷ 937,500/9,000,000 C Mobilization fee (P1.2B x 1%) Collections on billings (1.2B x 10% x 90%) Total fee received by NNO

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B

25 . 26 27 28 29

B

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A

Downpayment First installment payment Add’l fee (P1,000,000 x 3%) Earned Franchise Fees

P 50,000 50,000 30,000 P130,000

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C

P 100,000 x 1/5 = P 20,000 + 1% of P500,000 =

P 25,000

Contract price Gross profit rate Total estimated gross profit Percentage-of-completion Realized gross profit

P843,750 300,000 P543,750 500,000 P 43,750 P1,440,000 P 1.2M 10.8M P12.0M P100.00M 25% P25.00M 50% P12.50M

A B C

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A

P 1,000,000 + 5% of P8,000,000 =

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C

Downpayment PV of installment payment Additional fee ( P 9,000,000 x 5% ) Earned franchise fee

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P1,400,000 P 100,000 199,650 450,000 P 749,650

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