REVENUE RECOGNITION.docx

SPECIAL REVENUE RECOGNITION

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

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

Additional information:  

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

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

SPECIAL REVENUE RECOGNITION

P3,150,000

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

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

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

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

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

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

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

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

SPECIAL REVENUE RECOGNITION

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SPECIAL REVENUE RECOGNITION

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

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

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

2012 P 350,000 1,050,000

2013 P 930,000 685,000

2014 P670,000 0

192,500

1,420,000

212,500

Which of the following statements is true? A. The inventory account, net at December 31, 2013, assuming no dependable estimates are available amount to P386,250 due to customer. B. The inventory account balance at December 31, 2013, using cost to cost method is P1,140,000 C. The recognized loss in 2013 using zero profit method is P246,250 D. The realized gross profit in 2014 using percentage of completion method is P15,000 and the recognized loss in 2014 using zero profit method is P125,000. PROBLEM 2 DM, Inc. works on a P10,500,000 contract in 2013 to construct an office building. During 2013, DM, Inc. uses the cost to cost method. At December 31, 2013, the balances in certain accounts were: Construction in progress – P3,780,000; Accounts receivable – P360,000; and Billings on construction in progress – P1,800,000; Contract retention – P180,000; Mobilization fee – P140,000. At December 31, 2013, the estimated cost at completion is P7,350,000. The realized gross profit in 2013. A. P1,102,500 SPECIAL REVENUE RECOGNITION

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B. P1,062,500 C. P1,242,500 D. P1,134,000 PROBLEM 3 On January 1, 2012, Brave Construction Corp. began constructing a P2,100,000 contract. The following are relevant information provided by the corporation: Brave uses percentage of completion method. For the year ended December 31, 2013, Brave Construction billed its client an additional 55% of the contract price. Construction in Progress Estimated cost to complete Costs incurred Excess of CIP over Billings

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

2013 ? ? 969,000 P330,750 current liability

2014 ? 675,750 -

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

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C. P635,250 current liability D. P635,250 current asset

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

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

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

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

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

SPECIAL REVENUE RECOGNITION

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

P208,885 P246,900 P0 P83,554

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

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

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SPECIAL REVENUE RECOGNITION

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