P2 103 Special Revenue Recognition Installment Sales Construction Contracts Franchise (1)

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES PRACTICAL ACCOUNTING 2

2013-2014

SPECIAL REVENUE RECOGNITION P2 - 103

INSTALLMENT SALES

Problem 1. Hulugan Enterprises appropriately uses the installment sales method. Its gross profit rates were 30%, 25%, and 20% of cost for 2011, 2012, and 2013, respectively. The following account balances are available at the end of 2013:

Year of Sale IAR DGP (before adjustment)2011 P 2,400 P 2,8922012 24,600 24,3002013 78,000 48,060

Calculate the total cash collections during 2013.a. P 242,140 b. P 526,148 c. P 317,392 d. P 42,894

Problem 2. Paiyakan Corporation, which began operations on January 1, 2012, appropriately uses the installment method of accounting for revenues. The following information is available for the years ended December 31, 2012 and 2013.

2012 2013Cost of installment sale P 600,000 P 1,200,000Gross profit realized on sales made in:

2012 90,000 54,0002013 - 120,000

Gross profit rate, cost based 30% 40%

Calculate the ending balance of installments accounts receivable on December 31, 2013a. P 1,416,000 b. P 1,020,000 c. P 1,065,000 d. P 735,000

Problem 3. On October 1, 2013, Instagram Company sold Article One costing P270,000 for P400,000. Article Two, a used article was accepted as down payment and the balance on monthly installments for two years that include both principal and interest at 15% per year, starting October 31, 2013, as evidenced by a note. P120,000 was allowed on the article traded-in. The company estimates reconditioning cost of P8,000 on this article and a sales price of P110,000 after reconditioning. The company normally expects 20% gross profit on sale of used article.

Questions: 1. How much is the realized gross profit in 2013? (Round of PV factors to 4 decimal places) 2. Assume that there is a very high degree of uncertainty about the collectability of the note, thus, Instagram opted to use the

cost recovery method. How much is the increase in profit or loss related to interest income in 2014? (Round of PV factors to 4 decimal places)

Problem 4. Viber Company uses installment accounting and has the following data on its financial statements at year end:

Gross margin on cost 66 2/3 %Unrealized gross profit P192,000Cash collection including down payment 360,000

Questions:1. What was the amount of sale on installment basis? 2. What was the amount of sale on installment basis assuming the unrealized gross profit is before adjustment?

PARTNERSHIP ACCOUNTING - P2 103

Problem 5. Expedition Motors sells automobiles on installment basis. On May 30, 2013, Mr. Montenegro bought a car for P1,125,000, terms: 25% down payment and the balance is payable in 48 months starting June 30, 2013. The cost of the car is P800,625. In lieu of the down payment, Expedition Motors accepted the buyers slightly used pick up which has a resale value of P300,000 after reconditioning at a cost of P127,500. After paying the October 2013 installment, Mr. Montenegro met an accident which incapacitates him to meet his liabilities. After 3 notices, Expedition Motors repossessed the car. The repossessed car has a resale value of P496,875 after incurring reconditioning costs of P180,000. What is the cancelled profit due to repossession?

a. P 160,393 b. P 193,143 c. P 200,958 d. P 226,758

Problem 6. Abensons Company sells home theater set both on installment and cash basis. Mr. Aquino purchased a set from Abensons Company on March 30, 2013 for P367,500 which has a cost of P289,800. A used set is accepted as down payment, P89,600 being allowed on the trade in and the balance is payable 10 months starting May 1, 2013. The used set can be resold for P112,140 after reconditioning cost of P5,362. The company expects to make 20% gross profit on the sale of used sets. Mr. Aquino defaulted payment starting Nov. 1, 2013 and the set was repossessed. Abensons Company had to incur additional cost of repairs amounting to P6,475 before the car was subsequently sold for P90,125 on December 1, 2013. What is the net income to be recognized for the year 2013 in relation to the above transactions?

a. P 44,940 b. P 51,415 c. P 68,243 d. P 69,293

Problem 7. On January 1, 2013, Tom Brands sells 200 acres of farmland for P30,000,000, taking in exchange a 10% interest bearing note. Tom Brands purchased the farmland in 2008 at a cost of P25,000,000. The note will be paid in three installments of P12,063,450 each on December 31, 2013, 2014, and 2015. Collectability of the note is highly uncertain; Tom, therefore, uses the cost recovery method applied in US GAAP.

Questions:1. What is the installment receivable balance at December 31, 2013?

a. P 17,936,550 b. P 30,000,000 c. P 20,936,550 d. P 25,000,000

2. What is the balance of the Deferred Gross Profit account as of December 31, 2013?

a. P 5,000,000 b. P -0- c. P 3,489,400 d. P 1,510,578

Problem 8. 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 the 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?

Problem 9. Twitter Corporation, which began business on January 1, 2013, appropriately uses the installment sales method of accounting for tax purposes, but records net income under the accrual method. The following data were obtained for the years 2013 and 2014:

2013 2014

Installment sales P 7,500,000 P 8,400,000

Cost of installment sales 5,250,000 6,048,000

General & administrative expenses 700,000 840,000

Outstanding accounts on sales of 2013 4,400,000 1,400,000

Outstanding accounts on sales of 2014 -0- 4,000,000

A 2013 sale resulted in a default in 2014. At the date of default, the balance on the installment receivable was P120,000, and the repossessed merchandise had a fair value of P80,000.


Questions:1. Determine the net income for the year 2014 under installment method.2. Determine the net income for the year 2014 under full accrual method.

Problem 10. The following accounts were taken from the trial balance of Survival Company as of December 31, 2013:

Accounts Receivable – P750,000; Installment Receivable (2011) – P150,000; Installment Receivable (2012) – P450,000; Installment Receivable (2013) – P2,700,000; Merchandise Inventory – P525,000; Purchases – P3,900,000; Freight-in – P30,000; Repossessed Merchandise – P150,000; Repossession Loss – P240,000; Cash Sales – P900,000; Charge Sales – P1,800,000; Installment Sales – P4,460,000; Deferred Gross Profit (2011) – P222,000; Deferred Gross Profit (2012) – P393,600; Operating Expenses – P150,000; Shipment on Installment Sales – P2,787,500.

Additional Information: Gross profit rates for 2011 and 2012 installment sales were 30% and 32%, respectively. The entry for repossessed goods was:

Repossessed Merchandise 150,000Repossession Loss 240,000

Installment Receivables (2011) 180,000Installment Receivables (2012) 210,000

Merchandise on hand at the end of 2013 (new & repossessed) was P282,000.

Questions:1. Determine the Total Realized Gross Profit in 2013.2. Determine the balance of Deferred Gross Profit as of December 31, 2013. 3. Determine the Net Income in 2013.

Problem 11. Achievement Company which began operations on January 1, 2013 appropriately uses the installment method of accounting. The following data pertain to Achievement’s operations for year 2013:

Installment sales (before over/under-allowance) P 3,150,000Operating expenses 367,500Regular Sales 1,312,500Total collections for the year (both cash and non-cash, excluding interest of P84,000) 2,088,000Cost of regular sales 752,500Cost of installment sales 2,205,000Accounts receivable – 12/31/2013 512,500Installment receivable written-off (no provision was made in prior year) 154,000Estimated resale value of repossessed merchandise 290,000Profit usual on the sale of repossessed merchandise 15%Repossessed accounts 350,000Actual value of the trade-in merchandise 280,000Trade-in allowance 490,000Reconditioning cost of the repossessed merchandise 57,500

Questions:1. Determine the deferred gross profit at 12/31/2013. 2. Determine the net income for the year ended 12/31/2013.

Problem 12. On January 1, 2013, Liberty Realty Corporation sold property carried in inventory at a cost of P840,000 for P1,400,000. A 10% down payment was made and the balance is payable in 4 equal installments of P363,625, inclusive of 12% interest, payable every June 30 and December 31.

Questions:1. How much is the realized gross profit in 2013 assuming the installment method is used?


a. P 237,332.60 b. P 293,332.60 c. P 308,000 d. P 346,900

2. How much is the total collection in 2013 applied to interest?

a. P 0 b. P 133,918.50 c. P 151,200 d. P 168,000Problem 13. The following account balances appear on the books of Fulfillment Company as of December 31, 2013:

Cash P 150,000Receivables 800,000Merchandise Inventory 75,000Accounts Payable 30,000Deferred Gross Profit – 2011 261,250Sales 1,250,000Purchases 640,000Expenses 425,000

The Receivables account is a controlling account for three subsidiary ledgers which shows the following:

2012 Installment contracts P150,000 2013 Installment contracts 600,000Charge accounts (terms, 30 days, net) 50,000

The gross profit on sales on installment contracts for 2012 and 2013 was 55% and 50%, respectively. Collections on installment contracts for 2012, 2013 and charge accounts were P300,000, P400,000 and P200,000,

respectively, for the year just closed. 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 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. Sales account is also a controlling account for all the sales of the Company.

Questions:1. Compute for the total realized gross profit in 2013

a. P756,250 b. P626,250 c. P495,000 d. P365,000

2. Determine the Net Income in 2013.a. P331,250 b. P301,250 c. P328,750 d. P382,500

Problem 14.The Kimmy Dora Company has regular and installment sales. On December 31, 2013, the following unadjusted balances were taken from the general ledger:

Installment receivables – 2012 P 40,000

Installment receivables – 2013 160,000

Unrealized gross profit – 2012 42,000

Unrealized gross profit – 2013 74,000

Sales – regular 250,000

Cost of sales – regular 167,500


Every year the gross profit rate on installment sales are 4% higher than that on regular sales. The gross profit rate on 2013 installment sales is 2% higher than that of 2012.

The total realized gross profit on installment sales to be recognized on December 31, 2013 is

a. P 42,800 b. P 75,000 c. P 125,300 d. P 100,000Problem 15. Walang Hanggan Corporation has been using the cash method to account for income since its first year of operations in 2012. All sales are made on credit with notes receivable given by the customers. The statement of comprehensive income for 2012 and 2013 included the following amounts:

2012 2013

Revenues – collection on principal P 32,000 P 50,000

Revenues – interest 3,600 5,500

Cost of goods purchased * 45,200 52,020

* Includes increase in inventory of goods on hand of P 2,000 in 2011 and P 8,000 in 2012The balances due on the notes at the end of each year were as follows:

2012 2013

Notes receivable – 2011 P 62,000 P 36,000

Notes receivable – 2012 60,000

Discount on notes receivable – 2011 7,167 5,579

Discount on notes receivable – 2012 8,043

(Round-off gross profit rate in two decimal percentage and round of balances in nearest peso)

Questions:1. Under installment method, how much is the amount recognized in profit and loss for 2012?

a. P 14,164 b. P 16,080 c. P 17,764 d. P 19,680

2. Under installment method, how much is the realized gross profit in 2013?

a. P 12,267 b. P 21,615 c. P 23,329 d. P 26,806

Problem 16. THE IMMORTALS Store accounts for its sales on the installment basis. At the beginning of 2012, ledger accounts include the following balances: Installment contracts receivable, 2010 - P 30,000; Installment contracts receivable, 2011 - P 96,000; Deferred gross profit, 2010 - P 12,600; Deferred gross profit, 2011 - P 36,000.

At the end of 2012, account balances before adjustment for realized gross profit on installment sales are:

Installment contracts receivable, 2010 - P 0; Installment contracts receivable, 2011 - P 24,000; Installment contracts receivable, 2012 - P 130,000; Deferred gross profit, 2010 - P 12,600; Deferred gross profit, 2011 - P 34,350; Deferred gross profit, 2012 - P 60,000.

Installment sales in 2012 are made at 25% above cost of merchandise sold. During 2012 upon default in payment by the customer, the company repossessed the merchandise with an estimated market value of P 2,000. The sales was in 2011 for P 10,800, and P 6,400 had been collected prior to repossession.


Questions:1. Compute the gain or (loss) on repossession assuming that Profit is recognized when sale is made:

a. (P 2,400) b. P -0- c. (P 750) d. (P 750)

2. Compute the gain or (loss) on repossession assuming that Profit is in proportion to periodic collection (IS method):a. (P 2,400) b. P -0- c. (P 750) d. (P 750)

3. The net realized gross profit on December 31, 2012 is:a. P 73,600 b. P 71,950 c. P 71,200 d. P 34,000

LONG-TERM CONSTRUCTION CONTRACTS

Problem 1. On July 1, 2013, Janet Construction Corp. contracted to build an office building for Napoles Inc. for a total contract price of P2,950,000. Estimated total contract costs is P2,600,000.

Costs incurred to date are as follows related to the project were as follows:

Cost of direct materials used P200,000 Cost direct labor (includes labor cost of site supervision) 150,000 Cost of indirect materials used 55,000Cost incurred in securing the contract* 70,000Annual depreciation of plant and equipment used on the contract 240,000Payroll of design and technical department allocated to the contract 80,000Insurance costs (2/3 for other contracts) 180,000Costs of contracted research and development activities 105,000Depreciation of idle equipment that is not used on a particular contract 60,000Selling costs 45,000General & administration costs expenses specifically included under the

terms of the contract 30,000Borrowing cost incurred during the construction period 130,000Costs of labor for site supervision 50,000Advances made to subcontractors 100,000

* expensed in prior year although the contract was obtained in 2013

Using cost-to-cost method in determining the stage of completion, what is the realized gross profit for the period 2013? (Round-off stage of completion to 2 decimal percentage)

a. P 111,055 b. P 125,195 (x) c. P 134,610 d. P 141,330

Problem 2. Mediocre Builders, Inc. recognized a gross loss of P78,000 on its long term project which has accumulated costs of P595,000 at December 31, 2013. To finish the project, the company estimates that it has to incur additional costs of P820,000. The company uses percentage of completion method and thus noted that the project was about 42% completed at this point. Calculate the contract price that was agreed upon by both parties.

a. P 1,415,000 b. P 1,337,000 c. P 1,383,800 d. P 1,183,000

Problem 3. On January 1, 2013, Fast Builders, Inc. began constructing a P3,500,000 contract. As of years-end, the following are relevant information provided by the corporation.

2013 2014 2015Construction in progress P 735,000 P2,248,750 ?Estimated cost to complete 2,666,250 1,251,250 -Costs incurred P 708,750 P 1,615,000 P1,126,250

Questions:1. How much is the (1) RGP (loss) in 2014 using the percentage of completion method?2. How much is the (2) RGP (loss) in 2015 using zero-profit method?


Problem 4. On January 1, 2013, ALI, a real estate company, entered into a contract to construct a building on a piece of land it has acquired and, when construction is complete, to deliver the entire property to a customer. The following information pertains to the said contract: Total cost of land – P2M; Estimated total cost of construction – P8M; Estimated total cost of contract – P10M; Agreed purchase price – P11M. In CY 2013, total construction cost incurred amount to P2M while the fair value of the land is P2.5M.

Questions:1. Assume the contract is considered single contract and the POC rate is billed, determine the amount of revenues, contract

expenses, and gross amount due from customer recognized in the financial statements of ALI. 2. Assume the contract is considered multiple element contract and the POC rate is billed, determine the amount of revenues,

contract expenses, and gross amount due from customer recognized in the financial statements of ALI. 3. Determine amount included as current asset in the financial statements of ALI related to the above information under zero

profit method. Problem 5. Guagua Boatbuilders was recently awarded a P28,000,000 contract to construct a luxury liner for Cruiseliners Inc. Guagua estimates it will take 42 months to complete the contract. The company uses the cost-to-cost method to estimate profits.

The following information details the actual and estimated costs for the years 2012-2015:

2012 2013 2014 2015Actual cost incurred current year P13,000,000 P6,600,000 P4,800,000 P3,400,000Estimated cost to complete 13,600,000 7,800,000 3,800,000 -0-

How much revenue, cost, and gross profit is to be recognize in 2014 under the percentage of completion method?

Problem 6. 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

2012 2013 2014Contract costs incurred P 350,000 P 930,000 P 670,000Estimated cots to complete the contract 1,050,000 685,000 ---Billings to RX, Inc. 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 estimate are available amount to

P386,250 due to customer.b. The Inventory account balance at December 31, 2013, using the cost to cost method is P1,140,000. c. The recognized loss in 2013 using zero profit method is P246,250d. 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 7. 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 process – P1,800,000; contract retention – P180,000; Mobilization fee – P140,000. At December 31, 2013, the estimated cost at completion is P7,350,000. Determine the realized gross profit in 2013.

Problem 8. In 2013, Roar, Inc. was contracted to build the private road network of Alabang Subdivision for P350 million. The product is expected to be finished in 2 years, and the contract provided for:

A 5% mobilization fee (to be deducted from the last billing), payable within 15 days from the contract signing. A retention provision of 10% on all billings, payable with the final bill after the completed contract is accepted. Payment of progress billings within 30 days from acceptance.

Roar, Inc. estimated a gross margin of 25% on the project. By the end of the year, Roar had presented progress billings corresponding to 50% completion. Alabang accepted all the bills presented, except one for 10% which was accepted on January 7 of the next year. With the exception of the second to the last billing for 8% which was due January 13 of the next year, all accepted billings were settled. As of December 31, 2013, Roar, Inc. construction in progress, net of billings from the project under the percentage of completion method amounted to:


Problem 8. On January 1, 2015, a fire destroyed the office building of Conjuring Company and destroyed all the files in the accountant’s desk. The president of the company contracted you to help reconstruct the contract information. The following data were taken from salvage files:

12/31/13 12/31/14 Estimated cost to complete P 1,556,250 P 1,000,000Costs incurred 462,500Percentage of completion 60%Realized profit to date 62,500 150,000

What is the estimated total gross profit as of 2013 for this contract?a. P 156,250 b. P 208,333 c. P 250,000 d. P 312, 500

Problem 9. In 2013, Insidious Constructions began construction work under a three year contract. The contract price was P700,000. Insidious uses the percentage of completion method for financial accounting purposes. The financial statement presentation relating to this contract at December 31, 2013 is presented below:

Statement of Financial Position

Accounts receivables – construction billings P 26,250

Construction in progress P 87,500

Less: contract billings 82,250

Costs of uncompleted contract in excess of billings 5,250

Statement of Comprehensive Income

Gross profit (before tax) recognized in 2013 P 17,500

The total estimated cost is:a. P 140,000 b. P 490,000 c. P 560,000 d. P 656,250

Problem 10. 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.

2012 2013 2014Construction in Progress (CIP) P 441,000 ? ?Estimated costs to complete ? ? -Costs Incurred 425,250 P 969,000 P 675,750Excess of CIP over Billings P84,000 current liability P330,750 current liability -

Questions:1. How much is the estimated remaining cost in 2012? 2. How much is the realized gross profit (loss) in 2013? 3. How much is the balance of CIP in 2013?

Problem 11. On July 1, 2012, Great Corp. obtained a contract to construct a building. The building was estimated to be built at a total of P5,250,000 and is scheduled for completion on October 2014. The construct 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 the 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.


2012 2013 2014Costs incurred P 525,000 P 1,932,000 P 325,500Estimated cots to complete 2,100,000 273,000 -Billings to customers 420,000 4,567,500 1,260,000

Questions: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. P 840,000 current asset b. P 840,000 current liability c. P 800,000 current asset d. P 800,000 current liability

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. P 682,500 current asset b. P 682,500 current liability c. P 635,250 current asset d. P 635,250 current liability

Problem 12. Applause Corporation entered in a long term project in 2012 and continued through 2013. Applause Corp. presently has available dependable and reliable estimates. As of 2013, Applause billed 2/5 of the total contract price. Some other information about the project were as follows:

2012 2013

Construction cost to date P 148,500 P 420,000

Excess of CIP over Billings – due from (due to) 38,750 (62,250)

Contract billings 105,000 612,500

Collection from the contract 97,500 537,500

Compute the estimated cost to complete in 2012:a. P 746,667 b. P 1,089,000 c. P 1,387,500 d. P 1,650,000

Problem 11. On July 1, 2012, Hoops Construction Corp. contracted to build an office building for Kiri, Inc. for a total contract price of P975,000.

2012 2013 2014

Contract cost incurred to date P 75,000 P 600,000 P 1,050,000

Estimated cost to complete the contract 675,000 400,000 -

Billings to Kiri, Inc. 150,000 550,000 275,000

How much is the Construction in Progress account balance at December 31, 2013, using the percentage of completion method?

a. P 350,000 b. P 575,000 c. P 825,000 d. P 900,000

FRANCHISE

Problem 1. Castle Company sells a franchise that requires an initial franchise fee of P7,000,000. A down payment of P2,000,000 cash is required the balance covered by the issuance of a P5,000,000, 10% note payable by the franchisee in 5 equal annual installments. How much must be the franchise revenue earned under the following assumptions.

1. If all material services have been substantially performed by a franchisor, the refund period has expired, and the collectability of the note is reasonably assured.


2. If the refund period has expired and the collectability of the note is reasonably assured, but all material services have not been substantially performed by the franchisor.

3. If all material services have been substantially performed by the franchisor and the collectability of the note is reasonably assured, but the period of refund has not expired.

4. If the refund period has expired, but all material services have not been substantially performed by the franchisor and there is no basis for estimating the collectability of the note and the note is not recognized as an asset. Instead, a form of deposit method is used.

Problem 2. The ST Company sells a franchise that requires an initial franchise fee of P500,000. A P100,000 down payment is required with the balance in 4 equal monthly installments of P100,000. All material services have been substantially performed by ST Company, the refund period has expired, and the collectability of the note is reasonably assured. The interest rate for this type of loan is 12%.

The unearned franchise revenue earned during the period must be: Problem 3. 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 P437,500 annual payments (covered by a non-interest bearing note) representing the value of initial services rendered by Spiral restaurant. In addition, the agreement required the franchisee to pay 6% of its gross sales to the franchisor. The restaurant opened in July and its sales for the year amounted to P6,562,500. Assuming a 15% interest rate is appropriate. How much is the franchisors total income/revenue for the year ended 2013 profit or loss? (Round of PV factors into 2 decimal places)

Problem 4. 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 and indirect expenses, respectively. Prevailing market rate is 9%. On the FY ended September 30, 2013, how much revenue from franchise fee will the franchisor recognize? (Round PV factors into 4 decimal places)

Problem 5. Crab Claw Co. charges P90,000 for a franchise, with P18,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 9% is P58,315. The franchisee has the right to purchase P20,000 of equipment for P16,000. If the collectability of the payments is reasonably assured and substantial performance by Crab Claw has occurred, what is the amount of revenue from franchise fee that should be recognized?

Problem 6. Casio Co. charges new franchisees an initial fee of P3,500,000. Of this amount, P1,000,000 is payable in cash when the agreement is signed, and the remainder is to be paid in four equal annual installments which are evidenced by 12% promissory notes. In consideration therefore, Casio 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, 2013, Casio Co. entered into a franchising agreement with Corolla, Inc. By the end of the year, Casio Co. has completed about 25% of the initial services at a cost of P250,000 and it has ascertained that collection of the notes is reasonably assured. For 2013, Casio Co. should recognize unearned franchise revenue of:

a. P -0- b. P 3,500,000 c. P 1,000,000 d. P 2,500,000

Problem 7. On January 1, 2012, Mr. DJ entered into a franchise agreement with GB to market their products. The agreement provides for an initial fee of P12.5m payable as follows: P3,500,000 to be paid upon signing of the contract and the balance in five equal annual payments every end of the year starting December 31, 2012. Mr. DJ signs a non-interest-bearing note for the balance. His credit rating indicates that he can borrow money at 15% interest for a loan of this type. The present value of an annuity of P1 at 15% for 5 periods is 3.352. The agreement further provides that the franchisee must pay a continuing franchise fee equal to 3% of the monthly gross sales. On August 31, the franchisor completed the initial services required in the contract at a cost of P4,290,120 and incurred indirect costs of P175,000. The franchise outlet commenced business operations on November 30, 2012. The gross sales reported to the franchisor were P1,800,000 for December, 2012. The first installment payment was made in due date, but further collection of the balance was not reasonably assured. Calculate the net income for 2012 that the franchisor will report in its income statement.


a. P 3,126,268 b. P 3,201,268 c. P 2,417,268 d. P 3,072,268

Problem 8. On December 31, 2011, JKL, a franchisor, entered into a franchising agreement with GMD charging GMD a franchise fee of P400,000. Upon signing of the contract, a down payment of P100,000 is paid with the balance payable in four equal annual installments starting 2012. JKL had already performed 99.9% of the services as of February 1, 2012 at a total cost of P140,000. JKL was able to collect the first installment payment in 2012 but the collectability of the remaining balance is still doubtful. Calculate the profit to be recognized by JKL in its 2012 income statement.

a. P 260,000 b. P 48,750 c. P 65,000 d. P 113,750

Problem 9. On April 30, 2013, Mike Inc. entered into a franchise agreement with Ross Co. to sell their products. The agreement provides for an initial franchise fee of P1.20M which is payable as follows: P400,000 cash to be paid upon signing the contract, and the balance in five equal annual installments every December 1, starting in 2013 as evidenced by a noninterest bearing note for the said balance signed by Mike Inc. Prevailing market rate is 10% on April 30, 2013.The agreement further provides that Mike Inc. must pay a continuing franchise fee equal to 5% of its monthly gross sales. Ross Co. incurred direct cost of P540,000, of which P170,000 is related to continuing services and indirect costs of P72,000, of which P18,000 is related to continuing services. Mike Inc. started 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 collectability of the note is not reasonably assured, how much is the net income of the franchisor as of December 1, 2013? (Round off PV factors to 4 decimal places and GP % to whole %)

a. P 254,935 b. P 177,610 c. P 174,508 d. P 172,650Problem 10. On December 31, 2013, BonChon Inc. authorized ZubuChon to operate as a franchisee for an initial franchise fee of P3.40M. Upon signing the contract, P0.90M was received and the balance is paid by a note, due in 5 equal annual installments that include 12% interest, beginning December 31, 2014. The down payment is nonrefundable and it represents a fair measure of the services already performed by BonChon and substantial future services are still required. How much is the unearned revenue to be recognized as of December 31, 2013? (Round off PV factors to 5 decimal places)

a. P 1,802,390 b. P 2,702,390 c. P 2,500,000 d. P 3,400,000

Problem 11. On January 2, 2013, CeCe Co. entered into franchise agreement with Drake Inc., franchisee. The sale agreement was to make a P60,000 down-payment plus two P20,000 annual payments, representing the value of initial franchise services rendered by CeCe. In addition, the agreement required Drake to make an annual fixed payment of P36,000 to CeCe. CeCe estimates that continuing services will cost P40,000 per year (actualized in 2013). A reasonable profit from such services is estimated at 7.5% of cost (or P3,000/year). Drake commenced operations on March 1, 2013. Assuming a 10% interest rate is appropriate, CeCe’s CY 2013 total income/revenue: (Round off PV factors to 4 decimal places)

a. P 127,181 b. P 134,710 c. P 144,181 d. P 98,181

Problem 12. On December 1, 2012, Gamble, Inc. authorized Cedar Company to operate as a franchise for an initial franchise free of P1,000,000. On this amount, P600,000 was received upon signing the agreement and the balance, represented by a note, is due in four annual payments of P100,000 each beginning December 31, 21012. Those present value on December 31, 2012, for four annual payments appropriately discounted a P303,740. According to the agreements the non-refundable down payment represents a fair measure of the services already performed by Gamble and substantial future service are still to be rendered. However, collectability of the note is reasonably certain. Gamble’s December 31, 2012 income statement should report earned franchise fee from Cedar Company in the amount of

a. P 600,000 b. P 903,470 c. P 903,740 d. P 1,000,000

Problem 13. On January 1, 2013, Little Co. granted franchise right to Liars Inc. for a nonrefundable initial franchise fee of P400,000, of which 20% was collected upon signing of the contract and the remaining 80% is represented by a note receivable in 4 equal annual installments starting December 31, 2013. The prevailing market rate on January 1, 2013 is 12%. All of the initial services and conditions required under the franchise agreement were substantially performed and satisfied on March 1, 2013. On July 1, 2013, Liars Inc. decided not to pursue the franchise business. Accordingly, Little Co. repossessed the franchise.

Questions:1. No refund was made and the entire balance of the note was forfeited. Franchise fee revenue recognized in 2013 is

a. P -0- b. P 80,000 c. P 162,988 d. P 322,988

2. Assume 50% of collection was refunded and 50% was forfeited. Franchise revenue recognized in 2013 is


a. P -0- b. P 80,000 c. P 162,988 d. P 322,988

Problem 14. On January 1, 2013, Kamiseta, Inc. signed an agreement authorizing Mr. Geri de Castro to operate as a franchisee for an initial franchise fee of P5,000,000. Of this amount, P2,000,000 was received upon signing of the agreement and the balance evidenced by a 16% promissory note which is due in three annual installments of P1,000,000 each beginning December 31, 2013. Mr. de Castro started franchise operations on September 1, 2013 after Kamiseta rendered initial services required at a total cost of P1,500,000. The first installment was collected on due date. The collectibility of the note is not reasonably assured. How much net income is to be recognized on December 31, 2013?

a. P 2,100,000 b. P 2,580,000 c. P 3,980,000 d. P 1,080,000

Problem 15. On January 2, 2013, Magnolia Ice Cream signed an agreement authorizing Jomari to operate as franchisee for an initial franchise fee P500,000 received upon signing of the agreement. Jomari commenced operations on August 1, 2013, at which date all of the initial services required of Magnolia Ice Cream had been performed at a cost of P100,000. The franchise agreement further provides that Jesse must pay a 10% monthly continuing franchising fee. Sales reported from August 1 to December 31, 2013 amounts to P400,000. How much is the initial franchise fee to be recognized in 2013?

a. P 380,000 b. P 500,000 c. P 420,000 d. P 440,000

Problem 16. On December 31, 2012, Noynoy Company authorized Mar to operate as a franchisee for an initial franchise fee of P3,000,000. Of this amount, P1,200,000 was received upon signing of the contract, and the balance payable by a non-interest bearing note, due in three annual payments of P600,000, beginning December 31, 2013. The collectibility of the note is not reasonably assured. The market rate of interest is 18%. (Use two decimal places for present value factor.) How much is the interest revenue on December 31, 2013?

a. P 498,000 b. P -0- c. P 234,360 d. P 263,640


P2 103 Special Revenue Recognition Installment Sales Construction Contracts Franchise (1)

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