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, respecti ely. !he following account "alances are a aila"le at the end of 2013# $ear of %ale 2011 2012 2013 3alculate the total cash collections during 2013. a. * 2.2,1.0 ". * 521,1./ I&' * 2,.00 2.,100 2/,000 c. * 312,302 ()* +"efore ad,ustment* 2,/02 2.,300 ./,010 d. * .2,/0.

Problem 2. *aiya4an 3orporation, which "egan operations on 5anuary 1, 2012, appropriately uses the installment method of accounting for re enues. !he following information is a aila"le for the years ended (ecem"er 31, 2012 and 2013. 2012 3ost of installment sale * 100,000 )ross profit reali6ed on sales made in# 2012 00,000 2013 7 )ross profit rate, cost "ased 30% 2013 * 1,200,000 5.,000 120,000 .0%

3alculate the ending "alance of installments accounts recei a"le on (ecem"er 31, 2013 a. * 1,.11,000 ". * 1,020,000 c. * 1,015,000 d. * 235,000 Problem 3. 8n 8cto"er 1, 2013, Instagram 3ompany sold &rticle 8ne costing *220,000 for *.00,000. &rticle !wo, a used article was accepted as down payment and the "alance on monthly installments for two years that include "oth principal and interest at 15% per year, starting 8cto"er 31, 2013, as e idenced "y a note. *120,000 was allowed on the article traded7in. !he company estimates reconditioning cost of */,000 on this article and a sales price of *110,000 after reconditioning. !he company normally e9pects 20% gross profit on sale of used article. :uestions# 1. How much is the reali6ed gross profit in 2013; (Round of PV factors to 4 decimal places) 2. &ssume that there is a ery high degree of uncertainty a"out the collecta"ility of the note, thus, Instagram opted to use the cost reco ery method. How much is the increase in profit or loss related to interest income in 201.; (Round of PV factors to 4 decimal places) Problem 4. <i"er 3ompany uses installment accounting and has the following data on its financial statements at year end# )ross margin on cost >nreali6ed gross profit 3ash collection including down payment :uestions# 11 2=3 % *102,000 310,000

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1. ?hat was the amount of sale on installment "asis; 2. ?hat was the amount of sale on installment "asis assuming the unreali6ed gross profit is "efore ad,ustment; Problem . E9pedition @otors sells automo"iles on installment "asis. 8n @ay 30, 2013, @r. @ontenegro "ought a car for *1,125,000, terms# 25% down payment and the "alance is paya"le in ./ months starting 5une 30, 2013. !he cost of the car is */00,125. In lieu of the down payment, E9pedition @otors accepted the "uyers slightly used pic4 up which has a resale alue of *300,000 after reconditioning at a cost of *122,500. &fter paying the 8cto"er 2013 installment, @r. @ontenegro met an accident which incapacitates him to meet his lia"ilities. &fter 3 notices, E9pedition @otors repossessed the car. !he repossessed car has a resale alue of *.01,/25 after incurring reconditioning costs of *1/0,000. ?hat is the cancelled profit due to repossession; a. * 110,303 ". * 103,1.3 c. * 200,05/ d. * 221,25/ Problem !. &"ensons 3ompany sells home theater set "oth on installment and cash "asis. @r. &Auino purchased a set from &"ensons 3ompany on @arch 30, 2013 for *312,500 which has a cost of *2/0,/00. & used set is accepted as down payment, */0,100 "eing allowed on the trade in and the "alance is paya"le 10 months starting @ay 1, 2013. !he used set can "e resold for *112,1.0 after reconditioning cost of *5,312. !he company e9pects to ma4e 20% gross profit on the sale of used sets. @r. &Auino defaulted payment starting Bo . 1, 2013 and the set was repossessed. &"ensons 3ompany had to incur additional cost of repairs amounting to *1,.25 "efore the car was su"seAuently sold for *00,125 on (ecem"er 1, 2013. ?hat is the net income to "e recogni6ed for the year 2013 in relation to the a"o e transactions; a. * ..,0.0 ". * 51,.15 c. * 1/,2.3 d. * 10,203 Problem ". 8n 5anuary 1, 2013, !om Crands sells 200 acres of farmland for *30,000,000, ta4ing in e9change a 10% interest "earing note. !om Crands purchased the farmland in 200/ at a cost of *25,000,000. !he note will "e paid in three installments of *12,013,.50 each on (ecem"er 31, 2013, 201., and 2015. 3ollecta"ility of the note is highly uncertainD !om, therefore, uses the cost reco ery method applied in >% )&&*. :uestions# 1. ?hat is the installment recei a"le "alance at (ecem"er 31, 2013; a. * 12,031,550 ". * 30,000,000 c. * 20,031,550 d. * 25,000,000

2. ?hat is the "alance of the (eferred )ross *rofit account as of (ecem"er 31, 2013; a. * 5,000,000 ". * 707 c. * 3,./0,.00 d. * 1,510,52/

Problem #. 3onfidence 3orporation sells goods on the installment "asis. Eor the year ,ust ended, the following were reported# 3ost of installment sales F */,.00,000D Goss on repossession F *202,500D ?holesale alue of the repossessed merchandise F *1,1/2,500D 'epossessed account F *2,200,000D (eferred gross profit after ad,ustment F *1,120,000. Ho$ much was the collections for the year; Problem %. !witter 3orporation, which "egan "usiness on 5anuary 1, 2013, appropriately uses the installment sales method of accounting for ta9 purposes, "ut records net income under the accrual method. !he following data were o"tained for the years 2013 and 201.# 2013 Installment sales 3ost of installment sales )eneral H administrati e e9penses 8utstanding accounts on sales of 2013 8utstanding accounts on sales of 201. * 2,500,000 5,250,000 200,000 .,.00,000 707 * 2014 /,.00,000 1,0./,000 /.0,000 1,.00,000 .,000,000

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& 2013 sale resulted in a default in 201.. &t the date of default, the "alance on the installment recei a"le was *120,000, and the repossessed merchandise had a fair alue of */0,000. :uestions# 1. (etermine the net income for the year 201. under installment method. 2. (etermine the net income for the year 201. under full accrual method. Problem 10. !he following accounts were ta4en from the trial "alance of %ur i al 3ompany as of (ecem"er 31, 2013# &ccounts 'ecei a"le F *250,000D Installment 'ecei a"le +2011- F *150,000D Installment 'ecei a"le +2012- F *.50,000D Installment 'ecei a"le +2013- F *2,200,000D @erchandise In entory F *525,000D *urchases F *3,000,000D Ereight7in F *30,000D 'epossessed @erchandise F *150,000D 'epossession Goss F *2.0,000D 3ash %ales F *000,000D 3harge %ales F *1,/00,000D Installment %ales F *.,.10,000D (eferred )ross *rofit +2011- F *222,000D (eferred )ross *rofit +2012- F *303,100D 8perating E9penses F *150,000D %hipment on Installment %ales F *2,2/2,500. &dditional Information# )ross profit rates for 2011 and 2012 installment sales were 30% and 32%, respecti ely. !he entry for repossessed goods was#

'epossessed @erchandise 'epossession Goss Installment 'ecei a"les +2011Installment 'ecei a"les +2012-

150,000 2.0,000 1/0,000 210,000

@erchandise on hand at the end of 2013 +new H repossessed- was *2/2,000.

:uestions# 1. (etermine the !otal 'eali6ed )ross *rofit in 2013. 2. (etermine the "alance of (eferred )ross *rofit as of (ecem"er 31, 2013. 3. (etermine the Bet Income in 2013.

Problem 11. &chie ement 3ompany which "egan operations on 5anuary 1, 2013 appropriately uses the installment method of accounting. !he following data pertain to &chie ementIs operations for year 2013# Installment sales +"efore o er=under7allowance8perating e9penses 'egular %ales !otal collections for the year +"oth cash and non7cash, e9cluding interest of */.,0003ost of regular sales 3ost of installment sales &ccounts recei a"le F 12=31=2013 Installment recei a"le written7off +no pro ision was made in prior yearEstimated resale alue of repossessed merchandise *rofit usual on the sale of repossessed merchandise * 3,150,000 312,500 1,312,500 2,0//,000 252,500 2,205,000 512,500 15.,000 200,000 15%

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'epossessed accounts &ctual alue of the trade7in merchandise !rade7in allowance 'econditioning cost of the repossessed merchandise :uestions# 1. (etermine the deferred gross profit at 12=31=2013. 2. (etermine the net income for the year ended 12=31=2013.

350,000 2/0,000 .00,000 52,500

Problem 12. 8n 5anuary 1, 2013, Gi"erty 'ealty 3orporation sold property carried in in entory at a cost of */.0,000 for *1,.00,000. & 10% down payment was made and the "alance is paya"le in . eAual installments of *313,125, inclusi e of 12% interest, paya"le e ery 5une 30 and (ecem"er 31. :uestions# 1. How much is the reali6ed gross profit in 2013 assuming the installment method is used; a. * 232,332.10 ". * 203,332.10 c. * 30/,000 d. * 3.1,000 2. How much is the total collection in 2013 applied to interest; a. * 0 ". * 133,01/.50 c. * 151,200 d. * 11/,000 Problem 13. !he following account "alances appear on the "oo4s of Eulfillment 3ompany as of (ecem"er 31, 2013# 3ash 'ecei a"les @erchandise In entory &ccounts *aya"le (eferred )ross *rofit F 2011 %ales *urchases E9penses * 150,000 /00,000 25,000 30,000 211,250 1,250,000 1.0,000 .25,000

!he 'ecei a"les account is a controlling account for three su"sidiary ledgers which shows the following# 2012 Installment contracts 2013 Installment contracts 3harge accounts +terms, 30 days, net*150,000 100,000 50,000

!he gross profit on sales on installment contracts for 2012 and 2013 was 55% and 50%, respecti ely. 3ollections on installment contracts for 2012, 2013 and charge accounts were *300,000, *.00,000 and *200,000, respecti ely, for the year ,ust closed. &ccount "alances from installment sales made prior to 2012 were also collected. 'epossession for the year was on installment contracts for 2012 on which the uncollected "alance at the time of repossession amounted to *50,000. @erchandise repossessed was erroneously de"ited as newly acAuired merchandise eAual to the amount defaulted "y the customer. &ppraisal reports show that this repossessed merchandise has a true worth of *20,000 at the time of repossession and remain unsold at year end. !he final in entory of the merchandise +new- alued at cost amounted to *.5,000. %ales account is also a controlling account for all the sales of the 3ompany. :uestions# 1. 3ompute for the total reali6ed gross profit in 2013 a. *251,250 ". *121,250

c.

*.05,000

d. *315,000

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2. (etermine the Bet Income in 2013. a. *331,250 ". *301,250

c.

*32/,250

d. *3/2,500

Problem 14.!he Jimmy (ora 3ompany has regular and installment sales. 8n (ecem"er 31, 2013, the following unad,usted "alances were ta4en from the general ledger# Installment recei a"les F 2012 Installment recei a"les F 2013 >nreali6ed gross profit F 2012 >nreali6ed gross profit F 2013 %ales F regular 3ost of sales F regular * .0,000 110,000 .2,000 2.,000 250,000 112,500

E ery year the gross profit rate on installment sales are .% higher than that on regular sales. !he gross profit rate on 2013 installment sales is 2% higher than that of 2012.

!he total reali6ed gross profit on installment sales to "e recogni6ed on (ecem"er 31, 2013 is a. * .2,/00 ". * 25,000 c. * 125,300 d. * 100,000 Problem 1 . ?alang Hanggan 3orporation has "een using the cash method to account for income since its first year of operations in 2012. &ll sales are made on credit with notes recei a"le gi en "y the customers. !he statement of comprehensi e income for 2012 and 2013 included the following amounts# 2012 2013 'e enues F collection on principal 'e enues F interest 3ost of goods purchased & * 32,000 3,100 .5,200 * 50,000 5,500 52,020

K Includes increase in in entory of goods on hand of * 2,000 in 2011 and * /,000 in 2012 !he "alances due on the notes at the end of each year were as follows# 2012 Botes recei a"le F 2011 Botes recei a"le F 2012 (iscount on notes recei a"le F 2011 (iscount on notes recei a"le F 2012 2,112 * 12,000 * 2013 31,000 10,000 5,520 /,0.3

(Round-off gross profit rate in two decimal percentage and round of balances in nearest peso) :uestions# 1. >nder installment method, how much is the amount recogni6ed in profit and loss for 2012; a. * 1.,11. ". * 11,0/0 c. * 12,21. d. * 10,1/0 2. >nder installment method, how much is the reali6ed gross profit in 2013; a. * 12,212 ". * 21,115 c. * 23,320 d. * 21,/01

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Problem 1!. !HE I@@8'!&G% %tore accounts for its sales on the installment "asis. &t the "eginning of 2012, ledger accounts include the following "alances# Installment contracts recei a"le, 2010 7 * 30,000D Installment contracts recei a"le, 2011 7 * 01,000D (eferred gross profit, 2010 7 * 12,100D (eferred gross profit, 2011 7 * 31,000. &t the end of 2012, account "alances "efore ad,ustment for reali6ed gross profit on installment sales are# Installment contracts recei a"le, 2010 7 * 0D Installment contracts recei a"le, 2011 7 * 2.,000D Installment contracts recei a"le, 2012 7 * 130,000D (eferred gross profit, 2010 7 * 12,100D (eferred gross profit, 2011 7 * 3.,350D (eferred gross profit, 2012 7 * 10,000. Installment sales in 2012 are made at 25% a"o e cost of merchandise sold. (uring 2012 upon default in payment "y the customer, the company repossessed the merchandise with an estimated mar4et alue of * 2,000. !he sales was in 2011 for * 10,/00, and * 1,.00 had "een collected prior to repossession. :uestions# 1. 3ompute the gain or +loss- on repossession assuming that *rofit is recogni6ed when sale is made# a. +* 2,.00". * 707 c. +* 250d. +* 2502. 3ompute the gain or +loss- on repossession assuming that *rofit is in proportion to periodic collection +I% method-# a. +* 2,.00". * 707 c. +* 250d. +* 2503. !he net reali6ed gross profit on (ecem"er 31, 2012 is# a. * 23,100 ". * 21,050 c. * 21,200 d. * 3.,000

LONG-TERM CONSTRUCTION CONTRACTS

Problem 1. 8n 5uly 1, 2013, 5anet 3onstruction 3orp. contracted to "uild an office "uilding for Bapoles Inc. for a total contract price of *2,050,000. Estimated total contract costs is *2,100,000. 3osts incurred to date are as follows related to the pro,ect were as follows# 3ost of direct materials used 3ost direct la"or +includes la"or cost of site super ision3ost of indirect materials used 3ost incurred in securing the contractK &nnual depreciation of plant and eAuipment used on the contract *ayroll of design and technical department allocated to the contract /0,000 Insurance costs +2=3 for other contracts3osts of contracted research and de elopment acti ities (epreciation of idle eAuipment that is not used on a particular contract %elling costs )eneral H administration costs e9penses specifically included under the terms of the contract Corrowing cost incurred during the construction period 3osts of la"or for site super ision 50,000 &d ances made to su"contractors 100,000 K expensed in prior ear alt!oug! t!e contract was obtained in 2013 >sing cost7to7cost method in determining the stage of completion, what is the reali6ed gross profit for the period 2013; (Round-off stage of completion to 2 decimal percentage) a. * 111,055 ". * 125,105 +9c. * 13.,110 d. * 1.1,330 *200,000 150,000 55,000 20,000 2.0,000 1/0,000 105,000 10,000 .5,000 30,000 130,000

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Problem 2. @ediocre Cuilders, Inc. recogni6ed a gross loss of *2/,000 on its long term pro,ect which has accumulated costs of *505,000 at (ecem"er 31, 2013. !o finish the pro,ect, the company estimates that it has to incur additional costs of */20,000. !he company uses percentage of completion method and thus noted that the pro,ect was a"out .2% completed at this point. 3alculate the contract price that was agreed upon "y "oth parties. a. * 1,.15,000 ". * 1,332,000 c. * 1,3/3,/00 d. * 1,1/3,000 Problem 3. 8n 5anuary 1, 2013, East Cuilders, Inc. "egan constructing a *3,500,000 contract. &s of years7end, the following are rele ant information pro ided "y the corporation. 2013 201. 2015 3onstruction in progress * 235,000 *2,2./,250 ; Estimated cost to complete 2,111,250 1,251,250 7 3osts incurred * 20/,250 * 1,115,000 *1,121,250 :uestions# 1. How much is the +1- ')* +loss- in 201. using the percentage of completion method; 2. How much is the +2- ')* +loss- in 2015 using 6ero7profit method; Problem 4. 8n 5anuary 1, 2013, &GI, a real estate company, entered into a contract to construct a "uilding on a piece of land it has acAuired and, when construction is complete, to deli er the entire property to a customer. !he following information pertains to the said contract# !otal cost of land F *2@D Estimated total cost of construction F */@D Estimated total cost of contract F *10@D &greed purchase price F *11@. In 3$ 2013, total construction cost incurred amount to *2@ while the fair alue of the land is *2.5@. :uestions# 1. &ssume the contract is considered single contract and the *83 rate is "illed, determine the amount of re enues, contract e9penses, and gross amount due from customer recogni6ed in the financial statements of &GI. 2. &ssume the contract is considered multiple element contract and the *83 rate is "illed, determine the amount of re enues, contract e9penses, and gross amount due from customer recogni6ed in the financial statements of &GI. 3. (etermine amount included as current asset in the financial statements of &GI related to the a"o e information under 6ero profit method. Problem . )uagua Coat"uilders was recently awarded a *2/,000,000 contract to construct a lu9ury liner for 3ruiseliners Inc. )uagua estimates it will ta4e .2 months to complete the contract. !he company uses the cost7to7 cost method to estimate profits. !he following information details the actual and estimated costs for the years 201272015# 2012 2015 &ctual cost incurred current year Estimated cost to complete *13,000,000 13,100,000 2013 *1,100,000 2,/00,000 *.,/00,000 3,/00,000 201. *3,.00,000 707

How much re enue, cost, and gross profit is to "e recogni6e in 201. under the percentage of completion method; Problem !. 8n 5uly 1, 2012, )C 3onstruction 3orp. contracted to "uild an office "uilding for 'L, Inc. for a total contract price of *1,/25,000 2012 201. 3ontract costs incurred Estimated cots to complete the contract Cillings to 'L, Inc. * 350,000 1,050,000 102,500 2013 * 030,000 1/5,000 1,.20,000 * 120,000 777 212,500

?hich of the following statements is true; a. !he In entory account, net at (ecem"er 31, 2013, assuming no dependa"le estimate are a aila"le amount to *3/1,250 due to customer. ". !he In entory account "alance at (ecem"er 31, 2013, using the cost to cost method is *1,1.0,000. c. !he recogni6ed loss in 2013 using 6ero profit method is *2.1,250 d. !he reali6ed gross profit in 201. using percentage of completion method is *15,000 and the recogni6ed loss in 201. using 6ero profit method is *125,000. Problem ". (@, Inc. wor4s on a *10,500,000 contract in 2013 to construct an office "uilding. (uring 2013, (@, Inc. uses the cost to cost method. &t (ecem"er 31, 2013, the "alances in certain accounts were# 3onstruction in

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*rogress F *3,2/0,000D &ccounts 'ecei a"le F *310,000D and Cillings on 3onstruction in process F *1,/00,000D contract retention F *1/0,000D @o"ili6ation fee F *1.0,000. &t (ecem"er 31, 2013, the estimated cost at completion is *2,350,000. (etermine the reali6ed gross profit in 2013. Problem #. In 2013, 'oar, Inc. was contracted to "uild the pri ate road networ4 of &la"ang %u"di ision for *350 million. !he product is e9pected to "e finished in 2 years, and the contract pro ided for# & 5% mo"ili6ation fee +to "e deducted from the last "illing-, paya"le within 15 days from the contract signing. & retention pro ision of 10% on all "illings, paya"le with the final "ill after the completed contract is accepted. *ayment of progress "illings within 30 days from acceptance.

'oar, Inc. estimated a gross margin of 25% on the pro,ect. Cy the end of the year, 'oar had presented progress "illings corresponding to 50% completion. &la"ang accepted all the "ills presented, e9cept one for 10% which was accepted on 5anuary 2 of the ne9t year. ?ith the e9ception of the second to the last "illing for /% which was due 5anuary 13 of the ne9t year, all accepted "illings were settled. &s of (ecem"er 31, 2013, 'oar, Inc. construction in progress, net of "illings from the pro,ect under the percentage of completion method amounted to# Problem #. 8n 5anuary 1, 2015, a fire destroyed the office "uilding of 3on,uring 3ompany and destroyed all the files in the accountantIs des4. !he president of the company contracted you to help reconstruct the contract information. !he following data were ta4en from sal age files# Estimated cost to complete 3osts incurred .12,500 *ercentage of completion 'eali6ed profit to date 12,500 10% 150,000 12=31=13 * 1,551,250 12=31=1. * 1,000,000

?hat is the estimated total gross profit as of 2013 for this contract; a. * 151,250 ". * 20/,333 c. * 250,000 d. * 312, 500 Problem %. In 2013, Insidious 3onstructions "egan construction wor4 under a three year contract. !he contract price was *200,000. Insidious uses the percentage of completion method for financial accounting purposes. !he financial statement presentation relating to this contract at (ecem"er 31, 2013 is presented "elow# S'('eme)' o* F+)(),+(l Po-+'+o) &ccounts recei a"les F construction "illings 3onstruction in progress Gess# contract "illings 3osts of uncompleted contract in e9cess of "illings S'('eme)' o* Com.re/e)-+0e I),ome )ross profit +"efore ta9- recogni6ed in 2013 !he total estimated cost is# a. * 1.0,000 ". * .00,000 c. * 510,000 * 12,500 d. * 151,250 * /2,500 /2,250 5,250 * 21,250

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Problem 10. 8n 5anuary 1, 2012, Cra e 3onstruction 3orp. "egan constructing a *2,100,000 contract. !he following are rele ant information pro ided "y the corporation# Cra e uses percentage of completion method. Eor the year ended (ecem"er 31, 2013, Cra e 3onstruction "illed its client an additional 55% of the contract price. 2012 201. 3onstruction in *rogress +3I*; Estimated costs to complete 3osts Incurred * 125,250 E9cess of 3I* o er Cillings * ..1,000 ; .25,250 */.,000 current lia"ility ; * 010,000 *330,250 current lia"ility 7 2013 ; 7

:uestions# 1. How much is the estimated remaining cost in 2012; 2. How much is the reali6ed gross profit +loss- in 2013; 3. How much is the "alance of 3I* in 2013; Problem 11. 8n 5uly 1, 2012, )reat 3orp. o"tained a contract to construct a "uilding. !he "uilding was estimated to "e "uilt at a total of *5,250,000 and is scheduled for completion on 8cto"er 201.. !he construct contains a penalty clause to the effect that the other party was to deduct *12,500 from the contract price each wee4 of delay. 3ompletion was delayed for three wee4s. Celow are the data pertaining to the construction period. In 2013, there was an increase in the contract price in the amount of *200,000 per cost escalation clause. )reat 3orp. uses percentage of completion method. 2012 201. 3osts incurred Estimated cots to complete Cillings to customers 2013

* 525,000 * 1,032,000 * 325,500 2,100,000 223,000 7 .20,000 .,512,500 1,210,000

:uestions# 1. How much is the e9cess of construction in progress o er progress "illings or progress "illings o er construction in progress in 2012; +current asset or current lia"ilitya. * /.0,000 current ". * /.0,000 current c. * /00,000 current d. * /00,000 current asset lia"ility asset lia"ility 2. How much is the e9cess of construction in progress o er progress "illings or progress "illings o er construction in progress in 2013; +current asset or current lia"ilitya. * 1/2,500 current ". * 1/2,500 current c. * 135,250 current d. * 135,250 current asset lia"ility asset lia"ility Problem 12. &pplause 3orporation entered in a long term pro,ect in 2012 and continued through 2013. &pplause 3orp. presently has a aila"le dependa"le and relia"le estimates. &s of 2013, &pplause "illed 2=5 of the total contract price. %ome other information a"out the pro,ect were as follows# 2012 2013 3onstruction cost to date E9cess of 3I* o er Cillings F due from +due to3ontract "illings 3ollection from the contract 3ompute the estimated cost to complete in 2012# a. * 2.1,112 ". * 1,0/0,000 c. * 1./,500 3/,250 105,000 02,500 * 1,3/2,500 * .20,000 +12,250112,500 532,500 d. * 1,150,000

Problem 11. 8n 5uly 1, 2012, Hoops 3onstruction 3orp. contracted to "uild an office "uilding for Jiri, Inc. for a total contract price of *025,000.

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2012 3ontract cost incurred to date Estimated cost to complete the contract Cillings to Jiri, Inc. * 25,000 125,000 150,000

2013 * 100,000 .00,000 550,000

201. * 1,050,000 7 225,000

How much is the 3onstruction in *rogress account "alance at (ecem"er 31, 2013, using the percentage of completion method; a. * 350,000 ". * 525,000 c. * /25,000 d. * 000,000

FRANCHISE
Problem 1. 3astle 3ompany sells a franchise that reAuires an initial franchise fee of *2,000,000. & down payment of *2,000,000 cash is reAuired the "alance co ered "y the issuance of a *5,000,000, 10% note paya"le "y the franchisee in 5 eAual annual installments. How much must "e the franchise re enue earned under the following assumptions. 1. If all material ser ices ha e "een su"stantially performed "y a franchisor, the refund period has e9pired, and the collecta"ility of the note is reasona"ly assured. 2. If the refund period has e9pired and the collecta"ility of the note is reasona"ly assured, "ut all material ser ices ha e not "een su"stantially performed "y the franchisor. 3. If all material ser ices ha e "een su"stantially performed "y the franchisor and the collecta"ility of the note is reasona"ly assured, "ut the period of refund has not e9pired. .. If the refund period has e9pired, "ut all material ser ices ha e not "een su"stantially performed "y the franchisor and there is no "asis for estimating the collecta"ility of the note and the note is not recogni6ed as an asset. Instead, a form of deposit method is used. Problem 2. !he %! 3ompany sells a franchise that reAuires an initial franchise fee of *500,000. & *100,000 down payment is reAuired with the "alance in . eAual monthly installments of *100,000. &ll material ser ices ha e "een su"stantially performed "y %! 3ompany, the refund period has e9pired, and the collecta"ility of the note is reasona"ly assured. !he interest rate for this type of loan is 12%. !he unearned franchise re enue earned during the period must "e# Problem 3. %piral 'estaurant sold a fine dining restaurant franchise to 3ircles Hotel. !he sale agreement signed on 5anuary 1, 2013 called for a */25,000 down payment plus *.32,500 annual payments +co ered "y a non7interest "earing note- representing the alue of initial ser ices rendered "y %piral restaurant. In addition, the agreement reAuired the franchisee to pay 1% of its gross sales to the franchisor. !he restaurant opened in 5uly and its sales for the year amounted to *1,512,500. &ssuming a 15% interest rate is appropriate. How much is the franchisors total income=re enue for the year ended 2013 profit or loss; +'ound of *< factors into 2 decimal placesProblem 4. 8n &ugust 1, 2013, Holiday Inc. entered into a franchise agreement with Intense franchisee. !he initial franchise fees agreed upon is *2.1,000, of which *.1,000 is paya"le upon signing and the "alance to "e co ered "y a non7interest "earing note paya"le in four eAual annual installments. !he down payment is refunda"le within 25 days. Intense Inc. has a high credit rating, thus, collection of the note is reasona"ly assured. 8ut of poc4et costs of p125,331 and *12,3.5 were incurred for direct and indirect e9penses, respecti ely. *re ailing mar4et rate is 0%. 8n the E$ ended %eptem"er 30, 2013, how much re enue from franchise fee will the franchisor recogni6e; +'ound *< factors into . decimal placesProblem . 3ra" 3law 3o. charges *00,000 for a franchise, with *1/,000 paid when the agreement is signed and the "alance in four annual payments. !he present alue of the annual payments, discounted at 0% is *5/,315. !he franchisee has the right to purchase *20,000 of eAuipment for *11,000. If the collecta"ility of the payments is reasona"ly assured and su"stantial performance "y 3ra" 3law has occurred, what is the amount of re enue from franchise fee that should "e recogni6ed;

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Problem !. 3asio 3o. charges new franchisees an initial fee of *3,500,000. 8f this amount, *1,000,000 is paya"le in cash when the agreement is signed, and the remainder is to "e paid in four eAual annual installments which are e idenced "y 12% promissory notes. In consideration therefore, 3asio 3o. will assist in locating the "usiness site, conduct a mar4et study to estimate earnings potential, super ise construction of a "uilding, and pro ide initial training to employees. 8n (ecem"er 3, 2013, 3asio 3o. entered into a franchising agreement with 3orolla, Inc. Cy the end of the year, 3asio 3o. has completed a"out 25% of the initial ser ices at a cost of *250,000 and it has ascertained that collection of the notes is reasona"ly assured. Eor 2013, 3asio 3o. should recogni6e unearned franchise re enue of# a. * 707 ". * 3,500,000 c. * 1,000,000 d. * 2,500,000 Problem ". 8n 5anuary 1, 2012, @r. (5 entered into a franchise agreement with )C to mar4et their products. !he agreement pro ides for an initial fee of *12.5m paya"le as follows# *3,500,000 to "e paid upon signing of the contract and the "alance in fi e eAual annual payments e ery end of the year starting (ecem"er 31, 2012. @r. (5 signs a non7interest7"earing note for the "alance. His credit rating indicates that he can "orrow money at 15% interest for a loan of this type. !he present alue of an annuity of *1 at 15% for 5 periods is 3.352. !he agreement further pro ides that the franchisee must pay a continuing franchise fee eAual to 3% of the monthly gross sales. 8n &ugust 31, the franchisor completed the initial ser ices reAuired in the contract at a cost of *.,200,120 and incurred indirect costs of *125,000. !he franchise outlet commenced "usiness operations on Bo em"er 30, 2012. !he gross sales reported to the franchisor were *1,/00,000 for (ecem"er, 2012. !he first installment payment was made in due date, "ut further collection of the "alance was not reasona"ly assured. 3alculate the net income for 2012 that the franchisor will report in its income statement. a. * 3,121,21/ ". * 3,201,21/ c. * 2,.12,21/ d. * 3,022,21/ Problem #. 8n (ecem"er 31, 2011, 5JG, a franchisor, entered into a franchising agreement with )@( charging )@( a franchise fee of *.00,000. >pon signing of the contract, a down payment of *100,000 is paid with the "alance paya"le in four eAual annual installments starting 2012. 5JG had already performed 00.0% of the ser ices as of Ee"ruary 1, 2012 at a total cost of *1.0,000. 5JG was a"le to collect the first installment payment in 2012 "ut the collecta"ility of the remaining "alance is still dou"tful. 3alculate the profit to "e recogni6ed "y 5JG in its 2012 income statement. a. * 210,000 ". * ./,250 c. * 15,000 d. * 113,250 Problem %. 8n &pril 30, 2013, @i4e Inc. entered into a franchise agreement with 'oss 3o. to sell their products. !he agreement pro ides for an initial franchise fee of *1.20@ which is paya"le as follows# *.00,000 cash to "e paid upon signing the contract, and the "alance in fi e eAual annual installments e ery (ecem"er 1, starting in 2013 as e idenced "y a noninterest "earing note for the said "alance signed "y @i4e Inc. *re ailing mar4et rate is 10% on &pril 30, 2013.!he agreement further pro ides that @i4e Inc. must pay a continuing franchise fee eAual to 5% of its monthly gross sales. 'oss 3o. incurred direct cost of *5.0,000, of which *120,000 is related to continuing ser ices and indirect costs of *22,000, of which *1/,000 is related to continuing ser ices. @i4e Inc. started operations on %eptem"er 2, 2013 and was a"le to generate sales of *050,000 for 2013. !he first installment payment was made in due date. &ssuming collecta"ility of the note is not reasona"ly assured, how much is the net income of the franchisor as of (ecem"er 1, 2013; (Round off PV factors to 4 decimal places and "P # to w!ole #) a. * 25.,035 ". * 122,110 c. * 12.,50/ d. * 122,150 Problem 10. 8n (ecem"er 31, 2013, Con3hon Inc. authori6ed Mu"u3hon to operate as a franchisee for an initial franchise fee of *3..0@. >pon signing the contract, *0.00@ was recei ed and the "alance is paid "y a note, due in 5 eAual annual installments that include 12% interest, "eginning (ecem"er 31, 201.. !he down payment is nonrefunda"le and it represents a fair measure of the ser ices already performed "y Con3hon and su"stantial future ser ices are still reAuired. How much is the unearned re enue to "e recogni6ed as of (ecem"er 31, 2013; (Round off PV factors to $ decimal places) a. * 1,/02,300 ". * 2,202,300 c. * 2,500,000 d. * 3,.00,000 Problem 11. 8n 5anuary 2, 2013, 3e3e 3o. entered into franchise agreement with (ra4e Inc., franchisee. !he sale agreement was to ma4e a *10,000 down7payment plus two *20,000 annual payments, representing the alue of initial franchise ser ices rendered "y 3e3e. In addition, the agreement reAuired (ra4e to ma4e an annual fi9ed payment of *31,000 to 3e3e. 3e3e estimates that continuing ser ices will cost *.0,000 per year +actuali6ed in 2013-. & reasona"le profit from such ser ices is estimated at 2.5% of cost +or *3,000=year-. (ra4e commenced operations on @arch 1, 2013. &ssuming a 10% interest rate is appropriate, 3e3eIs 3$ 2013 total income=re enue# (Round off PV factors to 4 decimal places) a. * 122,1/1 ". * 13.,210 c. * 1..,1/1 d. * 0/,1/1 Problem 12. 8n (ecem"er 1, 2012, )am"le, Inc. authori6ed 3edar 3ompany to operate as a franchise for an initial franchise free of *1,000,000. 8n this amount, *100,000 was recei ed upon signing the agreement and the "alance,

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represented "y a note, is due in four annual payments of *100,000 each "eginning (ecem"er 31, 21012. !hose present alue on (ecem"er 31, 2012, for four annual payments appropriately discounted a *303,2.0. &ccording to the agreements the non7refunda"le down payment represents a fair measure of the ser ices already performed "y )am"le and su"stantial future ser ice are still to "e rendered. Howe er, collecta"ility of the note is reasona"ly certain. )am"leIs (ecem"er 31, 2012 income statement should report earned franchise fee from 3edar 3ompany in the amount of a. * 100,000 ". * 003,.20 c. * 003,2.0 d. * 1,000,000 Problem 13. 8n 5anuary 1, 2013, Gittle 3o. granted franchise right to Giars Inc. for a nonrefunda"le initial franchise fee of *.00,000, of which 20% was collected upon signing of the contract and the remaining /0% is represented "y a note recei a"le in . eAual annual installments starting (ecem"er 31, 2013. !he pre ailing mar4et rate on 5anuary 1, 2013 is 12%. &ll of the initial ser ices and conditions reAuired under the franchise agreement were su"stantially performed and satisfied on @arch 1, 2013. 8n 5uly 1, 2013, Giars Inc. decided not to pursue the franchise "usiness. &ccordingly, Gittle 3o. repossessed the franchise. :uestions# 1. Bo refund was made and the entire "alance of the note was forfeited. Eranchise fee re enue recogni6ed in 2013 is a. * 707 ". * /0,000 c. * 112,0// d. * 322,0// 2. &ssume 50% of collection was refunded and 50% was forfeited. Eranchise re enue recogni6ed in 2013 is a. * 707 ". * /0,000 c. * 112,0// d. * 322,0//

Problem 14. 8n 5anuary 1, 2013, Jamiseta, Inc. signed an agreement authori6ing @r. )eri de 3astro to operate as a franchisee for an initial franchise fee of *5,000,000. 8f this amount, *2,000,000 was recei ed upon signing of the agreement and the "alance e idenced "y a 11% promissory note which is due in three annual installments of *1,000,000 each "eginning (ecem"er 31, 2013. @r. de 3astro started franchise operations on %eptem"er 1, 2013 after Jamiseta rendered initial ser ices reAuired at a total cost of *1,500,000. !he first installment was collected on due date. !he collecti"ility of the note is not reasona"ly assured. How much net income is to "e recogni6ed on (ecem"er 31, 2013; a. * 2,100,000 ". * 2,5/0,000 c. * 3,0/0,000 d. * 1,0/0,000 Problem 1 . 8n 5anuary 2, 2013, @agnolia Ice 3ream signed an agreement authori6ing 5omari to operate as franchisee for an initial franchise fee *500,000 recei ed upon signing of the agreement. 5omari commenced operations on &ugust 1, 2013, at which date all of the initial ser ices reAuired of @agnolia Ice 3ream had "een performed at a cost of *100,000. !he franchise agreement further pro ides that 5esse must pay a 10% monthly continuing franchising fee. %ales reported from &ugust 1 to (ecem"er 31, 2013 amounts to *.00,000. How much is the initial franchise fee to "e recogni6ed in 2013; a. * 3/0,000 ". * 500,000 c. * .20,000 d. * ..0,000 Problem 1!. 8n (ecem"er 31, 2012, Boynoy 3ompany authori6ed @ar to operate as a franchisee for an initial franchise fee of *3,000,000. 8f this amount, *1,200,000 was recei ed upon signing of the contract, and the "alance paya"le "y a non7interest "earing note, due in three annual payments of *100,000, "eginning (ecem"er 31, 2013. !he collecti"ility of the note is not reasona"ly assured. !he mar4et rate of interest is 1/%. +>se two decimal places for present alue factor.- How much is the interest re enue on (ecem"er 31, 2013; a. * .0/,000 ". * 707 c. * 23.,310 d. * 213,1.0

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