Chapter 6 Corporations in Financial Difficulty

Problem
1. The Rex Company in liquidation provided the following data:
Asset at book value P100,000
Asset at net realizable value 75,000
Liabilities at book value 85,000
Unrecorded liabilities: Interest on bank notes 250
Liquidation Expenses 4,000
Assuming the assets are sold at net realizable values, what is the balance of the Estate Equity account at the end of
the period?
a. p14,250
b. P15,750
c. P13,750
d. P14,000
Solution: A
Estate equity, beginning (100,000 – 85,000) P15,000
Loss on realization (75,000 – 100,000) (25,000)
Interest payable (250)
Liquidation Expenses (4,000)
Estate equity, end (deficit) (14,250)
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 2-4
2. A trustee has been appointed by SEC for Ally Inc., which is being liquidated. the following transactions occurred after
the assets were transferred tot the trustee:
a. Sales on account by the trustee were P75,000. Cost of Goods sold were P60,000, consisting of all the
inventory transferred from Ally.
b. The trustee sold at P12,00 worth of marketable securities for P10,500.
c. Receivables collected by the trustee:
Old: P21,000 of the P38,000 transferred
New: P47,000
d. Recorded P16,000 depreciation on the plant assets of P96,000 transferred from Ally.
e. Disbursements by the trustee:
Old current payables: P22,000 of the P48,000 transferred
Trustee’s expenses: P4,300
In the statement of realization and liquidation of Ally Inc.:
How much are the total assets to be realized?
a. P206,OOO
b. P168,000
c. P140,000
d. 218,000
Solution: A
Old receivable (net) P38,000
Marketable securities 12,000
Old inventory 60,000
Depreciable assets- net 96,000
Total asset to be realized 206,000
Advanced Accounting Textbook 2017- Guerrero Prob. 6-26
3. Liabilities of P90,000 existed at the beginning of a period. During the period, liabilities recorded at P44,000 were
settled for P38,000 and new liabilities of P12,000 were incurred. A statement of realization and liquidation would show
“liabilities not liquidated” of:
a. P46,000
b. 58,000
c. 64,000
d. 102,000
Solution: B
(90,000 – 44,000 + 12,000 = 58,000)
CPA Reviewer Advance Accounting 2019- Dayag Prob. 2-23
4. If a statement of realization shows assets to be realized of P500,000, assets not realized of P320,000 assets acquired of
zero, and a gain on realization of P22,000, the amount that would be reported for asset realized is:
a. P158,000
b. P180,000
c. P202,000
d. cannot be determined from the information given
Solution: C
P180,000 of assets were sold (500,000 – 320,000 ) at a gain of P22,000, implying a sale price of P202,000.
CPA Reviewer Advance Accounting 2019- Dayag Prob. 2-21
 5. A company has the following balance sheet:

Plant and equipment P300,000 Accounts payable P170,000

Mortgage Payable 100,000
Stockholders’ equity 30,000
Total P300,000 Total 300,000

The plant and equipment has a current fair value of P180,000 and is pledged as security for the mortgage. The
estimated deficit to unsecured creditors?
a. P0
b. P90,000
c. P170,000
d. P190,000
Solution: B
Unsecured Debts P170,000
Free Assets (180,000 -100,000) (80,000)
Deficiency 90,000
CPA Reviewer Advance Accounting 2019- Dayag Prob. 2-20
6. Lyris Corporation is a parent company, having purchased 60% of S Company’s common stock at par value for
P600,000. Christopher Company is in financial difficulty. The parent granted unsecured loan of P200,000 to the
subsidiary, An accounting statement of affairs for Christopher Company shows a dividend of 30%. Lyris
Corporation can expect to receive payment for its investment in Christopher Company of approximately:
a. P 600,000 b. P 108, 000
c. P 180,000 d. P 0
Solution: D
Receivables and payables transacted between parent and subsidiary still exist on their separate balance
sheet. So, when collection or payment of an account which does not affect at all the investment in subsidiary account.
Dayag 2005, Problem 2-4
7. Argyll and Co., Inc. purchased a Cadillac automobile with little cash down and signed a note, secured by the Cadillac,
for 48 easy monthly installment payments. When the company files for bankruptcy, the balance due on the Cadillac
amount to P6,000,000. The car has a book value of P8,000,000 and net realizable value of P4,000,000. The unsecured
creditors of Argyll and Co. Can expect to receive 50% of their claims. In the liquidation, the bank holds the note on the
Cadillac should receive:
a. P 6,000,000 b. P 4,000,000
c. P 5,000,000 d. P 3,000,000
Solution: C
Car-Cadillac at net realizable value P 4,000,000
Add: Portion of free assets used to pay
Unsecured amount:(P6,000,000-P4,000,000)*50% P 1,000,000
P 5,000,000
Dayag 2005, Problem 2-10
8. Amounts related to the Statement of Affairs of Christian Company, in bankruptcy liquidation as April 1, 2019,
were as follows:
Assets pledged for fully secured liabilities P80,000
Assets pledged for partially secured liabilities 50,000
Free Assets 272,000
Fully secured liabilities 60,000
Unsecured liabilities with priority 40,000
Unsecured liabilities without priority 330,000
Compute the costs per peso that unsecured creditors may expect to receive from Christian Company.
a. P 0.76 b. P 0.81
c. P 0.70 d. P 0.61
Solution: C
Estimated deficiency to unsecured creditors:
Assets pledged for fully secured liabilities P80,000
Less: Fully secured liabilities 60,000
Free Assets of fully secured liabilities 20,000
Add: Free Assets 272,000
Total Free Assets to unsecured liabilities 292,000
Less: Unsecured liabilities with priority 40,000
Net Free assets P252,000
Less: Unsecured Liabilities:
Partially secured liabilities 80,000
Assets pledged for partially secured liabilities 50,000 30,000
Unsecured liabilities without priority 330,000
Total Unsecured Liabilities: P360,000
Estimated Deficiency to unsecured liabilities P108,000
 Expected Recovery Percentage of Unsecured Liabilities:
(P252,000/ P360,000) 70% or P0.70
Dayag 2005, Problem 2-15
9. Marc Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of realization and
liquidation is presented below:
Assets to be realized P1,375,000
Assets acquired 750,000
Assets realized 1,200,000
Assets not realized 1,375,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
Liabilities Liquidated 1,875,000
Liabilities not liquidated 1,700,000
Supplementary Charges 3,125,000
Supplementary Credits 2,800,000
The net gain (loss) for the three-month period ending March 31 is:
a. P 250,000 b. P 425,000
c. P 325,000 d. P 750,000
Solution: B
Credits:
Assets realized 1,200,000
Assets to be realized 1,375,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
Supplementary Credits 2,800,000
Total Credits P9,250,000

Assets to be realized P1,375,000

Assets acquired 750,000
Liabilities Liquidated 1,875,000
Liabilities not liquidated 1,700,000
Supplementary Charges 3,125,000
Total Debits P8,825,000
Net Gain for the three-month period P 425,000
Dayag 2005, Problem 2-18
10. Fatima Co. is insolvent and its statement of affairs shows the following information:
Estimated gains on realization of assets P1,440,000
Estimated losses on realization of assets 2,000,000
Additional Assets 1,280,000
Additional Liabilities 960,000
Capital Stock 2,000,000
Deficit 1,200,000
The deficiency pro-rate payment on the peso to stockholders is:
a. P 0.30 b. P 0.57
c. P 0.43 d. P 0.70
Solution: D
Estimated losses on realization of assets 2,000,000
Less:Estimated gains on realization of assets P1,440,000
Additional Assets 1,280,000 2,720,000
Estimated loss (gain) or loss in asset realization (720,000)
Less: loss borne by owners/stockholders’ equity
Capital Stock 2,000,000
Deficit 1,200,000 800,000
Estimated deficiency to unsecured creditors 560,000
Estimated deficiency to unsecured creditors 560,000
Divided by: stockholders’ equity 800,000
Deficiency pro-rate payment on peso 0.70
Dayag 2005, Problem 2-17
Chapter 8 Installment sales
Problem
1. The Ericka Sales Company employs the perpetual inventory basis in the accounting for new cars. On August 15,2017, a
new car costing P165,000 and with a list price of P220,000 was sold to Marc. The company granted Marc an allowance
of P85,000 on the trade-in of his old car, the current value of which was estimated to be P81,700; the balance of
P135,000 was payable as follows: P35,000 cash at the time of purchase and Twenty monthly payment of P5,000 starting
September 1, 2017.
On April 1, 2018 Marc defaulted in the payment of the MARCH 1, 2018, installment. The new car sold was reposed, and
its value to the seller was P40,000.
The total realized gross profit and the gain (loss) on repossession on December 31, 2018 are:
a. P32,616.62 & (P13,298.00)
b. P32,616.62 & 13,298.00
c. P37,388.62 & P15,810.62
d. P27,844.62 & (P15,810.62)
Solution: A
List price 220,000
Less: Trade-in over allowance (85,000 -
81,700) 3,300
Adjusted selling price 216,700 100%
Less: Cost of sales 165,000 76.14%
Gross profit 51,700 23.86%

Value of old car traded- in 81,700

Cash received at time of sale 35,000
Installment collected: 5,000 x 4 20,000
Total collection in 2018 136,700
Multiply by gross profit rate 0.2386
Realized gross profit as of Dec. 31, 2018 32,616.62

Adjusted selling price 216,700

Less: Collections
In 2017 136,700
In 2018 (5,000 x 2) 10,000 146,700
Defaulted balance 70,000
Multiply by cost rate 0.7614
Unrecovered cost 53,298

Value of repossessed car 40,000

Less: Unrecovered cost 53,298
Repossession gain (loss) 13,298

CPA Reviewer Advance Accounting 2016- Guerrero Prob. 3- 47

2. The books of Dominique Company show the following account balances on December 31,2018:
Accounts Receivable P313,750
Deferred gross profit (before adjustment) 38,000
Analysis of the accounts receivable reveals the following:
Regular accounts P207,500
2017 installment accounts receivable 16,250
2018 installment accounts receivable 90,000
Sales on installment basis in 2017 were made at 30% above cost, and in 2018 at 33 1/3% above cost. Expenses paid
relating to installment sales were P1,500.
How much is the total comprehensive income on installment sales?
a. P10,000
b. P10,250
c. P11,000
d. P11,500
Solution: B

Deferred gross profit, before adjustment 38,000

 Less: Deferred gross profit applicable to uncllected installment accounts:
2017: 16,250 x 30% / 130% 3,750
2018: 90,000 x 25% 22,500 26,250
Realized gross profit 11,750
Less: Expense 1,500
Net income on Installment Sales 10,250

CPA Reviewer Advance Accounting 2016- Guerrero Prob. 3-46

3. The Althea Company reports gross profit on the installment basis. the following data are available:
2016 2017 2018
Installment sales 240,000 250,000 300,000
Cost of goods- installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000

Collections:
2016 installment contracts 45,000 75,000 72,500
2017 installment contracts 47,500 80,000
2018 installment contracts 62,500
Defaults:
Unpaid balance of 2016 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2017 installment contracts 16,000
Value assigned to repossessed merchandise 9,000

The total realized gross profit after loss on repossession for 2018 is:
a. P49,775
b. P57,625
c. P48,975
d. P56,625
Solution: A
Year of Sales
2016 2017 2018 Total
Collections: 72,500 80,000 62,500
Gross profit:
2016: 60,000/ 240,000 25%
2017: 68,750/ 250,000 27.50%
2018: 84,000 / 300,000 28%
Realized profit 18,125 22,000 17,500 57,625

Loss on repossession:
Value of repossessed
merchandise 6,000 9,000
Unrecovered cost:
Unpaid balance 15,000 16,000
Less: Deferred gross profit
2016: 15,000 x 25% 3,750
2017: 16,000 x 27.5% 4,400
Unrecovered cost 11,250 11,600
Loss on repossession (5,250) (2,600) (7,850)
Total realized gross profit
after loss on repossession 49,775

CPA Reviewer Advance Accounting 2016- Guerrero Prob. 3- 38

4. Ericka enterprises uses the installment method of accounting and has the following data at year- end:
Gross margin on cost 66 2/3%
Unrealized gross profit P192,000
Cash collections including down payments 360,000
What was the total amount of sale on installment basis?
a. P480,000
b. 648,000
c. 552,000
d. 840,000
 Solutions: D

Installment accounts receivable year-end:

Unrealized gross profit-end 192,000
Divide by GPR on sales (66 2/3% / 166 2/3%) 40% 480,000
Add: Collections 360,000
Installment sales 840,000
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 3- 25
5. In August, 2018, Fatima Inc. sold condominium units costing P1,440,000 for P2,400,000 receiving P350,000 cash and a
mortgage note for the balance payable in monthly installments. Installments received in 2017 reduced the principal of
the note to a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2018, and the property was
repossessed. The property had a fair value of P1,150,000 at the time of repossession.
Compute the gain (loss) on repossession if (1) profit is recognized at the point of sale and (2) gross profit is recognized
in proportion to collections.
a. (1) P(850,000); and (2) P(50,000)
b. (1) P(850,000); and (2) P(450,000)
c. (1) P850,000; and (2) P(450,000)
d. (1) P(50,000); and (2) P50,000
Solution: A
(1) Profit is recognized at the point of sale
Fair value of repossessed property P1,150,000
Less: Unrecovered cost (unpaid balance) 2,000,000
Loss on repossession (850,000)

(2) Gross profit is recognized in proportion to collections

Fair value of repossessed property P1,150,000
Less: Unrecovered cost
Unpaid balance P2,000,000
Deferred gross profit (2,000,000 x 40%) 800,000 1,200,000
Loss on repossession (50,000)
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 3-12
6. Christian Company which began operations on January 2, 2016 appropriately uses installment sales method of
accounting. The following data pertains to 2016 operations:
Installment sales P900,000 Operating Expenses P72,000
Regular Sales 375,000 Collections (including interest of 24,000) 312,000
Cost of regular sales 215,000 Repossessed accounts 100,000
Cost of installment sales 630,000 Reconditioning cost 4,000
FV of repossessed merchandise 54,000
Installment accounts written-off due to defaults 44,000
What is the net income for the year ended December 31, 2016?
a. P 151,600 b. P 127,600
c .P 158,400 d. P 165,600
Solution: A
Regular sales P375,000
Cost of regular sales 215,000
Gross profit on regular sales 60,000
Realized gross profit on installment sales:
Collections excluding Interest (312,000 – 24,000) 288,000
Gross profit rate (270,000/900,000) 30% 86,400
Total realized gross profit 46,400
Loss on repossession
Fair value of repossessed merchandise 54,000
Less: Unrecovered cost (100,000 x 70%) 70,000 ( 16,000)
Total realized GP after loss on repossession 230,400
Less: Operating expenses 72,000
Installment accounts written-off (44,000 x .70) 30,800 102,800
Net operating income 127,600
Interest income 24,000
Net income P151,600
Guerrero 2017 problem 8-23
7. The following information pertains to sale in real estate by Gemma Corporation in December 31,2015:
Sales Price
Cash-down payment P600,000
Mortgage Payable 5,400,000
Cost 4,000,000
 The mortgage payable is to be paid in 9 annual installments of P600,000 beginning December 31, 2016 plus interest of
10%. The December 31, 2016 installment was paid as scheduled, together with the interest of P540,000. Gemma
Corporation uses the cost recovery method of revenue recognition. What amount of income should Gemma Corp
recognize in 2016 from the real estate?
a. P 540,000 b. none
c. P 1,040,000 d. P 740,000
Solution: B
Collection:
2015 Down payment P 600,000
2016 Installment collection 600,000
Interest 540,000
Total P1,740,000
Cost to be recovered P4,000,000
Since cost is not yet fully recovered, then no gross profit is to be recognized in 2016.
Guerrero 2017 problem 8-19
8. Argyll Inc. sells automatic voltage regulators costing P700 at a price of P1,200. Cardinal Audio buys a dozen voltage
regulators on installment and trade-in six of its old units at trade-in value of P300 each. Argyll Inc. Spends P25 to
recondition the old units and sells them for P315. Argyll Inc. Expects a 10% gross profit from the sale of used voltage
regulators. How much is the over-allowance granted by Argyll Inc. On the trade-in?
a. P 249 b. P 150
c. P 339 d. P 189
Solution: A
Trade-in Value (P300 X 6) 1,800
Less: Actual value
Estimated selling price (P315 X 6) P 1,890
Less: Reconditioning cost (P25 X 6) P150
Gross Profit (P1,890 X 10%) 189 339 1,551
Over-allowance P 249
Guerrero 2017 problem 8-16
9. On January 2, 2015, Fatima Company sold a car to Mr. Lana for P 1,050,000. On this date, the car cost P735,000. Mr.
Lana paid P150,000 as down-payment and signed a P900,000 interest bearing note at 10%. The note was payable in
three annual installments of P300,000 beginning January 1, 2016. Mr. Lana made a timely payment for the first
installment on January 1, 2016 of P390,000 which included interest of P90,000 to date of payment. Fatima company
uses installment method of accounting. In its December 31, 2016 Statement of Financial Position, what amount should
Fatima Co. report as deferred gross profit?
a. P 180,000 b. P 153,000
c. P 270,000 d. P 225,000
Solution: A
Deferred gross profit, 2015 (P1,050,000 - 735,000) P 315,000
Realized gross profit, 2015 (P150,000 X 30%) ( 45,000)
Deferred gross profit, 12/31/15 270,000
Realized gross profit, 2008 (P390,000-90,000) X 30% ( 90,000)
Deferred gross profit, 12/31/16 P 180,000
Guerrero 2017 problem 8-11
10. In 2016, a merchandise was sold on installment basis by Marc Company for P80,000 at a gross profit of 25% on cost.
During the year, a total of P42,500, including interest of P12,500 was collected on this contract. In 2016, no collection
was made on this sale, and the merchandise was repossessed. The fair value of the merchandise is P34,000 after
reconditioning cost of P4,000. What is the gain (loss) on repossession?
a. P (10,000) b. P (14,000)
c. P 10,000 d. P 20,000
Solution: A
Market value of repossessed merchandise P 30,000
(before reconditioning cost)
Less: Nonrecoverable cost
Unpaid balance (80,000-30,000) P 50,000
Less: Deferred gross profit (50,000X20%) 10,000 40,000
Loss on repossession (P 10,000)
Guerrero 2017 problem 8-5
Chapter 10 Franchise Accounting
Problem
1. On January 2, 2018, Argyll Services Inc. awarded a franchise to Ms. Ally for an initial franchise fee of P700,000. Ms. Ally
gave Argyll Services a 15% note to cover the initial franchise fee. The agreement provides that Argyll Services has
option (within 365 days) to acquire the franchise business and it seems certain that Argyll will exercise the option. Ms.
Ally makes payment of P175,000 on this note on September 30, 2018.
Assuming that Argyll Services, Inc. prepares interim financial statements for the period ended September 30, 2016.
How much would be the revenue to be recognized from this transaction?
a. P78,750
b. P105,000
c. P700,000
d. P0
Solution: A
The initial franchise fee of P700,000 will not be recognized as a revenue on September 30, 2018. It is to be
deferred because of the condition on the contract that the franchisor has the option to repurchase the
franchise after one year. The only revenue to be recognized on September 30, 2018 is the interest of P78,750
(700,000 x 15% x 9/12).
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 5- 21

2. On January 31, 2018, Christopher Corporation sold a franchise to Mr. Christian for P10,000,000 for the right to operate
as a franchisee of Christopher Corporation. Terms of the franchise contract are:
1. The initial franchise fee of P1,000,000 is payable in cash, when the contract is signed and
the balanced in five equal installments every December 31, evidenced by a 12%
promissory note.
2. The franchisor will assist in locating the site, supervise construction activity and training
of management and employees.
On December 31, 2018 direct cost of services rendered to the franchisee amounted to P2,000,000?
Assuming that there is substantial performance of services required in the contract and the collectability of the note
receivable is not reasonably assured, using the installment method how much net income is to be recognized by
Christopher on December 21, 2018?
a. P1,000,000
b. P1,880,000
c. P3,320,000
d. P2,800,000
Solution: C

Realized Gross Profit From Franchise Fee:

Down payment 1,000,000
Collection of NR (9,000,000 /5) 1,800,000
Total 2,800,000
GPR (8,000,000/ 10,000,000) 80%
RGP 2,240,000
Interest income (9,000,000 x 12%) 1,080,000
Net income 3,320,000
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 5- 19

3. Ella Burgers Inc. sell franchise to independent operators in Metro Manila. The franchise contract includes the following
provision:
a. The initial franchise fee is P25,000,000. Of this amount, P5,000,000 is payable when the agreement is signed
and a P4,000,000 non- interest- bearing note is payable at the end of each of the five consequent years.
b. All of the initial franchise fee collected by Ella, Inc. is to be refunded and the remaining obligation cancelled
if for any reason, the franchisee fails to open the franchise.
c. In addition to the initial franchise fee, the franchisee is required to pay Ella Inc. a monthly fee of 2% of sales.
Ella Inc. estimates that the value of the services rendered to the franchises after the contract is signed amounts to
P5,000,000. All franchisees to date have opened their locations at the scheduled time and none had defaulted on any
of the notes receivable. The credit rating of all franchisees would entitle them to borrow at the current rate of 10%.
The present value of an ordinary annuity of five annual receipts of P4,000,000 each, discounted at 10% is P15,163,000.
What is the amount of the deferred revenue from the initial franchise fee to be recorded on the date the agreement is
signed?
a. P25,000,000
b. P20,000,000
c. P20,163,000
d. P25,163,000
Solution: C
Initial Franchise fee P25,000,000
Less: Unearned interest
 FV of the note receivable 20,000,000
PV of the note receivable 15,163,000 4,837,000
Deferred revenue from IFF 20,163,000
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 5- 18
4. On June 30, 2018 Gemma, Inc. franchisor, enter into franchise agreement with Fatima, franchisee. The initial fee
agreed upon is P1,100,000 of which P100,000 is payable upon signing of the contract and the balance payable in four
equal annual installments. It was agreed that the down payment is not refundable, notwithstanding lack of substantial
performance of services by franchisor. On July 1, 2018 Fatima was able to start the operation.
When Gemma Inc. prepares financial statements on December 31,2018, the unearned franchise fee to be reported is?
a. P1,000,000
b. P1,100,000
c. P0
d. P100,000
Solution: B
Initial franchise fee P1,100,000
Less: Down payment 100,000
Balance (unearned) 1,000,000
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 5- 8
5. On July 1, 2018, Lyris entered into a franchise agreement with Ericka Inc. to sell their products. The agreement
provides for an initial franchise fee of P1,250,000, payable as follows; P350,000 cash to be paid upon signing of the
contract, and the balance in five equal annual payments every December 31, starting December 31, 2018. Lyris signs
15% interest bearing note for the balance. The agreement further provides that the franchisee must pay continuing
franchise fee equal to 5% of its monthly gross sales. On October, the franchisor completed the initial services required
in the contract at a costs of P78,750 and incurred expenses of P42,900. The franchise commenced business operations
on November 2, 2018. The gross sales reported to the franchisor are:
November sales P121,000
December sales 147,500
Assuming collections of the note receivable is not reasonably assured, in its statement of comprehensive income for
the year ended December 31, 2018, how much is the net income?
a. P234,125
b. P301,625
c. P220,700
d. 166,625
Solution: A
Realized gross profit on initial franchise fee
(schedule 1) 196,100
Continuing franchise fee (268,500 x 5%) 13,425
Total revenue 209,525
Interest income (900,000 x 15% x 6/12) 67,500
Total 277,025
Expenses (42,900)
Net income 234,125

Sch 1:
Collections:
Down payment 350,000
1st installments 180,000 530,000
GPR (462,500 / 1,250,000) 37%
RGP 196,100
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 5- 13
6. On August 1, 2016, Lyris Company sells a franchise that requires an initial franchise fee of P5,000,000. On September
15,2016, the contract was signed and the franchisee paid the initial franchise fee in full. On November 2, the
franchisee commenced operations after substantial services have rendered by the franchisor at a cost of P50,000. What
is the net income from franchise fee of the franchisor in its December 31, Statement of Comprehensive Income?
a. P 5,000,000 b. P 4,950,000
c. P 0 d. P 50,000
Solution: B
Initial franchise fee P5,000,000
Less: Cost of franchise 50,000
Net income P4,950,000
Guerrero 2017 problem 10-2
7. On January 4, 2016, Rico, Inc. signed an agreement authorizing Ms. Dom to operate as franchisee for an initial
franchise fee of P500,000 received when the agreement was signed. Ms. Dom commenced operations on July 1, 206, at
which date all of the initial services required of Rico, Inc. had been performed at a cost of P10,000. The franchise
agreement further provides that Ms. Dom must pay monthly to Rico, Inc., a continuing franchise fee equal to 5% of its
monthly gross sales. Ms. Dom reported from July 1 to December 31, 2016 gross sales P400,000. On December 31, 2016,
what is the net income from franchise fees to be reported by Rico, Inc.?
a. P 500,000 b. P 490,000
c. P 520,000 d. P 510,000
Solution: D
Initial franchise fee 500,000
Continuing franchise fee (P400,000 X .05) 20,000
Total revenue 520,000
Cost 10,000
Net income P 510,000
Guerrero 2017 problem 10-8
8. On January 2, 2016 Christian Inc., signed an agreement authoring Rex Company to operate as franchise e over a 20-
year period for an initial franchise fee of P50,000 received when the agreement was signed. Rex company commenced
operations on July 1, 2016 at which date all of the initial services required of Christian, Inc. had been performed. The
agreement also provides that Rex company must pay annually to Christian Inc. a continuing franchise fee equal to 5% of
their gross sales. Rex company reported gross sales of P400,00 for 2016.
For the year ended December 31, 2016, how much should Christian Inc. record as revenue from franchise fees with
respect to Rex Company franchise?
a. P 70,000 b. P 50,000
c. P 45,000 d. P 22,500
Solution: A
Initial franchise fee P 50,000
Continuing franchise fee (P400,000 x 5%) 20,000
Total revenue P 70,000
Guerrero 2017 problem 10-14
9. On January 2, 2016, Ericka signed an agreement to operate as a franchisee of Ella Inc. for an initial franchise fee of
P3,125,000 for 10 years. Of this amount 40% was paid when the agreement was signed and the balance payable in four
semi-annual payments beginning June 30,2016, Ericka signed a non-interest bearing note for the balance. Ericka’s
credit rating indicates that it can borrow money at 24% on the loan of this type. Substantial services costing P802,500
have been rendered by Ella Inc. The present value of annuity of 1 at 12% for 4 periods is P3.04.
If the collection of the note is not reasonable assured, the realized gross profit for the year ended December 31, 2016
a. P 1,321,345.5 b. P 1,069,031.5
c. P 1,316,861 d. P 1,338,307
Solution: C
Down payment (3,125,000 x 40%) P1,250,000
Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 1,425,000
Adjusted sales value of initial franchise fee 2,675,000
Direct cost of services 802,500
Gross profit 1,872,500
Gross profit rate (1,872,500 ÷ 2,675,000) 70%

Date Collection Interest Principal Balance of PV of NR

1/1 P1,425,000
6/30 468,750 171,000 297,750 1,127,250
12/30 468,750 135,270 333,480 793,770
Total collection applying to principal 631,230
Down payment 1,250,000
Total collection 1,881,230
Gross profit rate 70%
Realized gross profit on 1,316,861
Initial franchise fee
Guerrero 2017 problem 10-18
10. On December 31, 2016, Argyll Inc. authorized Mr. Rico to operate as a franchise for an initial fee of P3,000,000. Of this
amount, P1,200,000 was received upon signing of the contract, and the balance by a non-interest bearing note , is due
in 3 annual payments, beginning December 31, 2017. The present value of the 3 annual payments appropriately
discounted is P1,263,900. The collectibility of the note is not reasonably assured. On December 31, 2016, Argyll should
record unearned interest income and deferred revenue from franchise fee respectively of:
a. P 536,100;P3,000,000 b. P 536,100;P2,463,900
c. P 63,900;P3,000,000 d. P 63,900;P2,463,000
Solution: B
Face value of the note receivable P1,800,000
Present value of the note receivable 1,263,900
Unearned interest income P 536,100
Initial franchise fee P3,000,000
Less: Unearned interest income 536,100
Deferred revenue from franchise fee P2,463,900
Guerrero 2017 problem 10-10
Chapter 9 Long term construction contracts
Problem
1. Gemma Construction Company started work on three job sites during 2018. Any costs incurred are expected to be
recoverable. Data relating to the three jobs are as follows:
Estimated
Contract Cost Cost to
Site Price Incurred Complete Billings Colections
Bicol 875,000 656,500 - 875,000 875,000
Davao 1,225,000 175,000 700,000 175,000 175,000
Aklan 437,500 175,000 175,000 262,500 175,000

What is the balance of the Construction in Progress account on December 31, 2018 under the following methods?

Percentage of Completion Zero Profit

a. P26,250 due from P87,500 due to
b. P26,250 current liability P87,500 current asset
c. P87,500 due from P26,350 due to
d. P87,500 due from P26,250 current asset

Solution: A

Bicol Davao Aklan Total

Contract price 875,000 1,225,000 437,500 2,537,500
Total estimated cost:
Cost incurred 656,250 175,000 175,000 1,006,250
Est. cost to complete 700,000 175,000 875,000
Total estimated cost 656,250 875,000 350,000 1,881,250
Estimated gross profit 218,750 350,000 87,500 656,250
Percentage of
completion 100% 20% 50%
Gross profit earned 218,750 70,000 43,750 332,500

Percentage of Completion Zero profit

Total cost incurred 1,006,250 1,006,250
Total gross profit
earned 332,500 218,750
Construction in
progress 1,338,750 1,225,000
Less: Billings 1,312,500 1,312,500
Due from (to) 26,250 -87,500

Advance Accounting Textbook 2017- Guerrero Prob. 10-29

2. Marc Construction Company began operation on January 2, 2018. During the year, the company entered into a contract
with Althea Company to reconstruct a manufacturing facility. At that time, Marc estimated that it would take five
years to complete the facility at total cost of P1,800,000. The total contract price for the construction of the facility is
P2,500,000. During the year, the company incurred P440,000 in construction costs related to the construction project.
The estimated cost to complete the contract is P1,560,000. Althea Company was billed and paid 30% of the contract
price subject to a 10% retention.
Using the percentage of completion method, how much is the excess of Construction in Progress over Contract Billings
or Contract Billings over Construction in Progress?
a. P125,000 (Current Liability)
b. p125,000 (Current Asset)
c. P200,000 (Current Assets)
d. P200,000 (Current Liability)
Solution: D
Construction in Progress:
Cost incurred to date 440,000
Gross profit earned to date (2,500,000 -
2,000,000) 110,000
Total 550,000
 Less: Contract billings (2,500,000 x 30%) 750,000
Excess of contract billing over construction
in progress (CL) (200,000)

Advance Accounting Textbook 2017- Guerrero Prob. 10- 25

3. On January 2, 2016 2018, Marc Builders Corp. of Ilocos enters into a contract to construct a building for P40,000,000.
During the construction period many change orders are made to the original contract. All of the changes were accepted
by both the customer and the contractor. The following schedule summarizes the change order in 2018:
Estimated costs to
Cost incurred in 2018 complete Contract price
Basic Contract 8,000,000 28,000,000 40,000,000
Change order # 1 50,000 50,000 125,000
Change order # 2 50,000
Change order # 3 300,000 300,000 600,000
Change order # 4 125,000 100,000

Under the percentage of completion method, what is the gross profit to be recognized on December 31, 2018 (rounded
to the nearest peso)?
a. P907,828
b. P888,889
c. P909,063
d. P970,830
Solution: A

Total contract price after change order 40,825,000

Total cost incurred to date after change order 8,425,000

Total estimated cost to complete after change order 28,400,000
Total estimated cost 36,875,000
Estimated gross profit 3,950,000
Percentage of completion (8,475,000 / 36,875,000) 22.93%
Gross profit earned in 2018 907,828
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 4- 30

4. Rex Builders works on a P70 million contract in 2018 to construct a shopping mall for SM Inc. During 2018, Rex Builders
uses the percentage of completion method of revenue recognition. At December 31,2018 the account balances were:
Construction in Progress P24.55 million
Accounts Receivable 2.4 million
Contract billings 12.0 million
Estimated cost to complete 31.85 million

How much is the actual cost incurred in 2018?

a. P24.5 million
b. P49 million
c. P7.5 million
d. P17.150 million
Solution: D
Percentage of completion based on cost incurred to date:
Construction in progress 24.5 million
Divided by contract price 70.0 million = 35%
Therefore the estimated cost to complete of P31. 85 million is equal to 65%
Total estimated cost (P31. 85 million / 65%) P49 million
Estimated cost to complete 31.85 million
Actual cost incurred in 2018 17. 15 million
CPA Reviewer Advance Accounting 2016- Guerrero Prob. 4- 21
5. The following data relating to a construction job started by Althea Co. during 2018:
Total contract price P100,000
 Actual cost during 2018 20,000
Estimated remaining cost 40,000
Billed to customer during 2018 30,000
Received from customer during 2018 10,000
How much gross profit would Althea Co. recognized for 2018 under the zero profit method and percentage of
completion method?
a. P0 and P13,333, respectively
b. P0 and P26,667, respectively
c. P4,000 and P13,333, respectively
d. P12,000 and P33,333, respectively
Solution: A
Under the zero profit method no gross profit is to be recognized since the project is not yet completed,
under the percentage of completion method the gross profit to be recognized in 2018 is computed below:
Contract price P100,000
Estimated cost:
Cost to date 20,000
Cost to complete 40,000 60,000
Estimated gross profit 40,000
Percentage of completion (20,000 / 60,000) 33 1/3%
Gross profit recognized 13,333
6. Ally Construction Inc. has consistently used the percentage of completion method of recognizing income. In 2016, Ally
started work on P3,000,000 fixed price construction contract. The accounting records disclosed the following data for
the year ended December 31, 2016:
Cost incurred P 930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Ally have recognized in 2016?
a. P 230,000 b. P 100,000
c. P 30,000 d. P 0
Solution: B
Contract Price P3,000,000
Less: Total estimated cost (930,000 + 2,170,000) 3,100,000
Loss (P 100,000)
Guerrero 2017 problem 9-4
7. Althea Corp. began construction work in 2016 for a project with a contract price of P8,000,000. Althea Corp uses the
percentage of completion method. The financial statement for 2016 relating to the contract shows the following:
Accounts receivable P 500,000
Construction in progress 1,600,000
Progress billings to date 1,500,000
Gross profit earned in 2016 200,000
Compute the cash collections and cost incurred to date respectively:
a. P 1,000,000 ;P1,400,000 b. P 7,500,000;P1,400,000
c. P 1,000,000 ;P1,600,000 d. P 1,400,000;P1,600,000
Solution: A
Cash collections:
Progress billings P1,500,000
Less: Accounts receivable, end 500,000
Collection P1,000,000
Cost incurred to date:
Construction in Progress P1,600,000
Less: Gross profit earned 200,000
Cost incurred to date P1,400,000
Guerrero 2017 problem 9-17
8. Rex Co. recognizes construction revenue and costs using the percentage completion method. During 2015, a single
long-term project begun which continued through 2016. Information on the project follows:
2015 2016
Accounts receivable P200,000 P600,000
Construction costs 210,000 384,000
Construction in progress 244,000 728,000
Partial billings on contract 200,000 840,000
What is the gross profit recognized from this long-term construction contract 2015 and 2016 respectively?
a. P 44,000 ;P456,000 b. P 44,000;P200,000
c. P 34,000 ;256,000 d. P 34,000;P100,000
 Solution: D
2015: Construction in progress P 244,000
Less: Construction costs 210,000
Gross profit recognized - 2015 P 34,000

2016: Construction in progress (P728,000-P244,000) P 484,000

Less: Construction costs 384,000
Gross profit recognized - 2016 P 100,000
Guerrero 2017 problem 9-13
9. On April 1, 2014, Dom Company enters into a contract for the construction of a building which is estimated to cost Dom
P3,120,000. Dom is billing its client at cost plus 20% and uses the percentage completion method. The following data
are obtained on the project:
Cost incurred each year Estimated cost to complete
2014 P546,000 P2,054,000
2015 998,400 1,315,600
2016 1,575,600
What is the gross profit of Dom for 2016?
a. P 146,640 b. P 477,360
c. P 237,160 d. P 624,000
Solution: A
2006 2007 2008

Contract price (cost X 120%) P3,744,000 P3,744,000 P3,744,000

Less: Total estimated costs
(1) Cost incurred to date 546,000 1,544,400 3,120,000
Estimated cost to complete 2,054,000 1,315,000
(2) Total 2,600,000 2,860,000 3,120,000
Estimated gross profit 1,144,000 884,000 624,000
Percentage of completion (1/2) 20% 54% 100%
Gross profit earned to date 240,240 477,360 624,000
Gross profit earned in prior years 240,240 477,360
Gross profit earned this year P 240,240 P 237,120 P 146,640
Guerrero 2017 problem 9-15
10. Christopher Construction Company began construction project on a building for P3,000,000. The project was completed
during 2016. The accounting records disclosed the following:
2015 2016
Progress billings during the year P1,100,000 P1,900,000
Cost incurred during the year 900,000 1,800,000
Collections on billings during the year 700,000 2,300,000
Estimated Cost to complete 1,800,000
What is the balance of construction in progress account at the end of 2015 using percentage completion method and
Zero Profit method respectively?
a. P 1,000,000;P900,000 b. P 900,000;P900,000
c. P 1,000,000;P1,000,000 d. P 2,700,000,P1,800,000
Solution: A
Percentage of Completion Method:
Contract Price P3,000,000
Less: Total estimated cost (900,000/1,800,000) 2,700,000
Estimated gross profit 300,000
% of completion (900,000/2,700,000) 33.33%
Gross profit recognized, 2015 100,000
Add: Cost Incurred 900,000
Construction in Progress - 2015 P 1,000,000

Zero Profit Method:

Cost incurred to Construction in Progress – 2015 P 900,000
Guerrero 2017 problem 9-6