FOREX PROBLEM

On April 4, 2010, OBAMA Co. Products delivered to a Pakistan firm inventory it sold for 100,000 rupees.
Payment is due to be received on August 2, 2010. The company’s fiscal year ends June 30. Also on April
4, OBAMA Products entered into a foreign exchange forward to sell 100,000 rupees on August 2, 2010.

4 / 4/ 10 6 / 30 / 10 8 / 2 / 10
Spot rate (rupees) P.80 P.84 P.82
Forward rate (rupees)……   .77    .83    .82

1. The June 30, 2010 profit and loss statement, foreign exchange gain or loss due to sale of inventory
amounted to:
A. P6,000 gain                  B. P6,000 loss             C. P4,000 gain              D. P4,000 loss

2. The June 30, 2010 profit and loss statement, foreign exchange gain or loss due to hedging instrument:
A. P4,000 loss                   B. P4,000 gain            C. P6,000 loss             D. P6,000 gain

3. The June 30, 2010 net foreign exchange gain/loss in the profit and loss statement amounted to:        
     A. P -0-           B. P3,000 net gain      C. P2,000 net gain              D. P2,000 net gain

4. What amount will OBAMA disclose as the fair value of the forward contract on June       30,2010?
A. P0                     B. P4,000             C. P6,000               D. P 80,000

5. On settlement date, August 2, 2010 foreign exchange gain or loss due to forward contract/hedging

instrument:
A. P1,000 gain                  B. P1,000 loss             C. P2,000 gain            D. P5,000 loss

6. What amount will OBAMA’ s fair value of the forward contract on August 2, 2010?
A. P1,000                     B. P5,000         C. P82, 000          D. P83,000
LTCC, INSTALLMENT SALES, FRANCHISE

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____    1.         Which of the following best describes the condition(s) that must be present for the
recognition of revenue?
a. The revenue must be earned, measurable, and collected.
b. The revenue must be earned, measurable, and collectible.
c. The revenue must be earned and collectible.
d. The revenue must be measurable and collectible.

____    2.         Dilla Construction Company's projects extend over several years and collection of
receivables is reasonably certain. Each project has a contract that specifies a price and the rights and
obligations of all parties. Both the contractor and the customer are expected to fulfill their contractual
obligations on each project. Reliable estimates can be made of the extent of progress and cost to
complete each project. The method that the company should use to account for construction revenue is
a. installment sales.
b. percentage-of-completion.
c. completed-contract.
d. cost recovery.

____    3.         How should the balances of Progress Billings and Construction in Progress be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress Billings as income, Construction in Progress as inventory.
b. Net, as income from construction if credit balance, and loss from construction if debit
balance.
c. Progress Billings as deferred income, Construction in Progress as a current asset.
d. Net, as a current asset if debit balance and current liability if credit balance.

____    4.         If the percentage-of-completion method is used, what is the basis for determining the
gross profit to be recognized in the second year of a three-year contract?
a. Cumulative actual costs incurred only.
b. Incremental cost for the second year only.
c. Cumulative actual costs and estimated costs to complete.
d. No gross profit would be recognized in year 2.

____    5.         If the completed-contract method is used, what is the basis for determining the income to
be recognized in the second year of a three-year contract?
a. Cumulative actual costs incurred only.
b. Incremental cost for the second year only.
c. Latest available estimated costs.
d. No income would be recognized in year 2.

____    6.         Which of the following would be used in the calculation of the gross profit recognized in
the third and final year of a construction contract that is accounted for using the percentage-of-
completion method?
Actual Income
Contract Total Previously
Price Costs Recognized
a.   Yes           Yes            No
b.   Yes           Yes            Yes
c.   Yes           No             Yes
d.   No            Yes            Yes

____    7.         The installment method of recognizing revenue

a. should be used only in cases in which no reasonable basis exists for estimating the
collectibility of receivables.
b. is not a generally accepted accounting principle under any circumstances.
c. should be used for book purposes only if it is used for tax purposes.
d. is an acceptable alternative accounting principle for a firm that makes installment sales.
____    8.         Assume the percentage-of-completion method of revenue recognition is used on a long-
term construction contract. Under this method, revenues that are earned but unbilled at the balance
sheet date should be disclosed
a. as a long-term receivable in the noncurrent assets section of the balance sheet.
b. only as a footnote disclosure until the customer is billed for the percentage of work
completed.
c. as construction in progress in the current assets section of the balance sheet.
d. as construction in progress in the noncurrent assets section of the balance sheet.

____    9.         When using the installment sales method,

a. gross profit is deferred until all cash is received, but revenues and costs are recognized in
proportion to the cash collected from the sale.
b. gross profit is recognized only after the amount of cash collected exceeds the cost of the
item sold.
c. revenue, costs, and gross profit are recognized proportionally as the cash is received
from the sale of product.
d. total revenues and costs are recognized at the point of sale, but gross profit is deferred in
proportion to the cash that is uncollected from the sale.

____    10.       The completed-contract method of accounting for long-term construction-type contracts

is preferable when
a. a contractor is involved in numerous projects.
b. the contracts are of a relatively long duration.
c. estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
d. there are inherent uncertainties in the contract beyond normal business risks.

____    11.       Which of the following is not  a difference between the percentage-of completion and
completed-contract methods of accounting for long-term construction contracts?
a. They report different amounts for inventory during the construction period.
b. They report different amounts for progress billings during the construction period.
c. They cause a different cash inflow during the construction period.
d. They report different amounts for accounts receivable during the construction period.

____    12.       The theoretical support for using the percentage-of-completion method of accounting for
long-term construction projects is that it
a. is more conservative than the completed-contract method.
b. reports a lower Net Income figure than the completed-contract method.
c. more closely conforms to the cost principle.
d. produces a realistic matching of expenses with revenues.

____    13.       If a company uses the completed-contract method of accounting for long-term

construction contracts, then during the period of construction, financial information related to a long-
term contract will
a. appear on both the income statement and balance sheet during the construction period.
b. appear only on the income statement during the period of construction.
c. appear only on the balance sheet during the period of construction.
d. not appear on the financial statements.

____    14.       When the percentage-of-completion method of accounting for long-term construction

projects is used, why is Construction in Progress increased by the annual recognized gross profit on long-
term construction contracts?
a. The cost of the contract has increased.
b. The project's value has increased above cost.
c. The economy experiences inflation over the construction period.
d. Construction in Progress is not increased by the annual recognized profit.

____    15.       When comparing the percentage-of-completion and completed-contract methods of

accounting for long-term construction contracts, both methods will report
a. the same balances each period in the Progress Billings account.
b. the same expense for cost of construction each year.
c. the same amount of income in the year of completion.
d. the same inventory carrying value each year during the construction period.

____    16.       The cost recovery method

a. is used only when circumstances surrounding a sale are so uncertain that earlier
recognition is impossible.
b. is the most common method of accounting for real estate sales.
c. is similar to percentage-of-completion accounting.
d. is never acceptable under generally accepted accounting principles.

____    17.       Franchise fees are properly recognized as revenue

a. when received in cash.
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.

____    18.       Goods on consignment should be included in the inventory of

a. the consignor but not the consignee.

b. both the consignor and the consignee.
c. the consignee but not the consignor.
d. neither the consignor nor the consignee.

____    19.       In accounting for sales on consignment, sales revenue and the related cost of goods sold
should be recognized by the
a. consignor when the goods are shipped to the consignee.
b. consignee when the goods are shipped to the third party.
c. consignor when notification is received the consignee has sold the goods.
d. consignee when cash is received from the customer.
____    20.       A company uses the percentage-of-completion method to account for a four year
construction contract. Progress billings sent in the second year that were collected in the third year
would
a. be included in the calculation of the income recognized in the second year.
b. be included in the calculation of the income recognized in the third year.
c. be included in the calculation of the income recognized in the fourth year.
d. not be included in the calculation of the income recognized in any year.

____    21.       In accounting for a long-term construction contract for which there is a projected profit,
the balance in the Construction in Progress account at the end of the first year of work using the
percentage-of-completion method would be
a. zero.
b. the same as the completed-contract method.
c. higher than the completed-contract method.
d. lower than the completed-contract method.

____    22.       On May 1, 2009, Green Construction Company entered into a fixed-price contract to
construct an apartment building for P3,000,000. Green appropriately accounts for this contract under
the percentage-of-completion method. Information relating to the contract is as follows:

2009 2010
At December 31:
Percentage of completion ........ 20% 60%
Estimated costs at completion ... P2,250,000 P2,400,000
Income recognized (cumulative) .. P  150,000 P  360,000

What is the amount of contract costs incurred during the year ended December 31, 2010?

a. P600,00
b. P960,000
c. P990,000
d. P1,440,000

____    23.       C & J Construction, Inc. has consistently used the percentage-of-completion method of
recognizing income. Last year C & J started work on a P4,500,000 construction contract, which was
completed this year. The accounting records disclosed the following data for last year:

Progress billings ..................................... P1,650,000

Costs incurred ........................................ 1,350,000
Collections ........................................... 1,050,000
Estimated cost to complete ............................ 2,700,000

How much income should C & J have recognized on this contract last year?

a. P105,000
b. P150,000
c. P300,000
d. P350,000

____    24.       Jessup Construction, Inc. has consistently used the percentage-of-completion method of

recognizing income. During 2009, Jessup started work on a P1,500,000 fixed-price construction contract.
The accounting records disclosed the following data for the year ended December 31, 2009:

Costs incurred ........................................ P  465,000

Estimated cost to complete ............................ 1,085,000
Progress billings ..................................... 550,000
Collections ........................................... 350,000
How much loss should Jessup have recognized in 2009?

a. P15,000
b. P35,000
c. P50,000
d. P115,000

____    25.       Shepard Construction Company has consistently used the percentage-of- completion

method. On January 10, 2009, Shepard began work on a P3,000,000 construction contract. At the
inception date, the estimated cost of construction was P2,250,000. The following data relate to the
progress of the contract:

Gross profit recognized at December 31, 2009 .......... P  300,000

Costs incurred Jan. 10, 1999, through Dec. 31, 2010 ... 1,800,000
Estimated cost to complete at December 31, 2010 ....... 600,000

How much gross profit should Shepard recognize for the year ended December 31, 2010?

a. P150,000
b. P262,500
c. P300,000
d. P450,000

____    26.       For a construction firm using the completed-contract method, if costs exceed billings on
some contracts by P1,000,000 and billings exceed costs by P800,000 on others, the contracts should
ordinarily be reported as a
a. current asset of P200,000.
b. current liability of P200,000.
c. current asset of P1,000,000 less a contra-current asset of P800,000.
d. current asset of P1,000,000 and a current liability of P800,000.

____    27.       Salmon Construction Company uses the percentage-of-completion method of accounting.

In 2009, Salmon began work on a project which had a contract price of P1,600,000 and estimated costs
of P1,200,000. Additional information is as follows:

2009 2010
Costs incurred during the year ............ P240,000 P1,060,000
Estimated costs to complete, as of 960,000
   12/31/09 ................................
Billings during the year .................. 290,000 1,310,000
Collections during the year ............... 250,000 1,200,000

The amount of gross profit Salmon should recognize on this contract during 2009 is

a. P40,000.
b. P80,000.
c. P100,000.
d. P200,000.

____    28.       Brown Construction Company uses the percentage-of-completion method for long-term

construction contracts. A specific job was begun in 2009 and completed in 2011. The contract price was
P1,400,000 and cost information as of each year-end is given below:

2009 2010 2011

End of year estimated cost to
  complete ...................... P400,000 P200,000 P      0 
Annual cost incurred ............  400,000  400,000 120,000

Assuming Brown correctly recorded gross profit in 2009, how much gross profit should the company
record in 2010?

a. P0
b. P20,000
c. P300,000
d. P320,000

____    29.       The following data relate to a construction job started by Worthington Co. during 2009:

Total contract price .................................. P300,000

Actual costs incurred during 2009 ..................... 60,000
Estimated remaining costs ............................. 120,000
Billed to customer during 2009 ........................ 90,000
Received from customer during 2010 .................... 30,000

Under the completed-contract method, how much should Worthington recognize as gross profit for
2009?
a. P0
b. P30,000
c. P40,000
d. P90,000
____    30.       The following data relate to a construction job started by Worthington Co. during 2009:

Total contract price .................................. P300,000

Actual costs incurred during 2009 ..................... 60,000
Estimated remaining costs ............................. 120,000
Billed to customer during 2009 ........................ 90,000
Received from customer during 2009 .................... 30,000

Under the percentage-of-completion method, how much should Worthington recognize as gross profit
for 2009?
a. P0
b. P40,000
c. P80,000
d. P100,000

____    31.       Rainbow Construction Company uses the percentage-of-completion method for long-term

construction contracts. The company started a project with a contract price of P2,750 in 2009. Given the
following data, what is the balance in Construction in Progress for this contract at the end of 2009?

2009 2010
Costs incurred this year .................. P  400 P  500
Total estimated costs remaining at end
  of year .................................  1,600  1,000

a. P150
b. P400
c. P550
d. P1,750

____    32.       Lake Construction Company uses the percentage-of-completion method for long-term

construction contracts. The company has a project with a contract price of P7,000 on which P600 of
gross profit has been recognized in prior years. Information for the current year is as follows:

Total cost incurred through current year ............... P5,000

Estimated costs remaining at end of current year ....... 2,800

What is the loss that Lake should recognize in the current year?

a. P600
b. P800
c. P1,400
d. No loss should be recognized.
____    33.       Brooke Company began operations on January 1, 2009, and uses the installment sales
method of accounting. The company has the following information available for 2009 and 2010:

2009 2010
Installment sales ......................... P4,500,000 P5,400,000
Gross profit on sales .....................        30%        40%
Cash collections on 2009 sales ............  1,500,000  3,600,000
Cash collections on 2010 sales ............  4,200,000

The realized gross profit for 2010 would be

a. P1,680,000.
b. P2,760,000.
c. P3,120,000.
d. P4,320,000.

____    34.       Lake Construction Company uses the completed-contract method for long-term

construction contracts. The information for a specific contract as of January 1, 2009, is shown below.

Costs incurred to date ................................ P  700,000

Contract price ........................................ 2,000,000
Estimated remaining cost to complete .................. 800,000

P600,000 of cost was incurred during 2009 and on December 31, 2009, the estimated remaining cost to
complete was still P800,000. The correct balance for the Construction in Progress at December 31, 2009
is
a. P600,000.
b. P700,000.
c. P1,200,000.
d. P1.300,000.

____    35.       In 2009, Aldaus Corp. began construction work under a three-year contract. The contract
price is P800,000. Aldaus used the percentage-of-completion method for financial accounting purposes.
The income to be recognized each year is based on the proportion of costs incurred to total estimated
costs for completing the contract. The financial presentations relating to this contract at December 31,
2009, appear below.
Balance Sheet
Accounts receivable--construction contract
  billings .................................. P15,000
Construction in progress .................... P50,000 
Less contract billings ......................  (47,000)
Cost of uncompleted contract in excess of
  billings .................................. 3,000
Income Statement
Income (before tax) on the contract
   recognized in year 1 ...................... P10,000

How much cash was collected in 2009 on this contract?

a. P32,000
b. P35,000
c. P47,000
d. P50,000

____    36.       Paral Company began operations on January 2, 1999, and appropriately used the
installment sales method of accounting. The following data are available for 2009 and 2010:

2009 2010
Installment sales .......................... P3,000,000 P3,600,000
Gross profit on sales ......................        30%        40%
Cash collections from:
  2009 sales ............................... P1,000,000 P1,200,000
  2010 sales ............................... -- P1,400,000

The realized gross profit for 2010 is

a. P1,440,000.
b. P1,040,000.
c. P920,000.
d. P780,000.

____    37.       Wedtec Enterprises, which began operations on January 1, appropriately uses the

installment method of accounting. The following information is available for its first year:

Gross profit on sales ................................. 40%

Deferred gross profit at December 31 .................. P120,000
Cash collected, including down payments ............... P225,000

What is the total amount of Wedtec's installment sales for the first year?

a. P300,000
b. P345,000
c. P425,000
d. P525,000

____    38.       Leno Distributing, which began operating on January 1, appropriately uses the installment
method of accounting. The following information pertains to Leno's operations for the first year:

Installment sales ...................................... P1,000,000

Cost of installment sales .............................. 600,000
General and administrative expenses .................... 100,000
Collections on installment sales ....................... 200,000
The balance in the deferred gross profit account at December 31 should be
a. P400,000.
b. P320,000.
c. P240,000.
d. P200,000.

____    39.       On January 3, 2009, Lincoln Services, Inc., signed an agreement authorizing Lisa Company
to operate as a franchisee over a 20-year period for an initial franchise fee of P100,000 received when
the agreement was signed. Lisa commenced operations on July 1, 2009, at which date all of the initial
services required of Lincoln had been performed. The agreement also provides that Lisa must pay a
continuing franchise fee equal to 5% of the revenue from the franchise annually to Lincoln. Lisa's
franchise revenue for 2009 was P800,000. For the year ended December 31, 2009, how much should
Lincoln record as revenue from franchise fees in respect of the Lisa franchise?

a. P140,000
b. P90,000
c. P45,000
d. P42,500
____    40.       Assume the Randall Corporation sold P30,000 worth of merchandise on the installment
basis. The cost of the merchandise was P24,000, and collectibility of the receivable is uncertain.
Collection in the current year on the account is P8,000. How much gross profit should be reported as
realized?
a. P1,600
b. P2,000
c. P6,000
d. P8,000
____    41.       On November 30, Northrup Company consigned 90 freezers to Watson Company for sale
at P1,600 each and paid P1,200 in transportation costs. A report of sales was received on December 30
from Watson reporting the sale of 20 freezers, together with a remittance of the P27,200 balance due.
The remittance was net of the agreed 15% commission. How much, and in what month, should Northrup
recognize as consignment sales revenue?

November December

a.   P0            P32,000
b.   P0            P27,200
c.   P144,000      P0
d.   P142,800      P0
____    42.       Layton Construction Company has consistently used the percentage-of completion
method of recognizing income. During 2010, Layton entered into a fixed-price contract to construct an
office building for P10,000,000. Information relating to the contract is as follows:

December 31
2009 2010
Percentage of completion ..............        20%        60%
Estimated total cost at completion .... P7,500,000 P8,000,000
Income recognized (cumulative) ........    500,000  1,200,000

Contract costs incurred during 2010 were

a. P3,200,000.
b. P3,300,000.
c. P3,500,000.
d. P4,800,000.

____    43.       Hillson Company began operations on January 1, 2009, and appropriately uses the
installment method of accounting. The following data are available for 2009 and 2010:

2009 2010
Installment sales ..................... P1,200,000 P1,500,000
Cash collections from:
  2009 sales ..........................    400,000    500,000
  2010 sales ..........................         --    600,000
Gross profit on sales .................        30%        40%

The realized gross profit for 2010 is

a. P240,000.
b. P390,000.
c. P440,000.
d. P600,000.

____    44.       Seahawks, Inc. had the following consignment transactions during December:

Inventory shipped on consignment to Ashe Company ........ P18,000
Freight paid by Seahawks ................................ 900
Inventory received on consignment from Fenn Company ..... 12,000
Freight paid by Fenn .................................... 500

No sales of consigned goods were made through December 31. Seahawks' December 31 balance sheet
should include consigned inventory at

a. P18,900.
b. P18,000.
c. P12,500.
d. P12,000.