ADVANCED ACCOUNTING PART 1

REVENUE RECOGNIZATION

Long Term Construction

Problem 1 = Jet Construction Company began operation January 2, 2014. During the year, the
company entered into a contract with Holy Angel University to construct a library building. At the time,
Jet estimated that it would take five years to complete the facility at a 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 cost and total cost to complete the contract is P1,560,000. Angel
Company was billed and paid 30% of the contract price subject to a 10% retention.
Required:
1. Using the percentage of completion method, how much is the excess of Construction in Progress
over Contract Billing that increase assets?
2. Following the 10% retention policy, how much is the expected cash collection from the project for
the year 2014?

Problem 2 = Pirma Company, is a contractor for the construction of large office buildings. At the
beginning of 2014, one building is in progress. The following data described the status of the building at
the beginning of the year.

Contract price 6,300,000

Costs incurred to January 1, 2014 (including P50,000 worth of materials stored at
the site to be used in 2015 to complete the project) 1,425,000
Estimated cost to complete, January 1, 2014 4,075,000

During 2014, the following data were obtained with respect to the same building:

Cost incurred to date 3,040,000

Cost to complete, December 31, 2014 1,960,000

Using the percentage of completion:

3. What is the realized gross profit (loss) to be reported for the year 2013?
4. What is the realized gross profit (loss) to be reported for the year 2014?

Problem 3 = Joys Construction Company has used the percentage of completion method of computing
revenue. Total contract price was P10,000,000. The following data are available from 2013 to 2015:

2013 2014 2015

Realized gross profit (loss), each 200,000 700,000 (100,000)
Cost incurred each year 1,800,000 ? 4,100,000

5. How much is the total estimated cost to complete on the project for the year end of 2014?
6. How much is the total estimated gross profit on the project for the year 2014?
Problem 4 = Miracle Construct, Inc. is executing a gigantic project of constructing the tallest boarding
house in the country. The project is expected to take three years to complete. The company has signed
a fixed price contract of P12,000,000 for the construction of this prestigious boarding house. The details
of the costs incurred to date in the first year are:

Site labor costs P1,000,000

Costs of construction material 3,000,000
Depreciation of special plant and equipment used in constructing to build the
boarding house 150,000
Marketing and selling costs to get the boarding house in the country to right
exposure 1,000,000
Administrative costs related to construction project 350,000
Account receivable 2,000,000
Cash collected during the year 4,000,000
Net excess of progress billing over construction in progress reported as liability 600,000
Required:
7. How much is the total estimate cost to complete?
8. How much is the total income from construction for the year?

Problem 5 = On February 1, 2013, JJD Construction Company obtained a contract to build an athletic
stadium. The stadium was to be built at a total cost of 10,800,000 and was scheduled for completion by
September 1, 2015. One clause of the contract stated that JJD was to deduct 30,000 from the
13,200,000 billing price for each week that completion was delayed. Completion was delayed six weeks,
which resulted in a 180,000 penalty. Below are the data pertaining to the construction period:

2013 2014 2015

Costs incurred each year 3,664,000* 4,136,000 3,200,000
Estimated costs to complete 7,136,000 3,200,000 -0-
Progress billings each year 3,600,000 5,900,000 3,520,000
Cash collection to date 3,600,000 9,400,000 13,020,000
Operating expenses 200,000 180,000

*Including cement materials stored amounting to 100,000 that is held offsite to be used in 2015 to
complete the project.
For each year show how the details related to this contract would be disclosed on the balance sheet and
on the income statement:
9. Under Percentage-of-completion Method – Determine the net income (loss) for its December 31
yearly income statement for 2013, 2014 and 2015.
10. Under Cost recovery Method - Determine the net income (loss) for its December 31 yearly
income statement for 2013, 2014 and 2015.

Franchise

Problem 1 = On April 30, 2012 Weston, Inc. entered into a franchise agreement with a local business-
man. The franchise paid P2,400,000 and gave a P1,600,000, 9%, 3-year note payable with interest due
annually on March 31. Weston recorded the P4,000,000 initial franchise fee as revenue on April 30,
2012. On December 31, 2012, the franchisee decided not to open an outlet under Weston’s name.
Weston cancelled the franchisee’s note and refunded two/fifth (2/5) of the amount paid April 30, 2012,
less accrued interest on the note.
1. What is the net decrease on the net income of the franchisor due to the repossession of the franchise
considering all income and losses that would affect franchisor’s net income for year 2012?
Problem 2 = Buko Express Co. enters into a franchise agreement with Holy Angel University – ISSI on
January 1, 2011. As per arrangement, Buko Express charges P900,000 for a franchise, with P180,000
paid when the agreement is signed and issuance of 9% non-interest bearing for the balance payable for
four equal annual payment starting January 1, 2012. Furthermore, the franchisee will be charged
subsequent annual franchise fees of P75,000 over the next four years. And lastly, the franchisee has
the right to purchase P200,000 of equipment for P150,000.

Cost of initial franchise services rendered by Buko Express during the year is P500,000 and estimates
the cost of subsequent annual services to be P100,000 for the entire four years. Buko Express expects
a profit of 20% on subsequent services. HAU-ISSI paid the annual fee for 2012 June 1, 2012, while the
subsequent services required would expect to be completed by the year end. Before the end of 2012,
Holy Angel University purchased the equipment included on the franchise arrangement.

2. As of June 30, 2012, in Buko Express semi-annual financial statement, what amount of unrealized
franchise revenue should the company recognize?
3. On December 31, 2012, in Buko Express annual income statement for 2012, what amount of realized
franchise revenue should the company recognize?
4. On December 31, 2012, in Buko Express annual income statement for 2012, what amount of realized
profit from franchise revenue should company recognize, assuming the cost of equipment is
P150,000?

Problem 3 = January 1, 2012 Kamayan, Inc. charges an initial franchise fee of P500,000 for the right to
operate as a franchise of Kamayan. Of this amount, P100,000 is payable when the agreement was
signed and the balance is payable in a non-interest bearing note in five annual payments of P80,000
each. Franchise services were immediately started and these were completed on January 31, 2012 at
cost amounting to P100,000. The credit rating of the franchisee indicates that money can be borrowed
at 8%.

Case 1 = If the probability of refunding the initial franchise fee is extremely low, the amount of future
services to be provided to the franchisee is minimal, collectability of the note is reasonably assured and
substantial performance has occurred:
5. How much is the earned franchise fees in year-end 2012?
6. How much is the unearned franchise fee in year-end 2012?
7. How much income from franchise in year-end 2012?
8. How much is unearned income from franchise year-end 2012?

Case 2 = If the probability of refunding the initial franchise fee is extremely low, the amount of future
services to be provided to the franchisee is minimal and collectability of the note is NOT reasonably
assured and assuming the first payment was made December 31, 2012.
9. How much is the total unearned revenues?
10. How much is the total income from franchise during the year?