INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Peñablanca, Cagayan 3502

College of Business and Accountancy
AFAR DRILL NO. 2

1. The following data relates to a contruction job started by Esther Inc.:

Total contract price P 1,000,000
Actual cost incurred in 2008 200,000
Estimated remaining cost 400,000
Billings to customers in 2008 300,000
Collections from customers in 100,000
2008

How much gross profit is to be recognized by Esther, Inc.?

Percentage of Completion Method Zero Profit Method

a. P133,333 -0-
b. P266,667 P200,000
c. P333,333 P100,000
d. P133,333 P200,000

2. Tower Builders, Inc. has consistently used the percentage-of-completion

method of accounting for construction-type contracts. In 2007, Tower
Builders started work on a P9,000,000 fixed price construction contract
that was completed in 2008. The company’s accounting records disclosed the
following:

December 31 2007 2008

Cumulative contract costs P3,900,000 P6,300,000
incurred
Estimated total costs at 7,800,000 8,100,00
completion 0

How much income would Tower have recognized in this contract for the year
ended December 31, 2008?
a. P100,000
b. P300,000
c. P600,000
d. P700,000

3. F.F. Cruz construction Company has consistently used the percentage-of -

completion method. On January 10, 2007, FF Cruz began work on a P6,000,000
construction contract. At the inception date, the estimated costs of
construction was P4,500,000.
The following data relate to the progress of the contract:
Income recognized at December 31, P600,000
2007
Cost incurred Jan.10,2007 thru 2,170,000
Dec.31, 2008
Estimated cost to complete at 1,200,000
Dec.31,2008

How much income should FF Cruz recognize for the year ended December 31, 2008?
a. P300,000 c. P600,000
b. P525,000 d. P900,000

4. D. Diaz Construction Inc. has consistently used the percentage-of-

completion method of recognizing income. In 2008, Diaz started work on a
P3,000,000 fixed price construction contract. The accounting records
disclosed the following data for the year ended December 31, 2008:
Cost incurred P930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000

How much loss should D.D. Diaz recognized in 2008?

a. P230,000 c. P30,000
b. P100,000 d. 0

5. On April 1, 2007, GC Construction Company entered into a fixed-priced

contract to constuct an apartment building for P6,000,000. GC
appropriately account this contract under percentage-of-completion method.
information relating to the contract is as follows:

2007 2008
Percentage of completion 20% 60%
Estimated cost of completion P4,500,000 P4,800,000
income recognized 300,000 720,000
(comulative)

What is the amount of the contract cost incurred during the year ended
December 31,2008?
a. P1,200,000 c. P1,920,000
b. P1,980,000 d. P2,880,000

On January 1, 2011, entities Alpha and Blaire each acquired 30% of the
ordinary shares that carry voting rights at a general meeting of shareholders
of Zirco Co. for P300,000. Alpha and Blair immediately agreed to share control
over Zirco. For the year ended December 31, 2011, Zirco recognized a profit of
P400,000.
On December 30, 2011, Zirco declared and paid a dividend of P150,000 for
the year 2011. At December 31, 2011, the fair value of each venturers’
investment in Zirco is P425,000. However, there is no published price
quotation for Zirco Co.

6. Using the cost model, Alpha and Blair must each recognize dividend income
for the year 2011 amounted to:
a. P45,000 b. P120,000 c. P75,000 d. Zero

7. The same information in No. 1 at December 31, 2011, the venturers must
report their investments in Zirco Co. (a jointly controlled entity)
amounted to:
a. P255,000 b. P300,000 c. P400,000 d. P375,000

8. The same information in No. 1 and using equity method, Alpha and Blair
share in the income of Zirco Co’s amounted to:
a. P120,000 b. P75,000 c. P45,000 d. Zero
9. The same information in No. 1 and using the equity method at December 31,
2011 Alpha and Blair each report their investment in Zirco Company (a
jointly controlled entity) amounted to:
a. P255,000 b. P300,000 c. P375,000 d. P400,000

10. The same information in No. 1 and using the fair value method model,
Alpha and Blair must each recognize dividend income for the year 2011
amounted to:
a. P120,000 b. P75,000 c. P45,000 d. Zero

11. The same information in No. 1 and using the fair value model, at
December 31, 2011 Alpha and Blair must each report their investment in
Zirco Company (a jointly controlled entity) amounted to:
a. P255,000 b. P300,000 c. P400,000 d. P425,000

On January 1, 2011, Serena and Chuck each acquired 30% of the ordinary
shares that carry voting rights at a general meeting of the shareholders of
Dan Corp. for P300,000. Serena and Chuck immediately agreed to share control
over the Dan Corp. for the year ended December 31, 2011, Dan recognized a
profit of P400,000.

On January 2, 2011 Dan also declared a dividend of P100,000 for the year
2010.

On December 30, 2011 Dan declared and paid a dividend of P150,000 for
the year 2011. At December 31, 2011 the fair value of each of the venturers’
investment in Dan is P400,000. However, there is no published price quotation
for Dan.

12. Using the cost model, Serena and Chuck must each recognize dividend
income for the year 2011 amounted to:
a. P120,000 b. P75,000 c. P45,000 d. P30,000

13. The same information in No. 7, at December 31, 2011 each venturer must
report its investment in Dan Corporation amounted to:
a. P255,000 b. P300,000 c. P400,000 d. P425,000

14. The same information in No. 7 and using the equity method, Serena and
Chuck share in the income of Dan’s amounted to:
a. P45,000 b. P75,000 c. P30,000 d. P120,000

15. The same information in No. 7 and using the equity method at December
31, 2011 Serena and Chuck each report their investment in Dan amounted to:
a. P400,000 b. P345,000 c. P330,000 d. P375,000

16. The same information in No. 7 and using fair value model, Chuck and
Serena must each recognize investment income for the year 2011 amounted to:
a. P120,000 b. P75,000 c. P45,000 d. Zero

17. The same information in No.7 and using fair value model, at December 31,
2011 Serena and Chuck must each report their investment in Dan Company
amounted to:
a. P400,000 b. P375,000 c. P345,000 d. P300,000

18. On January 2, 2008, Pedro Jose got the franchise of Marios Inc. a known
steak house of upscale patronage. The franchise agreement required a
 P500,000 franchise fee payable P100,000 upon signing of the franchise and
the balance in four annual installments starting December 31,2008. At
present value using 12% as discount rate, the four installment would be
approximate P199,650. The fees once paid are not refundable. The franchise
may be canceled subject to the provisions of the agreement. Should their be
unpaid franchise fees attributed to the balance of main fee (500,000), same
would become due and demandable upon cancellation. Further, the franchisor
is entitled to a 5 % fee on gross sales payable monthly within the first
ten days of the following month.

The note receivable for the balance of the franchise fee was guaranteed by the
Metro Bank.

The first year of operations yielded gross sales of 9 million. On December

3,2008, Mario’s Inc. earned franchise fee is:
a. P550,000 b. P650,000 c. P749,650 d. P950,000

19. On December 31, 2008, Max’s, Inc. signed an agreement authorizing Maria
de Jesus to operate as a franchisee for an initial franchise fee of
P500,000. Of this amount, P200,000 was received upon signing of the
agreement and the balance is due in three annual payments of P100,000 each
beginning December 31, 2009. The agreement provides that the down payment
(representing a fair measure of the initial services already performed by
Max) is not refundable although a future services are yet to be performed.
Maria’s credit rating is such that collection of the note is reasonably
assued. The present value at December 31, 2008 of the three annual payments
discounted at 14% is P232,200.

On December 31, 2008, Max’s, Inc. should record unearned franchise fees of:
a. P232,200 b. P300,000 c. P422,200 d. P -0-

20. On April 1, 2010, Hate That I Love You Inc. entered into a franchise
agreement with Id Rather Inc., franchisee. The initial franchise fees
agreed upon is P1,234,500, of which P234,500 is payable upon signing and
the balance to be covered by a non-interest bearing note payable in four
equal annual installments. The down payment is refundable within 100 days.
Id Rather Inc. has a high credit rating, thus, collection of the note is
reasonably assured. Out-of-pocket costs of P626,655 and P61,725 were
incurred for direct expenses and indirect expenses respectively. Prevailing
market rate is 9%. PV factor is 3.2397. On the fiscal year ended June 30,
2010, how much revenue from franchise fee will the franchisor recognize?
a. P0 b. P1,234,500 c. P1,044,425 d. P417,770

21. On January 1, 2010, Top Inc. entered into a franchise agreement with Sy
Inc., franchisee. The initial franchise fees agreed upon is P1,520,000, of
which P720,000 is payable upon signing and the balance to be covered by a
non-interest bearing note payable in four equal annual installments
starting next year. Initial services’ out-of-pocket costs of P820,764 and
P68,397 were incurred for direct expenses and indirect expenses
respectively. Prevailing market rate is 9%. PV factor is 3.2397. The
collectability of the note is not reasonably assured. A 5% continuing
franchise fee is to be paid monthly by Sy, Inc. based on its monthly gross
sales. Franchisee commenced operations on October 1, 2010. Gross sales for
the first months amounted to P567,000. How much was the net income for the
year ended December 1, 2010?

a. P306,267.60 b. P338,664.60 c. P333,805.05 d. P301,408.05

22. On August 31, 2008, KFC, Inc. entered into a franchise agreements with
two franchisees. The agreements required an initial franchise fee payment
of P700,000 plus four P300,000 payments due every four months, the first
payment is due on December 31, 2008. The market interest rate is 12%. The
initial deposit is refundable until substantial performance has been
completed. The following data describes each agreement:
Services
Performed Total costs
Probability by Franchisor Incurred to
of
Franchisee Full Dec. 31, 2008 Dec. 31, 2008
Collection
Juan Jose Likely Substantially P700,000
Pedro Pablo Doubtful 25% N/A

The present and future value tables at 4% for four (4) periods were as
follows:

Present value of 1 0.8548

Present value of an annuity of P1 3.6299
Future value of P1 1.1699
Future value of an ordinary annuity of 4.2465
P1

What amount of net income is to be reported by KFC in 2008, assuming

P1,000,000 was received from each franchisee during the year.

Juan Jose Pedro Pablo

a. P1,088,970 P -0-
b. P1,788,970 P -0-
c. P1,132,529 P -0-
d. P1,132,529 P43,559

23. On December 31, 2008, Chowqueen, Inc. authorized Mr. Chun to operate as
a franchisee for an initial franchise fee of P150,000. Of this amount,
P60,000 was received upon signing the agreement and the balance represented
by a note due in three annual payments of P30,000 each beginning December
31, 2009. The present value on December 31, 2008, for three annual payment
appropriately discounted is P72,000. According to the agreement, the non-
refundable down payment represents a fair measure of the services already
performed by Chowqueen and substantial future services are still to be
rendered. However, the collectibility of the note is not reasonably
assured. Chowqueen’s December 31, 2008, balance sheet unearned franchise
fee from Mr. Chun’s franchise should report as:
a. P100,000 b. P132,000 c. d. P72,000 d. P - 0 -