Chapter7 Bay

CHAPTER 7
SUGGESTED ANSWERS
Exercise 7-1
1.
Contract price
Cost incurred to date
Est. cost to complete
2010
P50,000,000
P 7,500,000
30,000,000
2011
P50,000,000
P34,500,000
8,625,000
Total estimated cost

Total estimated gross profit
Percentage of completion
37,500,000
P12,500,000
20%
P43,125,000
P 6,875,000
80%
2012
P50,000,000
P40,800,000
__________
P40,800,000
P 9,200,000
100%
2010 - Recognized revenue

Cost of revenue
Gross profit
To Date
P10,000,000
7,500,000
P 2,500,000
Recognized in prior year/s

-
To be recognized this year

P10,000,000
7,500,000
P 2,500,000

Cost of revenue
Gross profit
P40,000,000
34,500,000
P 5,500,000
P10,000,000
7,500,000
P 2,500,000
P30,000,000
27,000,000
P 3,000,000

Cost of revenue
Gross profit
P50,000,000
40,800,000
P 9,200,000
P40,000,000
34,500,000
P 5,500,000
P10,000,000
6,300,000
P 3,700,000
2.
2010
a. Construction in progress
Cash, Materials, etc.
2011
7,500,000
b. Accounts Receivable
8,000,000
Progress Billings on Const. Contracts
2012
27,000,000
7,500,000
6,300,000
27,000,000
36,000,000
8,000,000
6,300,000
6,000,000
36,000,000
6,000,000
AA1 - Chapter 7 (2012 edition)
page
c. Cash
Accounts Receivable
5,500,000
d. Cost of LTCC
Construction in Progress
Revenue from LTCC
7,500,000
2,500,000
33,000,000
11,500,000
5,500,000
33,000,000
27,000,000
3,000,000
11,500,000
6,300,000
3,700,000
10,000,000
30,000,000
e. Progress Billings on
Construction Contracts
Construction In Progress
10,000,000
50,000,000
50,000,000
3.
Statement of Financial Position
Current Assets:
Accounts Receivable
P5,500,000
Current Liabilities:
Progress Billings on Construction Contracts
Less Construction in Progress
P44,000,000
40,000,000
P4,000,000
Exercise 7-2
2010
a. Construction in Progress
32,000,000
Progress Billing on Const. Contract
33,000,000
c. Cash
Accounts Receivable
31,000,000
d. Cost of LTCC
Revenue from LTCC
144
2011
43,000,000
32,000,000
15,500,000
43,000,000
45,000,000
33,000,000
22,000,000
40,000,000
22,000,000
29,000,000
40,000,000
45,250,000
4,750,000
25,000,000
15,500,000
45,000,000
31,000,000
23,000,000
2,000,000
2012
29,000,000
22,250,000
2,750,000
50,000,000
25,000,000
page
e. Progress Billing on Const. Contracts

Contract price
Estimated cost to complete
100,000,000
100,000,000
2010
P100,000,000
P 32,000,000
60,000,000
P 92,000,000
P 8,000,000
25%
2011
P100,000,000
P 75,000,000
16,000,000
P 91,000,000
P 9,000,000
75%
2012
P100,000,000
P 90,500,000
___________
P 90,500,000
P 9,500,000
100%

Cost of revenue
Gross profit
To date
P25,000,000
23,000,000
P 2,000,000

-

P25,000,000
23,000,000
P 2,000,000

Cost of revenue
Gross profit
P75,000,000
68,250,000
P 6,750,000
P25,000,000
23,000,000
P 2,000,000
P50,000,000
45,250,000
P 4,750,000

Cost of revenue
Gross profit
P100,000,000
90,500,000
P 9,500,000
P75,000,000
68,250,000
P 6,750,000
P25,000,000
22,250,000
P 2,750,000
Exercise 7-3
1.
144
Contract price
Total estimated cost:
P 4,400,000
15,600,000
Percentage of completion ( P 4,400,000/20,000,000)
Gross profit to be recognized in 2012
P25,000,000
20,000,000
P 5,000,000
22%
P 1,100,000
2.
page
Accounts Receivable
Progress Billings on Construction Contracts
(P25,000,000 x 30% x 10%)

(P4,400,000 + P1,100,000)
(P25,000,000 x 30%)
145
P 750,000
P5,500,000
P7,500,000
Exercise 7-4
Contract price
2010
P35,000,000
P17,500,000
10,500,000
P28,000,000
P 7,000,000
62.5%
2011
P35,000,000
P29,250,000
3,250,000
P32,500,000
P 2,500,000
90%
2012
P35,000,000
P31,000,000
P31,000,000
P 4,000,000
100%

Cost of revenue
Gross profit
To date
P21,875,000
17,500,000
P 4,375,000

-

P21,875,000
17,500,000
P 4,375,000

Cost of revenue
Gross profit
P31,500,000
29,250,000
P 2,250,000
P21,875,000
17,500,000
P 4,375,000
P 9,625,000
11,750,000
P(2,125,000)

Cost of revenue
Gross profit
P35,000,000
31,000,000
P 4,000,000
P31,500,000
29,250,000
P 2,250,000
P 3,500,000
1,750,000
P 1,750,000
2. Journal entries
Progress Billing on
Const. Contracts
c. Cash
Accounts Receivable
2010
17,500,000
2011
11,750,000
17,500,000
16,000,000
11,750,000
12,000,000
16,000,000
15,000,000
1,750,000
7,000,000
12,000,000
10,000,000
15,000,000
2012
1,750,000
7,000,000
10,000,000
10,000,000
10,000,000
d. Cost of LTCC
Revenue from LTCC
page
17,500,000
4,375,000
11,750,000
21,875,000
147
1,750,000
1,750,000
2,125,000
9,625,000
3,500,000
e. Progress Billing on Const. Contract

35,000,000
35,000,000
3.
Cost of revenue
Gross profit
To date
P17,500,000
17,500,000
==========

============

P17,500,000
17,500,000
==========

Cost of revenue
Gross profit
P31,500,000
29,250,000
P 2,250,000
P17,500,000
17,500,000
----------------
P14,000,000
11,750,000
P 2,250,000

Cost of revenue
Gross profit
P35,000,000
31,000,000
P 4,000,000
P31,500,000
29,250,000
P 2,250,000
P3,500,000
1,750,000
P1,750,000
Exercise 7-5
Revenue recognized in 2012
Gross profit/income recognized in 2012
Cost incurred in 2012
(P26,000,000 x 40%)
(P3,120,000 - P1,300,000)
P10,400,000
1,820,000
P 8,580,000
Binondo Project
P12,000,000
12,400,000
P (400,000)
Pasig Project
P1,290,000
1,400,000
P( 110,000)
Exercise 7-6
Revenue (CP x % of work done in 2011)
Cost of revenue
Gross profit (loss)
page
Exercise 7-7
1. Contract revenue/price
Less Total profit
Total cost incurred
Less Cost incurred in 2010 and 2012
Cost incurred in 2011
P40,000,000
3,200,000
P36,800,000
23,600,000
P13,200,000
2. Gross profit to date, Dec.31, 2011

Cost incurred to date, Dec.31, 2011 (P7,200,000 + P13,200,000)
Revenue to date, Dec.31, 2011
Percentage-of-completion (24,000,000/40,000,000)
P 3,600,000
20,400,000
P24,000,000
60%
3. Gross profit to date, Dec.31, 2011

P3,600,000
60%
P6,000,000
4. Contract price
Less Total estimated gross profit
Less Cost incurred to date
P40,000,000
6,000,000
P34,000,000
20,400,000
P13,600,000
Exercise 7-8
Cash
Notes Receivable
Discount on Notes Receivable
Unearned Franchise Fees
Exercise 7-9
1. Cash
Notes Receivable
*P3,000,000 - (2.4868 x P1000,000)
500,000
1,000,000
207,540
1,292,460
4,000,000
3,000,000
513,200*
6,486,800
148
page
2. Cash
Notes Receivable
Revenue from Franchise Fees
4,000,000
3,000,000
3. Cash
4,000,000
513,200
6,486,800
4,000,000
4. Cash
4,000,000
Notes Receivable
3,000,000
Revenue from Franchise Fees
Unearned Franchise Fees (1,000,000 x 2.48685)
Exercise 7-10
2011
July 1 Cash
Notes Receivable
Unearned Franchise Fee
P800,000 x 3.1699 = P2,535,900
P3,200,000 - P2,535,900 = P664,100
513,200
4,000,000
2,486,800
1,200,000
3,200,000
644,100
3,735,900
Sept. 1 - Deferred Franchise Cost

Cash
100,000
Nov. 15 - Deferred Franchise Cost

Cash
60,000
Dec. 31 - Discount on Notes Receivable

Interest Revenue
P2,535,900 x 10% x 6/12 = P126,795
2012
Jan. 10 - Deferred Franchise Cost
Cash
100,000
60,000
126,795
126,795
100,000
100,000
149
page
15 - Unearned Franchise Fee

Franchise Fee Revenue
3,735,900
3,735,900
15 - Cost of Franchise Fee Revenue

Deferred Franchise Cost
260,000
260,000
July 1 Cash
Notes Receivable
800,000
800,000
1 - Discount on Notes Receivable

Interest Revenue
126,795
126,795
Problem 7-1
2011
11,000,000
Progress Billing on Const. Contract
10,800,000
c. Cash
Accounts Receivable
10,000,000
d. Cost of LTCC
Revenue from LTCC
11,000,000
2,750,000
11,000,000
4,800,000
9,200,000
10,800,000
9,200,000
10,000,000
10,000,000
10,000,000
4,800,000
1,450,000
13,750,000
e. Progress Billing on Construction Contracts

Problem 7-2
Income Statement
Revenue from LTCC: 2011
2012
2012
4,800,000
6,250,000
20,000,000
20,000,000
P2,750,000
1,450,000
150
page
Statement of Financial Position

Receivables: 2011
P 800,000
2012
Inventory - CIP, net of billings
2011 (13,750,000 - 10,800,000)
P2,950,000
2012
Problem 7-3
Year
Income (loss) Recognized
Recl ending balance
2010
10,000,000
3,800,000
2011
10,000,000
9,400,000
2012
10,000,000
Contract price
Gross profit to date
Less Gross profit recognized in prior year/s
Gross profit to be recognized this year
Problem 7-4
Contract price
Total estimated gross profit (loss)
Gross profit (loss) to date
Less gross profit recognized in prior year
Gross profit - current year
2010
P150,000,000
P 40,000,000
80,000,000
P120,000,000
P 30,000,000
33 1/3%
P 10,000,000
_____-______
P 10,000,000
PROJECT A
2011
2012
P29,000,000
P29,000,000
P16,800,000
P26,400,000
11,200,000
------------P28,000,000
P26,400,000
P 1,000,000
P 2,600,000
60%
100%
P 600,000
P 2,600,000
------600,000
P 600,000
P 1,000,000
CIP Invty. ending balance

50,000,000
120,000,000
2011
P150,000,000
P100,000,000
25,000,000
P125,000,000
P 25,000,000
80%
P 20,000,000
10,000,000
P 10,000,000
PROJECT B
2011
2012
P34,000,000 P34,000,000
P14,400,000 P21,200,000
17,600,000
13,000,000
P32,000,000 P34,200,000
P 2,000,000 P( 200,000)
45%
P 900,000 P( 200,000)*
-----900,000
P 900,000 P(1,100,000)
* The entire loss should be recognized immediately
151
Cost in excess of billings

12,000,000
26,000,000
2012
P150,000,000
P120,000,000
---------------P120,000,000
P 30,000,000
100%
P 30,000,000
20,000,000
P 10,000,000
PROJECT C
2011
2012
P17,000,000
P17,000,000
P 3,200,000
P11,830,000
9,600,000
1,170,000
P12,800,000
P13,000,000
P 4,200,000
P 4,000,000
25%
91%
P 1,050,000
P 3,640,000
---1,050,000
P 1,050,000
P 2,590,000
PROJECT D
2012
P2,000,000
P 5,600,000
10,400,000
P16,000,000
P 4,000,000
35%
P 1,400,000
----P 1,400,000
page
(1) Percentage of completion method

Gross profit
Operating expenses
Net income
2011
P2,550,000
1,200,000
P1,350,000
2012
P3,890,000
1,200,000
P2,690,000
Problem 7-5
1. (a)
Contract price
2010
P1,200,000,000
P 240,000,000
760,000,000
P1,000,000,000
P 200,000,000
2011
P1,200,000,000
P605,000,000
495,000,000
P1,100,000,000
P 100,000,000
24%
55%
2012
P1,200,000,000
P900,000,000
100,000,000
P1,000,000,000
P 200,000,000
90%
2010-Revenue
Cost of revenue
Gross profit
To date
P288,000,000
240,000,000
P 48,000,000
Recognized in
prior year
----------------
To be recognized
in current year
P288,000,000
240,000,000
P 48,000,000
2011-Revenue
Cost of revenue
Gross profit
To date
P660,000,000
605,000,000
P 55,000,000
Recognized in
prior year
P288,000,000
240,000,000
P 48,000,000
To be recognized
in current year
P372,000,000
365,000,000
P 7,000,000
To date
P1,080,000,000
900,000,000
P 180,000,000
Recognized in
prior year
P660,000,000
605,000,000
P 55,000,000
To be recognized
in current year
P420,000,000
295,000,000
P125,000,000
2012-Revenue
Cost of revenue
Gross profit
2013
P1,200,000,000
P1,050,000,000
-------P1,050,000,000
P 150,000,000
100%
152
2013-Revenue
Cost of revenue
Gross profit
2.
a
b.
c.
d.
e.
page
To date
P1,200,000,000
1,050,000,000
P 150,000,000
Recognized in
prior year
P1,080,000,000
900,000,000
P 180,000,000
2010
240,000,000
Accounts Receivable
Progress Billings on Const. Contract
260,000,000
Cash
Accounts Receivable
240,000,000
Cost of LTCC
Revenue from LTCC
240,000,000
48,000,000
To be recognized
in current year
P 120,000,000
150,000,000
P( 30,000,000)
2011
365,000,000
240,000,000
365,000,000
310,000,000
260,000,000
2012
295,000,000
295,000,000
2013
150,000,000
150,000,000
340,000,000
290,000,000
310,000,000
270,000,000
240,000,000
340,000,000
300,000,000
270,000,000
365,000,000
7,000,000
288,000,000
290,000,000
300,000,000
300,000,000
295,000,000
125,000,000
372,000,000
Progress Billings on Const. Contracts

300,000,000
150,000,000
30,000,000
120,000,000
420,000,000
1,200,000,000
1,200,000,000
Problem 7-6
Contract price
Less Gross profit recognized in prior year
Gross profit - current year
153
2010
P14,000,000
P 5,000,000
7,500,000
P12,500,000
P 1,500,000
40%
P 600,000
-----P 600,000
2011
P14,000,000
P11,475,000
1,275,000
P12,750,000
P 1,250,000
90%
P 1,125,000
600,000
P 525,000
2012
P13,000.000
P12,295,000
------P12,295,000
P 705,000
100%
P 705,000
1,125,000
P (420,000)
page
154
Problem 7-7
1. Recognized revenue
Cost of revenue
Gross Profit (loss)
2010
P 11,000,000
10,000,000
P 1,000,000 (1)
2. Contract-price
Less GP recognized in prior year/s
GP to be recognized this year
2011
P13,000,000 (2)
12,500,000
P 500,000
2012
P11,000,000 (3)
11,500,000 (4)
P (500,000)
2010
P35,000,000
P10,000,000
22,500,000
P32,500,000
P 2,500,000
30.77%
P 769,250
P 769,250
2011
P35,000,000
P22,500,000
9,500,000
P32,000,000
P 3,000,000
70.3125%
P 2,109,375
769,250
P 1,340,125
Problem 7-8
Franchise A:
The circumstances imply that the full accrual method could be used.
Franchise revenue
P3,578,000*
Franchise cost
1,400,000
Interest revenue (P2,178,000 x 4%)
Income from Franchise A
*Initial deposit
PV of four payments [4% for 4 periods
(P600,000 x 3.6299)]
Total
P35,000,000
34,000,000 (5)
P 1,000,000
P2,178,000
87,200
P2,265,200
P 1,400,000
2,178,000
P 3,578,000
Franchise B:
Because of the doubtful collection and only partial completion, the deposit method should be used. No revenue or income would be
recognized in 2012 from the franchise fee. However, because the first payment of P600,000 was made, interest revenue of P87,200 would
be recognized.
page
155
Franchise C:
Because of the doubtful collection but substantial completion, either the installment sales or cost recovery method could be used. If the
installment sales method is used, gross profit of P843,600* would be recognized in 2012 plus interest revenue of P87,200.
*Franchise revenue
Franchise cost
Franchise gross profit
P3,578,000
2,000,000
P1,578,000
Gross profit percentage: P1,578,000 P3,578,000

Collections in 2012:
Initial fee
First payment:
Interest
Principal
Total
44.1%
P1,400,000
87,200
512,800
P 600,000
512,800
P1,912,800
Gross profit recognized in 2012: P1,912,800 x 44.1% = P843,600

If the cost recovery method is used, no revenue or income would be recognized, because the P2,000,000 collections are exactly offset by
the P2,000,000 costs.
Problem 7-9
2012
July
1
Cash
Notes Receivable
Aug. 15
Sept. 15
Dec. 31
7,000,000
8,000,000
15,000,000

Cash
800,000

Cash
500,000
Interest Receivable
Interest Revenue
400,000
800,000
500,000
400,000
2013
Jan. 1
15
31
July
Dec.
31
page
Cash
Notes Receivable
Interest Receivable
2,400,000

Cash
1,000,000
2,000,000
400,000
1,000,000

Cost of Franchise Revenue
Franchise Fee Revenue
15,000,000
2,300,000
15,000,000
2,300,000
Cash
Notes Receivable
Interest Revenue
P6,000,000 x 10% x 6/12
2,300,000
2,000,000
300,000
Interest Receivable
Interest Revenue
200,000
200,000
Problem 7-10
1. Downpayment made on Jan 1, 2012
Present value of an ordinary annuity (P240,000 x 3.69590)
Total revenue recorded by Triple Eight
P 800,000.00
887,016.00
P1,687.016.00
2. Cost of acquisition
P 1,687,016
3. Cash
Notes Receivable
800,000.00
1,200,000.00
312,984.00
1,687,016.00
156
4.
page
a. P800,000 cash received from downpayment. (P887,016.00 is recorded as unearned revenue from franchise fees).
b. P800,000 cash received from downpayment
c. None. (P 800,000 is recorded as unearned revenue from Franchise fees).
MULTIPLE CHOICE
1.
2.
3.
4.
5.
C
B
D
A
C
6.
7.
8.
9.
10.
11.
P20,000,000 x (3,000,000/15,000,000) =
12.
Contract price
Less Total estimated cost:
Est. cost to complete
Total estimated income
% of completion (3150/9450)
Income to be recognized in 2012
B
D
D
D
C
13.
Contract price
Total estimated income
Percentage-of-completion (27/81)
Income recognized last year
14.
Contract price
Total estimated cost (P4,650,000 + P10,850,000)
Total estimated loss to be recognized in full
P4,000,000
P10,500,000
P3,150,000
6,300,000
9,450,000
P 1,050,000
33 1/3%
P 350,000
P9,000,000
8,100,000
P 900,000
33 1/3%
P 300,000
P15,000,000
15,500,000
P 500,000
157
15
page
Contract price
Total estimated cost (P4M + P4M + P2M)
Percentage-of-completion (8M/10M)
Less Gross profit recognized in 2011
(P14M P8M = P6M x 4/8)
P14,000,000
10,000,000
P 4,000,000
80%
P 3,200,000
P
3,000,000
200,000
16
Contract price
Percentage-of-completion (600/1,800)
P3,000,000
1,800,000
P1,200,000
33 1/3%
P 400,000
17.
Contract price
Total cost incurred
Gross profit
Gross profit percentage (1,200/12,000)
P12,000,000
10,800,000
P 1,200,000
10%
18
A
Contract price
Total est. gross profit
Percentage-of-completion
Less GP recognized in 2011
GP to be recognized In 2012
Cubao
P16,200,000
14,400,000
P 1,800,000
83 1/3%
P 1,500,000
750,000*
P 750,000
Total GP = P750,000 + P228,000
Marikina
P25,200,000
23,100,000
P 2,100,000
100%
P 2,100,000
1,872,000**
P 228,000
P
978,000
*P16,200,000 P14,400,000 = P1,800,000 x 60/144 = P750,000

**P25,200,000 P22,500,000 = P2,700,000 x 156/225 = P1,872,000
19.
20,000,000/24,000,000
83.33%
158
20.
21.
Contract price
GP to date
GP recognized in prior years
(P30M - P22M = P8M x 50%)
GP to be recognized in 2012
Total amount billed
Less Balance of accounts receivable
Total collections
Amount deposited
Cash collected not yet deposited
22. D
P150,000 937,500/9,000,000
23. D
Mobilization fee (P1.2B x 1%)

Collections on billings (1.2B x 10% x 90%)
Total fee received by NNO
24. C
Contract price
Gross profit rate
Realized gross profit
25.
26.
27.
28.
29.
D
D
A
C
D
P200,000 + P1,000,000 P900,000 = P300,000
page
P30,000,000
24,000,000
P 6,000,000
83.33%
P 5,000,000
4,000,000
P 1,000,000
P843,750
300,000
P543,750
500,000
P 43,750
P1,440,000
P 1.2M
10.8M
P12.0M
P100.00M
25%
P25.00M
50%
P12.50M
159
page
30. C
Downpayment
First installment payment
Addl fee (P1,000,000 x 3%)
Earned Franchise Fees
P 50,000
50,000
30,000
P130,000
31. C
P1,000,000 x 1/5 = P200,000 + 1% of P5,000,000
P 250,000
32. D
P 1,000,000 + 5% of P8,000,000 =
33. C
Downpayment
PV of installment payment
Additional fee ( P 9,000,000 x 5% )
Earned franchise fee
P1,400,000
P 100,000
199,650
450,000
P 749,650
160

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CHAPTER 7

Total estimated cost

2010 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2011 - Recognized revenue

2012 - Recognized revenue

AA1 - Chapter 7 (2012 edition)

AA1 - Chapter 7 (2012 edition)

e. Progress Billing on Const. Contracts

2010 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2011 - Recognized revenue

2012 - Recognized revenue

AA1 - Chapter 7 (2012 edition)

(P25,000,000 x 30% x 10%)

2010 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2011 - Recognized revenue

2012 - Recognized revenue

AA1 - Chapter 7 (2012 edition)

e. Progress Billing on Const. Contract

Recognized in prior year/s

To be recognized this year

2011 - Recognized revenue

2012 - Recognized revenue

AA1 - Chapter 7 (2012 edition)

2. Gross profit to date, Dec.31, 2011

3. Gross profit to date, Dec.31, 2011

AA1 - Chapter 7 (2012 edition)

Unearned Franchise Fees

Sept. 1 - Deferred Franchise Cost

Nov. 15 - Deferred Franchise Cost

Dec. 31 - Discount on Notes Receivable

AA1 - Chapter 7 (2012 edition)

15 - Unearned Franchise Fee

15 - Cost of Franchise Fee Revenue

1 - Discount on Notes Receivable

e. Progress Billing on Construction Contracts

AA1 - Chapter 7 (2012 edition)

Statement of Financial Position

CIP Invty. ending balance

* The entire loss should be recognized immediately

Cost in excess of billings

AA1 - Chapter 7 (2012 edition)

(1) Percentage of completion method

AA1 - Chapter 7 (2012 edition)

Progress Billings on Const. Contracts

AA1 - Chapter 7 (2012 edition)

AA1 - Chapter 7 (2012 edition)

Gross profit percentage: P1,578,000 P3,578,000

Gross profit recognized in 2012: P1,912,800 x 44.1% = P843,600

Deferred Franchise Cost

Deferred Franchise Cost

AA1 - Chapter 7 (2012 edition)

Deferred Franchise Cost

Unearned Franchise Fee

AA1 - Chapter 7 (2012 edition)

AA1 - Chapter 7 (2012 edition)

Total GP = P750,000 + P228,000

*P16,200,000 P14,400,000 = P1,800,000 x 60/144 = P750,000