Accountancy Department

Final Examination in ADFINA 1

Name of student: _________________________________ Score: ____________
Class Schedule: _________________________________ Date: ___________

1. (155,000) 2. 1,012,500 3. 217,500 4. 45,150 5. 2,447,625

6. (12,625) 7. 753,500 8. 301,000 9. 900,000 10. ---

Problem A. On January 1, 2017, Matibay Development Corporation (MDC) entered

into a contract with Company B to construct a new corporate headquarters on land
owned by Company B. Contractor MDC determines that control of the building is
passed to Company B as it is constructed. Therefore, the performance obligation is
satisfied over time. The contract price is P5,000,000, but that amount will be reduced
or increased depending on when construction of the building is completed. For each
day before December 31, 2019, that the building is completed, the promised
consideration will increase by P25,000. For each day after December 31,2019 that the
building is incomplete, the promised consideration will be reduced by P25,000. The
parties have also agreed that when the building is complete, it will be inspected and
assigned a green building certification level. If the building achieves the certification
level specified in the contract, Contractor MDC will be entitled to an incentive bonus
of P200,000.

On December 31, 2017, MDC determined that “expected value” better predicts the
variable consideration it will receive regarding the early completion or delay of the
construction because of the different outcomes possible based on MDC’s current
construction schedule and its experience in past projects. MDC estimate that it is 50%
likely to complete the project 10 days ahead of schedule and receive an incentive of
P250,000, 25% likely to complete the project on time and receive no incentive and
25% likely to complete the project five days past schedule and incur a P125,000
penalty.

As of the same date, on the other hand, MDC determined that the “most likely
amount” is the better predictor to estimate the variable consideration associated with
the green building certification bonus because there are only two possible outcomes
(P200,000 or P0). Based on its history of completing building projects that achieve the
green building certification level specified in the contract and the absence of factors
that may indicate the criteria will not be met, MDC decided to include the bonus in the
construction price.
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On December 31, 2018, MDC did not change its estimate with respect to green
building certification bonus but after the evaluation evaluating construction
completed to date and the remaining project schedule, Contractor MDC determines it
is now 75% likely to complete the project 10 days ahead of schedule and receive an
incentive of P250,000 and 25% likely to complete the project on time and receive no
incentive bonus.

The following construction costs were provided by MDC for the years ended
December 31,2017 and 2018:

December 31, 2017 December 31, 2018

Costs incurred during the year P2,400,000 P750,000

Estimated costs to complete at P1,600,000 P1,350,000

the end of the year

Under IFRS 15, Assuming the outcome of construction can be estimated reliably,
what is the realized gross profit/(gross loss) to be recognized by MDC for the year
ended December 31, 2018?

Problem B. On July 1, 2013, Torela Company, a construction company, entered into a

contract to construct a commercial building for a customer-owned land for promised
consideration of P1,000,000 and a bonus of P200,000 if the building is completed
within 24 months. An inception date, the entity expects total construction costs of
P700,000 to complete the building. The entity accounts for the promised bundle of
goods and services as a single performance obligation satisfied over time in
accordance with paragraph IFRS 15 because the customer controls the building during
construction. At contract inception, the entity cannot conclude that it is highly
probable that a significant reversal in the amount cumulative revenue recognized will
not occur with respect to inclusion of bonus to contract price. Completion of the
building is highly susceptible to factors outside the entities influence, including
weather and regulatory approvals. In addition, the entity has limited experience with
similar types of contracts. The entity determines that the input measure, on the basis
of cost incurred, provides an appropriate measure of progress towards complete
satisfaction of the performance obligation. As of December 31, 2031, the construction
costs incurred to date by Tolera Company is P420,000.

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In the first quarter of 2032, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and
expected costs increased by P150,00 and P120,000 respectively. In addition, the
allowable time in achieving the P200,000 bonus is extended by 6 months to 30 months
from the original contract inception date. At the date of modification, on the basis of
its experience and the remaining work to be performed, which is primarily inside the
building and not subject to weather conditions, the entity conclude that it is highly
probable that including the bonus in the transaction price will not result in a significant
reversal in the amount of cumulative revenue recognized. Despite the changes, the
contractor evaluates that the remaining goods and services to be provided using the
modified contract are not distinct from the goods and services transferred on or
before the date of contract modification; that is, the contract remains a single
performance obligation. For the year ended December 31, 2032, Torela Company
incurred construction costs of P195,000.

Under IFRS 15, what is the balance of (1) Construction in Progress as of December 31,
2032 and (2) realized gross profit to be recognized by Torela Company for the year
ended December 31, 2032, respectively?

Problem C. Mcjobee operates and franchise restaurants around the world. On January
1, 2016, Macjobee entered into a franchise agreement with a franchisee. As part of its
franchise agreement, Mcjobee requires the franchisee to pay a non-refundable
upfront franchise fee of P95,000 upon opening a restaurant and ongoing payment of
royalties, based on 10% of franchisee’s sales. As part of the franchise agreement,
Mcjobee provides pre-opening services, including supply and installation of cooking
equipment and cash registers, valued at P30,000, which is the stand-alone selling price
of the pre-opening services. In addition, the franchise agreement includes a license of
Intellectual Property such as Mcjobee’s trademark and trade name to the
franchisee.Mcjobee has determined that the license provides a right access to
Intellectual Property over time. Mcjobee has determined the stand-alone selling price
of the license is P70,000. The franchise agreement has term of 10 years. On January 1,
2016, the franchisee paid the non-refundable upfront franchise fee of P95,000 to
Mcjobee.

Mcjobee evaluates the arrangements and determines it meets the criteria to be

accounted for a contract with a customer under IFRS 15. Mcjobee determines its

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pre-opening services and license of Intellectual Property are each distinct and,
therefore, need to be accounted for as separate performance obligations. As of
December 31, 2016, Mcjobee already satisfied its performance obligation to supply
and install cooking equipment and cash registers to the franchisee. For the year ended
December 31, 2016, the franchisee reported sales revenue of P100,000.

Under IFRS 15, how much total revenue shall be recognized by Mcjobee for the year
ended December 31, 2016?

Problem D. Chris Company, a 2-year old company, sells merchandise on an installment

basis and cash basis. Chris erroneously uses PAS 18 to account for both installment
sales and cash sales. The trial balance as of December 31, 2014 shows the following
information:

DEBIT CREDIT
Accounts Receivable P2,150,000
Inventory – Jan. 1, 2014 700,000
Purchases 5.550,000
Repossession 30,000
Sales P8,100,000

Additional information:

 Inventory – Dec. 31, 2014 (new and repossessed) amounted to P950,000.

 Gross profit rate on cash sales during the two year period was constant at 30%.
 Cash sales during the year was reported at P3,850,000.
 An aged schedule of receivables revealed that P150,000 of the accounts
receivable were 1 year and older.
 A write-off of receivable of P77,500 from sale in 2013 occurred during 2014. The
related inventory was repossessed during the year.
 Independent computations revealed that the unadjusted deferred gross profit
for 2013 sales should have been P505,124.
 Total collections on receivables during 2014 amounted to P3,222,500.

Required:
How much is the total realized gross profit in 2014? P2,447,625
How much should the gain or loss on repossession in 2014? (12,625)

Problem E. The following selected transactions took place between the home office
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and its two branches, LEYTE Branch and TACLOBAN Branch. Merchandise shipments to
the branches are billed at 25% above its cost.

a. Home office shipped merchandise to its LEYTE Branch costing P400,000.

b. Home office sent cash of P500,000 to TACLOBAN Branch.

c. Upon instruction of the home office, TACLOBAN Branch effected a fund transfer of
P100,000 to LEYTE Branch.

d. TACLOBAN Branch collected LEYTE Branch accounts receivable of P400,000 less 2%

discount.

e. TACLOBAN Branch paid P200,000 representing the travelling expenses of Mr.

Henry Ayala, chief finance Officer, when the latter attend the Southeast Asia
regional business conference in SRI LANKA. Of the amount paid, 60% was charged
to the home office, 20% to LEYTE Branch and the balance to TACLOBAN Branch.

f. LEYTE Branch paid accounts payable of the Home Office and that of TACLOBAN
Branch amounting to P30,000 and P20,000, respectively.

g. Home office shipped merchandise to TACLOBAN Branch with a total billed price of
P200,000. The Home office paid freight of P5,000 for the account of the receiving
branch.

h. Home office subsequently instructed TACLOBAN Branch to reship one-half of the

goods to LEYTE Branch. Additional freight P1,000 was paid by TACLOBAN Branch.
Had the goods been shipped directly from home office to TACLOBAN Branch, the
freight would have been only P3,000.

Required:

1. What is the balance of the investment in TACLOBAN Branch account on the

home office books?

2. What is the balance of Home Office account on the books of LEYTE Branch?
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Problem F. Adam, Ben and Clay are partners in business being liquidated. The
partnership has cash of P132,000, noncash assets with a book value of P1,584,000 and
liabilities of P1,039,500. The following data relates to the partners as of June 1, 2016:
Adam has capital balance of P775,500, personal assets of P165,000, personal liabilities
of P82,500.

Ben extended a loan to the partnership in the amount of P82,500, deficit of P231,000,
personal assets of P247,500, personal liabilities of 99,000. Clay has a capital balance of
49,500, personal assets of P412,500 and personal liabilities of P247,500. Their profit
and loss ratio is 3:1:1, Adam, Ben and Clay respectively.

On June 12, 2014, assets with a book value P495,000 were sold for P330,000 cash. The
proceeds were used to pay off liabilities of the partnership. During the remainder of
June, no additional assets were realized and outside creditors began to pressure the
partnership for payment. On July 3, the partners agreed to contribute personal assets,
to whatever extent possible, in order to eliminate their respective deficit. Shortly
thereafter, assets with book value of P330,000 and a fair value of P379,500 were
distributed to Adam. Additional assets with a book value of P700,000 were sold in July
and outside creditors were fully paid while Adam was paid P411,300.

How much cash was realized from the sale of the non-cash assets in July?

---End of Examination ---

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