CHAPTER SUGGESTED ANSWERS Exercise 7-1 Contract price Cost incurred to date Est cost to complete 2006 P50,000,000 P 7,500,000 30,000,000 2007 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% 2008 P50,000,000 P40,800,000 P40,800,000 P 9,200,000 100% 2006 - 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 2007 - Recognized revenue 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 2008 - Recognized revenue 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 2006 a Construction in progress Cash, Materials, etc 2007 7,500,000 b Accounts Receivable 8,000,000 Progress Billings on Const Contracts 2008 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 (2008 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 10,000,000 50,000,000 Construction Contracts Construction In Progress 50,000,000 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 2006 a Construction in Progress Cash, Materials, etc 32,000,000 b Accounts Receivable Progress Billing on Const Contract 33,000,000 c Cash Accounts Receivable 31,000,000 Cost of LTCC Construction in Progress Revenue from LTCC 2007 43,000,000 32,000,000 43,000,000 45,000,000 33,000,000 23,000,000 2,000,000 22,000,000 22,000,000 29,000,000 40,000,000 45,250,000 4,750,000 25,000,000 15,500,000 45,000,000 40,000,000 31,000,000 2008 15,500,000 29,000,000 22,250,000 2,750,000 50,000,000 25,000,000 AA1 - Chapter (2008 edition) page e Progress Billing on Const Contracts Construction in Progress Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion 100,000,000 100,000,000 2006 P100,000,000 P 32,000,000 60,000,000 P 92,000,000 P 8,000,000 25% 2007 P100,000,000 P 75,000,000 16,000,000 P 91,000,000 P 9,000,000 75% 2008 P100,000,000 P 90,500,000 _ P 90,500,000 P 9,500,000 100% 2006 - Recognized revenue Cost of revenue Gross profit To date P25,000,000 23,000,000 P 2,000,000 Recognized in prior year/s - To be recognized this year P25,000,000 23,000,000 P 2,000,000 2007 - Recognized revenue 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 2008 - Recognized revenue 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 Contract price Total estimated cost: Cost incurred to date P 4,400,000 Estimated cost to complete 15,600,000 Total estimated gross profit Percentage of completion ( P 400,000/20,000,000) Gross profit to be recognized in 2008 P25,000,000 20,000,000 P 5,000,000 22% P 1,100,000 AA1 - Chapter (2008 edition) page Accounts Receivable Construction in Progress Progress Billings on Construction Contracts (P25,000,000 x 30% x 10%) (P4,400,000 + P1,100,000) (P25,000,000 x 30%) P 750,000 P5,500,000 P7,500,000 Exercise 7-4 Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion 2006 P35,000,000 P17,500,000 10,500,000 P28,000,000 P 7,000,000 62.5% 2007 P35,000,000 P29,250,000 3,250,000 P32,500,000 P 2,500,000 90% 2008 P35,000,000 P31,000,000 P31,000,000 P 4,000,000 100% 2006 - Recognized revenue Cost of revenue Gross profit To date P21,875,000 17,500,000 P 4,375,000 Recognized in prior year/s - To be recognized this year P21,875,000 17,500,000 P 4,375,000 2007 - Recognized revenue 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) 2008 - Recognized revenue Cost of revenue Gross profit Journal entries 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 2006 a Construction in Progress Cash, Materials, etc 17,500,000 b Accounts Receivable Progress Billing on Const Contracts 16,000,000 2007 11,750,000 17,500,000 11,750,000 12,000,000 16,000,000 2008 1,750,000 1,750,000 7,000,000 12,000,000 7,000,000 AA1 - Chapter (2008 edition) page c Cash Accounts Receivable 15,000,000 d Cost of LTCC Construction in Progress Construction in Progress Rev from LTCC 17,500,000 4,375,000 10,000,000 15,000,000 10,000,000 10,000,000 10,000,000 11,750,000 21,875,000 1,750,000 1,750,000 2,125,000 9,625,000 3,500,000 e Progress Billing on Const Contract Construction in Progress 35,000,000 35,000,000 2006 - Recognized revenue Cost of revenue Gross profit To date P17,500,000 17,500,000 ========== 2007 - Recognized revenue 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 2008 - Recognized revenue 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 2008 Gross profit/income recognized in 2008 Cost incurred in 2008 (P26,000,000 x 40%) (P3,120,000 - P1,300,000) Exercise 7-6 Recognized in prior year/s ============ P10,400,000 1,820,000 P 8,580,000 To be recognized this year P17,500,000 17,500,000 ========== AA1 - Chapter (2008 edition) Revenue (CP x % of work done in 2007) Cost of revenue Gross profit (loss) page Binondo Project P12,000,000 12,400,000 P (400,000) Pasig Project P1,290,000 1,400,000 P( 110,000) Exercise 7-7 Contract revenue/price Less Total profit Total cost incurred Less Cost incurred in 2006 and 2008 Cost incurred in 2007 P10,000,000 800,000 P 9,200,000 5,900,000 P 3,300,000 Gross profit to date, 12.31.07 Cost incurred to date, 12.31.07 (P1,800,000 + P3,300,000) Revenue to date, 12.31.07 Percentage-of-completion (6,000,000/10,000,000) P 900,000 5,100,000 P6,000,000 60% Gross profit to date, 12.31.07 Percentage of completion Total estimated gross profit P 900,000 ÷ 60% P1,500,000 Contract price Less Total estimated gross profit Total estimated cost Less Cost incurred to date Estimated cost to complete P10,000,000 1,500,000 P 8,500,000 5,100,000 P 3,400,000 Exercise 7-8 Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fees Exercise 7-9 500,000 1,000,000 207,540 1,292,460 AA1 - Chapter (2008 edition) page Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fees 4,000,000 3,000,000 Cash Notes Receivable Discount on Notes Receivable (3,000,000-(2.48685 x 1,000,000) Revenue from Franchise Fees 4,000,000 3,000,000 Cash Unearned Franchise Fees 4,000,000 513,200 6,486,800 513,200 6,486,800 4,000,000 Cash 4,000,000 Notes Receivable 3,000,000 Discount on Notes Receivable Revenue from Franchise Fees Unearned Franchise Fees (1,000,000 x 2.48685) Exercise 7-10 2007 July - Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fee P800,000 x 3.1699 = P2,535,900 P3,200,000 - P2,535,900 = P664,100 Sept - Deferred Franchise Cost Cash Nov 15 - Deferred Franchise Cost Cash Dec 31 - Discount on Notes Receivable 513,200 4,000,000 2,486,800 1,200,000 3,200,000 644,100 3,735,900 100,000 100,000 60,000 60,000 126,795 AA1 - Chapter (2008 edition) page Interest Revenue P2,535,900 x 10% x 6/12 = P126,795 2008 Jan 10 - Deferred Franchise Cost Cash 126,795 100,000 100,000 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 - Cash Notes Receivable 800,000 800,000 - Discount on Notes Receivable Interest Revenue 126,795 126,795 Problem 7-1 2007 a Construction in Progress Cash, Materials, etc 11,000,000 b Accounts Receivable Progress Billing on Const Contract 10,800,000 c Cash Accounts Receivable 10,000,000 d Cost of LTCC Construction in Progress Revenue from LTCC e Progress Billing on Construction Contracts Construction in Progress 11,000,000 2,750,000 2008 4,800,000 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 6,250,000 20,000,000 20,000,000 AA1 - Chapter (2008 edition) page Problem 7-2 Statement of Recognized Income and Expenses: Income: 2007 2008 P2,750,000 1,450,000 Statement of Financial Position Receivable: 2007 2008 P 800,000 - Inventory - CIP, net of billings 2007 (13,750,000 - 10,800,000) 2008 Problem 7-3 Year 2006 2007 2008 P2,950,000 - Income (loss) Recognized 1,000,000 1,000,000 1,000,000 Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion Gross profit to date Less Gross profit recognized in prior year/s Gross profit to be recognized this year Rec’l ending balance 380,000 940,000 - 2006 P15,000,000 P 4,000,000 8,000,000 P12,000,000 P 3,000,000 33 1/3% P 1,000,000 _- P 1,000,000 CIP Invty ending balance 5,000,000 12,000,000 2007 P15,000,000 P10,000,000 2,500,000 P12,500,000 P 2,500,000 80% P 2,000,000 1,000,000 P 1,000,000 Cost in excess of billings 1,200,000 2,600,000 2008 P15,000,000 P12,000,000 -P12,000,000 P 3,000,000 100% P 3,000,000 2,000,000 P 1,000,000 Problem 7-4 PROJECT A 2007 2008 PROJECT B 2007 2008 PROJECT C 2007 2008 PROJECT D 2008 AA1 - Chapter (2008 edition) page Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit (loss) Percentage of completion Gross profit (loss) to date Less gross profit recognized in prior year Gross profit - current year P29,000,000 P16,800,000 11,200,000 P28,000,000 P 1,000,000 60% P 600,000 P 600,000 P29,000,000 P26,400,000 P26,400,000 P 2,600,000 100% P 2,600,000 600,000 P 1,000,000 P34,000,000P34,000,000 P14,400,000P21,200,000 17,600,000 13,000,000 P32,000,000P34,200,000 P 2,000,000 P( 200,000) 45% P 900,000P( 200,000)* -900,000 P 900,000P(1,100,000) P17,000,000 P 3,200,000 9,600,000 P12,800,000 P 4,200,000 25% P 1,050,000 -P 1,050,000 * The entire loss should be recognized immediately (1) Percentage of completion method 2007 P2,550,000 1,200,000 P1,350,000 Gross profit Operating expenses Net income Problem 7-5 (a) Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit 2006 P120,000,000 P 24,000,000 76,000,000 P100,000,000 P 20,000,000 Percentage of completion 24% 2006-Revenue Cost of revenue 2008 P3,890,000 1,200,000 P2,690,000 2007 P120,000,000 P60,500,000 49,500,000 P110,000,000 P 10,000,000 55% To date P28,800,000 24,000,000 2008 P120,000,000 P90,000,000 10,000,000 P100,000,000 P 20,000,000 90% Recognized in prior year - 2009 P120,000,000 P105,000,000 -P105,000,000 P 15,000,000 100% To be recognized in current year P28,800,000 24,000,000 P17,000,000 P11,830,000 1,170,000 P13,000,000 P 4,000,000 91% P 3,640,000 1,050,000 P 2,590,000 10 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 AA1 - Chapter (2008 edition) Gross profit page P 4,800,000 -Recognized in prior year P28,800,000 24,000,000 P 4,800,000 2007-Revenue Cost of revenue Gross profit To date P66,000,000 60,500,000 P 5,500,000 2008-Revenue Cost of revenue Gross profit P108,000,000 90,000,000 P 18,000,000 P66,000,000 60,500,000 P 5,500,000 2009-Revenue Cost of revenue Gross profit To date P120,000,000 105,000,000 P 15,000,000 Recognized in prior year P108,000,000 90,000,000 P 18,000,000 a b c d Construction in Progress Cash, Materials, etc 2006 24,000,000 Accounts Receivable Progress Billings on Const Contract 26,000,000 Cash Accounts Receivable 24,000,000 Cost of LTCC Construction in Progress Construction in Progress Revenue from LTCC P 4,800,000 To be recognized in current year P37,200,000 36,500,000 P 700,000 P42,000,000 29,500,000 P12,500,000 To be recognized in current year P 12,000,000 15,000,000 P( 3,000,000) 2007 36,500,000 24,000,000 2008 29,500,000 36,500,000 31,000,000 26,000,000 34,000,000 27,000,000 24,000,000 4,800,000 29,000,000 30,000,000 29,000,000 30,000,000 30,000,000 29,500,000 12,500,000 37,200,000 15,000,000 34,000,000 27,000,000 36,500,000 700,000 28,800,000 2009 15,000,000 29,500,000 31,000,000 24,000,000 11 30,000,000 15,000,000 3,000,000 12,000,000 42,000,000 AA1 - Chapter (2008 edition) e page Progress Billings on Const Contracts Construction in Progress 120,000,000 120,000,000 Problem 7-6 Contract price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion Gross profit to date Less Gross profit recognized in prior year Gross profit - current year 2006 P14,000,000 P 5,000,000 7,500,000 P12,500,000 P 1,500,000 40% P 600,000 -P 600,000 2007 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 2008 P13,000.000 P12,295,000 P12,295,000 P 705,000 100% P 705,000 1,125,000 P (420,000) Problem 7-7 Recognized revenue Cost of revenue Gross Profit (loss) 12 2006 P 1,100,000 1,000,000 P 100,000 – (1) 2007 P1,300,000 (2) 1,250,000 P 50,000 2006 P3,500,000 1,000,000 P2,250,000 P3,250,000 250,000 30.77% P 76,925 P 76,925 Contract-price Cost incurred to date Estimated cost to complete Total estimated cost Total estimated gross profit Percentage of completion Gross profit to date Less GP recognized in prior year/s GP to be recognized this year Problem 7-8 Franchise A: The circumstances imply that the full accrual method could be used 2008 P1,100,000 (3) 1,150,000 (4) P (50,000) 2007 P3,500,000 2,250,000 P 950,000 P3,200,000 300,000 70.3125% P 210,938 76,925 P 134,013 Total P3,500,000 3,400,000 –(5) P 100,000 AA1 - Chapter (2008 edition) Franchise revenue Franchise cost Interest revenue (P2,178,000 x 4%) Income from Franchise A *Initial deposit PV of four payments [4% for periods (P600,000 x 3.6299)] page P3,578,000* 1,400,000 13 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 2008 from the franchise fee However, because the first payment of P600,000 was made, interest revenue of P87,200 would be recognized 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 2008 plus interest revenue of P87,200 *Franchise revenue Franchise cost Franchise gross profit Gross profit percentage: P1,578,000 ÷ P3,578,000 P3,578,000 2,000,000 P1,578,000 44.1% Collections in 2008: Initial fee P1,400,000 First payment: Interest P 87,200 Principal 512,800 512,800 Total P 600,000 P1,912,800 Gross profit recognized – 2008: 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 AA1 - Chapter (2008 edition) Problem 7-9 2007 July Cash Notes Receivable Unearned Franchise Fee Aug 15 Sept 15 Dec 31 Jan 2008 15 31 July Dec 31 page 7,000,000 8,000,000 15,000,000 Deferred Franchise Cost Cash 800,000 Deferred Franchise Cost Cash 500,000 Interest Receivable Interest Revenue 400,000 800,000 500,000 400,000 Cash Notes Receivable Interest Receivable 2,400,000 Deferred Franchise Cost Cash 1,000,000 Unearned Franchise Fee Cost of Franchise Revenue Franchise Fee Revenue Deferred Franchise Cost Cash Notes Receivable Interest Revenue P6,000,000 x 10% x 6/12 Interest Receivable Interest Revenue 2,000,000 400,000 1,000,000 15,000,000 2,300,000 15,000,000 2,300,000 2,300,000 2,000,000 300,000 200,000 200,000 14 AA1 - Chapter (2008 edition) page Problem 7-10 Downpayment made on 1/1/ 07 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 Cost of acquisition P 1,687,016 Cash Notes Receivable Discount on Notes Receivable Unearned Franchise Fees 800,000.00 1,200,000.00 312,984.00 1,687,016.00 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 a None (P 800,000 is recorded as unearned revenue from Franchise fees) MULTIPLE CHOICE C B D A C 10 11 D P20,000,000 x (3,000,000/15,000,000) = 12 A Contract price Less Total estimated cost: B D D D C P4,000,000 P10,500,000 15 AA1 - Chapter (2008 edition) Cost incurred to date Est cost to complete Total estimated income % of completion (3150/9450) Income to be recognized in 2007 page P3,150,000 6,300,000 9,450,000 P 1,050,000 33 1/3% P 350,000 13 B Contract price Total estimated cost Total estimated income Percentage-of-completion (27/81) Income recognized last year 14 C Contract price Total estimated cost (P4,650,000 + P10,850,000) Total estimated loss – to be recognized in full P15,000,000 15,500,000 P 500,000 15 B Contract price Total estimated cost (P4M + P4M + P2M) Total estimated gross profit Percentage-of-completion (8M/10M) P14,000,000 10,000,000 P 4,000,000 80% Gross profit to date Less Gross profit recognized in 2006 (P14M –P8M = P6M x 4/8) Gross profit to be recognized in 2007 P 3,200,000 P3,000,000 1,800,000 P1,200,000 33 1/3% P 400,000 16 B Contract price Total estimated cost Total estimated gross profit Percentage-of-completion (600/1,800) Gross profit to be recognized in 2007 17 B Contract price Total cost incurred Gross profit P9,000,000 8,100,000 P 900,000 33 1/3% P 300,000 P 3,000,000 200,000 P12,000,000 10,800,000 P 1,200,000 16 AA1 - Chapter (2008 edition) page Gross profit percentage (1,200/12,000) 18 A Contract price Total estimated cost Total est gross profit Percentage-of-completion Gross profit to date Less GP recognized in 2007 GP to be recognized In 2008 Total GP = P750,000 + P228,000 19 20,000,000/24,000,000 20 Contract price Total estimated cost Total estimated gross profit Percentage-of-completion GP to date GP recognized in prior years (P30M - P22M = P8M x 50%) GP to be recognized in 2008 21 22 23 Total amount billed Less Balance of accounts receivable Total collections Amount deposited Cash collected not yet deposited P150,000 ÷ 937,500/9,000,000 C Mobilization fee (P1.2B x 1%) Collections on billings (1.2B x 10% x 90%) Total fee received by NNO 10% Cubao P16,200,000 14,400,000 P 1,800,000 83 1/3% P 1,500,000 750,000 P 750,000 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 83.33% 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 17 AA1 - Chapter (2008 edition) 24 B Contract price Gross profit rate Total estimated gross profit Percentage-of-completion Realized gross profit 25 26 27 28 29 B A B C 30 A Downpayment First installment payment Add’l fee (P1,000,000 x 3%) Earned Franchise Fees 31 32 C A P 100,000 x 1/5 = P 20,000 + 1% of P500,000 = 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 page P100.00M 25% P25.00M 50% P12.50M P 50,000 50,000 30,000 P130,000 P 25,000 P1,400,000 P 100,000 199,650 450,000 P 749,650 18 ... Total estimated cost Total estimated gross profit 2 006 P120,000,000 P 24,000,000 76,000,000 P100,000,000 P 20,000,000 Percentage of completion 24% 2 006- Revenue Cost of revenue 2008 P3,890,000 1,200,000... Recognized revenue Cost of revenue Gross Profit (loss) 12 2 006 P 1,100,000 1,000,000 P 100,000 – (1) 2007 P1,300,000 (2) 1,250,000 P 50,000 2 006 P3,500,000 1,000,000 P2,250,000 P3,250,000 250,000 30.77%... income would be recognized, because the P2,000,000 collections are exactly offset by the P2,000,000 costs AA1 - Chapter (2008 edition) Problem 7-9 2007 July Cash Notes Receivable Unearned Franchise