Long-term Construction

Part I: Theory of Accounts

1. It is a contract specifically negotiated for the construction of an asset or a combination of assets that
are closely interrelated or interdependent in terms of their design, technology and function or their
ultimate purpose or use.
a. Construction contract
b. Instalment contract
c. Franchise contract
d. Consignment contract

2. It is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per
unit of output, which in some cases is subject to cost escalation clauses.
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

3. It is a construction contract in which the constructor is reimbursed for allowance or otherwise defined
costs, plus a percentage of these costs or a fixed fee.
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

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4. Aside from the initial amount of revenue agreed in the long-term construction contract, additional

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revenues may be recognized by the contractor (1) to the extent that it is probable that they will result in
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revenue and (2) they are capable of being reliably measured. Which of the following will not be
considered as additional contract revenue by a contractor?

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a. Variation in contract work as instructed by the customer regarding the scope of work to be
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performed.
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b. Claim that the contractor may seek to collect from the customer for customer caused delays or
errors in specification or design.
c. Incentive payments to be paid to the contractor if specified performance standards are met or
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exceeded or for early completion of the contract.

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d. Gain on sale of scrap materials from construction.

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5. Which of the following costs shall be excluded in the contract costs of construction contract?
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a. Costs that relate directly to the specific contract.

b. Costs that are directly attributable to contract activity in general and can be allocated to the
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contract.
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c. Such other costs as are specifically chargeable to the customer under the terms of the contract.
d. Selling costs such as advertisement expense or commissions of real estate agents or brokers.

6. The following costs shall be capitalized as part of construction in progress or contract costs, except
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a. Costs of hiring and moving of plant and equipment to and from the contract site.
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b. Systematically, rationally and consistently allocated construction overheads and borrowing costs.
c. Costs that are specifically chargeable to the customer under the terms of the contract may include
some general administration costs and development costs for which reimbursement is specified in
the terms of the contract.
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d. General and research and development costs for which reimbursement is not specified in the
contract.

7. When the outcome of a construction contract can be estimated reliably, how shall contract revenue and
contract costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by percentage of
completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage of
collection of receivables from customer also known as by instalment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of revenue
or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will be
recoverable and the contract cost shall be recognized as expense in the period in which there
incurred also known as cost recovery or zero-profit method.
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 8. When the outcome of a construction contract cannot be estimated reliably, how shall contract revenue
and contract costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by percentage of
completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage of
collection of receivables from customer also known as by instalment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of revenue
or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will be
recoverable and the contract cost shall be recognized as expense in the period in which there
incurred also known as cost recovery or zero-profit method.

9. When it is probable that total contract costs will exceed total contract revenue, how shall it be
accounted for?
a. The expected loss shall be recognized as an expense immediately regardless of the certainty or
uncertainty of the outcome of a construction contract.
b. The expected loss shall be recognized as an expense immediately only when the outcome of a
construction contract cannot be estimated reliably.
c. The expected loss shall be recognized as an expense by reference to the state of completion of the
contract activity at the end of the reporting period when the outcome of a construction contract
cannot be estimated reliably.
d. The expected loss shall be accounted for based on company's policy.

10. When the company decides to change its accounting for construction contract from percentage of

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completion to cost recovery method, how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by retrospective application or

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with cumulative effect in the beginning retaining earnings at the date of change.
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b. It shall be accounted for as a change in account estimate treated by prospective application to the

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date of change and future date profit or loss.
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c. It shall be accounted for as a prior period error treated by retrospective restatement or with
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cumulative effect on the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.
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11. When the company changes its percentage of completion of the construction project every year, how
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shall the accounting change be treated?

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a. It shall be accounted for as a change in accounting policy treated by retrospective application or

with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by prospective application to the
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date of change and future date profit or loss.

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c. It shall be accounted for as a prior period error treated by retrospective restatement or with
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cumulative effect on the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.
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12. How shall the constructor present in its statement of financial the accounts related to construction
contract?
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a. It shall present as an asset the gross amount due from customers for contract work which is the net
amount of cost incurred plus recognized profit less the sum of recognized losses and progress
billings for all contracts in progress for which costs incurred plus recognized profits or less
recognized losses exceeds progress billings. (Meaning: It is presented as an asset if Construction-
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in-Progress exceeds Progress Billings)

b. It shall present as a liability the gross amount due to customers for contract work is the net amount
of cost incurred plus recognized profit less the sum of recognized losses and progress billings for all
contracts in progress for which progress billings exceeds costs incurred plus recognized profits or
less recognized losses. (Meaning: It is presented as a liability if Progress Billings exceeds
Construction-in-Progress)
c. Either A or B but the liabilities and assets resulting from the difference of Construction in Progress
and Progress Billings shall not be netted or offsetted in the Statement of Financial Position.
d. Both A and B but the liabilities and assets resulting from the difference of Construction in Progress
and Progress Billings shall not be netted or offsetted in the Statement of Financial Position.

13. Which of the following accounting changes shall be treated retrospectively instead prospectively by the
long-term construction contractor?
a. Change in the construction revenue
b. Change in the estimated costs to complete the contract
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c. Change in the estimate of the outcome of the contract

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 d. Change from percentage of completion to cost recovery method or vice versa

Part II: Problem Solving.

1. On July 1, 2016, ABC Construction Corp. contracted to build an office building for XYZ, Inc. for a total
contract price of P975,000.

2016 2017 2018

Contract cost incurred to date 75,000 600,000 1,050,000

Estimated costs to complete the contract 675,000 400,000 -

Billings to XYZ, Inc. 150,000 550,000 275,000

1. Under the percentage of completion method, how much is the Construction-in-Progress at

December 31, 2017?
a. 650,000
b. 575,000
c. 672,500
d. 597,500

2. Under the zero-profit method, how much is the Construction-in-Progress, net of Progress
Billings at December 31, 2017?

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a. (125,000)

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b. 125,000

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c. 50,000 eH w
d. (50,000)

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3. Under the percentage of completion method, how much is the realized gross profit/(loss) at
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December 31, 2018?
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a. (75,000)
b. (100,000)
c. (50,000)
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d. (72,500)
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2. EFG Construction was recently awarded a P6,730,000 contract to construct a trade center for Ayala
Inc. EFG Construction estimates it will take 46 months to complete the contract. The company uses the
percentage of completion method to estimate profits. (use two decimal places for the percentage of
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completion method). Example 62.48%

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The following information details the actual and estimated costs for the year 2017-2020:
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Year Actual Cost Each Year Estimated Cost to Complete

2017 3,120,000 3,264,000

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2018 1,584,000 1,800,000

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2019 1,152,000 912,000

2020 1,080,000 -
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How much is the balance of Construction in Progress account as of 2019?

a. 5,818,000
b. 5,856,000
c. 5,808,000
d. 5,800,000

3. DM, Inc. works on a P10,500,000 contract in 2016 to construct an office building. During 2016, DM,
Inc. uses the cost-to-cost method. At December 31, 2016, the balances in certain accounts were:

Construction in Progress P3,780,000

Accounts receivable P360,000

This study sourceBillings on construction

was downloaded in progress
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 Contract retention P180,000

Mobilization fee P140,000

At December 31, 2016, the estimated cost at completion is P 7,350,000

How much is the realized gross profit in 2016?

a. 1,102,500
b. 1,062,500
c. 1,242,500
d. 1,134,000

4. On January 1, 2016, Brave Construction Corporation began constructing a P2,100,000 contract. The
entity uses the percentage of completion method. For the year ended December 31, 2017, Brave
Construction billed its client an additional 55% of the contract price.

2016 2017 2018

Construction in progress 441,000 ? ?

Estimated cost to complete ? ? -

Costs incurred 425,250 969,000 675,750

Excess of construction in progress over (84,000) (330,750) -

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billings or (excess of billings over

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construction in progress)

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1.
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How much is the estimated remaining cost in 2016?

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a. 1,599,750
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b. 1,155,000
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c. 1,680,000
d. 1,584,000

2. How much is the realized gross profit (loss) in 2017?

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a. (45,000)
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b. 15,750
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c. (60,750)
d. 30,000
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3. How much is the balance of Construction in Progress in 2017?

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a. 1,680,000
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b. 2,010,750
c. 1,349,250
d. 1,365,000
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5. Avista Company is one of the leading construction firms in the country. On January 1, 2021, it entered
into a long-term construction contract with a fixed contract price of P4,500,000. The construction started
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on July 1, 2021 and ended on October 31, 2023. The following costs were provided by the chief
accountant of Avista Company:

2021 2022 2023

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Construction costs incurred to date P1,000,000 P2,916,000 P4,556,250

Estimated costs to complete as of the P3,000,000 P1,640,250 P-0-

end of the year

Assuming the outcome of the construction can be estimated reliably and the company decided
to employ cost-to-cost method, what is the amount of (1) revenue from long term contract, (2)
costs of construction and (3) gross profit/(gross loss), respectively to be reported by Avista
Company for the year ended December 31, 2022?
a. 1,734,750 and 1,916,000 and (181,250)
b. 1,755,000 and 1,936,250 and (181,250)
c. 1,859,250 and 1,916,000 and (56,250)
d. 1,755,000 and 1,811,250 and (56,250)
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 6. On July 1, 2031, Torela Company, a construction company entered into a contract to construct a
commercial building for a customer on customer-owned and 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 of 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 entity's 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 costs 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 Torela Company is P420,000.

In the first quarter of the 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 increase by P150,000
and P120,000, respectively. In addition, the allowable time for achieving the P200,000 bonus is
extended by 6 months to 30 months from the original contract inception date. At the date of the
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 concludes 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

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costs of P195,000.

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

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a. 1,012,500 and 97,500
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b. 862,500 and 67,500
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c. 1,012,500 and 217,500

d. 1,080,000 and 127,500
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7. On January 1, 2017, Matibay Development Corporation (MDC) entered into a contract with Company B
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to construct a new corporate headquarters on land owned by Company B. Contractor MDC determines
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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
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31, 2019, that the building is completed, the promised consideration will increase by P25,000. For each
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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
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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 the "expected value" better predicts the variable
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consideration it will receive regarding the early completion or delay of the construction because of the
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different outcomes possible based on MDC's current construction schedule and its experience with past
projects. MDC estimates 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
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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 transaction price.

On December 31, 2018, MDC did not change its estimate with respect to green building certification
bonus but after 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:
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 December December 31,
31, 2017 2018

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

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

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?
a. (230,000)
b. (220,625)
c. (250,000)
d. (155,000)

8. On January 1, 2031, Megaland Inc. entered into a construction contract with an owner to build an oil
refinery. The contract has the following characteristics. The oil refinery is highly customized to the
owner's specifications and changes to these specifications by the owner are expected over the contract
term. The oil refinery does not have an alternative use to the contractor. Non-refundable, interim
progress payments are required as a mechanism to finance the contract. The owner can cancel the
contract at any time (with a termination penalty); any work in process is the property of the owner. As a
result, another entity would not need to reperform the tasks performed to date. Physical possession and
title do not pass until completion of the contract. The contractor determines that the contract has a

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single performance obligation to build the refinery. The preponderance of evidence suggests that the

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contractor's performance creates an asset that the customer controls and control is being transferred

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over time. Megaland Inc. concludes that input method (cost-to-cost method) instead of output method is
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a more reasonable method for measuring the progress toward satisfying its performance obligation.

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The contract duration is 3 years with total estimated contract revenue of P300M. The total estimated
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contract cost as of December 31, 2031 is P200M. The cost incurred during year 2031 is P120M
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including P20M related to contractor-caused inefficiencies, which do not represent/depict the transfer of
goods or services to the customer. As of December 31, 2032, the total estimated contract cost becomes
P250M due to increase in cost of raw materials. The cost incurred during year 2032 is P105M including
P5M related to contractor-caused inefficiencies, which do not represent/depict the transfer of goods or
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services to the customer.

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Under IFRS 15, what is the net income/(net loss) to be reported by Megaland Inc. for the years
ended December 31, 2031 and 2032, respectively?
a. 30M and (15M)
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b. 50M and (10M)

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c. 60M and (15M)

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d. 40M and (5M)

9. Filvida Inc. entered into a long-term construction contract in January 1, 2016 to construct a shopping
mall at a fixed contract price of P10M. Filvida determined that the outcome of the construction cannot
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be estimated reliably. Filvida normally bills its customer 50% at the middle of the first year, 20% at the
middle of second year and the balance at the date of completion of project. A mobilization fee of 10% of
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the contract price (deductible from the first bill) is payable 30 days after the contract signing. The
contract provides that the customer shall pay 80% of the amount billed during the year on or before the
December 31 subject to retention provision/withholding by customer of 5% of amount to be paid by the
customer which is intended to protect the customer from the contractor failing to adequately complete
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its obligation under the contract. The customer satisfactorily complied with the contractual provision.
Filvida's accounting provide the following data for the years ended December 31, 2016 and December
31, 2017:

December 31, December 31,

2016 2017

Costs incurred to date P4,000,000 P7,000,000

Estimated costs to complete as P9,000,000 P4,000,000

of this date

What is the 12/31/2017 (1) Due from/(to) Customer, 12/31/2017 (2) excess of construction in
progress over progress billings and 2017 (3) realized gross profit/(loss), respectively to be
presented by Filvida Inc.?
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a. 680,000 and (1,000,000) and 2,000,000
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 b. 400,000 and (3,000,000) and 0
c. 1,400,000 and 4,000,000 and (3,000,000)
d. 320,000 and (2,000,000) and (1,000,000)

Franchise

Part 1: Theory of Accounts

1. Under IFRS 15, how shall the revenue from contracts with customers such as revenue from initial
franchise fee be recognized by the franchisor?
a. Upon receipt of the initial franchise fee by the franchisor.
b. Upon signing of the franchise agreement.
c. When the franchisor satisfies the performance obligation under the franchise agreement.
d. Applying the legality over the substance of the transaction.

2. Under IFRS, how may an entity satisfy a performance obligation under n a contract with customers?
a. Satisfaction of performance obligation over time.

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b. Satisfaction of performance obligation at a point in time.

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c. Either A or B.

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d. Neither A or B. eH w
3. IFRS 15 provides that initial franchise fee shall be recognized as revenue over time (percentage of

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completion method) if any one of the following criteria provided below is met. Which of the following
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indicator shows that the initial franchise fee shall be recognized as revenue at a point in time instead
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over time?
a. When the franchise simultaneously receives and consumes the benefits provided by the
franchisor’s performance as the franchisor performs.
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b. When the franchisor’s performance creates or enhances an asset that the franchisee controls as
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the asset is created or enhanced.

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c. When the franchisor’s performance does not create an asset with the alternative use to the
franchisor and the franchisor has an enforceable right to payment for performance completed to
date.
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d. When the franchisee has legal title to the franchise and has the significant risks and rewards of
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ownership of the franchise.

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4. Under IFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or revenue for
a sales-based royalty?
a. When the sales of the franchisee occurs.
b. When the performance obligation to which some or all of the contingent franchise fees or sales-
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based royalty has been satisfied or partially satisfied.

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c. When both A and B events occur.

d. When either A or B events occurs.

5. What is the measurement of franchise revenue recognized from franchise agreement?

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a. Fair value of the consideration received or receivable.

b. Book value of the consideration received or receivable.
c. Carrying amount of the consideration received or receivable.
d. Nominal amount of the consideration received or receivable.

Part II: Problem Solving

1. On January 1, 2016, MR. JOVEN entered into a franchise agreement with ONG to market their
products. The agreement provides for an initial fee of P12,500,000 payable as follows: P3,500,000 to
be paid upon signing of the contract and the balance in five equal annual payments every end of the
year starting December 31, 2016. MR. JOVEN signs a non-interest bearing note for the balance. His
credit rating indicates that he can borrow money at 15% interest for a loan of this type. The present
value for an annuity of P1 at 15% for 5 periods is 3.352%. The agreement further provides that the
franchise
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monthly gross sales. On August 31,
the franchiser completed the initial services required in the contract at a cost of P4,290,120 and
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 incurred indirect cost of P175,000. The franchisee commenced business operations of November 30,
2016. The gross sales reported to the franchiser were P1,800,000 for December 2016. The first
installment payment was made in due date.

1. Assume the collectability of the note is not reasonably assured, how much is the net income
for the year ended, December 31, 2016?
a. 3,126,268
b. 3,201,268
c. 2,417,268
d. 3,072,268

2. Assume the collectability of the note is reasonably certain, how much is the net income for
the year ended, December 31, 2016?
a. 9,438,880
b. 9,384,880
c. 6,027,520
d. 6,552,520

2. XY Inc., franchisor, entered into franchise agreement with AB Inc., franchisee on July 1, 2016. The
initial franchisee fees agreed upon is P850,000 of which P150,000 is payable upon signing and the
balance to be covered by a non-interest bearing note payable in four equal annual installments. It was
agreed that the down payment is not refundable, notwithstanding lack of substantial performance of
services by franchiser. Probability of collection is unlikely.

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The following expenses were incurred:

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Initial services: eH w
Direct cost 235,000

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Indirect cost 64,000
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Continuing services:

Direct cost 23,900

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Indirect cost 9,000

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The management of AB has estimated that they can borrow loan at the rate of 12% (PV factor 3.04).
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The franchisee commenced its operations on July 31, 2016. A continuing franchise fee equal to 5% of
its monthly gross sales was also specified in the contract. AB reported gross sales of P950,000 for the
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month.
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How much is the net income to be reported on august 31, 2016?

a. 59,550
b. 83,450
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c. 48,910
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d. 72,810

3. MIKE restaurant sold a fast food restaurant franchise to Irish. The sale agreement, signed on January
2016 called for a P100,000 down payment plus two P50,000 annual payments representing the value
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of initial franchise services rendered by MIKE restaurant. In addition, the agreement required the
franchisee to pay 8% of its gross revenues to franchisor. The restaurant opened early in 2016 and its
sales for the year amounted to P750,000. The prevailing rate for similar note was 12% (PV factor was
1.6901).

How much is the total revenue for 2016?

a. 84,505
b. 244,505
c. 254,646
d. 266,646

4. On April 1, 2016, GOOD Inc. entered into a franchise agreement with BEST franchisee. The initial
franchise fees agreed upon is P246,900, of which P46,900 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. BEST Inc. has a high credit rating, thus, collection of the note is
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 reasonably assured. Out-of-pocket costs of P125,331 and P12,345 were incurred for direct expenses
and indirect expenses respectively. Prevailing market rate is 9% (PV factor is 3.2397).

For the fiscal year ended June 30, 2016, how much revenue from franchise fee will the
franchisor recognize?
a. 0
b. 208,885
c. 246,900
d. 83,554

5. Mcjobee operates and franchises 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 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 provide a right to
access the Intellectual Property over time. Mcjobee has determined the stand-alone selling price of the
license is P70,000. The franchise agreement has a 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 arrangement and determines it meets the criteria to be accounted for as a
contract with a customer under IFRS 15. Mcjobee determines its pre-opening services and license of
Intellectual Property as each distinct and, therefore, need to be accounted for as separate performance

m
er as
obligations. As of December 31, 2016, Mcjobee already satisfied its performance obligation to supply
and install cooking equipment and cash registers o the franchisee. For the year ended December

co
31,2016, the franchisee reported sales revenue of P100,000
eH w
o.
Under IFRS 15, how much total revenue shall be recognized by Mcjobee for the year ended
rs e
December 31, 2016?
ou urc

a. P95,000
b. P28,500
c. P6,650
d. P45,150
o
aC s

6. Starbeans Inc. operates and franchises coffee shop around the world. On January 1, 2016, Starbeans
vi re

Inc. entered into a franchise agreement with a franchisee. As part of its franchise agreement, Starbeans
requires a franchisee to pay an initial franchise fee in the amount of P1,500,000 of which P500,000 is
payable at the date or perfection of contract and the balance payable in five equal annual installments
y

every December 31. The franchisee issued a non-interest bearing note with effective interest rate of
ed d

10% for the balance initial franchise fee and the present value of note is P758,157. The franchise
ar stu

agreement also provides for ongoing payment of royalties of 5% based on sales revenue of franchisee.
As part of the franchise agreement, starbeans provides pre-opening services. Including supply and
installation of coffee equipment and cash registers with a total cost of P754,894. Starbeans evaluates
and determines that the contract with the customer is a single performance obligation that need not be
is

separated. As of July 1, 2016. Mcjobee already satisfied its performance obligation to supply and install
coffee equipment and cash registers to franchise. For the year ended December 31, 2016, the
Th

franchisee reported sales revenue in the amount of P1,000,000.

1. What is the net income to be reported by Starbeans for the year ended December 31, 2016, if
the collection of the note receivable is reasonably assured?
sh

a. 629,079
b. 579,079
c. 553,263
d. 503,263

2. What is the net income to be reported by Starbeans for the year ended December 31, 2016, if
the collection of the note receivable is not reasonably assured
a. 375,490
b. 325,490
c. 399,674
d. 125,816

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