TEST BANK

ADVANCED ACCTG. I
Antonio Dayag
PARTNERSHIP

5.On August 1, A and B pooled their assets to form a partnership, with the firm to take over their
business assets and assume the liabilities. Partners capitals are to be based on net assets transferred
after the following adjustments. (Profit and loss are allocated equally.)

B’s inventory is to be increased by P4,000; an allowance for doubtful of P1,000 and P1,500 are to be
setup in the books of A and B, respectively; and accounts payable of P4,000 is to be recognized in
A’s books. The individual trial balances on August, before adjustments, follow:

A B
Assets P75,000 P113,000
Liabilities 5,000 34,500

What is the capital of A and B after the above adjustments?

A. A, P68,750; B, P77,250 C. A, P65,000; B, P76,000
B. A, P75,000; B, P81,000 D. A, P65,000; B, P81,000

9.The business assets of Mary and Ruth appears below:

Mary Ruth
Cash P 11,000 P 22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000 -
Building - 428,267
Furniture and fixtures 50,345 34,789
Other assets 2,000 3,600
Total P1,020,916 P1,317,002

Accounts payable P 178,940 P 243,650

Notes payable 200,000 345,000
Mary, Capital 641,976 -
Ruth, Capital - 728,352
Total P1,020,916 P1,317,002

Mary and Ruth agreed to form a partnership contributing their respective assets and equities subject
to the following adjustments:
1. Accounts receivable of P20,000 in Mary’s books and P35,000 in Ruth’s are uncollectible.
2. Inventories of P5,500 and P6,700 are worthless in Mary’s and Ruth’s respective books.
3. Other assets of P2,000 and P3,600 in Mary’s and Ruth’s respective books are to be written off.

The capital account of the partners after the adjustments will be:
A. Mary, P615,942; Ruth, P717,894 C. Mary, P640,876; Ruth, P683,050
B. Mary, P640,876; Ruth, P712,345 D. Mary, P614,476; Ruth, P683,052

10. The same information in above, how much total assets does the partnership have after formation?
A. P2,337,918 C. P2,265,118
B. P2,237,918 D. P2,365,218

23. On January 1, 20x4, Ray and Mark decided to form a partnership. At the end of the year, the
partnership made a net income of P120,000. The capital accounts of the partnership show the
 following transactions.
Ray, Capital Mark, Capital
Dr. Cr. Dr. Cr
January 1 P40,000 P25,000
April 1 P5,000
June 1 10,000
August 1 10,000
September 1 P3,000
October 1 5,000 1,000
December 1 4,000 5,000

Assuming that an interest of 20% per annum is given on average capital and the balance of
the profits is allocated equally, the allocation of profits should be:
A. Ray, P60,000; Mark, P59,400 C. Ray, P67,200; Mark, P52,800
B. Ray, P61,200; Mark, P58,800 D. Ray, P68,800; Mark, P51,200

28. A, B and C formed a partnership on January 1, 20x4, and contributed P150,000, P200,000, and
P250,000, respectively. Their articles of co-partnership provide that the operating income be shared
among the partners as follows: as salary, P24,000 for A, P18,000 for B, , and P12,000 for C; interest
of 12% on the average capital during 20x4 of the three partners; and the remainder in the ratio of
2:4:4, respectively.

The operating income for the year ending December 31, 20x4 amounted to P176,000. A contributed
additional capital of P30,000 on July1 and made a drawing of P10,000 on October 1; B contributed
additional capital of P20,000 on August 1 and made a drawing of P10,000 on October 1; and, C
made a drawing of P30,000 on November 1.

The partners’ capital balances on December 31, 20x4 are:

A. A, P179,680; B, P229,360; and C, P239,360
B. A, P179,760; B, P229,360; and C, P239,520
C. A, P189,680; B, P239,360; and C, P269,360
D. A, P223,180; B, P272,060; and C, P280,760

29. Mel, a partner in the Mel-ben Partnership, has a 30% participation in partnership profits and losses.
Mel’s capital account has a net decrease of P1,200,000 during the calendar year 20x4. During 20x4,
Mel withdrew P2,600,000 (charged against his capital account) and contributed property valued at
P500,000 to the partnership. What was the net income of the Mel-ben Partnership for year 20x4?
A. P3,000,000 C. P 7,000,000
B. P4,666,667 D. P11,000,000

30. On January 2, 20x4, Ben and Ped formed a partnership. Ben contributed capital of P175,000 and
Ped, P25,000. They agreed to share profits and losses 80% and 20%, respectively. Ped is the general
manager and works in the partnership full time and is given a salary of P5,000 a month; interest of
5% of the beginning capital (of both partner) and a bonus of 15% of net income before salary,
interest and bonus.

The profits and loss statement of the partnership for the year ended December 31, 20x4 is as follows:

Net Sales P875,000

Cost of goods sold 700,000
Gross profits P175,000
Expenses (including salary, interest and bonus) 143,000
Net income P 32,000

The amount of bonus to Ped in 20x4 amounted to:

A. P13,304 C. P18,000
 B. P16,456 D. P20,700

31. On January 1, 20x4, A, B, C and D formed ABCD Trading Co., a partnership, with capital
contributions as follows: A, P50,000; B, P25,000; C, P25,000; and D, P20,000. The partnership
contract provided that each partner shall receive a 5% interest on contributed capital, and that A and
B shall receive salaries of P5,000 and P3,000 respectively. The contract also provided that C shall
receive a minimum of P2,500 per annum, and D a minimum of P6,000 per annum, which is inclusive
of amounts representing interest and share of remaining profits. The balance of the profits shall be
distributed to A, B, C, and D in a ratio 3:3:2:2 ratio.

What amount must earned by the partnership, before any charge for interest and salaries, so that a
may receive an aggregate of P12,500 including interest, salary and share of profits?
A. P16,667 C. P30,667
B. P30,000 D. P32,333

32. A, B and C are partners with average capital balances during 20x4 of P472,500, P238,650, and
P162,350, respectively. The partners receive 10% interest on their average capital balances; after
deducting salaries of P122,325 to A and P82,625 to C, the residual profits or loss is divided equally.

In 20x4, the partnership had a net loss of P125,624 before interest and salaries to partners.

By what amount should A’s capital account change – increase (decrease)?

A. P30,267 C. P(40,844)
B. P29,476 D. P28,358

By what amount should C’s capital account change – increase (decrease)?

A. P(40,448) C. P31,235
B. P17,536 D. P32,458

33. The same information above, except the partnership had a loss of P125,624 after interest and salaries
to partners, by what amount should B’s capital account change – increase (decrease)?
A. P(115,443) C. P(41,875)
B. P 23,865 D. P(18,010)

35. Christine Marie, Pia, and Angelica, accountants agree to form a partnership and to share profits in
the ratio of 5:3:2. They also agreed that Angelica is to be allowed a salary of P28,000, and that Pia is
to be guaranteed P21,000 as her share of the profits. During the first year of operation, income from
fees are P180,000, while expenses total, P96,000. What amount of net income should be credited to
each partner’s capital account?
A. Christine Marie, P28,000, Pia, P16,800, Angelica, P11,200.
B. Chritsine Marie, P25,000, Pia, P21,000, Angelica, P38,000.
C. Christine Marie, P24,000, Pia, P22,000, Angelica, P38,000.
D. Christine Marie, P25,000, Pia, P21,000, Angelica, P39,000.

37. Ruth and Pia share profits after the provision of annual salary allowances of P14,400 and P13,200,
respectively in the ratio 6:4. However, if partnership’s net income is insufficient to provide for said
allowances in full amount, the net income shall be divided equally between the partners. In 20x4, the
following errors were discovered: Depreciation for 20x4 is understated by P2,100, and the inventory
on December 31, 20x4 is overstated by P11,400. The partnership net income for 20x4 was reported
to be P19,500.

The capital account of partner Ruth should be increased (decrease) by:

A. P(6,540) C. P(6,960)
B. P3,000 D. P(6,750)

The capital account of partner Pia should be increased (decrease) by:

A. P(6,540) C. P6,540
 B. P3,000 D. P(6,750)

38. Juan and Carlo are partners sharing profits 60% and 405 respectively. The average profits for the
past two years are to be capitalized at 205 per year (for purposes of admitting a new partner) in
determining the aggregate capital of Juan and Carlo, after adjusting the profits for the following
items omitted as follows:

Omissions at Year-end 20x3 20x4

Prepaid Expense P1,600
Accrued Expense 1,200
Deferred income P1,400
Accrued income 1,000

Other pertinent information are as follows:

20x3 20x4
Net income of partnership P14,400 P13,600
Capital accounts, end of year:
Juan 45,400 54,000
Carlo 45,000 55,000

The aggregate capital of Juan and Carlo after capitalizing the average profits at 20% per annum is:
A. P67,765 C. P69,000
B. P72,105 D. P71,000

39. A, B and C partners, share profits on a 5:3:2 ratio. On January 1, 20x4, D admitted into the
partnership with 10% share in profits. The old partners continue to participate in profits in their
original ratio.

For the 20x4, the net income of the partnership was reported as p12,500. However, it was discovered
that the following items were omitted in the firm’s books:

Unrecorded at year end 20x3 20x4

Prepaid expense P800
Accrued expense P600
Unearned income 700
Accrued income 500

The new profit and loss ratio for B is

A. 40% C. 25%
B. 27% D. 30%

The share of partner C in the 20x4 net income:

A. P2,214 C. P2,286
B. P2,500 D. P2,300

40. A, B and C are partners in an accounting firm. Their capital account balances at year-end were A
P90,000; B P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the
following special terms:
1. Partner C is to receive a bonus of 10% of net income after the bonus.
2. Interests of 10% shall be paid on that portion of a partner’s capital in excess of P100,000.
3. Salaries of P10,000 and P12,000 shall be paid to partners A& C respectively.

Assuming a net income of P44,000 for the year, the total profit share of Partner C was:
A. P7,800 C. P19,400
B. P16,800 D. P19,800
41. R, S and T, a partnership formed on January 1, 20x4 had the following initial investment:

R P100,000
S 150,000
T 225,000

The partnership agreement states that profits and losses are to be shared equally by the partners after
consideration is made for the following:
- Salaries allowed to partners: P60,000 for R, P48,000 for S and P36,000 for T.
- Average partner’s capital balances during the year shall be allowed 10%.

Additional information:

- On June 30, 20x4 R invested additional P60,000.

- T withdrew P70,000 from the partnership on September 30, 20x4.
- Share on the remaining partnership profit was P5,000 for each partner.

The total partnership capital on December 31, 20x4 was:

A. P405,000 C. P480,000
B. P671,500 D. P672,750

42. X and Y are in partnership, sharing profits equally and preparing their accounts to 31 December
each year. On July 1, 20x4, Z joined in the partnership, and from that date profits are shared X 40%,
Y 40% and Z 20%.

In the year ended December 31, 20x4, profits were:

6 months to June 31, 20x4 P200,000

6 months to December 31, 20x4 300,000

It was agreed that X and Y only should bear equally the expense for a bad debt of P40,000 written-
off in the six months to December 31, 20x4 in arriving at the P300,000 profit.

Which of the following correctly states X’s profit share for the year?
A. P216,000 C. P220,000
B. P200,000 D. P224,000

44. A and B entered into a partnership as of March 1, 20x4 by investing P125,000 and P75,000,
respectively. They agreed that A, as the managing partner, was to receive a salary of P30,000 per
year and a bonus computed at 10% of the net profit after adjustment for the salary; the balance of the
profit was to be distributed in the ratio of their original capital balances. On December 31, 20x4,
account balances were as follows:

Cash P70,000 Accounts Payable P 60,000

Accounts receivable 67,000 A, Capital 125,000
Furniture & Fixtures 45,000 B, Capital 75,000
Sales returns 5,000 A, Drawing (20,000)
Purchases 196,000 B, Drawing (30,000)
Operating expenses 60,000 Sales 233,000

Inventories on December 31, 20x4 were as follows: supplies, P2,500, merchandise, P73,000. Prepaid
insurance was P950 while accrued expenses were P1,550. Depreciation rate was 20% per year.

A’s capital balance on December 31, 20x4, after closing the net profit and drawing accounts,
A. P135,940 C. P139,680
B. P139,540 D. P142,350
 B’s capital balance on December 31, 20x4, after closing the net profit and drawing accounts,
A. P47,960 C. P48,680
B. P49,860 D. P47,670

45. In the Christian-Joseph partnership, Christian and Joseph had a capital ratio of 3:1 and a profit and
loss ratio of 2:1, respectively. The bonus method was used to record C’s admittance as a new
partner. What ratio would be used to allocate, to A and B, the excess of C’s contribution over the
amount credited to C’s capital account?
A. A and B’s new relative ratio.
B. A and B’s new relative profit and loss ratio.
C. A and B’s old capital ratio.
D. A and B’s old profit and loss ratio.

46. The MR partnership agreement provides for M to receive a 20% bonus on profits before the bonus.
Remaining profits and losses are divided between M and R in the ratio of 2 to 3, respectively. Which
partner has a greater advantage when partnership has a profit or when it has a loss?

Profit Loss
A. M R
B. M M
C. R M
D. R R

Assignment of Interest to a Third Party

47. Capital balances and profit and loss sharing ratios of the partners in the MMM Partnership are as
follows:

Mary, Capital (50%) P140,000

Mark, Capital (30%) 160,000
Matt, Capital (20%) 100,000
Total P400,000

Mary needs money and agrees to assign half of her interest in the partnership to Mariet for P90,000
cash. Mariet pays directly to Mary. Mariet does not become a partner.

What is the total capital of MMM Partnership immediately after the assignment of the interest to
Mariet?
A. P310,000 C. P490,000
B. P200,000 D. P400,000

Partnership Dissolution: Admission of a New Partner

48. Presented below is the condensed balance sheet of the partnership of R, D, and G who share profits
and losses in the ratio of 6:3:1, respectively:

Cash P 85,000 Liabilities P 80,000

Other assets 415,000 R, Capital 252,000
D, Capital 126,000
G, Capital 42,000
Total P500,000 Total P500,000

The partner agree to sell L 20% of their respective capital and profit and loss interest for a total
payment of P90,000. The payment by L is to be made directly to the individual partners. The capital
balance of R, D and G respectively after admission of L are:
A. P198,000; P 99,000; P33,000
 B. P201,600; P100,800: P33,600
C. P216,000; P108,000; P36,000
D. P255,600; P127,800; P42,600

49. On June 30, 20x4, the balance sheet of Pia-rose Marketing, a partnership, is summarized as follows:

Sundry assets P150,000

Pia, Capital 90,000
Rose, Capital 60,000

Pia and Rose share profit and losses at a 60:40 ratio, respectively. They agreed to take in Ruth as a
new partner, who purchases 1/8 interest of Pia and Rose for P25,000. What is the amount of Ruth’s
capital to be taken up in the partnership books if book value method is used?
A. P12,500 C. P25,000
B. P18,750 D. P31,250

50. The capital accounts of the partnership of M, N, and O on June 1, 20x4 are presented below with
their respective profit and losses ratios:

M P139,200 1 /2
N 208,800 1 /3
O 96,000 1 /6

On June 1, 20x4, P is admitted to the partnership when P purchased, for P132,000, a proportionate
interest from M and O in the net assets and profits of the partnership. As a result of a transaction P
acquired a one-fifth interest in the net assets and profits of the firm. What is the combined gain
realized by M and O upon the sale of a portion of their interest in the partnership to P?
A. P 0 C. P62,400
B. P43,200 D. P82,000

51. Francis contributed P24,000 and Marc contributed P48,000 to form partnership, and they agreed to
share profits in the ratio of their original capital contributions. During the first year of operations,
they made a profit of P16,290; Francis withdrew P5,050 and Marc P8,000. At the start of the
following year, they agreed to admit John into the partnership. He was to receive a one-fourth
interest in the capital and profits upon payment of P30,000 to Francis and Marc, whose capital
accounts were to be reduced by transfers to John’s capital account of amounts sufficient to bring
them back to their original capital ratio.

How should the P30,000 paid by John be divided between Francis and Marc?
A. Francis, P 9,825; Marc, P20,175 C. Francis, P10,000; Marc, P20,000.
B. Francis, P15,000; Marc, P15,000 D. Francis, P9,300; Marc, P20,700.

52. MR partnership had a net income of P2,000 for the month ended September 30, 20x4.

S purchased an interest in the MR partnership by paying M P8,000 for half of his capital and half of
his 50% profit sharing interest on October 1, 20x4. At this time M capital balance was P6,000 and R
capital balance was P14,000.

S should receive a credit to his capital account balance of:

A. P4,000 C. P5,000
B. P3,000 D. P6,667

53. On January 31, 20x4, partners of Ane, Bony & Cindy partnership, had the following loan and capital
account balances (after closing entries for January):
Loan receivable from Ane P20,000 dr.
Loan payable to Cindy 60,000 cr.
Ane, Capital 30,000 dr.
 Bony, Capital 120,000 cr.
Cindy, Capital 70,000 cr.

The partnership’s income sharing ratio was Ane, 50%, Bony, 20%, and Cindy, 30%. On January 31,
20x4, Daisy was admitted to the partnership for a 20% interest in total capital of the partnership in
exchange for an investment of P40,000 cash. Prior to Daisy’s admission, the existing partners agreed
to increase the carrying amount of the partnership’s inventories to current fair value, a P60,000
increase. The capital account to be credited to Daisy:
A. P60,000 C. P52,000
B. P40,000 D. P46,000

54. Partners R, S and T divide profits and losses 5:3:2, respectively, and their balance sheet on
September 30, 20x4 are as follows:

RST Partnership
Balance Sheet
September 30, 20x4

Cash P 80,000 Accounts Payable P200,000

Other assets 720,000 R, Capital 148,000
S, Capital 260,000
T, Capital 192,000
Total asset P800,000 Total Liabilities and Capital P800,000

The assets and liabilities are recorded at approximate current fair values. U is to be admitted as a
new partner with a 20% interest in capital and earnings in exchange for a cash investment. Goodwill
or bonus will not be considered.

How much cash should U contribute?

A. P120,000 C. P150,000
B. P144,000 D. P160,000

55. The following condensed balance sheet is presented for the partnership of X, Y and Z, who share
profits and losses in the ratio of 4:3:3, respectively.

Cash P 90,000 Accounts payable P210,000

Other assets 830,000 Z, loan 30,000
X, loan 20,000 X, Capital 310,000
Y, Capital 200,000
Z, Capital 190,000
P940,000 P940,000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership
decides to admit W as a new partner, with 20% interest. No goodwill or bonus is to be recorded.

How much should W contribute in cash or other assets?

A. P140,000 C. P175,000
B. P142,000 D. P177,500

56. Cherry and Dennis are partners who share profits and losses in the ratio of 7:3, respectively. On
October 21, 20x4, their respective capital accounts were as follows:

Cherry P35,000
Dennis 30,000
P65,000
 On that date they agreed to admit Francis as a partner with a one-third interest in the capital and
profits and losses, and upon his investment of P25,000. The new partnership will begin with a total
capital of P90,000. Immediately after Francis admission, what are the capital balances of Cherry,
Dennis and Francis, respectively?

A. P30,000; P30,000; P30,000 C. P31,667; P28,333; P30,000

B. P31,500; P28,500; P30,000 D. P35,000; P30,000; P25,000

57. The capital account for the partnership of Marjorie and Romulo at October 31, 20x4 are as follows:

Marjorie, Capital P 80,000

Romulo, Capital 40,000
P120,000

The partners share profits and losses in the ratio of 3:2 respectively.

The partnership is in desperate need of cash, and the partners agree to admit John as a partner with
one-third in the capital and profits and losses upon his investment of P30,000. Immediately after
John’s admission, what should be the capital balances of Marjorie, Romulo and John respectively,
assuming bonus is to be recognized?

A. P50,000; P50,000; P50,000 C. P66,667; P33,333; P50,000

B. P60,000; P60,000; P60,000 D. P68,000; P32,000; P50,000

58. P and M are partners with capital balances P60,000 and P20,000, respectively. Profits and losses are
divided in the ratio of 60:40. P and M decided to form a new partnership with A, who invested land
valued at P15,000 for a 20% capital interest in the new partnership. A’s cost of the land was
P12,000. The partnership elected to use the bonus method to record the admission of A into the
partnership. A’s capital account should be credited for:

A. P12,000 C. P16,000
B. P15,000 D. P19,000

59. Ray and Mark formed a partnership and agreed to divide initial capital equally, even though Ray
contributed P25,000 and Mark contributed P21,000 in identifiable assets. Under the bonus approach
to adjust the capital accounts. Mark’s unidentifiable assets should be debited for:

A. P11,500 C. P2,000
B. P 4,000 D. P 0

60. The partnership of Mar and Risa is being dissolved, and the assets and equities at book value and
profit and loss ratios at January 1, 20x4 are as follows:

Book Value Fair Value

Cash P 20,000 P 20,000
Accounts receivable – net 100,000 100,000
Inventories 50,000 200,000
Plant assets – net 100,000 120,000
P270,000 P440,000
Accounts payable P 50,000 P 50,000
Mar, Capital 120,000
Risa, Capital 100,000
P270,000

Mar and Risa agreed to admit Maria into the partnership for a one-third interest. Maria invests
 P95,000 cash and a building to be used in the business with a book value to Maria for P100,000 and
a fair value of P120,000.

Compute the balance of Risa after the admission, assuming that the assets are not revalued and
bonus is recognized.
A. P135,000 C. P195,000
B. P155,000 D. P205,000

Retirement or withdrawal of a partner

62. On June 30, 20x4, the balance sheet for the partnership of A, B and C, together with their respective
profit and loss ratios, were as follows:

Assets, at cost P180,000

A, Loan P 9,000
A, Capital 42,000
B, Capital 39,000
C, Capital 90,000
Total P180,000

A decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30, 20x4. It was agreed that the partnership would pay A P61,200
cash for A’s partnership interest, including A’s loan which is to be repaid in full. No goodwill is to
be recorded. After A’s retirement, what is the balance of B’s capital account?

A. P36,450 C. P45,450
B. P39,000 D. P46,200

63. The December 31, 20x4, balance sheet of R, S and T partnership is summarized as follows:

Cash P100,000 S, loan P100,000

Other assets, at cost 500,000 R, Capital 100,000
S, Capital 200,000
T, Capital 200,000
P600,000 P600,000

The partners share profits and losses as follows: R, 20%; S, 30%; and T, 50%. S is retiring from the
partnership from the partnership and the partners have agreed that “other assets” should be adjusted
to their fair value of P600,000 at December 31, 20x4, they further agree that S will receive P244,000
cash for his partnership interest exclusive of the loan, which is to be paid in full, and that no
goodwill implied by S’s payment will be recorded.

After S’s retirement, the capital balances of R and T, respectively, will be:

A. P116,000 and P240,000 C. P100,000 and P200,000

B. P101,714 and P254,286 D. P 73,143 and P182,857

64. The partners’ capital (income-sharing ratio) of Den, Ed, Fred and Gale Partnership on May 31, 20x4,
was as follows:

Den (20%) P 60,000

Ed (20%) 80,000
Fred ( 20%) 70,000
Gale (40%) 40,000
Total partners’ capital (100%) P250,000
 On May 31, 20x4, with the consent of Den, Ed and Gale:
a. Fred retired from the partnership and was paid P50,000 cash in full settlement of his interest
in the partnership.
b. Henry was admitted to the partnership with a P20,000 cash investment for a 10% interest in
the net assets of Den, Ed, Gale and Henry Partnership.

The capital account to be credited to Henry:

A. P22,000 C. P20,000
B. P27,000 D. P25,000

65. When Minie retired from the partnership of Minie, Nene, and Onie, the settlement of Minie’s
interest exceeded Minie’s capital balance. Under the bonus method, the excess:

A. Was recorded as goodwill.

B. Was recorded as an expense.
C. Reduced the capital balances of Nene and Onie.
D. Had no effect on the capital balances of Nene and Onie.

Incorporation of a Partnership

70. Mark and Francis are partners sharing profits and losses in the ratio of 1:2, respectively. On July 1,
20x4, they decided to form the MF Corporation by transferring the assets and liabilities from the
partnership to the corporation in exchanges of its stocks. The following is the post-closing trial
balance of the partnership to the Corporation in exchange of its stocks:

Debit Credit
Cash P 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed Assets (net) 174,000
Liabilities P 60,000
Mark, Capital 94,800
Francis, Capital 214,200
P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the corporation:

Accounts receivable P 40,000

Inventory 68,000
Fixed assets 180,600

The MF Corporation was authorized to issue P100 par preferred stock andP10 par common stock.
Marc and Francis agreed to receive for their equity in the partnership 720 shares of the common
stock each, plus even multiples of 10 shares of preferred stock for their remaining interest.

The total number of shares of preferred stock issued by the corporation in exchange of the assets and
liabilities of the partnership is:
A. 2,540 shares C. 2,642 shares
B. 2,592 shares D. 2,600 shares

The total number of shares of common stock issued by the corporation in exchange of the assets and
liabilities of the partnership is:
A. 1,500 shares C. 1,440 shares
B. 1,400 shares D. 1,550 shares
71. The condensed balance sheet of the partnership of Cherry and Romulo as of December 31, 20x4
showed the following:

Total assets P200,000

Total liabilities 40,000
Cherry, Capital 80,000
Romulo, Capital 80,000

On this date, the partnership was dissolved and its net assets were transferred to a newly-formed
corporation. The fair value of the assets was P24,000 more than the carrying value of the firm’s
books. Each of the partners were issued 10,000 shares of the corporation’s P1 par common stock.
Immediately after effecting the transfer of the net assets, and the issuance of stock, the corporation’s
additional paid-in capital account would be credited for:
A. P136,000 C. P154,000
B. P140,000 D. P164,000

72. Partners Mel and Joey, who share equally in the profits and losses, have the following balance sheet
as of December 31, 20x4:

Cash P120,000 Accounts payable P172,000

Receivable 100,000 Accum. Dep’n 8,000
Inventory 140,000 Mel, Capital 140,000
Equipment 80,000 Joey, Capital 120,000
Total P440,000 Total P440,000

They agreed to incorporate their partnership, with the new corporation absorbing the net assets after
the following adjustments: provision of allowances for bad debts of P10,000; statement of the
inventory at its current fair value of P160,000; and recognition of further depreciation on the
equipment of P3,000. The corporation’s capital stock is to have a par value of P100, and the
partners are to be issued corresponding total shares equivalent to their adjusted capital balances.

The total par value of the shares of capital stock that were issued to partners Mel and Joey was:
A. P260,000 C. P273,000
B. P267,000 D. P280,000

Partnership Liquidation

75. The balance sheet of the partnership of Lanie, Janet and Cecilia, who share profits and losses in the
respective ratio of 5:3:2, follows:

Assets Liabilities & Capital

Cash P 30,000 Liabilities P 50,000

Other assets 320,000 Lanie, Capital 80,000
Janet, Capital 115,000
Cecilia, Capital 105,000
Total P350,000 Total P350,000

The partners agreed to liquidate the partnership by installments. Immediately, there was a realization
of P100,000 cash from selling other assets with book value of P150,000. Of the cash available, the
priority is the payment of the liabilities and the balance is to be distributed to the partners.

How should the remaining cash be distributed?

A. Lanie, P50,000; Janet, P30,000; and Cecilia, P20,000
B. Lanie, P40,000; Janet, P24,000; and Cecilia, P16,000
C. Lanie, P 0; Janet, P31,000; and Cecilia, P49,000
 D. Lanie, P 0; Janet, P48,000; and Cecilia, P32,000
76. A, B and C are partners sharing profits and losses in the ratio of 4:3:3, respectively. The
condensed balance sheet of ABC Partnership as of December 31, 20x4 is:

ABC Partnership
Balance Sheet
December 31, 20x4

Cash P 50,000
Other assets 130,000
Total assets P180,000

Liabilities P 40,000
A, Capital 60,000
B, Capital 40,000
C, Capital 40,000
Total liabilities and capital P180,000

Assume instead that ABC Partnership is dissolved and liquidated by installments and the first
realization of P40,000 cash is the sale of other assets with book value of P80,000. After the
payment of liabilities, the available cash shall be distributed to A, B and C, respectively, as
follows:
A. P36,000; P27,000; and P27,000
B. P44,000; P28,000; and P28,000
C. P16,000; P12,000; and P12,000
D. P24,000; P13,000; and P13,000

77. The partners of the Mar-Lo Partnership started liquidating their business on July 1, 20x4, at which
time the partners were sharing profits and losses 40% to Mar and 60% to Lo. The balance sheet of
the partnership appeared as follows:

Mar-Lo Partnership
Balance Sheet
July 1, 20x4

Assets Liabilities & Capital

Cash P 8,800 Accounts Payable P 32,400

Receivable 22,400 Mar, Capital P31,000
Inventory 39,400 Mar, drawing 5,400 25,600
Equipment P65,200 Lo, Capital P33,200
Accum. Dep’n 30,800 34,400 Lo, drawing 200 33,000
Lo, loan 14,000
Total P105,000 Total P105,000

During the month of July, the partners collected P600 of the receivables with no loss. The partners
also sold during the month entire inventory on which they realized a total of P32,400.

How much of the cash was paid to Mar’s capital on July 31, 20x4?
A. P25,600 C. P320
B. P 5,400 D. P 0

78. The condensed balance sheet of Dennis Francis and John, as of March 31, 20x4, follows:

Cash P 28,000 Liabilities P 48,000

Other assets 265,000 Dennis, Capital 95,000
Francis, Capital 80,000
 John, Capital 70,000
Total assets P293,000 Total Liabilities & capital P293,000

The income and loss ratio is 50: 25:25, respectively. The partners voted to dissolve their partnership
and liquidate by selling the other assets in installments. The amount of P70,000 was realized on the
first cash sale of other assets with a book value of P150,000. After settlement with creditors, all cash
available was distributed to the partners.

How much was received by John in the cash distribution?

A. P10,500 C. P21,250
B. P20,000 D. P32,500

79. After operating for five years, the books of the partnership of Dennis and Romulo showed the
following balances:

Net assets P169,000

Dennis, Capital 110,500
Romulo, Capital 58,500

If liquidation takes place at this point and the net assets are realized at book value, the partners are
entitled to:
A. Dennis to receive P117,000 & Romulo to receive P52,000.
B. Dennis to receive P126,750 & Romulo to receive P42,250.
C. Dennis to receive P84,500 & Romulo to receive P84,500.
D. Dennis to receive P110,500 & Romulo to receive P58,500.

81. A, B, C and D are partners, sharing earnings in the ratios of 3/21, 4/21, 6/21, and 8/21, respectively.
The balances of their capital accounts on December 31, 20x4 are as follows:

A P 1,000
B 25,000
C 25,000
D 9,000
P60,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume that a
debit balance of ay partner’s capital is uncollectible.

After the P22,200 was divided, the capital balance of B was:

A. P3,200 C. P 4,500
B. P3,920 D. P17,800

82. As of December 31, 20x4, the books of Men Partnership showed a capital balances of : M, P40,000;
E, P25,000; N, P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to liquidate and they sold all non-cash assets for P37,000. After settlement of all liabilities
amounting P12,000, they still have cash of P28,000 left for distribution. Assuming that any capital
debit balance is uncollectible, the share of M in the distribution of the P28,000 cash would be:

A. P17,800 C. P19,000
B. P18,000 D. P17,000

86. X, Y and Z are partners in textile distribution business, sharing profits and losses equally. On
December 31, 20x4 the partnership capital and partners drawings were as follows:

X Y Z Total
Capital P100,000 P80,000 P300,000 P480,000
 Drawing 60,000 40,000 20,000 120,000

The partnership was unable to collect on trade receivables and was forced to liquidate. Operating
profit in 20x4 amounted to P72,000 which was all exhausted including the partnership assets.
Unsettled creditors’ claims at December 31, 20x4 totaled P84,000. Y and Z have substantial private
resources but X has no personal assets.

Final cash distribution to Z was:

A. P78,000 C. P108,000
B. P84,000 D. P162,000

94. Gale and Dale formed a partnership on July 1, 20x4 to operate two stores to be managed by each of
them. They invested P30,000 and P20,000 and agreed to share earnings 60% and 40%, respectively.
All their transactions were for cash, and all their subsequent transactions were handled through their
respective bank accounts as summarized below:

Gale Dale
Cash receipts P79,100 P65,245
Cash disbursements 62,275 70,695

On October 31, 20x4, all remaining noncash assets in the two stores were sold for cash of P60,000.
The partnership was dissolved, and cash settlement was effected. In the distribution of the P60,000
cash, Gale received:
A. P24,000 C. P34,000
B. P26,000 D. P36,000

96. The ABC Partnership is being dissolved. All liabilities have been paid and the remaining assets are
being realized gradually. The equity of the partners is as follows:

Partners’ Accounts Loan to (from) Partnership P&L Ratio

A P24,000 P6,000 3
B 36,000 - 3
C 60,000 (10,000) 4

The second cash payment to any partner(s) under a program of priorities shall be made thus:
A. To C P2,000 C. To C P8,000
B. To B P6,000 D. To B P6,000 & C P8,000

CORPORATE LIQUIDATION

1.Bank of P.I. holds a P500,000 note secured by a building owned by JC Software, which has filed for
bankruptcy. If the property has a book value of P600,000 and a fair market value of P450,000, what
is the best way to describe the notes held by Bank of P. I.? The bank has
A. A secured claim of P500,000.
B. An unsecured claim of P500,000.
C. A secured claim of P450,000 and an unsecured claim of P50,000.
D. A secured claim of P50,000 and an unsecured claim of P50,000.

2.A and B Inc. owes AB Corporation P60,000 on account, which is secured by accounts receivable with
a book value of P50,000. The unsecured portion is considered a claim under the bankruptcy law, A
and B has filed for bankruptcy. Its statement of affairs lists the accounts receivable securing the AB
Corporation account with an estimated realizable value of P45,000. If the dividend to general
unsecured creditors is 80%, how much can AB expect to receive?
 A. P60,000 C. P57,000
B. P58,000 D. P48,000

3.Pia Corporation is a parent, having purchased 60% of Rose Company’s common stock at par value for
P600,000. Rose Company is in financial difficulty. The parent granted an unsecured loan of
P200,000 to the subsidiary. An accounting statement of affairs for Rose Company shows a dividend
of 30%.

Pia Corporation can expect to receive on the loan of appropriately:

A. P120,000 C. P36,000
B. P 60,000 D. P 0

4.Pia Corporation can expect to receive payment for its Investment in Rose Company of approximately:
A. P600,000 C. P108,000
B. P180,000 D. P 0

5.Cherry, Inc. has forced into bankruptcy and has begun to liquidate. Unsecured claims will be paid at
the rate of 40 cents on the peso. Marjorie Co. holds a non-interest bearing note receivable from
Cherry in the amount of P100,000 collateralized by machinery with a liquidation value of P25,000.
The total amount to be realized by Marjorie on this note receivable is:
A. P25,000 C. P55,000
B. P40,000 D. P65,000

6. Dennis Corp. was forced into bankruptcy and is in the process of liquidating assets and paying
claims. Unsecured claims will be paid at the rate of forty cents on the peso. John holds a P30,000
noninterest-bearing note receivable from Dennis collateralized by an asset with a book value of
P35,000 and a liquidation value of P5,000. The amount to be realized by John on this note is
A. P 5,000 C. P15,000
B. P12,000 D. P17,000

7. Francis, Inc. signed a note payable to its bank for P10,000. Accrued interest on the note on February
28, 20x4 amounts to P250. The note is secured by inventory with a book value of P12,000. The
inventory is sold for P8,000 and unsecured creditors receive 30% of their claims. The bank should
receive the following amount in settlement of the note and interest:
A. P10,250 C. P8,675
B. P10,000 D. P8,000

8. The trust for Romulo Inc. prepares a statement of affairs which shows that unsecured creditors whose
claims total P60,000 may expect to receive approximately P36,000 if assets are sold for the benefit of
the creditors.

 Miki is an employee who is owed P750.

 Melody holds a note for P1,000 on which interest of P50 is accrued; nothing has been pledged on
the note.
 Cora holds a note of P6,000 on which interest of P300 is accrued; securities with a book value of
P6,500 and a present market value of P5,000 are pledged on the note.
 Sheila holds a note for P2,500 on which interest of P150 is accrued, property with a book value
of P2,000 and a present market value of P3,000 is pledged on the note.

How much may each of the following creditors hope to receive?

Miki
A. P 0 C. P350
B. P90 D. P750

Melody
A. P 0 C. P1,050
 B. P450 D. P 630

Cora
A. P 0 C. P5,780
B. P6,300 D. P5,000

Sheila
A. P 0 C. P2,000
B. P2,390 D. P2,650

9. AB Co. filed a voluntary bankruptcy petition on August 15, 20x4, and the statement of affairs
reflects the following amounts:

Book Value Estimated Current Value

Assets:
Assets pledged with fully secured creditors P300,000 P370,000
Assets pledged with partially secured creditors 180,000 120,000
Free assets 420,000 320,000
P900,000 P810,000

Liabilities:
Liabilities with priority P 70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
P1,070,000

Assume that the assets are converted to cash at the estimated current values and the business is
liquidated. What amount of cash will be available to pay unsecured non-priority claims?
A. P240,000 C. P320,000
B. P280,000 D. P360,000

10. Zest and Co., Inc. purchased a Cadillac automobile with little cash down and signed a note, secured
by the Cadillac, for 48 easy monthly payments. When the company files for balance due on the
Cadillac amount to P6,000,000. The car has a book value of P8,000,000 and a net realizable value of
P4,000,000. The unsecured creditors of Zest and Co. can expect to receive 50 percent of their claims.
In the liquidation, the bank that holds the note on the Cadillac should receive:
A. P6,000,000 C. P4,000,000
B. P5,000,000 D. P3,000,000

11. The following data are provided by the Mhel Company:

Assets at book value P150,000

Assets at net realizable value 105,000
Liabilities at book value:
Fully secured mortgage 60,000
Unsecured accounts and notes payable 70,000
Unrecorded liabilities:
Interest on bank notes 500
Estimated cost of administering estate 6,000

The court has appointed a trustee to liquidate the company.

The journal entry made by the trustee to record the assets and liabilities should include an estate
deficit of:
 A. P31,500 C. P25,500
B. P31,000 D. P25,000

12. Using the same information above, the statement of affairs prepared by the trustee at this time should
include an estimated deficiency to unsecured creditors of:
A. P45,000 C. P31,500
B. P39,000 D. P25,000

13. Cole Corporation is in bankruptcy and is being liquidated by a court-appointed trustee. The financial
report that follow was prepared by the trustee just before the final cash distribution:

Assets:
Cash P100,000

Approved Claims:
Mortgage payable (secured by property that was
sold for P50,000) P 80,000
Accounts payable, unsecured 50,000
Administrative expenses payable, unsecured 8,000
Salaries payable, unsecured 2,000
P140,000

The administrative expenses are for trustees and other costs of administering the debtor
corporation’s estate.

How should the P100,000 be distributed to the following creditors?

Unsecured Creditors with Priority

A. P 0 C. P 5,000
B. P10,000 D. P10,000

Partially Secured Creditors

A. P80,000 C. P75,000
B. P65,000 D. P60,000

Unsecured Creditors without Priority

A. P20,000 C. P25,000
B. P10,000 D. P15,000

14. On December 18, 20x4, the statement of affairs of Donita Company, which is in bankruptcy
liquidation, included the following:

Assets pledged for fully secured liabilities P100,000

Assets pledged for partially secured liabilities 40,000
Free assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000

Compute the estimated amount to be paid to:

Fully Secured Liabilities

A. P80,000 C. P70,000
B. P64,000 D. P74,000

Unsecured Liabilities with Priority

 A. P60,000 C. P48,000
B. P50,000 D. P40,000

Partially Secured Liabilities

A. P50,000 C. P60,000
B. P48,000 D. P40,000

Unsecured Liabilities without Priority

A. P70,000 C. P72,000
B. P88,000 D. P78,000

15. Amounts related to the statement of affairs of Samantha Company, in bankruptcy liquidation as of
April 1, 20x4, were as follows:

Assets pledged for fully secured liabilities P 80,000

Assets pledged for partially secured liabilities 50,000
Free assets 272,000
Fully secured liabilities 60,000
Partially secured liabilities 80,000
Unsecured liabilities with priority 40,000
Unsecured liabilities without priority 330,000

The total estimated deficiency to unsecured creditors:

A. P 78,000 C. P108,000
B. P104,000 D. P158,000

The costs per peso that unsecured creditors may expect to receive from Samantha Company:
A. P0.76 C. P0.81
B. P0.70 D. P0.61

16. The following data were taken from the statement of affairs for Lotus Company:

Assets pledged for fully secured liabilities

(fair value, P75,000) P 90,000
Assets pledged to partially secured liabilities
(fair value, P52,000) 74,000
Free assets (fair value, P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000

Total estimated deficiency to unsecured creditors

A. P42,000 C. P 0
B. P 3,000 D. P40,000

The expected recovery per peso of unsecured claims:

A. P0.65 C. P1.00
B. P0.98 D. P0.70

17. Mayo, a CPA, has prepared a statement of affairs. Assets which there are no claims or liens are
expected to produce P70,000, which must be allocated to unsecured claims of all classes totaling
P105,000. The following are some of the claims outstanding:

1. Accounting fees for Mayo, P1,500.

2. An unrecorded note for P1,000, on which P60 of interest has accrued held by Angie.
3. A note for P3,000 secured by P4,000 receivables, estimated to be 60% collectible held by Jay.
 4. A P1,500 note, on which P30 of interest has accrued, held by Joy. Property with a book value of
P1,000 and a market value of P1,800 is pledged to guarantee payment of principal and interest.
5. Unpaid income taxes of P3,500.

The estimated payment to partially secured creditors:

A. P1,060 C. P2,490
B. P1,950 D. P2,790

JOINT VENTURES

Jointly Contoled Operations/Assets – Uncompleted Joint Venture

1.The following joint venture account reflects the transactions of the venture of A, B and C as recorded
by each Venturer (participant).

Joint Venture

20x4 20x4
Nov. 5 Merchandise – C P12,750 Nov. 18 Cash sales – A P30,600
17 Merchandise – B 10,500 Dec 12 Cash sales – A 6,300
22 Freight in – A 525 28Merchandise – B 1,815
Dec. 3 Purchase – A 5,250
13 Selling expenses – A 600

Distributions of gains or losses are to be trade as follows: A – 50%; B – 30%; and C – 20%. The
venture is to close on December 31, 20x4.

The joint venture profit (loss) is:

A. P7,275 C. P25,980
B. P9,090 D. P29,625

2. Using the same information above, how much each venture (participant) receive in the final
settlement?
A. A – none ; B – P11,412; C – P14,568
B. A – P4,545 ; B – P11,212; C – P10,932
C. A – P5,070 ; B – P11,412; C – P10,932
D. A – P4,545 ; B – P11,412; C – P14,568

3.Cherry, Dennis and Francis formed a joint venture for the sale of assorted fruits during the Christmas
season. Their transactions during the two-month period are summarized below:

Joint Venture

20x4 20x4
Nov. 6 Merchandise – Cherry P8,500 Nov. 10 Cash sales – Francis P20,400
8 Merchandise – Dennis 7,000 12 Cash sales – Francis 4,200
22 Freight in – Francis 200 28 Merchandise – Dennis 1,210
Dec. 3 Purchase – Francis 3,500 Dec 30 Unsold merchandise
13 Selling expenses – Francis 550 charged to Cherry 540

The venture agreement provided for the division of gains and losses among Cherry, Dennis and
Francis in the ratio 2:3:5. The venture is to close on December 31, 20x4.

The joint venture profit (loss) is:

 A. P6,600 C. P6,060
B. P(6,600) D. P(6,060)

4.Using the same information above, how much would Cherry receive cash in final settlement?
A. P9,712 C. P1,212
B. P8,500 D. P9,280

5.Al and Bel formed a joint venture. Their capital contributions and profit and loss ratio are presented
below:

Contributions Profit and

Cash Merchandise Loss Ratio
Al P5,000 P8,000 50%
Bel - 6,000 50%

A summary of the joint venture activities is presented below:

Purchases of merchandise by Bel P4,000

Expenses paid by Bel:
Mayor’s permit 400
Freight on merchandise contributed by Al 300
Delivery expense of merchandise sold 200
Sales ( all of the merchandise contributed and purchased by Bel
and one-half of those contributed by Al) 14,000

The balance of the joint venture account before profit or loss distribution is:
A. P 4,900 C. P14,400
B. P14,000 D. P 0

6.Using the same information above, the profit (loss) of the joint venture is:
A. P(450) C. P(750)
B. P750 D. P450

7.Using the same information above, how much would Al receive in the final settlement assuming he
took the unsold merchandise at cost?
A. P13,000 C. P8,475
B. P12,625 D. P8,515

8. Ane and Beth are participants in a venture for the acquisition of construction supplies at an auction.
The two participants agreed to contribute cash of P20,000 each to be used in purchasing the supplies,
and to share profits and losses equally. They also agreed that each shall record his purchases, sales
and expenses in his own books.

Several months later, the two participants terminated the venture. The following data relate to the
venture activities:
Ane Beth
Joint venture P16,000 Cr. P18,400 Cr.
Value of inventory taken 600 2,200
Expenses paid from JV cash 800 1,800

The amount of joint venture sales is:

A. P77,000 C. P34,400
B. P27,000 D. P 0
9.Using the same information above, Ane would receive in the final settlement:
A. P 2,000 C. P 4,000
B. P18,600 D. P38,000

10. On July 1, 20x4, Amy, Benny and Candy formed a joint venture for the sale of merchandise. Amy
was designated as the managing participant. Profits and losses are to be divided as follows: Amy,
50%; Benny, 25%; and Candy, 25%. On October 1, 20x4, though the joint venture is still
uncompleted, the participants agrees to recognize profit of loss on the venture to date. The cost of
inventory on hand is determined at P25,000. The Joint Venture account has a debit balance of
P15,000 before distribution of profit or loss. No separate set of books is maintained for the joint
venture and the participants record in their individual books all venture transactions.

The joint profit (loss) on October 1, 20x4 is:

A. P10,000 C. P(15,000)
B. P25,000 D. P 0

11. Using the same information above and the joint venture account has a credit balance of P30,000, the
joint venture profit (loss) is:
A. P(55,000) C. P(5,000)
B. P55,000 D. P5,000

12. Rene and Sonny formed a joint venture to acquire and sell a special type of merchandise. Rene is to
manage the venture and to furnish the capital. The participants are to share equally any gain or loss
on the joint venture. On April 1, 20x4, Sonny sent Rene P10,000 cash, which was all used to
purchase merchandise. Rene paid freight of P240 on the merchandise purchased. On April 27, one-
half of the merchandise was sold for P7,200 cash. Rene paid the cost of delivering merchandise to
customers which amounted to P260. No further transactions occurred until the end of the month.

The profit (loss) of the venture for the month of April 20x4 is:
A. P1,820 C. P(1,700)
B. P1,950 D. P 0

13. Using the same information above, the account of Sonny in the books of Rene shows a debit (credit)
balance on April 30, 20x4 after recognizing the profit (loss) on the uncompleted joint venture:
A. P(10,910) C. P10,850
B. P10,975 D. Zero

14. May and Ray agreed on a joint venture to purchase and sell car accessories. They agreed to
contribute P25,000 each to be used in purchasing the merchandise, share equally in any gain or loss,
and record their venture transactions in their individual books. After one year, they decided to
terminate the venture, and data from their records were:
Joint venture account credit balances: in books of May, P18,000; in books of Ray, P20,200, Cost of
car accessories taken: by May, P1,000; by Ray, P1,800, Expenses paid by May, P1,850; by Ray,
P2,600.

How much was the joint venture’s sales?

A. P83,750 C. P91,000
B. P86,550 D. P92,650

15. Using the same information above, compute the joint venture’s gain?
A. P38,200 C. P42,750
B. P41,000 D. P45,550

16. Ram, Sam and Tom formed a joint venture. Ram was designated as the manager and was to record
the venture’s transactions in his own books. As manger, Ram was to be allowed a salary of P12,000;
the remaining profit or loss was to be divided equally.
 The following balances appeared at the end of 20x4, before adjustment for venture inventory and
profit:
Debit Credit
Joint venture cash P48,000 P -
Joint venture - 15,000
Sam, Capital 1,000 -
Tom, Capital - 27,000

The venture was terminated on December 31, 20x4 and unsold merchandise costing P10,500 were
taken over by Tom. Ram made cash settlement with Sam and Tom.

In the final cash settlement, how much did Tom receive?

A. P31,500 C. P21,000
B. P27,000 D. P10,500

17. Risa, Salve and Troy formed a joint venture. Risa is to act as manger and is designated to record the
joint venture accounts in his books. As manger, he is allowed a salary of P12,000. Remaining profit
(loss) is to be divided equally.

The following balances appear at the end of 20x4 before adjustments for venture inventory and
profits.
Debit Credit
Joint venture – cash P48,000
Salve, Capital 3,000
Troy, Capital P27,000

The venture is to terminate on December 31, 20x4 with unsold merchandise costing P10,400.

Assuming that the joint venture profit is P5,000, what is the balance of the Joint Venture account
before the distribution of profit?
A. P6,400 (Credit) C. P19,000 (Debit)
B. P5,400 (Debit) D. P15,400 (Debit)

18. Using the same information above, and assuming that the joint venture incurs a loss of P1,000, what
is the balance of the Joint Venture account before distribution of loss?
A. P9,400 (Debit) C. P11,400 (Debit)
B. P9,400 (Credit) D. P11,400 (Credit)

19. Den, Elma and Fiona formed a joint venture in 20x3 and agreed to divide profits and losses equally.
The venture is terminated on December 31, 20x4 even though there are still unsold merchandise. On
this date, Den’s trial balance contains the following account balances before profit or loss
distribution:

Debit Credit
JV – Cash P30,000
Joint Venture 6,000
Elma, Capital 14,000
Fiona, Capital P16,000

Den receives P4,500 for his share in the venture profit. Furthermore, he agrees to be charged for the
unsold merchandise as of December 31, 20x4.

The cost of the unsold merchandise charged to Den is:

A. P 3,000 C. P13,500
 B. P15,000 D. P19,500

20. Lyn, Myra and Nene formed a joint venture to purchase a piece of lot and erect an apartment
building for sale. Lyn is to manage the venture hence, he will receive a bonus of 10% of the
venture’s gain before deducting the bonus as an expense. Any remaining gain or loss is to be
divided equally among the participants. The venture is completed on August 31, 20x4. On this date,
the accounts of Myra and Nene show the following balances:

Books of
Myra Nene
Account with Lyn P16,000 Cr. P16,000 Cr.
Account with Myra 32,000 Cr.
Account with Nene 18,000 Dr.

There are unused construction supplies which Lyn agreed to take over its cost of P42,000.

Final settlement with the venturers will require payments as follows:

A. Lyn pays Nene P11,200, and Myra pays Nene P14,000
B. Lyn pays Nene P25,600 and Myra P14,400
C. Lyn pays Myra P14,400, and Nene pays Lyn P30,800
D. Lyn pays Myra P35,600, and Nene pays Lyn P14,400

21. Xydo, Yolz and Zen agree to sell yellow t-shirts and visors on February 24 and 25, Xydo constructed
a stand in front of Zen’s house at a cost of P200 chargeable to operations. Any profit from the
venture will be distributed first by the payment of P50 to Z to cover the cost of cleaning his lot after
the venture, then by allowing a 405 commission on individual sales and, finally, by dividing the
remainder between Xydo and Yolz in the ratio of 3:1. All purchases will be out-of-pocket and all
sales activities will be the responsibility of each individual.

On February 24, Xydo purchased merchandise worth P5,000 using P1,000 handed to him by Yolz
and P4,000 of his own money. Zen paid P100 for a permit to operate the concession.

Xydo, Yolz and Zen made sales at a mark-up of 100% of cost, as follows: Xydo – P3,400;Yolz –
P5,200; and Zen – P1,200, Zen paid P180 for their personal meals, which is to be shared equally by
all of them.

On February 26, Zen agreed to pay P100 for the stand. The balance of the inventory was taken by
Xydo at 50% of cost, as agreed to by Yolz and Zen.

The final cash settlement would be:

Xydo
A. P5,340 C. P1,870
B. P2,560 D. P1,930

Yolz
A. P(4,260) C. P(2,250)
B. P(2,010) D. P(2,400)

Zen
A. P(1,080) C. P(670)
B. P(550) D. P(470)

22. Vic, Ike and Pete form a joint venture for the sale of merchandise. Pete is to contribute the
merchandise, while Vic is to act as manager and Ike to be allowed a bonus of 25% of the profit after
deduction of the bonus as expense. Ike and Pete are to be allowed 6% interest a year on their
original investments. The balance of the profit on the venture is to be divided equally among the
 three participants.

On July 1, 20x4, Ike and Pete contributed merchandise of P66,000 and P90,000, respectively. For
the period between July1 and October 1, Vic sold venture merchandise on account for P240,000, of
which he collected P229,500, allowed sales discounts of P4,050, and wrote off P6,450 as
uncollectible. Vic paid joint venture expenses of P58,560 from the venture cash. On October 1, the
joint venture was terminated and unsold merchandise was returned at the following values: to Ike,
P15,000, and to Pete, P11,400. Cash settlement was completed by Vic on the same day.

The cash settlement received by Ike:

A. P62,234.00 C. P72,333.33
B. P62,666.67 D. P73,468.00

The cash settlement received by Pete:

A. P90,194.00 C. P92,166.67
B. P90,333.33 D. P101,788.00

Jointly Controlled Operations/Assets – Completed Joint Venture

29. Ben and Susan formed a joint venture on January 1, 20x4 to operate two stores to be managed by
each venture. They agreed to contribute cash as follows: Ben, P30,000; Susan, P20,000.

Profits and losses are to be divided in the capital ratio. All the venture transactions are for cash, and
the cash receipts and disbursements of the venture during the four-month period, handled through the
participant’s bank accounts, are as follows:

Ben Susan
Receipts P78,920 P65,425
Disbursements 62,275 70,695

On April 30, 20x4, the remaining joint venture’s non-cash assets in the hands of the venturers were
sold for P60,000 cash. The venture was terminated and settlement was made between Ben and Susan.

The venture profit (loss) for the four-month period, after selling the remaining non-cash assets, was:
A. P11,375 C. P(31,375)
B. P21,375 D. P(38,625)

30. Using the same information above, the P60,000 cash was divided between the venturers in the
following manner:

Ben
A. P16,180 C. P26,180
B. P21,905 D. P48,095

Susan
A. P43,820 C. P33,820
B. P38,095 D. P11,905

33. The joint venture accounts in the books of the venture, Al, Bryle and Cindy, show the balances
below, upon termination of the joint venture and distribution of the profits:

Accounts with Al Bryle Cindy

Dr(Cr) Dr(Cr) Dr(Cr)
Al - P2,500 P2,500
Bryle P4,000 - 4,000
Cindy (6,500) (6,500) -
 Final settlement of the joint venture will require payments as follows:
A. Al pays P2,500 to Cindy, and Bryle pays P4,000 to Cindy.
B. Cindy pays P2,500 to Al and P4,000 to Bryle.
C. Bryle pays P6,500 to Al, and Cindy pays P2,500 to Bryle.
D. No payment(s) to be made.

35. On September 30, 20x4, Roy, Sally and Tim agreed on a joint venture to sell their common stock
shares of the Euro Copper Mines. Gains and losses are to be shared in proportion to the contributed
shares.

Roy contributes 6,000 shares, which had cost him P42 a share; Sally gave 10,000 shares which had
cost P58 each and Tim 4,000 shares which had cost P62 per share.

The par value of the shares was P50 and when the venture began, market value was P40 a share.

On October 20 the joint venture sold 4,500 shares for P44 a share and P3,000 expenses incurred. On
November 1, Euro distributed a stock dividend of 20%. Tim sold 5,000 shares, ex-stock dividend,
on November 5 for P25 a share. On November 15, Euro paid cash dividend of P1 a share. On
November 22, the y sold 6,000 shares for P28. On December 20, the remainder of the shares were
sold for P35 a share. Tim’s expenses were P4,700.

The 20,000 shares contributed to the venture should be valued at:

A. P 800,000 C. P1,080,000
B. P1,000,000 D. P1,200,000

36. Assuming the venture is ended on December 31, the share of Roy in the loss of the venture would
be:
A. P10,130 C. P13,130
B. P11,130 D. P12,130

37. If a distribution of proceeds is made on December 31. The share of Sally would amount to:
A. P374,650 C. P381,450
B. P378,500 D. P385,300

38. Tim’s loss on the disposition on his Investment in Euro Copper is:
A. P95,420 C. P105,420
B. P98,140 D. P120,140

INSTALLMENT SALES

5.The books of Euro Co. show the following balances on December 31, 20x4:

Accounts receivable P313,750

Deferred Gross Profit (before adjustment) 38,000

Analysis of the accounts receivable reveal the following:

Regular accounts P207,500

20x3 installment accounts 16,250
20x4 installment accounts 90,000

Sales on an installment basis in 20x3 were made at 30% above cost; in 20x4, 33 1/3 above cost.
Expenses paid was P1,500 relating to installment sales. How much is the net income on installment
sales?
A. P11,000 C. P16,000
 B. P11,500 D. P10,250

6. CJ Co. accounts for installment sales on the installment basis. On January 1, 20x2, the ledger
accounts included the following balances:

Installment Receivable – 20x2 P 38,500

Installment Receivable – 20x3 155,000
Deferred Gross Profit – 20x2 11,550
Deferred Gross Profit – 20x3 62,000

On December 31, 20x4, account balances before adjustments for realized gross profit on
installment sales were:

Installment Receivable – 20x2 P none

Installment Receivable – 20x3 42,000
Installment Receivable – 20x4 100,500
Deferred Gross Profit – 20x2 11,550
Deferred Gross Profit – 20x3 62,000
Deferred Gross Profit – 20x4 75,810

Installment sales in 20x4 were made at 42% above cost of merchandise.

The total realized gross profit on installment sales in 20x4:

A. P132,510 C. P 97,510
B. P 98,910 D. P102,834

7. Bohol Company sells appliances on the installment basis. Below are information for the past three
years:
20x4 20x3 20x2
Installment sales P750,000 P600,000 P400,000
Cost of sales 450,000 375,000 260,000
Collections on:
20x4 installment sales 275,000
20x3 installment sales 180,000 240,000
20x2 installment sales 125,000 120,000 150,000

Repossessions on defaulted accounts included one made on a 20x4 sale for which the unpaid balance
amounted to P5,000. The depreciated value of the appliance repossessed was P2,500.

The realized gross profit in 20x4 on collections of 20x4 installment sales was:
A. P108,000 C. P221,250
B. P110,000 D. P221,500

15. Northern Subdivision sells residential subdivision lots on installment basis. The following
information was taken from the company’s records as at December 31, 20x4:

Installment Accounts Receivable:

January 1, 20x4 P755,000
December 31, 20x4 840,000
Unrealized Gross Profit, January 1, 20x4 339,750
Installment Sales 950,000

How much is the balance of Unrealized Gross Profit as at December 31, 20x4?
A. P378,000 C. P427,500
B. P339,750 D. P389,250

19. The following selected accounts appeared in the trial balance of Euro Sales as of December 31,
 20x4:
Debit Credit
Installment Receivable – 20x3 sales P 15,000
Installment Receivable – 20x4 sales 200,000
Inventory, December 31, 20x3 70,000
Purchases 555,000
Repossession 3,000
Installment Sales P425,000
Sales (Regular) 385,000
Unrealized Gross Profit 20x3 54,000

Additional information:

Installment Receivable – 20x3 sales, as of

December 31, 20x3 120,000
Inventory of new and repossessed merchandise
as of December 31, 20x4 95,000
Gross profit percentage of regular sales during
the year 30% on sales
Repossession was made during the year. It was a 20x3 sale and the corresponding
uncollected account at the time of repossession was P7,750.

The total realized gross profit on installment sales in 20x4

A. P129,262.50 C. P120,262.50
B. P 85,500.00 D. P 85,000.00

The gain or (loss) on repossession in 20x4:

A. P(1,262.50) C. P1,200.00
B. P1,262.50 D. P1,250.00

20. Jane Corporation started operations on January 1, 20x3 selling home appliances and furniture sets
both for cash and on installment basis. Date on the installment sales operation of the company
gathered for the years ending December 31, 20x3 and 20x4 were as follows:

20x3 20x4
Installment sales P400,000 P500,000
Cost of installment sales 240,000 350,000
Cash collected on installment sales:
20x3 installment contracts 210,000 150,000
20x4 installment contracts 300,000

Additional information:

On January 5, 20x5 an installment sale in 20x3 was defaulted and the merchandise with an
appraised value of P5,000 was repossessed. Related installment receivable balance on January 5,
20x5 was P8,000.

The balance of Deferred Gross Profit on December 31, 20x4:

A. P130,000 C. P 76,000
B. P 72,000 D. P120,000

The gain or (loss) on repossession in 20x5:

A. P200 C. P1,800
B. P(1,800) D. P(200)

21. Minnie Enterprises uses the installment method of accounting and it has the following data at year-
end:
 Gross margin on cost 66 2/3%
Unrealized gross profit P192,000
Cash collections including down payments 360,000

What was the total amount of sales on installment basis?

A. P480,000 C. P648,000
B. P552,000 D. P840,000

22. Francis, Inc. began operating of the calendar year 20x4, and using the installment method of
accounting, presented the following data for the first year:

Installment sales P400,000

Gross margin based on cost 66 2/3%
Inventory, Dec. 31, 20x4 80,000
General and administrative expenses 40,000
Accounts receivable, Dec. 31, 20x4 320,000

The balance of the deferred gross profit account, end of 20x4 should be:
A. P192,000 C. P96,000
B. P128,000 D. P80,000

23. These data pertain to installment sales of Marc Store:

 Down payment : 20%.

 Installment sales: P545,000 in 20x2; P785,000 in 20x3; and P968,000 in 20x4.
 Mark-up on cost: 35%.
 Collections after down payment: 40% in the year of sale, 35% in the year after, and 25%
in the third year.

The Installment Accounts Receivable at the end of 20x4:

A. P621,640 C. P464,640
B. P460,640 D. P620,640

The total unrealized gross profit at the end of 20x4:

A. P217,547 C. P161,166
B. P217,574 D. P160,166

26. Vivien Sales Co. employs the perpetual inventory basis in its accounting for new cars. On August
15, 20x3, a new car was sold to Mercy with a list price of P220,000 costing P165,000. It granted
Mercy an allowance of P85,000 for her old car as trade-in, the current value of which was estimated
to be P81,700. The balance of P135,000 was payable as follows: Cash at time of purchase P35,000,
balance in 20 monthly payment of P5,000, first payment being made on September 1, 20x3. On
April 1, 20x4, Mercy defaulted in the payment of March 1, 20x4 installment. The new car sold was
repossessed; its value to the seller is P40,000. (Use two decimal places for gross profit percentage)

The total realized gross profit on installment sales in 20x3:

A. P32,617 C. P30,617
B. P37,889 D. P87,966

The gain (loss) on repossession in 20x4:

A. P(15,811) C. P(13,298)
B. P(10,298) D. P13,298

29. Mr. Co is a dealer in appliance who sells on an installment basis. A refrigerator which originally
cost P9,240 was sold by him for P16,500 to Pedro who made a down payment of P2,200, but
 defaulted in subsequent payments.

Mr. Co repossessed the refrigerator at an appraised value of P4,600. To improve its salability, he
expended P600 for reconditioning. He was able to sell the refrigerator to Henry for P10,000 at a
downpayment of the first installment of P2,500.

The realized gross profit from the installment sale – Pedro:

A. P968 C. P 908
B. P264 D. P2,304

The realized gross profit from the second installment sale – Henry are:
A. P1,350 C. P1,200
B. P1,250 D. P1,150

(with present value factor)

Items 48 through 53 are based on the following information:

Pangasinan Industrial sells machinery on the installment plan. On September 1, 20x4, Pangasinan
entered into an installment sale contract with Dagupan Productions for a six-year period. Equal
annual payments under the installment sale are P187,500 and are due on August 31 of each year
beginning in 20x5.

Additional information:
(a) The cost of the machinery sold to Dagupan was P637,500.
(b) The implicit interest rate on the installment sale is 10%.

Pangasinan Industrial uses calendar year as a result of the above transaction and use effective-
interest rate method of amortizing any discount.

The present value factors at 10% for six periods are as follows:

Year PV of P1 PV of an annuity of P1
1 .9091 .9091
2 .8264 1.7355
3 .7513 2.4869
4 .6830 3.1699
5 .6209 3.7908
6 .5645 4.3553
48. Assuming tat circumstances are such that the collection of the installments due under the contract is
reasonably assured, compute the realized gross profit on installment sales for 20x4 (rounded):
A. Zero C. P179,119
B. P81,250 D. P487,500

49. Using the same information above, compute the total income for 20x4 (rounded):
A. P 27,221 C. P206,340
B. P108,471 D. P541,721

50. Using the same information above, compute the total income for 20x5 (rounded):
A. P71,221 C. P206,340
B. P78,134 D. P257,433

51. Assuming that circumstances are such that the collection of the installments due under the contract
cannot be reasonably assured, compute the realized gross profit on installment sales for 20x4
(rounded):
A. Zero C. P179,119
B. P81,250 D. P487,500
52. Using the same information above, compute the total income for 20x4 (rounded):
A. P27,221 C. P206,340
B. P108,471 D. P541,721

53. Using the same information above, compute the total income for 20x5 (rounded):
A. P 78,134 C. P102,194
B. P101,418 D. P119,384

55. Cherry has been using the cash method to account for income since its first year of operation in
20x3. All sales are made on credit with notes receivable given by customers. The balances due on
the notes, at the end of each year, were as follows:

20x3 20x4
Notes receivable 20x3 P108,000 P 72,000
Notes receivable 20x4 120,000
*Discount on notes receivable 20x3 14,000 12,000
*Discount on notes receivable 20x4 16,000

*Discount on notes receivable is popularly known as unearned interest income.

The income statements for the years 20x3 and 20x4 included the following amounts:

20x3 20x4
Revenue – collections on principal P 64,000 P100,000
Revenue – interest 7,000 11,000
Cost of goods purchased* 100,850 105,250

*Includes increase in inventory –

P10,000 in 20x3 & P16,000 in 20x4.

The realized gross profit for the year 20x3, assuming the use of installment method of accounting:
A. P27,200 C. P27,000
B. P23,149 D. P23,000

The realized gross profit for the year 20x4, assuming the use of installment method of accounting:
A. P45,800 C. P37,378
B. P37,000 D. P45,000

56. The Narda Motors Company makes all sales on installment contracts and accordingly reports income
on the installment basis. Installment contracts receivables are accounted for by years. Defaulted
contracts are recorded by debiting Loss on Repossession account and crediting the appropriate
Installment Contract Receivable account for the unpaid balance at the time of default. All
repossessions and trade-ins are recorded at realizable values. The following data relate to the
transactions during 20x3 and 20x4.

20x3 20x4
Installment sales P150,000 P198,500
Installment contract receivable, 12/31
20x3 sales 80,000 25,000
20x4 sales 95,000
Purchases 100,000 120,000
New merchandise inventory, 12/31 at cost 10,000 26,000
Loss on repossessions 6,000

The company auditor disclosed that the inventory taken on December 31, 20x4 did not include
certain merchandise received ad trade-in on December 2, 20x4 for which an allowance was given.
 The appraised value of the merchandise is P1,500 which was also the allowance on the trade-in. No
entry was made to record this merchandise on the books at the time it was received. At the time of
default, the repossessed merchandise had an appraised value of P2,500. The repossessed
merchandise was neither recorded nor included in the physical inventory on December 31, 20x4.

The total realized gross profit on sales in 20x4:

A. P70,000 C. P50,400
B. P60,000 D. P19,600

The gain or loss on repossession:

A. P 100 C. P(1,100)
B. P(1,000) D. P3,500

61. The following selected accounts are taken from the trial balance on December 31, 20x4 of Bohol
Company:
Accounts receivable – charge sales P 75,000
Installment receivables – 20x2 15,000
Installment receivables – 20x3 45,000
Installment receivables – 20x4 270,000
Merchandise inventory 52,500
Purchases 390,000
Freight –in 3,000
Repossessed merchandise 15,000
Repossession loss 24,000
Cash sales P 90,000
Charge sales 180,000
Installment sales 446,400
Deferred gross profit – 20x2 22,200
Deferred gross profit – 20x3 39,360

Additional information:
a. Gross profit rate on 20x2 installment sales was 30% and for 20x3, the rate was 32%.
b. Installment sales prices exceed cash sales prices by 24% while charge sales prices exceed
cash sales prices by 20%.
c. The entry for repossessed goods was:
Repossessed merchandise P15,000
Repossession loss 24,000
Installment receivables – 20x2 P18,000
Installment receivables – 20x3 21,000
d. Merchandise on hand at the end of 20x4 (new and repossessed) was P70,500.

If all sales were on cash basis, the total sales for 20x4
A. P600,000 C. P516,328
B. P700,000 D. P800,000

The cost of goods sold on installment sales for 20x4:

A. P272,160 C. P390,000
B. P234,000 D. P267,624

62. Using the same information above, the cash collections on Installment Sales for –

20x2
A. P89,000 C. P41,000
B. P74,000 D. P33,000

20x3
A. P168,000 C. P57,000
 B. P123,000 D. P66,000

20x4
A. P176,400 C. P170,000
B. P174,600 D. P160,000

63. The following data were taken from the records of Francis Company, before the accounts are closed
for the year 20x4. The company sells exclusively on the installment basis and uses the installment
method of recognizing profit.

20x2 20x3 20x4

Installment sales P400,000 P440,000 P420,000
Cost of installment sales 240,000 272,800 256,200
Operating expenses 100,000 94,000 104,000
Balances as of Dec. 31:
Inst. Contracts Rec’ble 20x2. 220,000 110,000 28,000
Inst. Contracts Rec’ble 20x3. 250,000 92,000
Inst. Contracts Rec’ble 20x4. 238,000
Deferred gross profit – 20x2 . 44,000 44,000
Deferred gross profit – 20x3. 95,000 95,000

During 20x4, because the customers can no longer be located, the company wrote off P9,000 of the
20x2 accounts and P2,800 of the 20x3 accounts as uncollectible, and the entry made was:

Operating expenses P11,800

Installment contracts receivable 20x2 P9,000
Installment contracts receivable 20x3 2,800

Also during 20x4 a customer defaulted and the company repossessed merchandise appraised at
P4,000 after costs of reconditioning estimated at p400. The merchandise had been purchased in 20x2
by a customer who still owed P5,000 at the date of repossession. The entry made was:

Inventory of repossessed merchandise P 5,000

Inst. Contracts receivable 20x2 P 5,000

The total realized gross profit on installment sales for the year 20x4
A. P157,156 C. P 86,176
B. P 70,986 D. P151,756

The gain or loss on repossession:

A. P(960) C. P960
B. P(600) D. P600

64. Using the same information above. The correcting entry for write offs:
A. Deferred gross profit – 20x2 P3,600
Deferred gross profit – 20x3 1,064
Operating expenses P4,664

B. Deferred gross profit 4,664

Operating expenses 4,664

C. Realized gross profit 4,664

Operating expenses 4,664

D. Operating expenses 4,664

Deferred gross profit – 20x2 3,600
Deferred gross profit – 20x3 1,064
68. For financial statement purposes, the installment method of accounting may be used if the:
A. Collection period extend over more than 12 months.
B. Installments are due in different years.
C. Ultimate amount collectible is indeterminate.
D. Percentage-of-completion method is inappropriate.

69. Marc Co. produces expensive equipment for sale on installment contracts. When there is doubt
about eventual collectability, the income recognition method least likely to overstate income is:
A. At the time the equipment is completed.
B. The installment method.
C. The cost recovery method.
D. At the time of delivery.

70. According to the cost recovery method of accounting, gross profit on an installment sale is
recognized as income:
A. After cash collections equal to the cost of sales have been received.
B. In proportion to the cash collections.
C. On the date the final cash collection is received.
D. On the date of sale.

CONSTRUCTION ACCTG.

48-9 pas 11

1.A fixed price contract is a contract in which the contractor

I - Agrees to a fixed contract price or a fixed rate per unit of output which in some cases is
subject to a cost escalation clause.

II- Is reimbursed for allowable or otherwise defined costs plus a percentage of such costs or a
fixed fee.

A. I only C. Both I and II

B. II only D. Neither I nor II

2. Contract revenue in construction contract comprises

A. The initial amount of revenue agreed in the contract only.
B. Variation in contract work, claim and incentive payment only.
C. The initial amount of revenue agreed in the contract.
D. The initial amount of revenue agreed in the contract and progress billings.

3. A variation is
A. An instruction by the customer for a change in the scope of work to be performed under
the contract.
B. An amount that the contractor seeks to collect from the customer as reimbursement for cost not
included in the contract.
C. An additional amount paid to the contractor if specified performance standards are met.
D. The initial amount of revenue agreed in the contract.

4. The measurement of contract revenue is affected by a variety of uncertainties that depend on the
outcome of future events. Which statement is incorrect?

A. A contractor and a customer may agree on variations and claims that increase or decrease
contract revenue subsequently.
 B. The amount of revenue agreed in a fixed price contract may increase as a result of cost
escalation clause.
C. The amount of revenue may increase as a result of penalties arising from delays caused by
the contractor in the completion of the contract.
D. When a fixed price contract involves a fixed price per unit of output, contract revenue increases
as the number of units is increased.

5. Contract costs of a construction contract comprise all of the following, except

A. Costs that directly relate to the specific contract.
B. Costs that are attributable to contract activity in general and can be allocated to the contract.
C. Such other costs that are specifically chargeable to the customer under the terms of the contract.
D. General administration costs for which reimbursement is not specified in the contract.

6. Which statement is incorrect when the outcome of construction contract cannot be estimated
reliably?
A. Revenue shall be recognized only to the extent of contract costs incurred that it is probable will
be recoverable.
B. Contract costs shall be recognized as an expense in the period in which they are incurred.
C. An expected loss on the construction contract shall be recognized as an expense immediately.
D. Contract revenue and contract costs shall be recognized by reference to the stage of
completion of the contract activity on balance sheet date.

7. The recognition of revenue and expenses by reference to the stage of completion of a contract is
often referred to as
A. Percentage of completion method
B. Cost recovery method
C. Accrual method
D. Production method

8. the percentage of completion of a construction contract is based on all of the following, except
A. The proportion that contract costs incurred for work performed to date bear to the estimated total
contract costs.
B. Survey of work performed.
C. Completion of a physical proportion of the contract work.
D. Progress payments and advances received from customers.

9. According to PAS 11, an entity shall disclose all of the following, except
A. The method used to determine the stage of completion
B. The method used to determine the contract revenue recognized in the period.
C. Advances received in cash, analyzed according to each material contract.
D. Total amount of contract revenue recognized in the period.

10. The effect of a change in the estimate of contract revenue and contract cost is accounted for as
A. Change in accounting estimate
B. Change in accounting policy
C. Prior period error
D. Component of equity

48-10
1.In selecting an accounting method for a newly contracted long-term construction project, the principal
factor to be considered should be
A. The terms of payment in the contract.
B. The degree to which a reliable estimate of the progress toward contract completion is
practicable.
C. The method commonly used by the contractor to account for other long-term construction
contracts.
D. The inherent nature of the contractor’s technical facilities used in construction.
 E.
2. The calculation of the income recognized in the first year of a four-year construction contract
accounted for using the percentage of completion method is generally based on the ratio of
A. Total estimated costs to estimated costs to complete
B. Total estimated costs to actual costs incurred to date
C. Actual costs incurred to date to total estimated costs
D. Estimated costs to complete to total estimated costs

3. In accounting for a long-term construction contract using the percentage of completion method, the
amount of income recognized in any year would be added to
A. Deferred revenue
B. Progress billings on contracts
C. Construction in progress
D. Property, plant and equipment

4. When should an expected loss on a long-term contract be recognized?

Cost recovery Percentage of completion

A. Immediately Over life of project
B. Immediately Immediately
C. Contract complete Over life of project
D. Contract complete Immediately

5. In accounting for a long-term construction contract using the percentage of completion method, the
progress billings on contracts account is a
A. Contra current asset account
B. Contra noncurrent asset account
C. Noncurrent liability account
D. Revenue account

1.Marg Inc. has entered into a very profitable fixed price contract for constructing a high-rise building
over a period of three years. It incurs the following costs relating to the contract during the first year:

 Cost of material = P2.5 million

 Site labor cost = P2.0 million
 Agreed administrative costs as per contract to be reimbursed by the customer = P1
million.
 Depreciation of the plant used for the construction = P0.5 million.
 Marketing costs for selling apartments, when they are ready = P1.0 million.

Total estimated cost of the project = P18 million.

The percentage of completion of this contract at the year-end is:

A. 33 1/3% (= 6.0/18.0) C. 25% (= 4.5/18.0)
B. 27% (= 4.5/16.5) D. 39% (= 7.0/18)
2. Marc Construction, Inc. is executing a gigantic project of constructing the tallest boarding house
in the country. The project is expected to take three years to complete.

The company has signed a fixed price contract of P12,000,000 for the construction of this
prestigious boarding house.

The details of the costs incurred to date in the first year are:

Site labor costs P1,000,000

Costs of construction material 3,000,000
Depreciation of special plant and equipment used in
constructing to build the boarding house 500,000
 Marketing and selling costs to get the boarding house in
the country the right exposure 1,000,000
Total P5,000,000

Total contract cost estimated to complete P5,500,000

The revenue to be recognized:

A. P5,400,000 C. P6,000,000
B. P5,000,000 D. P6,400,000

The costs to be recognized:

A. P4,500,000 C. P4,000,000
B. P5,500,000 D. P5,000,000

The profit (loss) to be recognized:

A. P900,000 C. P1,500,000
B. P(100,000) D. P 850,000

5.Dennis Construction Company uses the percentage-of-completion method of accounting. During 20x4,
Dennis contracted to build an apartment house for Marjorie for P10,000,000. Dennis estimated that
the total costs would amount to P8,000,000 over the period of construction. In connection with this
contract, Dennis incurred P1,000,000 of construction costs during 20x4. Dennis billed and collected
P1,500,000 from Marjorie in 20x4. How much gross profit should Dennis recognize in 20x4?
A. P300,000 C. P187,500
B. P250,000 D. P125,000

6.LG Builders, Inc. has consistently used the percentage-of-completion method of accounting for
construction-type contracts. During 20x3, LG started work on a P9,000,000 fixed-price construction
contract that was completed in 20x4. LG’s accounting records disclosed the following:

12/31/20x3 12/31/20x4
Cumulative contract costs incurred P3,900,000 P6,300,000
Estimated total costs at completion 7,800,000 8,100,000

How much income would LG have recognized on this contract for the year ended December 31,
20x4?
A. P100,000 C. P600,000
B. P300,000 D. P700,000

7.DG Construction Corporation contracted to construct a building for P400,000. Construction began in
20x3 and was completed in 20x4. Data relating to the contract are summarized below:

Year ended December 31,

20x3 20x4
Costs incurred P200,000 P110,000
Estimated costs to complete 100,000 -

DG uses the percentage-of-completion method as the basis for income recognition.

For the year ended December 31, 20x3, DG should report recognized revenue of:
A. P66,667 C. P100,000
B. P 0 D. P266,667

For the year ended December 31, 20x4, DG should report recognized revenue of:
A. P 23,333 C. P 90,000
B. P400,000 D. P133,333
8. RG Construction Company has consistently used the percentage-of- completion method of
recognizing income. During 20x3, RG started work on a P3,000,000 construction contract which
was completed in 20x4. The accounting records provided the following data:

20x3 20x4
Progress billings P1,100,000 P1,900,000
Costs incurred each year 900,000 1,800,000
Collections 700,000 2,300,000
Estimated cost to complete 1,800,000

How much income should RG have recognized in 20x4?

A. P100,000 C. P150,000
B. P110,000 D. P200,000

9. RST Construction Company has consistently used the percentage-of-completion method. On January
10, 20x3, RST began work on a P6,000,000 construction contract. At the inception date, the
estimated cost of construction was P4,500,000. The following data relate to the progress of the
contract:

Income recognized at 12/31/ 20x3 P 600,000

Costs incurred 1/10/20x3 through 12/31/20x4 3,600,000
Estimated cost to complete at 12/31/20x4 1,200,000

How much income should RST recognize for the year ended December 31, 20x4?
A. P300,000 C. P600,000
B. P525,000 D. P900,000

11. The following information relates to a flood control project of GG Construction Co. which started in
20x3 and completed in 20x4:

Costs incurred to-date: Estimated total cost on completion:

As at June 30, 20x3 P 9,750,000 As at June 30, 20x3 P19,500,000
As at June 30, 20x4 15,750,000 As at June 30, 20x4 20,250,000

The project is a P22,500,000 fixed-price construction contract, and GG uses the percentage-of-
completion method of revenue accounting. On June 30, 20x4, how much income would GG report
on the project?
A. P250,000 C. P750,000
B. P300,000 D. P900,000

12. During 20x3, Marc Corporation started a construction job with a total contract price of P600,000.
Any costs incurred are expected to be recoverable. The job was completed on December 15, 20x4.
Additional data are as follows:

20x3 20x4
Actual costs incurred P225,000 P255,000
Estimated remaining costs 225,000 -
Billed to customer 240,000 360,000
Received from customer 225,000 375,000

Under the cost recovery method of construction accounting (zero-profit approach) what amount
should Marc recognize as gross profit for 20x3:
A. P 0 C. P225,000
B. P75,000 D. P120,000

Under the cost recovery method of construction accounting (zero-profit approach) what amount
 should Marc recognize as gross profit for 20x4
A. P 0 C. P225,000
B. P75,000 D. P120,000

13. The following data relate to a construction job started by JJ Company during 20x4:

Total contract price P100,000

Actual costs during 20x4 20,000
Estimated remaining costs 40,000
Billed to customer during 20x4 30,000
Received from customer during 20x4 20,000

Any costs incurred are expected to be recoverable. Under the cost recovery method-construction
accounting (zero-profit approach), what amount should JJ Company recognize as gross profit for
20x4?
A. P 0 C. P10,000
B. P4,000 D. P12,000

14. The Kim Construction Company has consistently used the cost recovery method- construction
accounting method of recognizing income (zero-profit approach).

In 20x3, it began construction project to erect a building for P3,000,000. The project was completed
during 20x4. Under this method, the accounting records disclosed the following (any costs incurred
are expected to be recoverable).

20x3 20x4
Progress billings during the year P1,100,000 P1,900,000
Costs incurred during the year 900,000 1,800,000
Collections on billings during the year 900,000 2,100,000
Estimated costs to complete the project 1,800,000 -

The company should recognized revenue for the year 20x3 amounting to:
A. P 0 C. P 700,000
B. P900,000 D. P1,000,000

The company should recognized revenue for the year 20x4 amounting to:
A. P3,000,000 C. P 0
B. P2,100,000 D. P2,000,000

15. The DG Corporation uses the percentage-of-completion method of recognizing income from long-
term construction contracts. In 20x2 DG entered into a fixed-price contract to construct a bridge for
P30,000,000. Estimated costs to complete the construction and contract costs incurred up to 20x4
were as follows:
Cumulative costs incurred Estimated costs to complete
As of December 31, 20x2 P 2,000,000 P16,000,000
As of December 31, 20x3 11,000,000 11,000,000
As of December 31, 20x4 20,000,000 4,000,000

What is the percentage of completion during the year 20x4?

A. 25.00% C. 50.00%
B. 33.33% D. 83.33%

16. The October 1, 20x2, Francis Corp. enters a contract to build a sports arena which is estimated
would cost P3,120,000. Francis bills its clients at cost plus 20% and recognized construction revenue
on a percentage-of-completion basis. Data on this project for 20x2, 20x3 and 20x4 follow:
 Costs Incurred Est’d Costs to Complete
20x2 P 546,000 P2,054,000
20x3 998,400 1,315,600
20x4 1,575,600 -

Francis Corp’s gross profit on the project for 20x4 is:

A. P146,640 C. P237,160
B. P477,360 D. P624,000

17. The Santos Construction Company started work on three job sites during the current year. Any costs
incurred are expected to be recoverable. Data relating to the three jobs are given below:

Site Contract Costs Estimated costs Billings Collections on

Price Incurred to complete on contract contract
Bohol P500,000 P375,000 P500,000 P500,000
Manila 700,000 100,000 P400,000 100,000 100,000
La Union 250,000 100,000 100,000 150,000 100,000

What would be the amount of construction in progress to be reported on the year-end balance sheet if
the percentage-of-completion method is used?
A. P765,000 C. P265,000
B. P125,000 D. P225,000

What would be the amount of construction in progress to be reported on the year-end balance sheet
if the cost recovery method of construction accounting (zero-profit approach) is used?
A. P700,000 C. P265,000
B. P765,000 D. P200,000

18. Matt Builders Company began operations on January 1, 20x4. During the year, Matt entered into a
contract with Pia Company to construct a manufacturing facility. At that time, Matt estimated that it
would take five years to complete the facility at a total cost of P4,800,000. The contract price for
construction of the facility is P5,800,000.

During 20x4, Matt incurred P1,250,000 in construction costs related to the project. Because of rising
material and labor costs, the estimated cost to complete the contract at the end of 20x4 is P3,750,000.
Pia Company was billed for and paid 30% of the contract price in accordance with the contract
agreement. It is further agreed, that any costs incurred is expected to be recoverable.

The amount of construction in progress (net) – due from customers or progress billings (net) – due to
customers using cost recovery method of construction accounting (zero-profit approach):
A. P290,000 due to C. P490,000 due to
B. P 0 due from D. P490,000 due from

The amount of construction in progress (net) – due from customers or progress billings (net) – due
to customers using percentage-of-completion method:
A. P490,000 due from C. P290,000 due to
B. P 0 due to D. P290,000 due from

19. Dale Construction Company has consistently used the percentage-of-completion method of
recognizing income. During 20x3, Dale entered into a fixed-price contract to construct an office
building for P10,000,000. Information relating to the contract is as follows:

12/31/20x3 12/31/20x4
Percentage of completion 20% 60%
Estimated total cost at completion P7,500,000 P8,000,000
Income recognized (cumulative) 500,000 1,200,000
 Contract costs incurred during 20x4 were
A. P3,200,000 C. P3,500,000
B. P3,300,000 D. P4,800,000

20. Gale Co. recognizes construction revenue and expenses using the percentage-of-completion method.
During 20x3, a single long-term project was begun, which continued through 20x4. Information on
the project follows:

20x3 20x4
Accounts receivable from construction contract P100,000 P300,000
Construction expenses 105,000 192,000
Construction in progress 122,000 364,000
Partial billings on contract 100,000 420,000

Profit recognized from the long-term construction contract in 20x4 should be:
A. P 50,000 C. P128,000
B. P108,000 D. P228,000

35. Melanie Construction Co. was engaged on October 1, 20x4 to construct a building for a contract
price of P8,400,000 payable in 5 installments. One-fifth of the contract price was to be paid upon
completion of each quarter of the work (as defined in detail by the terms of the contract), the final
payment being due within 10 days after acceptance of the completed project.

By December 29, 20x4, 3/4 of the building had been completed whereupon the third billing was
made in accordance with the terms of the contract (cash had been received on the previous billings).
During 20x4, a total of P4,200,000 had been disbursed by Melanie for costs incurred and, at year-
end, outstanding accounts payable for materials purchases totaled P1,000,000. Melanie expected that
an additional P1,800,000 would be required to complete the project.

Using percentage-of-completion method on an output basis proportional method, the gross profit to
be recognized in the 20x4 income statement would be:
A. P 950,000 C. P1,050,000
B. P1,040,000 D. P1,100,000

36. Using the same information above, the percentage-of-completion output method-actual costs
approach, the gross profit to be recognized in 20x4 income statement would be:
A. P 950,000 C. P1,050,000
B. P1,040,000 D. P1,100,000

37. JJ Construction Co. has two projects for which it reported, as of December 31, 20x4, the following
information:

In thousand pesos: Proj. A Proj. B

Contract price P4,800 P860

20x3: Costs incurred P3,400
Per cent completed 75%
20x4: Costs incurred P1,250 P140
Per cent completed 25% 15%

Using percentage-of-completion method of revenue recognition, gross profit on Project A to be

recognized in 20x3:
A. P200,000 C. P400,000
B. P300,000 D. P900,000

38. Which of the following would be used in the calculation of the income recognized in the fourth and
 final year of a contract accounted for by the percentage-of-completion method?

Actual Total Costs Income previously recognized

A. Yes Yes
B. Yes No
C. No Yes
D. No No

39. A company uses the percentage-of-completion method to account for a four-year construction
contract. Which of the following would be used in the calculation of the income recognized in the
first year?

Progress billings Collections on progress billings

A. Yes Yes
B. Yes No
C. No No
D. No Yes

40. A company uses the Cost Recovery Method of Construction Accounting method (or Zero-profit
approach) to account for a four-year construction contract which is presently in its third year.
Progress billings were recorded and collected in the third year. Based on events occurring in the
third year, there is now an anticipated loss on the contract. When would the effect of each of the
following be reported in the company’s income statement?

Third year progress billings Anticipated loss

A. Not third year Third year
B. Not third year Fourth year
C. Third year Third year
D. Third year Fourth year

41. When should an anticipated loss on a long-term contract be recognized under the percentage-of-
completion method and the Cost Recovery Method of construction accounting (or Zero-profit
approach), respectively?

Percentage-of-completion Cost Recovery Method of construction accounting

A. Over life of project Contract complete
B. Immediately Contract complete
C. Over life of project Immediately
D. Immediately Immediately

42. If the construction in progress account has a balance of P1,000,000 while the Progress Billings on
Contracts account’s balance is P800,000, how should these accounts be reflected on the balance
sheet ?
A. Construction in progress will be shown as a current asset.
B. Progress Billings on Contracts will be shown as a current liability.
C. The difference between the two accounts will be reflected as a current asset.
D. The difference between the two accounts will be reflected as a current liability.

FRANCHISE ACCOUNTING

1.On January 1, 20x4, RG Enterprises, Inc. authorized MD Company to operate as a franchisee over a
twenty-year period for an initial franchise fee of P60,00 received on signing the agreement. MD
started operations on June 30,20x4, by which date RG had performed all of the required initial
services. In its income statement for the six-months ended June 30, 20x4, what amount should RG
report as revenue from franchise fees in connection with MD franchise?
A. P 0 C. P30,000
B. P1,500 D. P60,000
2. On January 3, 20x4, Pam Services, Inc. signed an agreement authorizing Cane Company to operate
as a franchisee over a 20-year period for an initial franchise fee of P50,000 received when the
agreement was signed. Cane commenced operations on July 1, 20x4, at which date all of the initial
services required of Pam had been performed. The agreement also provides that Cane must pay
annually to Pam a continuing franchise fee equal to 5% of the revenue from the franchise. Cane’s
franchise revenue for 20x4 was P400,000. For the year ended, December 31, 20x4, how much
should Pam record as revenue from franchise fees in respect of the Cane’s franchise?
A. P70,000 C. P45,000
B. P50,000 D. P22,500

3.On December 31, 20x4, Ram, Inc. authorized Fe to operate as a franchisee for an initial franchise fee
of P75,000. Of this amount, P30,000 was received upon signing the agreement, and the balance,
represented by a note, is due in three annual payments of P15,000 each, beginning December 31,
20x4. The present value on December 31, 20x3 of the three annual payments appropriately
discounted is P36,000. According to the agreement, the nonrefundable downpayment represents a
fair measure of the services already performed by Ram, however, substantial future services are
required of Ram. Collectability of the note is reasonably certain. On December 31, 20x3, Ram
should record unearned franchise fees in respect of the Fe franchise of
A. P 0 C. P45,000
B. P36,000 D. P75,000

4.On December 31, 20x4, Roy, Inc. authorized Gale 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, is due in three annual payments of P30,000 each beginning December 31,
20x4. The present value on December 31, 20x4, of the three annual payments appropriately
discounted is P72,000. According to the agreement, the nonrefundable downpayment represents a
fair measure of the services already performed by Roy, however, substantial future services are
required of Roy. Collectibility of the note is reasonably certain. In Roy’s December 31, 20x4,
balance sheet, unearned franchise fees from Gale’s franchise should be reported as
A. P 90,000 C. P150,000
B. P132,000 D. P 72,000

5.On December 331, 20x4, Plum Inc. signed an agreement authorizing Zet Company to operate as a
franchisee for an initial franchise fee of P50,000. Of this amount, P20,000 was received upon
signing of the agreement and the balance is due in three annual payments of P10,000 each beginning
December 31, 20x5. The agreement provides that the downpayment (representing a fair measure of
the services already performed by Plum) is not refundable and no substantial future services are
required to be performed by Zet. Company’s credit rating is such that collection of the note is
reasonably assured. The present value at December 31, 20x4 of the three annual payments
discounted at 14% (the implicit rate for a loan of this type) is P23,220. On December 31, 20x4,
Plum should record unearned franchise fees of
A. P 0 C. P43,220
B. P23,220 D. P30,000

7.On May 1, 20x4, Marc received P200,000 from Francis representing the down payment on the
franchise agreement signed on that date. Francis issued promissory notes for the balance of
P1,000,000, payable in four equal semi-annual installments due on November 20, 20x4 at an
aggregate cost of P900,000. The first semi-annual installment due on November 30, 20x4 was
appropriately paid by Francis. Accordingly, Marc uses the accrual method in recording franchise
revenue. In its December 31, 20x4 financial statements, how much would Marc report as deferred
franchise revenue for the year?
A. P 0 C. P600,000
B. P300,000 D. P750,000

8. Jaypee Inc. enters into an agreement with Ron’s Co., clothing the latter with full authority to operate
as its franchise for a period of ten years. An initial franchise fee of P275,000, among others, was
 stipulated in the contract and was promptly paid during the year 20x4.

Assuming that Jaypee was able to perform the initial services during 20x4, what is the franchise
revenue to be recognized in its year-end income statement?
A. P 0 C. P137,500
B. P27,500 D. P275,000

10. On September 30, 20x4, Cathy Inc. received from Amy P550,000 representing franchise fee.
Franchise services were immediately started by Cathy’s and these were completed on October 31,
20x4 at cost amounting to P330,000. The franchise fee revenue to be reported by Cathy’s in its
October 31, 20x4 income statement is:
A. P 0 C. P220,000
B. P137,500 D. P550,000

13. John, Inc. awarded its franchise for a total fee of P250,000, payable P50,000 at the time the contract
is signed and the balance in two equal installments after each year following the signing date. The
agreement was signed at the end of 20x4 and it provided, among others, that in the event the first
year’s operation prove to be unprofitable the franchise agreement maybe voided. So far, no services
has yet been performed. In 20x4, John would report franchise for revenue of:
A. P 0 C. P150,000
B. P50,000 D. P250,000

17. Flor entered into a franchise agreement with Ram. As per agreement on July 1, 20x4, Ram is to pay
Flor an up-front franchise fee of P1,000,000 and subsequent annual franchise fees of P50,000 over
next four years. Cost of initial franchise services rendered by Flor’s during the year is P250,000
which is substantial, and it estimates the cost of subsequent annual services to be P10,000. Ram paid
the annual franchise fee for 20x5, and Flor’s rendered the services for the year. In its December 31,
20x5 income statement, the amount of realized franchise fee revenue to be reported by Flor’s is:
A. P25,000 C. P250,000
B. P50,000 D. P300,000

18. Mila’s Lechon, Inc. franchiser, entered into franchise agreement with Nene, franchisee, on March
31, 20x4. The total franchise fee is P500,000, of which P100,000 is payable upon signing and the
balance in four equal annual installments. The downpayment is refundable in the event the franchiser
fails to render services and none thus far had been rendered. When Mila prepares its financial
statements on March 31, 20x4, the franchise fee revenue to be reported is:
A. P 0 C. P500,000
B. P100,000 D. P400,000

19. Ruth Corporation enters into a franchise agreement with Rose on June 1, 20x3. As per agreement,
Rose is to pay Ruth an up-front franchise fee of P1,000,000 and subsequent annual franchise fees of
P50,000 over the next four years. Cost of initial franchise services rendered by Ruth during the year
is P250,000 and estimates the cost of subsequent annual services to be P100,000. Ruth expects a
profit of 20% on subsequent services. Rose paid the annual fee for 20x4 and Ruby rendered annual
services for that year. In its December 31, 20x4, income statements, the realized franchise revenue to
be reported by Ruth is:
A. P145,000 C. P245,000
B. P 50,000 D. P 20,000

20. On December 29, 20x4, Pie Shop signed a franchising agreement for the operation of an outlet in
Dagupan City by Pia Co. the franchising agreement required the franchisee, Pia Co., to make an
initial payment of P200,000 upon signing of the contract and three payments each of P100,000
beginning one year from the agreement date and yearly thereafter. The franchisor agrees to make
market studies, find a suitable location, train employees, and perform some other related services by
next year. The initial payment is refundable until substantial performance is effected. At the end of
20x4, Pie Shop should report franchise fee revenue of:
A. P 0 C. P200,000
 B. P125,000 D. P500,000

21. At the beginning of the year, MD dot the franchise of RLG’s, 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 at the end of the current
year. At present value using 12% as discount rate, the four installments would approximate
P199,650. The fees once paid are refundable. The franchise may be cancelled subject of the
provisions of the agreement. Should there be unpaid franchise fee attributed to the balance of main
fee (P500,000), 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 Credit Investigation Bureau rated MD as AAA credit rating. The balance of the franchise fee
was guaranteed by a commercial bank.

The first year of operations yielded gross sales of P9,000,000, RLG’s earned franchise fees for the
first year is:
A. P550,000 C. P749,650
B. P450,000 D. P950,000

22. RG Enterprises, a franchisor, charges franchisees a “franchise fee” of P500,000. Of this amount, a
nonrefundable P200,000 is paid upon the signing of the contract with the balance payable in three
equal installments after each year thereafter. RG will assist in locating a suitable business site,
conduct a market study, oversee the construction of facilities, and provide initial training for
employees.

On December 1, 20x4, RG signed a franchising agreement for the U-belt area. By the end of 20x4, it
was determined that the substantial performance of the initial services had cost RG a total of
P150,000 and that collection of the balance of the franchise fee has been reasonably assured.

In its 20x4 income statement, RG should report franchise revenue of

A. P500,000 C. P400,000
B. P 0 D. P350,000

In its 20x4 income statement, RG should report franchise revenue of

A. P350,000 C. P 0
B. P500,000 D. P400,000

25. Joy Corporation grants a franchise to Happy for an initial franchise fee of P1,000,000. The
agreement provides that Joy has the option within one year to acquire franchisee’s business, and it seems
certain that Joy will exercise this option. On Joy’s books, how should the initial fee be recorded?
A. Deferred and treated as reduction in Joy’s investment when the option is exercised.
B. Realized revenue
C. Extraordinary revenue
D. Deferred revenue to be amortized