Chapter 7 Aa 1 Sol

CHAPTER 7
SUGGESTED ANSWERS
Exercise 7-1
1
.
Contract price
Cost incurred to date
Est. cost to complete
2006
2007
2008
P50,000,000
P 7,500,000
30,000,000
P50,000,000
P34,500,000
8,625,000
Total estimated cost

Total estimated gross profit
Percentage of completion
37,500,000
P12,500,000
20%
P43,125,000
P 6,875,000
80%
P50,000,000
P40,800,000
__________
P40,800,000
P 9,200,000
100%
2006 - Recognized revenue

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

-
To be recognized this year

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

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

Cost of revenue
Gross profit
P50,000,000
40,800,000
P 9,200,000
P40,000,000
34,500,000
P 5,500,000
P10,000,000
6,300,000
P 3,700,000
2006
2007
2008
2
.
a. Construction in progress
Cash, Materials, etc.
7,500,000
b. Accounts Receivable
8,000,000
Progress Billings on Const. Contracts
27,000,000
7,500,000
6,300,000
27,000,000
36,000,000
8,000,000
6,300,000
6,000,000
36,000,000
6,000,000
AA1 - Chapter 7 (2008 edition)
page
c. Cash
Accounts Receivable
5,500,000
d. Cost of LTCC
Construction in Progress
Revenue from LTCC
7,500,000
2,500,000
33,000,000
5,500,000
11,500,000
33,000,000
27,000,000
3,000,000
10,000,000
11,500,000
6,300,000
3,700,000
30,000,000
10,000,000
d. Progress Billings on
Construction Contracts
Construction In Progress
50,000,000
50,000,000
3
.
Statement of Financial Position
Current Assets:
Accounts Receivable
P5,500,000
Current Liabilities:
Progress Billings on Construction Contracts
Less Construction in Progress
P44,000,000
40,000,000
P4,000,000
Exercise 7-2
2006
a. Construction in Progress
32,000,000
Progress Billing on Const. Contract
33,000,000
c. Cash
Accounts Receivable
31,000,000
2007
43,000,000
32,000,000
15,500,000
43,000,000
45,000,000
33,000,000
15,500,000
22,000,000
45,000,000
40,000,000
31,000,000
2008
22,000,000
29,000,000
40,000,000
29,000,000
Cost of LTCC
Revenue from LTCC
e. Progress Billing on Const. Contracts
Contract price
Estimated cost to complete
page
23,000,000
2,000,000
45,250,000
4,750,000
25,000,000
2006
P100,000,000
P 32,000,000
60,000,000
P 92,000,000
P 8,000,000
25%
22,250,000
2,750,000
50,000,000
2007
P100,000,000
P 75,000,000
16,000,000
P 91,000,000
P 9,000,000
75%
2008
P100,000,000
P 90,500,000
___________
P 90,500,000
P 9,500,000
100%

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

-

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

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

Cost of revenue
Gross profit
P100,000,000
90,500,000
P 9,500,000
P75,000,000
68,250,000
P 6,750,000
P25,000,000
22,250,000
P 2,750,000
Exercise 7-3
1
.
25,000,000
100,000,000
100,000,000
Contract price
Total estimated cost:
P25,000,000
P 4,400,000
15,600,000
20,000,000
2
.
page

Percentage of completion ( P 400,000/20,000,000)
Gross profit to be recognized in 2008
P 5,000,000
22%
P 1,100,000
Accounts Receivable
(P25,000,000 x 30% x 10%)
P 750,000
Progress Billings on Construction Contracts
(P4,400,000 + P1,100,000)
(P25,000,000 x 30%)
P5,500,000
P7,500,000
Exercise 7-4
Contract price
2006
P35,000,000
P17,500,000
10,500,000
P28,000,000
P 7,000,000
62.5%
2007
P35,000,000
P29,250,000
3,250,000
P32,500,000
P 2,500,000
90%
2008
P35,000,000
P31,000,000
P31,000,000
P 4,000,000
100%

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

-

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

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

Cost of revenue
Gross profit
2. Journal entries
P35,000,000
31,000,000
P 4,000,000
P31,500,000
29,250,000
P 2,250,000
P 3,500,000
1,750,000
P 1,750,000
2006
17,500,000
2007
11,750,000
2008
1,750,000
page
17,500,000
Progress Billing on
Const. Contracts
c. Cash
Accounts Receivable
16,000,000
d. Cost of LTCC
Rev. from LTCC
17,500,000
4,375,000
11,750,000
1,750,000
12,000,000
16,000,000
15,000,000
7,000,000
12,000,000
7,000,000
10,000,000
15,000,000
10,000,000
10,000,000
10,000,000
11,750,000
21,875,000
1,750,000
1,750,000
2,125,000
9,625,000
3,500,000
e. Progress Billing on Const. Contract

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

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

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

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

Cost of revenue
Gross profit
P35,000,000
31,000,000
P 4,000,000
P31,500,000
29,250,000
P 2,250,000
P3,500,000
1,750,000
P1,750,000
Exercise 7-5
Revenue recognized in 2008
(P26,000,000 x 40%)
P10,400,000
Gross profit/income recognized in 2008

Cost incurred in 2008
page
(P3,120,000 - P1,300,000)
1,820,000
P 8,580,000
Binondo Project
P12,000,000
12,400,000
P (400,000)
Pasig Project
P1,290,000
1,400,000
P( 110,000)
Exercise 7-6
Revenue (CP x % of work done in 2007)
Cost of revenue
Gross profit (loss)
Exercise 7-7
1. Contract revenue/price
Less Total profit
Total cost incurred
Less Cost incurred in 2006 and 2008
Cost incurred in 2007
P10,000,000
800,000
P 9,200,000
5,900,000
P 3,300,000
2. Gross profit to date, 12.31.07

Cost incurred to date, 12.31.07 (P1,800,000 + P3,300,000)
Revenue to date, 12.31.07
Percentage-of-completion (6,000,000/10,000,000)
P 900,000
5,100,000
P6,000,000
60%
3. Gross profit to date, 12.31.07

P 900,000
60%
P1,500,000
4. Contract price
Less Total estimated gross profit
Less Cost incurred to date
P10,000,000
1,500,000
P 8,500,000
5,100,000
P 3,400,000
Exercise 7-8
Cash
500,000
Notes Receivable
Discount on Notes Receivable
Unearned Franchise Fees
Exercise 7-9
1. Cash
Notes Receivable
page
1,000,000
207,540
1,292,460
4,000,000
3,000,000
513,200
6,486,800
2. Cash
Notes Receivable
(3,000,000-(2.48685 x 1,000,000)
Revenue from Franchise Fees
4,000,000
3,000,000
3. Cash
4,000,000
513,200
6,486,800
4,000,000
4. Cash
4,000,000
Notes Receivable
3,000,000
Revenue from Franchise Fees
Unearned Franchise Fees (1,000,000 x 2.48685)
Exercise 7-10
2007
July 1 - Cash
Notes Receivable
Unearned Franchise Fee
P800,000 x 3.1699 = P2,535,900
P3,200,000 - P2,535,900 = P664,100
513,200
4,000,000
2,486,800
1,200,000
3,200,000
644,100
3,735,900
page
Sept. 1 - Deferred Franchise Cost

Cash
100,000
100,000
Nov. 15 - Deferred Franchise Cost

Cash
Dec. 31 - Discount on Notes Receivable
Interest Revenue
P2,535,900 x 10% x 6/12 = P126,795
60,000
126,795
2008
Jan. 10 - Deferred Franchise Cost
Cash
100,000
60,000
126,795
100,000
15 - Unearned Franchise Fee

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

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

Interest Revenue
126,795
126,795
Problem 7-1
2007
11,000,000
Progress Billing on Const. Contract
10,800,000
c. Cash
10,000,000
2008
4,800,000
11,000,000
4,800,000
9,200,000
10,800,000
9,200,000
10,000,000
page
Accounts Receivable
10,000,000
d. Cost of LTCC
Revenue from LTCC
e. Progress Billing on Construction Contracts
11,000,000
2,750,000
13,750,000
20,000,000
Statement of Financial Position

Receivable: 2007
2008
P 800,000
-
Contract price
Income (loss) Recognized

1,000,000
1,000,000
1,000,000
6,250,000
20,000,000
P2,750,000
1,450,000
Problem 7-3
Year
2006
2007
2008
10,000,000
4,800,000
1,450,000
Problem 7-2
Statement of Recognized Income and Expenses:
Income: 2007
2008
Inventory - CIP, net of billings

2007 (13,750,000 - 10,800,000)
2008
P2,950,000
Recl ending balance
380,000
940,000
2006
P15,000,000
P 4,000,000
8,000,000
P12,000,000
P 3,000,000
33 1/3%
CIP Invty. ending balance

5,000,000
12,000,000
2007
P15,000,000
P10,000,000
2,500,000
P12,500,000
P 2,500,000
80%
Cost in excess of billings

1,200,000
2,600,000
2008
P15,000,000
P12,000,000
---------------P12,000,000
P 3,000,000
100%
page
Gross profit to date

Less Gross profit recognized in prior year/s
Gross profit to be recognized this year
P 1,000,000
_____-______
P 1,000,000
P 2,000,000
1,000,000
P 1,000,000
PROJECT A
2007
2008
P29,000,000
P29,000,000
P16,800,000
P26,400,000
11,200,000
------------P28,000,000
P26,400,000
P 1,000,000
P 2,600,000
60%
100%
P 600,000
P 2,600,000
------600,000
PROJECT B
2007
2008
P34,000,000 P34,000,000
P14,400,000 P21,200,000
17,600,000
13,000,000
P32,000,000 P34,200,000
P 2,000,000 P( 200,000)
45%
P 900,000 P( 200,000)*
-----900,000
PROJECT C
2007
2008
P17,000,000
P17,000,000
P 3,200,000
P11,830,000
9,600,000
1,170,000
P12,800,000
P13,000,000
P 4,200,000
P 4,000,000
25%
91%
P 1,050,000
P 3,640,000
---1,050,000
P 900,000
P 1,050,000
10
P 3,000,000
2,000,000
P 1,000,000
Problem 7-4
Contract price
Total estimated gross profit (loss)
Gross profit (loss) to date
Less gross profit recognized in prior
year
Gross profit - current year
600,000
P 1,000,000
P(1,100,000)
* The entire loss should be recognized immediately

(1) Percentage of completion method
Gross profit
Operating expenses
Net income
2007
P2,550,000
1,200,000
P1,350,000
Problem 7-5
1. (a)
Contract price
2006
P120,000,000
P 24,000,000
76,000,000
P100,000,000
P 20,000,000
2008
P3,890,000
1,200,000
P2,690,000
2007
P120,000,000
P60,500,000
49,500,000
P110,000,000
P 10,000,000
2008
P120,000,000
P90,000,000
10,000,000
P100,000,000
P 20,000,000
2009
P120,000,000
P105,000,000
-------P105,000,000
P 15,000,000
P 2,590,000
PROJECT D
2008
P2,000,000
P 5,600,000
10,400,000
P16,000,000
P 4,000,000
35%
P 1,400,000
----P 1,400,000
page
24%
55%
90%
Recognized in
2006-Revenue
Cost of revenue
Gross profit
To date
P28,800,000
24,000,000
P 4,800,000
prior year
----------------
2007-Revenue
Cost of revenue
Gross profit
To date
P66,000,000
60,500,000
P 5,500,000
Recognized in
prior year
P28,800,000
24,000,000
P 4,800,000
2008-Revenue
Cost of revenue
Gross profit
P108,000,000
90,000,000
P 18,000,000
P66,000,000
60,500,000
P 5,500,000
2009-Revenue
Cost of revenue
Gross profit
To date
P120,000,000
105,000,000
P 15,000,000
Recognized in
prior year
P108,000,000
90,000,000
P 18,000,000
2.
a
b.
Accounts Receivable
Progress Billings on Const. Contract
2006
24,000,000
26,000,000
P42,000,000
29,500,000
P12,500,000
To be
recognized
in current year
P 12,000,000
15,000,000
P( 3,000,000)
2008
29,500,000
36,500,000
31,000,000
26,000,000
100%
To be
recognized
in current year
P28,800,000
24,000,000
P 4,800,000
To be
recognized
in current year
P37,200,000
36,500,000
P 700,000
2007
36,500,000
24,000,000
11
2009
15,000,000
29,500,000
34,000,000
31,000,000
15,000,000
29,000,000
34,000,000
29,000,000
c.
d.
e.
page
Cash
Accounts Receivable
24,000,000
Cost of LTCC
Revenue from LTCC
24,000,000
4,800,000
27,000,000
24,000,000
30,000,000
27,000,000
36,500,000
700,000
28,800,000
30,000,000
30,000,000
29,500,000
12,500,000
37,200,000
3,000,000
12,000,000
42,000,000
120,000,000
120,000,000
Problem 7-6
2006
P14,000,000
P 5,000,000
7,500,000
P12,500,000
P 1,500,000
40%
P 600,000
-----P 600,000
2007
P14,000,000
P11,475,000
1,275,000
P12,750,000
P 1,250,000
90%
P 1,125,000
600,000
P 525,000
2008
P13,000.000
P12,295,000
------P12,295,000
P 705,000
100%
P 705,000
1,125,000
P (420,000)
Problem 7-7
1. Recognized revenue
Cost of revenue
Gross Profit (loss)
2. Contract-price
30,000,000
15,000,000
Progress Billings on Const. Contracts

Contract price
Less Gross profit recognized in prior year
Gross profit - current year
12
2006
P 1,100,000
1,000,000
P 100,000 (1)
2007
P1,300,000 (2)
1,250,000
P 50,000
2006
P3,500,000
1,000,000
P2,250,000
P3,250,000
2008
P1,100,000 (3)
1,150,000 (4)
P (50,000)
2007
P3,500,000
2,250,000
P 950,000
P3,200,000
Total
P3,500,000
3,400,000 (5)
P 100,000
page

250,000
30.77%
P 76,925
Less GP recognized in prior year/s
GP to be recognized this year
P 76,925
Problem 7-8
Franchise A:
The circumstances imply that the full accrual method could be used.
Franchise revenue
P3,578,000*
Franchise cost
1,400,000
Interest revenue (P2,178,000 x 4%)
Income from Franchise A
*Initial deposit
PV of four payments [4% for 4 periods
(P600,000 x 3.6299)]
13
300,000
70.3125%
P 210,938
76,925
P 134,013
P2,178,000
87,200
P2,265,200
P 1,400,000
2,178,000
P 3,578,000
Franchise B:
Because of the doubtful collection and only partial completion, the deposit method should be used. No revenue or income would be
recognized in 2008 from the franchise fee. However, because the first payment of P600,000 was made, interest revenue of P87,200 would
be recognized.
Franchise C:
Because of the doubtful collection but substantial completion, either the installment sales or cost recovery method could be used. If the
installment sales method is used, gross profit of P843,600* would be recognized in 2008 plus interest revenue of P87,200.
*Franchise revenue
Franchise cost
Franchise gross profit
Gross profit percentage: P1,578,000 P3,578,000
Collections in 2008:
Initial fee
P3,578,000
2,000,000
P1,578,000
44.1%
P1,400,000
page
14
First payment:
Interest
P 87,200
Principal
512,800
512,800
Total
P 600,000
P1,912,800
Gross profit recognized 2008: P1,912,800 x 44.1% = P843,600
If the cost recovery method is used, no revenue or income would be recognized, because the P2,000,000 collections are exactly offset by
the P2,000,000 costs.
Problem 7-9
2007
July 1
Cash
Notes Receivable
Aug. 15
Sept. 15
Dec. 31
2008
Jan. 1
15
31
7,000,000
8,000,000
15,000,000

Cash
800,000

Cash
500,000
Interest Receivable
Interest Revenue
400,000
800,000
500,000
400,000
Cash
Notes Receivable
Interest Receivable
2,400,000

Cash
1,000,000

Cost of Franchise Revenue
Franchise Fee Revenue
2,000,000
400,000
1,000,000
15,000,000
2,300,000
15,000,000
2,300,000
July
Dec.
31
page
Cash
Notes Receivable
Interest Revenue
P6,000,000 x 10% x 6/12
Interest Receivable
Interest Revenue
2,300,000
2,000,000
300,000
200,000
200,000
Problem 7-10
1. Downpayment made on 1/1/ 07
Present value of an ordinary annuity (P240,000 x 3.69590)
Total revenue recorded by Triple Eight
P 800,000.00
887,016.00
P1,687.016.00
e. Cost of acquisition
P 1,687,016
3. Cash
Notes Receivable
f.
800,000.00
1,200,000.00
312,984.00
1,687,016.00
a.
P800,000 cash received from downpayment. (P887,016.00 is recorded as unearned revenue from franchise fees).
g. P800,000 cash received from downpayment
h. None. (P 800,000 is recorded as unearned revenue from Franchise fees).
MULTIPLE CHOICE
1.
2.
3.
4.
5.
C
B
D
A
C
6.
7.
8.
9.
10.
B
D
D
D
C
15
11
.
P20,000,000 x (3,000,000/15,000,000) =
12
.
Contract price
Less Total estimated cost:
Est. cost to complete
Total estimated income
% of completion (3150/9450)
Income to be recognized in 2007
13
.
14
.
15
page
P4,000,000
P10,500,000
P3,150,000
6,300,000
9,450,000
P 1,050,000
33 1/3%
P 350,000
Contract price
P9,000,000

Total estimated income
Percentage-of-completion (27/81)
Income recognized last year
8,100,000
P 900,000
33 1/3%
P 300,000
Contract price
P15,000,000
Total estimated cost (P4,650,000 + P10,850,000)

Total estimated loss to be recognized in full
15,500,000
P 500,000
Contract price
Total estimated cost (P4M + P4M + P2M)
Percentage-of-completion (8M/10M)
P14,000,000
10,000,000
P 4,000,000
80%
16
page

Less Gross profit recognized in 2006
(P14M P8M = P6M x 4/8)
P 3,200,000
P3,000,000
1,800,000
P1,200,000
33 1/3%
P 400,000
3,000,000
P 200,000
16
Contract price
Percentage-of-completion (600/1,800)
17
.
Contract price
P12,000,000
Total cost incurred

Gross profit
Gross profit percentage (1,200/12,000)
10,800,000
P 1,200,000
10%
18
A
Contract price
Total est. gross profit
Percentage-of-completion
Less GP recognized in 2007
GP to be recognized In 2008
Total GP = P750,000 + P228,000
19.
20,000,000/24,000,000
20
Contract price
Cubao
P16,200,000
14,400,000
P 1,800,000
83 1/3%
P 1,500,000
750,000
P 750,000
Marikina
P25,200,000
23,100,000
P 2,100,000
100%
P 2,100,000
1,872,000
P 228,000
P 978,000
83.33%
P30,000,000
24,000,000
P 6,000,000
83.33%
17
GP to date
GP recognized in prior years
(P30M - P22M = P8M x 50%)
GP to be recognized in 2008
page
P 5,000,000
4,000,000
P 1,000,000
21.
Total amount billed

Less Balance of accounts receivable
Total collections
Amount deposited
Cash collected not yet deposited
22
23
P150,000 937,500/9,000,000
C
Mobilization fee (P1.2B x 1%)
Collections on billings (1.2B x 10% x 90%)
Total fee received by NNO
24
25
.
26
27
28
29
30
Downpayment
First installment payment
Addl fee (P1,000,000 x 3%)
Earned Franchise Fees
P 50,000
50,000
30,000
P130,000
31
P 100,000 x 1/5 = P 20,000 + 1% of P500,000 =
P 25,000
Contract price
Gross profit rate
Realized gross profit
P843,750
300,000
P543,750
500,000
P 43,750
P1,440,000
P 1.2M
10.8M
P12.0M
P100.00M
25%
P25.00M
50%
P12.50M
A
B
C
18
32
P 1,000,000 + 5% of P8,000,000 =
33
Downpayment
PV of installment payment
Additional fee ( P 9,000,000 x 5% )
Earned franchise fee
page
P1,400,000
P 100,000
199,650
450,000
P 749,650
19

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CHAPTER 7

Total estimated cost

2006 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2007 - Recognized revenue

2008 - Recognized revenue

AA1 - Chapter 7 (2008 edition)

AA1 - Chapter 7 (2008 edition)

2006 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2007 - Recognized revenue

2008 - Recognized revenue

AA1 - Chapter 7 (2008 edition)

Total estimated gross profit

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

2006 - Recognized revenue

Recognized in prior year/s

To be recognized this year

2007 - Recognized revenue

2008 - Recognized revenue

AA1 - Chapter 7 (2008 edition)

Cash, Materials, etc.

e. Progress Billing on Const. Contract

Recognized in prior year/s

To be recognized this year

2007 - Recognized revenue

2008 - Recognized revenue

AA1 - Chapter 7 (2008 edition)

Gross profit/income recognized in 2008

2. Gross profit to date, 12.31.07

3. Gross profit to date, 12.31.07

AA1 - Chapter 7 (2008 edition)

AA1 - Chapter 7 (2008 edition)

Sept. 1 - Deferred Franchise Cost

Nov. 15 - Deferred Franchise Cost

15 - Unearned Franchise Fee

15 - Cost of Franchise Fee Revenue

1 - Discount on Notes Receivable

AA1 - Chapter 7 (2008 edition)

Statement of Financial Position

Income (loss) Recognized

Inventory - CIP, net of billings

CIP Invty. ending balance

Cost in excess of billings

AA1 - Chapter 7 (2008 edition)

Gross profit to date

* The entire loss should be recognized immediately

AA1 - Chapter 7 (2008 edition)

AA1 - Chapter 7 (2008 edition)

Progress Billings on Const. Contracts

AA1 - Chapter 7 (2008 edition)

Total estimated gross profit

AA1 - Chapter 7 (2008 edition)

Deferred Franchise Cost

Deferred Franchise Cost

Deferred Franchise Cost

Unearned Franchise Fee

AA1 - Chapter 7 (2008 edition)

AA1 - Chapter 7 (2008 edition)

Total estimated cost

Total estimated cost (P4,650,000 + P10,850,000)