ST.

THOMAS MORE COLLEGE – CLARK

TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
 A Professional Business School Tel. No. (045) 321 - 0727

CONSTRUCTION CONTRACTS

1. Beavis Construction Company was the low bidder on a construction project to build an earthen dam
for P1,800,000. The project was begun in 20x7 and completed in 20x8. Cost and other data are
presented below:

20x7 20x8
Cost incurred during the year 450,000.00 1,100,000.00
Estimated costs to complete 1,200,000.00 -
Billings during the year 400,000.00 1,400,000.00
Cash collections during the year 300,000.00 1,500,000.00

Required: compute the items listed below for each year assuming (round all percentages to two
decimals)
a. The use of percentage –of-completion cost-to-cost method, and
b. The cost recovery (zero-profit) method

2. On February 1, 20x5, Marsh Contractors agreed to construct a building at a contract price of

P6,000,000. Marsh estimated total construction costs would be P4,000,000 and the project
would be finished in 20x7. Information relating to the costs and billings for this contract is as
follows:
20x5 20x6 20x7
Total costs incurred to date P 1,500,000 P 2,640,000 P 4,600,000
Estimated costs to complete 2,500,000 1,760,000 -0-
Customer billings to date 2,200,000 4,000,000 5,600,000
Collections to date 2,000,000 3,500,000 5,500,000
Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and
for cost-recovery accounting, show the gross profit that should be recorded for 20x5, 20x6, and
20x7.
Percentage-of-Completion Cost-Recovery

Gross Profit Gross Profit

a) 20x5 _________________ 20x5 ___________________

b) 20x6 _________________ 20x6 ___________________

c) 20x7 _________________ 20x7 ___________________

3. Cooper Construction Company had a contract starting April 20x4, to construct a P9,000,000
building that is expected to be completed in September 20x6, at an estimated cost of
P8,250,000. At the end of 20x4, the costs to date were P3,795,000 and the estimated total costs
to complete had not changed. The progress billings during 20x4 were P1,800,000 and the cash
collected during 20x4 was P1,200,000. The company use the percentage of completion method.

a) For the year ended December 31, 20x4, Cooper would recognize gross profit on the building of:

b) At December 31, 20x4 Cooper would report Construction in Process in the amount of:
 ST. THOMAS MORE COLLEGE – CLARK
TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
 A Professional Business School Tel. No. (045) 321 - 0727

FRANCHISE ACCOUNTING

1. Shake pizza Inc., charges an initial franchise fee of P600,000 for the right to operate as a franchisee
of Shake’s pizza. Of this amount, P120,000 is payable when the agreement is signed and the
balance is payable in five annual payments of P96,000 each. In return for the initial franchise fee,
the franchisor will help allocate the site, negotiate the lease or purchase of the site, supervise the
construction activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five
annual receipts of P96,000 each discounted at 8% is P383,300.16. the discount of P96,699.84
represents the interest revenue to be accrued by the franchisor over the payment period.
Required: Prepare entries on the books of franchisor Jollibee to record the following, assuming:
1. If there is a reasonable expectation that the downpayment may be refunded and substantial
future services remain to be performed by Shake’s Pizza, Inc.
2. If the probability of refunding the initial franchise fee is extremely low, the amount of future
services to be provided to the franchisee is minimal, collectability of the note is reasonably
assured and substantial performance has occurred.
3. If the initial downpayment is not refundable, represents a fair measure of the services
already provided, with a significant amount of services still to be performed by the franchisor
in future periods, and collectability of the note is reasonably assured.
4. If the initial downpayment is not refundable and no future services are required by the
franchisor, but collection of the note is so uncertain that recognition of the note as an asset
is unwarranted.
5. If the initial downpayment is refundable or substantial services are yet to be performed, but
collection of the note is so uncertain that recognition of the note as an asset is unwarranted.

2. On January 1, 20x7, Hotdog Company entered into a franchise agreement with Doors Corporation to
sell their products and to operate a franchise for a period of twenty years.
 The agreement provides for an initial franchise fee of P6,000,000, P1,500,000 downpayment
upon signing of the contract and the balance is payable in four annual payment plus interest
every December 31. Doors Company signs a 10% interest bearing note for the balance.
 The agreement further provides that the franchiser will assist in site location, make a survey
of potential market, supervise construction activity and training of management employees
and perform a few relatively minor services.

On December 31, 20x7, Doors Corporation has rendered services to the franchisee amounting to
P1,800,000. Operating expenses amounted to P120,000. On this date, there is a substantial
performance of services and the downpayment is not refundable.

Required:

1. Prepare entries on the books of franchisor to record the following, assuming:

a. The collectability of the note is reasonable assured; and
b. The collectability of the note is not reasonably assured (use installment sales
method).
2. Compute the revenue, gross profit and net income, assuming:
ST. THOMAS MORE COLLEGE – CLARK
TMC Building, New York St.
Villa Sol Subdivision
Angeles City, Philippines
 A Professional Business School Tel. No. (045) 321 - 0727

a. The collectability of the note is reasonable assured; and

b. The collectability of the note is not reasonably assured (use installment sales
method).