Bass Co.

appropriately uses the cost to cost method in measuring its progress on a construction
contract with a customer. Information on this contract is shown below:
20x1 20x2 20x3
Transaction price 20,000,000 20,000,000 20,000,000
Profit each year 400,000 1,400,000 (200,000)
Cost incurred each year 3,600,000 ? 8,200,000

Requirements: Compute for the following:

Franchise

3. On January 1, 20x1, ABC Co. enters into a contract with a customer to transfer a license.
• The initial franchise fee is P 100,000 payable as follows: 20% cash down payment
upon signing of the contract and the balance is payable in 4 equal annual
installments starting December 31, 20x1. The appropriate discount rate is 12%.
• The contract also requires ABC Co. to transfer equipment to the customer. The
equipment has a cost of P30,000 and a stand-alone selling price of P 40,000.
• The license has a stand-alone selling price of P 38,000.
• ABC Co. regularly sells the license and the equipment separately.
• The license provides the customer the right to use the entity ‘s intellectual property
as it exists at the point in time at which the license is granted.
• The equipment is transferred to the customer on January 15, 20x1 while the license
is transferred to the customer on February 1, 20x1.
Requirement:
Provide all the necessary journal entries in January and February.

Jan. 1, Cash on hand 20,000

Feb. 1,
No entry
20x1
Apr. 1, Contract liability 1,000,000
20x1 Revenue 1,000,000

Consignment Sales
4. Trumpet Co. consigned eight heavy machineries to Cold Breeze Co. Each machine costs P
1,000,000 and has suggested retail price of P 2,100,000. Trumpet paid P 200,000 in transporting
the machines to the consignee’s place of business. At the end of the period, Cold Breeze reported
three unsold machines and remitted the collections on sales during this period, after deducting the
following:
Commission (based on sales net of commission) 20%
Finder’s fee (based on commission) 5%
Delivery, installation and testing (on each unit sold) P 50,000

Materials generated from the testing were sold for P 5,000 and included in the remittance to
Trumpet Co.

Requirements:
a. How much profit earned by the consignor from the sale?
b. How much was the net remittance to the consignor?
c. How much is the cost of the unsold machineries?

Installment Sales

5. Cool Morning Co. uses the installment sale method. During the year, Cool Morning sells an
inventory costing P 585,000 for P 900,000.

Case 1: If the deferred gross profit at the end of the year of sale is P 112,000, how much is the
ending balance of the installment receivable?

Case 2: If the deferred gross profit at the end of the year of sale is P 269,500, how much were
collected during the year?

Case 3: If the deferred gross profit of P 200,000 at the end of the year of sale, how much is the
realized gross profit during the year?

Case 4: If the total collection during the year of sale totaled P300,000, how much is the deferred
gross profit at the end of the year?

Case 5: If the realized gross profit during the year is P 220,000, how much is the ending balance
of deferred gross profit?

Case 6: If the realized gross profit during the year is P 180,000, how much is the ending balance
of the receivable?

(Simulated CPA Board Exam)

Construction Contracts
 1. On January 1, 20x1, Frowny Co. enters into a contract with a customer for the construction
of a building. Frowny’s performance obligation in the contract is satisfied over time.
Frowny uses the “cost to cost” method in measuring the progress on the contract.
Information on the contract follows:
Transaction price 3,000,000
Estimated cost of construction, Dec. 31, 20x1 2,250,000
Percentage of completion, Dec. 31, 20x1 40%
Contract cost incurred to date, Dec. 31, 20x2 1,800,000
Estimated costs to complete, Dec. 31, 20x2 600,000

Requirements:
a. How much is the profit recognized in 20x2?
b. How much is the estimated costs to complete as of December 31, 20x1?
c. How much are the contract costs incurred in 20x2?
d. Compute for the revenues and cost of construction in 20x1 and 20x2, respectively.

Franchise
2. On December 1, 20x1, Canorous Co. granted a 5-year franchise right to Meledious, Inc.
for an initial franchise fee of P 400,000. The non-refundable initial franchise fee was
collected in full upon signing of the contract. As of December 31, 20x1, Canorous has no
remaining obligation or intent to refund any of the cash received, all of the services
pertaining to the pre-opening activities to set-up the contract have been performed and
there are no other material conditions or obligations required of Canorous under the
franchise agreement.
a. If the promise to grant the franchise is not distinct and that the performance
obligation is satisfied at a point in time, how much revenue shall Canorous
recognize in December 20x1?
b. If the promise to grant the franchise is distinct and that the grant of franchise
provides the customer the right to use the entity’s intellectual property, how much
revenue shall Canorous recognize in December 20x1?
c. If the promise to grant the franchise is distinct and that the grant of franchise
provides the customer the right to access the entity’s intellectual property, how
much revenue shall Canorous recognize in December 20x1?

Consignment Sales

3. ABC Co. consigned twelve refrigerators to XYZ, Inc. The refrigerators cost P 6,000 each
and the consignor paid P 720 for freight out. The consignee subsequently rendered account
sales for five units sold at P 7,700 each, and deducted the following items from the selling
price:
Commission (based on sales net of commission) 10%
Marketing expense (based on commission) 10%
Delivery and installation (on each unit sold) P30

a. How much was the net profit of the consignor on the five refrigerators sold?
b. How much was the net remittance of the consignee on the five refrigerators sold?
Installment Sales

4. The Bass Co., on September 30, 20x1, sold for P 48,000 a piano costing P 30,000. The
down payment was P 4,800 and an equal amount was to be paid at the end of each
succeeding month. Monthly interest of 1% yield rate was to be charged on the unpaid
balance of the installment contract, with payment applying first to accrued interest and the
balance to principal. After paying a total of P19,200, the customer defaulted and the piano
was correspondingly repossessed on February 28, 20x2, at which time it was estimated to
have a total value of P 16,800 on a depreciated cost basis. Bass Co. uses perpetual inventory
system and records the total deferred gross profit at the time of sale.
a. How much was the realized gross profit at the end of 20x1?
b. How much was the gain or loss on the repossession in 20x2?