ND

ARTS CPA REVIEW

2 Floor, Yague Building, Arellano corner Blumentritt Streets, Centro 1, Tuguegarao City, Cagayan
0917-5723900/ 0917-5784158
e-mail address: jonathandeveyra_ARTS@yahoo.com.ph

1ST BATCH
ADVANCED FINANCIAL ACCOUNTING & REPORTING ACCT. ROMMEL ROYCE VALDEZ CADAPAN, CIB CTT

SUMMARY LECTURE (3) ADV – 26B

JOINT ARRANGEMENTS
Use the following information for questions 1 & 2:
Because the scale of the project exceeded the capacity of entities C and D individually, they tendered jointly for a public contract
with a government to construct waterways between two cities. Following the tender process the government awarded the
contract jointly to entities C and D. In accordance with the contractual arrangements, entities C and D are jointly contracted with
the government for delivery of the waterways in return for P 39,200,000 (a fixed price contract). In 2017, in accordance with the
agreement between entities C and D.
 Entities C and D each used their own equipment and employees in the construction activity.
 Entity C constructed three bridges to cross rivers on the route at a cost of P 11,200,000.
 Entity D constructed all of the other elements of the waterways at a cost of P 16,800,000.
 Entities C and D shared equally in the P 39,200,000 jointly invoiced to (and received from) the government.

1. Determine the net income generated by Joint Operator – Entity C:

a. 19,600,000 c. 8,400,000
b. 11,200,000 d. Nil

2. Determine the net income generated by Joint Operator – Entity D:

a. 19,600,000 c. 2,800,000
b. 16,800,000 d. Nil

Use the following information for questions 3 & 4:

On January 01, 2017, entities M, N, O, P and Q (the joint operators) jointly buy a jet aircraft for P 14,000,000 cash. The
operators are registered as an equal joint owners of the aircraft. They enter into an agreement whereby the aircraft is at the
disposal of each operator for 70 days each year. The aircraft is in maintenance for the remaining days each year. The
operators may decide to use the aircraft, or, for example, lease it to a third party. Decisions regarding maintenance and disposal
of the aircraft require the unanimous consent of the operators. The contractual arrangement is for the expected life (20 years) of
the aircraft and can be changed only if all of the operators agree. The residual value of the aircraft is zero. In 2017, the
operators each paid P 140,000 to meet the joint costs of maintaining the aircraft (e.g., hangar rental and aviation license fees).
In 2017, each operator also incurred cost of running the aircraft when they made use of the aircraft (e.g., entity M incurred costs
of P 70,000 on pilot fees, aviation fuel and landing costs). In 2017, entity M also earned rental income of P 532,000 by renting
the aircraft to others.

3. Determine the net income generated by Joint Operator – Entity M:

a. 182,000 c. 392,000
b. 322,000 d. Answer not given

4. The net book value of property, plant & equipment:

a. 2,660,000 c. 2,268,000
b. 2,590,000 d. Answer not given.

Use the following information for questions 5 & 6:

A and B have established the AB Joint Operation, A has a 60% interest in the joint operation and B has a 40% interest. A
contributed an asset with a carrying amount of P 90,000 and a fair value of P 120,000 and B agreed to provide technical
services to the joint operation over the first two years of operations. The fair value of the technical services was agreed to be P
80,000 and the cost to provide the services was estimated at P 65,000 at the inception of the joint operation.

5. As part of its initial contribution, the journal entry for joint operator A:
a. Debit against the Services Receivable in JO account of P 32,000.
b. Debit against the Plant in JO account of P 54,000.
c. Credit against the Plant of P 120,000.
d. Credit against the Gain on Sale of Plant of P 18,000.

6. As part of its initial contribution entry B will record:

a. Debit against the Services Receivable in JO account of P 32,000.
b. Debit against the Plant in JO account of P 36,000.
c. Credit against the Obligation to JO of P 39,000.
d. Credit against the Gain on Provision of Services of P 6,000.

SUMMARY LECTURE (3) page 02

IMPLICATIONS OF PFRS 15 ON THE FOLLOWING:
INSTALLMENT SALES
7. On January 15, 2015, A Company enters into a contract to build custom equipment for B Company. The contract
specified a delivery date of March 01. The equipment was not delivered until March 31. The contract required full
payment of P 150,000 30 days after delivery. This contract should be:
a. Recorded on January 15, 2015. c. Recorded on March 31, 2015.
b. Recorded on March 01, 2015. d. Recorded on April 30, 2015.

8. D, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. D also
offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the
expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the
extended warranty is P 3,600. The standalone price of each is P 2,760 and P 960, respectively. The estimated cost of
the assurance-warranty is P 420. The accounting for warranty will include a:
a. Debit to Warranty Expense P 960 c. Credit to Warranty Liability P 960
b. Debit to Warranty Expense P 420 d. Credit to Unearned Warranty Revenue P 960

9. G Builders enters into a contract with a customer to build a warehouse for P 1,020,000 on March 30, 2015 with a
performance bonus of P 60,000 if the building is completed by July 31, 2015. The bonus is reduced by P 12,000 each
week that completion is delayed. G Builders commonly includes these completion bonuses in its contracts and based
on prior experience, estimates the following completion outcomes:
Completed by Probability
July 31, 2015 65%
August 07, 2015 25%
August 14, 2015 5%
August 21, 2015 5%
The transaction price for this transaction is:
a. 1,074,000 c. 663,000
b. 1,020,000 d. 702,000

10. Z Co. entered into a licensing agreement with J Lab for a new drug under development. Z will receive P 8,100,000 if
the new drug receives BFAD approval. Based on prior approval, Z determines that it is 85% likely that the drug will
gain approval. The transaction price of this arrangement should be:
a. 8,100,000 c. 1,215,000
b. 6,885,000 d. 0 until approval is received.

11. X Company is a full-service technology company. They provide equipment and installation services as well as training.
Customers can purchase any product or service separately or as a bundled package. Y Corporation purchased
computer equipment, installation and training for a total cost of P 144,000 on March 15, 2014. Estimated standalone
fair values of the equipment, installation, and training are P 90,000, P 60,000 and P 30,000, respectively. The
transaction price allocated to equipment, installation and training is:
a. 90,000, 60,000, 30,000, respectively. c. 144,000 for the entire bundle.
b. 48,000, 48,000, 48,000, respectively. d. 72,000, 48,000, 24,000, respectively.

12. Swim Company sells prefabricated pools that cost P 120,000 to customers for P 216,000. The sales price includes an
installation fee, which it valued at P 30,000. The fair value of the pool is P 192,000. The installation is considered a
separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the
pool and the installation is:
a. 186,811.20 and 29,118.80, respectively. c. 216,000 and 30,000, respectively.
b. 192,000 and 30,000, respectively. d. 166,053.60 and 25,946.40, respectively.

13. The first step in the process for revenue recognition is to:
a. Determine the transaction price.
b. Identify the contract with the customer.
c. Allocate the transaction price to the separate performance obligations.
d. Identify the separate performance obligations in the contract.

14. The second step in the process for revenue recognition is to:
a. Allocate transaction price to the separate performance obligations.
b. Determine the transaction price.
c. Identify the contract with customers.
d. Identify the separate performance obligations in the contract.

15. The third step in the process for revenue recognition is to:
a. Determine the transaction price.
b. Identify the separate performance obligations in the contract.
c. Allocate transaction price to the separate performance obligations.
d. Recognize revenue when each performance obligation is satisfied.

16. The fourth step in the process for revenue recognition is to:
a. Recognize revenue when each performance obligation is satisfied.
b. Identify the separate performance obligations in the contract.
c. Allocate transaction price to the separate performance obligations.
d. Determine the transaction price.

SUMMARY LECTURE (3) page 03

FRANCHISE ACCOUNTING
 17. Cell Inc. charges an initial franchise fee of P 90,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how 40,000
Training services 11,500
Equipment (cost of P 10,800) 38,500
Total initial franchise fee 90,000
Upon signing of the agreement, a payment of P 40,000 is due. Thereafter, two annual payments of P 30,000 are required. The
credit rating of the franchisee is such that it would have to pay interest at 8% to borrow money. The franchise agreement is
signed on August 01, 2007, and the franchise commences operation on November 01, 2007. Assuming that no future services
are required by the franchisor once the franchise begins operations, the entity on November 01, 2007 would include:
a. A credit to Unearned Franchise Revenue for P 40,000.
b. A credit to Service Revenue for P 11,500.
c. A debit to Sales Revenue for P 38,500.
d. A debit to Unearned Franchise Revenue for P 40,000.

18. Con Inc charges an initial franchise fee of P 90,000 broken down as follows:
Rights to trade name, market area, and proprietary know-how 40,000
Training services 11,500
Equipment (cost of P 10,800) 38,500
Total initial franchise fee 90,000
Upon signing of the agreement, a payment of P 40,000 is due. Thereafter, two annual payments of P 30,000 are required. The
credit rating of the franchisee is such that it would have to pay interest at 8% to borrow money. The franchise agreement is
signed on August 01, 2008, and the franchise commences operation on November 01, 2008. Assume that the total training fees
includes training services for the period leading up to the franchise opening (P 5,500 value) and for 3 months following the
opening. The journal entry on August 01, 2008 would include:
a. A credit to Unearned Franchise Revenue for P 11,500.
b. A credit to Unearned Service Revenue for P 6,000.
c. A debit to Sales Revenue for P 38,500.
d. A debit to Unearned Franchise Revenue for P 40,000.

19. Franchise fees should be recognized:

a. On the date the contract was signed. c. On the date the franchise fee is paid to franchisor.
b. On the date the franchise is opened for business. d. When performance obligations are satisfied.

20. Franchise revenue are recognized over time if:

a. Franchise rights are transferred at a point in time.
b. The franchisor is providing access to the right rather than transferring control.
c. Performance obligations regarding franchise rights are completed when the franchise opens.
d. The franchisee fee is payable upon signing of contract.

CONSIGNMENT SALES
Use the following information for questions 21 & 22:
On August 01, 2016, JBV Inc. consigned to Mags Store 10 ladies handbags costing P 3,000 each, paying freight charge of P
3,000. At the end of the month, Mags reported sales of 6 handbags at P 6,000 each and expenses incurred of 2,500 and
remitted the net proceeds due to JBV after deducting a 20% commission.
21. How much net income did JBV realize in August on the consignment?
a. 7,500 net income c. 6,700 net loss
b. 6,500 net income d. 6,500 net loss

22. What is the total cost of inventory of unsold handbags?

a. 12,000 c. 14,200
b. 13,200 d. 15,000

Use the following information for questions 23 to 25:

On September 05, 2016, the Hug Computers consigned 30 apple computer units costing P 80,000 each, to Abe Inc. The units
were to be sold on either cash or credit basis at a commission of 15% of net sales. The consignor paid freight of P 18,000 on
the shipment. On September 11, the consignee received the goods. Sales were made as follows:
September 15: 10 units for cash at P 130,000 each. September 27: 12 units on account at P 140,000 each.

On September 30, 2016, a sales allowance of P 20,000 was given to a charge customer for a defective unit. On October 10,
2016, a receivable balance of P 70,000 was determined to be uncollectible. On October 11, 2016, the consignee made the
proper remittance.

23. The amount due from Abe is:

a. 2,980,000 c. 2,536,000
b. 2,890,000 d. 2,446,000

24. The consignment profit (loss) is:

a. 464,000 c. 554,000
b. 484,000 d. 672,800

25. The cost of inventory on consignment is:

a. 640,000 c. 664,800
b. 644,800 d. 708,000

- end -