CHAPTER 7

SUGGESTED ANSWERS

Exercise 7-1
1. 2006 2007 2008
Contract price P50,000,000 P50,000,000 P50,000,000
Cost incurred to date P 7,500,000 P34,500,000 P40,800,000
Est. cost to complete 30,000,000 8,625,000 -
__________
Total estimated cost 37,500,000 P43,125,000 P40,800,000
Total estimated gross profit P12,500,000 P 6,875,000 P 9,200,000
Percentage of completion 20% 80% 100%

To Date Recognized in prior year/s To be recognized this year

2006 - Recognized revenue P10,000,000 - P10,000,000
Cost of revenue 7,500,000 - 7,500,000
Gross profit P 2,500,000 - P 2,500,000

2007 - Recognized revenue P40,000,000 P10,000,000 P30,000,000

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

2008 - Recognized revenue P50,000,000 P40,000,000 P10,000,000

Cost of revenue 40,800,000 34,500,000 6,300,000
Gross profit P 9,200,000 P 5,500,000 P 3,700,000

2. 2006 2007 2008

a. Construction in progress 7,500,000 27,000,000 6,300,000
Cash, Materials, etc. 7,500,000 27,000,000 6,300,000

b. Accounts Receivable 8,000,000 36,000,000 6,000,000

Progress Billings on Const. Contracts 8,000,000 36,000,000 6,000,000

c. Cash 5,500,000 33,000,000 11,500,000

 AA1 - Chapter 7 (2008 edition) page 2

Accounts Receivable 5,500,000 33,000,000 11,500,000

d. Cost of LTCC 7,500,000 27,000,000 6,300,000

Construction in Progress 2,500,000 3,000,000 3,700,000
Revenue from LTCC 10,000,000 30,000,000 10,000,000

e. Progress Billings on
Construction Contracts 50,000,000
Construction In Progress 50,000,000

3.
Statement of Financial Position
Current Assets:
Accounts Receivable P5,500,000

Current Liabilities:
Progress Billings on Construction Contracts P44,000,000
Less Construction in Progress 40,000,000 P4,000,000

Exercise 7-2
2006 2007 2008
a. Construction in Progress 32,000,000 43,000,000 15,500,000
Cash, Materials, etc. 32,000,000 43,000,000 15,500,000

b. Accounts Receivable 33,000,000 45,000,000 22,000,000

Progress Billing on Const. Contract 33,000,000 45,000,000 22,000,000

c. Cash 31,000,000 40,000,000 29,000,000

Accounts Receivable 31,000,000 40,000,000 29,000,000

Cost of LTCC 23,000,000 45,250,000 22,250,000

Construction in Progress 2,000,000 4,750,000 2,750,000
Revenue from LTCC 25,000,000 50,000,000 25,000,000
e. Progress Billing on Const. Contracts 100,000,000
 AA1 - Chapter 7 (2008 edition) page 3

Construction in Progress 100,000,000

2006 2007 2008

Contract price P100,000,000 P100,000,000 P100,000,000
Cost incurred to date P 32,000,000 P 75,000,000 P 90,500,000
Estimated cost to complete 60,000,000 16,000,000 ___________
Total estimated cost P 92,000,000 P 91,000,000 P 90,500,000
Total estimated gross profit P 8,000,000 P 9,000,000 P 9,500,000
Percentage of completion 25% 75% 100%

To date Recognized in prior year/s To be recognized this year

2006 - Recognized revenue P25,000,000 - P25,000,000
Cost of revenue 23,000,000 - 23,000,000
Gross profit P 2,000,000 - P 2,000,000

2007 - Recognized revenue P75,000,000 P25,000,000 P50,000,000

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

2008 - Recognized revenue P100,000,000 P75,000,000 P25,000,000

Cost of revenue 90,500,000 68,250,000 22,250,000
Gross profit P 9,500,000 P 6,750,000 P 2,750,000

Exercise 7-3

1. Contract price P25,000,000

Total estimated cost:
Cost incurred to date P 4,400,000
Estimated cost to complete 15,600,000 20,000,000
Total estimated gross profit P 5,000,000
Percentage of completion ( P 400,000/20,000,000) 22%
Gross profit to be recognized in 2008 P 1,100,000

2. Accounts Receivable (P25,000,000 x 30% x 10%) P 750,000

 AA1 - Chapter 7 (2008 edition) page 4

Construction in Progress (P4,400,000 + P1,100,000) P5,500,000

Progress Billings on Construction Contracts (P25,000,000 x 30%) P7,500,000

Exercise 7-4
2006 2007 2008
Contract price P35,000,000 P35,000,000 P35,000,000
Cost incurred to date P17,500,000 P29,250,000 P31,000,000
Estimated cost to complete 10,500,000 3,250,000 -
Total estimated cost P28,000,000 P32,500,000 P31,000,000
Total estimated gross profit P 7,000,000 P 2,500,000 P 4,000,000
Percentage of completion 62.5% 90% 100%

To date Recognized in prior year/s To be recognized this year

2006 - Recognized revenue P21,875,000 - P21,875,000
Cost of revenue 17,500,000 - 17,500,000
Gross profit P 4,375,000 P 4,375,000

2007 - Recognized revenue P31,500,000 P21,875,000 P 9,625,000

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

2008 - Recognized revenue P35,000,000 P31,500,000 P 3,500,000

Cost of revenue 31,000,000 29,250,000 1,750,000
Gross profit P 4,000,000 P 2,250,000 P 1,750,000
2. Journal entries
2006 2007 2008
a. Construction in Progress 17,500,000 11,750,000 1,750,000
Cash, Materials, etc. 17,500,000 11,750,000 1,750,000

b. Accounts Receivable 16,000,000 12,000,000 7,000,000

Progress Billing on
Const. Contracts 16,000,000 12,000,000 7,000,000
c. Cash 15,000,000 10,000,000 10,000,000
 AA1 - Chapter 7 (2008 edition) page 5

Accounts Receivable 15,000,000 10,000,000 10,000,000

d. Cost of LTCC 17,500,000 11,750,000 1,750,000

Construction in Progress 4,375,000 1,750,000
Construction in Progress 2,125,000
Rev. from LTCC 21,875,000 9,625,000 3,500,000

e. Progress Billing on Const. Contract 35,000,000

Construction in Progress 35,000,000

3. To date Recognized in prior year/s To be recognized this year

2006 - Recognized revenue P17,500,000 - P17,500,000
Cost of revenue 17,500,000 - 17,500,000
Gross profit - - -
========== ============ ==========

2007 - Recognized revenue P31,500,000 P17,500,000 P14,000,000

Cost of revenue 29,250,000 17,500,000 11,750,000
Gross profit P 2,250,000 ---------------- P 2,250,000
2008 - Recognized revenue P35,000,000 P31,500,000 P3,500,000
Cost of revenue 31,000,000 29,250,000 1,750,000
Gross profit P 4,000,000 P 2,250,000 P1,750,000

Exercise 7-5
Revenue recognized in 2008 (P26,000,000 x 40%) P10,400,000
Gross profit/income recognized in 2008 (P3,120,000 - P1,300,000) 1,820,000
Cost incurred in 2008 P 8,580,000

Exercise 7-6
Binondo Project Pasig Project
 AA1 - Chapter 7 (2008 edition) page 6

Revenue (CP x % of work done in 2007) P12,000,000 P1,290,000

Cost of revenue 12,400,000 1,400,000
Gross profit (loss) P (400,000) P( 110,000)

Exercise 7-7
1. Contract revenue/price P10,000,000
Less Total profit 800,000
Total cost incurred P 9,200,000
Less Cost incurred in 2006 and 2008 5,900,000
Cost incurred in 2007 P 3,300,000

2. Gross profit to date, 12.31.07 P 900,000

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

3. Gross profit to date, 12.31.07 P 900,000

Percentage of completion 60%
Total estimated gross profit P1,500,000

4. Contract price P10,000,000

Less Total estimated gross profit 1,500,000
Total estimated cost P 8,500,000
Less Cost incurred to date 5,100,000
Estimated cost to complete P 3,400,000

Exercise 7-8
Cash 500,000
Notes Receivable 1,000,000
Discount on Notes Receivable 207,540
Unearned Franchise Fees 1,292,460

Exercise 7-9
1. Cash 4,000,000
 AA1 - Chapter 7 (2008 edition) page 7

Notes Receivable 3,000,000

Discount on Notes Receivable 513,200
Unearned Franchise Fees 6,486,800

2. Cash 4,000,000
Notes Receivable 3,000,000
Discount on Notes Receivable
(3,000,000-(2.48685 x 1,000,000) 513,200
Revenue from Franchise Fees 6,486,800

3. Cash 4,000,000
Unearned Franchise Fees 4,000,000

4. Cash 4,000,000
Notes Receivable 3,000,000
Discount on Notes Receivable 513,200
Revenue from Franchise Fees 4,000,000
Unearned Franchise Fees (1,000,000 x 2.48685) 2,486,800

Exercise 7-10
2007
July 1 - Cash 1,200,000
Notes Receivable 3,200,000
Discount on Notes Receivable 644,100
Unearned Franchise Fee 3,735,900
P800,000 x 3.1699 = P2,535,900
P3,200,000 - P2,535,900 = P664,100

Sept. 1 - Deferred Franchise Cost 100,000

Cash 100,000

Nov. 15 - Deferred Franchise Cost 60,000

Cash 60,000
Dec. 31 - Discount on Notes Receivable 126,795
Interest Revenue 126,795
 AA1 - Chapter 7 (2008 edition) page 8

P2,535,900 x 10% x 6/12 = P126,795

2008
Jan. 10 - Deferred Franchise Cost 100,000
Cash 100,000
15 - Unearned Franchise Fee 3,735,900
Franchise Fee Revenue 3,735,900

15 - Cost of Franchise Fee Revenue 260,000

Deferred Franchise Cost 260,000

July 1 - Cash 800,000

Notes Receivable 800,000

1 - Discount on Notes Receivable 126,795

Interest Revenue 126,795

Problem 7-1
2007 2008
a. Construction in Progress 11,000,000 4,800,000
Cash, Materials, etc. 11,000,000 4,800,000

b. Accounts Receivable 10,800,000 9,200,000

Progress Billing on Const. Contract 10,800,000 9,200,000

c. Cash 10,000,000 10,000,000

Accounts Receivable 10,000,000 10,000,000

d. Cost of LTCC 11,000,000 4,800,000

Construction in Progress 2,750,000 1,450,000
Revenue from LTCC 13,750,000 6,250,000
e. Progress Billing on Construction Contracts 20,000,000
Construction in Progress 20,000,000
 AA1 - Chapter 7 (2008 edition) page 9

Problem 7-2
Statement of Recognized Income and Expenses:
Income: 2007 P2,750,000
2008 1,450,000

Statement of Financial Position

Receivable: 2007 P 800,000
2008 -

Inventory - CIP, net of billings

2007 (13,750,000 - 10,800,000) P2,950,000
2008 -

Problem 7-3
Year Income (loss) Recognized Recl ending balance CIP Invty. ending balance Cost in excess of billings
2006 1,000,000 380,000 5,000,000 1,200,000
2007 1,000,000 940,000 12,000,000 2,600,000
2008 1,000,000 - - -

2006 2007 2008

Contract price P15,000,000 P15,000,000 P15,000,000
Cost incurred to date P 4,000,000 P10,000,000 P12,000,000
Estimated cost to complete 8,000,000 2,500,000 ----------------
Total estimated cost P12,000,000 P12,500,000 P12,000,000
Total estimated gross profit P 3,000,000 P 2,500,000 P 3,000,000
Percentage of completion 33 1/3% 80% 100%
Gross profit to date P 1,000,000 P 2,000,000 P 3,000,000
Less Gross profit recognized in prior year/s _____-______ 1,000,000 2,000,000
Gross profit to be recognized this year P 1,000,000 P 1,000,000 P 1,000,000

Problem 7-4
PROJECT A PROJECT B PROJECT C PROJECT D
2007 2008 2007 2008 2007 2008 2008
Contract price P29,000,000 P29,000,000 P34,000,000 P34,000,000 P17,000,000 P17,000,000 P2,000,000
 AA1 - Chapter 7 (2008 edition) page 10

Cost incurred to date P16,800,000 P26,400,000 P14,400,000 P21,200,000 P 3,200,000 P11,830,000 P 5,600,000
Estimated cost to complete 11,200,000 ------------- 17,600,000 13,000,000 9,600,000 1,170,000 10,400,000
Total estimated cost P28,000,000 P26,400,000 P32,000,000 P34,200,000 P12,800,000 P13,000,000 P16,000,000
Total estimated gross profit (loss) P 1,000,000 P 2,600,000 P 2,000,000 P( 200,000) P 4,200,000 P 4,000,000 P 4,000,000
Percentage of completion 60% 100% 45% 25% 91% 35%
Gross profit (loss) to date P 600,000 P 2,600,000 P 900,000 P( 200,000)* P 1,050,000 P 3,640,000 P 1,400,000
Less gross profit recognized in prior year ------- 600,000 ------ 900,000 ---- 1,050,000 -----
Gross profit - current year P 600,000 P 1,000,000 P 900,000 P(1,100,000) P 1,050,000 P 2,590,000 P 1,400,000

* The entire loss should be recognized immediately

(1) Percentage of completion method

2007 2008
Gross profit P2,550,000 P3,890,000
Operating expenses 1,200,000 1,200,000
Net income P1,350,000 P2,690,000

Problem 7-5
1. (a) 2006 2007 2008 2009
Contract price P120,000,000 P120,000,000 P120,000,000 P120,000,000
Cost incurred to date P 24,000,000 P60,500,000 P90,000,000 P105,000,000
Estimated cost to complete 76,000,000 49,500,000 10,000,000 --------
Total estimated cost P100,000,000 P110,000,000 P100,000,000 P105,000,000
Total estimated gross profit P 20,000,000 P 10,000,000 P 20,000,000 P 15,000,000

Percentage of completion 24% 55% 90% 100%

Recognized in To be
recognized
To date prior year in current year
2006-Revenue P28,800,000 ------ P28,800,000
Cost of revenue 24,000,000 ------ 24,000,000
 AA1 - Chapter 7 (2008 edition) page 11

Gross profit P 4,800,000 ------ P 4,800,000

To be
Recognized in recognized
To date prior year in current year
2007-Revenue P66,000,000 P28,800,000 P37,200,000
Cost of revenue 60,500,000 24,000,000 36,500,000
Gross profit P 5,500,000 P 4,800,000 P 700,000

2008-Revenue P108,000,000 P66,000,000 P42,000,000

Cost of revenue 90,000,000 60,500,000 29,500,000
Gross profit P 18,000,000 P 5,500,000 P12,500,000
To be
Recognized in recognized
To date prior year in current year
2009-Revenue P120,000,000 P108,000,000 P 12,000,000
Cost of revenue 105,000,000 90,000,000 15,000,000
Gross profit P 15,000,000 P 18,000,000 P( 3,000,000)

2. 2006 2007 2008 2009

a Construction in Progress 24,000,000 36,500,000 29,500,000 15,000,000
Cash, Materials, etc. 24,000,000 36,500,000 29,500,000 15,000,000

b. Accounts Receivable 26,000,000 31,000,000 34,000,000 29,000,000

Progress Billings on Const. Contract 26,000,000 31,000,000 34,000,000 29,000,000

c. Cash 24,000,000 27,000,000 30,000,000 30,000,000

Accounts Receivable 24,000,000 27,000,000 30,000,000 30,000,000

d. Cost of LTCC 24,000,000 36,500,000 29,500,000 15,000,000

Construction in Progress 4,800,000 700,000 12,500,000 3,000,000
Construction in Progress 12,000,000
Revenue from LTCC 28,800,000 37,200,000 42,000,000

e. Progress Billings on Const. Contracts 120,000,000

Construction in Progress 120,000,000
 AA1 - Chapter 7 (2008 edition) page 12

Problem 7-6
2006 2007 2008
Contract price P14,000,000 P14,000,000 P13,000.000
Cost incurred to date P 5,000,000 P11,475,000 P12,295,000
Estimated cost to complete 7,500,000 1,275,000 -------
Total estimated cost P12,500,000 P12,750,000 P12,295,000
Total estimated gross profit P 1,500,000 P 1,250,000 P 705,000
Percentage of completion 40% 90% 100%
Gross profit to date P 600,000 P 1,125,000 P 705,000
Less Gross profit recognized in prior year ------ 600,000 1,125,000
Gross profit - current year P 600,000 P 525,000 P (420,000)

Problem 7-7
2006 2007 2008 Total
1. Recognized revenue P 1,100,000 P1,300,000 (2) P1,100,000 (3) P3,500,000
Cost of revenue 1,000,000 1,250,000 1,150,000 (4) 3,400,000 (5)
Gross Profit (loss) P 100,000 (1) P 50,000 P (50,000) P 100,000
2006 2007
2. Contract-price P3,500,000 P3,500,000
Cost incurred to date 1,000,000 2,250,000
Estimated cost to complete P2,250,000 P 950,000
Total estimated cost P3,250,000 P3,200,000
Total estimated gross profit 250,000 300,000
Percentage of completion 30.77% 70.3125%
Gross profit to date P 76,925 P 210,938
Less GP recognized in prior year/s - 76,925
GP to be recognized this year P 76,925 P 134,013
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 P2,178,000
Interest revenue (P2,178,000 x 4%) 87,200
Income from Franchise A P2,265,200
 AA1 - Chapter 7 (2008 edition) page 13

*Initial deposit P 1,400,000

PV of four payments [4% for 4 periods
(P600,000 x 3.6299)] 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 P3,578,000

Franchise cost 2,000,000
Franchise gross profit P1,578,000

Gross profit percentage: P1,578,000 P3,578,000 44.1%

Collections in 2008:
Initial fee P1,400,000
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 7,000,000
Notes Receivable 8,000,000
 AA1 - Chapter 7 (2008 edition) page 14

Unearned Franchise Fee 15,000,000

Aug. 15 Deferred Franchise Cost 800,000

Cash 800,000

Sept. 15 Deferred Franchise Cost 500,000

Cash 500,000

Dec. 31 Interest Receivable 400,000

Interest Revenue 400,000

2008
Jan. 1 Cash 2,400,000
Notes Receivable 2,000,000
Interest Receivable 400,000

15 Deferred Franchise Cost 1,000,000

Cash 1,000,000

31 Unearned Franchise Fee 15,000,000

Cost of Franchise Revenue 2,300,000
Franchise Fee Revenue 15,000,000
Deferred Franchise Cost 2,300,000

July 1 Cash 2,300,000

Notes Receivable 2,000,000
Interest Revenue 300,000
P6,000,000 x 10% x 6/12
Dec. 31 Interest Receivable 200,000
Interest Revenue 200,000

Problem 7-10
1. Downpayment made on 1/1/ 07 P 800,000.00
Present value of an ordinary annuity (P240,000 x 3.69590) 887,016.00
Total revenue recorded by Triple Eight P1,687.016.00
 AA1 - Chapter 7 (2008 edition) page 15

2. Cost of acquisition P 1,687,016

3. Cash 800,000.00
Notes Receivable 1,200,000.00
Discount on Notes Receivable 312,984.00
Unearned Franchise Fees 1,687,016.00

4. a. P800,000 cash received from downpayment. (P887,016.00 is recorded as unearned revenue from franchise fees).
b. P800,000 cash received from downpayment
a. None. (P 800,000 is recorded as unearned revenue from Franchise fees).

MULTIPLE CHOICE

1. C 6. B
2. B 7. D
3. D 8. D
4. A 9. D
5. C 10. C

11. D P20,000,000 x (3,000,000/15,000,000) = P4,000,000

12. A Contract price P10,500,000

Less Total estimated cost:
Cost incurred to date P3,150,000
Est. cost to complete 6,300,000 9,450,000
Total estimated income P 1,050,000
% of completion (3150/9450) 33 1/3%
Income to be recognized in 2007 P 350,000
 AA1 - Chapter 7 (2008 edition) page 16

13. B Contract price P9,000,000

Total estimated cost 8,100,000
Total estimated income P 900,000
Percentage-of-completion (27/81) 33 1/3%
Income recognized last year P 300,000

14. C Contract price P15,000,000

Total estimated cost (P4,650,000 + P10,850,000) 15,500,000
Total estimated loss to be recognized in full P 500,000

15 B Contract price P14,000,000

Total estimated cost (P4M + P4M + P2M) 10,000,000
Total estimated gross profit P 4,000,000
Percentage-of-completion (8M/10M) 80%

Gross profit to date P 3,200,000

Less Gross profit recognized in 2006
(P14M P8M = P6M x 4/8) 3,000,000
Gross profit to be recognized in 2007 P 200,000
16 B Contract price P3,000,000
Total estimated cost 1,800,000
Total estimated gross profit P1,200,000
Percentage-of-completion (600/1,800) 33 1/3%
Gross profit to be recognized in 2007 P 400,000
17. B Contract price P12,000,000
Total cost incurred 10,800,000
Gross profit P 1,200,000
Gross profit percentage (1,200/12,000) 10%

18 A Cubao Marikina
Contract price P16,200,000 P25,200,000
Total estimated cost 14,400,000 23,100,000
 AA1 - Chapter 7 (2008 edition) page 17

Total est. gross profit P 1,800,000 P 2,100,000

Percentage-of-completion 83 1/3% 100%
Gross profit to date P 1,500,000 P 2,100,000
Less GP recognized in 2007 750,000 1,872,000
GP to be recognized In 2008 P 750,000 P 228,000

Total GP = P750,000 + P228,000 P 978,000

19. 20,000,000/24,000,000 83.33%

20 Contract price P30,000,000

Total estimated cost 24,000,000
Total estimated gross profit P 6,000,000
Percentage-of-completion 83.33%
GP to date P 5,000,000
GP recognized in prior years
(P30M - P22M = P8M x 50%) 4,000,000
GP to be recognized in 2008 P 1,000,000

21. Total amount billed P843,750

Less Balance of accounts receivable 300,000
Total collections P543,750
Amount deposited 500,000
Cash collected not yet deposited P 43,750

22 P150,000 937,500/9,000,000 P1,440,000

23 C Mobilization fee (P1.2B x 1%) P 1.2M
Collections on billings (1.2B x 10% x 90%) 10.8M
Total fee received by NNO P12.0M

24 B Contract price P100.00M

Gross profit rate 25%
Total estimated gross profit P25.00M
Percentage-of-completion 50%
Realized gross profit P12.50M
 AA1 - Chapter 7 (2008 edition) page 18

25. B
26 A
27 B
28 C
29

30 A Downpayment P 50,000
First installment payment 50,000
Addl fee (P1,000,000 x 3%) 30,000
Earned Franchise Fees P130,000

31 C P 100,000 x 1/5 = P 20,000 + 1% of P500,000 = P 25,000

32 A P 1,000,000 + 5% of P8,000,000 = P1,400,000

33 C Downpayment P 100,000
PV of installment payment 199,650
Additional fee ( P 9,000,000 x 5% ) 450,000
Earned franchise fee P 749,650