ACCOUNTING FOR SPECIAL TRANSACTIONS
FINAL GRADING EXAMINATION
1. Which of the following is not considered an unsecured liability with priority?
a. Administrative expenses relating to liquidation
b. Unpaid employee salaries and other benefits
c. Liability with collateral security
d. Taxes and assessments
2. The primary difference between a balance sheet and an accounting statement of affairs is that
a. a balance sheet reflects book values, while a statement of affairs emphasizes realization values.
b. assets are arranged in a different sequence.
c. liabilities are arranged in a different sequence.
d. owners’ equity is not considered in the statement of affairs.
3. An arrangement of which two or more parties have joint control.
a. joint operation
b. joint venture
c. joint arrangement
d. elbow joint
4. According to PFRS 11, it is a separately identifiable financial structure, including separate legal entities
or entities recognized by statute, regardless of whether those entities have a legal personality.
a. separate vehicle
b. special purpose entity
c. special purpose vehicle
d. public utility vehicle
5. Read Co. and Learn Co. are national distributors of textbooks. Read and Learn enters into a contract to
acquire a warehouse in a particular region. Each party will use the warehouse to store its own
inventories. The parties agree to share in the costs of acquiring and maintaining the warehouse. The
arrangement between Read and Learn is most likely a
a. joint operation
b. jointly controlled asset
c. joint venture
d. none of these
6. A party to a joint venture that has joint control of that joint venture.
a. joint venturist
b. joint operationer
c. joint arrangementor
d. joint venturer
7. At contract inception, PFRS 15 requires an entity to determine how the performance obligations
identified in the contract will be satisfied. According to PFRS 15, how does an entity satisfy a
performance obligation in a long-term construction contract?
a. over time
b. at a point in time
c. any time
d. either a or b
8. Which of the following statements is correct?
a. Long-term construction contracts are unique from other contracts with customers. Therefore, PFRS
15 excludes from its scope the accounting for long-term construction contracts.
b. Long-term construction contracts are unique from other contracts with customers. Therefore, PFRS
15 requires an entity to recognize revenue from long-term construction contracts using either the
percentage of completion method or the zero-profit method.
c. PFRS 15 does not provide a special distinction between long-term construction contracts from other
types of contracts with customers. Therefore, an entity shall apply the same principles in accounting
for long-term construction contracts as those applied to other types of contracts with customers.
d. PFRS 15 does not exclude long-term construction contracts from its scope. However, because of the
unique nature of long-term construction contracts, PFRS 15 requires an entity to recognize revenue
from a long-term construction contract that is expected to be completed within 3 years or more using
the percentage of completion method. For those that are expected to be completed within a shorter
period, revenue shall be recognized when construction is complete.
Use the following information for the next two questions:
PARAMOUR Co. was contracted by LOVER, Inc. for the construction of a flyover in 20x1. The contract price
is ₱10M. Information on costs is as follows:
20x1 20x2
Total costs incurred to date 1,600,000 6,000,000
Estimated costs to complete 6,400,000 1,500,000
9. How much revenue is recognized in 20x2?
a. 8M
b. 6M
c. 4M
d. 0
10. What is the percentage of the progress completed in 20x2?
a. 80%
b. 60%
c. 40%
d. 16%
11. VALEDICTION Construction Co. entered into a ₱80M fixed price contract for the construction of a private
road for FAREWELL SPEECH, Inc. The performance obligation on the contract is satisfied over time.
VALEDICTION measures its progress on the contract using the “cost-to-cost” method. The estimated
total contract cost is ₱40M. The following were the actual costs incurred by VALEDICTION during the
first year of the construction:
Costs of negotiating the contract (charged immediately as expense) 400,000
Costs of materials used in construction 12,000,000
Costs of materials purchased but not yet used in construction 2,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Depreciation of idle construction equipment 240,000
Costs of moving plant, equipment and materials to and from the contract site 160,000
Costs of hiring plant and equipment 560,000
Advance payments to subcontractors (subcontracted work is not yet started) 80,000
What is the percentage of completion of the contract as of the end of the first year?
a. 42%
b. 45%
c. 46%
d. 50%
12. On Oct. 1, 20x1, ABC Co. enters into a construction contract with a customer. The performance
obligation in the contract will be satisfied over time. ABC Co. uses the “cost-to-cost” method in
measuring its progress. The estimated total contract cost is ₱10M. In 20x1, ABC Co. incurred a total cost
of ₱6M, which includes ₱2M advance payment to a subcontractor (the subcontracted work is not yet
started) and ₱200,000 cost of materials not yet installed. ABC Co. does not regard the cost of the
unused materials as significant in relation to the expected total contract costs. Moreover, ABC Co.
retains control over the unused materials because it can use them in a contract with another customer.
The contract price is ₱20M. How much is the revenue recognized in 20x1?
a. 7,600,000
b. 12,000,000
c. 8,200,000
d. 11,600,000
13. On January 1, 20x1, ABC Co. enters into a contract with a customer for the construction of a building.
The contract price is ₱1,000,000. The following are the transactions during 20x1:
At contract inception, the customer makes an advance payment of ₱100,000 as facilitation fee.
ABC Co. incurs total contract costs of ₱300,000 during the period.
The estimated costs to complete as of year-end amounts to ₱500,000.
ABC Co. collects the billing, net of 10% retention by the customer to be used to rectify any
unsatisfactory work determined at the completion of the contract.
How much is the gross profit earned from the contract in 20x1?
a. 75,000
b. 82,000
c. 375,000
d. 482,000
Use the following information for the next three questions:
In 20x1, ABC Co. enters into a construction contract with a customer. The contract price is ₱10,000,000.
Information on the contract follows:
20x1 20x2 20x3
Costs incurred to date 2,400,000 4,500,000 6,000,000
Estimated costs to complete 3,600,000 1,500,000 -
14. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it
has a single performance obligation that is satisfied over time. ABC Co. determines that the measure of
progress that best depicts its performance on the contract is “cost-to-cost” method. How much is the
revenue recognized in 20x1?
a. 4,200,000
b. 4,000,000
c. 2,800,000
d. 0
15. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it
has a single performance obligation that is satisfied over time. However, ABC Co. determines that the
outcome of the performance obligation cannot be reasonably measured but expects to recover the
contract costs incurred. How much is the gross profit recognized in 20x3?
a. 5,500,000
b. 1,500,000
c. 4,000,000
d. 0
16. At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it
has a single performance obligation. In its determination of the satisfaction of the performance obligation,
ABC Co. identifies that, during the construction period, ABC Co. retains control over the asset created in
the contract. This precludes the customer from simultaneously receiving and consuming the benefits
provided by ABC Co.’s performance as ABC Co. performs. Moreover, the asset created in the contract
has an alternative use to ABC Co. because, in case the contract is cancelled, ABC Co. retains ownership
over any asset created and can direct that asset for another use without significant modification or cost.
Accordingly, ABC Co. concludes that the performance obligation is satisfied at a point in time. ABC Co.
determines the point in time when the performance obligation is satisfied using the principles in PFRS 15
and concludes that the performance obligation is satisfied only when the construction is completed and
the control over the promised good is transferred to the customer. How much is the revenue recognized
in 20x1?
a. 4,200,000
b. 4,000,000
c. 2,400,000
d. 0
17. You are an accountant. Your client, a franchisor, asked you for an advice regarding the recognition of
revenue from a franchise contract. Your advice to your client would most certainly be based on which of
the following standards?
a. FAS No. 45 (US GAAP)
b. PFRS 15
c. PAS 15
d. PFRS 18
18. If the promise to grant a license is distinct and that the license provides the customer the “right to
access” the entity’s intellectual property, how is revenue recognized from the initial fee in the contract?
a. in full upon the signing of the contract
b. in full when the customer obtains and starts using the license
c. in full when the initial services to setup the contract are substantially performed
d. deferred and amortized over the license period
Use the following information for the next two questions:
On Jan. 1, 20x1, Pane Co. entered into a franchise agreement with Hero Co. The franchise contract gives
Hero Co. the right to use Pane’s trademark and proprietary processes for a period of 4 years. The franchise
requires payment of an upfront fee of ₱1,000,000, payable at contract inception, and 5% monthly royalty
based on sales. Aside from the granting of the license, the franchise agreement also requires Pane Co. to
undertake pre-opening activities to setup the contract and post-commencement activities, such as research
and development and marketing campaigns, to support the intellectual property. Although the activities do
not result in the direct transfer of a good or service to Hero Co. as the activities occur, it is expected that
Hero Co. will benefit from them. All the necessary preparations were completed and Hero Co. started
business operations on January 31, 20x1.
19. How should Pane Co. recognize revenue from the initial franchise fee?
a. in full on January 1, 20x1
b. in full on January 31, 20x1
c. deferred and amortized over 4 years starting Jan. 1, 20x1
d. deferred and amortized over 4 years starting Jan. 31, 20x1
20. How should Pane Co. recognize revenue from the continuing franchise fee?
a. Pane Co. shall estimate the variable consideration and amortize it as revenue in full on Jan. 1, 20x1.
b. Pane Co. shall estimate the variable consideration and amortize it as revenue over the license
period.
c. Pane Co. shall estimate the variable consideration, discount it to present value, subject it to
“Constraining estimates of variable consideration,” and amortize it to revenue over the license
period.
d. Pane Co. shall recognize revenue equal to 5% of the franchisee’s sales as the sales occur.
21. On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a fixed
fee of ₱100,000 payable as follows:
20% payable upon signing of contract.
80% due in four equal annual installments starting December 31, 20x2. The appropriate discount
rate is 12%.
The license provides Customer X rights over Entity A’s patented processes. Customer X continues to
operate using its trade name and has the discretion of developing a new product name for the products it will
produce using the patented processes. The license does not explicitly require Entity A to undertake activities
that will significantly affect the intellectual property to which Customer X has rights. Neither does Customer X
expect that Entity A will undertake such activities. Entity A grants the license to Customer X on December 31,
20x1. How much revenue from the franchise contract will Entity A recognize in 20x1?
a. 80,747
b. 21,187
c. 20,000
d. 0
22. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the
a. consignor when the goods are shipped to the consignee.
b. consignee when the goods are shipped to the third party.
c. consignor when notification is received that the consignee has sold the goods.
d. consignee when cash is received from the customer.
Use the following information for the next two questions:
Schindler Co. consigns 20 water heaters to Paralax Co. on January 1, 20x1. The unit cost per water heater is
₱10,000. Schindler pays ₱3,000 in transporting the water heaters to Paralax. At month-end, Paralax remits
₱232,000 for the sale of 16 water heaters, after deduction for the following:
20% commission based on selling price
Freight out ₱16,000
Installation costs ₱ 8,000
23. How much is the profit recognized by Schindler on the consignment arrangement?
a. 60,600
b. 66,000
c. 66,900
d. 69,600
24. How much is the total cost of the unsold water heaters?
a. 40,600
b. 44,600
c. 46,400
d. 46,000
Use the following information for the next two questions:
CR Manufacturing Co. consigned to CE Trading Corp. twelve (12) Sony colored TV sets which cost ₱9,000
each. Freight out was paid by the consignor in the amount of ₱600. CE Trading sold eight (8) sets, rendered
an account sales, and remitted the amount of ₱82,600 after deducting the following from the selling price of
the sets sold:
Commission on selling price 12%
Selling expenses 1,200
Cost of antennae given free 1,400
Delivery and installation 2,800
25. The total selling price of the eight (8) sets sold by CE Trading Corp. is
a. 100,000
b. 88,000
c. 98,560
d. 78,571.43
26. The net profit of CR Manufacturing Co. on the eight (8) sets sold by CE Trading Corp. is:
a. 40
b. 9,332.80
c. 10,200
d. 10,600
Use the following information for the next two questions:
Stainless Works Mfg. Co. consigned 5 dozens of stainless chairs to Urban Furniture Co. on April 1, 20x1.
Each chair cost ₱120 and the consignor paid ₱600 for the shipment to the consignee. On August 15, 20x1,
36 were already sold and the consignee rendered an account sales, and remitted the balance due the
consignor in the amount of ₱5,580 after deducting the following:
Commission at 15% of the selling price
Selling expenses ₱360
Delivery and installation 180
27. How much is Stainless Works Mfg. Co.’s profit on the consignment?
a. 660
b. 900
c. 1,000
d. 1,260
28. The cost of the inventory on consignment in the hands of Urban Furniture Co. is
a. 2,880
b. 3,120
c. 3,480
d. 4,320
29. Leaf Co. began operations on January 1, 20x1. Leaf uses the “installment sales method” of accounting.
Data for 20x1 are as follows:
Installment accounts receivable, Dec. 31, 20x1 500,000
Installment sales 900,000
Cost ratio 60%
How much is the realized gross profit in 20x1?
a. 148,000
b. 152,000
c. 160,000
d. 162,000
30. BUCOLIC RURAL Co. uses the “installment sales method.” Information on BUCOLIC’s transactions
during 20x1 and 20x2 is shown below:
20x1 20x2
Installment sales 2,000,000 2,400,000
Cost of sales 1,200,000 1,320,000
Gross profit 800,000 1,080,000
Cash collections from:
20x1 sales 800,000 400,000
20x2 sales 960,000
How much is the total realized gross profit in 20x2?
a. 160,000
b. 432,000
c. 592,000
d. 642,000
31. Banana Co. began operations on January 2, 20x1. Banana uses the “installment sales method” of
accounting. Banana’s records on December 31, 20x1 show the following information:
Installment accounts receivable, Dec. 31, 20x1 800,000
Deferred gross profit, before year-end adjustment 560,000
Gross profit on sales 40%
How much is the realized gross profit in 20x1?
a. 240,000
b. 248,000
c. 256,000
d. 260,000
Use the following information for the next three questions:
Bell Co. uses the “installment sales method.” In 20x1, Bell Co. sells an inventory costing ₱450,000 for an
installment sale price of ₱600,000. Bell makes the following collections:
20x1 ₱400,000
20x2 ₱150,000
20x3 ₱ 50,000
32. How much are the realized gross profits in 20x1, 20x2 and 20x3, respectively?
20x1 20x2 20x3
a. 89,000 29,200 8,600
b. 92,000 37,500 10,500
c. 100,000 26,800 12,500
d. 100,000 37,500 12,500
33. How much are the balances of installment accounts receivable at the end of 20x1, 20x2 and 20x3,
respectively?
20x1 20x2 20x3
a. 200,000 42,000 10,000
b. 200,000 50,000 0
c. 180,000 50,000 10,000
d. 180,000 30,000 0
34. How much is the deferred gross profit at the end of 20x1, 20x2 and 20x3, respectively?
20x1 20x2 20x3
a. 48,000 12,500 6,000
b. 50,000 10,000 0
c. 40,000 10,000 2,000
d. 50,000 12,500 0
35. Garden Co. uses the installment sales method. Garden Co. sells a good costing ₱10,000 for an
installment sale price of ₱16,000. Garden Co. accepts old merchandise as down payment and gives the
customer a trade-in value of ₱4,000 for this merchandise. The fair value of the old merchandise is
₱4,000. Subsequent cash collections during the period amount to ₱6,000. How much is the realized
gross profit recognized in the year of sale?
a. 3,750
b. 5,966
c. 6,333
d. 6,667
36. ABASE HUMILIATE Co. is currently preparing its combined financial statements for the year ended
December 31, 20x1. As of this date, the “Investment in branch” account has a balance of ₱380,000 while
the “Home office” account has a balance of ₱528,000. The following information has been gathered:
(a) The home office allocated unpaid utilities expenses amounting to ₱40,000 to the branch which the
branch did not record in full. Instead, the branch sent a wrong adjusting memo to the home office
reducing the charge by ₱10,000 and setting up a liability for the remaining amount.
(b) The home office erroneously credited the branch for a return of shipment of merchandise worth
₱100,000. The branch did not make any return of merchandise.
(c) The branch mistakenly received a copy of the home office correcting entry for item (b) above dated
January 3, 20x2 and entered a credit in favor of the home office on December 31, 20x1.
(d) The branch mistakenly sent the home office a debit memo amounting to ₱12,000 for an apparent
remittance of collections which did not happen. The home office did not record the debit memo.
How much is the net adjustment to the “Investment in branch” account? increase (decrease)
a. 100,000
b. 48,000
c. (48,000)
d. (52,000)
Use the following information for the next eleven questions:
The following information was taken from the records of a branch:
Sales by branch 2,800,000
Beginning inventory -
Billings to branch by home office 2,500,000
Operating expenses 400,000
Ending inventory at billed price 1,000,000
The following information was taken from the records of the home office:
Branch current account 2,600,000
Shipments to branch 2,000,000
Allowance for markup - Unadjusted 500,000
37. What is the billing rate based on cost?
a. 20%
b. 25%
c. 120%
d. 125%
38. What is markup percentage based on cost?
a. 20%
b. 25%
c. 120%
d. 125%
39. How much is the sales of branch to be included in the combined financial statements?
a. 2,800,000
b. 2,240,000
c. 2,333,333
d. 0
40. How much is the realized markup of the branch?
a. 300,000
b. 240,000
c. 380,000
d. 270,000
41. How much is the cost of goods sold of the branch to be included in the combined financial statements?
a. 1,500,000
b. 1,800,000
c. 1,200,000
d. 900,000
42. How much is the ending inventory of the branch to be included in the combined financial statements?
a. 1,000,000
b. 8333,333
c. 1,250,000
d. 800,000
43. How much is the unrealized markup in ending inventory?
a. 200,000
b. 166,667
c. 230,000
d. 266,667
44. How much is the ending balance of the “allowance for markup” account before combining the financial
statements?
a. 200,000
b. 166,667
c. 230,000
d. 266,667
45. How much is the individual profit of the branch?
a. 880,000
b. 900,000
c. 920,000
d. 1,020,000
46. How much is the true profit of the branch?
a. 1,200,000
b. 1,400,000
c. 1,250,000
d. 1,266,667
47. How much is the adjusted balance of the branch current account immediately prior to combining the
financial statements?
a. 3,800,000
b. 3,400,000
c. 3,500,000
d. 3,666,667
48. The home office transfers inventory worth ₱600,000 to Branch #1. Freight paid by the home office is
₱40,000. Later on, the home office instructs Branch #1 to transfer the merchandise to Branch #2. Branch
#1 pays freight of ₱12,000. If the merchandise had been shipped directly from the home office to Branch
#2, the freight cost would have been ₱56,000. The entries to record the transactions described includes
a. a credit to savings on freight of ₱4,000 in the books of Branch #1.
b. a credit to savings on freight of ₱4,000 in the books of Branch #2.
c. a credit to savings on freight of ₱4,000 in the books of the home office.
d. none of these
49. Which of the following is a characteristic of an insurance contract?
a. transfer of insignificant insurance risk from the policyholder to the issuer
b. the policyholder pays the issuer in exchange for the transfer of financial risk
c. the issuer indemnifies the policyholder for losses when the insured event occurs
d. transfer of significant insurance risk from the issuer to the policyholder
Rainy August Afternoon Co. (RAA) enters into a service concession arrangement whereby RAA undertakes
to build a public infrastructure, operate that infrastructure over a specified period, and thereafter transfer it to
the government (the grantor). In addition, RAA is obligated to recondition the infrastructure a year before it is
handed over to the government. This is regardless of the infrastructure’s condition and level of usage. In
return, the government promises to pay RAA a fixed amount of cash plus interest in each year during the
operation period.
50. What standard should RAA apply in recognizing and measuring the revenue from the contract?
a. IFRIC 15
b. PFRS 12
c. PFRS 9
d. PFRS 15
