COMPETENCY REVIEW AND ASSESSMENT

ADVANCED FINANCIAL ACCOUNTING AND REPORTING April 14, 2025

First Preboard Examination 1:00 PM to 4:00 PM

For items 1 to 4:

On January 1, 2022, ABC granted franchise to XYZ. The franchise agreement requires the franchisee to pay a
nonrefundable initial franchise fee of P3,000,000 and sales-based royalty of 8% of the sales of the franchisee.
The franchisee paid P1,000,000 upon signing of the agreement and the balance payable in four equal annual
installments starting December 31, 2022. The franchisee's credit rating indicates that he can borrow money at
7% for a loan of this type. The PV annuity factor for 4 periods at 7% is 3.3872.

In relation to the non-refundable initial franchise fee, the franchise agreement required the entity to render the
following distinct performance obligations:

• To construct the franchisee's stall with stand-alone selling price of P1,200,000.

• To deliver 40,000 units of raw materials to the franchisee with stand-alone selling price of P1,500,000.
• To allow the franchisee the access to the entity's tradename for a period of ten years starting January 1,
2022 with stand-alone selling price of P300,000.

On June 30, 2022, the entity completed the construction of the stall of the franchisee. As of December 31, 2022,
the entity was able to deliver 12,000 units of raw materials to the franchisee. For the year ended December 31,
2022, the franchisee reported sales revenue amounting to P1,200,000.

1. How much is the transaction price to be allocated among the performance obligations?

a. P1,693,600
b. P2,693,600
c. P2,656,000
d. P1,656,000

2. How much of the transaction price will be allocated to the construction of the franchisee’s stall?

a. P269,360
b. P1,346,800
c. P1,077,440
d. P2,693,600

3. How much is the amount of revenue to be recognized related to the performance obligation to deliver raw
materials to the franchisee?

a. P269,360
b. P404,040
c. P1,077,440
d. P1,508,416

4. How much is the amount of revenue to be recognized related to the performance obligation to provide access
to the entity’s tradename?

a. P26,936
b. P30,000
c. P269,360
d. P300,000

Page 1 of 12
For items 5 and 6:

In 2022, Gorgeous Co. enters into a fixed-price construction contract with a customer. At contract inception,
Gorgeous Co. assesses its performance obligations in the contract and concludes that it has a single
performance obligation that is satisfied over time. Gorgeous Co. determines that the measure of progress that
best depicts its performance on the contract is input method based on costs incurred.

Information on the contract follows:

2022 2023
Cumulative contract costs incurred 2,250,000 4,800,000
Cumulative profits recognized 750,000 1,200,000
Progress billings 2,400,000 3,600,000
Collections on progress billings 2,000,000 4,000,000
The contract is completed in 2023.

5. What amount of revenue is recognized in 2023?

a. 2,800,000
b. 3,000,000
c. 4,800,000
d. 6,000,000

6. How much is the transaction price in the contract?

a. 5,000,000
b. 6,000,000
c. 7,000,000
d. 9,000,000

7. On December 1, 2022, Canorous Co. granted a 5-year franchise right to Melodious, Inc. for an initial franchise
fee of P400,000 and a 10% sales-based royalty. The initial franchise fee is non-refundable and due upon signing
of the contract. At contract inception, Canorous determines that the nature of its promise to grant the license is
to provide the customer with the right to access Canorous’ intellectual property as it exists throughout the license
period.

As of December 31, 2022, Canorous has no remaining obligation or intent to refund any of the cash received, all
the initial services necessary to setup the contract have been performed, and Melodious started operating the
franchised business. Melodious reported sales of P800,000 for 2022. How much revenue shall Canorous
recognize in 2022?

a. 480,000
b. 86,667
c. 80,000
d. 0

For items 8 and 9:

The SAN AGUSTIN BUILDERS started work on three job sites during the current year. Any costs incurred are
expected to be recoverable. Data relating to the three jobs are given below:

Page 2 of 12
8. Calculate the net amount to be reported on the balance sheet for the above projects under the percentage of
completion method:

a. Contract Liability P (11,250)

b. Contract Liability P (13,750)
c. Contract Asset P 13,750
d. Contract Asset P 11,250

9. Calculate the net amount to be reported on the balance sheet for the above projects under the zero profit
method.

a. Contract Liability P (11,250)

b. Contract Liability P (13,750)
c. Contract Asset P 13,750
d. Contract Asset P 11,250

10. CONCRETE CONSTRUCTION COMPANY began construction work in 2021 for a project with a contract
price of P8,000,000. CONCRETE uses the cost-to-cost percentage of completion method. The financial for 2021
relating to the contract shows the following:

Accounts receivable P 500,000

Construction in Progress 1,600,000
Progress billings to date 1,500,000
Gross profit earned in 2021 200,000

Calculate the following items for the year 2021.

Cash Collections Cost incurred to date

a. P 1,000,000 P 1,400,000
b. P 7,500,000 P 1,400,000
c. P 1,000,000 P 1,600,000
a. P 1,400,000 P 1,600,000

For items 11 and 12:

On December 1, 20x1, CANOROUS Co. granted a 5-year franchise right to MELODIOUS, Inc. for an initial
franchise fee of ₱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 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.

11. If the promise to grant the franchise right is distinct and that the performance obligation is satisfied at a point
in time, how much revenue shall CANOROUS recognize in December 20x1?

a. 400,000 c. 0
b. 80,000 d. None of these

12. If the promise to grant the franchise right 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?

a. 400,000 c. 0
b. 80,000 d. 6,667

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13. The HERMOSILLA Construction Company was the lowest bidder on an office building construction contract.
The contract bid was P 70 million, with an estimated cost to complete the project of P 60 million. The contract
period was 34 months starting January 2019. The company uses the cost-to-cost method of estimating earnings.
Because of changes requested by the customer, the contract price was adjusted downward to P 65 million on
January 1, 2020.

A record of construction activities for the years 2019-2022 follows: (in millions)

Compute the gross profit (loss) realized in 2020.

A. P 4.167 million
B. P 2.806 million
C. P (1.360) million
D. P 3.317 million

14. On January 1, 2020, SMDC Corp.. entered into a contract to build a large office building for ABS Inc. for a
total contract price of P5,000,000. ABS Inc. will make annual payments to SMDC Corp.. but the amount of these
payments cannot exceed the direct costs incurred by SMDC Corp.. The construction contract provides ABS Inc.
with a final inspection right to ensure compliance with the contract terms prior to accepting the completed project.
It has been the accounting policy of SMDC Corp.. to use percentage-of-completion method to compute its
construction revenue and gross profit. On January 1, 2022, SMDC Corp.. implemented an accounting charge
from percentage-of-completion method to zero profit or cost recovery method.
The following data were provided by the accountant of ABS Inc for the year ended December 31, 2020, 2021
and 2022:
2020 2021 2022
Cost incurred each year 1,450,000 2,600,000 600,000
Estimated cost to complete at year end 3,150,000 400,000 -
Progress billings each year 400,000 2,000,000 2,600,000
Progress payment received each year 275,000 2,100,000 2,625,000

The above costs incurred for each year are inclusive at actual marketing expense and general administrative
costs which are not reimbursable under the construction contracts and provided by the accountant as follows:

2020 2021 2022

Marketing expense 70,000 200,000 120,000
General administrative cost 30,000 150,000 80,000

The corporate income tax for the years ended is 30%. What is the net income to be reported by SMDC Corp.,
for the year ended December 31, 2021?

A. P100,000
B. P150,000
C. P250,000
D. P280,000

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15. DMCI Company entered into a long term construction contract for 3 years. Contract price agreed was
P8,300,000. The outcome of the contract was estimated reliably. The following data were ascertained for the
contract:
2020 2021 2022
Percentage of completion 30% 82.5% ?
Estimated costs to complete P 3,920,000 P 1,680,000 ?

What is the construction-in-progress as of 2021?

A. 4,130,000
B. 4,940,000
C. 6,620,000
D. 6,847,500

16. A franchisor signed a contract with a franchisee on September 1, 2016. The franchisor receives a partial
payment of the initial franchise fee it changes to its franchisee and the balance of the franchise fee is due in the
next several years. The franchisor does not recognize revenue from franchise fee in 2016 when-

A. The period of refund has elapsed, collection of the note is certain, the franchisor has a fair measure of services
already period performed, but substantial services remain to be performed.
B. The refundability period has expired and no future services are required by the franchisor but collection of the
note is highly uncertain.
C. The down payment is refundable and substantial future services remain to be performed by the franchisor.
D. The down payment is nonrefundable, collection of the note is reasonably assured, and the franchisor has
performed substantially all of the services required by the initial fee.

17. Which of the following statements is wrong regarding long-term construction contracts?

A. The amount of expected warranty cost is part of the estimated cost at completion.
B. If upon completion of the project the balance of Progress Billings is greater than the balance of Construction
in Progress, the excess is due to customer which is a liability.
C. General administrative costs may be part of contract costs but would usually be expensed.
D. The latest estimated of anticipated cost of materials, labor and subcontracting costs and indirect cost required
to complete a project should be used to determine the progress toward completion.

18. A franchise agreement grants the franchisor an option to purchase the franchisee’s business. It is probable
that the option will be exercised. When recording the initial fee, the franchisor should

A. Record the entire initial franchise fee as a deferred credit which will reduce the franchisor’s investment in the
purchased outlet when the option is exercised.
B. Record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when
the option is exercised.
C. Record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction
of the future amounts receivable from the franchisee.
D. None of these.

19. SBX Restaurant sold a fast food restaurant franchise to NKE Corporation. The sale agreement signed on
January 2, 2021 called for a P70,000 down payment plus two P15,000 annual payments representing the value
of initial franchise services rendered by SBX. The present value factor of two annual payments appropriately
discounted at 10% is 1.7355. In addition, the agreement required the franchisee to pay 5% of its gross revenues
to the franchisor; this was deemed sufficient to cover the cost and provide a reasonable profit margin on
continuing franchise services to be performed by SBX. The restaurant opened early in 2021 and its sales for the
year amounted to P600,000. SBX Restaurant’s 2021 total revenue from the franchise will be:

A. P 0
B. P 30,000
C. P 56,033
D. P126,033

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20. On January 1, 2021, Mrs. Reed entered into a franchise agreement with KK to market their products. The
agreement provides for an initial fee of P15,500,000 payable as follows: P6,500,000 to be paid upon signing of
the contract and the balance in five equal annual payments every end of the year starting December 31, 2021.
Mrs. Reed signs a non-interest bearing notes for the balance. His credit rating indicates that he can borrow
money at 15% interest for a loan of this type. The present value of an annuity of P1 at 15% for 5 periods is 3.352.
The agreement further provides that the franchisee must pay a continuing franchise fee equal to 3% of the
monthly gross sales. On August 31, the franchiser completed
the initial services required in the contract at a cost of P7,290,120 and incurred indirect cost of P475,000.

The franchisee commenced business operations on November 30, 2021. The gross sales reported to the
franchisor were P1,800,000 for December, 2021. The first installment payment was made in due date. Assume
the collectability of the note is not reasonably assured, the net income for the year ended, December 31, 2021
is

A. P 4,121,288
B. P 5,026,268
C. P 5,243,480
D. P 4,551,268

Numbers 21 and 22

AAA Corp. had the following data ascertained before liquidation: Total book value of the assets were P250,000.
The book value of the inventories, P80,000 had an excess in the amount of P26,000 over its estimated fair value.
The equipment’s estimated fair value had an excess in the amount of P2,500 over its book value of P120,000.
Included in the book value of the assets was prepaid expenses of P18,000 which was considered worthless.
Other assets not mentioned above have an estimated fair value which was P15,000 less than its book value.
Total liabilities were P200,000. The accounts payable in the amount of P70,000 was secured by the inventories
while the notes payable in the amount of P95,000 was secured by the equipment. Other liabilities not mentioned
include salaries and taxes in the amount of P12,500.

21. What is the amount of the net free assets?

A. 44,500
B. 32,000
C. 93,000
D. 50,000

22. What is the estimated recovery for the partially secured creditors?

A. 67,299
B. 67,506
C. 67,128
D. 66,962

23. During corporate liquidation, which of the following types of creditors will always receive full settlements of
his claims?

A. Unsecured creditors with priority

B. Unsecured creditors with priority
C. Partially secured creditors
D. Fully secured creditors

For items 24 and 25:

The following data were ascertained for the month of September in the Statement of realization and liquidation
of BBB Corp.: Assets to be realized at the beginning of October were P18,000. Assets realized during the month
were P338,000. Unrecorded assets during the month were P25,000. Assets not sold or collected at the end of
August were P380,000. Liabilities assumed were P28,000. Liabilities not liquidated at the end of August were
P350,000. Liabilities paid were P268,800. Liabilities to be liquidated at the beginning of October were 109,200.
Supplementary charges were 86,350 and supplementary credits were P59,700. Equity at the end of August was
P40,500.

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24. What is the gain or loss in the statement of realization and liquidation?

A. 75,650
B. (75,650)
C. 19,650
D. (19,650)

25. What is the beginning cash balance?

A. 10,500
B. 56,050
C. 131,700
D. 65,150

26. On July 1, 2024, A, B and C formed ABC Partnership with original capital contribution of P240,000, P400,000
and P160,000. A is appointed as managing partner. During 2024, A, B and C made additional investments of
P400,000, P160,000 and P240,000, respectively. Also in 2024, A, B and C made drawings of P160,000, P80,000
and P320,000, respectively. At the end of 2024, the capital balance of C is reported at P256,000. The profit or
loss agreement of the partners is as follows:

● 10% interest on original capital contribution of the partners.

● Quarterly salary of P32,000 and P8,000 for A and B, respectively.
● Bonus to the managing partner equivalent to 20% of net income after interest and salary to all partners
● Remainder is to be distributed equally among the partners. The capital balance of A on December 31, 2024

A. 824,800
B. 808,000
C. 850,000
D. 926,000

For items 27 and 28:

PQR and CDE formed a partnership on January 1, 2024 by contributing capital of P1,050,000 and P150,000,
respectively. They agreed to share profits and losses 70% and 30% respectively. CDE manages the partnership
and is given a salary of P20,000 per month and a bonus of 20% of net income. Interest of 5% of the beginning
capital is to be provided to each partner and any remainder is to be divided according to their profit and loss
ratio. For the year ended December 31, 2024, the partnership generated a net income of P192,000 after salaries,
interests and bonus to partner(s).

27. What is the amount received by PQR in the distribution of profit?

A. 186,900
B. 134,400
C. 309,900
D. 182,900

28. What is the amount received by CDE in the distribution of profit?

A. 305,100
B. 309,100
C. 428,100
D. 420,600

Page 7 of 12
For items 29 and 30:

Partners RS, CD and AB decided to liquidate their partnership. The partnership’s statement of financial position
reveals the following:

Cash P 200,000 Liabilities P 240,000

Other assets 2,000,000 RS, Capital 720,000
CD, Capital 960,000
AB, Capital 280,000

The partners share profits and losses in a 4:4:2 ratio and all partners are personally solvent. The following are
two independent cases:

29. Assuming AB received P392,000 in cash in full settlement of his share of the partnership. What were the
proceeds on sale of the other assets?

A. 2,760,000
B. 2,560,000
C. 1,440,000
D. 1,640,000

30. Assuming CD received P580,000 in cash in full settlement of his share of the partnership. What is the amount
received by AB?

A. 90,000
B. 204,000
C. 280,000
D. 0

For items 31 and 32:

JKL Partnership engaged in steel manufacturing business had the following condensed financial position prior
to liquidation:

Assets Liabilities and Capital

Cash P 480,000 Liabilities P1,400,000
Non Cash assets 7,200,000 Loan payable to J 600,000
J, Capital (50%) 1,800,000
K, Capital (30%) 2,800,000
_________ L, Capital (20%) 1,080,000
Total P7,680,000 Total P7,680,000

Assuming assets with a book value of P2,800,000 were sold for P2,000,000 and that all available cash was
distributed. The following are two independent cases:

31. What amount would the remaining assets have to be sold in order for Partner K to receive a total of
P3,160,000 cash after liquidation?

A. 6,200,000
B. 6,400,000
C. 6,000,000
D. 6,600,000

32. What amount would the remaining assets have to be sold in order for Partner J to receive a total of
P1,980,000 cash after liquidation?

A. 4,380,000
B. 4,440,000
C. 4,360,000
D. 4,840,000

Page 8 of 12
For items 33 and 34:

CDE and FGH formed a partnership. CDE invested cash worth P340,000 and a machine. On the other hand,
FGH contributed cash worth P220,000 and equipment which has a mortgage of P140,000 which the partners
agreed to assume. The total agreed capital after formation was P1,440,000. They also further agreed to reflect
a 55:45 ratio as to their capital balances respectively. CDE’s capital was increased by P32,000 to conform with
their capital ratio agreement. In relation, the capital account of FGH decreased also by P32,000 to conform with
their capital ratio agreement. No other transfer occurred other than those mentioned.

33. How much is the fair value of the machine?

A. 452,000
B. 420,000
C. 428,000
D. 460,000

34. How much is the fair value of the equipment?

A. 536,000
B. 428,000
C. 600,000
D. 568,000

For items 35 to 37:

On December 31, 2023, the Statement of Financial Position of ABC Partnership provided the following data with
profit or loss ratio of 1:6:3:

Current Assets 8,000,000 Total Liabilities 4,800,000

Noncurrent Assets 16,000,000 A, Capital 7,200,000
B, Capital 6,400,000
C, Capital 5,600,000
The following are three independent cases:

35. Case A. On January 1, 2024, D was admitted to the partnership by purchasing 40% of the capital interest of
B at a price of P4,000,000. What is the capital balance of B after the admission of D on January 1, 2024?

A. 4,320,000
B. 3,840,000
C. 3,360,000
D. 2,400,000

36. Case B. On January 1, 2024, D was admitted to the partnership by investing P4,200,000 to the partnership
for a 20% capital interest. If all the assets of the existing partnership are properly valued, what is the capital
balance of C after the admission of D?

A. 5,600,000
B. 5,744,000
C. 5,456,000
D. 5,120,000

37. Case C. On January 1, 2024, D was admitted to the partnership by investing P3,500,000 to the partnership
for a 30% capital interest and total agreed capitalization of P25,000,000. What is the capital balance of A after
the admission of D?

A. 7,030,000
B. 7,370,000
C. 6,800,000
D. 7,430,000

Page 9 of 12
For items 38 and 39:

On December 31, 2023, ABC Partnership’s Statement of Financial Position shows that A, B and C have capital
balances of P3,200,000, P2,400,000 and P800,000 with profit or loss ratio of 1:4:5. On January 1, 2024, C retired
from the partnership and received P640,000.

The following are two independent cases:

38. At the time of C’s retirement, the assets and liabilities of the partnership are properly valued. What is the
capital balance of B after the retirement of C?

A. 2,272,000
B. 2,464,000
C. 2,528,000
D. 2,560,000

39. At the time of C’s retirement, an asset of the partnership is to be revalued. What is the capital balance of A
after the retirement of C?

A. 3,168,000
B. 3,184,000
C. 3,136,000
D. 3,232,000

For items 40 to 42:

RB and RL, partners sharing profits and losses at 30% and 70% have capital balances of P315,000 each. RZ is
admitted as a new partner, making a cash investment of P420,000, for a one-third interest in both capital and
earnings.

The following are independent cases:

40. Assuming RZ is credited in full for the amount of her investment. What is the new capital of RL?

A. 462,000
B. 315,000
C. 420,000
D. 525,000

41. Assuming the agreed capitalization of the partnership amounts to P990,000. What is the new capital of RB?

A. 297,000
B. 342,000
C. 324,000
D. 306,000

42. Assuming the agreed capitalization of the partnership amounts to P1,500,000. What is the
new capital of RL?

A. 630,000
B. 574,000
C. 686,000
D. 426,000

Page 10 of 12
For items 43 and 44:

LF, VR, and HQ, with capital balances of P668,000; P416,250; and P329,500 respectively, decided to dissolve
the partnership 6 months prior to year-end. Their profit and loss ratio is 45:25:30. Net income for the 6 months
period is P360,000. Prior to liquidation the Statement of Financial Position shows cash at P633,500 and liabilities
at P874,800. HQ received P493,750 after payment of P698,550 to outside creditors.

43. How much is the amount of cash distribution to LF?

A. 745,625
B. 914,375
C. 752,375
D. 583,625

44. How much is the amount of cash distribution to VR?

A. 553,125
B. 463,125
C. 459,375
D. 369,375

45. JJ, a partner in the JM partnership is entitled to 40% of the profits and losses. During 2024, JJ contributed
land to the partnership that cost him P15,000,000, but had a current value of P18,000,000.

Also, during 2024, JJ had drawings of P24,000,000. The balance of JJ’s capital accounts was
P36,000,000 at the beginning of the year and P45,000,000 at the end of the year.
Compute the partnership’s earnings (loss) for 2024:

A. (22,500,000)
B. (15,000,000)
C. 45,000,000
D. 37,500,000

For items 46 and 47:

TD decided to withdraw from his partnership with SM and MR. Before his withdrawal, TD’s capital balance was
P406,000, while SM’s was P448,000 and MR’s was P539,000. Also, the partnership’s total assets amounted to
P3,150,000, but the partners agreed that a fixed asset was under depreciated by P105,000. TD, SM and MR
share profits and losses in the ratio of 2:4:4, respectively. TD was paid P372,400 upon his retirement.

46. How much is the capital balance of SM after TD’s withdrawal?

A. 454,300
B. 412,300
C. 441,700
D. 496,300

47. How much is the capital balance of MR after TD’s withdrawal?

A. 587,300
B. 497,000
C. 503,300
D. 490,700

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48. OO and PP formed a new partnership. OO invests P45,000,000 in cash for his 60% interest in the capital
and profits of the business. PP contributes land that has an original cost of P6,000,000 and a fair market value
of P10,500,000, and a building that has a tax basis of P7,500,000 and a fair value of P13,500,000. The building
is subject to a P6,000,000 mortgage that the partnership will not assume.

What amount of cash should PP contribute?

A. 6,000,000
B. 12,000,000
C. 16,500,000
D. 22,500,000

For items 49 and 50:

On April 1, 2024, K, L and M formed a partnership with respective capital contribution of P2,000,000, P5,000,000
and P3,000,000. The Articles of Co-Partnership provides that profit or loss shall be distributed accordingly:

⮚ 20% interest on original capital contribution.

⮚ P120,000 quarterly salary for K and P30,000 monthly salary for M.
⮚ The remainder shall be distributed on the basis of original capital contribution ratio.

On December 31, 2024, K, L and M made withdrawals of P500,000, P1,000,000, and P200,000, respectively.
The statement of financial position of the partnership shows that L’s capital on December 31, 2024 is P6,500,000.

49. What is the capital balance of K on December 31, 2024?

A. 1,360,000
B. 3,360,000
C. 2,860,000
D. 2,960,000

50. What is the capital balance of M on December 31, 2024?

A. 4,970,000
B. 4,770,000
C. 4,570,000
D. 4,920,000

- END OF EXAMINATION -

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