Accounting for Construction Contracts and Franchise Operations PDF

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Accounting for Construction Contracts and Franchise OperationsAFAR 2020 State the correct sequence of the following steps of revenue recognition under PFRS 15. I. Determine the transaction priceII. Recognize revenue when (or as) the entity satisfies a performance obligationIII. Identify the performa...

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Accounting for Construction Contracts and Franchise Operations AFAR 2020 1. State the correct sequence of the following steps of revenue recognition under PFRS 15. I. Determine the transaction price II. Recognize revenue when (or as) the entity satisfies a performance obligation III. Identify the performance obligations in the contract IV. Allocate the transaction price to the performance obligations in the contract V. Identify the contract with the customer a) V, I, III, IV, II b) V, I, IV, III, II

c) V, III, I, IV, II d) V, IV, II, I, III

2. Which of the following correctly relates to ‘Step 2’ in the recognition of revenue under PFRS 15? a. The entity shall assess the customer’s ability and intention to pay the consideration in the contract when they become due. b. The entity shall determine the transaction price and shall consider whether the transaction price includes, among other things, a variable consideration or significant financing. c. The entity shall treat each promise to transfer a distinct good or service as a performance obligation. d. The entity shall recognize revenue when (or as) a performance obligation is satisfied. 3. According to PFRS 15, a good or service is distinct if a. it is tangible. b. the customer can benefit from it, either on its own or together with other resources that are readily available to the customer. c. the good or service is separately identifiable. d. b and c 4. If an entity’s promise to grant a license is not distinct, a. the general principles of PFRS 15 are applied to determine whether the performance obligation is satisfied over time or at a point in time. b. the specific principles of PFRS 15 are applied to determine whether the performance obligation is satisfied over time or at a point in time. c. both the general and specific principles are used to determine whether the performance obligation is satisfied over time or at a point in time and whether the nature of the promise to grant the license is a ‘right to access’ or a ‘right to use.’ d. US GAAP (FAS No. 45) is applied to determine whether there is substantial performance of the initial services required in the contract.

5. An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas, has the right to show the movie in its cinemas for six weeks. In exchange for providing the license, the entity will receive a portion of the operator’s ticket sales for Movie XYZ. Which of the following statements is incorrect? a. The only performance obligation in the contract is the promise to grant the license. b. The fact that the performance obligation in the contract is satisfied over time or at a point in time is irrelevant when determining how revenue is recognized on the contract. c. The transaction price is a variable consideration. d. The entity shall estimate the variable consideration, subject the estimate to the “constraining’ principle of PFRS 15, and recognize the resulting amount at the point in time when the license is transferred to the customer. 6. On Nov. 1, 20x1, DRINK Co. entered into a franchise contract with TIPPLE Co. The franchise agreement requires an initial franchise fee that is payable as follows: 20% down payment at the signing of the contract, and the balance due in four equal annual payments starting November 1, 20x2. The license period is 4 years. The franchise contract requires DRINK Co. to undertake pre-opening activities necessary to setup the contract and post-opening activities that would further improve the intellectual property to which the franchisee has rights. All the preopening activities are completed, and TIPPLE Co. started operations, on January 31, 20x2. How should DRINK Co. recognize revenue from the initial franchise fee? a. The sum of the cash down payment and the present value of the deferred balance are recognized as revenue in full on January 31, 20x1. b. The sum of the cash down payment and the present value of the deferred balance are recognized as revenue over the license period. c. The cash down payment is recognized in full on January 1, 20x2 but the balance is amortized over the license period. d. The cash down payment is recognized in full on January 31, 20x2 but the balance is amortized over the license period. 7. On December 1, 20x1, CANOROUS Co. granted a 5-year franchise right to MELODIOUS, Inc. for an initial franchise fee of ₱400,000 and a 10% sales-based royalty. The initial franchise fee is nonrefundable 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’s intellectual property as it exist throughout the license period. As of December 31, 20x1, 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 ₱800,000 for 20x1. How much revenue shall CANOROUS recognize in 20x1? a. b. c. d.

86,667 480,000 80,000 0

Use the following information for the next three questions: On January 1, 20x1, Sunbathe Co. enters into a contract with a customer to transfer a license. 



  

The initial franchise fee is ₱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 states that the initial franchise fee consists of ₱30,000 consideration for the equipment that Sunbathe Co. will transfer to the customer and the ₱70,000 balance for the franchise rights. Sunbathe regularly sells the equipment and the license separately. The stand-alone selling prices are ₱40,000 for the equipment and ₱38,000 for the license. The license provides the customer the “right to use” Sunbathe’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.

8. The journal entry on Jan. 1, 20x1 includes a _____ to Contract Liability for __________. (Sunbathe Co. uses ’Unearned interest income’ account.) a. b. c. d.

dedit; 80,747 credit; 80,747 credit; 80,000 dedit; 80,000

9. The journal entry on Jan. 15, 20x1 includes a ______ to Revenue for ______. (Sunbathe Co. recognizes interest income only at year-end.) a. b. c. d.

Debit; 41,409 Credit; 41,409 Debit; 40,409 Credit; 40,409

10. The journal entry on Feb. 1, 20x1 includes a ______ to Revenue for ______. a. b. c. d.

Debit; 38,338 Credit; 39,338 Debit; 39,338 Credit; 38,338

11. The primary issue in the accounting for construction contracts is a. the determination of the percentage of completion and revenue to be recognized during the period. b. the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed c. the determination of the rate at which physical performance has been made during the reporting period and the future performance on which future revenues will be allocated. d. the allocation of costs of a long-lived asset to permit the proper matching of costs with revenues.

12. According to PFRS 15, each contract is accounted for separately. However, two or more contracts entered into at or near the same time with the same customer are combined and accounted for as a single contract if any of the following conditions are met, except a. The contracts are negotiated as a package with a single commercial objective. b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract. c. At contract inception, the collectability of the consideration is probable of collection. d. Some or all of the goods or services promised in the contracts are a single performance obligation. 13. Which of the following does not indicate that a promise to transfer a good or service is separately identifiable? a. The good or service is not highly interrelated with other goods or services promised in the contract. b. The customer’s decision of not purchasing a good or service affects the other promised goods or services in the contract. c. The good or service is not an input to a combined output specified by the customer. d. The good or service does not significantly modify another good or service promised in the contract. Use the following information for the next three questions: Information on Red Hot Co.’s construction contracts with customers which commenced during 20x1 is shown below:

Cont r actpr i ce Cos t si ncur r eddur i ngt hey ear Est i mat edcost st ocompl et e Pr ogr essbi l l i ngs Col l ect i ons

Cont r act1

Cont r act2

420, 000 240, 000 120, 000 150, 000 90, 000

300, 000 280, 000 40, 000 270, 000 250, 000

14. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1 and Contract 2 is satisfied over time. Red Hot Co. uses the ‘cost-to-cost’ method in measuring its progress on the contract. How much total profit (loss) is recognized from the two contracts in 20x1? a. b. c. d.

0 (20,000) 40,000 20,000

15. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1 and Contract 2 is satisfied over time. However, Red Hot Co. determined that the outcome of the performance obligation in each of the contracts cannot be reasonably measured but contract costs incurred are recoverable. How much total profit (loss) is recognized from the two contracts in 20x1?

a. b. c. d.

40,000 20,000 0 (20,000)

16. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1 and Contract 2 is satisfied at a point in time, that is, when the construction is completed. How much total profit (loss) is recognized from the two contracts in 20x1? a. b. c. d.

20,000 40,000 (20,000) 0

17. VALEDICTION Construction Co. entered into an ₱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 VALEDICTION incurred the following costs in the first year of the construction: Cost sofnegot i at i ngt hecont r act( char gedi mmedi at el yasexpense)

400, 000

Cost sofmat er i al susedi nconst r uct i on Cost sofmat er i al spur chas edbutnotyetusedi nConst r uct i on

12, 000, 000 2, 000, 000

Si t el aborcost s

4, 000, 000

Si t esuper vi si oncost s

800, 000

Depr eci at i onofequi pmentusedi nconst r uct i on

480, 000

Depr eci at i onofi dl eequi pmentnotusedi nt heCont r act

240, 000

Cost sofmovi ngequi pmentandmat er i al st oandf r om t heconst r uct i onsi t e

160, 000

Cost sofhi r i ngequi pment

560, 000

Advancepaymentt osubcont r act or( t hesubcont r act edwor ki snotyetst ar t ed) 80, 000

How much revenue is recognized in the first year of the contract? a. b. c. d.

45 million 25 million 46 million 36 million

Use the following information for the next two questions: On July 1, 20x1, Contractor Co. enters into a contract with a customer for the construction of a building. At contract inception, Contractor Co. assesses the contract in accordance with the principles of PFRS 15 and concludes that it has a single performance obligation that is satisfied over time. Contractor Co. then determines that the appropriate measure of its progress on the contract is input method based on costs incurred. Information on the contract is shown below: Cont r actpr i ce 600, 000 Cont r actcost si ncur r eddur i ng20x1 120, 000 Est i mat edr emai ni ngcos t sasofDec.31,20x1 240, 000 Bi l l i ngst ot hecus t omerdur i ng20x1 Col l ec t i onsonbi l l i ngsdur i ng20x1 18. What amount of revenue is recognized on the contract in 20x1? a. b. c. d.

180, 000 60, 000

200,000 240,000 180,000 220,000

19. What amount of Contract Asset (Liability) is presented in Contractor Co’s. statement of financial position under PFRS 15? a. b. c. d.

40,000 20,000 (40,000) (20,000)

20. In 20x1, Silverchair Co., a construction company, enters into a contract with a customer for the construction of a building. The contract states a fixed fee of ₱8,700,000. Silverchair’s performance obligation in the contract is satisfied over time. Silverchair uses the ‘cost-to-cost’ method in measuring its progress in the contract. Information on the contract follows:

Est i mat edt ot alcos t satcompl et i on Per cent ageofcompl et i on How much is the profit recognized in 20x2? a. b. c. d.

1,131,000 804,750 840,750 978,750

20x1 6, 525, 000 15%

20x2 6, 960, 000 65%

Use the following information for the next two questions: In 20x1, Gorgeous Too Co. enters into a fixed-price construction contract with a customer. At contract inception, Gorgeous Too Co. assesses its performance obligations in the contract and concludes that it has a single performance obligation that is satisfied over time. Gorgeous Too 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: Cumul at i vecont r actcost si ncur r ed Cumul at i vepr ofit sr ecogni z ed

20x1

20x2

2, 250, 000

4, 800, 000

750, 000

1, 200, 000

Pr ogr essbi l l i ngs

2, 400, 000

3, 600, 000

Col l ect i onsonpr ogr essbi l l i ngs

2, 000, 000

4, 000, 000

The contract is completed in 20x2. 21. What amount of revenue is recognized in 20x2? a. b. c. d.

2,800,000 3,000,000 6,000,000 4,800,000

22. How much is the transaction price in the contract? a. b. c. d.

9,000,000 6,000,000 7,000,000 5,000,000

24. In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive an additional payment of ₱200,000. Information on the project is shown below: Cost si ncur r edt odat e

20x1 2, 400, 000

20x2 4, 575, 000

20x3 6, 125, 000

Est i mat edcost st ocompl et e

3, 600, 000

1, 525, 000

125, 000

In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in 20x3, ABC assessed that project will be completed earlier than originally expected and thus it is now highly probable that the incentive payment will be received. How much profit is recognized on the contract in 20x3? a. 634,000 b. 595,000 c. 603,000

d. 506,000

Use the following information for the next two questions: In 20x1, Salamagi Co. entered into a contract with a customer. The contract stipulates the following:   

Contract price of ₱20,000,000 5% mobilization fee due upon signing of the contract, to be deducted from the final billing 10% customer retention on all subsequent progress billings, to be paid to Salamagi on completion of the project

Salamagi Co. estimated a ₱5,000,000 gross profit from the project. The percentage of completion method will be used. In 20x1, Salamagi billed the customer for 50% completion of the project. The customer accepted all the billings, except one for 10% which was accepted on January of the following year. All the accepted billings were collected during the year except an 8% billing which was due January of the following year. 25. What is the amount of profit recognized from the contract in 20x1? a. b. c. d.

2,900,000 2,720,000 2,650,000 2,500,000

26. What is the total amount of collections from the billings in 20x1? a. b. c. d.

6,760,000 6,400,000 7,400,000 5,760,000

Use the following information for the next two questions: In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators for a total consideration of ₱5,000,000. The promised refurbishment service, including the installation of elevators, is a single performance obligation satisfied over time. Total expected costs are ₱4,000,000, including ₱1,500,000 for the elevators. The entity determines that it acts as a principal because it obtains control of the elevators before they are transferred to the customer. A summary of the transaction price and expected costs is as follows: Transaction price

₱5,000,000

Expected costs: Elevators Other costs Total expected costs

₱1,500,000 2,500,000 ₱4,000,000

The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of the performance obligation. The customer obtains control of the elevators when they are delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators are significant relative to the total expected costs to completely satisfy the performance obligation. The entity is not involved in designing or manufacturing the elevators. As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the cost of the elevators. 27. How much revenue is recognized in 20X2? a. b. c. d.

2,500,000 0 1,000,000 2,200,000

28. How much profit is recognized from the contract in 20X2? a. b. c. d.

200,000 0 265,000 220,000

29. An entity, a construction company, enters into a contract to construct a commercial building for a customer on customer-owned land for a promised consideration of ₱1 million and a bonus of ₱200,000 if the building is completed within 24 months. The entity accounts for the promised bundle of goods and services as a single performance obligation satisfied over time because the customer controls the building during construction. At the inception of the contract, the entity expects the following: Transaction price

₱1,000,000

Expected costs

700,000

Expected profit (30%)

300,000

At contract inception, the entity does not expect to receive the bonus because it cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Completion of the building is highly susceptible to factors outside the entity’s influence, including weather and regulatory approvals. In addition, the entity has limited experience with similar types of contracts. The entity determines that the input measure, on the basis of costs incurred, provides an appropriate measure of progress towards complete satisfaction of the performance obligation. Information as of the end of the first year is as follows: Costs incurred to date Total expected costs

₱420,000 ₱700,000

The entity reassesses the variable consideration and concludes that the amount is still constrained. In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of the building. As a result, the fixed consideration and expected costs increase by ₱150,000 and ₱120,000, respectively. In addition, the allowable time for achieving the ₱200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of ...