Construction Franchise
Construction Franchise
Construction Franchise
PROBLEM 1 DJ Builders Construction enters into a contract with a customer to build a warehouse for
P850,000 on March 30, 20X5 with a performance bonus of P50,000 if the building is completed by July
31, 20X5. The bonus is reduced by P10,000 each week that completion is delayed. DJ Builders commonly
includes these completion bonuses in its contracts and, based on prior experience, estimates the
following completion outcomes.
PROBLEM 2.On January 2, 2030, DMCI Corp. contracted to building an office for Robinson Corp. for a
total contract price of P11,800,000. Estimated total contract costs are P10,400,000. Cost incurred to
date related to the project are as follows:
Using the cost to cost method, what is the realized gross profit to be recognized in year 2030?
PROBLEM 3. On January 1. 2025, Entity A entered into a long term construction contract to construct a
building with initial contract price of P10,000,000. The outcome of the construction can be measured
reliably and the contractor decided to employ the cost-to-cost method. At contract inception, the
customer makes an advance payment (mobilization fee) of 10% of the contract price deductible from
the first billing. Entity A incurred P3,500,000 construction cost during 2025 and the estimated cost to
complete the building on December 31, 2025 is P5,250,000. On January 1, 2026, the entity billed the
customer for the work performed on the contract. On January 10, 2026, the customer pays the bill
subject to retention provision of 5%.
Prepare the journal entries and compute the realized gross profit
PROBLEM 4.In 2021, ABC Construction Co. enters into a contract to construct a building for a customer.
The contract price of P6M will be billed to the customer periodically based on ABC’s progress on the
construction.
2021 2022
Total costs incurred to date 400,000 1,500,000
Estimated costs to complete 1,600,000 375,000
Compute: Revenue, Cost, and Gross Profit for 2021 and 2022.
PROBLEM 5. On Jan. 1, 20X1, ABC enters into a contract to construct a building for a customer. ABC
identifies its performance obligation to be satisfied over time. ABC uses the input method based on
costs to measure its progress on the contract. The contract price is P9,000,000.
1. Compute for revenues, cost and gross profit for 2021 to 2023
2. Journal entries
3. Amounts to be presented in FS
PROBLEM 6. In 20X1, ABC Co. enters into a construction contract with a customer. The contract price is
P10,000,000. Information on the contract follows:
Assuming that the Percentage of Completion Method cannot be measured reliably, prepare the
journal entries, contract asset/liability every year.
PROBLEM 7. In 2019, DJ Builders Construction agreed to construct an apartment building at a price of
P2,000,000. The information relating to the cost and billings for the contract is as follows:
During 2020, the customer agrees to a variation with increases expected revenue from the contract by
P40,000 and causes additional costs of P20,000. At the end of 2020 there are materials stored on site for
use in 2021 which cost P16,000 during the period.
Prepare the necessary journal entries. Compute for the contract asset/ contract liability for each year.
PROBLEM 8. On January 1, 2020, an entity entered into a long-term construction contract with fixed
contract price of P5,000,000. The entity billed its client as follows: 30% during 2020, 40% during 2021
and the remainder at the year of project completion. The following data were provided by the cost
accountant of the entity.
1. What is the excess of construction in progress over progress billings on December 31, 2020 under the
POC method?
2. What is the excess of construction in progress over progress billings on December 31, 2021 under the
POC method?
PROBLEM 9. DMCI Builders Inc. started work on three projects that are distinct. Any cost incurred by the
entity is recoverable. Data relating to the three projects are given below:
PROBLEM 10. On January 1, 2021, SMDC started the construction of a building with a fixed contract
price of P10,000,000. The outcome of the construction project can be estimated reliably and the
contractor decided to employ cost to cost method. The following data are provided by the accountant
and project manager concerning the construction costs for the three years of construction:
PROBLEM 11. On January 1, 2021, DMCI entered into a long-term construction contract with a fixed
contract price of P4,500,000. The construction started o July 1, 2021 and ended on October 31,2023.
The following costs were provided by the chief accountant of DMIC Company:
1. What is the amount of revenue from long-term contract for the year ended December 31, 2022?
2. What is the amount of Costs of Construction for the year ended Dec. 31, 2022?
2. What is the amount of Gross profit(gross loss), respectively to be reported by DMCI Company for the
year ended December 31, 2022?
FRANCHISE ACCOUNTING
PAS 18. PROBLEM 1. On January 1, 2020, FRANK entered into a franchise agreement with JAY to market
their products. The agreement provides for an initial fee of P12,500,000 payable as follows: P3,500,000
to be paid upon signing of the contract and the balance in five equal annual payments every end of the
year starting December 31, 2020. FRANK signs a non-interest bearing note for the balance. His credit
rating indicates that he can borrow money at 15% interest for a loa of this type. The PV of an annuity of
1 at 15% 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 P4,290,120 and incurred indirect cost of P175,000. The franchisee
commenced business operations on November 30,2020. The gross sales reported to the franchiser were
P1,800,000 for December, 2020. The first installment payment was made in due date.
1. Assume the collectibility of the note is not reasonably assured, how much is the net income for the
year ended, December 31, 2020.
2. Assume the collectibility of the note is reasonably certain, how much is the net income for the year
ended, December 31, 2020?
PROBLEM 2. On July 1, 2020, McJo Inc., a franchisor, entered into a contract with a franchisee for the
operation of a restaurant. The franchise agreement provides that the franchisee shall pay a non-
refundable upfront franchise fee amounting to P2,500,000 with P500,000 payable at the signing of
contract and the balance payable in five equal semi-annual installments every December 31 and June
30. The franchisee issued a non-interest bearing note w/ effective interest rate of 10%. The PV of the
note receivable is P1,731,791. The collection of the note receivable is unlikely. The franchise agreement
further provides for the payment of on-going royalties equivalent to 3% based on franchisee’s sales
revenue.
During 2020, McJo Inc. has substantially performed the direct cost of services required by the franchise
in the amount of P1,785,433. In the same year, McJo. has also incurred indirect cost amounting to
P10,000. For the years 2020 and 2021, the franchisee has reported sales revenue amounting to
P400,000 and P600,000, respectively.
1. What is the net income to be reported by McJo Inc. for the year ended December 31, 2020?
2. What is the net income to be reported by McJo. for the year ended December 31, 2021?
PFRS15 PROBLEM 3. On January 1, 20x1, Pizza Pie granted a franchise to a franchisee. The franchise
agreement required the franchise to pay a nonrefundable upfront fee in the amount of P480,000. The
franchisee paid the nonrefundable upfront fee on January 1, 20x1.
In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the
following performance obligations:
The tradename will be transferred at the inception of the contract; franchisee stall will be finished once
month after the contract together with the delivery of the equipment and supplies. The following
performance obligations are distinct goods and services each satisfied at a point in time.
PROBLEM 4. On January 1, 20x1, McJo. sells a franchise license for four years which requires an initial
franchise fee of P500,000. The license provides the customer the right to the tradename and secret
formula which are not considered distinct. A downpayment of P100,000 cash is required and the
balance to be covered by 10% notes, payable by the franchise in four equal annual payments. On
January 5, McJo incurs a direct cost of P200,000. The license is transferred to the customeron January
25, 20x1.
PROBLEM 5. Burger Queen entered into a five-year franchise agreement on January 1, 20X1. As part of
its franchise agreement, Burger Queen requires the franchisee to pay a non-refundable upfront
franchise fee of P950,000 upon opening a restaurant and ongoing payment of royalties, based on 10% of
franchisee’s sales. As part of the agreement, Burger Queen provides installation of cooking equipment,
values at P300,000 which is the stand-alone selling price of the pre-opening services. In addition, the
franchise agreement includes a license of Intellectual Property such as Burger Queen’s trademark and
trade name to the franchisee.
Burger Queen has determined that the license provides a right to access the Intellectual Property over
time. Burger Queen has determined the stand alone selling price of the license is P700,000. The
franchise agreement has a term of 5 years. On January 1, 20x1, the franchisee paid the non refundable
upfront franchise fee of P950,000 to Burger Queen and on January 12 the franchise was transferred to
the franchisee.
On January 10, 20x1, Burger Queen already satisfied its performance obligation to supply and install
cooking equipment to the franchisee. For the year ended December 31, 20X1, the franchisee reported
sales revenue of P1,000,000.
Req. 1: Assume the promise goods and service are not distinct, how much is the total franchise revenue
on December 31, 20x1?
Req. 2: Using the information in # 1, when should the entity recognized revenue from the P950,000
initial franchise fee?
b. Recognize the initial franchise fee in full as revenue on January 10, 20X1
C. Recognize the initial franchise fee revenue over the license period
Req 3. Assume the promised goods or services are distinct, how much is the total franchise revenue on
December 31, 20x1?
Req. 4: Assume the entity determined that the license provides a customer a right to use the intellectual
Property and the entity evaluates that the pre-opening services and license of intellectual property is
distinct. How much is the total revenue from franchise on December 31, 20x1?