BSA 3101 - ACCOUNTING FOR SPECIAL TRANSACTIONS

MIDTERM DEPARTMENTAL EXAM REVIEWER

TOPIC COVERAGE:
1. Long-Term Construction Contracts
2. Installment Sales
3. Consignment Sales

THEORIES (MULTIPLE CHOICE QUESTIONS)

1. When the outcome of a construction contract can be estimated reliably, how shall
contract revenue and contract costs associated with the construction contract be
recognized?
a. Revenue shall be recognized only to the extent of contract cost incurred
that it is probable will be recoverable and the contract cost shall be
recognized as an expense in the period in which they are incurred also
known as cost recovery or zero-profit method.
b. They shall be recognized as revenue and expenses respectively by
reference to the percentage of collection of receivables from customers
also known as by installment method.
c. They shall be recognized as revenue and expenses respectively by the
date of earning revenue or incurring of expenses also known as the
accrual method.
d. They shall be recognized as revenue and expense respectively by
reference to the state of completion of the contract activity at the end of
the reporting period also known as by percentage of completion.

2. Consider the following statements:

Statement 1: If a company uses the percentage of completion method of
accounting for long-term construction contracts, then during the period of
construction, financial information related to a long-term contract will appear only
on the statement of financial position during the period of construction.
Statement 2: Under cost to cost method, the cost of revenue is equal to the
actual cost incurred
a. False, True c. True, True

b. True, False d. False, False

3. Consider the following statements:
Statement 1: Insurance is an example of a cost that relates directly to the specific
contact.
Statement 2: The gross profit recognized each year is debited to the account
“Construction in Progress” thereby decreasing the balance of the said account.
a. False, True c. True, True

b. True, False d. False, False

4. Consider the following statements:

Statement 1: “Step 2” of the recognition principles of PFRS 15 is the allocation of
the transaction price to the performance obligations in the contract.
Statement 2: A cost-plus contract is a construction contract in which the
contractor agrees to a fixed contract price, or a fixed price rate per unit of output,
which in some cases is subject to cost escalation clauses.
a. False, True c. True, True

b. True, False d. False, False

5. PFRS 15 requires how many steps in recognizing revenue from contracts with
customers?
a. 2
b. 3
c. 5
d. 7

6. When the company changes its percentage of completion of the construction

project every year, how shall the accounting change be treated?
a. It shall be accounted for as a change in account estimate by prospective
application to the date of change and future date profit or loss.
b. It shall be accounted for as a change in accounting policy treated by
retrospective application or with cumulative effect in the beginning
retaining earnings at the date of change.
c. It shall be accounted for as a prior period error treated by retrospective
restatement or with cumulative effect in the beginning retaining earnings at
the date of discovery of error.
 d. It shall be accounted for as an equity transaction to be adjusted in the
share premium or other comprehensive income as the case may be.

7. In selecting an accounting method for a newly contracted long-term construction

project, the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and the
extent of progress toward completion is practicable.
c. the method commonly used by the contractor to account for other
long-term construction contracts.
d. the inherent nature of the contractor's technical facilities used in
construction.

8. When work to be done and costs to be incurred on a long-term contract can be

estimated dependably, which of the following methods of revenue recognition is
preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these

9. 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.

10. When goods are consigned out, profits should be recognized by the consignor
when the
a. Goods are sold by the consignee.
b. Goods are received by the consignee.
c. Consignee agrees to the terms of the consignment.
d. Goods are shipped by the consignor.

11. Deferred gross profit on installment sales is generally treated as a(n):

a. Deduction from installment accounts receivable.
b. Deduction from installment sales.
 c. Unearned revenue and classified as a current liability.
d. Deduction from gross profit on sales.

12. The installment-sales method of recognizing profit for accounting purposes is

acceptable if:
a. Collections in the year of sale do not exceed 30% of the total sales price.
b. An unrealized profit account is credited.
c. Collection of the sales price is not reasonably assured.
d. The method is consistently used for all sales of similar merchandise.

13. Under the installment-sales method,

a. Revenue, costs, and gross profit are recognized proportionate to the cash
that is received from the sale of the product.
b. Gross profit is deferred proportionate to cash uncollected from sale of the
product, but total revenues and costs are recognized at the point of sale.
c. Gross profit is not recognized until the amount of cash received exceeds
the cost of the item sold.
d. Revenues and costs are recognized proportionate to the cash received
from the sale of the product, but gross profit is deferred until all cash is
received.

14. Consider the following statements:

Statement 1: Under a consignment arrangement, the consignor recognizes net
revenue equal to the gross sales price less the consignee’s commission
Statement 2: Under the “installment sales method,” the deferred gross profit at
any given point of time may be determined by multiplying the balance of
receivables by the gross profit rate.
a. False, True c. True, True

b. True, False d. False, False

15. Revenue is recognized by the consignor when the:

a. goods are shipped to the consignee
b. consignee receives the goods
c. consignor receives an advance from the consignee
d. consignor receives an account sale from the consignee
16. The percentage-of-completion method must be used when certain conditions
exist. Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are
reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the
contract.
d. The contract clearly specifies the enforceable rights of the parties, the
consideration to be exchanged, and the manner and terms of settlement.

17. In accounting for a long-term construction-type contract using the

percentage-of-completion method, the gross profit recognized during the first
year would be the estimated total gross profit from the contract, multiplied by the
percentage of the costs incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.

18. DJD Construction is constructing a building for Hotel Dian. Under the
construction agreement, if for any reason DJD cannot complete construction,
Hotel Dian would own the partially completed building and could hire another
construction company to complete the job. When should DJD recognize revenue:
as the building is constructed or after the construction is completed?
a. Overtime
b. No revenue recognized
c. Point in time
d. No transaction

19. Under the cost recovery method,

a. The initial collections on the sale are treated as a recovery of the cost of
the inventory sold. Thus, no gross profit or interest income is recognized
until total collections from the sale equals the cost of inventory sold.
b. The initial collections on the sale are treated as a recovery of the cost of
the inventory sold. Thus, no gross profit is recognized until total collections
from the sale equals the cost of inventory sold. However, interest income
may nonetheless be recognized
c. both of these
 d. none of these

20. When goods or services are exchanged for cash or claims to cash (receivables),
revenues are considered
a. earned.
b. realized.
c. recognized.
d. All of these answers are correct.

PROBLEM-SOLVING (MULTIPLE CHOICE QUESTIONS)

21. In August, 2024, Mega World Inc. sold condominium units costing P1,440,000 for
P2,400,000 receiving P350,000 cash and a mortgage note for the balance
payable in monthly installments. Installment received in 2022 reduced the
principal of the note to a balance of P2,000,000. The buyer defaulted on the note
at the beginning of 2025, and the property was repossessed. The property had a
fair market value of P1,150,000 at the time of repossession.

Compute the gain (loss) on repossession if (1) profit is recognized at the point of
sale and (2) gross profit is recognized in proportion to collections.
a. (1) P(850,000); and (2) P(50,000)
b. (1) P(850,000); and (2) P(450,000)
c. (1) P850,000; and (2) P(450,000)
d. (1) P(50,000); and (2) P50,000

22. Marie Construction entered into a contract with a customer to build a warehouse
for P850,000 on March 30, 2023 with a performance bonus of P50,000 if the
building is completed by July 31, 2023. The bonus is to be reduced by P10,000
each week that completion is delayed. Marie commonly includes these
completion bonuses in its contracts and based on prior experience, estimates the
following outcomes:

Completed by Probability
July 31, 2023 65%
August 7, 2023 25%
August 14, 2023 5%
August 21, 2023 5%

The transaction price for this contract is

 a. P895,000
b. P850,000
c. P585,000
d. P582,000

For numbers 23-24, refer to the following information.

Cooper Construction Company had a contract starting April 2020 to construct a

P12,000,000 building that is expected to be completed in September 2022 at an
estimated cost of P11,000,000. At the end of 2020, the costs to date were P5,060,000
and the estimated total costs to complete had not changed. The progress billings during
2013 were P2,400,000 and the cash collected during 2020 was P1,600,000.

23. For the year ended December 31, 2020, Cooper would recognize gross profit on
the building of
a. P421,667
b. P460,000
c. P540,000
d. P0

24. At December 31, 2020, Cooper would report Construction in Process in the
amount of:
a. P460,000
b. P5,060,000
c. P5,520,000
d. P4,720,000

For numbers 25-27, refer to the following information.

Seasons Construction is constructing an office building under contract for Cannon

Company. The contract calls for progress billings and payments of P1,240,000 each
quarter. The total contract price is P14,200,000. Seasons estimates that the building will
take 3 years to complete, and commences construction on January 2, 2023.

25. At December 31, 2023, Season estimates that it is 30% complete with the
construction, based on cost incurred. What is the total amount of Revenue from
Long-Term Contracts recognized for 2023 and what is the balance of Accounts
 Receivable assuming Cannon Company has not yet made its last quarterly
payment?
Choice Revenue Accounts Receivable
a P4,960,000 P4,960,000
b P4,260,000 P1,240,000
c P4,464,000 P1,240,000
d P4,260,000 P4,960,000

26. At December 31, 2023, Seasons Construction estimates that it is 75% complete
with the building; however, the estimate of total costs to be incurred has risen to
P14,400,000 due to unanticipated price increase. At December 31, 2022,
Seasons estimated that it was 30% complete. What is the total amount of
Construction Expenses that Seasons will recognize for the year ended December
31, 2023?
a. P10,800,000
b. P6,540,000
c. P6,390,000
d. P6,300,000

27. Seasons Construction completes the remaining 25% of the building construction
on December 31, 2024, as scheduled. At the time the total construction costs
were P15,000,000. At December 31, 2023, the estimates were 75% complete
and total costs of P14,400,000. What is the total amount of Revenue from
Long-Term Contracts and Construction Expenses that Seasons will recognize for
the year ended December 31, 2024?
Choice Revenue Accounts Receivable
a P14,880,000 P15,000,000
b P3,720,000 P3,750,000
c P3,720,000 P4,200,000
d P3,750,000 P3,750,000

For numbers 28-30, refer to the following information.

On July 15, 2020, James Last Sales Company received a shipment of merchandise with
a selling price of P150,000 from James Bond Company. The consigned goods cost
James Bond P100,000 and freight charges of P1,200 had been paid to ship the goods
to James Last.

The consignment agreement provided for a sale of merchandise on credit with terms at
2/10, n/30. The 15% commission is to be based on the accounts receivable collected by
the consignee. Cash discounts taken by customers, expenses applicable to goods on
consignment and any cash advanced to the consignor are deductible from the
remittance by the consignee.

James Last advanced P60,000 to James Bond upon receipt of the shipment. Expenses
of P8,000 was paid by James Last. By August 2020, 70% of the shipment had been
sold, and 80% of the resulting accounts receivable had been collected, all within the
discount period. Remittance of the amount due was mode on August 30, 2020.

28. The cash remitted by James Last is:

a. P1,720
b. P22,300
c. P23,400
d. P61,720

29. The net income (loss) on consignment is:

a. P14,280
b. P13,560
c. P11,880
d. P8,730

30. The cost of unsold units in the hands (merchandise on consignment) of James
Last is:
a. P15,000
b. P30,360
c. P30,840
d. P31,860

For numbers 31-32, refer to the following information.

Gomez, Inc. began work in 2019 on Contract #3814, which provided for a contract price
of 9,600,000. Other details follow:
 2019 2020
Costs incurred during the year 1,600,000 4,900,000
Estimated costs to complete, as of December 31 4,800,000 0
Billings during the year 1,800,000 7,200,000
Collections during the year 1,200,000 5,850,000

31. Assume that Gomez uses the percentage-of-completion method of accounting.

The portion of the total gross profit to be recognized as income in 2019 is
a. P600,000
b. P800,000
c. P2,400,000
d. P3,200,000

32. Assume that Gomez uses the completed-contract method of accounting. The
portion of the total gross profit to be recognized as income in 2020 is
a. P1,200,000
b. P1,800,000
c. P3,100,000
d. P9,600,000

33. GMB Publishing ships 8-volume sets of encyclopedias to book dealers on

consignment. The sets are to be sold at an advertised price of P99. The cost per
set is P50. Consignees are allowed a commission of 30% of the sales price, and
are to be reimbursed for freight relating to the consigned goods.

On December 3, 2019, 100 sets were sent to MTG Bookstore on consignment.

The consignor paid packaging charges of P170 for the shipment. The shipping
cost paid by the consignor was P400 and the consignee paid P60 for the freight
on the sets received. 60 sets were sold in December for cash. Remittance of the
amount owed to the consignor was made on December 31, 2019. How much is
the consignor’s net profit on the consignment?
a. P560
b. P780
c. P650
d. P870
34. Roco Corporation, which began business on January 1, 2020, appropriately uses
the installment sales method of accounting for income tax reporting purposes.
The following data are available for 2020:

Installment accounts receivable, 12/31/2020 P 200,000

Installment sales for 2020 350,000
Gross profit on sales 40%

Under the installment method, what would be Roco’s deferred gross profit at
December 31, 2020?
a. P20,000
b. P90,000
c. P80,000
d. P60,000

35. A sale on installment basis was made in 2024 for P8,000 at a gross profit of
P2,800. At the end of 2024, when the installment account receivable had a
balance of P3,500, it was ascertained that the customer would be unable to
make further payments. The merchandise was then repossessed and was
appraised at a value of P1,500. The loss on repossession was:
a. P3,500
b. P2,000
c. P775
d. P1,775
ANSWER KEY
THEORIES (MULTIPLE CHOICE QUESTIONS)
1. D. They shall be recognized as revenue and expense respectively by reference
to the state of completion of the contract activity at the end of the reporting period
also known as by percentage of completion.
2. A. False, True
3. D. False, False
4. D. False, False
5. C. 5
6. A. It shall be accounted for as a change in account estimate by prospective
application to the date of change and future date profit or loss.
7. B. the degree to which a reliable estimate of the costs to complete and the extent
of progress toward completion is practicable.
8. B. Percentage-of-completion method
9. C. Consignor when notification is received that the consignee has sold the
goods.
10. A. Goods are sold by the consignee.
11. C. Unearned revenue and classified as a current liability.
12. C. Collection of the sales price is not reasonably assured.
13. B. Gross profit is deferred proportionate to cash uncollected from sale of the
product, but total revenues and costs are recognized at the point of sale.
14. C. True, True
15. D. consignor receives an account sale from the consignee
16. C. The buyer can be expected to satisfy some of the obligations under the
contract.
17. B. total estimated cost.
18. A. Overtime
19. A. The initial collections on the sale are treated as a recovery of the cost of the
inventory sold. Thus, no gross profit or interest income is recognized until total
collections from the sale equals the cost of inventory sold.
20. B. Realized

PROBLEM-SOLVING (MULTIPLE CHOICE QUESTIONS)

21. A. (1) P(850,000); and (2) P(50,000)
1. Profit is recognized at the point of sale

Fair value of repossessed property P1,150,000

 Less: Unrecovered cost (unpaid balance) (2,000,000)
Loss on Repossession P(850,000)

2. Profit is recognized in proportion to collections

Fair value of repossessed property P 1,150,000
Less: Unrecovered cost
Unpaid balance 2,000,000
Deferred gross profit (2M x 40%) (800,000) (1,200,000)
Loss on Repossession P (50,000)

22. A. P895,000
(850,000 + 50,000) x 65% P 585,000
(900,000 - 10,000) x 25% 222,500
(890,000 - 10,000) x 5% 44,000
(880,000 - 10,000) x 5% 43,500
Transaction Price P 895,000

23. B. 460,000
(12,000,000 – 11,000,000) x (5,060,000 ÷ 11,000,000) = 460,000

24. C. 5,520,000
5,060,000 + 460,000 = 5,520,000

25. C. P4,464,000; P1,240,000

P14,880,000 x.30 = 4,464,000

26. B. 6,540,000
(P14,400,000 x 0.75) - (14,200,000 x 0.3) = 6,540,000

27. C. P3,720,000; P4,200,000

(14,880,000 x .25) = 3,720,000
(15,000,000 - (14,400,000 x.75)) = 4,200,000

28. A. P1,720
The total amount remitted amounted to P1,720 computed as follows:

Gross collection (P150,000 x 70% x 80%) P 84,000

 Less: Cash discount taken by customers (P84,000 x
2%) (1,680)
Net collection 82,320
Less: Charges
Expenses 8,000
Commission (P84,000 x 15%) 12,600 (20,600)
Due to consignor 61,720
Less: advances (60,000)
Cash Remitted by James Last P 1,720

29. D. P8,730
Consignment Sales (P150,000 x 70%) P 105,000
Less: Applicable cost and -expenses - charges relating to
consignment sales 96,270
Net Income P 8,730

30. B. P30,360
Charge Analysis
Sales (70%) Inventory (30%) Total (100%)
Charges by consignor:
Cost 70,000 30,000 100,000
Freight 840 360 1,200
Charges by consignee:
Expenses 8,000 0 8,000
Commission
15,750 0 15,750
(P105,000 x 15%)
Cash discounts (105,000 x
1,680 0 1,680
80% x 2%)
Total 96,270 30,360 126,630

31. B. P800,000
1,600,000
6,400,000
x (9,600,000 – 6,400,000) = 800,000

32. C. P3,100,000
9,600,000 – 6,500,000 = 3,100,000
33. B. P780
Sales (60 x P99) P 5,940
Less: applicable cost and expenses
Cost of sales (50 x 60) 3,000
Packing (170 x 60/100) 102
Shipping (400 x 60/100) 240
Freight (60 x 60/100) 36
Commission (5,940 x 30%) 1,782 (5,160)
Consignment Profit P 780

34. C. P80,000
Installment accounts receivable, 12/31/2020 P 200,000
Gross profit rate 40%
Deferred Gross Profit, 12/31/2020 P 80,000

35. C. P775
Appraised value of repossessed merchandise P 1,500
Less: Unrecovered cost
Unpaid balance 3,500
Less: deferred gross profit (3,500 x 35%) (1,225) (2,275)
Loss on Repossession P 775