ACTIVITY

Instruction: Solve each problem carefully. Do not do this activity alone. Make sure to have a pair. You may open your
notes, books, and other reading materials for reference.

Problem 1. Monato is a resident of Davao City. He is engaged in a merchandising business for 10 years already. He is
currently using a fiscal calendar beginning July 1 and ending June 30 in accounting his income under accrual basis. On
April 1, 2018, he decided to change his fiscal year to reflect better accounting and reporting of income, from the old
fiscal year to the new fiscal year beginning April 1 and ending March 31.

Accounting data revealed the following relevant information:

1/1/17 – 6/30/17 7/1/17 – 12/31/17 1/1/18 – 3/31/18
Gross Sales P 2,450,000 P 2,890,000 P 1,400,000
Discounts availed by customers 70,000 110,000 20,000
Cost of Goods sold claimed 1,300,000 1,500,000 650,000
Expenses and Deductions Claimed 640,000 930,000 410,000
Total Purchases 1,580,000 1,830,000 770,000
Inventories:
December 31, 2017 740,000
December 31, 2016 570,000
Physical count on June 30, 2017 520,000
Physical count on March 31, 2018 820,000
You were asked by Monato to review his accounting records prior to changing to the new fiscal year. Upon your
investigation, you found out that some expenses are not supported by official receipts. The total expenses not receipted
amounted to P 71,000 on December 31, 2018.

Requirements:
1. Is Monato allowed to change his accounting of income for income tax purposes? (2 point)

2. How will this change affect his income for: (a) accounting purposes and (b) tax purposes? (2 points)

3. Compute the taxable income of Monato on:

a. December 31, 2017 (3 points) __________________
b. March 31, 2018 (3 points) __________________

Problem 2. Camello Corporation is a real estate developer. It is primarily engaged in selling residential house and lots
units to various clients. It also accepts construction contracts on case-to-case basis. It normally sells units at 70% above
cost, while construction contract varies in pricing. As recommended by its consultant, Camello priced its construction
contract on fixed-variable scheme for a more effective pricing strategy. During 2018, Camello revealed to you the
following data:
Unit 1 Unit 2 Unit 3
Date Sold February 5 June 2 September 1
Selling Price P 1,870,000 P 4,420,000 P 4,080,000
Terms of payment:
Downpayment 70,000 920,000 1,050,000
Mortgage assumed by the buyer 1,200,000 200,000 -
Installment evidenced by a loan:
January 1, 2019 200,000 825,000 606,000
January 1, 2020 200,000 825,000 606,000
January 1, 2021 200,000 825,000 606,000
January 1, 2022 - 825,000 606,000
September 1, 2023 - 606,000
Cost of the properties sold 70% above cost 70% above cost 70% above cost

All installment payment above are evidenced by a non-interest bearing note. The prevailing effective market interest
rate for the same transactions above is 7%. The following are the present value factors for 7%:
Year 1 0.93458 Year 4 0.76290
Year 2 0.87344 Year 5 0.71299
Year 3 0.81630

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The best way to learn is to teach. Teach a friend to learn, not to cheat.
Also, during the year 2018, one big client approached him to construct a hospital. Accounting data and payment terms
were as follow:
o The construction shall commence on July 1, 2018, and must be completed no later than June 30, 2021.
o The fixed contract price is P 37,000,000. The contract price will shoulder the materials and labor, and other
necessary costs to construct the hospital, which was estimated to be 70% of the fixed contract price.
o If the total costs of materials and labor breached the 80% of the contract price, the client will reimburse
Camello for 125% of materials and labor in excess of the threshold.
o Adjustment and reimbursement to Camello shall be made when the contract is completed.
o The terms of payment uses the milestone method, to wit:
Downpayment March 1, 2018 20% of the contract price
Completion at 40% 30% of the contract price
Completion at 70% 30% of the contract price
Completion at 100% 20% of the contract price
o The contract also provides a penalty of 10% of the remaining unpaid balance, deductible from such unpaid
balance, should there be any delay in the completion of the construction.
o The client has given Camello three post-dated checks (PDCs) for milestone payment as given above.

The construction had the following data:

Dec. 2018 Dec. 2019 Dec. 2020 July 2021
Cost of Labor P 3,500,000 P 6,000,000 P 7,250,000 P 1,560,000
Cost of Materials 9,700,000 3,200,000 4,470,000 1,120,000
Other Costs 810,000 750,000 900,000 430,000
Percentage of Completion 30% 65% 90% 100%

Requirements:
1. Is Camello allowed for installment reporting of income for the sales of residential units? Explain. (3 points)

2. Compute the gross income from the sales of housing units to be reported by Camello Corporation in (2 points each):
a. Year 2018 _______________ d. Year 2021 _______________
b. Year 2019 _______________ e. Year 2022 _______________
c. Year 2020 _______________ f. Year 2023 _______________

3. Prepare an amortization table for the sale of Unit 3 (5 points).

4. How much is the adjusted contract price for the construction of the hospital? (2 points) _______________
5. How much is the penalty deducted by the client? (2 points) _______________
6. Compute the gross reportable income or loss of Camello from the construction contract in the following years (2
points each):
a. Year 2018 _______________ c. Year 2020 _______________
b. Year 2019 _______________ d. Year 2021 _______________

7. How much is the income received by Camello on (2 points each):

a. December 2018 _______________ c. December 2021 _______________
b. December 2019 _______________ d. July 2021? _______________

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The best way to learn is to teach. Teach a friend to learn, not to cheat.