CASE 1.

CORPORATE LIQUIDATION

Everwing Company has decided to seek liquidation after previous restructuring and quasi-
reorganization attempts failed. The company has the following condensed balance sheet as of
July 31, 2020:

Assets Liabilities and Stockholder’s Equity

Cash 12,000.00 Salaries Payable 40,000.00
Accounts Receivable 280,000.00 Loans from Officer 50,000.00
Inventory 70,000.00 Accounts Payable 60,000.00
Prepaid Expenses 1,000.00 Equipment Loan Payable 360,000.00
Plant Assets 300,000.00 Business Loan Payable 180,000.00
Goodwill 39,000.00 Common Stock 60,000.00
Deficit 48,000.00
TOTAL 702,000.00 TOTAL 702,000.00
Additional Information:

The equipment loan payable is secured by specific plant assets having a book value of
300,000.00 and a realizable value of 350,000.00. Of the accounts payable, 40,000.00 is secured
by inventory which has a cost of 40,000.00 and a liquidation value of 44,000.00. The balance of
the inventory has a realizable value of 32,000.00. Receivables have a realizable value of
230,000.00.

1. Assuming trustee expenses of 12,000.00 in addition to recorded liabilities, which of the

remaining unsecured creditors has the next highest order of priority?
a. Salaries Payable
b. Equipment Loan Payable
c. Loan from Officer
d. Business Loan Payable
2. The realizable value of assets pledged with fully secured creditors is:
a. 459,000.00
b. 44,000.00
c. 40,000.00
d. 489,000.00
3. Of those creditors who are partially secured, their unsecured amounts are:
a. 10,000.00
b. 100,000.00
c. 110,000.00
d. 120,000.00
4. The total realizable value of free assets to unsecured creditors before unsecured creditors
with priority is:
a. 618,000.00
b. 278,000.00
 c. 198,000.00
d. 232,000.00
5. The expected recovery percentage of unsecured creditors (rounded) is:
a. 88%
b. 90%
c. 92%
d. 94%
6. Estimated amount paid to fully secured creditors is:
a. 40,000.00
b. 390,000.00
c. 470,000.00
d. 430,000.00
7. Estimated amount paid to unsecured creditors without priority is:
a. 230,000.00
b. 220,000.00
c. 240,000.00
d. 250,000.00
8. Estimated payment to partially secured creditors is:
a. 358,800.00
b. 359,000.00
c. 359,200.00
d. 359,400.00

CASE 2. INSTALLMENT SALES

Find the missing figures.

2019 2020 2021

Installment Sales 50,000.00 80,000.00 (7)
Cost of Installment Sales (1) (5) 91,800.00
Gross Profit (3) (6) 28,200.00
Gross Profit Percentage (2) 25% (8)
Cash Collections:
2019 (4) 25,000.00 10,000.00
2020 20,000.00 50,000.00
2021 45,000.00
Realized Gross Profit on Installment Sales 1,100.00 10,500.00 (9)
Provide your answers on the space provided below:

1. 4. 7.
2. 5. 8.
3. 6. 9.
9. 22
The TRISHA CO. uses the installment method, the following information was taken from the
incomplete records of the TRISHA CO.:

2016 2017 2018

Installment Sales 16,000,000 19,200,000 ?
Cost of Sales ? ? ?
Gross Profit ? ? ?
Gross Profit Rates ? ? 25%
Collections:
2016 Sales 8,000,000 4,800,000 3,200,000
2017 Sales 9,600,000 5,760,000
2018 Sales 14,400,000
Realized Gross Profit 1,760,000 ? 5,686,400
10. What is the cost of sales on 2017?
a. 14,400,000
b. 14,592,000
c. 14,784,000
d. 14,976,000

CASE 3. PARTNERSHIP

On December 31, 2015 II and JJ formed a partnership with each contributing the following
assets:

II JJ
Cash 300,000.00 700,000.00
Machinery and Equipment 250,000.00 750,000.00
Building - 2,250,000.00
Furniture and Fixtures 100,000.00 -
The building is subject to mortgage loan of 800,000.00 which is to be assured by the partnership
agreement provided that II and JJ share profits and losses were 30 and 70 respectively.

The partnership agreement provided that II and JJ receive a salary of 12,000 and JJ a salary of
900 annually to recognize their relative time spent in operating the partnership. Interest was
given based on their beginning capital each year. Monthly net income is 4,500.00.

On December 31, 2017, the partners agree to sell KK 20% of their respective capital and profit
and loss interest for a total payment of 800,000. The payment of KK is to be made directly to the
individual partners. The partners agreed also to give KK 1,000 annually for services he will
render to the partnership. And no interest will apply to the three partners after admission of KK.

On June 30, 2018, the partners decided to liquidate the partnership. They estimate that the non-
cash assets can be converted into its book value over the six months period ending December 31,
2018. Cash is to be distributed to the appropriate parties as it becomes available during the
liquidation process.

1. What are the capital balances of II and JJ after formation?

a. 650,000 and 2,900,000
b. 650,000 and 3,050,000
c. 550,000 and 2,900,000
d. 550,000 and 3,050,000
2. What are the capital balances of II and JJ before admission of KK?
a. 659,450 and 2,944,550
b. 668,697 and 2,989,302.50
c. 534,958 and 2,391,442
d. Cannot be determined
3. The allocation of profits for the year 2016 should be
a. 9,450 and 44,550
b. 9,247.50 and 44,752.50
c. 8,760 and 10,940
d. Cannot be determined
4. How much is the capital of KK?
a. 731,600.00
b. 738,900.00
c. 659,450.00
d. 668,697.50
5. How much should the partners expect to receive after liquidation?
a. 543,718; 2,402,382 and 738,900
b. 534,958; 2,391,442 and 731,600
c. 659,450; 2,944,550 and 901,000
d. 668,697.50; 2,989,302.50 and 914,500

CASE 4. CONSIGNMENT SALES

Amoranto submits the following information on account sales:

Account Sales: October 31, 2019

Sales by Amoranto for the account of Ledesma

Date Explanation Amount

October 5-31 Sales: 4 electric fans at 1,500.00 6000.00
On Hand: 6 electric fans

Freight in 1,000.00
Commission (25% of sales)

The cost of each unit to the consignor is 700.00. Both the consignee and the consignor take
physical inventories at year-end in calculating cost of goods sold.
 1. How much is the cash remittance of the consignee?
a. 3,500.00
b. 2,500.00
c. 1,500.00
d. 1,300.00
2. How much is the net profit of the consignor?
a. 3,500.00
b. 2,500.00
c. 1,500.00
d. 1,300.00

CASE 5. LONG-TERM CONSTRUCTION CONTRACTS

Manny and Bobby began their construction company in the year 2020. Construction for the year
is shown below. They opt to use the cost-to-cost method in computing their revenue. (round off
to two decimal places)

Billings Collections Estimated

Contract Cost to
Contract through through Costs to
Price 12/31/2020
12/31/2020 12/31/2020 Complete
1 600,000 240,000 225,000 225,000 225,000
2 100,000 100,000 80,000 60,000 0.00
3 330,000 190,000 180,000 225,000 120,000
4 360,000 150,000 100,000 82,000 188,000
1. How much is shown on the income statement for 2020 related to Contract 1?
a. 0
b. 75,000
c. 120,000
d. Cannot be determined
2. Assuming cost recovery method, how much is shown on the income statement for 2020
related to Contract 1?
a. 0
b. 75,000
c. 120,000
d. Cannot be determined
3. Assuming cost recovery method, how much is shown on the income statement for 2020
related to Contract 2?
a. 40,000
b. 10,000
c. 12,000
d. 0
 4. How much is shown on the income statement for 2020 related to Contract 2?
a. 40,000
b. 10,000
c. 12,000
d. 0
5. How much is shown on the balance sheet for 2020?
a. 60,000 inventory
b. 20,000 inventory
c. 39,000 inventory
d. Answer not given
6. How much is shown on the balance sheet for 2020 related to Contract 2?
a. 60,000 inventory
b. 20,000 inventory
c. 39,000 inventory
d. Answer not given
7. Assuming cost recovery method, how much is shown on the balance sheet for 2020?
a. 15,000 current liability
b. 20,000 current liability
c. 68,000 current liability
d. 63,000 current liability
8. Assuming cost recovery method, how much is shown on the balance sheet for 2020
related to Contract 1?
a. 15,000 current liability
b. 20,000 current liability
c. 68,000 current liability
d. 63,000 current liability

CASE 6. FRANCHISING

UUV Crabs, Inc., franchisor, entered into a franchise agreement with Ligaya, franchisee
on July 1, 2020. The total franchise fees agreed upon is 1,100,000 of which 100,000 is payable
upon signing and the balance payable in four equal annual installments. It was agreed that the
down payment is non-refundable, not withstanding lack of substantial performance of services
by franchisor.

On June 1, 2020, Bibo Eggs, franchisor, received 200,000 from Danny representing down
payment on the franchise agreement signed that day. Danny gave Bibo Eggs a non-interest
bearing promissory note for the balance of 1,000,000 payable in four equal semi-annual
installments. Franchise services were substantially completed by Bibo Eggs on November 15 at a
cost of 900,000.00. The first semi-annual installment became due and was accordingly paid by
Danny. Bibo Eggs appropriately uses the accrual method in recording franchise revenues.
 1. When UUV Crabs prepares its financial statements on July 31, the franchise fees earned
to be reported is
a. 0
b. 100,000
c. 1,000,000
d. 1,100,000
2. In its December 31 Financial Statements, how much will Bibo report as realized gross
profit for the year?
a. 112,500
b. 187,500
c. 250,000
d. 300,000

THEORIES

1. Cash collection is a critical event for income recognition in the

Cost Recovery Installment

Method Method
a. No No
b. Yes Yes
c. No Yes
d. Yes No
2. The installment method of recognizing profit for accounting purposes is acceptable if
a. Collection in the year of sale do not exceed 30% of the total sales price
b. An unrealized profits 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
3. Under the installment sales method,
a. Revenue, costs and gross profit are recognized proportionately to the cash
received from the sale of the product
b. Gross profit is deferred proportionately to cash uncollected from sale of the
product, but total revenue and costs are recognized at the point of sale
c. Gross profit is not recognized until the amount of cash received exceeds the costs
of the items sold
d. Revenues and costs are recognized proportionately to the cash received from the
sale of the product, but gross profit is deferred until all cash is received.
4. Under the cost recovery method of revenue recognition,
a. Income is recognized on a proportionate basis as cash is received on the sale of
the product.
b. Income is recognized when the cash received from the sale of the product is
greater than the cost of the product
 c. Income is recognized immediately
d. None of these
5. Chris Co. sells equipment on installment contracts. Which of the following statements
best justifies Chris’ use of the cost recovery method of revenue recognition to account for
these installment sales?
a. The sales contract provides that title to the equipment passes to the buyer only
when all payments have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return
d. There is no reasonable basis for estimating collectability
6. Winner Co. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winner does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. Production basis
b. Cash (or collection) basis
c. Sales (or accrual) basis
d. Cost recovery basis
7. Leopard Co. uses the installment sales method to recognize revenue. Customers pay the
installment notes in 24 equal monthly amounts, which include 12% interest. What is the
balance of an installment note receivable 6 months after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted at 12%
d. Less than the present value of the remaining monthly payments discounted at 12%
8. The percentage of completion method of inventory valuation of term construction
contract
a. Recognizes income upon completion of work
b. Recognizes income based on collection billings
c. Recognizes income based on the progress of work
d. Does not recognize income at the balance sheet date
9. In accounting for 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 cost
incurred during the year to the:
a. Total cost incurred to date
b. Total estimated cost
c. Unbilled portion of the contract price
d. Total contract price
10. The theoretical support for using the percentage-of-completion method of accounting for
long-term construction projects is that it
 a. Is conservative
b. Reports a lower net income
c. Closely conforms to the cost principle
d. Produces a realistic matching of expenses with revenues
11. 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
a. Appear on both the income statement and statement of financial position during
the construction period
b. Appear only on the income statement during the period of construction
c. Appear only on the statement of financial position during the period of
construction
d. Not appear on the financial statements
12. What is the basis for determining the gross profit to be recognized in the second year of a
three year contract under the percentage of completion method?
a. Cumulative actual costs incurred only
b. Incremental cost for the second year only
c. Cumulative actual costs and estimated costs to complete
d. No gross profit would be recognized in Year 2
13. I. Installment contracts receivable qualifies for inclusion under the current assets or non-
current assets or non-current assets depending on the length of time required for its
collection
II. Estimated cost to complete includes pre-contract costs and costs incurred after contract
acceptance.
a. I is True, II is False
b. I is False, II is True
c. I is True, II is True
d. I is False, II is False
14. I. The withheld portion of the billings to ensure the completion of the project
satisfactorily is debited to contract retention account. The contract retention account is
presented in the statement of financial position as noncurrent asset
II. The amount of contract revenue may decrease as a result of cost de-escalation clause.
a. I is True, II is False
b. I is False, II is True
c. I is True, II is True
d. I is False, II is False
15. I. If collection of initial franchise fee is not assured, the unearned franchise fee would
always equal the balance of the note, regardless if the initial service is with direct
franchise cost or not.
II. When the initial franchise fee is not paid in full and the collectability of the note for
the balance is reasonably assured, the method to be used by the franchisors to recognize
revenue from the initial franchise fee is installment method.
a. I is True, II is False
b. I is False, II is True
c. I is True, II is True
d. I is False, II is False