Advanced Accounting Dayag Solution Manual PDF [PDF]

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Advanced Accounting Solution Manual Antonio J. Dayag Chapter 1 Problem I Requirement 1: Assuming that A and B agree that each partner is to receive a capital credit equal to the agreed values of the net assets each partner invested: To record adjustments: nothing to adjust since both of them have no set of books. To close the books: nothing to close since both of them have no set of books. To record investments: Partnership books: Cash………………………………………………………………………………. 120,000 Inventory…………………………………………………………………………. 120,000 Equipment……………………………………………………………………….. 240,000 A, capital………………………………………………………………...

480,000

Initial investment. Cash……………………………………………………………………………….. 120,000 Land……………………………………………………………………………….. 240,000 Building……………………………………………………………………………. 480,000 Mortgage payable…………………………………………………….

240,000

B, capital………………………………………………………………..

600,000

Initial investment. Requirement 2: Assuming that A and B agree that each partner is to receive an equal capital interest. To record adjustments: nothing to adjust since both of them have no set of books. To close the books: nothing to close since both of them have no set of books. To record investments: Partnership books: Bonus Approach: Cash…………………………………………………………………………… 120,000 Inventory……………………………………………………………………… 120,000 Equipment……………………………………………………………………. 240,000 A, capital……………………………………………………………..

480,000

Cash…………………………………………………………………………… 120,000 Land……………………………………………………………………………. 240,000 Building………………………………………………………………………… 480,000 Mortgage payable…………………………………………………

240,000

B, capital.……………………………………………………….……

600,000

B, capital……………………………………………………………………….. 60,000 A, capital………………………………………………………………

60,000

Total agreed capital (P480,000 + P600,000)….P 1,080,000 Multiplied by: Capital interest (equal)………...

1/2

Partner’s individual capital interest…………….P 540,000 Less: A’s capital interest………………………..….480,000 Bonus to A…….……………………………………..P 60,000

Revaluation (Goodwill) Approach: Cash…………………………………………………………………………… 120,000 Inventory……………………………………………………………………… 120,000 Equipment………………………………………………………………… .... 240,000 A, capital……………………………………………………………..

480,000

Cash…………………………………………………………………………… 120,000 Land……………………………………………………………………………. 240,000 Building………………………………………………………………………... ..480,000 Mortgage payable…………………………………………………

240,000

B, capital.……………………………………………………….……

600,000

Assets (or goodwill or intangible asset)…………………………………... 120,000 A, capital…………………..………………………………………..

120,000

Total agreed capital (P600,000 / 1/2)………..….

P1,200,000

Less: Total contributed capital (P480,000 + P 600,000)………………………………....… 1,080,000 Goodwill to A……………..………………………….

P 120,000

Problem II Agreed Fair Values Cash

Invested

Invested

Invested

by John

by Jeff

by Jane

P100,000

---

---

P 110,000

---

P 110,000

0

30,000

---

Equipment Total assets

100,000

Note payable assumed by partnership

---

Net assets invested

P100,000

1. Bonus Method

P

80,000

P

0

2. Goodwill Method (Revaluation of Asset)

Cash

100,000 110,000

Cash

100,000

Equipment

Equipment

110,000

Goodwill

90,000

Note Payable

30,000

Note Payable

30,000

John, Capital

60,000

John, Capital

90,000

Jeff, Capital

60,000

Jeff, Capital

90,000

Jane, Capital

60,000

Jane, Capital

90,000

2. The bonus method is used when John and Jeff recognize that Jane is bringing something of value to the firm other than a tangible asset, but they do not want to recognize an intangible asset. To equalize the capital accounts, P40,000 is transferred from John's capital account and P20,000 is transferred from Jeff's capital account. The goodwill method is used when the partners recognize the intangible nature of the skills Jane is bringing to the partnership. However, the capital accounts are equalized by recognizing an intangible asset and a corresponding increase in the capital accounts of the partners. Unless the

intangible asset can be specifically identified, such as a patent being invested, it should not be recognized, because of a lack of justification for goodwill in a new business. Problem III 1.

(a)

Cash

13,000

Accounts Receivable

8,000

Office Supplies

2,000

Office Equipment

30,000

Accounts Payable

2,000

Tom, Capital

Cash

12,000

Accounts Receivable Office Supplies Land

(b)

51,000

6,000 800 30,000

Accounts Payable

5,000

Mortgage Payable

18,800

Julie, Capital

25,000

Tom, Drawing

15,000

Cash

Julie, Drawing

15,000

12,000

Cash

(c)

Income Summary

12,000

50,000

Tom, Capital P50,000 (P51,000/P76,000)

33,553

Julie, Capital P50,000 (P25,000/P76,000)

16,447

Tom, Capital

15,000

Julie, Capital

12,000

Tom, Drawing

15,000

Julie, Drawing

12,000

TOM AND JULIE PARTNERSHIP

2.

Statement of Changes in Partners' Capital For the Year Ended December 31, 20x4 Tom

Julie

0

P0

Add: Additional investments

51,000

25,000

76,000

Net income allocation

33,553

16,447

50,000

P 84,553

P 41,447

P126,000

15,000

12,000

27,000

P 69,553

P 29,447

P99,000

Capital balances, Jan. 1

Totals Less: Withdrawals Capital balances, Dec. 31

P

Total P

0

Problem IV Book of H is to be retained by the new partnership. The following procedures are to be followed: Individual versus Sole Proprietor Books of

*Books of

Individual

Sole Proprietor

Adjusting entries

N/A

Yes

Closing entries (real accounts)

N/A

No

Investments

Yes**

Balance Sheet

Yes

* Books of H; Partnership books ** Investments of individual; additional investments or withdrawals of sole proprietor. 1. Books of Sole Proprietor (H): a. To record adjustments: a. H, capital………………………………………………………………… 1,800 Allowance for doubtful accounts……………………………. Additional provision computed as follows: Required allowance: 10% x P48,000 = P 4,800 Less: Previous balance…………………

3,000

1,800

Additional provision…………………… P 1,800 b. Interest receivable or accrued interest income………………….

3,600

H, capital……………………………………………………………

3,600

Interest income for nine months computed as follows: P60,000 x 8% x 9/12 = P3,000. c. H, capital………………………………………………………………….. 6,000 Merchandise inventory…………………………………………..

6,000

Decline in the value of merchandise. P27,000 – P21,000 = P6,000. d. H, capital………………………………………………………………….

4,800

Accumulated depreciation…………………………………….

4,800

Under depreciation. e. Prepaid expenses………………………………………………………...

2,400

H, capital……………………………………………………………

2,400

Expenses paid in advance. H, capital…………………………………………………………………… 7,200 Accrued expenses………………………………………………….

7,200

Unrecorded expenses. Note: All adjustment that reflects nominal accounts should be coursed through the capital account, since all nominal accounts are already closed at the time of formation. b. To close the books: nothing to close since the books of H will be retained. c. To record investment: Cash……………………………………………………………………………. 116,100 I, capital……………………………………………………………… Initial investment computed as follows: Unadjusted capital of H………………………………P 246,000

116,100

Add (deduct): adjustments: a. Doubtful accounts...……………………...(

1,800)

b. Interest income……………………………..

3,600

c. Decline in the value of merchandise….(

6,000)

d. Under-depreciation……………………….(

4,800)

e. Prepaid expenses…………………………..

2,400

Accrued expenses………………………...(

7,200)

Adjusted capital balance of H……………..……...P 232,200 Divided by: Capital interest of H……………………

2/3

Total agreed capital…………………………….…….P 348,300 Multiplied by: Capital interest of I……………..……

1/3

Investment of I…………………………………………P 116,100 Note: The initial investment of H is already recorded since his books are already retained. No further entry is required since there are no additional investments or withdrawals made by H. 2. The balance sheet for both cases presented above is as follows: HI Partnership Balance Sheet November 1, 20x4 Assets Cash Accounts receivables Less: Allowance for doubtful accounts………...........

P 236,100 P 48,000 4,800

43,200

Notes receivable……...................................................

60,000

Interest receivable………………..................................

3,600

Merchandise Inventory................................................

21,000

Prepaid expenses…………..........................................

2,400

Equipment (net)…………............................................. Less: Accumulated depreciation………………........ Total Assets....................................................................

P 72,000 10,800

61,200 P 427,500

Liabilities and Capital Liabilities Accrued expenses…….. .......................................

P

7,200

Accounts payable...................................................

12,000

Notes payable…………...........................................

60,000

Total Liabilities................................................................

P 79,200

Capital........................................................................... H, capital………………………..................................

P 232,200

I, capital…………………...........................................

116,100

Total Capital..................................................................

P 348,300

Total Liabilities and Capital..........................................

P 427,500

Problem V New set of books. The following procedures are to be followed: Sole Proprietor versus Sole Proprietor Books of

Books of

Sole Proprietor

Sole Proprietor

*New Set of

(Baker)

(Carter)

Books

Adjusting entries

Yes

Yes

Closing entries (real accounts)

Yes

Yes

Investments

Yes**

Balance Sheet

Yes

* Partnership books ** Additional investments or withdrawals of sole proprietors.

1. Books of Sole Proprietor a. To record adjustments: Books of J

Books of K

a. J, capital…………………………12,000 Merchandise Inventory……

12,000

Worthless inventory.

a. Merchandise Inventory………… 6,000 K, capital………………………

6,000

Upward revaluation.

b. J, capital………………………… 7,200

b. K, capital……….…………………. 3,000

Allowance for doubtful

Allowance for doubtful

Accounts…………………..

7,200

Worthless accounts.

accounts…………………….

3,000

Additional provision. Required allowance: 5% x P180,000…….. P9,000 Less: Previous Balance……….. 6,000 Additional Provision....…………P3,000

c. Rent receivable…………………12,000 J, capital…………………….

12,000

Income earned.

c. K, capital……………………………. 9,600 Salaries payable……………….

9,600

Unpaid salaries. d. Interest receivable…………………1,200 K, capital………….................. Interest income from August 17 to October 1. P60,000 x 16% x 45/360

e. J, capital………………………… 8,400 Office supplies……………….

8,400

Expired office supplies. f. J, capital………………………… 6,000 Accumulated depreciation - equipment……………… Under-depreciated.

6,000

1,200

g. K, capital……………………………12,000 Accumulated depreciationFurniture and fixtures………

12,000

Under-depreciated. h. J, capital…………………………. 1,800 Interest payable…………….

1,800

Interest expense from July 1 to October 1. P60,000 x 12% x 3/12 i. Patent………………………………. 48,000 K, capital……………………..

48,000

Unrecorded patent. Unadjusted capital of J…….……….P 372,000

Unadjusted capital of K..……………...P432,000

Add(deduct): adjustments:

Add(deduct): adjustments:

a. Worthless merchandise……..( 12,000)

a. Merchandise revaluation……..

6,000

b. Worthless accounts………….(

7,200)

b. Worthless accounts…………….(

3,000)

c. Rent income……………….….

12,000

c. Salaries…………….…….………..(

9,600)

e. Office supplies expense…….(

8,400)

d. Interest income…………………..

1,200

f. Additional depreciation……(

6,000)

g. Additional depreciation………( 12,000)

h. Interest expense………………( 1,800)

h. Patent………….……….…………. 48,000

Adjusted capital of J…………………P348,600

Adjusted capital of K….………………..P462,600

b. To close the books: Books of J

Books of K

Allowance for doubtful

Allowance for doubtful

accounts................................. 12,000 Accumulated depreciation –

accounts.................................

9,000

Accumulated depreciation –

equipment…………………… 60,000

furniture and fixtures ……….

36,000

Accounts payable……………159,600

Accounts payable……………. 120,000

Notes payable………………… 60,000

Salaries payable……………….

Interest payable………………. 1,800

K, capital…….…………………. 462,600

J, capital…….………………….348,600

9,600

Cash………………………….

54,000 180,000

Cash…………………………

90,000

Accounts receivable……..

Accounts receivable…….

216,000

Notes receivable………….

Merchandise inventory….

180,000

Interest receivable………...

60,000 1,200

Office supplies…………….

24,000

Merchandise inventory…..

150,000

Equipment………………….

120,000

Furniture and fixtures.……..

144,000

Rent receivable…………...

12,000

Patent………….…………….

48,000

Close the books of J.

Close the books of K..

2. New Set of Books To record investments: Cash……………………………………………………………….

90,000

Accounts receivable…………………………………………..

216,000

Merchandise inventory………………………………………..

180,000

Office supplies…………………………………………………..

24,000

Equipment (net)………………………………………………...

60,000

Rent Receivable………………………………………………..

12,000

Allowance for doubtful accounts…………………….

12,000

Accounts payable………………………………………..

39,600

Notes payable…………………………………………….

60,000

Interest payable…………………………………………..

1,800

J, capital……………………………………………………

468,600

Cash……………………………………………………………….

54,000

Accounts receivable…………………………………………..

180,000

Notes receivable……………………………………………….

60,000

Interest receivable……………………………………………..

1,200

Merchandise inventory………………………………………..

150,000

Furniture and fixtures (net)…..………………………………..

108,000

Patent…………..………………………………………………...

48,000

Allowance for doubtful accounts…………………….

3.

9,000

Accounts payable………………………………………..

120,000

Salaries payable….……………………………………….

9,600

K, capital……………………………………………………

462,600

H Unadjusted capital (refer to 1a) Adjusted capital (refer to 1b) Net adjustments (debit)/credit

I

P372,000

P432,000

348,600

462,600

(P 23,400)

P 30,600

4. The balance sheet after formation is as follows: J and K Partnership Balance Sheet October 1, 20x4 Assets Cash...............................................................................

P 144,000

Accounts receivables.................................................

P396,000

Less: Allowance for doubtful accounts……….........

21,000

375,000

Notes receivable……...................................................

60,000

Interest receivable………………..................................

1,200

Rent receivable……………….......................................

12,000

Merchandise Inventory................................................

330,000

Office supplies...............................................................

24,000

Equipment (net)………….............................................

60,000

Furniture and fixtures (net)………………….................

108,000

Patent……………………...............................................

48,000

Total Assets....................................................................

P1,162,200

Liabilities and Capital Liabilities Salaries payable……………...................................

P

9,600

Accounts payable..................................................

159,600

Notes payable…………..........................................

60,000

Interest payable……………....................................

1,800

Total Liabilities...............................................................

P 231,000

Capital J, capital………………………..................................

P 468,600

K, capital………………….........................................

462,600

Total Capital..................................................................

P 931,200

Total Liabilities and Capital..........................................

P1,162,200

Problem VI 1. Total assets – P1,094,000, at fair value 2. Total liabilities - P540,000, at fair value 3. Total capital - P554,000 (P1,094,000 – P540,000) Balance Sheet January 1, 2009 Assets Cash

Liabilities and Capital P 70,000

Liabilities

Account Receivable (net)

108,000

Accounts Payable

P 190,000

Merchandise Inventory

208,000

Mortgage Payable

__350,000

Building (net)

600,000

Total Liabilities

P 540,000

Furniture and Fixture (net)

108,000

Capital:

Accounts Payable

L, Capital

Mortgage Payable

M, Capital

Total Assets

P 260,000 ___294,000

__________

Total Capital

P 554,000

P1,094,000

Total Liabilities and Capital

Multiple Choice Problems 1. c – P45,000 2.

d – the prevailing selling price which is also the fair market value.

3.

b - (P400,000 - P190,000) + [P270,000 - (P400,000 - P190,000)]/3 = P230,000

4. c 5. b - P60,000 + P80,000 + P100,000 = P240,000 6.

c - P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000 - P30,000 = P5,000

7. a Total Agreed Capital (P50,000/40%)…………………………...............

P125,000

P 1,094,000

Less: Total Contributed Capital (P65,000 + P50,000)……..................

115,000

Goodwill (revaluation of assets upward)…………………..................

P 10,000

Assets, fair value (P20,000 + P60,000 + P15,000)…………………………P 95,000 Less: Liabilities assumed…………………………………………………..…

30,000

Bill, capital..…………………………………………………………………… P 65,000 8.

b

The capital balances of William (WW) and Martha (MM) at the date of partnership formation are determined as follows: William

Martha

P20,000

P 30,000

Inventory

-

15,000

Building

-

40,000

15,000

-

P35,000

P 85,000

Cash

Furniture and equipment Total Less mortgage assumed by partnership

(10,000)

Amounts credited to capital

P35,000

P 75,000

9.c Evan Unadjusted capital

Helen

59,625

33,500

Add (deduct) adjustments: Allowance

( 555)

(

405)

Depreciation

______

(

900)

Adjusted capital

59,070

32,195

10. c: Jones – P80,000 + P400,000 – P120,00 = P360,000 Smith – P40,000 + P280,000 – P60,000 = P260,000 11. c – P35,374 – refer to No. 12 12. c – P17,687 Unadjusted capital of CC………………………………………………………………….P 33,000 Add (deduct): adjustments-

Allowance for doubtful accounts (3% x P14,200)………………………………...(

426)

Increase in merchandise inventory (P23,000 – P20,000)…………………………

3,000

Prepaid salary…………………………………………………………………………....

600

Accrued rent expense…………………………………………………………………(

800)

Adjusted capital balance of CC………………………………………

P35,374

Divided by: Capital interest of CC……………………………………………………....

2/3

Total capital of the partnership……………………………………………………………P 53,061 Less: Adjusted capital balance of CC…………………………………………………..

35,374

Capital balance of DD…………………………………………………………………….. P 17,687 13. a Total assets: Cash

P 70,000

Machinery

75,000

Building

225,000

Less Liabilities (Mortgage payable)

P 370,000 90,000

Net assets (equal to FF’s capital account)

P 280,000

FF, capital (see no.13)

P 280,000

14. d Divide by FF’s P & L share percentage

70%

Total partnership capital

P 400,000

Required capital of CC (P400,000 x 30%)

P 120,000

Less: Assets already contributed: Cash

P 30,000

Machinery and equipment

25,000

Furniture and fixtures

10,000

Cash to be invested by CC

65,000 P 55,000

15. a Agreed Fair Values Cash

Invested

Invested

Invested

by John

by Jeff

by Jane

100,000

---

---

110,000

---

110,000

0

Equipment Total assets

100,000

Note payable assumed by partnership Net assets invested

---

30,000

---

100,000

80,000

0

Bonus Method

Goodwill Method

Cash

100,000 110,000

Cash

100,000

Equipment

Equipment

110,000

Goodwill

90,000

Note Payable

30,000

Note Payable

30,000

John, Capital

60,000

John, Capital

90,000

Jeff, Capital

60,000

Jeff, Capital

90,000

Jane, Capital

60,000

Jane, Capital

90,000

Note: The bonus method is used when John and Jeff recognize that Jane is bringing something of value to the firm other than a tangible asset, but they do not want to recognize an intangible asset. To equalize the capital accounts, P40,000 is transferred from John's capital account and P20,000 is transferred from Jeff's capital account. The goodwill method is used when the partners recognize the intangible nature of the skills Jane is bringing to the partnership. However, the capital accounts are equalized by recognizing an intangible asset and a corresponding increase in the capital accounts of the partners. Unless the intangible asset can be specifically identified, such as a patent being invested, it should not be recognized, because of a lack of justification for goodwill in a new business.

16. c – refer to No. 15 for computation. 17. a FF, capital: Unadjusted balance

P 57,000

Adjustments: Accumulated depreciation

( 1,500)

Allowance for doubtful account

(12,000)

Adjusted balance

P 43,500

GG, capital: Unadjusted balance

P 49,500

Adjustments: Accumulated depreciation

( 4,500)

Allowance for doubtful account

( 4,500)

Adjusted balance

P 40,500

GG’s adjusted capital (see no. 17)

P 40,500

18. c Divide by GG’s P & L share percentage

40%

Total partnership capital

P 101,250

Multiply by FF’s P & L share percentage

60%

FF’s capital credit

60,750

FF’s contributed capital (see no. 1)

43,500

Additional cash to be invested by FF

P 17,250

Total capital of the new partnership (see no. 20)

P 296,875

19. d Multiply by RR’s interest

20%

Cash to be invested by RR

P 59,375

20. (a)

Unadjusted capital balances

OO

PP

Total

(60%)

(40%)

P133,000

P108,000

P241,000

( 2,700)

( 1,800)

( 4,500)

3,000

2,000

5,000

( 2,400)

( 1,600)

( 4,000)

P130,900

P106,600

Adjustments: Allowance for bad debts Inventories Accrued expenses Adjusted capital balances

Total capital before the formation of the new partnership (see above) Divide by the total percentage share of OO and PP (50% + 30%) Total capital of the partnership after the admission of RR

P237,500 P 237,500 80% P 296,875

21. a Agreed Capital OO

Contributed Capital

Settlement

P148,437.50 (50% x P296,875)

P 130,900

P 17,537.50

89,062.50 (30% x P296,875)

106,600

(17,537.50)

PP

Therefore, OO will pay PP P17,537.50 22. c Total partnership capital (P113,640/1/3)

P 340,920

Less DD’s capital

113,640

CC’s capital after adjustments

P 227,280

Adjustments made: Allowance for doubtful account (2% x P96,000)

1,920

Merchandise inventory

( 16,000)

Prepaid expenses

( 5,200)

Accrued expenses

3,200

CC’s capital before adjustments

P 211,200

23. a Assets invested by CC: Cash: Capital Add Accounts payable

P211,200 49,600

Total assets (excluding cash)

260,800

Less Noncash assets (96,000 + P144,000)

240,000

Accounts receivable (96,000 – P1,920) Merchandise inventory Prepaid expenses Cash invested by DD Total assets of the partnership

P20,800 94,080 160,000 5,200

P 280,080 113,640 P 393,720

24. d Total partnership capital (P180,000/60%)

P 300,000

GG’s Capital (P300,000 x 40%)

P 120,000

Less Cash investment

30,000

Merchandise to be invested by GG

P 90,000

25. a Adjusted capital of JJ: Total assets (at agreed valuations)

P 180,000

Less Accounts payable

48,000

Required capital of JJ

P 132,000 180,000

Cash to be invested by JJ

P 48,000

Quiz-I 1. P276,000 = (P480,000 – P228,000) + [P324,000 - (P480,000 – P228,000)]/3 2. Philip, P100,000; Ray, P100,000 and Sarah, P90,000 (P300,000 – P210,000) 3. P330,000 P330,000 = P50,000 + (P310,000 - P30,000) 4. c

The capital balances of each partner are determined as follows: Apple Cash

Blue

Crown

P50,000

Property

P 80,000

Mortgage assumed

(35,000)

Equipment

P 55,000

Amount credited to capital accounts

P50,000

P 45,000

5. P15,000 (P190,000 – P160,000) x 1/2 = P15,000 6. P18,000 – the prevailing selling price which is also the fair market value. 7. 8. P15,000 P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000 P50,000 - P35,000 = P15,000 9. P45,000 10. P225,000

P 55,000

11. P375,000 = P400,000 – P25,000 12. P50,000 13. P280,000 Pane Cash

P 40,000

Machinery and equipment Building Less: Liability assumed by the partnership Capital balances, 7/1/06

P 30,000

100,000 ..

Subtotal

Sills

P140,000

350,000 P380,000

..

(100,000)

P140,000

P280,000

14. d Adjusted capital of LL Contributed capital of MM Total capital

P 165,900 82,950 P 248,850

15. a FF, capital: Unadjusted balance

P 57,000

Adjustments: Accumulated depreciation

( 1,500)

Allowance for doubtful account

(12,000)

Adjusted balance

P 43,500

Unadjusted balance

P 49,500

GG, capital: Adjustments: Accumulated depreciation

( 4,500)

Allowance for doubtful account

( 4,500)

Adjusted balance

THEORIES Completion statements: 1. accounting 2. GAAP

P 40,500

3.

a. cash basis instead of accrual basis b. prior period adjustments c. use of fair (or current) values instead of historical cost d. recognition of goodwill in situations not involving business combinations

4. drawings 5. fair (or current) values 6. achieving equity among the partners 7. capital balances 8. professional corporation True or False 9

False

14.

True

19.

False

24.

False

29.

False

10.

True

15.

False

20.

True

25.

True

30.

True

11.

False

16.

False

21.

False

26.

False

12.

True

17.

False

22.

True

27.

True

13.

False

18.

True

23.

False

28.

True

Note for the following numbers: 17. Individuals, partnerships, and corporations are allowed to be partners in a partnership. 19. All of the general partners are liable for all the partnership’s debts. 21. Most small partnerships maintain their financial information using the tax basis. 23., While the partnership does not pay income taxes, it is responsible for other taxes such as payroll taxes and franchise taxes. 24. The proprietary theory is based on the notion that the business entity is an aggregation of the owners 26. This is an example of the proprietary theory of equity. 28. Any basis (i.e., carrying value, tax basis, or market value) can be used to value noncash assets contributed to a partnership

MULTIPLE-CHOICE QUESTIONS 31.

a

36.

d

41.

c

46.

a

51.

d

32.

B

37.

b

42.

c

47.

c

52.

b

33.

a

38.

c

43.

a

48.

b

53.

b

34.

e

39.

a

44.

d

49.

b

35.

d

40.

a

45.

b

50.

c

Chapter 2

Problem I 1. Beginning Capital.

Income summary………… X, drawing……. Y, drawing…….

345,600

X, capital, January 1……….. X, capital, January 1……….. Total capitals

P 360,000 504,000 P 864,000

X’s share of net income: 360/864 of P345,600 Y’s share of net income 504/864of P345,600 Total capitals

P 144,000 201,600 P 345,600

2. Ending Capital.

Income summary………… X, drawing……. Y, drawing…….

345,600

X, capital, December 31……….. X, capital, December 31……….. Total capitals

P 432,000 540,000 P 972,000

X’s share of net income: 432/972 of P345,600 Y’s share of net income 540/972 of P345,600 Total

P 153,600 192,000 P 345,600

3. Interest on Excess Average Capital Balance. Income summary………… Y, drawing…….

4,320

Interest allowed based on average capitals.

Y’s interest on excess average capital: 6% of (P486,000 – P414,000)…………………..

X:

1/1/x4: 4/1/x4:

Capital balance P360,000 432,000

x x

Average

Y:

1/1/x4: 3/1/x4: 11/1/x4:

Average Total

Capital balance P504,000 468,000 540,000

x X x

No. of Mos. Unchanged 3 9 12

No. of Mos. Unchanged 2 8 2 12

P 4,320

P1,080,000 3,888,000 P4,968,000 P 414,000

P 1,008,000 3,744,000 1,080,000 P5,832,000 P 486,000 P 900,000

144,000 201,600

153,600 192,000

4,320

The net effect of the foregoing on capitals is: Interest on excess average capital…… Balance (1:2)……….. Total

X P 113,760 P 113,760

P

Y 4,320

227,520 P 231,840

P

Total 4,320

341,280 P345,600

The allocation of net income may be summarized in a single entry as follows: Income summary……………. X, drawing……. Y, drawing…….

345,600

113,760 231,840

Problem II 1. A bonus of 20% of net income before the bonus is deducted, the bonus would be computed as follows: Let B B B B

= Bonus = 20% of Net income = 20% of P504,000 = P100,800

2. A bonus of 20% of net income after deduction of the bonus, the bonus would be computed as follows: Let B B B B 1.20 B B

= Bonus = 20% of Net income after Bonus = 20% (P504,000 – B) = P100,800 - .20B = P100,800 = P84,000

Problem III 1. Bonus is based on net income before bonus, salaries and interest The schedule showing the allocation of net income is presented as follows: Bonus…. Salaries……… Interest…………. Balance (2;1)………. Total

2.

A P 100,800 48,000 14,400 172,800 P336,000

B

P 72,000 9,600 86,400 P168,000

Total P 100,800 120,000 24,000 259,200 P504,000

Bonus is based on net income after bonus but before salaries and interest The schedule showing the allocation of net income is presented as follows: Bonus…. Salaries……… Interest…………. Balance (2;1)………. Total

A P 84,000 48,000 14,400 184,000 P330,400

B

P 72,000 9,600 92,000 P173,600

Total P 84,000 120,000 24,000 276,000 P504,000

3. Bonus is based on net income after bonus and salaries but before interest: Let B B B B B B 1.20 B B

= Bonus; S = Salaries; and I = Interest. = 20% of Net income after Bonus and Salaries before Interest = 20% (P504,000 – B – S) = 20% (P504,000 – B – P120,000) = 20% (P384,000 – B) = P76,800 - .20B = P76,800 = P64,000

Proof:

Net income before bonus, salaries and interests…………… Less: Bonus……………… Salaries……………0 Net income after bonus, salaries before interests…………… Multiplied by: Bonus rate…………. Bonus…………

P504,000 64,000 120,000 P320,000 20% P 64,000

The schedule showing the allocation of net income is presented as follows: Bonus…. Salaries……… Interest…………. Balance (2;1)………. Total

A P 64,000 48,000 14,400 197,333 P323,733

B

P 72,000 9,600 98,667 P180,267

Total P 64,000 120,000 24,000 296,000 P504,000

4. Bonus is based on net income after bonus, salaries and interest: Let B B B B B B 1.20 B B

= Bonus; S = Salaries; and I = Interest. = 20% of Net income after Bonus, Salaries and Interest = 20% (P504,000 – B – S - I) = 20% (P504,000 – B – P120,000 – P24,000) = 20% (P360,000 – B) = P72,000 - .20B = P72,000 = P60,000

Proof:

Net income before bonus, salaries and interests…………… Less: Bonus……………… Salaries…………… Interest…………….. Net income after bonus, salaries before interests…………… Multiplied by: Bonus rate…………. Bonus…………

P504,000 60,000 120,000 24,000 P300,000 20% P 60,000

The schedule showing the allocation of net income is presented as follows: Bonus…. Salaries……… Interest…………. Balance (2;1)………. Total

A P 60,000 48,000 14,400 200,000 P322,400

B

P 72,000 9,600 100,000 P181,600

Total P 60,000 120,000 24,000 300,000 P504,000

5. Bonus is based on net income after salaries but before bonus and interest: Let B B B B B B

= Bonus; S = Salaries; and I = Interest. = 20% of Net income after Salaries before Bonus and Interest = 20% (P504,000 – S) = 20% (P504,000 – P120,000) = 20% (P384,000) = P76,800

Refer to Note of No. 3.

6. Bonus is based on net income after interest but before bonus and salaries: Let B B B B B

= Bonus; S = Salaries; and I = Interest. = 20% of Net income after Interest before Bonus and Salaries = 20% (P504,000 – P24,000I = 20% (P480,000) = P96,000

Refer to Note of No. 3. 7. Bonus is based on net income before bonus but after income tax (tax rate is 35%): Let B B B

= Bonus; = 20% (P504,000 – T) = P100,800 - .20T

Let T T T

= Income tax = 35% (P504,000) = P176,400

Substituting the equation for T in the equation for B: Let B B B

= P100,800 - .20 (P176,400) = P100,800 – P35,280 = P65,520

Proof:

Net income before bonus and income tax…………… Less: Bonus……………… Net income before bonus after income tax…….. Less: Income tax…………… Net income after bonus and income tax………

Bonus as computed above:

Net income before bonus and income tax…………… Less: Income tax (35% x P504,000) Net income after income tax before bonus…….. Multiplied by: Bonus rate……… Net income after bonus and income tax………

8. Bonus is based on net income, that is, after bonus and income tax: Let B B B

= Bonus; T = Income tax = 20% (P504,000 – B - T) = P100,800 - .20B - .20T

Let T T T

= Income tax = 35% (P504,000) = P176,400

P504,000 65,520 P438,480 _176,400 P262,080

P504,000 176,400 P327,600 ____ 20% P 65,520

Substituting the equation for T in the equation for B: Let B B 1.20B 1.20B B

= P100,800 - .20B - .20T = P100,800 - .2B - .20 (P176,400) = P100,800 – P35,280 = P65,520 = P54,600

Proof:

Net income before bonus and income tax…………… Less: Bonus……………… Net income before income tax…….. Less: Income tax (35% x P504,000) Net income after bonus and income tax………

P504,000 54,600 P449,400 176,400 P273,000

Bonus as computed above:

Net income after bonus and income tax……… Multiplied by: Bonus rate……… Bonus……………

P273,000 ____ 20% P 54,600

Problem IV

B = Bonus to Rodgers B = 0.20(Net Income - interest - salary - bonus) B = 0.20(P168,000 - [0.08(P150,000)] - P60,000 – B) B = 0.20(P96,000 - B) B = P19,200 - 0.20B 1.20B = P19,200 B = P16,000

Problem V Interest (8%) Salary

James P4,400 (below) 13,000

Remaining income (loss): P30,000 (17,200) (48,000) P(35,000) (7,040) Totals P10,360

Keller P5,600 15,000

Rivers P7,200 20,000

Totals P17,200 48,000

(10,560) P10,040

(17,600) P9,600

(36,200) P30,000

CALCULATION OF JAMES INTEREST ALLOCATION Balance, January 1 – June 1 (P48,000 x 5 months) Balance, June 1 – December 31 (60,000 x 7 months) Total Months Average monthly capital balance Interest rate Interest allocation (above)

P240,000 420,000 P660,000 ÷ 12 P 55,000 x 8% _P 4,400

STATEMENT OF PARTNERS’ CAPITAL James Keller Beginning balances P 48,000 P70,000 Additional contribution 12,000 0 Income (above) 10,060 10,040 Drawings (P1,000/month) (12,000) (12,000) Ending capital balances P58,360 P68,040 Problem VI 1: Net income is P360,000 Salaries Bonus on net income Interest on average capital balances Remainder is P 88,600 (positive) Totals 2. Net income is P240,000 Salaries Bonus on net income Interest on average capital balances Remainder is P 9,800 (negative) Totals 3. Net loss is P40,000 Salaries Bonus (no distribution) Interest on average capital balances Remainder is P 246,600 (negative) Totals Problem VII:

1 and 2. Total to allocate: As Bonus (Note A below) As Salaries As Interest (Note B below) Subtotal: Residual Profit-sharing Final Allocations: Note A (Bonus): Bonus = .20(Net Income 1.2Bonus = .20(P150,000) 1.2Bonus = 30,000 Bonus = P25,000

Rivers P90,000 0 9,600 (12,000) P87,600

Totals P208,000 12,000 30,000 (36,000) P214,000

P P 80,000 21,600 9,800 ___53,160 P 164,560

Q P 100,000 43,200 16,800 __35,440 P195,440

Total P180,000 64,800 26,600 ___88,600 P 360,000

P P 80,000 14,400 9,800 _(4,900) P 99,300

Q P 100,000 28,800 16,800 __(4,900) P 140,700

Total P 180,000 43,200 26,600 __(9,800) P240,000

P P 80,000 0 9,800 (123,300) (P33,500)

Q P 100,000 0 16,800 (123,300) (P 6,500)

Total P 180,000 0 26,600 (246,600) (P 40,000)

Total P150,000 (25,000) (72,000) (10,720) P 42,280 (42,280) P 0

Bonus)

Carey

Drew

P25,000 36,000 6,560 P67,560 21,140 P88,700

P36,000 4,160 P40,160 21,140 P61,300

Note B (Interest): Carey:

Drew:

Capital Amount P100,000 (12,000) 88,000 (12,000) 76,000 (12,000) P 64,000

Fraction of Year 1/12

Interest Rate 0.08

= Subtotal P 667

6/12

0.08

3,520

3/12

0.08

1,520

2/12 1.0000

0.08

853 P6,560

Capital Amount P70,000 (12,000) 58,000 (12,000) 46,000 (12,000) P34,000

Fraction of Year 1/12

Interest Rate 0.08

= Subtotal P 467

6/12

0.08

2,320

3/12

0.08

920

2/12 1.0000

0.08

453 P4,160

Problem VIII Jones would have to receive a bonus of P12,000 to be indifferent to the two profit-sharing options. Since Cable would receive the same bonus, the total bonus would have to be P24,000. Therefore, P24,000 = 10%  (Net income - Salaries - Bonuses) P24,000 = 10%  (Net income - [30,000 + 40,000] - 24,000) P24,000 = 10%  (Net income - 94,000) P24,000 = 10%  Net income - 9,400 P33,400 = 10%  Net income Net income P334,000 Problem IX 1. It should be noted that the order of priority is of no significance when it comes to allocation of net income. Unless in cases, when there is a resulting residual loss, wherein the residual loss should be allocated based on their agreement. In this case, there is no such agreement, so the allocation would still be to satisfy completely all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss cause by such action. Olsen Katch Total Interest P 2,000 P 2,400 P 4,400 Bonus 10,000 10,000 Salaries 48,000 36,000 84,000 Remainder (6:4) __8,040 __5,360 _13,400 P58,040 P26,960 P85,000

Weighted Average Calculation: Olsen: 1/1 to 4/1 4/1 to 10/1 10/1 to 12/31 Total Average Katch: 1/1 to 3/1 3/1 to 9/1 9/1 to 11/1 11/1 to 12/31 Total Average 2.

Capital Balance 20,000 25,000 30,000

Gross # of Months 3 6 3

Capital Balance 40,000 30,000 20,000 30,000

Gross # of Months 2 6 2 2

Olsen P48,000

Salaries Bonus Interest* Remainder Final Profit:

2,000 39,960 P89,960

Katch P36,000 10,000 2,400 26,640 P75,040

*see part 'a' solution for weighted average capital calculation Problem X

Weighted Average Capital Calculation: Matt Cap Bal # months 1/1 to 6/1 6/1 to 10/1 10/1 to 12/31

1/1 to 3/1 3/1 to 9/1 9/1 to 11/1 11/1 to 12/1 12/1 to 12/31

35,000 45,000 50,000

5 4 3 Total Average

Jeff Cap Bal # months 25,000 2 35,000 6 25,000 2 20,000 1 28,000 1

Gross Cap 175,000 180,000 150,000 505,000 42,083 Gross Cap 50,000 210,000 50,000 20,000 28,000

Capital 60,000 150,000 90,000 300,000 25,000

Capital 80,000 180,000 40,000 60,000 360,000 30,000 Total P 84,000 10,000 4,400 66,600 P165,000

Total Average 1.

2.

3.

4.

358,000 29,833

Salary Bonus Interest Subtotal Remainder Total

Matt P N/A N/A 4,208 P 4,208 29,404 P33,612

Jeff P N/A N/A 2,983 P 2,983 29,405 P32,388

Total P 0 0 7,191 P 7,191 58,809 P66,000

Salary Bonus Interest Subtotal Remainder Total

Matt P 0 N/A 5,000 P 5,000 29,520 P34,520

Jeff P 9,000 N/A 2,800 P11,800 19,680 P31,480

Total P 9,000 0 7,800 P16,800 49,200 P66,000

Salary Bonus Interest Subtotal Remainder Total

Matt P10,000 N/A N/A P10,000 23,992 P33,992

Jeff P15,000 N/A N/A P15,000 17,008 P32,008

Total P25,000 0 0 P25,000 41,000 P66,000

Salary Bonus* Interest Subtotal Remainder Total

Matt P20,000 6,000 4,208 P30,208 (1,096) P29,112

Jeff P35,000 N/A 2,983 P37,983 (1,095) P36,888

Total P55,000 6,000 7,191 P68,191 (2,191) P66,000

AA 14,400 12,960 ( 1,200) 26,160

BB 12,000 17,280 ( 900) 28,380

CC 13,600 24,840 ( 900) 37,540

Total 40,000 55,080 ( 3,000) 92,080

AA 96,000

BB 144,000

CC 216,000

Total 456,000

24,000 26,160 ( 9,000)

28,380 ( 9,000)

(36,000) 37,540 ( 9,000)

(12,000) 92,080 (27,000)

Problem XI

1. Allocation/Distribution of Net Income Salaries Interest-12% of Ave. Cap. Balance/Remainder (4:3:3) Share in Net Income 2. Statement of Partners’ Capital Capital, January 2, 2010 Additional Investments (Withdrawals) Net Income Personal Withdrawals

Capital, December 31, 2010

137,160

163,380

208,540

509,080

AA BB CC Interest-12% of Ave. Cap. 12,960 17,280 24,840 Balance/Remainder (4:3:3) ( 1,200) ( 900) ( 900) Share in Net Income 11,760 16,380 23,940 *Net income before partners’ salaries and interests…………………P 92,080 Less: Operating expenses (including salaries)……………………….. 40,000 Net Income after partners’ salaries but before interests……………P 52,080

Total 55,080 ( 3,000) 52,080*

3. Allocation/Distribution of Net Income

Incidentally, the entry to record the salaries would be: Operating expenses (for salaries)…………………. 40,000 AA, capital……………………………………………………….. BB, capital……………………………………………………….. CC, capital……………………………………………………….. 3. Statement of Partners’ Capital

AA 96,000 24,000 11,760 14,400 ( 9,000) 137,160

Capital, January 2, 2010 Addit’l. Inv. (Withdrawals) Net Income Sal. (refer to entry above) Personal Withdrawals Capital. December 31, 2010

Problem XII Components of Allocation Profit/loss percentage .................................... Gain on sale of equipment ........................... Salaries .............................................................. Bonus (Note A) ................................................. Bonus (Note A) ................................................. Interest on capital (Note B) ........................... Remaining profit (loss) .................................... Profit (loss) allocation ....................................

Durand 35% P 5,000 40,000 .............. 2,692 7,958 14,280 P 69,930

BB 144,000

14,400 12,000 13,600

16,380 12,000 ( 9,000) 163,380

CC 216,000 ( 36,000) 23,940 13,600 ( 9,000) 208,540

Partners Price 25% P 5,000 20,000 5,000 2,692 11,417 10,200 P 54,309

Russell 40% P 5,000 45,000 .............. 2,692 6,750 16,319 P75,761

Cumulative Total ................ P 15,000 105,000 5,000 8,076 26,125 40,799 P200,000

Note A: Bonus to Price based on sales is 5% × (P1,100,000 – P1,000,000) Bonus to all partners based on net income: Bonus = 30% × [(net income – P150,000) – bonus] Bonus = 30% × [(P185,000 – P150,000) – bonus] 130% Bonus = P10,500 Bonus = P8,076 The total bonus of P8,076 divided equally among the partners is P2,692 per partner. Note B:

Calculation of weighted-average capital (capital is reduced by draws in excess of salaries): Durand Price P75,000 × 5/12 = 85,000 × 4/12 = 80,000 × 3/12 =

P

31,250 28,333 20,000

P 79,583 10% P 7,958

P125,000 × 1/12 = 120,000 × 2/12 = 115,000 × 3/12 = 110,000 × 6/12 =

P

P P

10,417 20,000 28,750 55,000 114,167 10% 11,417

P40,000 × 70,000 ×

Russell 1/12 = 11/12 =

P

3,333 64,167

P 67,500 10% P 6,750

Problem XIII 1. Distribution of income for 20x4: Interest Compensation Subtotals Allocation of remainder Totals

Norr P 12,000 __10,000 P 22,000 __14,640 P 36,640

Caylor P 9,600 __14,000 P 23,600 __9,760 P 33,360

Total P 21,600 __24,000 P 45,600 __24,400 P 70,000

2. Capital account balances at the end of 20x4: Beginning capital balances Share of income Withdrawals Ending capital balances

Norr P 100,000 36,640 _(12,000) P 124,640

3. Distribution of income for 20x5: Interest Compensation Subtotals Allocation of remainder Totals

Norr P 14,957 __8,000 P 22,957 __13,872 P 9,085

Caylor P 80,000 33,360 _(12,000) P 101,360

Caylor P 12,163 __12,000 P 24,163 __9,248 P 14,915

Total P 27,120 __240,000 P 47,120 _(23,120) P 24,000

4. Capital account balances at the end of 20x5: Beginning capital balances Share of income Withdrawals Ending capital balances

Norr P 124,640 9,085 _(12,000) P 121,725

Caylor P 101,360 14,915 _(12,000) P 104,275

Problem XIV 1.

The interest factor was probably inserted to reward Page for contributing P50,000 more to the partnership than Childers. The salary allowance gives an additional P15,000 to Childers in recognition of the full-time (rather than part-time) employment. The 40:60 split of the remaining income was probably negotiated by the partners based on other factors such as business experience, reputation, etc.

2.

The drawings show the assets removed by a partner during a period of time. A salary allowance is added to each partner's capital for the year (usually in recognition of work done) and is a component of net income allocation. The two numbers are often designed to be equal but agreement is not necessary. For example, a salary allowance might be high to recognize work contributed by one partner. The allowance increases the appropriate capital balance. The partner might, though, remove little or no money so that the partnership could maintain its liquidity.

3.

Page, Drawings ......................................................................................... Repair Expense ................................................................................... (To reclassify payment made to repair personal residence.)

5,000

Page, Capital ............................................................................................. Childers, Capital ........................................................................................ Page, Drawings (adjusted) .............................................................. Childers, Drawings ............................................................................. (To close drawings accounts for 2008.)

13,000 11,000

5,000

13,000 11,000

Revenues ................................................................................................. 90,000 Expenses (adjusted by first entry) .................................................... Income Summary ............................................................................... (To close revenue and expense accounts for 2008.) Income Summary ...................................................................................... Page, Capital ..................................................................................... Childers, Capital ................................................................................

31,000

(To close net income to partners' capital–see allocation plan shown below.) Allocation of Income Page Interest (10% of beginning balance) P 8,000 Salary allowances 5,000 Remaining income (loss): P31,000 (11,000) (25,000) P (5,000) (2,000) (40%) P11,000 4.

59,000 31,000

11,000 20,000

Childers P 3,000 20,000

(3,000) (60%) P20,000

Total capital (original balances of P110,000 plus 2008 net income less drawings) ................................................................ P117,000 43,000 Investment by Smith .................................................................................. Total capital after investment ................................................................. P160,000 20% Ownership portion acquired by Smith ................................................... Smith, capital ......................................................................................... P 32,000 Amount paid ......................................................................................... 43,000 Bonus paid by Smith—assigned to original partners ............................ P 11,000 Bonus to Page (40%) .................................................................................

P4,400

Bonus to Childers (60%) ............................................................................

P6,600

Cash ........................................................................................................ Smith, Capital (20% of total capital) .............................................. Page, Capital ..................................................................................... Childers, Capital ................................................................................

43,000

Multiple Choice Problems 1. c Capital, Beg Additional Investment Withdrawal (800 x 12) Net income (?) Capital, Ending 2. b Salaries Bonus Interest (20% x average capital) Balance - equally 10M

45,000 50,000 (96,000) 31,000 P 30,000 A 2,000 8,000 8,000 8,500 44,500

B 25,000 0 10,000 8,500

10M 45,000 8,000 18,000 1,700 8,800

32,000 4,400 6,600

*Bonus= 10% (NI - B) B= .10 (8,800 - B) B= 8,800 - .10B 1.10B= 8,800 B= 8,000 3.

b

The net income of P80,000 is allocated to Blue and Green in the following manner: Blue Green Net Income P 80,000 Salary allowances P 55,000 P45,000 (100,000) Remainder P (20,000) Allocation of the negative remainder in the 60:40 ratio (12,000) (8,000) 20,000 Allocation of net income P 43,000 P37,000 P -0-

4. a Salaries Bonus* Interest: 10% x Ave. capital 1:3 Total

A 30,000 3,600 5,000 4,625 P 43,225

B P 45,000

A P 40,000

B P 45,000

6,000 (32,000) P 14,000

9,000 (16,000) P 38,000

6,500

Total P 75,000 3,600 11,500 18,500 P 108,600

*Bonus = 12% (NI – S – B) B = .12 (108,600 – 75,000 – B) B = .12 (33,600 – B) B = 4,032 - .12B 1.12B = 4,032 B = 3,600 5. a Salaries Bonus (refer to Note) Interest on average capital (15%) Balance (2:1) Total

Total P 85,000 0 15,000 (48,000) P 52,000

Note: 1. The basis of the bonus is negative, so there’s no bonus at all. 2. It should be noted that the order of priority is of no significance when it comes to allocation of net income. When there is a resulting residual loss, wherein the residual loss should be allocated based on their agreement. In this case, there is no such agreement, so the allocation would still be to satisfy completely all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss caused by such action. 6. d Salaries Bonus* 3:4:3 Total

A P 40,000

B P 40,000

__3,000 P 43,000

4,000

C

P 1,000 _3,000 P 4,000

Total P 80,000 1,000 10,000 P 91,000

*Bonus = 10% (NI – S – B) B = .10 (91,000 – 80,000 – B) B = .10 (11,000 – B) B = 1,100 - .10B 1.10B = 1,100 B = 1,000 7. c Salaries Bonus (refer to Note) Interest on average capital (10%) Balance (1:2) Total

A P 41,600

B P 38,400

2,000 (16,500) P 27,100

3,500

Total P 80,000 0 5,500 (49,500) P 52,000

Note: 1. The basis of the bonus is negative, so there’s no bonus at all. 2. It should be noted that the order of priority is of no significance when it comes to allocation of net income. When there is a resulting residual loss, wherein the residual loss should be allocated based on their agreement. In this case, there is no such agreement, so the allocation would still be to satisfy completely all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss caused by such action. 8. b 2/1/20x4: P20,000 x 4 = P 80,000 6/1/20x4: P40,000 x 3 = 120,000 9/1/20x4: P30,000 x 4 = 120,000 P 320,000 / 12 months = P26,667 Note: Annual is 12 months. 9. c Salaries 6:4 Total

Mack P 90,000 _30,000 P120,000

Ruben P 60,000 __20,000 P 80,000

Total P 150,000 50,000 P 200,000

10. c – Robbie, P50,000 x 90/150 = P30,000; Ruben, P50,000 x 60/150 = P20,000 11. c - B = .05(P180,000 - P150,000) 12. d - B = {[(P540,000 - P500,000)/P500,000] - .05} P120,000 13. d - (P60,000 - P50,000)(.60) + (P80,000 - P60,000)(.70) 14. c - (P300,000 - P200,000)(.75) + (P380,000 - P300,000)(.60) 15. c - (P300,000 - P100,000)(.35) + (P450,000 - P300,000)(.55) 16. d - (P120,000 - P50,000)(.40) 17. a - (P600,000 - P350,000)(.40 - .30) 18. b XX YY ZZ Salary 60,000 48,000 36,000 Interest: 10% x average capital 7,500 Balance: equally 5,000 5,000 5,000 X: P100,000 x 6 = P600,000 P160,000 x 6 = 960,000

P1,560,000 / 12 = P 130,000

Total 144,000 48,750 15,000 207,750

Y (same with beginning since no additional investments or withdrawals were made) Z: P225,000 x 9 = P2,025,000 P155,000 x 3 = 465,000 P2,490,000/12 = 19. d - ASSIGNMENT OF INCOME Interest—10% of beginning capital Salary ........................................................ Allocation of remaining income (P6,000 divided on a 3:3:4 basis) ............ Totals ............................................ STATEMENT OF CAPITAL Beginning capital ...................................... Net income (above) ................................ Drawings (given) ....................................... Ending capital ...........................................

20. a ASSIGNMENT OF INCOME—YEAR ONE Interest—10% of beginning capital ........ Salary ........................................................ Allocation of remaining loss (P80,000 divided on a 5:2:3 basis) ........... Totals ............................................ STATEMENT OF CAPITAL—YEAR ONE Beginning capital ...................................... Net loss (above) ........................................ Drawings (given) ....................................... Ending capital .................................... ASSIGNMENT OF INCOME—YEAR TWO Interest—10% of beginning capital Salary ........................................................ Allocation of remaining loss (P15,000 divided on a 5:2:3 basis) .......... Totals ............................................ STATEMENT OF CAPITAL—YEAR TWO Beginning capital (above) ...................... Net income (above) ................................ Drawings (given) ....................................... Ending capital ....................................

150,000 207,500 P 487,500 x 10% = P48,750

ARTHUR P 6,000 20,000

BAXTER P 8,000

1,800 P 7,800

1,800 P29,800

ARTHUR P60,000 7,800 (5,000) P62,800

BAXTER P80,000 29,800 (5,000) P104,800

WINSTON P11,000 20,000

DURHAM P 8,000 -0-

CARTWRIGHT P10,000 20,000 2,400 P12,400 CARTWRIGHT P100,000 12,400 (5,000) P107,400

TOTAL P24,000 6,000 P50,000 TOTAL P240,000 50,000 (15,000) P275,000

SALEM P11,000 10,000

TOTAL P30,000 30,000

(40,000) P(9,000)

(16,000) P (8,000)

(24,000) P (3,000)

(80,000) P (20,000)

WINSTON P110,000 (9,000) (10,000) P 91,000

DURHAM P80,000 (8,000) (10,000) P62,000

SALEM P110,000 (3,000) (10,000) P 97,000

TOTAL P300,000 (20,000) (30,000) P250,000

WINSTON P 9,100 20,000

DURHAM P 6,200 -0-

SALEM P 9,700 10,000

TOTAL P25,000 30,000

(7,500) P21,600

(3,000) P3,200

(4,500) P15,200

(15,000) P40,000

WINSTON P 91,000 21,600 (10,000) P102,600

DURHAM P62,000 3,200 (10,000) P55,200

SALEM P 97,000 15,200 (10,000) P102,200

TOTAL P250,000 40,000 (30,000) P260,000

21. a Capital, Beginning Additional investment Withdrawals Net income Net Decrease

25,000 (130,000) 45,000 / 30% = P 150,000 (60,000)

22. a

________

H 4,000 20,000 _________

Total 22,000 50,000 (105,000) (33,000)

D 25,000 13,000 28,200 66,200

E 20,000

F 25,000

14,100 34,100

_4,700 29,700

Total 70,000 13,000 47,000 130,000

C 100,000 29,000 (12,000) 117,000

W 150,000 63,000 (12,000) 20,100

N 200,000 58,000 (12,000) 24,600

Total 450,000 150,000 (36,000) 564,000

C 10,000 19,000 29,000

W 15,000 10,000 38,000 63,000

N 20,000 38,000 58,000

Total 45,000 10,000 95,000 150,000

Capital, 1/1/x5 Net income Withdrawals – personal Capital, 12/31/x5

117,000 34,420 (12,000) 139,420

201,000 75,540 (12,000) 264,540

246,000 70,040 (12,000) 304,040

564,000 180,000 (36,000) 708,000

Net income – 20x5 10% interest a beginning capital Salary 20% : 40% : 40%

117,000 34,420 (12,000) 139,420

201,000 75,540 (12,000) 264,540

246,000 70,040 (12,000) 304,040

564,000 180,000 (36,000) 708,000

10% interest a Average capital Salaries Equally

23. d, P66,200; E, P34,100; F, P29,700 Salaries Bonus on income (10% x P130,000) Remainder (6:3:1)

24. a Capital, 1/1/x4 Net Income – 20x4 Withdrawal – personal Capital, 12/31/x4 Net income – 20x4 10% interest on beginning capital Salary 20% : 40% : 40%

25. d - refer to No.24 26. b - refer to No.24 27. c - refer to No.24

F 12,000 30,000 (35,000) 7,000

G 6,000

28. b Capital, 1/1/Year 1 Net income (loss) Withdrawals – personal Capital, 12/31/ Year I

Y 143,000 (11,700) (13,000) 118,300

E 104,000 (10,400) (13,000) 80,600

I 143,000 (3,900) (13,000) 126,100

Total 390,000 (26,000) (39,000) 325,000

Year I Net loss Salary Interest – 10% x beginning capital 5:2:3 Total

26,000 14,300 (52,000) (11,700)

10,400 (20,800) (10,400)

13,000 14,300 (31,200) (3,900)

3,900 3,900 (10,400) (2,600)

Capital, 1/1/Year2 Net income (loss) Withdrawals – personal Capital, 12/31/ Year 2

118,300 28,080 (13,000) 133,380

80,600 76,700 (13,000) 144,300

126,100 19,760 (13,000) 132,860

325,000 52,000 (3,900) 338,000

8,060 (3,900) 76,700

13,000 12,610 (5,850) 19,750

3,900 32,500 (19,500) 52,000

Year 2 Net loss Salary Interest – 10% x beginning capital 5:2:3

26,000 11,830 (9,750) 28,080

29. d - refer to No.28 30. c - refer to No.28 31. a - refer to No.28 32. d Because both partners have equal capital balances, NN's capital has to be increased to equal that of MM's. Since MM's capital balance is P60,000 and NN's is P20,000, an additional P40,000 has to be credited to NN's capital to make it equal MM's capital. This additional amount credited to NN's capital is the goodwill that NN is bringing to the partnership. 33. a - MM's share of the net income of P25,000 is 60%, or P15,000. 34. b 2/1/20x4: P20,000 x 4 = P 80,000 6/1/20x4: P40,000 x 3 = 120,000 9/1/20x4: P30,000 x 4 = 120,000 P 320,000 / 12 months = P26,667 Note: Annual - 12 months. 35. b Interest: (P500,000 x 10%) = P50,000 Salary: (P10,000 + P20,000) = P30,000 Bonus: Condition not met = P0 Total allocations = P80,000 and over-allocations = P80,000 - P60,000 = P20,000

36. b Bloom: Interest allocation: P20,000 Salary allocation: P10,000 Carnes: Interest allocation: P30,000 Salary allocation: P20,000 There is a total of P80,000 for positive allocations. To bring them down to a P20,000 loss, a residual adjustment of (P100,000) is needed which is allocated (P40,000) to Bloom and (P60,000) to Carnes. After these amounts are assigned to the partners, each partner’s capital account will be reduced by a net P10,000. 37. c Salaries Bonus* Remainder (3:4:3) Total

J P 50,000 16,000 (6,000) P 60,000

P P 60,000 8,000 (8,000) P 60,000

B P 30,000 16,000 (6,000) P 40,000

Total P140,000 40,000 (20,000) P160,000

Salaries Bonus (10% of average capital) Remainder (4:4:2) Total

A P 30,000 5,000 _ 24,000 P 59,000

P P 10,000 3,000 __24,000 P 37,000

B P 40,000 2,000 _12,000 P 54,000

Total P 80,000 10,000 60,000 P150,000

Salaries Bonus (10% of average capital) Remainder (4:4:2) Total

A P 30,000 5,000 (16,000) P 19,000

P P 10,000 3,000 (16,000) (P3,000)

B P 40,000 2,000 ( 8,000) P 34,000

Total P 80,000 10,000 (40,000) P 50,000

*since problem is silent it should be based on net income before any deductions.

38. c

39. c

40. b

41 d

Total agreed capital = total contributed capital* (P200,000 + P100,000 + P100,000) Multiplied by: Capital interests of May *No goodwill or asset adjustment

P60,000, salary = P25,000, salary + [.20 (NI – B)] P60,000 = P25,000 + P35,000, bonus Therefore, bonus would be P35,000 B = .20 (NI – B) P35,000 = . 20 (NI – P35,000) P35,000 = .20NI – P7,000 P35,000 + P7,000 = .20NI P42,000 = .20NI NI = P210,000

P 400,000 _____35% P 140,000

42. c - P30,000 + P40,000 = P70,000, annual salary to allocate net income. 43. b [P70,000 – (P40,000 + P10,000 +P2,000)] Salary to partners is an allocation of net income (they are not expenses) Partner’s withdrawals are deduction to capital accounts. 44. c Bonus = 20% (NI before deduction on salaries, interests and bonus) B = 20% (NI after deduction of salaries, interests and bonus + salaries + interests + bonus) B = 20% [P46,750 + (P1,000 x 12 months) + (.05 x P25,000) + B] B = .20 [P60,000 + B] B = P12,000 + .20B 1.20 B = P12,000 B = P15,000 45. a Allocation/Distribution of Net Income

DD EE Salaries 18,000 24,000 Interest (10% of Ave. Cap.) 15,000 20,000 Balance/Remainder (60%:40%) 25,800 17,200 Share in Net Income 58,800 61,200 *P 500,000 – P100,000 (excluding salaries and int. – P100,000

Statement of Partners’ Capital Capital, March 1, 2011 Additional Investments Net Income Personal Withdrawals Capital, March 1, 2012 Allocation/Distribution of Net Income Interest on Average Capital – 10% Balance/Remainder – 60%:40% Share in Net Income Statement of Partners’ Capital Capital balance, 2/28/20x4 Additional Investment Share in Net Income Salaries Salary withdrawals Capital balance, March 1, 20x5 46. a – refer to No. 45 47. b – refer to No. 45 48. c – refer to No. 45

DD 150,000

Total 42,000 35,000 __43,000 120,000*

58,800 (18,000) 190,800

EE 180,000 60,000 61,200 (24,000) 277,200

Total 330,000 60,000 1240,000 ( 42,000) 468,000

DD P 15,000 51,000 P 66,000

EE P20,000 34,000 P54,000

Total P 35,000 85,000 P 120,000

DD P 150,000

EE P 180,000 60,000 54,000 24,000 ( 24,000) P 294,000

66,000 18,000 ( 18,000) P 216,000

49. a

NN OO Total Salary allowances P180,000 P P180,000 Balance/Remainder: Equally 15,000 15,000 30,000 Net Income for 20x5 P195,000 P 15,000 P 210,000 Adjustment of net income for 20x4 – 60% : 40% 24,000 16,000 40,000 Total P219,000 P31,000 P250,000 Note: Any adjustments related to a particular year, the profit and loss ratio existing on that year should be used as a basis for allocating the required adjustments.

50 – 53: No requirement 54. b Abe Bert Carl Dave Total

55. b

Old P & L 70% 20% 10% 100%

Unadjusted net income, 20x5 Add (deduct): adjustments Accrued expense – 20x5 Accrued income – 20x5 Prepaid expense – 20x4 Deferred or unearned income – 20x4 Adjusted net income, 20x5 Multiplied by: P& L of Dave Share in net income – 20x5

Interests Acquired 85% 15% 100%

New P & L 59.50% 17.00% 8.50% 15.00% 100%

P

15,000

(1,050) 875 (1,400) __1,225 P 14,650 _____17% P2,490.50

Quiz – II 1. P47,500 = [(P0,000 x 4) + (P40,000 x 6) + (P65,000 x 2)]/12 2. P6,400 = [(P60,000 x 2) + (P90,000 x 5) + (P70,000 x 4) + P110,000] (.08) 3. P3,703 - B = .08(P250,000 - P200,000 - B) 4. P39,150 = (P130,000 - P10,000 - P15,000 - P18,000) .45 5. Nick, P44,075; Joe, P48,435; Mike, P57,490 Total Nick Joe Mike Interest on capital P200,000 x .09 P18,000 P350,000 x .09 P31,500 P180,000 x .09 P16,200 P65,700 Salary 25,000 15,000 35,000 75,000 Bonus .1(P150,000 - P100,000) 5,000 5,000 Residual P4,300 x .25 1,075 P4,300 x .45 1,935 4,300 P4,500 x .30 ______ _______ 1,290 Totals P44,075 P48,435 P57,490 P150,000 6. P185,000 = P35,000 + (P500,000 - P35,000 - P50,000 - P40,000) .4 7. P78,000 = (P250,000 x .08) + [P300,000 - (P200,000 + P250,000 + P400,000)(.08)] .25

8. P10,000 = (P60,000 - P50,000)(.40) + (P80,000 - P60,000)(.30) 9. P57,000 = (P300,000 - P200,000)(.25) + (P380,000 - P300,000)(.40) 10. P197,500 = (P300,000 - P100,000)(.65) + (P450,000 - P300,000)(.45) 11. P42,000 = (P120,000 - P50,000)(.60) 12. P36,000 = (P200,000 - P120,000)(.45) 13. P105,000 = (P520,000 - P370,000)(.70) 14. P78,000 = (P650,000 - P520,000)(.60) 15. P13,000 increase = (P250,000 - P120,000)(.70 - .60) 16. P25,000 decrease = (P600,000 - P350,000)(.70 - .60) 17. P68,800 Garlic Pepper Salary 60,000 Interests – 10% on beginning 4,000 4,800 Equally 4,000 4,000 Total 8,000 68,800

Salt 24,000 3,200 4,000

Total 84,000 12,000 12,000 108,000

Rivers 7,200 20,000 (17,600) 9,600

Total 17,200 48,000 (35,200) 30,000

18. P310,000 Using bonus formula to solve for income: Bonus = .20 (NI – Bonus – Salary) 35,000 = .20 NI – [.20 x P35,000] – [.20 x P100,000*] 62,000 = .2Income P310,000 = income *salaries 25,000 + 75,000 19. James, P58,360; Keller, P68,040; Rivers, P87,600 James Interest – 8% 4,400 Salary 13,000 2:3:5 (7,040) Total 10,360 Interest: James: P48,000 x 5 = P240,000 P60,000 x 7 = 420,000 P660,000/12 = Capital, beginning Additional investments Net income (loss) Withdrawals – P1,000 per month Capital, ending 20. JJ, P27,000; KK, P24,000; LL, P39,000

Keller 5,600 15,000 (10,560) 10,040

P55,000 x 8% = P4,400

48,000 12,000 10,360 (12,000) 58,360

JJ Bonus (20%) ..................................... P18,000 Interest (15% of average capital) 15,000 30,000 Remaining loss ($18,000) .............. (6,000) Income assignment ....................... P27,000

70,000

90,000

10,040 (12,000) 68,040

9,600 (12,000) 87,600

KK -045,000 (6,000) P24,000

P

P

LL

-090,000 (6,000) P39,000

208,000 12,000 30,000 (36,000) 214,000 Total P18,000 (18,000) P90,000

21. PP, P64,600; SS, P49,000; TT, P2,000 PP Interest (10%) 6,600 (below) Salary 18,000 Remaining income (loss) (16,000) Totals 8,600

SS TT 4,000 2,000 25,000 8,000 ( 8,000) (16,000) 21,000 (6,000)

CALCULATION OF PURKERSON'S INTEREST ALLOCATION Balance, January 1—April 1 (P60,000 × 3) Balance, April 1—December 31 (P68,000 × 9) Total ................................................................................................... Months ............................................................................................... Average monthly capital balance ............................................. Interest rate ...................................................................................... Interest allocation (above) ........................................................... STATEMENT OF PARTNERS' CAPITAL PP SS Beginning balances ......................... 60,000 40,000 Additional contribution ................... 8,000 -0Income (above) ............................ 8,600 21,000 Drawings (P1,000 per month) ......... (12,000) (12,000) Ending capital balances ................. 64,600 49,000

Totals 12,600 51,000 (40,000) 23,600 P180,000 612,000 P792,000 ÷ 12 P 66,000 × 10% P 6,600 TT 20,000 -0(6,000) (12,000) 2,000

Totals 120,000 8,000 23,600 (36,000) 115,600

32,880 37,146 36,147

70,000 72,000 82,000

RR 6,000 -0(13,120) (7,120)

Total 15,600 20,000 (65,600) (30,000)

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4 LL CC RR Beginning balances ..................... 20,000 60,000 50,000 Income allocation ........................ (5,280) (17,600) (7,120) Drawings ........................................ (10,000) (10,000) (10,000) Ending balances .................... 4,720 32,400 32,880

Total 130,000 (30,000) (30,000) 70,000

22. Ending capital balances: 20x4 .......................................... 20x5 .......................................... 20x6 …………………………….

4,720 4,766 9,610

32,400 30,088 36,243

INCOME ALLOCATION—20x4 LL CC Interest (12% of beginning capital) 2,400 7,200 Salary 12,000 8,000 Remaining income/loss (19,680) (32,800) Totals (5,280) (17,600)

INCOME ALLOCATION—20x5 LL CC Interest(12% of beginning capital above) *566 3,888 Salary ............................................. 12,000 8,000 Remaining income/loss: (2,520) (4,200) Totals ...................... 10,046 7,688 *Rounded

RR 3,946 -0(1,680) 2,266

Total 8,400 20,000 (8,400) 20,000

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6 LL CC RR Beginning balances (above) 4,720 32,400 32,880 Additional investment ................. -0-012,000 Income allocation ........................ 10,046 7,688 2,266 Drawings ........................................ (10,000) (10,000) (10,000) Ending balances .................... 4,766 30,088 37,146

Interest (12% of beginning capital above)* ................................... Salary ............................................. Remaining income........................ Totals .................................. *Rounded

INCOME ALLOCATION—20x6 LL CC 572 12,000 2,272 14,844

3,611 8,000 4,544 16,155

Total 70,000 12,000 20,000 (30,000) 72,000

RR

Total

4,457 -04,544 9,001

8,640 20,000 11,360 40,000

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6 LL CC RR Beginning balances (above) 4,766 30,088 37,146 Income allocation 14,844 16,155 9,001 Drawings (10,000) (10,000) (10,000) Ending balances 9,610 36,243 36,147 23. Julio, P2,820 decrease; Fong, P120 increase Short-term prepayments Julio, Capital Fong, Capital Salaries Payable The correction to partners' capital accounts is computed as follows: Inventories understated by P12,000, Dec. 31, 20x5 Inventories understated by P12,000, Jan. 1, 20x6 Accrued salaries of P5,400 not recorded, Dec. 31, 20x6 Short-term prepayments of P2,700 not recorded, Dec. 31, 20x6 Net corrections to partners' capital accounts THEORIES True of False 1. False 2. True 3. True 4. False 5. True

6. 7. 8. 9. 10.

False True False True False

11. 12. 13. 14. 15.

True True False True False

2,700 2,820

16. 17. 18. 19. 20.

120 5,400

Julio

Fong

P 6,000

P 6,000

(7,200)

(4,800)

(3,240)

(2,160)

1,620

1,080

P(2,820)

True False False True True

P

21. 22. 23. 24. 25.

Total 72,000 40,000 (30,000) 82,000

120

False True False True False

26. 27. 28.

False True False

Note for the following numbers: 1. While the partnership law may have indicated that the partners cannot withdraw resources and make the partnership insolvent, withdrawals are typically controlled by the articles of partnership. 4. If the partnership agreement is silent with regard to profit and loss allocation, profits and losses are shared equally. 6. The interest component of partnership profit and loss allocation rewards partners for capital contributions. 8. The interest on capital balances component of partnership profit and loss allocation may be based on the beginning, ending, simple average capital balance, or weighted average capital balance. 10. The salary component of the partnership profit and loss allocation would be expected to be renegotiated periodically as the duties of the partners change. 13. Partnerships can offer bonuses to anyone. The choice is up to the partners. On the other hand, there is no requirement to ever offer a bonus. 15. While many bonuses are based on a measure of income, it is not required. Bonus can be based on other criteria such as market share, revenue, or average cost per unit. 17. Residual interests may be equal but they are not required to be equal. 18. While profit residual ratios and loss residual ratios are generally the same, they can differ. 21. Residual profit and loss percentages are the last component of the profit and loss allocation process applied because they are designed to allocate any remaining amount to the partners. 23. There are several ways that the difference between market and book value of assets can be addressed when the profit and loss ratios are changed. Revaluing the assets is one of the possibilities along with maintaining a record of assets with market and book value differences as well as directly adjusting capital accounts while leaving asset values unchanged.

Multiple Choice 29. c 30. d 31. c 32. d 33. a

34. 35. 36. 37. 38.

d d c d a

39. 40. 41. 42. 43.

b e c b d

44. 45. 46. 47.

c a b C

Problem I 1. Ben, capital Pet, capital (50% x P700,000)

Chapter 3 350,000

350,000

2. The total capital of BIG Entertainment Galley remains at P1,480,000. The total amount paid by Pet to Ben does not affect the partnership and Pet does not become a partner with the assignment of half of Ben’s interest. Problem II 1. a. D, capital…………………………………………………………… 24,000 F, capital…………………………………………………......... 24,000 b.1.

D, capital (P72,000 x ¼)………………………………………… 18,000 E, capital (P48,000 x ¼)………………………………………… 12,000 F, capital…………………………………………………. 30,000 The capital balances of the partners after the admission of F would be as follows: D Capital before admission…P 72,000 x: Interest remained……….. ¾ Capital after admission….. P54,000

E P 48,000 ¾ P 36,000

F (book value) P 30,000

Total_ P120,000 ________ P120,000

Therefore, the profit and loss ratio of the partners after the admission of F would be as follows: D, capital (70% x ¾)……………………………………………… 52.50% E, capital (30% x ¾)………………………………………………. 22.50% F, capital (equivalent to interest acquired)…………………. 25.00% Total………………………………………………………………….100.00% b.2

b.2.1 D, capital (P72,000 x ¼)………………………………………… 18,000 E, capital (P48,000 x ¼)………………………………………… 12,000 F, capital…………………………………………………. 30,000 The positive excess of P6,000 represents a personal gain of D and E, computed as follows: Amount paid (P21,600 + P14,400)…………………………………. P36,000 Less: BV of interest acquired – (P 120,000 x ¼)……………………………............................. 30,000 Excess (Gain of D and E – personal in nature)….……………….. P 6,000 The partnership does not record this gain because it was not benefited from it.

b.2.2 Assets (Goodwill)……………………………………………….. 24,000 D, capital (P24,000 x 70%).……………………………........ 16,800 E, capital (P24,000 x 30%).……………………………......... 7,200 Or, Amount paid (P21,600 + P14,400)…………….. P36,000 / ¼ P144,000 (100%) Less: BV of interest acquired – (P 120,000 x ¼)……………………………... 30,000 120,000 (100%) Excess……………………………………………….. P 6,000 ¼ Divided by (capitalized at): Interest acquired Revaluation of Asset Upward………………….. P24,000 P 24,000 (100%) D, capital [(P72,000 + P16,800) x ¼]………………………… 22,200 E, capital [(P48,000 + P7,200) x ¼]…………………………… 13,800 F, capital…………………………………………………...... 36,000 The capital balances of the partners after the admission of F would be as follows: Capital before admission… Revaluation upward………. Capital balance after revaluation………………. x: Interest remained……….. Capital after admission….. Capital interest %.............. P & L %: D (3/4 x 70%)…… E (3/4 x 30%)…… F (1/4)……………

D P 72,000 16,0800

Total_ E F (amount paid) P 48,000 P120,000 24,000 7,200

P 88,800 ¾ P66,600

P 55,200 ¾ P 41,400

52.50

P 36,000

P144,000 ________ P144,000

25 22.50

25

It should be observed that the total capital balance after the admission increases equivalent to the revaluation of assets amounting to P24,000. The reason of such adjustments is to equalize the capital of the new partner to the amount paid. b.3

b.3.1 D, capital (P72,000 x ¼)………………………………………… 18,000 E, capital (P48,000 x ¼)………………………………………… 12,000 F, capital…………………………………………………. 30,000 The negative excess of P3,600 represents a personal loss of D and E, computed as follows: Amount paid ……………………….…………………………………. P 26,400 Less: BV of interest acquired – (P 120,000 x ¼)……………………………............................. 30,000 Excess (Loss of D and E – personal in nature)….………………… P( 3,600)

b.3.2

The entry to record the transaction in the books follows: D, capital (P14,400 x 70%).…………………………………….. 10,080 E, capital (P14,400 x 30%).……………………………………... 4,320 Assets ……………………………………………………..... 14,400 Or, Amount paid ………………………….………….. P 26,400 / ¼ P 105,600 (100%) Less: BV of interest acquired – (P 120,000 x ¼)……………………………... 30,000 120,000 (100%) Excess……………………………………………….. P( 3,600) ¼ Divided by: Interest acquired………………….. Revaluation of Asset Downward..…………….. P(14,400) P(14,400) (100%) D, capital [(P72,000 – P10,080) x ¼]………………………. 15,480 E, capital [(P48,000 – P4,320) x ¼]………………………….. 10,920 F, capital………………………………………………….. 26,400

The capital balances of the partners after the admission of F would be as follows: D Capital before admission…P 72,000 Revaluation downward…… 10,080 Capital balance after revaluation……………….. P 61,920 x: Interest remained………… ¾ Capital after admission….. P46,440 Capital interest %.............. P & L %: D (3/4 x 70%)…… E (3/4 x 30%)…… F (1/4)……………

E P 48,000 4,320

F (amount paid)

P 48,680 ¾ P 32,760

P 26,400

Total_ P120,000 14,400

P 105,600 ________ P 105,600

25

52.50

22.50

25

Comparison between b.3.1 and b.3.2: Schedule of Account Balances

Book Value Approach Balances before admission Admission

Net Assets P120,000

Balances after admission of F P 120,000

Revaluation Approach Balances before admission Revaluation Admission Balances after admission of F

Depreciation/impairment* Totals

Goodwill/Asset Revaluation =

P120,000 P120,000 P120,000

P

-0-

D

Capital__________ E F___

P 72,000 P 48,000 ( 18,000) (12,000) P 30,000 P 54,000 P 36,000 P 30,000

P 24,000 P 24,000 ( 24,000) P -0-

*new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)

P 72,000 16,800 ( 22,200) P 66,600 ( 12,600) P 54,000

P 48,000 7,200 (13,800) P 36,000 P 41,400 P 36,000 ( 5,400) ( 6,000) P 36,000 P 30,000

The two methods will yield the same results computed as follows; Balances after admission of F (BV approach) Balances after admission of F (Revaluation approach) Gain or (loss) through use of book value approach

Capital__________ D E F___ P 54,000 P 36,000 P 30,000 54,000 36,000 30,000 P -0- P -0- P -0-

Problem III a: No Bonus or No Revaluation. The total agreed capital is equal to total agreed capital: Total agreed capital (given)………………………………………….P 48,000 Less: Total agreed capital (P24,000 + P12,000 + P12,000)………. 48,000 Difference…………………………………………………………………P -0The entry to record the transaction in the books follows: D, capital (P72,000 x ¼)………………………………………… 18,000 E, capital (P48,000 x ¼)………………………………………… 12,000 F, capital…………………………………………………. 30,000 b: Bonus to New Partner. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (given)…………………………………………P 48,000 Less: Total contributed capital (P24,000 + P12,000 + P12,000)…. 48,000 Difference………………………………………………………………..P -0The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner: J’s contributed capital (given)……………………………………...P 12,000 J’s agreed capital: (P48,000 x 35%)…………………………………. 16,800 Difference (bonus to new partner)………………………………….P 4,800 The entry to record the transaction in the books follows: Cash……………………………………………………………….. 12,000 G, capital (P4,800 x 60%)………………………………………. 2,880 H, capital (P4,800 x 40%)………………………………………. 1,920 J, capital ……………..…………………………………. 16,800 c: Revaluation (Goodwill) to New Partner The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be recognized as follows: Total agreed capital: (P18,000 / 1/3)……………………………….P 54,000 Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000 Difference (revaluation/goodwill)………………………………….P 6,000 The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a) is attributable to revaluation/goodwill to new partner: J’s contributed capital (given)……………………………………...P 12,000 J’s agreed capital (given) ………..…………………………………. 18,000 Difference (revaluation/goodwill to new partner)………………P 6,000

The entry to record the transaction in the books follows: Cash………………………………………………………………..12,000 Assets (goodwill)………………………………………………… 6,000 J, capital ……………..…………………………………. 18,000 d: Bonus to Old Partners. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC since it is a bonus method)……………………………………P 60,000 Less: Total contributed capital [(P24,000 + P12,000 + (P30,000 – P6,000)]……………….…. 60,000 Difference………………………………………………………………..P -0The new partner’s contributed capital is greater than his agreed capital, the difference is attributable to bonus to old partners: J’s contributed capital (P30,000 – P6,000)………………………..P 24,000 J’s agreed capital: (P60,000 x 30%)………………………………... 18,000 Difference (bonus to old partners)..………………………………..P( 6,000) The entry to record the transaction in the books follows: Tangible asset…………………………………………………….30,000 Mortgage payable……………………………………. 6,000 J, capital ……………..…………………………………. 18,000 G, capital (P6,000 x 60%)…………………………….. 3,600 H, capital (P6,000 x 40%)…………………………….. 2,400 e: Revaluation (Goodwill) to Old Partners. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation should be recognized as follows: Total agreed capital (given) ………………………………………... P 76,800 Less: Total contributed capital (P24,000 + P12,000 + P 8,400, revaluation + P28,800)…………………………. 73,200 Difference (revaluation/goodwill)………………..………………… P 3,600 The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in (a) is attributable to revaluation (goodwill) to old partners: J’s contributed capital………………………………………………… P 28,800 J’s agreed capital: (P76,800 x 37.5%)….………………………….... 28,800 Difference …………………………..…………………………………… P -0The entries to record the transaction in the books follows: Equipment………………………………………………………… 8,400 G, capital (P8,400 x 60%)…………………………….. 5,040 H, capital (P8,400 x 40%)……………………………… 3,360 Cash………….…………………………………………………….28,800 Other assets………………………………………………………. 3,600 J, capital ……………..…………………………………. 28,800 G, capital (P3,600 x 60%)…………………………….. 2,160 H, capital (P3,600 x 40%)……………………………… 1,440

f: Bonus and Revaluation (Goodwill) to New Partner. The total contributed capital (TCC) is less than the total agreed capital (TAC), so (goodwill) should be recognized as follows: Total agreed capital (given)…………………………………………P 60,000 Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000 Difference (revaluation/goodwill) …………………..……………..P 12,000

revaluation

The new partner’s contributed capital is less than the agreed capital, the difference of P15,000 are composed of revaluation of P12,000 in (a) above and the balance is bonus to new partner: J’s contributed capital (given)……………………………………... P 12,000 J’s agreed capital: (P60,000 x 45%)…………………………………. 27,000 Difference (total bonus and revaluation)..………………………...P 15,000 Less: Revaluation / goodwill to new partner………………………. 12,000 Bonus to new partner…………………………………………………... P 3,000 The entry to record the transaction in the books follows: Cash……………………………………………………………….. 12,000 Assets (goodwill)………………………………………………… 12,000 G, capital (P3,000 x 60%)………………………………………. 1,800 H, capital (P3,000 x 40%)………………………………………. 1,200 J, capital ……………..…………………………………. 27,000 To record the admission of J. g: Bonus and Revaluation to Old Partners. The total contributed capital (TCC) is less than the total agreed capital (TAC), so (goodwill) should be recognized as follows: Total agreed capital (given)…………………………………………P 72,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000 Difference (revaluation/goodwill)…………………....…………….P 18,000

revaluation

The new partner’s contributed capital is greater than the agreed capital, the difference of P3,600 is bonus to old partners since there is already a revaluation(goodwill) as indicated by (a) above. J’s contributed capital (given).…………………………………….. P 18,000 J’s agreed capital: (P72,000 x 20%)………………………………… 14,400 Difference (bonus to old partners)………………………………… P( 3,600) Less: Revaluation / goodwill to old partners……………………… 18,000 Total bonus and revaluation to old partners.……………………. P 21,600 The P3,600 difference is considered as a bonus since there was a transfer of capital (as indicated by the decrease in capital of the new partner) made by the new partner to the old partners. The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 Assets (goodwill)…………………………………………………18,000 J, capital ……………..………………………………… 14,400 G, capital (P21,600 x 60%)…………………………….. 12,960 H, capital (P21,600 x 40%)…………………………….. 8,640

h: Revaluation (Goodwill) to New and Old Partners. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be recognized as follows: Total agreed capital (given)…………………………………………P 72,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000 Difference (revaluation/goodwill ) …………………..……………. P 18,000 The new partner’s contributed capital is less than the agreed capital, the difference of P18,000 in (a) is attributable to revaluation (goodwill) to new partner and old partners: J’s contributed capital (given)…………………………………….. P 18,000 J’s agreed capital: (P72,000 x 30%)………………………………... 21,600 Difference (revaluation/goodwill to new partner)..…………….P 3,600 Less: Revaluation / goodwill computed in (a)..…………………. 18,000 Revaluation/goodwill to old partners……….……………………..P 14,400 The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 Assets (goodwill)…………………………………………………18,000 J, capital ……………..…………………………………. 21,600 G, capital (P14,400 x 60%)…………………………… 8,640 H, capital (P14,400 x 40%)……………………………. 5,760 i: Bonus to Old Partners with Bonus Amount Given. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC since it is a bonus method)……………………………………P 60,000 Less: Total contributed capital [(P24,000 + P12,000 + P24,000)……………...…………….…. 60,000 Difference………………………………………………………………..P -0The new partner’s contributed capital is greater than his agreed capital, the difference is attributable to bonus to old partners: J’s contributed capital…………………….. …………………………P 24,000 J’s agreed capital (P24,000 – P6,000).……………………………... 18,000 Difference (bonus to old partners)..……………………………….. P( 6,000) The entry to record the transaction in the books follows: Cash………………………………………………………………..24,000 J, capital ……………..…………………………………. 18,000 G, capital (P6,000 x 60%)…………………………….. 3,600 H, capital (P6,000 x 40%)…………………………….. 2,400 j: Bonus to New Partner with an Indication of Bonus. There is an overstatement of asset amounting to P2,400 (P6,000 – P3,600) that is needed to be recorded to comply with the provisions of GAAP recognizing overvaluation of net assets. Therefore, the contributed capital of partner G and H are as follows: G, capital: P24,000 – (P2,400 x 60%)………………………….P 22,560 H, capital: P12,000 – (P2,400 x 40%)…………………………. 11,040 Total contributed capital before the admission………….. P 33,600

The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC since it is a bonus method)…………………………………… P 40,800 Less: Total contributed capital [P33,600 (a) + P7,200].………… 40,800 Difference………………………………………………………………..P -0The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner: J’s contributed capital (given)……………………………………...P 7,200 J’s agreed capital: (P40,800 x 30%)…………………………………. 12,240 Difference (bonus to new partner)………………………………….P 5,040 The entries to record the transaction in the books follows: G, capital (P2,400 x 60%)………………………………………. 1,440 H, capital (P2,400 x 40%)………………………………………. 960 Equipments……………………………………………… 2,400 Cash……………………………………………………………….. 7,200 G, capital (P5,040 x 60%)………………………………………. 3,024 H, capital (P5,040 x 40%)………………………………………. 2,016 J, capital ……………..…………………………………. 12,240 k: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill). There is an understatement of asset amounting to P6,000 (P12,600 – P6,600) that is needed to be recorded (also even in cases of overstatement) as long as the revaluation (goodwill) approach is being used. Therefore, the contributed capital of partner G and H are as follows: G, capital: P24,000 + (P6,000 x 60%)………………………….P 27,600 H, capital: P12,000 + (P6,000 x 40%)………………………….. 14,400 Total contributed capital before the admission…………..P 42,000 The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be recognized as follows: Total agreed capital (P18,000 / ¼ )*…..……….…………………...P 72,000 Less: Total contributed capital [P42,000 (a) + P18,000]………..… 60,000 Difference (revaluation/goodwill ) …………………..…………….P 12,000 *The old partner’s total contributed capital of P42,000 should not be used as a basis because it will result to a negative revaluation. In cases of revaluation and there is no specification as to upward or downward adjustments, the presumption should always be upward. The P18,000 was capitalized by ¼ to determine the value of the partnership as a whole. The new partner’s contributed capital is equal to the agreed capital, the difference of P12,000 in (a) is attributable to revaluation (goodwill) to old partners: J’s contributed capital (given)……………………………………...P 18,000 J’s agreed capital……………………………………………………… 18,000 Revaluation/goodwill to new partner……….……………………...P -0-

The entries to record the transaction in the books follows: Other assets…………………………………………………….... 6,000 G, capital (P6,000 x 60%)…………………………….. 3,600 H, capital (P6,000 x 40%)…………………………….. 2,400 Cash……………………………………………………………….. 18,000 Assets (goodwill)………………………………………………… 12,000 J, capital ……………..…………………………………. 18,000 G, capital (P12,000 x 60%)…………………………… 7,200 H, capital (P12,000 x 40%)……………………………. 4,800 l: Revaluation (Goodwill) to New Partner with Revaluation Amount Given. The total contributed capital (TCC) is less than the total agreed capital (TAC), so (goodwill) should be recognized as follows:

revaluation

Total agreed capital (TCC, P60,000 + P7,200, goodwill) ……….P 67,200 Less: Total contributed capital (P24,000 + P12,000 + P24,000)… 60,000 Difference (revaluation/goodwill ) …………………..……………..P 7,200 The new partner’s contributed capital is less than the agreed capital, the difference of P7,200 in (a) is attributable to revaluation (goodwill) to new partner: J’s contributed capital (given)……………………………………...P 24,000 J’s agreed capital: (P24,000 + P7,200)……………………………… 31,200 Revaluation/goodwill to new partner……….……………………..P 7,200 The entry to record the transaction in the books follows: Cash……………………………………………………………….. 24,000 Assets (goodwill)………………………………………………… 7,200 J, capital ……………..…………………………………. 31,200 To record the admission of J. m: Withdrawals Instead of Revaluation. The total contributed capital (TCC) is greater than total agreed capital (TAC), so it should have been a negative revaluation. Since there was an indication that capital balances should equal to the profit and loss (old or new) ratio, then the difference should be considered as withdrawals (if it is a positive revaluation it should have been additional investment and if the TCC = TAC, it should have been settlement between partners) instead of negative revaluation. Total agreed capital (given)………………………………………...P 48,000 Less: Total contributed capital (P24,000 + P12,000 + P24,000).. 60,000 Difference (withdrawals)……………………………………………..P 12,000 The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner: J’s contributed capital (given)……………………………………...P 24,000 J’s agreed capital: (P48,000 x 50%)…………………………………. 24,000 Difference……………………………..………………………………….P -0-

The withdrawals of P12,000 should be attributable to the old partners computed as follows: Total agreed capital (given)……………………………. P 48,000 24,000 Less: J’s agreed capital (P48,000 x 50%)……………… Total agreed capital of the old partners……………… P 24,000 Less: G’s agreed capital (P24,000 x 60%)………………P 14,400 24,000 H’s agreed capital (P24,000 x 40%)……………… 9,600 G’s withdrawal: P24,000 – P14,400……………………… H’s withdrawal: P12,000 – P9,600………………………..

P 9,600 P 2,400

The entry to record the transaction in the books follows: Cash (P24,000 – P12,000)………………………………………. 12,000 G, capital…………………………………………………………. 9,600 H, capital………………………………………………………….. 2,400 J, capital ……………..…………………………………. 24,000 n: Bonus and Revaluation (Goodwill) When Not Specifically Stated. n.1: Revaluation (Goodwill) or Bonus to New Partner. n.1.1: Bonus Approach. The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC, since it is a bonus method)……………………………………P 54,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000 Difference……………………………..…………………..…………….P -0The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner: J’s contributed capital (given).……………………………………...P 18,000 J’s agreed capital: (P54,000 x 40%)………………………………… 21,600 Difference (bonus to new partner)..………………………………..P 3,600 The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 G, capital (P3,600 x 60%)……………………………………… 1,260 H, capital (P3,600 x 40%)………………………………………. 1,440 J, capital ……………..…………………………………. 21,600 n.1.2: Revaluation (Goodwill) Approach. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be recognized as follows: Total agreed capital: (P24,000 + P12,000) / (100% - 40%)…………………………...P 60,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000 Difference (revaluation/goodwill).…………………..…………….P 6,000

The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a) is attributable to revaluation (goodwill) to new partner: J’s contributed capital (given).…………………………………….P 18,000 J’s agreed capital: (P60,000 x 40%)……………………………….. 24,000 Difference (revaluation/goodwill to new partner)..…………...P 6,000 The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 Assets (goodwill)………………………………………………… 6,000 J, capital ……………..…………………………………. 24,000 The following items should be observed: 1. The New Profit and Loss Ratio. The capital interest of J is 40%, while his profit and loss is 25%, so the new profit and loss interest of the new partnership is computed as follows: ____G Capital interest %.............. P & L %: G (60% x 75%)…… 45 H (40% x 75%)…… J ……..……………

H

_

30

J____ 40 25

2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the new partners are computed as follows: Bonus Approach (total agreed capital) - refer to Alternative 1 above: G, capital (P24,000 – P2,160)………………………………P 21,840 H, capital (P12,000 – P1,440)……………………………… 10,560 J, capital…………………………………………………....... 21,600 Total……………………………………………………………. P 54,000 Revaluation (goodwill) Approach (total agreed capital) - refer to Alternative 2 above: G, capital……………………………………………………...P 24,000 H, capital……………………………………………………… 12,000 J, capital (P60,000 x 40%)………………………………….. 24,000 Total…………………………………………………………….P 60,000

Schedule of Account Balances

Bonus Approach

Balances after admission of J

Revaluation Approach

Net Assets P 54,000

P 54,000 Depreciation/impairment* Totals P 54,000 Balances after admission of J

Goodwill/Asset Revaluation = P

-0-

P 6,000 ( 6,000) P -0-

G P 21,840

Capital__________ H J___ P 10,560 P 21,600

P 24,000 P 12,000 P 24,000 ( 2,700) ( 1,800) ( 1,500) P 21,300 P 10,200 P 22,500

*new profit and loss ratio (G, 45%; H, 30%, and J, 25%) The two methods will yield the same results computed as follows; Balances after admission of J (Bonus approach) Balances after admission of J (Revaluation approach) Gain or (loss) through use of bonus approach

Capital__________ G H J__ P 21,840 P10,560 P 21,600 21,300 10,200 22,500 P 540 P 360 P( 900)

n.2: Revaluation (Goodwill) or Bonus to Old Partners. n.2.1: Bonus Approach. The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC, since it is a bonus method)……………………………………P 54,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000 Difference……………………………..…………………..…………….P -0The new partner’s contributed capital is greater than the agreed capital, the difference is attributable to bonus to old partners: J’s contributed capital (given).……………………………………...P 18,000 J’s agreed capital: (P54,000 x 30%)………………………………… 16,200 Difference (bonus to old partners)..…………………………………P 1,800 The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 J, capital ……………..…………………………………. 16,200 G, capital (P1,800 x 60%)…………………………….. 1,080 H, capital (P1,800 x 40%)……………………………… 720

n.2.2: Revaluation (Goodwill) Approach. The total contributed capital (TCC) is greater than the total agreed capital (TAC), so revaluation (goodwill) should be recognized as follows: Total agreed capital: P18,000 / 30%...............…………………...P 60,000 Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000 Difference (revaluation/goodwill).…………………..…………….P 6,000 The new partner’s contributed capital is equal to the agreed capital, the difference of P6,000 in (a) is attributable to revaluation (goodwill) to old partners: J’s contributed capital (given).…………………………………….P 18,000 J’s agreed capital: (P60,000 x 30%)……………………………….. 18,000 Difference………………………………………………....……………P -0The entry to record the transaction in the books follows: Cash………………………………………………………………..18,000 Assets (goodwill)………………………………………………… 6,000 J, capital ……………..…………………………………. 18,000 G, capital (P6,000 x 60%)…………………………….. 3,600 H, capital (P6,000 x 40%)……………………………… 2,400 The following items should be observed: 1. The New Profit and Loss Ratio. The capital interest of J is 30%, while his profit and loss is 40%, so the new profit and loss interest of the new partnership is computed as follows: ____G Capital interest %.............. P & L %: G (60% x 60%)…… 36 H (40% x 60%)…… J ……..……………

H 24

_

J____ 30 40

2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the new partners are computed as follows: Bonus Approach (total agreed capital) - refer to Alternative 1 above: G, capital (P24,000 + P1,080)…..……………………………P 25,080 H, capital (P12,000 + P720)………………………………… 12,600 16,200 J, capital…………………………………………………....... Total……………………………………………………………. P 54,000 Revaluation (goodwill) Approach (total agreed capital) - refer to Alternative 2 above: G, capital (P24,000 + P3,600)……………………………...P 27,600 H, capital (P12,000 + P2,400)………………………………. 14,400 J, capital (P60,000 x 30%)………………………………….. 18,000 Total…………………………………………………………….P 60,000

Schedule of Account Balances

Bonus Approach

Balances after admission of J

Revaluation Approach

Balances after admission of J

Depreciation/impairment* Totals

Net Assets

Goodwill/Asset Revaluation

P 54,000

P

P 54,000

P 6,000 ( 6,000) P -0-

P 54,000

-0-

=

G P 25,080

Capital__________ H J___ P 12,720 P 16,200

P 27,600 P 14,400 P 18,000 ( 2,160) ( 1,440) ( 2,400) P 25,440 P 12,960 P 15,600

*new profit and loss ratio (G, 36%; H, 24%, and J, 40%) The two methods will yield the same results computed as follows; Balances after admission of J (Bonus approach) Balances after admission of J (Revaluation approach) Gain or (loss) through use of bonus approach Problem IV 1. Phoenix, Capital Dallas, Capital

Capital__________ G H J__ P 25,080 P 12,720 P 16,200 25,440 12,960 15,600 P( 360) P( 240) P 600 22,500

2. Phoenix, Capital Tucson, Capital Dallas, Capital

18,000 10,000

3. Cash

60,000

Phoenix, Capital (P60,000 - P40,000) × .50 Tucson, Capital Dallas, Capital

22,500

28,000 10,000 10,000 40,000

(P90,000 + P50,000) + P60,000 = P200,000; Therefore, no goodwill is to be recognized. Dallas, capital = P200,000 × 0.20 = P40,000 4. Goodwill Phoenix, Capital Tucson, Capital

20,000

10,000 10,000

P40,000/0.20 = P200,000 Goodwill = P200,000 - (P90,000 + P50,000 + P40,000) = P$20,000 Cash

Dallas, Capital

40,000

40,000

Problem V 1. Book value of interest acquired = (P180,000 + P90,000) × 1/3 = $90,000 Bonus Method Cash

90,000

Moore, Capital

90,000

2. Book value of interest acquired = (P180,000 + P120,000) × 0.45 = P135,000 Book value of interest is greater than assets invested. Bonus Method Cash Brown, Capital (0.60 × P15,000) Coss, Capital (0.40 × P15,000) Moore, Capital

120,000 9,000 6,000

135,000

The goodwill method is not applicable because the partners agreed to total capital interest of P300,000. 3. Book value of interest acquired (P180,000 + P120,000) ×

1 = P100,000 3

Bonus method cannot be used because Moore will not accept less than P120,000 capital interest. Goodwill Method Total capital implied from contract [P120,000/(1/3)] Minus current capital balance + Moore's investment (P180,000 + P120,000) Goodwill Goodwill Brown, Capital (0.60 × P60,000) Coss, Capital (0.40 × P60,000) Cash

Moore, Capital

60,000

120,000

P360,000 300,000 P60,000 36,000 24,000 120,000

4. Book value of interest acquired (P180,000 + P40,000) × ¼ = P55,000 Book value of interest acquired is greater than assets invested. Bonus Method Cash Brown, Capital (0.60 × P15,000) Coss, Capital (0.40 × P15,000) Moore, Capital 5. Book value of interest acquired (P180,000 + P35,000) × 0.20 = P43,000 Book value of interest acquired is greater than the asset invested.

40,000 9,000 6,000

55,000

Goodwill Method Total capital Minus recorded value of net assets + Moore's investment (P180,000 + P35,000) Goodwill

P225,000 215,000 P10,000

Cash Goodwill Moore, Capital

45,000

35,000 10,000

6. Book value of interest acquired (P180,000 + P150,000) × (1/3) = P110,000 Book value of interest acquired is less than asset invested. Bonus Method Land

Brown, Capital (0.60 × P40,000) Coss, Capital (0.40 × P40,000) Moore, Capital

150,000

24,000 16,000 110,000

Goodwill Method Net value of firm implied by contract [P150,000/(1/3)] Minus current capital + Moore's investment (P180,000 + P150,000) Goodwill

P450,000 330,000 P120,000

Goodwill Brown, Capital (0.60 × P120,000) Coss, Capital (0.40 × P120,000)

120,000

Land

150,000

Moore, Capital

72,000 48,000 150,000

7. Bonus Method Brown, Capital (0.30 × P92,000) Coss, Capital (0.30 × P88,000) Moore, Capital Problems- VI 1. (a) Goodwill method: Cash………………………………………………………… 5,000 Goodwill…………………………………………………… 4,200 Mason, Capital………………………………………… 2,520 Norris, Capital………………………………………….. 1,680 Oster, Capital………………………………………….. 5,000 Computation of goodwill: Total capital after adjustment for goodwill, P5,000 / .25…………………………………………….. P20,000 Total capital before adjustment for goodwill….. 15,800 Goodwill allowed old partners……………………..P 4,200

27,600 26,400

54,000

Distribution of goodwill: Mason: 3/5 of P4,200…………………………………P 2,250 Norris: 2/5 of P4,200…………………………………… 1,680 P 4,200 (b) Bonus method: Cash………………………………………………………… 5,000 Mason, Capital………………………………………… 630 Norris, Capital………………………………………….. 420 Oster, Capital………………………………………….. 3,950 Computation of bonus: Amount invested by Oster………………………….. P 5,000 Oster’s interest, 25% of P 15,800………………..….. 3,950 Bonus allowed old partners………………………… P 1,050 Distribution of bonus: Mason: 3/5 of P1,050…………………………………. P 630 Norris: 2/5 of P1,050…………………………………… 420 P 1,050 (c) The bonus method will be preferred by Oster, who will gain P350. Norris will gain P140, while Mason will lose P490. COMPARISON WHEN GOODWILL IS FOUND TO EXIST Goodwill__ P4,200

When goodwill method is used….. When bonus method is used……… Add recognition of goodwill (gain distributed in profit and loss ratio, equally)………………………. P4,200 P4,200 Gain (loss) through use of bonus method……………………….

Other Assets P15,800 P15,800

Mason Capital P8,520 P6,630

Norris Capital P6,480 P5,220

Oster Capital P5,500 P3,950

P15,800

1,400 P8,030

1,400 P6,620

1,400 P5,350

(P 490)

P 140

P350

COMPARISON WHEN GOODWILL IS NOT REALIZED

When bonus method is used……… When goodwill method is used….. Deduct write-off of goodwill (loss distributable equally)…………

Goodwill__ P4,200 P4,200

Other Assets P15,800 P15,800

Mason Capital P6,630 P8,520

1,400 P15,800 P7,120 Gain (loss) through use of bonus method…………………… (P 490)

Norris Capital P5,220 P6,480

Oster Capital P3,950 P5,500

1,400 P5,080 P 140

1,400 P3,600 P350

2. (a) Goodwill method: Cash………………………………………………………… 5,000 Goodwill…………………………………………………… 2,200 Oster, Capital………………………………………….. 7,200

Computation of goodwill: Total capital after adjustment for goodwill, P10,800 / .60…………………………………………….P18,000 Total capital before adjustment for goodwill….. 15,800 Goodwill allowed to Oster………………………….. P 2,200 (b)Bonus method: Cash………………………………………………………… 5,000 Mason, Capital…………………………………………… 792 Norris, Capital…………………………………………….. 528 Oster, Capital………………………………………….. 6,320 Computation of bonus: Oster’s interest, 40% of P 15,800………………..….. 6,320 Amount invested by Oster………………………….. P 5,000 Bonus allowed to Oster……………………………… P 1,320 Charge to partners for bonus allowed to Oster: Mason: 3/5 of P1,320…………………………………. P 792 Norris: 2/5 of P1,320…………………………………… 528 P 1,320 (c) The goodwill method will be preferred by Oster, who will gain P146.66. Norris’ loss is P205.33, and Mason’s gain is P58.67. COMPARISON WHEN GOODWILL IS FOUND TO EXIST Goodwill__ P2,200

When goodwill method is used….. When bonus method is used……… Add recognition of goodwill (gain distributed in profit and loss ratio, equally)………………………. P2,200 P2,200 Gain (loss) through use of bonus method……………………….

Other Assets P15,800 P15,800

Mason Capital P6,000 P5,208

Norris Capital P4,800 P4,272

Oster Capital P7,200 P6,320

733.33 733.33 733.34 P15,800 P5,941.33 P5,005.33 P7,053.34 (P 58.67) P 205.33 (P146.66)

COMPARISON WHEN GOODWILL IS NOT REALIZED Goodwill__

When bonus method is used……… When goodwill method is used….. P2,200 Deduct write-off of goodwill (loss distributable equally)………… P2,200 Gain (loss) through use of bonus method……………………….

Other Assets P15,800 P15,800 P15,800

Mason Capital P5,208 P6,000

Norris Oster Capital Capital P4,272 P3,950 P4800 P7,200

733.34 733.33 733.33 P5,266.67 P4,066.67 P6,466.66 (P58.67)

P205.33 (P146.66)

Problem VII 1. The total interest of the retiring partner K amounted to: Capital interest………………………………………………….P 36,000 Add (deduct): Share in net income…………………………………….. 7,200 Loan receivable………………………………………….( 6,000) Total Interest of K before his retirement............................P 37,200 2.

a. Payment at Book Value (Settlement price is equal to the interest of retiring partner). The entry to record the transaction in the books follows: K, capital…………………………………………………………. 37,200 Cash………………………….………………………….. 37,200 b. Payment at More than Book Value ((Settlement price is greater than the interest of retiring partner). b.1. Bonus to Retiring Partner. The excess is considered bonus chargeable to L and M. The entry to record the transaction in the books follows: K, capital…………………………………………………………. 37,200 L, capital (P4,800 x 5/7)……………………………………….. 3,429 M, capital (P4,800 x 2/7)………………………………………. 1,371 Cash………………………….………………………….. 42,000 Amount paid………………………..………………………….. P 42,000 Less: BV of K’s total interest (30%).……..……..................... 37,200 Bonus to Retiring Partner……………………………………… P 4,800

The following items should be observed: 1. It should be observed that under bonus approach, undervaluation of net assets should not be recorded for this will be in contradiction of current accounting standards. 2. The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit – P3,429, bonus)………………P56,571 M, capital (P18,000 + P4,800 profit – P1,371, bonus)……………….. 21,429 Assuming the same data, except that by mutual agreement the inventory is to be adjusted to their fair value. Then, the undervalued asset should be recorded first before the settlement. The entries to record the transaction in the books follows: Inventory………………………………………………………… 4,800 K, capital (P4,800 x 30%)……………………………. 1,440 L, capital (P4,800 x 50%)…………………………….. 2,400 M, capital (P4,800 x 20%)…………………………… 960 K, capital………………………………………………………….38,640 L, capital (P3,360 x 5/7)……………………………………….. 2,400 M, capital (P3,360 x 2/7)……………………………………… 960 Cash………………………….…………………………. 42,000 Amount paid………………………..…………………………... P 42,000 Less: BV of K’s total interest (30%) - (P37,200 + P1,440).... 38,640 Bonus to Retiring Partner……………………………………… P 3,360

b.2: Partial Revaluation (Goodwill) to Retiring Partner. The entries to record the transaction in the books follows: Inventory………………………………………………………… 4,800 K, capital (P4,800 x 30%)…………………………….. 1,440 L, capital (P4,800 x 50%)…………………………….. 2,400 M, capital (P4,800 x 20%)……………………………. 960 K, capital…………………………………………………………. 38,640 Assets (Goodwill)……………………………………………….. 3,360 Cash………………………….………………………….. 42,000 Amount paid………………………..………………………….. P 42,000 Less: BV of K’s total interest (30%) - P37,200 + P1,440........ 38,640 Partial revaluation (goodwill) to Retiring Partner………… P 3,360 The following items should be observed: 1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill) of P3,360 that has been purchased should be recorded. 2. The situation at bar is the same situation in admission by investment Case 9, that recognition of understatement of assets is in compliance with GAAP under the revaluation (goodwill) approach. 3. The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit + P2,400, adjustment).………P62,400 M, capital (P18,000 + P4,800, profit + P960 adjustment)…….…… 23,760 A modified version of this partial revaluation (goodwill) approach happens assuming that when assets and liabilities are revalued only to the extent of the excess payment to K, the entry to record the transaction is as follows: K, capital…………………………………………………………. 37,200 Assets ……………)………………………………………………. 4,800 Cash………………………….………………………….. 42,000 Amount paid………………………..………………………….. P 42,000 Less: BV of K’s total interest (30%)……………………......... 37,200 Partial revaluation (goodwill) to Retiring Partner………… P 4,800 b.3: Total Revaluation (Goodwill) to Retiring Partner. The entries to record the transaction in the books follows: Inventory………………………………………………………… 4,800 K, capital (P4,800 x 30%)…………………………….. 1,440 L, capital (P4,800 x 50%)…………………………….. 2,400 M, capital (P4,800 x 20%)……………………………. 960 The excess is considered as revaluation (goodwill) to be recognized. Assets (Goodwill)……………………………………………….. 11,200 K, capital (P11,200 x 30%)…………………………….. 3,360 L, capital (P11,200 x 50%)…………………………….. 5,600 M, capital (P11,200 x 20%)……………………………. 2,240

Amount paid………………………..………………………….. P 42,000 Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 36,640 Partial revaluation (goodwill) to Retiring Partner………… P 3,360* Divided by (capitalized at): Profit and loss % of K............. 30% Total Revaluation (goodwill)…………………………………. P 11,200 *The P3,360 represents K’s 30% interest in revaluation (goodwill) of P11,200. Notice that the P3,360 represents K’s interest in the gain, which would be realized if the revaluation (goodwill) were sold. Therefore, K’s percentage is used to suggest the total value of the revaluation (goodwill).

K, capital (P 38,640 + P3,360)…………………………………. 42,000 Cash………………………….………………………….. 42,000 The following items should be observed: 1. Whether part or all of the goodwill is recognized, opponents of this procedure contend that transactions between partners should not be viewed as arm’s length; therefore, the measure of revaluation (goodwill) may not be determined objectively. Also, inequitable results may be produced if the remaining partners subsequently changed their profit and loss ratio. 2. The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit + P2,400, adjustment + P5,600).P68,000 M, capital (P18,000 + P4,400, profit + P960 adjustment + P2,240)….. 26,000 For purposes of comparison, let us assume that there is no undervalued inventory amounting to P4,800 in Case 2 above. Refer to the following schedule for comparison. Schedule of Account Balances

Bonus Approach Balances after retirement of K

Goodwill/Asset Revaluation P

Partial Revaluation (Goodwill) Approach Balances after retirement of K* P Depreciation/impairment*** ( Totals P

L

Capital__________ M_____

-0-

P

56,571

4,800** 4,800) -0-

P 60,000 ( 3,429) P 58,971

P 21,429 P 22,800 ( 1,371) P 21,429

*excluding undervalued inventory of P2,400 and P960 for L and M, respectively. ** P42,000 – P37,200 = P4,800, partial revaluation *** old profit and loss ratio (L, 5/7 and M, 2/7)

Total Revaluation (Goodwill) Approach Balances after retirement of K* P 16,000** Depreciation/impairment*** ( 16,000) Totals P -0-

P 68,000 ( 11,429) P 56,571

*excluding undervalued inventory of P2,400 and P960 for L and M, respectively. ** P42,000 – P37,200 = P4,800, partial revaluation / 30% = P16,000. L, capital: (P48,000 + P12,000) + (P16,000 x 50%) = P68,000 M, capital: (P18,000 + P4,800) + (P16,000 x 20%) = P 26,000 *** old profit and loss ratio (L, 5/7 and M, 2/7)

P 26,000 ( 4,571) P 21,429

The three methods will yield the same results computed as follows; Balances after retirement of K (Bonus approach) Balances after retirement of K (Partial Revaluation approach) Balances after retirement of K (Total Revaluation approach)

Total_______ L M__ P 56,571 P 21,249 P 56,571 P 21,249 P 56,571 P 21,249

c: Payment at Less than Book Value ((Settlement price is less than the interest of retiring partner). c.1. Bonus to Remaining Partners. The excess is considered bonus chargeable to L and M. The entry to record the transaction in the books follows: K, capital…………………………………………………………. 37,200 Cash………………………….………………………….. 31,200 L, capital (P6,000 x 5/7)………………………………. 4,286 M, capital (P6,000 x 2/7)……………………………… 1,714 Amount paid………………………..…………………………… P 31,200 Less: BV of K’s total interest (30%).……..……..................... 37,200 Bonus to Remaining Partners…………………………………. P 6,000 The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit + P4,286, bonus)……………..P64,286 M, capital (P18,000 + P4,800 profit + P1,714, bonus)……………….. 24,514 c.2: Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner). The entry to record the transaction in the books follows: K, capital…………………………………………………………. 37,200 Specific Asset…..……………………………………… 6,000 Cash………………………….………………………….. 31,200 Amount paid………………………..…………………………… P 31,200 Less: BV of K’s total interest (30%)………………………....... 37,200 Partial revaluation/write-down of specific assets……..… P 6,000 The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit)………………………….………P60,000 M, capital (P18,000 + P4,800, profit)…………………………….…… 22,800 c.3: Total Revaluation/Write-down of Assets (Entire Entity). The entries to record the transaction in the books follows: K, capital (P20,000 x 30%)…………………………………...... 6,000 L, capital (P20,000 x 50%)………………………………………10,000 M, capital (P20,000 x 20%)……………………………………. 4,000 Assets……………………………………………………. 20,000 To record write-down of assets computed as follows: Amount paid………………………..…………………………….P 31,200 Less: BV of K’s total interest (30%)………………………........ 37,200 Partial revaluation/write-down of asset……………………..P 6,000* Divided by (capitalized at): Profit and loss % of K............ 30% Total Revaluation/Write-down of assets….………………….P 20,000

*The P6,000 represents K’s 30% interest in write-down of assets of P20,000. Notice that the P6,000 represents K’s interest in the loss.

K, capital (P 37,200 - P6,000)………………………………. 31,200 Cash………………………….………………………... 31,200 The capital balances of the partners after the retirement of K are as follows: L, capital (P48,000 + P12,000, profit – P10,000)…………………………...P50,000 M, capital (P18,000 + P4,800, profit - P4,000)……………………….….. 18,800 Assets (Goodwill)……………………………………………….. 11,200 K, capital (P11,200 x 30%)…………………………….. 3,360 L, capital (P11,200 x 50%)…………………………….. 5,600 M, capital (P11,200 x 20%)……………………………. 2,240 To record total revaluation (goodwill) computed as follows: Amount paid………………………..………………………….. P 42,000 Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 38,640 Partial revaluation (goodwill) to Retiring Partner………… P 3,360* Divided by (capitalized at): Profit and loss % of K............. 30% Total Revaluation ……………………………………………….. 11,200 Problem VIII 1.

Grey, Capital P200,000 + (P30,000 × 2/6) Portney, Capital (P20,000 × 3/4) Ross, Capital (P20,000 × 1/4) Cash

2.

Goodwill (P20,000 ÷ 2/6) Portney, Capital Grey, Capital Ross, Capital Grey, Capital Cash

Problem IX 1.

(a)

(b)

C, Capital A, Capital B, Capital Cash

Goodwill C, Capital C, Capital Cash

(c)

210,000 15,000 5,000 60,000

230,000

105,000 21,000 14,000

35,000 140,000

230,000 30,000 20,000 10,000 230,000

140,000

35,000 140,000

0.5X =P35,000 X =P70,000 Goodwill A, Capital B, Capital C, Capital

70,000

21,000 14,000 35,000

C, Capital Cash 2.

140,000

140,000

The bonus method is more objective. That is, the bonus method does not require the allocation of a subjective value to goodwill. Since this is not an arm’s length transaction, there is no objective basis to revalue the firm as a whole.

Problem X

(1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of P80,000 (5/8 goodwill = P50,000), resulting in a total payment to Colter of P230,000. The entry would be: Agler, Capital 50,000 Bates, Capital 30,000 Colter, Capital 150,000 Cash 230,000 (2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is recorded. Thus, the payment to Colter was P210,000 (P150,000 + P60,000). Under the total Goodwill, since P66,000 was credited, total goodwill of P220,000 (P66,000/0.3) is recorded. Colter is allocated P44,000 (P220,000 × 0.20). Thus, the payment to Colter was P194,000 (P150,000 + P44,000).

Problem XI 1. Partnership Books Retained Entries in the Books of the New Corporation using the Partnership Books: Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . Accumulated Depreciation of Equipment (P36,600 – P31,200). . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,400 12,000 12,000

AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock (P10 par x 9,000 shares) . . . . . . . . . . . . . . . . . . . . Paid-in capital in excess of par [(P11 – P10) x 9,000 shares] . . . .

75,348 23,652

To adjust assets and liabilities to agreed amounts and to divide net gain of P22,200 between partners in 4:1 ratio

To record distribution of common stock of J & K Corporation to partners; AA: (P57,588 + P17,760) / P11 per share = 6,850 shares BB: (P19,212 + P4,440) / P11per share = 2,150 shares Total shares................................................ 9,000 shares

2. New Books Opened for the Corporation Entries in the Books of the Partnership:

Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . Accumulated Depreciation of Equipment (P36,600 – P31,200). . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,400 12,000 12,000

Receivable from A&B Corporation (P76,800 + P22,200) . . . . . . . . . .

99,000

To adjust assets and liabilities to agreed amounts and to divide net gain of P22,200 between partners in 4:1 ratio

480 5,400 1,320 17,760 4,440

90,000 9,000

480 5,400 1,320 17,760 4,440

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42,000 1,320 1,200 36,600

Common Stock of A & B Corporation (9,000 shares x P11) . . . . . . . Receivable from A & B Corporation . . . . . . . . . . . . . . . . . . . . . . . To record receipt of 9,000 shares of P10 par common stock valued at P11 a share in payment for net assets transferred to A & B Corporation.

99,000

AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . .

75,348 23,652

To record transfer of assets and liabilities to A&B Corporation.

To record distribution of common stock of J & K Corporation to partners; AA: (P57,588 + P17,760) / P11 per share = 6,850 shares BB: (P19,212 + P4,440) / P11per share = 2,150 shares Total shares................................................ 9,000 shares

14,400 33,720 36,000 84,000 12,000

99,000

99,000

In the Accounting Records of the Corporation: Entries in the Books of the New Corporation:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment (P84,000 - P36,600). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . .............

14,400 33,720 36,000 47,400 12,000

Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, P10 par (9,000 x P10) . . . . . . . . . . . . . . . . . . . . . Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . To record issuance of 9,000 shares of common stock valued at P11 a share in payment for net assets of A&B Partnership.

99,000

To record acquisition of assets and liabilities from A&B Partnership.

Problem XII Cash Trade Accounts Receivable Inventories Equipment Allowance for Doubtful Accounts Notes Payable Trade Accounts Payable Payable to Sade and Tipp To record acquisition of net assets from Sade & Tipp LLP.

8,700 13,250 28,000 35,000

1,200 42,000 1,320 99,000

90,000 9,000

800 10,000 9,800 64,350

Payable to Sade and Tipp Common Stock, P1 par Paid-in Capital Excess of Par To record issuance of 10,000 shares of common stock to Sade and Tipp. Problem XII 1. Cash Inventory Equipment Snow, Capital

64,350

20,000 15,000 67,000

Cash Land

50,000 120,000

Mortgage Payable Waite, Capital 2. Snow, Capital Waite, Capital Income Summary

7,680 16,320 Snow P10,200 15,000

P13,000 20,000

Allocation 40:60 Net loss allocated to partners

(32,880) P(7,680)

(49,320) P(16,320)

Capital interest of Snow (P102,000 - P7,680) Capital interest of Waite (P130,000 - P16,320) Investment of Young Total capital interest in new partnership Percentage acquired by Young Capital interest of Young Investment by Young Bonus to Young

102,000

40,000 130,000 24,000 Total

Waite

Net loss to be allocated Interest on capital investment P102,000 × 10% P130,000 × 10% Salaries to partners

3. Cash Snow, Capital (P13,400 × 40%) Waite, Capital (P13,400 × 60%) Young, Capital

10,000 54,350

70,000 5,360 8,040

P23,200 35,000 58,200 (82,200) P(24,000)

83,400

P94,320 113,680 70,000 278,000 30% 83,400 (70,000) P13,400

4. Income Summary Snow, Capital (P150,000 × 20%) Waite, Capital (P150,000 × 50%) Young, Capital (P150,000 × 30%)

150,000

5. Snow, Capital* Waite, Capital (P18,960 × 50/80)

118,960

30,000 75,000 45,000 11,850

Young, Capital (P18,960 × 30/80) Cash Note Payable

7,110 40,000 60,000

*P102,000 - P7,680 - P5,360 + P30,000 = P118,960 Problem XIV Multiple Choice Problems 1. c

Note: A partnership is not dissolved when a partner assigns his or her interest in the partnership to a third party because such an assignment does not in itself change the relations among partners. Such assignment only entitles the assignee to receive the assigning interest partner’s interest in future partnership profits and in partnership assets in the event of liquidation. The assignee does not become a partner, however, and does not obtain the right to share in management of the partnership. If the assignee does not become a partner, the only change required on the partnership books is for transfer of the capital interest of the assignor partner to the assignee. The assignment by A to D of his 50% interest in the BIG Entertainment Company is recorded are follows: A, Capital (P168,000 x 1/4)................................................................. 42,000 D, Capital.............................................................................. 42,000 The amount of the capital transfer is equal to the recorded amount of A’s capital at the time of the assignment, and it is independent of the consideration received by A for his 1/4 interest. If the recorded amount of A’s is P42,000, then the amount of the transfer entry is P42,000, regardless of whether D pay A P42,000 or some amount. Therefore, the capital of the partnership after the assignment of interest remains the same at P480,000.

2. c Amount paid……………………………………………………………………………….P 200,000 Less: Book value of interest acquired: (P100,000 + P200,000 + P300,000) x 25%.. 150,000 Excess – partial goodwill…………………………………………………………………P 50,000 Divided by: capitalization rate based on interest acquired…………………....... 25% Goodwill or revaluation of asset upward…………………………………………….P 200,000 Jethro: [P200,000 + (P200,000 x 30%)] x 75% = P195,000 3. b

Amount paid Less: Book value of interest acquired: (P140,000 x ¼) Excess Capitalized at: P&L of W Goodwill/revaluation

P40,000 35,000 P 5,000 1/4 P20,000

E: [P80,000 + (P20,000 x 60%)] x 3/4 = P69,000 G: [P40,000 + (P20,000 x 30%)] x 3/4 = P34,500 D: [P20,000 + (P20,000 x 10%)] x 3/4 = P16,500 4. a

Amount paid………………………………………………………………………………P 60,000 Less: Book value of interest acquired: P120,000 x 40%…………………................ 48,000 Difference…………..……………………………………………………………………...P 12,000 40% Divided by: Capital Interest………………………………………………………….......

Goodwill…………………………………………………………………………………….P 30,000 LL: P50,000 + (P30,000 x ½) = P65,000 – (P60,000 x ½) = P35,000 QQ: P70,000 + (P30,000 x ½) = P85,000 – (P60,000 x ½) = P55,000 DD: Since there is an adjustment, the capital of the new partner will always be the same with the amount paid, P60,000. 5. d - The amount that Richard will pay Ray depends on many factors and cannot be determined from the information provided here. 6.

b

7. c

Amount paid Less: Book value of interest acquired (P444,000 x 1/5) Gain- personal (to N, S & J)

P132,000 88,800 P 43,200

Total agreed capital* (P74,000 + P130,000 + P96,000)/80% ............ P375,000 Less: Total contributed capital *...............…………………………..... 375,000 Difference .......................................………………..………………….. ..P 0

*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed capital.

The contributed capital or investment of the new partner will be computed based on total agreed capital. Total contributed capital………………………………………….. . P375,000 Less: Total contributed capital of old partners............................ 300,000 Investment or contribution of new partner..................................P 75,000 or,

8. b

Total contributed capital………………………………………….. . P375,000 20% Multiplied by: Capital interest of Jones (new partner)………... Investment or contribution of new partner..................................P 75,000

Total Agreed Capital Multiplied by: Interest acquired by K Agreed capital of K Cash investment by K Bonus to K Therefore, E= P70,000 – (P10,000 x 70%) = P63,000 D= P60,000 – (P10,000 x 30%) = P57,000 J= P50,000

P180,000 1/3 P 60,000 50,000 P 10,000

9. b - Total capital is P200,000 (P110,000 + P40,000 + P50,000) after the new investment. As Kansas's portion is to be 30 percent, the capital balance would be P60,000 (P200,000 × 30%). Since only P50,000 was paid, a bonus of P10,000 must be taken from the two original partners based on their profit and loss ratio: Bolcar –P7,000 (70%) and Neary – P3,000 (30%). The reduction drops Neary's capital balance from P40,000 to P37,000. 10. d Total of old partners' capital Investment by new partner

P 80,000 15,000

Total of new partnership capital Capital amount credited to Johnson (P95,000 x .20)

P 95,000 P 19,000

11. b LL invests P40,000 and total capital specified as P150,000: Investment in partnership P 40,000 New partner's proportionate book value [(P110,000 + P40,000) x 1/3] (50,000) Difference (investment < book value) P (10,000) Method: Bonus or goodwill to new partner Specified total resulting capital Total net assets not including goodwill (P110,000 + P40,000) Estimated goodwill

P 150,000 (150,000) P -0-

Therefore, bonus of P10,000 to new partner Boris' capital = P54,000 = P60,000 - (P10,000 x 6/10) 12. a – “preferable accounting method” refers to bonus method Total agreed capital = Total contributed capital (under the bonus method) (P70,000 + P30,000 + P40,000).......................................................................... P 140,000 20% Multiplied by: interest acquired by new partner.............................................. Capital of new partner Chapman...................................................................... P 28,000 40,000 Less: Investment by Chapman............................................................................. Bonus to old partners to be allocated equally to old partners – Adams and Bye......................................................................................... P 12,000 13. c - [P120,000 - (P170,000 + P260,000 + P120,000)(.25)] 14. c Scott invests P36,000 for a 1/5 interest: Investment in partnership New partner's proportionate book value [(P120,000 + P36,000) x .20] Difference (investment > book value) Method: Goodwill to prior partners 1/5 estimated total resulting capital Estimated total resulting capital (P36,000 / .20) Estimated total resulting capital Total net assets not including goodwill (P120,000 + P36,000) Estimated goodwill/adjustment to prior partners

(Use the same procedure in Nos. 9 and 10)

P 36,000 P

(31,200) 4,800

P 36,000 P 180,000 P 180,000 (156,000) P 24,000

15. b - Total capital is P270,000 (P120,000 + P90,000 + P60,000) after the new investment. However, the implied value of the business based on the new investment is P300,000 (P60,000/20%). Thus,

goodwill of P30,000 must be recognized with the offsetting allocation to the original partners based on their profit and loss ratio: Bishop – P18,000 (60%) and Cotton P12,000 (40%). The increase raises Cotton's capital from P90,000 to P102,000. 16. c

Total agreed capital* P120,000 /60% ............................................. P300,000 Multiplied by: Capital interest of Jones (new partner)………...... 60% Agreed capital of R.............................................................................P180,000

Note: The investment of D is used as the basis to determine total agreed capital, otherwise using the capital balance of D will lead to a “negative” goodwill or revaluation downward.

17. c

Total agreed capital* (P250,000/20%)....................................... P 1,250,000 Less: Total contributed capital of R and S: (P500,000 + P400,000 + P40,000) + P250,000................. 1,190,000 Goodwill or revaluation to old partners................................... P 60,000 Riley: P500,000 + (P40,000 x 60%) + (P60,000 x 60%) = P560,000 or, Riley [P500,000 + (P40,000 x 60%)] Smith [P400,000 + (P40,000 x 40%)] Tyler Total

18. c

Contributed Capital P 524,000 416,000 P 940,000 250,000 P 1,190,000

Agreed Capital P 560,000 P1,000,000 250,000 / 20% P1,250,000 100%

Goodwill P 36,000 60% 24,000 40% P 60,000 -0P 60,000

Total agreed capital* ................................................................. P 260,000 Less: Total contributed capital of L, M, and N (P120,000 + P70,000 – P30,000 + P60,000) + P40,000.... 260,000 Difference..................................................................................... P 0 Total agreed capital Multiplied by: Interest acquired Capital credited to Ole

or, Old Partners: (P120,000+P70,00 - P30,000 + P60,000) New Partner: Ole

P 260,000 20% P 52,000 Contributed Capital

Agreed Capital

P 220,000 __40,000 P 52,000 20%* P 260,000 P 260,000 * P52,000 is derived from multiplying P260,000 by 20%. Notes: 1. The partners agreed that assets should revalued using fair value. 2. Since problem is silent, bonus method is used.

P

-0-

19. a - Admission by purchase. The implied value of the company is P900,000 (P270,000/30%). Since the money is going to the partners rather than into the business, the capital total is P490,000 before realigning the balances. Hence, goodwill of P410,000 must be recognized based on the implied value (P900,000 – P490,000). This goodwill is assumed to represent unrealized business gains and is attributed to the original partners according to their profit and loss ratio. They will then each convey 30 percent ownership of the P900,000 partnership to Darrow for a capital balance of P270,000. Formal presentation: Amount paid ………………………….………….. P 270,000 / 30% Less: BV of interest acquired – (P220,000 + P160,000 + P110,000) x 30%….... 147,000 Excess……………………………………………….. P123,000 20% Divided by: Interest acquired………………….. Goodwill or revaluation of Asset …………….. P410,000 The entry would be as follows; Goodwill/Asset Williams (40%) Jennings (40%) Bryan (20%) Williams [P220,000 + (P410,000 x 40%)] x 30% Jennings [P160,000 + (P410,000 x 40%)] x 30% Bryan [P110,000 + (P410,000 x 20%)] x 30% Darrow

P900,000 (100%) 490,000 (100%) P410,000 (100%)

410,000

115,200 97,200 57,600

164,000 164,000 82,000

270,000

20. d - Admission by investment. Since the money goes into the business, total capital becomes P740,000 (P490,000 + P250,000). Darrow is allotted 30 percent of this total or P222,000. Because Darrow invested P250,000, the extra P28,000 is assumed to be a bonus to the original partners. Jennings will be assigned 40 percent of this extra amount or P11,200. This bonus increases Jennings’ capital from P160,000 to P171,200. Formal presentation: Total agreed capital* (same with total contributed capital)…... P740,000 Less: Total contributed capital (P220,000 + P160,000 + P110,000 + P250,000)..............…………………………....... 740,000 Difference .......................................………………..………………… ..P 0

*since no goodwill or revaluation is allowed total agreed is the same with total contributed capital.

The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in (a) is attributable to revaluation (goodwill) to old partners: Darrow’s contributed capital………………………………………… P250,000 Darrow’s agreed capital: (P740,000 x 30%)……………………....... 222,000 Bonus to old partners ........................………………………………… P 28,000 Jennings: [P160,000 + (P28,000 x 40%)] = P171,200

or, alternatively W J B Total

D

Contributed Capital (CC) 220,000 160,000 110,000 490,000 250,000 740,000

Agreed Capital (AC) 171,200 _______ 518,000 222,000 30% 740,000

21.

d

As specified no bonus or goodwill recognized. 5/6 estimated total resulting capital Estimated total resulting capital (P150,000 / 5/6) Required investment (P180,000 x 1/6)

22.

d

Direct purchase; reclassify CCs capital only (if silent – book value).

23. d

11,200 40% 11,200 40% 5,600 20% 28,000 28,000 0

P 150,000 180,000 P 30,000

Total contributed capital* (P140,000 + P40,000) / 4/5 ............................................. P225,000 Less: Total contributed capital of Allen and David................ 180,000 Investment by David......................................................................P 45,000

*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed capital.

24. c

Total agreed capital (140,000 + 40,000) / 3/4.............................P240,000 Less: Total contributed capital (P140,000 + P40,000 + P50,000)......................................... 230,000 Goodwill/revaluation...........................………………..…………..P 10,000

Note: since the problem indicates that there is goodwill/revaluation of asset downward, total agreed capital should be higher compared to total contributed capital (to achieve this objective the capital of old partners should be used as a basis)

Cash Goodwill/assets David, capital (1/4 x P240,000) 25. b

50,000 10,000

60,000

Total agreed capital (P40,000) / 1/5............................................P200,000 Less: Total contributed capital (P140,000 + P40,000 + P40,000)......................................... 220,000 Revaluation of asset / inventory decreased……..…………....P( 20,000)

Note: since the problem indicates that there is revaluation of asset downward, total agreed capital should be lower compared to total contributed capital.

26. b – refer to No. 25 for computation Allen: P140,000 – (P20,000 x 3/4) = P125,000 Daniel: P40,000 – (P20,000 x 1/4) = P35,000

27. d

28. a.

29. b

Amount paid (P34,000 + P10,000) Less: Book value of Allen and Daniel (1/5) x P180,000 ) Partial goodwill/revaluation adjustment Capitalized at Revaluation of land

P 44,000 36,000 P 8,000 1/5 P 40,000

Allen: [P140,000 + (P40,000 x 3/4)] x 4/5 = P136,000 Daniel: [P40,000 + (P40,000 x 1/4)] x 4/5 = P40,000 Total agreed capital (given)........................................................P220,000 Less: Total contributed capital (P140,000 + P40,000 + P40,000)......................................... 220,000 Difference..............................................………………..…………..P 0

Note: Since total agreed and total contributed are the same, therefore is no goodwill or revaluation.

Total Agreed Capital Multiplied by: Interest acquired by David Agreed capital of David Cash investment by David Bonus to David Cash Allen (P4,000 x 3/4) Daniel (P4,000 x 1/4) David

P220,000 1/5 P 44,000 40,000 P 4,000 40,000 3,000 1,000 44,000

30. d – refer to No. 29 Allen = P140,000 – (P10,000 x 3/4) = P137,000 Daniel = P40,000 – (P10,000 x 1/4) = P39,000 31. a

Total agreed capital (P50,000) / 1/5............................................P250,000 Less: Total contributed capital (P140,000 + P40,000 + P50,000)......................................... 230,000 Goodwill/revaluation...........................………………..…………..P 20,000

Note: since the problem indicates that there is goodwill/revaluation of asset downward, total agreed capital should be higher compared to total contributed capital (to achieve this objective the capital of the new partners should be used as a basis)

32. a - A P10,000 bonus is paid to Costello (P100,000 is paid rather than the P90,000 capital balance). This bonus is deducted from the two remaining partners according to their profit and loss ratio (2:3). A reduction of 60 percent (3/5) is assigned to Burns or a decrease of P6,000 which drops that partner’s capital balance from P30,000 to P24,000. 33. a - (P121,000 − P100,000) x 35/60 = P12,250] 34. c - (P39,000 + P7,200 − P750 = P45,450)

35. b

36. a

37. b

Amount paid Less: Book value of Williams P70,000 + (P360,000 – P300,000) x 20% Partial goodwill/revaluation adjustment Capitalized at P&L of Dixon Goodwill/revaluation

P 102,000 82,000 P 20,000 20% P100,000

Brown: P65,000 + (P60,000 x 20%) + (P100,000 x 20%) Lowe: P150,000 + (P60,000 x 60%) + (P100,000 x 60%)

P 97,000 P246,000

Amount paid Less: Book value of Dixon (20%): (P210,000 – P160,000) Partial goodwill/revaluation adjustment Capitalized at P&L of Dixon Goodwill/revaluation

P 74,000 50,000 P 24,000 20% P120,000

Amount paid……………………………………………………………………………P 80,000 Less: Book value of Interest of Bolger P60,000 + [(P170,000 + P210,000 + P100,000) – (P180,000 + P200,000 + P75,000)] x 35%........................................................................ 68,750 Partial Goodwill (to retiring partner)……………………………………………….P 11,250 Incidentally, the entry for the retirement (payment to Bolger) would be: Bolger, capital……………………………………………… 68,750 Goodwill……………………………………………………… 11,250 Cash……………………………………………….. 80,000 Therefore, the capital of Grossman after the retirement of Bolger would be, P66,250 [P55,000 + (45% x P25,000)].

38. c – no goodwill or revaluation therefore, bonus. Tiffany Ron (P10,000 x3/5) Stella (P10,000 x 2/5) Cash 39. a – refer to No. 38 (P80,000 – P6,000 = P74,000) 40. d Amount paid Less: Book value of Tiffany (1/6) Partial goodwill/revaluation adjustment Capitalized at P 36,000

50,000 6,000 4,000

)

60,000

P 56,000 50,000 P 6,000 1/6

41. c - Roberts receives an additional P60,000 above her capital balance. Amount paid P 160,000 100,000 Less: Book value of Robert (40%) Partial goodwill/revaluation adjustment P 60,000 Capitalized at 40% P 150,000

Goodwill/revaluation

Goodwill/revaluation

Goodwill/assets Peter (20%) Robert (40%) Dana (40%)

150,000

Robert (P100,000 + P60,000) Cash

160,000

60,000

30,000 60,000

160,000

Therefore: Peter: P80,000 + P30,000 = P110,000 42. d – refer to No. 41 Dana: P60,000 + P60,000 = P120,000 43. e – refer to No. 41 Total Assets before retirement (P80,000 + P100,000 + P60,000) Add: Goodwill/revaluation of asset Less: Cash paid Total assets after retirement

P240,000 150,000 160,000 P230,000

44. e – same with No. 43

45. c

Total Capital of L (wherein goodwill should be generated) Total assets, fair value (P40,000 + P52,000 + P94,000 + P320,000 + P64,000) Less: Total liabilities ( P110,000 + P200,000) Less; Total Capital of M Total assets, fair value (P30,000 + P56,000 + P114,000 + P280,000 + P44,000) Less: Total liabilities ( P80,000 + P150,000) Goodwill

P 570,000 __310,000 P 524,000 230,000

P 260,000

294,000 P 34,000

46. c L, Capital and M, Capital are each $P94,000 if L's goodwill is recognized. Total capital is P588,000, and total liabilities and capital amount to P1,128,000. 47. d (1) Goodwill (revaluation) method: Amount paid P 36,000 30,000 Less: Book value of interest acquired (P100,000 x 30%)) Partial goodwill/revaluation adjustment P 6,000 Capitalized at 30% Goodwill/revaluation P 20,000 Therefore, the capital balances after the admission of OO: Adams: [P60,000 + (P20,000 x 60%)] x 70%………………………P 72,000 Brown: [P40,000 + (P20,000 x 40%)] x 70%...…………………….. 48,000 Call.............................................……………………………………. __36,000 Total capital after admission…………………………………….. .P156,000 (2) If Book (or bonus) method is used, the capital balances would be:

Adams...............................................................……………………P 60,000 Brown..............................................................…………………….. 40,000 Call: (P60,000 + P40,000) x 30%…………………………………. ..__ 30,000 Total capital after admission…………………………………….. .P130,000 For purposes of comparing bonus and goodwill, there are two alternatives presented: Alternative 1: If goodwill is found to exist: Brown P48,000 P40,000 5,600 P45,600 P 2,400

Call P36,000 P30,000 6,000 P36,000 P 0

Alternative 2: If goodwill is not realized and written-off as a loss: Adams Brown Goodwill Method is used…………………. P 72,000 P48,000 Less: Write-off of goodwill *………………. 8,400 5,600 P63,600 P42,400 BV/Bonus Method is used………………… P60,000 P40,000 (Gain) loss – bonus method………………. P 3,600 P 2,400

Call P36,000 6,000 P30,000 P30,000 P 0

Goodwill Method is used…………………. BV/Bonus Method is used………………… Add: Goodwill *……................................... (Gain) loss – BV/bonus method………….

Adams P72,000 P60,000 8,400 P68,400 P 3,600

Adams: 70% x 6/10 = 42% Brown: 70% x 4/10 = 28% Call 30%

Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is objective that is establishes total capital of the new partnership at an amount based on actual consideration received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a bonus to either old or new partners. The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not determined objectively and other factors may have influenced the amount of investment required from the new partners. Although either method can be used in achieving the required interest for the new partner, the two methods offer the same ultimate results only: 1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon admission are equal, and 2. When the former partners continue to share profits and losses between themselves in the original ratio. If these conditions are not fully met, however, results will be different.

48. d – refer to No. 47 for Note. (1) Goodwill method: Using the capital balance of new partner as a basis of computing total agreed capital,: Total agreed capital (P5,000/25%)……………………………………. P20,000 Less: Total contributed capital (P6,000/P4,800+P5,000)…………… 15,800 Goodwill to old partners…………………………………………………. P 4,200

Therefore, the capital balances after the admission of OO: MM: [P6,000+(P4,200x3/5)]…………………………………………………. P 8,520 NN: [P4,800+(P4,200x2/5)]………………………………………………….. 6,480 OO………………………………………………………………………………. 5,000 Total agreed capital………………………………………………………… P20,000 (2) If bonus method is used, the capital balances would be: Total agreed capital (P6,000+P4,800+P5,000)………………………….......... P 15,800 25% Multiplied by: OO’s capital interest…………………………………………..... Agreed capital to be credited to OO………………………………………... P 3,950 5,000 Contributed/Invested capital of OO…………………………………….......... Bonus to MM and NN (old partner)………………………………………......... P 1,050 The bonus would be added to MM and NN: MM: [P60,000+(1,050,000x3/5)]……………………………………………. P 6.630 NN: [P4,800+(P1,050x2/5)]………………………………………………….. 5,220 3,950 OO……………………………………………………………………………… Total agreed capital……………………………………………………….. P 15,800 For purposes of comparing bonus and goodwill, there are two alternatives presented: Alternative 1: If goodwill is found to exist: Goodwill Method is used…………………. Bonus Method is used……………………... Add: Goodwill (allocated equally)…….. (Gain) loss – bonus method……………….

MM P8,520 P6,630 1,400 P8,030 P 490

NN P6,480 P5,220 1,400 P6,620 P (140)

OO P5,000 P3,950 1,400 P5,350 P 350 (d)

Alternative 2: If goodwill is not realized and written-off as a loss: Goodwill Method is used…………………. Less: Write-off of goodwill (allocated equally)…………………. Bonus Method is used……………………... (Gain) loss – bonus method……………….

MM P8,520

NN P6,480

OO P5,000

1,400 P7,120 P6,630 P 490

1,400 P5,080 P5,220 P (140)

1,400 P3,600 P3,950 P 350 (d)

49. a – refer to No. 47 for Note. Goodwill method: Using the capital balance of new partner as a basis of computing total agreed capital. Total agreed capital (P500,000/25%)……………………………………. P2,000,000 Less: Total contributed capital (P600,000/P480,000+P500,000)…….. 1,580,000 Goodwill to old partners…………………………………………………... P 420,000 Therefore, the capital balances after the admission of CC: AA: [P600,000+(P420,000x3/5)]…………………………………………… P 852,000 (d) BB: [P480,000+(P420,000x2/5)]……………………………………………. 648,000 500,000 CC………………………………………………………………………………

Total agreed capital………………………………………………………….. P 2,000,000 Bonus Method: Total agreed capital (P600,000+P480,000+P500,000)………………... P 1,580,000 25% Multiply by: CC’s capital interest………………………………………… Agreed capital to be credited to CC………………………………….. P 395,000 500,000 Contributed/Invested capital of CC……………………………………. Bonus to AA and BB (old partners)………………………………………. P 105,000 The bonus would be added to AA and BB: AA: [P600,000+(1,050,000x3/5)]……………………………………………. P 663,000 BB: [P480,000+(P105,000x2/5)]……………………………………………… 522,000 395,000 CC………………………………………………………………………………. Total agreed capital………………………………………………………… P 1,580,000 For purposes of comparing bonus and goodwill, assume that goodwill is not realized and it should be written-off as a loss: AA BB CC P500,000 Goodwill Method is used…………………. P852,000 P648,000 Add: Goodwill (allocated equally)…….. 140,000 140,000 140,000 P712,000 P508,000 P360,000 Bonus Method is used……………………... P663,000 P522,000 P395,000 (Gain) loss – bonus method………………. P 49,000 P (14,000) P 35,000 50. b

Total Capital, before adjustment………………… P309,000 Less: Net adjustment*……………………….. 35,400 Capital, after adjustment………………….. P273,600 Less: Portion covered by common stock, par P10 (720 share to each partner).. 14,400 Portion to be covered by preferred stock, par P100…………………………………..... P259,200 Shares to be issued: Preferred stock………………………. 2,592 758 Common stock……………………… 1,440 720 *FV, P40,000 + P68,000 + P180,600 – BV, P60,000 + 90,000 + P174,000. 51. d

Gil P214,200 23,600 P190,600

Roy P94,800 11,800 P83,000

7,200

7,200 P75,800

P183,400 1,834 720

Fair value of the assets (P200,000 + P24,000)……………………………. P224,000 Less: Total liabilities……………………………………………………………. 40,000 Fair value of Net Assets……………………………………………………… P184,000 20,000 Less: Common stock at P1 par (10,000 shares x 2 x 1 par)…………… Additional paid-in capital………………………………………………… P164,000

52. b

53. c

54. c

Unadjusted capital balances (P140,000 + P120,000)…………………… P260,000 Add (deduct): adjustments: Allowances for doubtful accounts……………………………… (10000) Revaluation of inventory (P160,000 - P140,000)………………... 20,000 Additional depreciation……………………………………………. (3,000) Adjusted capital balances equivalent to the total shares issued……P267,000 Unadjusted assets (P10,500 + P15,900 + P42,000 + P60,000)……………. P128,400 Add (deduct): adjustments: Allowances for doubtful accounts……………………………… ( 1,200) Short-term prepayments............................................................... 800 Revaluation of inventory (P48,000 – P42,000)...………………... 6,000 12,000 Revaluation of equipment (P72,000 – P60,000)………………... Adjusted asset balance............................................................................. P146,000 Adjusted asset balance............................................................................. P146,000 17,150 Less: Liabilities (P16,400 + P750).................................................................. Adjusted net assets..................................................................................... P128,850 50,000 Less: Common stock, P5 par x 10,000 shares.....................……………... Additional paid-in capital…………………………………………………… P 78,850

Quiz-III 1. a 2. d 3. a 4. b 5. c 6. d 7. c 8. a 9. d Problems 1. P19,000 2. PP invests P17,000; no goodwill/revaluation recorded: Investment in partnership New partner's proportionate book value [(P60,000 + P17,000) x 1/5] Difference (investment > book value)

P 17,000 P

(15,400) 1,600

Method: Bonus to prior/old partners PP's capital credit = P77,000 x 1/5 = P15,400 3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000 Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment. As Claudius's portion is to be 20 percent, the new capital balance would be P90,000 (P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and Romulus – P4,000 (40%). The increase raises

Messalina's capital balance from P210,000 to P216,000 and Romulus's capital balance from P140,000 to P144,000. 4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20) 5. P337,500 = P250,000 + (P125,000 x .70) 6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70) 7. Abele, P300,000; Boule, P480,000; Dann, P420,000 8. Brown, P156,000; Green, P99,000; Red, P45,000 9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250 10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the price paid by Mary Ann. 11. P180,000 12. Net assets of the partnership will increase by P190,000, including Professor’s interest. 13. P120,000 14. b 15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000 16. P130,000 (P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill) P120,000 = P94,000 + .2 goodwill P26,000 = .2 goodwill Goodwill = P130,000 17. b (P250,000 + P300,000 + P225,000)(.25) = P193,750 18. P125,000 (P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill) P225,000 = P193,750 + .25 goodwill P31,250 = .25 goodwill Goodwill = P125,000 19. P145,000 Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits and losses, this allocation indicates total goodwill of P50,000. 20% of Goodwill = P10,000 .20 G = P10,000 G = P10,000/.20 G = P50,000 Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of this goodwill, an entry that raises this partner's capital balance from P130,000 to P145,000. 20. a – [(P80,000 − P60,000) ÷ 3 + P6,667] 21. Susan’s capital account balance cannot be determined from the information given 22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000

23. 24. 25. 26. 27.

P24,000 = (P250,000 - P210,000)(45/75) P136,000 = P160,000 - (P250,000 - 210,000)(45/75) P172,500 = P150,000 + (P75,000 x .3) P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60) Donald, P55,000; Todd, P60,000 Anne receives an additional P30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of P75,000, which must be split among all partners. 40% of Goodwill = P30,000 Amount paid Less: Book value of Anne (40%) Partial goodwill/revaluation adjustment Capitalized at P 75,000

P 80,000 50,000 P 30,000 40%

Goodwill/assets Donald (20%) Anne (40%) Todd (40%)

75,000

Anne (P50,000 + P30,000) Cash

30,000 80,000

Goodwill/revaluation

15,000 30,000 80,000

Donald: P40,000 + P15,000 = P55,000 Todd: PP30,000 + P30,000 = P60,000 28. Donald, P30,000; Todd, P10,000 The P30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split. Anne Donald (P30,000 x 2/6) Todd (P30,000 x 4/6) Cash

50,000 10,000 20,000

80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000 29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000) 30. Prefer bonus method due to ZZ’s gain of P35,000 Goodwill method: Using the capital of new partner as a basis for computing total agreed capital. Total agreed capital (P500,000 ÷ 25%) P2,000,000 Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000 Goodwill to old partners P 420,000 Therefore, the capital balances after admission of ZZ: XX: [P600,000 + (P420,000 x 3/5)] YY: [P480,000 + (P420,000 x 2/5)] ZZ: Total agreed capital

P852,000 648,000 500,000 P2,000,000

Bonus Method: Total agreed capital (P600,000 + P480,000)( P500,000) Multiplied by; ZZ’s capital interest Agreed capital to be credited to ZZ

P 1,580,000 25% P 395,000

Contributed / invested capital of ZZ Bonus to XX and YY (old partners) The bonus would be added to XX and YY: XX: [P600,000 + (P105,000 x 3/5)] YY: [P480,000 + (P105,000 x 2/5)] ZZ Total agreed capital

500,000 P 105,000 P 663,000 522,000 395,000 P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented: Alternative 1: if goodwill is found to exist: XX YY ZZ Goodwill Method is used P 852,000 P 648,000 P 500,000 Bonus Method is used P 663,000 P 522,000 P 395,000 Add: Goodwill (allocated equally) 140,000 140,000 140,000 P803,000 P 662,000 P 535,000 (Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000 Alternative 2: If goodwill is not realized and written-off as a loss: XX YY Goodwill Method is used P 852,000 P 648,000 Less: Write-off of goodwill (equally) 140,000 140,000 P 712,000 P 508,000 Bonus Method is used 663,000 522,000 (Gain) Loss – Bonus method P 49,000 P (140,000)

ZZ P 500,000 140,000 P 360,000 395,000 P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is objective that is establishes total capital of the new partnership at an amount based on actual consideration received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a bonus to either old or new partners. The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not determined objectively and other factors may have influenced the amount of investment required from the new partners. Although either method can be used in achieving the required interest for the new partner, the two methods offer the same ultimate results only: 1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon admission are equal, and 2. When the former partners continue to share profits and losses between themselves in the original ratio. If these conditions are not fully met, however, results will be different.

31. Be indifferent for the goodwill (revaluation) or bonus methods are the same. Goodwill method: Using the capital of new partner as a basis for computing total agreed capital. Total agreed capital (P500,000 ÷ 25%) P2,000,000 Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000 Goodwill to old partners P 420,000 Therefore, the capital balances after admission of ZZ: XX: [P600,000 + (P420,000 x 3/5)]

P852,000

YY: [P480,000 + (P420,000 x 2/5)] ZZ: Total agreed capital

648,000 500,000 P2,000,000

Bonus Method: Total agreed capital (P600,000 + P480,000)( P500,000) Multiplied by; ZZ’s capital interest Agreed capital to be credited to ZZ Contributed / invested capital of ZZ Bonus to XX and YY (old partners)

P 1,580,000 25% P 395,000 500,000 P 105,000

The bonus would be added to XX and YY: XX: [P600,000 + (P105,000 x 3/5)] YY: [P480,000 + (P105,000 x 2/5)] ZZ Total agreed capital

P 663,000 522,000 395,000 P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented: Alternative 1: if goodwill is found to exist: XX YY ZZ Goodwill Method is used P 852,000 P 648,000 P 500,000 Bonus Method is used P 663,000 P 522,000 P 395,000 Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000 P852,000 P 648,000 P 500,000 (Gain) Loss – Bonus method P 0 P 0 P 0 *XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30% Alternative 2: If goodwill is not realized and written-off as a loss: XX Goodwill Method is used P 852,000 Less: Write-off of goodwill* 189,000 P 633,000 Bonus Method is used 663,000 (Gain) Loss – Bonus method P 0

YY P 648,000 126,000 P 522,000 522,000 P 0

ZZ P 500,000 105,000 P 395,000 395,000 P 0

32. Be indifferent for the goodwill (revaluation) or bonus methods are the same. *Goodwill (revaluation) method: Amount paid P300,000 250,000 Less: Book value of interest – Neal (40%)) Partial goodwill/revaluation adjustment P 50,000 Capitalized at 40% Goodwill/revaluation P125,000 Capital balances before withdrawal Allocate goodwill* Withdrawal of Neal Write-off Impaired Goodwill (125,000 × 0.50)

Neal 250,000 50,000 300,000 (300,000) _______

Palmer 150,000 37,500 187,500 _______ 187,500 (62,500)

Ruppe 100,000 37,500 137,500 _______ 137,500 (62,500)

0

Capital balances using the bonus method**

33. Prefer bonus method due to Palmer’s gain of P12,500 Neal Capital balances before withdrawal 250,000 Allocation of goodwill* 50,000 300,000 Withdrawal of Neal (300,000) -0Write-off Impaired Goodwill 125,000 × 0.60 125,000 × 0.40 ________ -0Capital balances using the bonus method** (Gain) Loss – Bonus method 0

125,000 125,000

75,000 75,000

Palmer 150,000 37,500 187,500 _______ 187,500

Ruppe 100,000 37,500 137,500 _______ 137,500

(75,000) _______ 112,500 125,000 12,500

(50,000) 87,500 75,000 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer and Ruppe as follows: Ruppe Palmer Capital balance before withdraw 150,000 100,000 Allocation of excess paid to Neal (25,000) (25,000) Capital balance using bonus method 125,000 75,000 34. P82,000 Carrying value of net assets (P100,000 – P20,000)………………………P 80,000 Add: Adjustments to reflect fair value…………………………………… 12,000 Fair value of net assets………………………………………………………. P 92,000 Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000 Additional paid-in capital…………………………………………………… P82,000 35. P54,350 Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110 Add: Adjustments to reflect fair value 19,240 (P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… Fair value of net assets………………………………………………………. P 64,350 10,000 Less: Common stock, P1 par (10,000 shares x P1)……………………... Additional paid-in capital…………………………………………………… P 54,350

Note: Refer to Problem XII for journal entries for further analysis

True or False 1. False 6. 2. True 7. 3. False 8. 4. True 9. 5. False 10.

THEORIES False False True False False

11. 12. 13. 14. 15,

True True True False True

16. 17. 18. 19. 20.

True True False False True

21. 22. 23. 24. 25.

False True False True False

26. 27. 28. 29. 30.

False True False True False

31. 32.

True True

Note for the following numbers: 1.

A dissolution occurs every time there is a change in relationship among the partners. This can occur when a new partner enters the partnership or an existing partner leaves the partnership. A dissolution occurs when the partnership is going out of business but the termination of business is not a requirement for a dissolution. 3. A new partner's liability for actions that occurred before joining the partnership is limited to the amount invested in the partnership. 5. Regardless how a new partner enters a partnership, the other partners have to approve the admission because they must accept unlimited liability due to actions of the new partner taken on behalf of the partnership. 6. There is no necessary relationship between the percentage of equity acquired and the amount of profit or loss received. These are separate contractual issues. 7. There are three methods that may be used when a new partner is paying an amount more than book value for the investment: revaluation of existing assets, bonus method, and goodwill method. The partners do not have to choose one method. It would not be inconsistent to revalue the assets and apply either the bonus or the goodwill method to record the investment. 9. Existing partners share the difference between market value and book value equally if that is the manner in which profits and losses are shared. If profits and losses are shared in some other manner, then the difference between market and book values are shared in that manner. 10. While it is possible that an error has been made, it is more likely that the existing partners recognized an increase in their capital accounts via a bonus. The difference between the amount credited to the new partner’s capital account and the amount invested is shared by the existing partners. 14. New partners may receive a bonus if they bring value to the partnership in excess of the tangible assets invested. This additional amount may be from such things as expertise, experience, or business contacts. The bonus allocated to the new partner is payment for these types of unidentifiable assets contributed to the partnership. 18. Goodwill may be recognized with regard to the existing partners but it may also be recognized with regard to the new partner. 19. When goodwill is recognized with regard to the new partner, the new partner’s capital account will be greater than the amount invested by the recognized goodwill. 21. The articles of partnership may include an agreement on the length of advanced notice a partner must give before withdrawing from a partnership. Failure to provide the agreed notice may result in the withdrawing partner being liable for damages suffered by the partnership. 23. If existing partners acquire a withdrawing partner’s equity, they can divide the purchase of that equity among themselves in any manner they choose. 25. Partnership assets may be revalued but they may also remain at their carrying value. 26. The revaluation of the partnership’s assets is unrelated to the purchase of the withdrawing partners ownership interest in the partnership. 28. The revaluation of partnership assets at the time of a partner’s withdrawal has no impact on the recognition of a bonus or goodwill. 30. While the partners can recognize either the withdrawing partner’s goodwill or the entire partnership’s goodwill, there is no requirement to recognize any goodwill when a partner withdraws from a partnership.

Multiple Choice 33. b 38. e 34 d 39. e 35. d 40. d 36. d 41. d 37. d 42. b

43. 44. 45. 46. 47.

c c d c b

47. 48. 50. 51. 52.

a c c a d

53. 54. 55. 56. 57.

c c c b b

58. 59. 60. 61. 62.

a c b b b

63. 64. 65. 66. 67. 68.

c d c d d a

Chapter 4 Problem I 1: Gain on Realization Fully Allocated to Partner’s Capital Balances. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities Payment to partners - loan Balances after payment of partners’ loans Payment to partners capital

Cash 24,000

NonCash Assets 84,000

Q, Capital 30%) 9,600

R, Capital (50%) 48,000

S, Capital (20%) 36,000

Liabilities 12,000

Q, Loan 2,400

_____ 12,000 (12,000)

______ 2,400

3,600 13,200

6,000 54,000

2,400 38,400

2,400 (2,400)

13,200 ______

54,000 ______

38,400 _______

105,600

13,200

54,000

38,400

(105,600)

(13,200)

(54,000)

(38,400)

96,000 120,000 (12,000)

(84,000)

108,000 (2,400)

2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from Partner’s Loan Account (Right of Offset Exercised). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of liabilities Offset deficit versus loans Balances after offsetting Payment to partners – loan Balances after payment of partners’ loans Payment to partners capital

Liabilities 12,000

Q, Loan 2,400

Q, capital (30%) 9,600

_____ 12,000 (12,000)

______ 2,400

(10,800) (1,200)

(18,000) 30,000

(7,200) 28,800

2,400 (1,200) 1,200 (1,200)

(1,200) 1,200

30,000 _______ 30,000 _______

28,800 _______ 28,800 ______

58,800

30,000

28,800

(58,800)

(30,000)

(28,800)

Cash 24,000 48,000 72,000 (12,000) 60,000 _______ 60,000 (1,200)

NonCash Assets 84,000

(84,000)

R, Capital (50%) 48,000

S, Capital (20%) 36,000

3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and Made). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit – Balances after offsetting partner’s loan Additional investment by Q Balances after additional Investment Payment to partners capital

Liabilities 12,000

Q, Loan 2,400

Q, capital (30%) 9,600

________ 12,000 (12,000)

________ 2,400 ________

(14,400) ( 4,800) _______

(24,000) 24,000 _______

(9,600) 26,400 _______

2,400 (2,400)

( 4,800) 2,400

24,000 _______

26,400 _______

(2,400) 2,400

24,000 _______

26,400 _______

50,400

24,000

26,400

(50,400)

(24,000)

(26,400)

Cash 24,000 36,000 60,000 (12,000)

NonCash Assets 84,000 (84,000)

48,000 _______ 48,000 __2,400

R, Capital (50%) 48,000

S, Capital (20%) 36,000

4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Additional loss due to insolvency of Q Balances after additional , Loss Payment to partners capital

Liabilities 12,000

Q, Loan 2,400

Q, capital (30%) 9,600

_______ 12,000 (12,000)

________ 2,400 _______

(12,600) ( 3,000) _______

(21,000) 27,000 _______

(8,400) 27,600 _______

2,400 (2,400)

(3,000) 2,400 ( 600)

27,000 ______ 27,000

27,600 ______ 27,600

( 429)

( 171)

54,000

26,571

27,429

(54,000)

(26,571)

(27,429)

Cash 24,000 42,000 66,000 (12,000) 54,000 _______ 54,000 _______

NonCash Assets 84,000 (84,000)

600

R, Capital (50%) 48,000

S, Capital (20%) 36,000

5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made (Personally Insolvent). QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Realization and distribution of gain Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Additional investment by Q Balances after additional investment Additional loss due to insolvency of Q Balances after additional Loss Payment to partners capital

NonCash Assets 84,000

Cash 24,000

Q, capital (30%) 9,600

R, Capital (50%) 48,000

S, Capital (20%) 36,000

Liabilities 12,000

Q, Loan 2,400

_______ 12,000 (12,000)

_______ 2,400 _______

(18,000) ( 8,400) _______

(30,000) 18,000 _______

(12,000) 24,000 _______

2,400 (2,400)

( 8,400) 2,400 (6,000), _ 3,600

18,000 ______ 18,000 ______

24,000 _______ 24,000 _______

39,600

(2,400)

18,000

24,000

______

2,400

(1,714)

( 686)

39,600

16,286

23,314

(39,600)

(16,286)

(23,314)

24,000 48,000 (12,000)

(84,000)

36,000 ______ 36,000 _3,600

6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Payment of liquidation expenses Balances after payment of liquidation expenses Write-off goodwill and prepaid expenses Balances after write-offs Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of Liabilities Offset loan versus deficit Balances after offsetting Additional investment by Q and R Balances after additional Investment Payment of liabilities Balances after payment of Liabilities Payment to partners - Capital

Cash 24,000

NonCash Assets 84,000

Liabilities 12,000

(14,400)

______

________

9,600

84,000

_______

Q, Loan 2,400

Q, capital (30%) 9,600

R, Capital (50%) 48,000

S, Capital (20%) 36,000

________

(4,320)

(7,200)

(2,880)

12,000

2,400

5,280

40,800

33,120

(72,000)

_______

________

(21,600)

(36,000)

(14,400)

9,600

12,000

12,000

2,400

(16,320)

4,800

1,200 10,800 (10,800)

(12,000)

_______ 12,000 (10,800)

________ 2,400 ________

( 3,240) ( 19,560) _______

( 5,400) ( 600) ________

( 2,160) 16,560 _______

1,200 _______ 1,200

2,400 (2,400)

(19,560) 2,400 (17,160)

( 600) _______ ( 600)

16,560 _______ 16,560

-0______ -017,760

_______

17,760 (1,200)

1,200 (1,200)

16,560 (16,560)

17,160

600

18,720

______ 16,560 _______ 16,560 (16,560)

7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s Loan Account (Right of Offset Is Exercised) with Revaluation of Assets. QRS Partnership Statement of Realization and Liquidation November 1 – 30, 20x4

Balances before liquidation Increase in equipment Decrease in furniture Balances after revaluation Refund of prepaid expenses Balances after refunds Received noncash assets Balances after receipt of noncash assets Realization and distribution of loss Balances after realization Payment of liabilities Balances after payment of liabilities Offset loan versus deficit Balances after offsetting Payment to partners loan Balances after payment of loans Payment to partnerscapitals

______ 24,000

NonCash Assets 84,000 1,200 (600) 84,600

_6,960 30,960 ______

(8,400) 76,200 (10,200)

_______ 12,000 _______

______ 2,400 ______

_(432) 9,348 _____

(720) 47,580 (7,200)

(288) 35,832 (3,000)

30,960

66,000

12,000

2,400

40,380

32,832

32,400 63,360 (12,000)

(66,000)

_______ 12,000 (12,000)

______ 2,400 _______

9,348 ( 10,080) ( 732) _______

( 16,800) 23,580 _______

( 8,064) 26,112 _______

23,580 ______ 23,580

26,112 ______ 26,112

______

_______

49,692

23,580

26,112

(49,692)

(23,580)

(26,112)

Cash 24,000

Q, Loan 2,400

_______ 12,000

______ 2,400

51,360 _______ 51,360

2,400 ( 732) 1,668

(1,668)

(1,668)

Problem II

(

R, Capital (50%) 48,000 600 (300) 48,300

S, Capital (20%) 36,000 240 (120) 36,120

732) 732

DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation January 14, 20x4

Explanation

Cash

Balances before realization Sales of noncash assets Balances Payment of liabilities Balances Allocation of Hardin's balance

Liabilities 12,000

Q, capital (30%) 9,600 360 _(180) 9,780

debit

Balances Distribution of cash to partners Balances

P

Liabilities

Capital Balances Dawson Feeney

P25,000

Other Assets P120,000

Hardin

P(40,000)

P(31,000)

P(65,000)

P(9,000)

60,000 85,000

(120,000) 0

______ (40,000)

18,000 (13,000)

24,000 (41,000)

18,000 9,000

(40,000) 45,000

__________ 0

40,000 0

________ (13,000)

________ (41,000)

________ 9,000

______ 45,000

__________ 0

______ 0

3,857 (9,143)

5,143 (35,857)

(9,000) 0

(45,000) 0

__________ P 0

______ P 0

9,143 P 0

35,857 P 0

________ P 0

Problem III 1.

CDG Partnership Statement of Realization and Liquidation Lump-sum Liquidation on December 10, 20X6

Liabilities

Carlos 20%

25,000

475,000

(270,000)

(120,000)

(50,000)

(60,000)

260,000 285,000

(475,000) -0-

(270,000)

43,000 (77,000)

86,000 36,000

86,000 26,000

25,000 310,000

-0-

(270,000)

(77,000)

36,000

(25,000) 1,000

Cash Preliquidation balances Sale of assets and distribution of P215,000 loss Cash contributed by Gail to extent of positive net worth Distribution of deficit of insolvent partner: 20/60(P1,000) 40/60(P1,000) Contribution by Dan to remedy deficit Payment to creditors Payment to partner Post-liquidation balances 2.

Capital Balances Dan Gail 40% 40%

Noncash Assets

333 310,000

-0-

(270,000)

(76,667)

36,667

(1,000) 667 36,667

-0-

(36,667)

346,667

-0-

(270,000)

(76,667)

-0-

-0-

(270,000) 76,667

-0-

270,000 -0-

(76,667)

-0-

-0-

-0-

-0-

(76,667) -0-

76,667 -0-

-0-

CDG Partnership Net Worth of Partners December 10, 20X6

Personal assets, excluding partnership capital interests Personal liabilities Personal net worth, excluding partnership capital interests, Dec. 1, 20X6 Contribution to partnership Liquidating distribution from partnership Net worth, December 10, 20X6

-0-

Carlos

Dan

Gail

250,000 (230,000)

300,000 (240,000)

350,000 (325,000)

20,000

60,000 (36,667) -023,333

25,000 (25,000) -0-0-

76,667 96,667

This computation assumes that no other events occurred in the 10-day period that changed any of the partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a computation of net worth is current and timely.

The table shows the effects of the transactions between the partnership and each partner. A presumption of this table is that the personal creditors of Dan or Gail would not seek court action to block the settlement transactions with the partnership. Upon winding up and liquidation, the partnership does not have any priority to the partner’s personal assets. Thus, the personal creditors may seek to block the transactions with the partnership in order to provide more resources from which they can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who had to make additional contributions or even by a partnership creditor if the failed partner is liable to the partnership creditor. But those claims are not superior to the other claims to the partner’s individual assets. When accountants provide professional services to partnerships and to its partners, the accountant should expect, at some time, legal suits involving the partnership and/or individual partners. A strong and thorough understanding of the legal and accounting foundations of partnerships will be very important to that accountant. Problem IV Cash

Noncash Assets

Liabilities

Beginning balances P 25,000 P200,000 P165,000 Liquidation expense (20,000) Sale of non-cash assets 160,000 (200,000) Payment of liabilities (165,000) (165,000) Contribution by Flowers 10,000 Allocation of Flower's Distribution to partners (10,000) Ending balances 0 0 0 Problem V Beginning: Payment of liabilities Cramer/Bower pay in from personal worth to cover deficit balances: Payment of liabilities Allocation of deficit balances: Able paid:

Capital and Loan Balances Merz Dechter Flowers P 40,000 (8,000) (16,000) (6,000) (10,000) 0

P30,000 P(10,000) (8,000) (4,000) (16,000) (8,000) 10,000 12,000 0 0

(6,000) 0 0

Cash P20,000 (20,000) P 0

Liabilities P(30,000) 20,000 P(10,000)

Able P(10,000)

Bower P5,000

Cramer P15,000

P(10,000)

P5,000

P15,000

12,000 P12,000 (10,000) P 2,000

________ P(10,000) 10,000 P 0

________ P(10,000)

(2,000) P3,000

(10,000) P 5,000

P(10,000)

P3,000

P 5,000

______ P 2,000 (2,000) P 0

________ P 0

8,000 P (2,000) 2,000 P 0

(3,000) P 0

(5,000) P 0

P

P

P

0

0

0

Problem VI Answer: Cash 70,000 Arthur, Capital 6,000 Baker, Capital 15,000 Casey, Capital 9,000 Other Assets To record realization of assets at a loss of $30,000, divided among Arthur, Baker, and Casey in 2:5:3 ratio, respectively. Trade Accounts Payable Cash To record payment of liabilities.

65,000

Arthur, Capital Loan Receivable from Arthur To offset Arthur's loan account against Arthur's capital account.

20,000

Arthur, Capital Loan Payable to Baker Casey, Capital Cash To record payments to partners, computed as follows:

14,000 20,000 1,000

Capital account balances Add: Loan payable to Baker Less: Loan receivable from Arthur Loss on realization of assets, P30,000 Balances Maximum potential additional loss of P150,000 (P250,000 – P100,000 = P150,000) divided in 2:5:3 ratio Cash payments

Arthur P70,000

100,000

Casey P55,000

(6,000) P44,000

(15,000) P95,000

(9,000) P46,000

(30,000) P14,000

(75,000) P20,000

(45,000) P 1,000

Multiple Choice Problems 1. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000) 2. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000 3. c 4. a - Phil (P35,000 + P10,000); Harry P28,000; Bill (P27,000 - P5,000) 5. c - Rick P46,000; Mary (P39,000 - P15,000); Fran (P29,000 + P10,000) 6. d - P50,000 - (P15,000 - P9,500)(.25) 7. b - P45,000 - (P15,000 - P9,500)(.30) 8. a - P108,000 + [P10,000 - (P25,000 - P18,000)](.55) 9. c - P62,000 + [P10,000 - (P25,000 - P18,000)](.20) 10. b 11. c 12. d 13. c

20,000

35,000

Baker P80,000 30,000

(20,000)

65,000

Vulnerability ranks: Lang equity (P70,000 - P40,000)/.25 = P120,000 = 1 Maas equity (P80,000 + P50,0000/.25 = P520,000 = 3 Neal equity (P150,000/.5) = P300,000 = 2 Assumed loss absorption: Equities Loss to eliminate Lang

P

Loss to eliminate Neal

14.

c Profit ratio Prior capital Loss on sale of inventory

15.

a

25% Lang 30,000

Prior capital Loss on sale of inventory Allocate Charles' capital deficit: JJ = .40/.50 TT = .10/.50

(

25% Maas 130,000

P

30,000 ) ( 0 P

30,000 ) 100,000

( P

( P

45,000 ) 55,000

( P

JJ

CC

TT

Total

40%

50%

10%

100%

(160,000)

(45,000)

(55,000)

(260,000)

24,000 (136,000)

30,000 (15,000)

6,000 (49,000)

60,000 (200,000)

P

50% Neal 150,000

P

Total 310,000

60,000 ) 90,000

( P

120,000 ) 190,000

90,000 ) 0

( P

135,000 ) 55,000

(160,000)

(45,000)

(55,000)

(260,000)

72,000 (88,000)

90,000 45,000

18,000 (37,000)

180,000 (80,000)

9,000 (28,000)

(80,000)

36,000 (52,000)

16. c – (P234,000 – P434,000) x 20% = P40,000 17. b T Capital before realization 40,000 Loss on sale (85,000 – 33,000) (26,000) 14,000 Additional loss (5:2) (4,000) 10,000

(45,000) -0-

D 10,000 (15,600) ( 5,600) 5,600

H 15,000 (10,400) 4,600 ( 1,600) 3,000

18. a

T 40,000 (31,950) 8,050 (6,550) 1,500 ( 400) 1,100

Capital before realization Loss on sale (85,000 – 21,100) Additional loss (5:2) Additional loss 19. b Capital before realization Liquidation expenses Loss on sale (300 - 180) Additional loss (2:4) 20. d Capital before realization Loss on sale (2:4:4) Additional loss (2:4)

D 10,000 (19,170) ( 9,170) 9,170

H 15,000 (12,780) 2,220 (2,620) ( 400) 400

K 60,000 (2,000) (24,000) 34,000 ( 4,000) 30,000

L 40,000 ( 4,000) (48,000) (12,000) 12,000

M 80,000 ( 4,000) ( 48,000) 28,000 ( 8,000) 20,000

H 80,000 (61,000) 19,000 ( 4,000) 15,000

I 110,000 (122,000) (12,000) 12,000

J Total 140,000 330,000 (122,000) (305,000) 18,000 25,000 ( 8,000) 10,000

21. d – [(P240,000 – P96,000) /30% = P480,000] 22. a

Capital before realization – C Liquidation expenses (12,000 x 50%) Share on loss on realization Capital balance after realization

130,000 (6,000) (132,000) ( 8,000)

Total loss on realization: P132,000/50% Non-cash assets Proceeds

(264,000) 434,000 170,000

23. b Capital before realization Loss on sale (4:2:2:2) Possible insolvency loss (4:2:2) Safe payments 24. e – refer to No. 23

Ding 60,000 (52,800) 7,200 ( 4,700) 2,500

Laurel 67,000 ( 26,400) 40,600 ( 2,350) 38,250

Ezzard 17,000 (26,400) ( 9,400) ( 9,400) 0

Tillman 96,000 (26,400) 69,600 ( 2,350) 67,250

Total 240,000 (132,000) 108,000 -0108,000

25. b Capital before realization Loss on sale (30:45:25); [200 – 150] 26. c Capital Loan Total interests Loss on sale (5:3:2) - [90,000 – 26,000] Possible insolvency (5:3) Additional investment

Gonda 60,000 (15,000) 45,000

Herron 70,000 ( 22,500) 47,500

Morse 40,000 (12,500) 27,500

Total 170,000 (50,000) 120,000

S 40,000 ________ 40,000 (32,000) 8,000 (1,750) 6,250 _______ 6,250

D 15,000 _______ 15,000 ( 19,200) ( 4,200) ( 1,050) ( 5,250) 5,250

F 5,000 5,000 10,000 (12,800) ( 2,800) 2,800

Total 60,000 5,000 65,000 (64,000) 1,000 0 1,000 5,250 6,250

27. b 28. a – Since the partnership currently has total capital of P350,000, the P150,000 that is available would indicate maximum potential losses of P200,000 that is hypothetically split among the partners. White Sands Luke Total Capital before realization 50,000 100,000 200,000 350,000 Loss on sale (30:20:50); [350 – 150] (60,000) ( 40,000) (100,000) (200,000) (10,000) 60,000 100,000 150,000 Possible insolvency (2:5) 10,000 (2,857) (7,143) 0 Safe payments 57,143 92,857 150,000 29. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below) Revaluation entry: Accumulated depreciation Gym, capital Hob, capital Ing, capital

3,000 1,000 1,000 1,000

Withdrawal of equipment: Accumulated depreciation (8,000 – 3,000) Hob, capital Equipment

30. b –

13,000

5,000 18,000

Accumulated depreciation 70,000 K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000 Machinery, at cost 150,000 Rice [P110,000 – (P150,000 – P70,000)] x 1/3 10,000 Long [P110,000 – (P150,000 – P70,000)] x 1/3 10,000

31. c Capital before realization Loss on sale (35%:35%:30%)

X 90,000 (42,000) 48,000

*balancing figure – total reduction in capital

Y 60,000 (42,000) 18,000)

Z 30,000 (36,000) ( 6,000)

Total 180,000 *(120,000) 60,000

Quiz - IV

1. Zero/nil Capital before realization Loss on sale (3:2:1:4)) Additional loss (2:1:4)

B 25,000 (45,000) (20,000) (20,000)

Additional loss (2:1)

P 110,000 ( 30,000) 80,000 ( 5,714) 74,286 ( 4,286) 70,000

2. Zero/nil – refer to No. 1 3. Page, P70,000 and Larry, P80,000 – refer to No. 1 4. P39,525 = P42,000 - (P15,000 - P9,500)(.45) 5. P56,750 = P56,000 + [P10,000 - (P25,000 - P18,000)](.25) 6. P(1,000) = P20,000 - [P30,000 + (P50,000 - P90,000)](.30) 7. P(1,500) = P30,000 - [P30,000 + (P50,000 - P90,000)](.45) 8. P(2,500) = P15,000 - [P30,000 + (P50,000 - P90,000)](.25) 9. P340,000 = (P147,000 + P28,000)/.35 10. P1,040,000 = (P260,000 / .25) 11. Abrams and Creighton Capital before realization Liquidation expenses Loss on sale (134 - 434)

A

80,000 (3,600) (90,000) (13,600)

12. Tom, P30,000; Dick, P4,000 and harry, P11,000 T Capital before realization 40,000 Loss on sale (85,000 – 65,000) (10,000) 30,000 13. P34,000 Capital before realization Liquidation expenses Loss on sale (300 - 180) Additional investment 14. P25,000 Cash, beginning Payment of liquidation expenses Payment of liabilities Payment to partners

K 60,000 (2,000) (24,000) 34,000 _____ 34,000

B

L 100,000 (15,000) 85,000 ( 2,857) 82,143 ( 2,143) 80,000

C

90,000 (2,400) (60,000) 27,600

130,000 (6,000) (300,000) (176,000)

D 10,000 (6,000) 4,000

H 15,000 (4,000) 11,000

L 40,000 ( 4,000) (48,000) (12,000) 12,000

S 65,000 (60,000) 5,000 (11,429) ( 6,429) 6,429

M 80,000 ( 4,000) ( 48,000) 28,000 ______ 28,000 P90,000 ( 5,000) ( 60,000) P25,000

15. P15,000

B 25,000 (60,000) (35,000) (35,000) 15,000

Capital before realization Loss on sale (4:2:1:3) Additional loss (2:1:3)

P 110,000 ( 30,000) 80,000 (11,667) 68,333

L 100,000 (15,000) 85,000 ( 5,833) 79,167

16. P2,500 - refer to No. 15 17. Page, P68,3333 and Larry, P79,167 – refer to No.15 18. Bond: P225,000; Hamm: P115,000; Zell: P –0– Bond’s capital balance ................................................................ Less: Bond’s share of P140,000 loss in liquidation (P140,000 × 50%) ...........................................................................

P300,000 (70,000) P230,000

Less: Bond’s share of Zell’s capital deficiency of P8,000 (5/8 of P8,000) ...................................................................

( 5,000) P225,000

19. Alexa: P25,000; Bell: P75,000; Graham: P–0– 20. Jody, P5,200; Kane, P64,800; Lark, P10,000 Balance, May 1 Plant sold Inventory sold Balances before distribution Offset loans Pay creditors Partner equity Possible loss: Plant assets Distribution

( ( (

Assets 250,000 10,000 6,000) 254,000 26,000) 88,000) ( 140,000

(

30% Jody 32,000 3,000 1,800 )

(

33,200 10,000 )

Debts 88,000

88,000 88,000 )

S 65,000 (45,000) 20,000 (17,500) 2,500

45% Kane 90,000 4,500 2,700 )

(

91,800

23,200

60,000) 80,000

(

(

25% Lark 40,000 2,500 1,500 )

(

41,000 16,000 )

91,800

18,000 ) 5,200

(

27,000 ) 64,800

25,000 (

15,000 ) 10,000

(Cash Distribution: P54,000 + P54,000 + P60,000 - P88,000 = P80,000) May 1 Inventory Plant Creditors May 30

21. Oak, P0; Nebe, P0; and Pang, P11,000 NonCash Cash Assets Jan 1 Balance 3,000 33,000 Sale of assets 17,000 ( 15,000 Subtotal 20,000 18,000 Safe Payments Schedule Partners’ pre-distribution balances Possible losses on non-cash assets Write off Oak 2/7 and 5/7

)

First Rank Debt 9,000 9,000

30% Oak Equity 2,000 600 2,600

Oak Equity 2,600 ( 5,400 ( 2,800 2,800

20% Nebe Equity 4,000 400 4,400 Nebe Equity 4,400 ) ( 3,600 ) 800 ( 800

50% Pang Equity 21,000 1,000 22,000 Pang Equity 22,000 ) ( 9,000 ) 13,000 ) ( 2,000 )

Cash distribution to partners

0

0

11,000

Cash distribution plan on October 31: First P9,000 goes to priority creditors, and then Pang receives P11,000. 22. Ide, P0; Hanly, P0; Jen, P92,000

Ide Capital ( 60,000

Cash 50,000

Balance, Aug. 1 Ide’s personal contribution

40,000 90,000

Write-off Ide Hanly’s personal contribution

40,000 ( 20,000 20,000 0

90,000

) )

Jen Capital 106,000

4,000 7,500 3,500

106,000 12,500 93,500

( (

2,000 (

1,500 1,500 0

92,000 Distribute cash

92,000 0

)( )

)

)

( (

93,500 1,500 92,000 92,000 0

Completion Statements 1. a. partnership creditors other than partners b. partners’ loans—if subordinated c. partners’ capital 2. statement of realization and liquidation 3. schedule of safe payments 4. marshalling of assets 5. rule of setoff 6. legal recourse against 7. bringing the capital balances into the profit and loss ratio

True False False True True

18. 19. 20. 21. 22.

)

False True True False True

23. 24. 25. 26. 27.

False True False True True

28. 29. 30. 31. 32.

True False False False False

40,000 90,000 90,000 2,000

Theories

True or False 8. True 13. 9. False 14. 10. False 15. 11. False 16. 12. True 17.

Total 50,000

2,000

92,000

Write-off Hanly

Hanly Capital 4,000

33. 34. 35.

True True False

)

92,000 92,000

) (

92,000 ) 0

Note for the following numbers: 9. The accountant is liable if he/she fails to meet the fiduciary responsibility of protecting the creditors’ interest during the liquidation process. 10. The amount of cash distributed to each partner is a function of the capital balances and the profit and loss ratios. It is unlikely that partners will receive the same amount of cash. 11. Partnership creditors have priority claims against partnership assets and partner creditors have priority claims against partner assets. 14. Partner creditors have claims first against partner assets. They can also have a claim against partnership assets to the extent of the partner’s equity in the partnership. 15. The accountant has a fiduciary responsibility to the partnership’s creditors to ensure that sufficient assets exist to pay the creditors. It does not mean that creditors must be fully paid before any partner distributions occur. 18. Gains and losses realized during the liquidation process are generally allocated using the residual profit and loss ratio. Other profit and loss allocation components are not considered because these items are generally relevant to the partnership’s operation and the current issue is the partnership’s liquidation. 21. This is called an installment liquidation 23. This document is called a Statement of Realization and Liquidation. 25. The Statement of Realization and Liquidation does not include income statement accounts. All income statement amounts are allocated directly to partnership equity.

Multiple Choice Theories 36. A 41. b 37. A 42. d 38. C 43. b 39. D 44. d 40. C 45. b

46. 47. 48. 49. 50.

c a c d b

51. 52.

b a

Chapter 5

Problem I 1.

Balances before Liquidation January - Realization - Payment of expenses - Payment of liabilities Balances after Jan February - Realization - Payment of expenses - Payment of liabilities Balances before payment to partners Payment to Partners (Sch. 1) Balances after February March - Realization - Payment of expenses Balances before payment to partners Payment to Partners (Sch. 2) Balances after March April - Realization - Payment of expenses Balances before payment to partners Payment to Partners (Note 1) Balances after April May - Realization - Payment of expenses Balances before Offsetting Offset deficit vs. Loan Balances before payment

Cash

NonCash Assets 181,800

72,000

A, B, C and D Partnership Statement of Liquidation January 1, 20x4 to May 31, 20x4 Liabilities 84,000

A, loan 6,000

D, loan

A, capital (40%)

B, capital (20%)

C, capital (20%)

D, capital (20%)

3,000

26,400

25,800

20,400

16,200

(7,200)

(3,600)

(3,600)

(3,600)

( 480)

( 240)

( 240)

( 240)

______ 18,720

______ 21,960

______ 16,560

______ 12,360

(3,360)

(1,680)

(1,680)

(1,680)

( 528)

( 264)

(90,000)

(1,200) (66,000) 4,800

______ 91,800

21,600

(30,000)

(66,000) 18,000

_____ 6,000

_____ 3,000

(1,320) ______

______

______

_______

( 264) ______

( 264) ______

61,800

6,000

3,000

14,832

20,016

14,616

10,416

( 5,280)

______

______

_____

______

(5,280)

______

_____

1,800

61,800

6,000

3,000

14,832

14,736

14,616

10,416

19,200

(24,000)

(1,920)

( 960)

( 960)

( 960)

( 1,440)

______

______

_____

( 576)

( 288)

( 288)

( 288)

19,560

31,500

6,000

3,000

12,336

13,488

13,368

9,168

(18,360)

______

(2,736)

(3,000)

(5,688)

(5,568)

(1,368)

1,200

37,800

3,264

12,336

7,800

7,800

7,800

6,000

(19,800)

(5,520)

(2, 760)

(2,760)

(2,760)

(4,800)

______

(1,920)

( 960)

( 960)

( 960)

2,000

15,000

3,264

4,896

4,080

4,080

4,080

(1,500)

______

( 720)

( 360)

( 360)

( 360)

500

18,000

2,554

4,896

3,720

3,720

3,720

2,400

(18,000)

(6,240)

(3,120)

(3,120)

(3,120)

(18,000)

_______

7,080

(18,000)

( 960)

_____

( 384)

( 192)

( 192)

( 192)

1,440

2,554

( 1,728)

408

408

408

______

(1,728)

1,728

_____

______

_____

2,040

816

408

408

408

Payment to Partners (Note 2)

(2,040)

2.

(816)

(408)

(408)

A, capital (40%)

B, capital (20%)

C, capital (20%)

D, capital (20%)

6,000 14,832 20,832

20,016 20,016

14,616 14,616

3,000 10,416 13,416

(12,720) 7,296 (1,536) 5,760 ( 420) 5,340 ( 60) 5,280

(12,720) 1,896 (1,536) 360 ( 420) ( 60) 60

(12,720) 696 (1,536) ( 840) 840

A, B, C and D Partnership Schedule of Safe Payments

Schedule 1 – February 28, 20x4 Computation of Distribution of Cash on February 28, 20x4

Balances before payment to partners: Loans Capital Total Interest Restricted interest for possible losses: Unrealized non-cash assets Cash withheld

(408)

P 61,800 1,800 P 63,600

Restricted for possible insolvency of A (2:2:2)

(25,440) ( 4,608) 4,608

Restricted for possible insolvency of D (2:2) Restricted for possible insolvency of C Payment to partner (s) Applied to: Loans Capital

-05,280 5,280

Schedule 2 – March 31, 20x4 Computation of Distribution of Cash on March 31, 20x4

Balances before payment to partners: Loans Capital Total Interest Restricted interest for possible losses: Unrealized non-cash assets Cash withheld

Applied to: Loans Capital

P 37,800 1,200 P 39,000

A, capital (40%)

B, capital (20%)

C, capital (20%)

D, capital (20%)

6,000 12,336 18,336

13,488 13,488

13,488 13,488

3,000 9,168 12,168

(15,600) 2,736

( 7,800) 5,688

( 7,800) 5,568

( 7,800) 4,368

2,736 ___-02,736

-05,688 5,688

-05,568 5,568

3,000 1,368 4,368

3.

Balances before liquidation: Loans Capital Total Interests Divided by: P & L % Loss Absorption Abilities Priority I

T, U, V and W Partnership Cash Payment Priority Program* January 31, 20x4 Interests Payments

T, capital (40%)

U, capital (20%)

6,000 26,400 32,400 __40%

25,800 25,800 ___20%

V, capital (20%)

W, capital (20%)

T, capital (40%)

U, capital (20%)

Total Interests Divided by: P & L % Loss Absorption Abilities Order of Cash Distribution Vulnerability Rankings (1 Is most vulnerable)

W, capital (20%)

Total

3,000 16,200 19,200 __20%

20,400 20,400 __20%

81,000 129,000 102,000 96,000 ______ (27,000) _______ _______ 81,000 102,000 102,000 96,000 Priority II ______ ( 6,000) ( 6,000) _______ 81,000 96,000 96,000 96,000 Priority III ______ (15,000) (15,000) (15,000) _______ 81,000 81,000 81,000 81,000 ____-0*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.

4.

V, capital (20%)

5,400

5,400

1,200

1,200

3,000 9,600

3,000 4,200

2,400 3,000 3,000

T, capital (40%) P 32,400 ____40%

U, capital (20%) P 25,800 ____20%

V, capital (20%) P 20,400 ____20%

W, capital (20%) P 19,200 ____20%

P 81,000 (4)

P129,000 (1)

P 102,000 (2)

P 96,000 (3)

(1)

(4)

(3)

(2)

9,000 16,800

The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity were reduced to zero with a partnership liquidation loss of P81,000. Partner U is least vulnerable because his equity is sufficient to absorb his share of liquidation losses up to P129,000. This interpretation helps explain why partner U received all the cash distributed to partner on the first installment distribution (August 20x4). Incidentally, the cash priority program developed will yield the same cash payment as the process of computing safe payments each time cash is available. The cash distribution under the cash priority program is as follows: Order of Cash Distribution 1. First P70,000 2. Next P 4,500 3. Next P2,000 4. Next P7,500 5. Remainder

Creditors 100%

T

U

V

W

40%

100% 50% 33 1/3% 20%

50% 33 1/3% 20%

33 1/3% 20%

The first P84,000 available is, of course paid to the creditors. Cash may be held back from distribution if it is anticipated that additional expenses will be incurred and unrecorded liabilities will

be discovered. The distribution of cash in excess of the reserve amount proceeds as determined. Partner U will receive all of an additional ash up to P5,400. Additional cash in excess of P5,400 and up to P7,800 is distributed 50:50 to partners U and V. Any amount in excess of P7,800up to P16,800 is distributed 1: 1: 1 to partners U, V, and W, respectively. After P16,800 (P5,400 + P2,400 + P9,000) has been distributed to the partners, the capital accounts are in the desired profit and loss ratio of 4:2:2:2. Any further distributions to the partners are made in accordance with the profit and loss ratio. Even though both methods produce the same results, the cash payment priority program is more informative to both personal and partnership creditors, and to the partners. Interested parties now know the order in which the individual partners will receive cash and the amounts that each may receive at each period of the distribution process. One requirement that must be satisfied in the development of the advance plan is that the partners must share income in the same ratio that they share losses. If this were not the case the potential amount of a new loss would need to be computed after every allocation to the partners’ capital accounts. This occurs because the allocation of liquidation gain alters the order of cash distribution computed in the priority program.

Problem II

ABC Partnership Statement of Partnership Realization and Liquidation For the period from January 1, 20x4, through March 31, 20x4 Capital Balances Other Accounts AA BB Cash Assets Payable 50% 30% Balances before Liquidation, 18,000 307,000 (53,000) (88,000) (110,000) January 1,20x4 January transactions: 1. Collection of accounts receivable at a loss of P15,000 51,000 (66,000) 7,500 4,500 2. Sale of inventory at a loss 38,000 (52,000) 7,000 4,200 of P14,000 3. Liquidation expenses paid (2,000) 1,000 600 4. Share of credit memorandum 3,000 (1,500) (900) 5. Payments to creditors (50,000) 50,000 55,000 189,000 -0(74,000) (101,600) Safe payments to partners (Schedule 1) (45,000) __ 26,600 10,000 189,000 -0(74,000) (75,000) February transactions: 6. Liquidation expenses paid (4,000) __ 2,000 1,200 6,000 189,000 -0(72,000) (73,800) Safe payments to partners (Schedule 2) -0__ ___ -0-06,000 189,000 -0(72,000) (73,800) March transactions: 8. Sale of M&Eq. at a loss of 146,000 (189,000) 21,500 12,900 P43,000 9. Liquidation expenses paid (5,000) 2,500 1,500 147,000 -0-0(48,000) (59,400) 10. Payments to partners (147,000) 48,000 59,400 Balances at end of liquidation, March 31, 20x4

-0-

-0-

-0-

-0-

-0-

CC 20% (74,000)

3,000 2,800 400 (600) (68,400) 18,400 (50,000) 800 (49,200) -0(49,200) 8,600 1,000 (39,600) 39,600 -0-

ABC Partnership Schedules of Safe Payments to Partners

Schedule 1: January 31, 20x4 Capital balances Possible loss: Other assets (P189,000) and possible liquidation costs (P10,000) Absorption of AA’s potential deficit balance BB: (P25,500 x 3/5 = P15,300) CC: (P25,500 x 2/5 = P10,200) Safe payment, January 31, 20x4 Schedule 2: February 27, 20x4 Capital balances Possible loss: Other assets (P189,000) and possible liquidation costs (P6,000) Absorption of AA’s potential deficit balance: BB: (P25,500 x 3/5 = P15,300) CC: (P25,500 x 2/5 = P10,200) Safe payment, February 27, 20x4

AA 50% (74,000)

BB 30% (101,600)

CC 20% (68,400)

99,500 25,500 (25,500)

59,700 (41,900)

39,800 (28,600)

-0-

(26,600)

10,200 (18,400)

(72,000)

(73,800)

(49,200)

97,500 25,500 (25,500)

58,500 (15,300)

39,000 (10,200)

-0-

-0-

15,300

15,300

10,200 -0-

Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners. This is due to the large book value of Other Assets still unrealized and the reservation of the $6,000 cash on hand for possible future liquidation expenses.

Problem III: Cash Distribution Plan

PET Partnership Cash Distribution Plan June 30, 20x4

Loss Absorption Power

Profit and loss percentages

PP

EE

TT

Decrease highest LAP to next highest: EE (P30,000 x .30)

PP 50%

Preliquidation capital balances Loss absorption Power (Capital balances / Loss percent)

Capital Accounts

(110,000)

(150,000)

(120,000)

(110,000)

30,000 (120,000)

(120,000)

EE 30%

TT 20%

(55,000)

(45,000)

(24,000)

(55,000)

9,000 (36,000)

(24,000)

Decrease LAPs to next highest: EE (P10,000 x .30) TT (P10,000 x .20)

10,000

(110,000)

Cash available First Next Next Additional paid in P&L ratio

Problem IV

3,000 10,000 (110,000)

(110,000)

(55,000)

2,000 (22,000)

(33,000)

Summary of Cash Distribution (If Offer of P100,000 is Accepted) Accounts PP Payable 50% P106,000 (17,000) P17,000 (9,000) (5,000)

EE 30%

TT 20%

P 9,000 3,000

P 2,000

(75,000) P -0-

22,500 P34,500

15,000 P17,000

______ P17,000

P37,500 P37,500

PET Partnership Statement of Partnership Liquidation and Realization From July 1, 20x4, through September 30, 20x4

Preliquidation balances July: Assets Realized Paid liquidation costs Paid creditors Safe Payments (Sch. 1)

Cash 6,000 26,500 (1,000) (17,000) 14,500 (6,500) 8,000

August: Equipment withdrawn (allocate P6,000 gain) Paid liquidation costs Safe Payments (Sch. 2) September: Assets Realized Paid liquidation costs Payments to partners Postliquidation balances

Noncash Assets 135,000

Accounts Payable (17,000)

(36,000)

99,000 99,000

75,000 (1,000) 76,500 (76,500) -0-

Capital EE 30% (45,000)

TT 20% (24,000)

17,000 -0-

4,750 500

2,850 300

1,900 200

(49,750)

(41,850) 6,500

(21,900)

-0-

(49,750)

(35,350)

(21,900)

(3,000)

(1,800)

8,800 300 (12,800)

4,000 200 (8.600) 8,600 -0-

(4,000) (1,500) 6,500 (4,000) 2,500

PP 50% (55,000)

95,000

-0-

750 (52,000)

95,000

-0-

(52,000)

450 (36,700) 4,000 (32,700)

-0-

-0-

-0-

-0-

10,000 500 (41,500) 41,500 -0-

6,000 300 (26,400) 26,400 -0-

(95.000)

(12,800)

PET Partnership Schedules of Safe Payments to Partners PP Schedule 1: July 31, 20x4 50% Capital balances (49,750) Possible loss on noncash assets (P99,000) 49,500 Cash retained (P8,000) 4,000 3,750 Absorption of Pen's potential deficit (3,750) EE: P3,750 x .30/.50 TT: P3,750 x .20/.50 -0Absorption of TT’s potential deficit EE P1,000 x .30/.30 Safe payment -0Schedule 2: August 31, 20x4 Capital balances Possible loss on noncash assets (P95,000) Cash retained (P2,500)

(52,000) 47,500 1,250 (3,250)

Absorption of TTs’ potential deficit PP: P6,700 x .50/.80 EE: P6,700 x .30/.80

EE 30% (41,850) 29,700 2,400 (9,750) 2,250 (7,500) 1,000 (6,500)

(36,700) 28,500 750 (7,450)

4,188 938 (938)

Absorption of PPs potential deficit EE: P938 x .30/.30 Safe payment

-0-

TT 20% (21,900) 19,800 1,600 (500)

1,500 1,000 (1,000) -0-

(12,800) 19,000 500 6,700 (6,700)

2,512 (4,938)

-0-

938 (4,000)

-0-

Problem V

DSV Partnership Statement of Partnership Realization and Liquidation — Installment Liquidation From July 1, 20x4, through September 30, 20x4 Capital Balances Noncash D S V Cash Assets Liabilities 50% 30% 20% Preliquidation balances, 6/30 50,000 670,000 (405,000) (100,000) (140,000) (75,000) July, 20x4: Sale of assets and distribution of P120,000 loss Liquidation expenses Payment to creditors Payments to partners (Sch. 1) August, 20x4: Sale of assets & distribution of P13,000 loss Liquidation expenses Payments to partners (Sch. 2)

390,000 440,000 (2,500) 437,500 (405,000) 32,500 (22,500) 10,000 22,000 32,000 (2,500) 29,500 (19,500) 10,000

(510,000)

60,000

36,000

24,000

(40,000) 1,250 (38,750)

(104,000) 750 (103,250)

(51,000) 500 (50,500)

(38,750)

(103,250) 22,500 (80,750)

(50,500)

3,900 (76,850) 750 (76,100) 13,700 (62,400)

2,600 (47,900) 500 (47,400) 5,800 (41,600)

160,000

(405,000)

160,000 160,000

(405,000) 405,000 -0-

160,000

-0-

(35,000) 125,000

-0-

125,000

-0-

6,500 (32,250) 1,250 (31,000)

125,000

-0-

(31,000)

(38,750)

(50,500)

September, 20x4: Sale of assets distribution of P70,000 loss Allocate D's deficit to S and V Liquidation expenses Payments to partners Postliquidation balances

55,000 65,000

(125,000) -0-

-0-

65,000 (2,500) 62,500 (62,500) -0-

-0-

-0-

-0-

-0-

-0-

-0-

35,000 4,000 (4,000) -0-0-0-0-

DSV Partnership Schedule of Safe Payments to Partners D 50%

Schedule 1, July 31, 20x4: Capital balances, July 31, Before cash distribution Assume full loss of P160,000 on remaining noncash assets and P10,000 in possible future liquidation expenses Assume D's potential deficit must be absorbed by S and V: 30/50 x P46,250 20/50 x P46,250

Assume V's potential deficit must be absorbed by S completely Safe payments to partners on July 31, 20x4 Schedule 2, August 31, 20x4: Capital balances, August 31, before cash distribution Assume full loss of P125,000 on remaining noncash assets and P10,000 in possible liquidation Expenses Assume D's potential deficit must be absorbed by S and V: 30/50 x P36,500 20/50 x P36,500 Safe payments to partners

21,000 (41,400) 2,400 (39,000) 1,500 (37,500) 37,500 -0-

S 30%

14,000 (27,600) 1,600 (26,000) 1,000 (25,000) 25,000 -0-

V 20%

(38,750)

(103,250)

(50,500)

85,000 46,250

51,000 (52,250)

34,000 (16,500)

(46,250)

27,750 (24,500)

18,500 2,000

2,000

(2,000)

-0-

(22,500)

-0-

(31,000)

(76,100)

(47,400)

67,500 36,500

40,500 (35,600)

27,000 (20,400)

-0-

(36,500) -0-

21,900 (13,700)

14,600 (5,800)

Problem VI: Cash Distribution Plan (or better use the format presented in the discussion) DSV Partnership Cash Distribution Plan June 30, 20x4

Loss Absorption Power D Profit and loss sharing ratio Preliquidation capital balances Loss absorption power (LAP) capital accounts / loss sharing percentage

(200,000)

Decrease highest LAP to next highest LAP: Decrease S by P91,667 (Cash distribution: P91,667 x .30)

1. 2. 3. 4. 5.

(466,667)

V

(200,000)

(375,000)

S

V

50% (100,000)

30% (140,000)

20% (75,000)

(100,000)

27,500 (112,500)

(75,000)

(375,000)

(375,000)

175,000

52,500

175,000 (200,000)

(200,000)

(200,000)

50%

30%

20%

Summary of Cash Distribution Plan (Estimated on June 30, 20x4) Liquidation Creditors Expenses 100% 100%

First P405,000 Next P10,000 Next P27,500 Next P87,500 Any additional distributions in the partners' profit and loss ratio

D

91,667

Decrease LAP to next highest level: Decrease S by P175,000 Cash distribution: P175,000 x .30) Decrease V by P175,000 Cash distribution: P175,000 x .20) Decrease LAPs by distributing cash in the P/L sharing ratio

S

Capital Accounts

D

50%

35,000 (100,000)

(60,000)

S

V

100% 60%

40%

30%

20%

(40,000)

b. Confirmation of cash distribution plan DSV Partnership Capital Account Balances June 30, 20x4, through September 30, 20x4 D Profit and loss ratio 50% Preliquidation balances, June 30 (100,000) July loss of P120,000 on disposal of assets and P2,500 paid in liquidation costs 61,250 (38,750) July 31 distribution of P22,500 of available cash to partners (Sch. 1) First P22,500 of P27,500 layer: 100% to S (38,750) August loss of P13,000 on disposal of assets and P2,500 paid in liquidation costs 7,750 (31,000) August 31 distribution of P19,500 of available cash to partners (Sch. 2) Remaining P5,000 of P27,500 layer of which P22,500 paid on July 31: 100% to S Next $14,500 of P87,500 layer: 60% to S 40% to V (31,000) September loss of P70,000 on disposal of assets and P2,500 paid in liquidation Costs 36,250 5,250 Distribution of D's deficit (5,250) -0September 30 distribution of P62,500 of available cash to partners (Sch. 3) Next P62,500 of P87,500 layer of which P14,500 paid on August 31: 60% to S 40% to V Postliquidation balances -0-

S 30% (140,000)

V 20% (75,000)

36,750 (103,250)

24,500 (50,500)

22,500 (80,750)

(50,500)

4,650 (76,100)

3,100 (47,400)

5,000 8,700 (62,400)

5,800 (41,600)

21,750 (40,650) 3,150 (37,500)

14,500 (27,100) 2,100 (25,000)

37,500 -0-

25,000 -0-

Schedule 1, July 31, 20x4: Computation of P22,500 of cash available to be distributed to partners on July 31, 20x4: Cash balance, July 1, 20x4 P 50,000 Cash from sale of noncash assets 390,000 Less: Payment of actual liquidation expenses (2,500) Less: Payments to creditors (405,000) Less: Amount held for possible future liquidation expenses (10,000) Cash available to partners, July 31, 20x4 P 22,500

Schedule 2, August 31, 20x4: Computation of P19,500 of cash available to be distributed to partners on August 31, 20x4: Cash balance, August 1, 20x4 Cash from sale of noncash assets Less: Payment of actual liquidation expenses Less: Amount held for possible future liquidation expenses Cash available to partners, August 31, 20x4

P10,000 22,000 (2,500) (10,000) P 19,500

Schedule 3, September 30, 20x4: Computation of P62,500 of cash available to be distributed to partners on September 30, 20x4: Cash balance, September 1, 20x4 Cash received from sale of noncash assets Less: Payment of actual liquidation expenses Cash available to partners, September 30, 20x4

P10,000 55,000 (2,500) P62,500

Problem VII

Cash distribution program: First Next Next All over

P 50,000 34,000 48,000 P132,000

Creditors 100%

Ames

40%

Beard

Craig

100% 33 1/3% 20%

66 2/3% 40%

Working paper for cash distributions to partners during liquidation (not required): Ames Beard Craig Capital balances before liquidation P60,000 P80,000 P92,000 Income-sharing ratio 4 4 2 Capital per unit of income sharing P15,000 P40,000 P23,000 Reduce Beard's capital to next highest capital for Craig ______ (17,000) ______ Capital per unit of income sharing P15,000 P23,000 P23,000 Reduce Beard's and Craig's capital to Ames's capital ______ (8,000) (8,000) Capital per unit of income sharing P15,000 P15,000 P15,000 Problem VIII Cash Quanto, Capital Rollo, Capital Simms, Capital Assets To record realization of assets at a loss of $10,000, divided amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.

60,000 5,000 3,000 2,000

Liabilities Cash To record payment to creditors.

30,000

Loan Payable to Quanto Rollo, Capital Simms, Capital Cash

9,500 10,500 5,000

70,000

30,000

25,000

To record payment to partners, computed as follows: Capital (including Quanto's loan of P10,000) before liquidation Loss on realization of assets Balances Maximum potential additional loss (P5,000 + P50,000 = P55,000) divided in 5:3:2 ratio Cash payments Multiple Choice Problems 1. c

d

Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (77,500 x .20 = 15,500) Balances Loss to reduce BB & CC to AA: (B:70,000 x .40 = 28,000) (C:70,000 x .20 = 14,000) Balances

P30,000 (3,000) P27,000

P18,000 (2,000) P16,000

(27,500) P 9,500

(16,500) P10,500

(11,000) P 5,000

Total

40%

50%

10%

100%

(160,000)

(45,000)

(55,000)

(260,000)

24,000 (136,000)

30,000 (15,000)

6,000 (49,000)

60,000 (200,000)

Possible loss for unrealized assets P1,000,000 – P600,000 = 400,000

4.

P42,000 (5,000) P37,000

TT

Capital balances Loss on sale of assets (475,000 – 600,000) – 4:4:2

d

Simms

CC

2. a

3.

Rollo

JJ

Profit ratio Prior capital Loss on sale of inventory

Quanto

Peter 300,000

Paul 350,000

Mary 400,000

Total 1,050,000

( 50,000) 250,000

(50,000) 300,000

(25,000) 375,000

(125,000) 925,000

160,000 (90,000

160,000 140,000

80,000 295,000

400,000 525,000

AA 37,000 40% 92,500

BB 65,000 40% 162,500

CC 48,000 20% 240,000

92,500

162,500

77,500 162,500

70,000 92,500

92,500

Cash of P20,000 after settlement of liabilities: CC receives first P15,500; remaining P4,500 split 2/3 to BB and 1/3 to CC

70,000 92,500

5.

d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and 1/3 to CC.

6.

a If all partners received cash after the second sale, then the remaining 12,000 is distributed in the loss ratio.

7.

b Capital before realization Loss on sale (2:2:1); [90 – 50] Possible loss P90,000, unrealized NCA Possible insolvency loss (2:1)

8.

b Capital before realization Loss on sale (2:2:1); [90 – 50] Possible loss P90,000, unrealized NCA plus P3,000 = P93,000 Possible insolvency loss (2:1)

9.

a

A 37,000 (16,000) 21,000 (36,000) (15,000) 15,000

B 65,000 ( 16,000) 49,000 (36,000) 13,000 (10,000) 3,000

C 48,000 ( 8,000) 40,000 (18,000) 22,000 ( 5,000) 17,000

Total 150,000 (40,000) 110,000 90,000 20,000 0

A 37,000 (16,000) 21,000

B 65,000 ( 16,000) 49,000

C 48,000 ( 8,000) 40,000

Total 150,000 (40,000) 110,000

(37,200) (16,200) 16,200

(37,200) 11,800 (10,800) 1,000

(18,600) 21,400 ( 5,400) 16,000

AE 40% (40,000) 40,000 -0-

Profit and loss ratio Capital balances Loss of P100,000 Remaining equities

BT 30% (180,000) 30,000 (150,000)

KT 30% (30,000) 30,000 -0-

AE will receive nothing; the entire P150,000 will be paid to BT. 10. 11. 12. 13.

c d d c

14. a Profit and loss ratio Beginning capital Actual loss on assets (5:3:2) Possible loss – unrealized NCA Safe payments

CC 5/10 80,000 (15,000) 65,000 ( 50,000) 15,000

DD 3/10 90,000 (9,000) 81,000 (30,000) 51,000

EE 2/10 70,000 (6,000) 64,000 (20,000) 44,000

Total 10/10 240,000 ( 30,000) 210,000 ( 20,000) 190,000

93,000 17,000 0 17,000

15. c Capital before realization Divided by: Loss absorption abilities 16. a

X

Y

130,000 50% 260,000

130,000 30% 260,000

Z

100,000 20% 500,000

The loan payable to AA has the same legal status as the partnership’s other liabilities. After payment of the loan, then any available cash can be distributed to the partners using the safe payments computations.

17. a Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce N to D: (80,000 x .20 = 16,000) 18. d – Harding, P6,107; Jones, P12,275 Capital balances Potential loss from Sandy deficit Loss to reduce H and J: (50:35) Balances

D 72,000 40% 180,000

R 32,000 20% 160,000

H 20,000 (5,882) 14,118

J 22,000 (4,118) 17,882

(8,011) 6,107

(5,607) 12,275

N 52,000 20% 260,000

J 24,000 20% 120,000

80,000

____0

S (10,000) 10,000 0

Total 32,000 0 32,000 (13,618) 13,382

Note:

1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may not be recovered for purposes of distribution of cash. 2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Harding and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program Capital balances Additional contribution Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce JJ to HH: (19,428 x 35/85 = 8,000) Balances Cash available Less: Priority I to Jones (P19,428 x 35/85) Less: P& L (50:35) 19. c 20. b

P18,382 8,000 P10,382 (10,382)

H 20,000 0 20,000 50/85 34,000

J 22,000 0 22,000 35/85 53,429

34,000

19,428 34,000 P 8,000

P 6,107 P6,107

4,275 P 12,275

S (10,000) 10,000

21. c Capital before realization Loan Total interests Loss on sale (240,000 – 195,000)

A 70,000 20,000 90,000 (15,000) 75,000

B 30,000 ______ 30,000 ( 15,000) 15,000

C 50,000 ______ 50,000 (15,000) 35,000

Total 150,000 20,000 170,000 (45,000) 125,000

22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the one entitled to the first priority. INTERESTS PAYMENTS______ A B C A B C Total Balances before realization Loans………………….. P 20,000 Capital………………... 70,000 P 30,000 P 50,000 Total interests………... P 90,000 P 30,000 P 50,000 1/3 Divided by: P&L ratio………… 1/3 1/3 Loss absorption ability……….. P270,000 P 90,000 P150,000 P40,000 P40,000 Priority I…………………………. 120,000 _______ P150,000 P90,000 P150,000 40,000 Priority II………………………… 60,000 0 60,000 20,000 0 P20,000 P 90,000 P90,000 P 90,000 P60,000 P 0 P20,000 P80,000 23. d

A 70,000 20,000 90,000 (15,000) 75,000 Payment of loans to partner (20,000) 55,000 Asset received ______ Payment to partners after payment of loan 55,000 Capital before realization Loan Total interests Loss on sale (240,000 – 195,000)

B 30,000 ______ 30,000 ( 15,000) 15,000 ______ 15,000 ______ 15,000

C 50,000 ______ 50,000 (15,000) 35,000 _____ 35,000 (30,000) 5,000

Total 150,000 20,000 170,000 (45,000) 125,000 (20,000) 105,000 (30,000) 75,000

Note: The requirement is payment to partners after outside creditors and loans to partners had been paid, therefore, the payment to partners is in so far as capital is concerned.

24. a Capital balances Less: Machine, at fair value Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce E to D: (45,000 x 1/3 = 15,000) Balances

D 40,000 ______ 40,000 1/3 120,000

E 90,000 (35,000) 55,000 1/3 165,000

F 30,000 ______ 30,000 1/3 90,000

120,000

(45,000) 120,000

____0 90,000

25. c Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (170,000 x .10 = 17,000) Balances 26. c Capital balances Divided by: Profit and loss ratio Loss absorption power Loss to reduce CC to BB: (15,000 x .20 = 3,000) Balances

K 59,000 40% 147,500

M 39,000 30% 130,000

B 34,000 10% 340,000

J 34,000 20% 170,000

147,500

130,000

170,000 170,000

____0 170,000

C 60,000 40% 150,000

P 27,000 30% 90,000

H 43,000 20% 215,000

M 20,000 10% 200,000

150,000

90,000

15,000 200,000

____0 200,000

27. c - the P16,000 available cash can be distributed but should be done under the assumption that all deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a 60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can be immediately distributed. or, alternatively: Capital balances Loan Total interests Potential insolvency loss (3:2) 28. b Capital balances Potential loss from A deficit (5:3) Loss to reduce H and J: (5:3) Possible insolvency loss

W (2,000) ______ (2,000) 2,000

A (5,000) 5,000

J (5,000) 3,000 (2,000) 2,000

F 13,000 _______ 13,000 ( 2,400) 10,600

R 7,000 __ 7,000 (1,600) 5,400

B 18,000 (3,125) 14,875

C 6,000 (1,875) 4,125

Total 19,000 0 19,000

(8,750) 6,125 (1,125) 5,000

(5,250) (1,125) 1,125

(14,000) 5,000 0

29. a – installment liquidation (refer for more problems in Chapter 5) P

INTERESTS Q

Balances before realization Totall interests………... P 70,000 P 50,000 Divided by: P&L ratio………… 20% 40% Loss absorption abilities……….. P350,000 P125,000 Priority I…………………………. (100,000) P250,000 P125,000 Priority II………………………… (125,000) P125,000 P125,000

R

PAYMENTS Q R

P

P100,000 40% P250,000 0 P20,000 P250,000 (125,000) 25,000 P125,000 P75,000

P20,000 P 4,500

Cash, beginning Add (deduct): Liquidation expenses paid Payment of liabilities Proceeds from sale of assets (?) Payment to partner before payment to Renquist (priority I only) 30. d – Justice P15,533 Capital balances Potential loss from Douglass (40:35) Note:

J 23,000 (7,467) 15,533

___ Total

Z 22,000 (6,533) 15,467

P50,000 75,000 P50,000 P95,000

P 90,000 ( 8,000) (170,000) 108,000 P 20,000

D (14,000) 14,000 0

Total 31,000 0 31,000

1.

Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit may not be recovered for purposes of distribution of cash. 2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)

or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5) J Z Capital balances 23,000 22,000 Additional contribution 0 0 Capital balances 23,000 22,000 Divided by: Profit and loss ratio 40/75 35/75 Loss absorption power 43,125 47,143 Loss to reduce Z to D: (4,018 x 35/55 = 1,875) 4,018 Balances 43,125 43,125 Cash available Less: Priority I to Douglass (P4,018 x 35/75) Less: P& L (40:35)

P31,000 1,875 P29,125 (29,125)

P 1,875 P15,533 P15,533

13,592 P15,467

D (14,000) 14,000

31. d

INTERESTS K

D

R

D

Balances before realization Loans………………….. P 0 P 10,000 P(20,000) 100,000 Capital………………... 170,000 170,000 Total interests………... P170,000 P180,000 P 80,000 20% Divided by: P&L ratio………… 50% 30% Loss absorption abilities……….. P340,000 P600,000 P400,000 Priority I…………………………. (200,000) 0 P340,000 P400,000 P400,000 Priority II………………………… (60,000) (60,000) P340,000 P340,000 P340,000

T

N

INTERESTS D

Balances before realization Loans………………….. P 0 P 0 P 0 14,000 Capital………………... 22,000 15,500 Total interests………... P 22,000 P15,500 P 14,000 1/4 Divided by: P&L ratio………… 2/4 1/4 Loss absorption abilities……….. P 44,000 P62,000 P 56,000 Priority I………………………… ( 6,000) 0 P 44,000 P56,000 P56,000 Priority II………………………… (12,000) (12,000) __ P 44,000 P44,000 P44,000 P

Cash received by Tree Divided by: P & L ratio Amount in excess of P7,500 Total cash payments – refer to program Payment to partners 33. d Cash, beginning Add (deduct): Proceeds from sale of certain assets Liquidation expenses paid Payment of liabilities Payment to partners (refer to No. 30) Cash withheld

___ Total

P60,000

P60,000

18,000 36,000 18,000 P – P 78,000 P18,000 P 96,000

Cash received by the partner Kemp Add (deduct): Liabilities paid Expenses paid Contingency Cash, beginning Proceeds from sale of other assets 32. b

PAYMENTS K R

P 60,000 250,000 5,000 10,000 (120,000) P205,000 PAYMENTS N D

T

P 1,500 –

___ Total

P1,500

3,000 P 3,000 6,000 P 4,500 P 3,000 P 7,500

P

6,250 2/4 P 12,500 7,500 P 20,000 P 12,000 32,000 ( 1,000) ( 5,400) ( 20,000) P 17,600

34. d

Priority Creditors First P300,000………. P300,000 Next P80,000 (7:3)… Next P70,000 (3:4)… Remainder*……….. P300,000

Mattews P56,000 30,000 22,000 P108,000

Norell

Reams

P24,000

P40,000 44,000 P84,000

34,000 P58,000

Total P300,000 80,000 70,000 100,000 P550,000 (d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000 P

INTERESTS Q

R

Balances before realization Loans………………….. P 6,000 P(10,000) 60,000 Capital………………... 24,000 P36,000 Total interests………... P30,000 P36,000 P50,000 4/10 Divided by: P&L ratio………… 3/10 3/10 Loss absorption abilities…….. P100,000 P120,000 P125,000 Priority I…………………………. (5,000) P100,000 P120,000 P120,000 Priority II………………………… (20,000) (20,000) P100,000 P100,000 P100,000

P

PAYMENTS______ Q R Total

P 2,000 P 2,000 P6,000 P – P6,000

8,000 14,000 (d) P10,000 P16,000

35. d Priority Creditors First P300,000………. P300,000 Next P80,000 (7:3)… Next P70,000 (3:4)… Remainder*……….. P300,000

Mattews P56,000 30,000 22,000 P108,000

Norell P24,000 34,000 P58,000

Reams P40,000 44,000 P84,000

Total P300,000 80,000 70,000 100,000 P550,000 (d)

*P550,000 – P300,000 – P80,000 – P70,000 = P100,000

Quiz - V

1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation principles. M K C Total Capital before realization 100,000 175,000 75,000 350,000 Loss on sale (50%:30%:20%) (162,500) (97,500) (65,000) *(325,000) ( 62,500) 77,500 10,000 **25,000 Additional loss (3:2) 62,500 (37,500) (25,000) ______40,000 (15,000) 25,000 Additional loss (15,000) 15,000 -025,000 *balancing figure – total reduction in capital

Payment to partners: P200,000 – P25,000 – P150,000 = P25,000** 2. Homer, P54,000; Marge, P84,000; Bart, P177,000. 3. P150,000

4. Stan, P0; Kenney, P10,000; Cartman, P0 5. P500,000 = (P147,000 + P28,000)/.35 6. P1,040,000 = (P260,000 / .25) 7. P675,000 = (P285,000 - P15,000)/.40 8. a 9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000 10. 11. b 12. P33,000 First allocation (H) (P400,000 - P380,000) (.30) Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) Third allocation, share based on profit and loss ratios

P24,000 20,000

P 6,000 44,000 10,000

Harold: P6,000 + P24,000 + (P10,000 x .30) 13. P2,500 First allocation (H) (P400,000 - P380,000) (.30) Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) Third allocation, share based on profit and loss ratios

P24,000 20,000

P 6,000 44,000 10,000

Sheldon: (P10,000 x .25) 14. P24,500 First allocation (H) (P400,000 - P380,000) (.30) Second allocation (H) (P380,000 - P300,000) (.30) (F) (P380,000 - P300,000) (.25) Third allocation, share based on profit and loss ratios

P24,000 20,000

P 6,000 44,000 10,000

Fred: P20,000 + (P10,000 x .45) 15. P147,000 Equities Possible loss on remaining assets Contingencies Subtotals

Losses

200,000 10,000

Eliminate Jack’s debit balance Safe payments 16. P495,000 = (P162,000 + P36,000) / .40

40% Hara 135,000

30% Ives 216,000

( (

80,000 ) 4,000 ) 51,000

( (

60,000 ) 3,000 ) 153,000

(

8,000 )

(

6,000 )

43,000

147,000

30% Jack 49,000 ( ( (

60,000 ) 3,000 ) 14,000 ) 14,000 0

17. c

P 70,000 (1,600) 68,400 20% 342,000

Capital before realization Liquidation expenses Divided by: Loss absorption abilities Selling Price Book value Loss

Q 50,000 ( 3,200) 46,800 40% 117,000

R 100,000 ( 3,200) 96,800 40% 242,000

183,000 300,000 (117,000)

or, Quincy capital before liquidation………………………………………………..P 50,000 Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200 Quincy capital before realization of non-cash assets……………………….P 46,800 0 Less: Cash received by Quincy (minimum)……………………………………. Share in the loss on realization……………………………………………………P 46,800 Divided by: Profit and loss ratio………………………………………………….. 40% Loss on realization…………………………………………………………………..P117,000 Less; Non-cash assets………………………………………………...................... 300,000 Proceeds from sale…………………………………………………………………P183,000 18. P29,000 (P14,000 Warle capital + P10,000 Xin capital + P6,000 Yates capital + P5,000 Loan from Xin P6,000 Loan to Warle) 19. P2,000 (P4,000 beginning balance + P3,000 cash collected + P4,000 for inventory sold - P7,000 of accounts payable - P2,000 for expenses) 20. P2,000

Warle 8,000 2,000 ) 400 ) 5,600

Xin 15,000 3,000 ) 600 ) 11,400

Yates 6,000 5,000 ) 1,000 ) 0

Total 29,000 10,000 ) 2,000 ) 17,000

Equities,Jun 30 Inventory loss Contingency fund Subtotals

( (

Possible losses on remaining assets Subtotals

(

3,000 ) 2,600

(

4,500 ) 6,900

( (

3,000 ) 400 )

(

4,500 ) 2,400

7,500 0

2,000

400 0

(

400 ) 2,000

0

2,000

Eliminate Yates’s Deficit Subtotals Eliminate Warle’s Deficit Cash distribution

( (

( (

( (

7,500 ) 7,500 )

( (

(

15,000 ) 2,000

THEORIES

True or False 1. False 2. True 3. False 4. False 5. True

6. 7. 8. 9. 10.

True True False True True

Multiple Choice 18. b 19. b 20. a 21. a 22. d

23. 24. 25. 26. 27.

a d d a d

11. 12. 13. 14. 15,

False True False True True

16. 17.

False True

Note for the following numbers: 1. An installment liquidation occurs over an extended period of time and partners generally receive interim (installment) distributions. 3. The accountant must ensure that the partnership will have sufficient cash to pay current and prospective creditors before distributions are made to partners. 4. It may not be prudent for the accountant to pay creditors as quickly as possible. However, funds should be set aside so that creditors can be paid in a timely manner. 8. The size of the capital account must be evaluated in conjunction with the residual profit and loss ratio to determine which partner is least likely to have a deficit occur during the partnership liquidation. 11. The cash distribution plan indicates how a distribution will be allocated among the partners but it does not guarantee that a distribution will be made. 13. The loss absorption power indicates the amount of loss the partnership would have to occur before that partner’s capital account balance is reduced to zero. 16. The schedule of safe payments can be used for any partnership liquidation but it provides the same distribution as the cash distribution plan under most circumstances.

28. 29. 30. 31. 32.

b e a a c

33. 34. 35. 36. 37.

b d b a b

38. 39. 40. 41. 42.

c d b a b

43. 44. 45. 46.

d b c d

Chapter 6 Problem I 1. Statement of Affairs - Formal

Book Value P 50,000 1,200

119,000

13,200

6,000 61,000 60,000 1,100 8,500

MINER COMPANY Statement of Affairs May 31, 2012 Assets Assets Pledged with Fully Secured Creditors: Notes Receivable P39,800 Accrued Interest Rec. 1,000 P 40,800 Notes Payable Accrued Interest Pay.

40,000 800

Building Note Payable Accrued Interest Pay.

20,000 800

40,800 75,000 20,800

Free Assets Cash Accounts Receivable Inventory Prepaid Insurance Goodwill Total Net Realizable Value Liabilities having Priority – Wages Taxes Net Free Assets

6,000 2,400

Estimated Deficiency to Unsecured Creditors

P 6,000 2,400 60,000 1,600 10,000

P 54,200

Assets Pledged with Partially Secured Creditors: Equipment 4,200 Note Payable 10,000

Equities Liabilities Having Priority: Accrued Wages Taxes Payable Fully Secured Creditors: Notes Payable Accrued Interest Payable Partially Secured Creditors: Note Payable Equipment

6,000 50,000 30,000 400 0 140,600 8,400 132,200 53,600 P 185,800

P 320,000 Book Value

Realizable Value

Unsecured P 6,000 2,400

P 8,400

60,000 1,600

61,600 10,000 4,200

P 5,800

170,000 10,000 110,000 ( 50,000) P 320,000

Unsecured Creditors: Accounts Payable Notes Payable

170,000 10,000

Stockholders’ Equity Common Stock Retained Earnings (Deficit) P 185,800

2. Deficiency Statement to determine estimated deficiency to unsecured creditors: Deficiency Account May 31, 2012 Estimated Losses: Estimated Gains: Accounts Receivable P 11,000 Common Stock Notes Receivable 10,400 Retained Earnings Inventory 30,000 Estimated Deficiency to Buildings 44,000 Unsecured Creditors Equipment 9,000 Prepaid Insurance 700 Goodwill 8,500 P113,600 Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15% Problem II 1. Formal

Book Value P165,000

3,000 72,000 60,000

______ P300,000

P 110,000 (50,000) 53,600

P 113,600

Down Dog Corporation Statement of Affairs June 30, 2014

Assets Pledged with partially secured creditors Equipment-net Less: Note payable and accrued interest Unsecured amount (See below) Free Assets Cash Accounts receivable-net Inventories Total net realizable value Less: Priority liabilities – wages payable Total available for unsecured creditors Estimated deficiency to unsecured creditors

Realizable Value P87,000 (96,000) (9,000) 3,000 48,000 72,000 123,000 (45,000) 78,000 30,000 P108,000

P

0

Deficiency Account (Loss/Gain) (78,000)

(24,000) 12,000

______ (90,000)

Unsecured Equities

Book Value P 45,000

96,000

72,000 27,000 180,000 (120,000) P300,000

Priority liabilities Wages payable (assumed under P4,650 per employee)

P 45,000

Partially secured creditors Note payable and accrued interest Less: Equipment pledged as security

P 96,000 (87,000)

Unsecured creditors Accounts payable Rent payable

Liabilities

P 9,000 72,000 27,000

Stockholders’ equity Capital stock Retained earnings (deficit)

180,000 (120,000) P 60,000 P(30,000)

______ P108,000

Estimated Deficiency

2. Estimated payments per dollar for unsecured creditors Cash available Distribution to partially secured and unsecured priority creditors: Note payable and interest P87,000 Administrative expenses 24,000 Wages payable 45,000 Available to unsecured nonpriority creditors Note payable and interest (unsecured portion) Accounts payable Rent payable Unsecured nonpriority claims

P210,000

(156,000) P 54,000 P 9,000 72,000 27,000 P108,000

(P54,000 / P108,000 = P0.50 per peso) Expected recovery for each class of claims Partially secured Note payable and interest Secured portion Unsecured portion (P9,000 × 0.50)

P87,000 4,500

P91,500

Unsecured priority Administrative expenses Wages payable

P24,000 45,000

69,000

Unsecured nonpriority Accounts payable (P72,000 × 0.50 Rent payable (P27,000 × 0.50) Total payments

P36,000 13,500

49,500 P210,000

Problem III Realizable value of all assets (P635,000 + P300,000 + P340,000) Allocated to: Fully secured creditors Partially secured creditors Unsecured creditors with priority Remainder available to general unsecured creditors Payment rate to general unsecured creditors (Including balance due to partially secured creditors) P559,000 / (P1,165,000 + (P400,000 - P300,000))

P1,275,000 (316,000) (300,000) (100,000) P559,000

44.2%

Realizable value of assets: Assets pledged to fully secured creditors Assets pledged to partially secured creditors Free assets Total realizable value

P635,000 300,000 340,000 P1,275,000

Amounts to be paid to: Fully secured creditors Partially secured creditors [P300,000 + (0.442 × P100,000)] Unsecured creditors with priority General unsecured creditors (0.442 × P1,165,000) Total

P316,000 344,200 100,000 514,800* P1,275,000

*Rounded P130 Problem IV Free Assets: Current Assets ................................................................................. Buildings and Equipment .............................................................. Total ........................................................................................

P 35,000 110,000 P145,000

Liabilities with Priority: Administrative Expenses ................................................................ Salaries Payable (only P3,000 per employee) ........................... Income Taxes ................................................................................. Total ........................................................................................

P 20,000 6,000 8,000 P 34,000

Free Assets After Payment of Liabilities with Priority (P145,000 – P34,000) ......................................................................

P111,000

Unsecured Liabilities Notes Payable (in excess of value of security) ......................... Accounts Payable .......................................................................... Bonds Payable ................................................................................ Total ........................................................................................

P 30,000 85,000 70,000 P185,000

Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %

Payment On Notes Payable: Value of Security (land) ................................................................ 60% of Remaining P30,000 ............................................................ Total Collected by holders ...........................................................

P 90,000 18,000 P108,000

Problem V Free Assets: Cash ........................................................................................ Receivables (30 percent collectible) .......................................... Inventory ........................................................................................ Land (value in excess of secured note: P120,000 – P110,000) ................................................................ Total ........................................................................................

P30,000 15,000 39,000 10,000 P94,000

Less: Liabilities with priority Salary payable (below maximum)........................................ Free assets available ................................................................ Unsecured Liabilities: Accounts payable .......................................................................... Bonds payable (less secured interest in building: P300,000 – P180,000) ................................................ Unsecured liabilities ..................................................................

(10,000) P84,000 P90,000 120,000 P210,000

Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40% Amounts to be paid for: Salary payable (liability with priority to be paid in full) ........................................................................................ Accounts payable (unsecured—will collect 40% of debts of P90,000).................................................................. Note payable (fully secured by land—will collect entire balance) ........................................................................ Bonds payable (partially secured—will collect P180,000 from building and 40 percent of the remaining P120,000) ................................................................. Problem VI

Class of Creditors Fully secured liabilities Partially secured liabilities Unsecured liabilities with priority Unsecured liabilities without priority

Total Creditor’s Claims 183,600 54,600 30,810 182,500

Total Amounts Expected to be Recovered 183,600 51,720 30,810 116,800

P10,000 P36,000 P110,000 P228,000 % of Total Claims Expected to be Recovered 100.0 94.7 100.0 64.0

Problem VII 1. Total estimated proceeds Less asset proceeds claimed by secured creditors: Notes payable and interest (from proceeds of receivables and inventory) Mortgage payable and interest (from proceeds of land and building) Total available to unsecured claimants. Less distributions to unsecured claims with priority: Wages payable Taxes payable Amount available for unsecured claims 2.

Unsecured portion of notes payable and interest (P500,000 + P30,000 – P150,000) Accounts payable Total claims ofunsecured creditors Dividend to Unsecured Creditors P410,000 ÷ P640,000 = 64.1%

3.

Unsecured portion of notes payable and Interest Dividend on unsecured amount Amount received on unsecured portion Proceeds from receivables and inventory Total Received Dividend to note holders: P393,580 ÷ P530,000 = 74.3%

P910,000

P150,000 320,000

470,000 P440,000

P 10,000 20,000

30,000 P410,000 P380,000 260,000 P640,000



P380,000 64.1% P243,580 150,000 P393,580

Problem VIII 1.

Book Value P 40,000

50,000 110,000

WILBUR CORPORATION STATEMENT OF AFFAIRS DECEMBER 31, 20x4 Assets

(1) Assets pledged with fully secured creditors: Accounts receivable (net) Less: 10% note payable and interest Land Plant and equipment (net) Less: Mortgages payable and interest

20,000

35,000

4,000 35,000 55,000 6,000 140,000 48,000

P 543,000

(2) Assets pledged with partially secured creditors: Marketable securities Less: 10% note payable and interest

Estimated Current Values

Estimated Amount Available to Unsecured Claims

Estimated Gain (Loss) on Realization

P 40,000 38,500

P 1,500

P 65,000 100,000 P165,000 (157,500)

P 15,000 (10,000) 7,500

P 16,000

(4,000)

(20,800)

Inventory Less: Accounts payable

P 32,000 (60,000)

(3) Free assets: Cash Accounts receivable (net) Inventory Prepaid insurance Plant and equipment (net) Franchises

P 4,000 35,000 50,000 1,000 60,000 15,000

(3,000)

4,000 35,000 50,000 1,000 60,000 15,000

Estimated amount available Less: Creditors with priority Net available to unsecured creditors Estimated deficiency

P 174,000 (43,000) P 131,000 45,000

Total unsecured debt

P 176,000

2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%

(5,000) (5,000) (80,000) (33,000)

(P 125,000)

Problem IX Smith Company Statement of Realization and Liquidation Assets Assets Realized

Assets to be realized Old Receivebles, net Marketable Securities Old Inventory Depreciable Assets, net

P 50,000 20,000 72,000 120,000

Assets Acquired New Receivables

Old Receivbles New Receivbles Marketable Securities Sales of Inventory Assets Not Realized

100,000

Old Receivables, net New Receivables, net Depreciable Assets

Supplementary Charges

Supplementary Items Supplementary Credits

Old Current Payables

P 31,000

P 31,000

Liabilities Not Liquidated Old Current Payables Problem X

Net Loss

22,000 35,000 96,000

P 7,000

Liabilities Liabilities to be Liquidated

Liabilities Liquidated Old Current Payables

P 28,000 65,000 15,000 100,000

Old Current Payables

P 65,000

Liabilities Incurred P 34,000 P433,000

________ P 433,000

Mallory Corporation Statement of Realization and Liquidation For the Three Months Ended July 31, 20x5

Assets Beginning balances assigned 5/1/x5 Cash Receipts: Collection of Accounts Receivable Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts pay. Partial payment of bank loan Ending balance

Assets Cash Non-Cash P 4,000 P720,000 60,000 170,000 20,000 70,000

(70,000) (200,000) (340,000) (100,000)

(60,000) (170,000) (70,000) P24,000

P10,000

Assets Beginning balances assigned Cash Receipts: Collection of Accounts Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts Partial payment of bank loan Ending balance

Fully Secured P240,000

Partially Secured P270,000

Liabilities Unsecured With Without Priority Priority P94,000 P0

(10,000) (30,000) (80,000) (30,000)

(240,000) (60,000) (180,000) ________ (90,000) ________ P 0 P 0 P34,000

Owner's Equity P120,000

10,000 20,000 P30,000

________ P (30,000)

Multiple Choice Problems 1. d – since there is parent and subsidiary relationship, any intercompany accounts are eliminated from consolidated point of view. 2. a - [P90,000 + P36,000 + P10,000 – P45,000 = P91,000 total estimated amount available; P91,000 – (P4,500 + P10,000) = P76,500 estimated amount available for unsecured, non-priority creditors; P76,500 ÷ P90,000 = 0.85] 3. c – it is a partially secured liability 4. d – [(P1,110,000 – P780,000) + P960,000] – P210,000 = P1,080,000 5. b – P25,000 + [.30 x (P75,000 – P25,000)] = P40,000 6. d – (P555,000 – P390,000) + P480,000 = P645,000 – P105,000 = P540,000 7. b – P30,000 + [.30 x (P90,000 – P30,000)] = P48,000 8. c – [ P110,000 + (P150,000 – P110,000) x 40%] = P128,000 9. d 10. c – P60,000 + [(P120,000 + P6,000) – (P30,000 + P35,000) = P121,000 11. b - P20,000 + P80,000 + [P170,000 – (P150,000 + P7,000)] = P113,000 – (P10,000 + P10,000) = P93,000 12. c – P93,000/P121,000 = 77% rounded. 13. a Net Free Assets: (P700,000 – P300,000) + P70,000 + P230,000 = P700,000 – P140,000 = P560,000 Total Unsecured Creditors without priority: (P400,000 – P300,000) + P600,000 = P700,000

14. c - Pension P10,000 + Salaries P35,000 (= P10,600 + P10,950 + P10,950 + P2,500) + Taxes P80,000 + Liq. expenses P40,000 = P165,000. 15. c

Statement of Realization and Liquidation

Assets to be Realized…………. Assets Acquired……………….. Liabilities Liquidated…………. Liabilities Not Liquidated……. Supplementary charges/ debits………………………

P 1,375,000 750,000 1,875,000 1,700,000 3,125,000

Assets Realized…………………..P 1,200,000 Assets Not Realized…………… 1,375,000 Liabilities to be Liquidated…. 2,250,000 Liabilities Assumed………….. 1,625,000 Supplementary credits……… 2,800,000

P 8,825,000

P 9,250,000 Net Gain……………………….. P 425,000

16. No requirement 17. c Total Liabilities (refer to Liabilities not liquidated–No. 14)…………………… P1,700,000 +: Stockholders’ Equity (P1,500,000 – P500,000)………………………………… 1,000,000 Total LSHE = Total Assets…………………………………………………………… P 2,700,000 -: Noncash assets (refer to Assets not realized-No. 14)……….……………… 1,375,000 Cash balance, ending………………………………………………………………P1,325,000 18. P440,000 Total Free Assets: Fully secured: Land and building: P650,000 – (P300,000 + P20,000) = P 330,000 Free assets: Cash 10,000 Equipment 100,000 P440,000 Or, Total estimated proceeds P910,000 Less asset proceeds claimed by secured creditors: Notes payable and interest (from proceeds of receivables and inventory) P150,000 Mortgage payable and interest (from proceeds of land and building) 320,000 470,000 Total available to unsecured claimants/total free P440,000 19. P410,000 Total available to unsecured claimants/total free Less distributions to unsecured claims with priority: Wages payable Taxes payable Amount available for unsecured claims/net free assets

P440,000 P 10,000 20,000

30,000 P410,000

20. P640,000 = P260,000 + [(P50,000 + P100,000) – (P500,000 + 30,000), or Unsecured portion of notes payable and interest (P500,000 + P30,000 – P150,000) Accounts payable Total claims of unsecured creditors

P380,000 260,000 P640,000

21. 64.1%

Dividend to unsecured creditors P410,000 ÷ P640,000 = 64.1%

22. P320,000 = P300,000 + P20,000 23. P393,580 Unsecured portion of notes payable and interest Dividend on unsecured amount Amount received on unsecured portion Proceeds from receivables and inventory Total Received

x

P380,000 64.1% P243,580 150,000 P393,580

Dividend to note holders: P393,580 ÷ P530,000 = 74.3% 24. P30,000 25. P166,666 = P260,000 x 64.1 26. P910,247 = P320,000 + P393,580 + P30,000 + P166,666 (discrepancy of P247 due to rounding-off) 27. P230,000 Net free assets (No. 19) P410,000 640,000 Less: Unsecured creditors without priority (No. 20) P230,000 28. P340,000 = P910,000 – P1,250,000 29. P340,000, same with No. 28, since there are no unrecorded expenses liabilities) 30. P60,675 – you may the same procedure in Nos. 18 to 29 to solve this problem, the following is the formal presentation of statement of affairs

Book Value 98,500 5,800

41,000 43,000 1,850 21,200 15,000

_______ 226,350

Assets

Assets pledged with fully secured creditors: Land and Bldg 92,800 Investment in Calandir 15,000 Total 107,800 Assets pledged with partially secured creditors: Inventory 20,000 Equipment 8,000 Free Assets: Cash 1,850 Accounts Rec 17,000 Note Rec 15,000 Estimated Amount Avail for unsecured creditors with and without priority Less unsecured creditors with priority Estimated amounts for unsecured creditors without priority (Net Free Assets): Net Realizable Amount Avail Deficiency _______ 169,650

Book Liabilities Value and Owners Equity Fully Secured Creditors: 600 Accrued Mtg Interest 70,000 Mortgage Payable 375 Accrued N/P Interest 10,000 Note Payable Total Partially Secured Creditors: 50,000 Accounts Payable Unsecured Creditors with Priority: 3,775 Accrued Payroll Unsecured creditors without Priority: 40,625 Accounts Payable 10,000 Other Accrued Liabilities 185,375 Totals 40,975 Owner Equity 226,350

31. 32. 33. 34. 35. 36.

Estimated Net Realizable Value

Estimated Secured Amount

Estimated Amt Avail for Unsecured Creditors

Estimated Gain or (Loss)on Liquidation

22,200 4,625

(5,700) 9,200

(21,000) (35,000) 1,850 17,000 15,000

0 (4,200) 0

60,675 (3,775) 56,900 15,725 72,625

_______ (56,700)

Estimated Unsecured Amount With Without Priority Priority

600 70,000 375 10,000 80,975 28,000

22,000 3,775

_______ 108,975

3,775

P56,900 – refer to No. 30 for computation P72,625 – refer to No. for computation Dividend - P56,900/P72,625 = P.78 – refer to No. 30 for further computation P80,975 – refer to No. 30 for computation P45,160 = P28,000 + (P22,000 x 78%) P3,775

40,625 10,000 72,625

37. P39,487.50 = 78% x (P40,625 + P10,000) 38. P169,397.50 No. 34……………..P 80.975 No. 35…………….. 45,160 No. 36…………….. 3,775 No. 37…………….. 39,487.50 P169,397.50 (discrepancy around P250 plus due to rounding-off) 39. P15,725 – refer to No. 30 or P56,700, estimated net loss – P40,975, owners’ equity 40. P56,700 – refer to No. 30 or P169,650 – P226,350 41. P56,700 (same with No. 40 since there are no unrecorded expenses liabilities) 42. P22,475 Liabilities Unsecured Assets Fully Partial With Without Cash Noncash Secured Secured Priority Priority 6/1/x5 Balances: 1,850 224,500 80,975 50,000 3,775 50,625 Cash Receipts: Securities Sale 16,000 N/R Collected 15,000 Equipment 7,000 Sale Inventory Sale 22,000 Cash Disbursements: Bank Loan (10,375) Part Pyt-A/P (29,000) 6/30 Balance 22,475

Owners' Equity 40,975

(5,800) (15,000) (43,000)

10,200 0 (36,000)

(41,000)

(19,000)

---------119,700

43. P119,700 – refer to No. 42 44. P70,600 – refer to No. 42 45. None – refer to No. 42 46. P3,775 – refer to No. 42 47. P71,625 – refer to No. 42 48. (P3,825) deficit – refer to No. 42

(10,375) --------70,600

(50,000) 0

------3,775

21,000 71,625

---------(3,825)

49. P150,900

Book Value 57,000 174,000 6,000 900 90,000

327,900

Book Value 3,600 69,000 2,400 30,000 24,900 0 0 18,000 6,000 126,000

Estimated Net Realizable Assets Value Assets pledged with fully secured creditors: Accounts receivable (net) 45,000 Land, plant and equipment (net) 150,000 Total 195,000 Free assets: Notes receivable 6,000 Accrued interest receivable 900 Inventories (90,000 x 60%) 54,000 Estimated amount available for unsecured creditors with and without priority Less unsecured creditors with priority Estimated amounts for unsecured creditors without priority: Net realizable amount available Deficiency Totals

255,900 Estimated Secured Amount

Liabilities and Owners' Equity Fully secured creditors: Accrued interest Note payable Accrued interest Note payable Total Unsecured creditors with priority: Wages payable Administration fees – accountant’s fee Unsecured creditors without priority: Accrued interest Cash overdraft Notes payable Accounts payable

279,900 Totals 48,000 Owners' equity--see Note A 327,900 Note A: Includes the effect of the P2,000 professional fee.

50. P124,000 – refer to No. 49 51. P150,000– 52. 82.67% = P124,000/P150,000 53. P105,000 54. None 55. P26,900 56. P124,005 = P150,000 x 82.67%

Estimated Amount Available for Unsecured Creditor

Estimated Gain or (Loss) on Liquidation

12,600 77,400

(12,000) (24,000)

6,000 900 54,000

0 0 (36,000)

150,900 (26,900) 124,000 26,000 150,000

(72,000)

Estimated Unsecured Amount With Priority

Without Priority

3,600 69,000 2,400 30,000 105,000 24,900 2,000

--------

--------

0 18,000 6,000 126,000

105,000

26,900

150,000

57. P255,900 = P72,000 + P26,900 + P124,005 (discrepancy of P5) 58. P26,000 = (P72,000 + P2,000 unrecorded ) – P48,000 or P150,000 – P124,000 59. P72,000 – refer to No. 49 60. P74,000 = P72,000, loss of realization of assets + P2,000 unrecorded expenses Quiz - VI 1. P96,000 Claims of partially secured creditors ................................................................... Current value of assets pledged with these creditors ...................................... Deficiency that is unsecured ................................................................................. Claims of other unsecured creditors .................................................................... Total unsecured creditors claims ........................................................................

P 120,000 (80,000) P 40,000 360,000 P 400,000

Amount available to unsecured creditors: Excess left over after paying fully secured creditors (P195,000 – P150,000) ........................................................................................... Current value of free assets (net of P45,000 to creditors with priority)........................................................................................... Amount available to unsecured creditors ........................................................

115,000 P160,000

Settlement to unsecured claims per dollar (P160,000/P400,000) ...................

P

Total distribution to partially secured creditors: Current value of assets pledged ........................................................................ Deficiency of P40,000 × P.40 ................................................................................ 2. P144,000 = P360,000 x 40% 3. P56,000 Claims of partially secured creditors ................................................................... Current value of assets pledged with these creditors ...................................... Deficiency that is unsecured ................................................................................. Claims of other unsecured creditors .................................................................... Total unsecured creditors claims ........................................................................ Amount available to unsecured creditors: Excess left over after paying fully secured creditors (P300,000 – P250,000) ........................................................................................... Current value of free assets (net of P60,000 to creditors with priority)........................................................................................... Amount available to unsecured creditors ........................................................ Settlement to unsecured claims per peso (P36,000/P240,000) ....................... Total distribution to partially secured creditors: Current value of assets pledged ........................................................................ Deficiency of P40,000 × P.15 ................................................................................ 4. P30,000 = P200,000 x 15% 5. P35,000 = P20,000 + (P70,000 – P20,000) x 30%

P 45,000

.40

P 80,000 16,000 P 96,000

P 90,000 (50,000) P 40,000 200,000 P 240,000

P 50,000 (14,000) P 36,000 P

.15

P 50,000 6,000 P 56,000

6. P96,000 = Free assets P220,000 - priority claims P100,000 = P120,000 P120,000/P300,000 unsecured = payment of 40% on unsecured peso 40% x P240,000 A/P = P96,000 7. P474,000 = Land and building sold for P450,000 leaves P60,000 unsecured still owing. 40% x P60,000 = P24,000 8. P295,000 = P200,000 + P95,000 9. P42,950 - (P10,950 + P2,000 + P20,000 + P10,000) 10. P76,050 - Excess of salaries, P1,050 + notes pay in excess of security P25,000 + accounts pay P50,000 11. P163,800 Free assets: Other assets P104,000 Excess from assets pledged with secured 59,800 (P150,800 – P91,000) P163,800 12. P109,200 Total free assets P163,800 54,600 Less: Liabilities with priority P109,200 13. P364,000 Unsecured creditors: Excess of partially secured liabilities over Pledged assets (P169,000 – P65,000) P104,000 260,000 Unsecured creditors P364,000 14. P96,200 Payment of partially secured debt: Value of pledged assets P 65,000 31,200 30%* of remaining P104,000 P 96,200 *P109,200/P364,000 = 30%

15. P78,000 Cash Excess of pledged with secured liabilities (P117,000 – P104,000) 16. P52,000 Free assets after of liabilities with priority: Total free assets Less: Liabilities with priority 17. P260,000 Unsecured creditors: Excess of partially secured liabilities over pledged assets (P195,000 – P169,000) Accounts payable

P 65,000 13,000 P 78,000 P 78,000 26,000 P 52,000

P

26,000 234,000 P 260,000

18. P174,200 Payment on bond: Value of pledged assets 20%* of remaining P26,000 Free after priority: P52,000/P260,000 = 20% 19. P247,000 Free assets Excess from assets pledged with fully secured (P260,000 – P195,000) Amount available Unsecured liabilities with priority Net free assets / available for unsecured

P 169,000 5,200 P 174,200

P390,000 65,000 P455,000 ( 208,000) P247,000

20. P32,000 Cash Mortgage payable, paid in full

(

Note payable to bank, secured portion

(

Priority claims (P16,000 of administrative costs + P2,000 of customer deposits + P4,000 property tax) Available for unsecured nonpriority claims

(

22,000 ) 8,000

Unsecured, nonpriority claims: Unsecured portion of note payable to bank Accounts payable Total unsecured, nonpriority claims

10,000 30,000 40,000

P8,000 cash/P40,000 claims = P.20 on the dollar Amount paid to bank: P30,000 for secured portion + (P10,000 x .20) for unsecured portion =

32,000

21. P15,400 Mortgage note receivable Less: Portion secured by equipment Unsecured portion

(

Estimated recovery on secured portion Estimated recovery on unsecured portion (P28,000 x P.30) = Recovery on mortgage note receivable 22.

120,000 60,000 ) 60,000 30,000 ) 30,000

Mortgage note receivable Less: Portion secured by marketable securities Unsecured portion Estimated recovery on secured portion Estimated recovery on unsecured portion (20,000 x P.25) =

35,000 7,000 28,000

)

7,000 8,400 15,400

(

80,000 60,000 20,000 60,000 5,000

)

Recovery on mortgage note receivable 23. P30,000 Book value of assets Net realizable of assets Less stockholders' equity (P700,000 – P400,000) Deficiency

65,000

P700,000 370,000 P330,000 300,000 P 30,000

24. P.75 Dividend = P370,000 – P250,000 – P30,000 / P400,000 – P250,000 – P30,000 25. P8,500 = P7,000 + [(P9,000 – P7,000) x .75] 26. P410,000 Total estimated proceeds P910,000 Less asset proceeds claimed by secured creditors: Notes payable and interest (from proceeds of receivables and inventory) P150,000 Mortgage payable and interest (from proceeds of land and building) 320,000 470,000 Total available to unsecured claimants. P440,000 Less distributions to unsecured claims with priority: Wages payable P 10,000 Taxes payable 20,000 30,000 Amount available for unsecured creditors P410,000 27. 64.10% Unsecured portion of notes payable and interest (P500,000 + P30,000 – P150,000) Accounts payable Total claims of unsecured creditors

P380,000 260,000 P640,000

Dividend to unsecured creditors: P410,000 ÷ P640,000 = 64.1% 28. Unsecured portion of notes payable and Interest Dividend on unsecured amount Amount received on unsecured portion Proceeds from receivables and inventory Total Received Dividend to note holders: P393,580 ÷ P530,000 = 74.3%

P380,000 x 64.1% P243,580 150,000 P393,580

THEORIES 1. debtor 2. P5,000 3. inability to pay debts as they mature 4. a. administrative costs b. certain postfiling “gap” claims in involuntary filings c. wages, salaries, and commissions d. employee benefit plans e. deposits by individuals f. taxes 5. infrequent 6. two-thirds, more than one-half 7. fraudulent, preferential 8. realization and liquidation 9.

10. 11. 12. 13. 44.

45. 46. 47. 48.

False False False True False

a c c a b

14.

15. 16. 17. 18.

False True True True True

c 50. d 51. a 52. d 53. b 49.

19.

False False

20. 21. c 22. a 23. a d 55. c 56. d 57. b 58. a

54.

c 25. a 26. d 27. c 28. e 24.

59. a 60. c

b 30. b 31. b 32. a 33. c 29.

b 35. d 36. b 37. c 38. a 34.

39.

40. 41. 42. 43.

b c b a

c

Chapter 7

Problem I 1. Entries in 20x4: Cash Mortgage Notes Receivable Real Estate ………………………………… Gain on Sale of Real Estate Cash

Mortgage Notes Receivable

3,500 20,500 15,000 500

9,000

500

Entry in 20x5: Real Estate ………………………………………………………… 16,500 Loss on Repossession of Real Estate ……………………… 3,500 Mortgage Notes Receivable ……………………………… 20,000 2. Entries in 20x4 Cash ………………………………………………………………………… 3, 500 Mortgage Notes Receivable ………………………………… 20,500 Real Estate …………………………………………………………… 9,000 Deferred Gross Profit on Installment Sales ………… … 15,000 Cash ………………………………………………………………………… Mortgage Notes Receivable ……………………………… Receipt P500 cash in 20x4 applicable to principal of note Deferred Gross Profit on Installment Sales ……………… 2,500 Realized Gross Profit on Installment Sales………………

500 500

2,500

Gross Profit Percentages 15,000/24,000, or 62.5% 6.25% of P4,000 (collections in contract in 20x4) Or P2,500 Entry in 20x5 Real Estate…………………………………………………………… 16,500 Deferred Gross Profit on Installment Sales ……………… 12,500 Mortgage Notes Receivable …………………………………… 20,000 Gain in Repossession of Real Estate ………………………… 9,000 Problem II 1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment. 20x5 P750 is profit. P250 is treated as a return of investment. Following years: Each annual installment f P1,000 is profit. 2. 20x4: P4,000 is profit. 20x5: P1,000 is profit. 20x6: P750 is profit, and P250 is treated as return of investment. Following years: Each annual installment is P1,000 is treated as a return of investment. 3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales 20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.

Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit. P425 per year is treated as return of investment. Problem III 1. a. Installment Contracts Receivable 19X8………………… 250,000 Installment Sales ……………………………………………………

250,000

b. Cash ………………………………………………………………………… 120,000 Installment Contracts Receivable 19X8 …………………… 120,000 c. Cost of Installment Sales ………………………………………… 200,000 Merchandise Inventory …………………………………… 200,000 d. Merchandise Repossessions ………………………………… 14,500 Deferred Gross Profit on Installment Sales 19X8 ………… 4,000 Loss on Repossession …………………………………… 1,500 Installment Contracts Receivable, 19X8 …………….

20,000

Gross Profit Percentages: 50,000/250,000, or 20% Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000 Fair value of repossessed merchandise.. Less: Unrecovered cost: Unpaid balance…………………………P 20,000 Less: Deferred Gross Profit 20% x P20,000…………………… 4,000 Loss on repossession…………………….

P 14,500

16,000 P 1,500

e. Expenses ……………………………………………………………………… Cash ………………………………………………………………….

16,000

16,000

2. Adjustment to Recognize Gross Profit on Installments Sales: a. To set-up Cost of Installment Sales: No entry (since perpetual inventory method is used) b. To set-up Deferred Gross Profit on Installment Sales: Installment Sales ……………………………………………………… 250,000 Cost of Installment Sales …………………………………. 200,000 Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000 c. Adjustment to Recognize Gross Profit on Installment Sales: Deferred Gross Profit on Installment Sales – 20x4……… Realized Gross Profit on Installment Sales – 20x4 ………. Realized Gross Profit: 20% of P120,000 (collections), or P24,000

24,000

24,000

d. Closing of nominal accounts. Realized Gross Profit on Installment Sales – 20x4………………… Expenses ………………………………………………………. Loss on Repossessions ………………………………………. Income Summary ……………………………………………. To close the accounts for 20x4.

Problem IV 1.

January to December 31

(1) To record regular sales:

Accounts receivable Sales

(2) To record installment sale: Cash Installment accounts receivable Installment Sales

20x4 600,000

60,000 300,000

24,000

20x5

600,00

360,000

1,080,000

144,000 336,000

1,080,000

480,000

(3) To record cost of sales: Periodic Method: No entry Perpetual Method: Regular Sales: Cost of Sales Merchandise inventory Installment Sales: Cost of installment sales Merchandise inventory (4) To record collections: Regular Sales: Cash Accounts receivable Installment Sales: Cash Installment Accounts receivable – 20x2 Installment Accounts receivable – 20x3 Interest income

2.

(5) to record payment of operating expenses: Operating expenses Cash

480,000

252,000

144,000

480,000

252,000

144,000

108,000

90,000

864,000

312,000

360,000

360,000

72,000

72,000

36,000

60,000 72,000

90,000

102,000

(6) To recognize accrued interest receivable 1,440

312,000

204,000

Adjusting entries (end of the year): Interest receivable

864,000

2,880

102,000

16,000 1,500 6,500

Interest income

1,440

2,880

(7) To set-up Cost of Sales: Periodic Method: Cost of installment sales

480,000

Merchandise inventory

864,000 480,000

864,000

Perpetual Method: No entry (7) To set-up Cost of Installment Sales: Periodic Method: Cost of installment sales

252,000

Shipment s on installment sales

312,000 252,000

312,000

Perpetual Method: No entry (8) To set-up Deferred Gross Profit Installment sales

360,000

480,000

Cost of installment sales

252,000

Deferred gross profit – 20x4

108,000

312,000

Deferred gross profit – 20x5 Gross profit rate – 20x4: P 108,000 / P360,000 = 30%. Gross profit rate – 20x5: P168,000 / P480,000 = 35%.

168,000

(9) To record realized gross profit on installment sales: Deferred gross profit – 20x4

25,200

25,200

Deferred gross profit – 20x5

21,000

Realized gross profit

25,200

46,200

20x4: Realized gross profit on installment sales: Collections applying as to principal..……………………………P 72,000 Multiplied by: Gross profit rate……………………………………. 30% Realized gross profit…………………………………………………P 21,600 20x5: Realized gross profit on installment sales; 20x4

20x5

Collections – principal……………

P 72,000

P 60,000

Multiplies by: Gross profit %..........

____30%

____35%

Realized gross profit………………

P 21,600

P 21,000

P 42,600

Closing entries: (10) To close realized gross profit account: Realized gross profit

21,600

Income summary

42,600 21,600

42,600

(11) To close other nominal accounts Sales

600,000

1,080,000

Interest income

37,440

Cost of sales

74,880 480,000

864,000

Operating expenses

90,000

102,000

Income summary

67,440

188,880

(12) To close results of operations: Income summary

89,040

Retained earnings

Problem V 1.

Type of Sale Regular Sales: Cash sales Credit sales Total regular sales Installment Sales Total Sales

Amount

*P225,000/P1,800,000 x P1,170,000 = P146,250 **P450,000/P1,800,000 x P1,170,000 = P292,500

2.

Ratio to Total Sales

P 225,000 ___450,000 P 675,000 _ 1,125,000 P 1,800,000

675/1,800 1,125/1,800

231,480

Allocated Cost P *146,250 **292,500 P 438,750 __731,250 P 1,170,000

The allocation above was based on the assumptions that the markup for each type of sale is the same. Normally, the selling prices of the merchandise are not the same for each type of sales. Type of Sale Cash sales Credit sales Installment Sales Total Sales

*P450,000 / 120% = P375,000 **P1,125,000 / 125% = P900,000

3.

231,480 89,040

Type of Sale Cash sales Credit sales Installment Sales Total Sales

* Amount of sale x cost ratio.

Amount P 225,000 450,000 1,125,000 P 1,500,000

Amount 225,000 450,000 1,125,000 P 1,800,000 P

Amount based on Cash Sales (100%) P 225,000 375,000* 900,000** P 1,250,000

Ratio to Total Sales 225/1,500 375/1,500 900/1,500

Gross profit rate 30% 36% 40%

Cost ratio 70% 64% 60%

Allocated Cost P 175,500 292,500 __ 702,000 P 1,170,000

Allocated Cost* P 157,500 288,000 _ _675,000 P 1,170,000

Problem VI The entries are required under the periodic method:

Repossessed merchandise………………………………… Deferred gross profit – 20x4……………………………… Loss on repossession……………………………………………… Installment accounts receivable – 20x4…………………….

68,400 48,000 3,600

Repossessed merchandise……………………………… Cash, etc (or various credits)……………………

12,000

To record repossessed merchandise.

To record reconditioning costs

The loss on repossession is computed as follows: Estimated selling price after reconditioning costs Less: Reconditioning costs……………………………………… Costs to sell and dispose……………………………… Normal profit (20% x 108,000)………………………… Market value before reconditioning costs………………… Less: Unrecovered cost Installment accounts receivable – 20x4, unpaid balance…………………………………… Less: Deferred gross profit – 20x4 (P120,000 x 40%) Loss on repossession…………………………….

P 12,000 6,000 __21,600

P120,000 __48,000

120,000

12,000

P 108,000 __39,600 P 68,400

__72,000 P( 3,600)

Problem VII The entry to record the sale of the new vehicle under the periodic method: Trade-in Merchandise……………………………… Over-allowance on trade-in merchandise…………………. Cash…………………………………………………………… Installment accounts receivable – 20x4… Installment sales……………………………

840,000 360,000 2,400,000 3,360,000

To record installment sales with trade-in.

6,960,000

Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales, the entry would be as follows: Trade-in Merchandise……………………………… Cash……………………………………………………………… Installment accounts receivable – 20x4……… Installment sales (net of over-allowance)…

840,000 2,400,000 3,360,000

To record installment sales with trade-in.

The over-allowance is computed as follows:

Trade-in allowance……………………………… Less: Market value before reconditioning costs: Estimated resale price after reconditioning costs. Less: Reconditioning costs…………………………… Costs to sell (5% x P1,680,000)…………………… Normal profit (20% x P1,680,000)……… Over-allowance……………………………………………………

6,600,000

P1,200,000 P1,680,000 420,000 84,000 __336,000

__840,000 P 360,000

The gross profit rate on installment sales is computed as follows:

Installment sales……………………………………………………… Less: Over-allowance………………………………………………………… Adjusted Installment Sales…………………………………………………… Less: Cost of installment sales……………………………………………… Gross profit…………………………………………………………………… Gross profit rate (P2,680,000/P6,600,000)…………………………

P6,960,000 ___360,000 P6,600,000 __3,920,000 P2,680,000 40.60%

Further, the entry to record the reconditioning costs is as follows: Trade-in Merchandise……………………………… Cash, etc (or various credits)…………………

420,000

To record reconditioning costs.

420,000

Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is computed as follows: Trade-in merchandise (market value before reconditioning costs)……… Down payment…………………………………………………………………… Installment collection (March 31 – December 31: P80,000 x 10 months) Total collections…………………………………………………………… Multiplied by: Gross profit rate in 20x4………………………………… Realized gross profit on installment sales of new merchandise…………

P

840,000 2,000,000 ___800,000 P3,640,000 ___40.60% P1,477,840

Problem VIII 1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance: Oct. 31 Cash ……………………………………………………………………… 20,000 Mortgage Notes Receivable ………………………………… 55,000 Real Estate ……………………………………………………… 60,000 Deferred Gross Profit on Installment Sales …………… 15,000 Nov. 30 Cash ……………………………………………………………………… 1,150 Mortgage Notes Receivable ………………………………… 600 Interest Income ………………………………………………… 550 Interest Received: P55,00 at 12% for 1 month, or P550 Dec. 31 Cash ………………………………………………………………………… 1,144 Mortgage Notes Receivable ……………………………… 600 Interest Income …………………………………………………… 544 Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544 31 Deferred Gross Profit on Installment Sales ……………… 4,240 Realized Gross Profit on Installment Sales ………………… 4,240 Gross Profit Percentage: 15,000/75,000, or 20% Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240 2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the contract: Dec. 31 Cash ……………………………………………………………………… 20,000.00 Mortgage Notes Receivable ………………………………… 55,000.00 Real Estate ……………………………………………………… 60,000.00 Deferred Gross Profit on Installment Sales ………… 15,000.00

Nov. 30 Cash ……………………………………………………………………… Mortgage Notes Receivable …………………… Interest Income …………………………………………………

600 50.00 550.00

Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50, is reduction in principal) Dec. 31 Cash ………………………………………………………………………. Mortgage Notes Receivable ………………………………… Interest Received ………………………………………………

600.00

50.50 549.50

Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in principal. 31 Deferred Gross Profit on Installment Sales ………………… 4,020.10 Realized Gross Profit on Installment Sales ………………… 4,020.10 Gross Profit Percentage: 15,000/75,000, or 20% Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or P4,020.10 Problem IX 1. 6/30x4: Cash…………………………………………………………………………… 25,000 Notes Receivable …………………………………………………………… 125,000 Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300 Depreciation Expense (1/2[2% of P90,000]) …………………………… 900 Land …………………………………………………………………… 10,000 Building …………………………………………………………… 90,000 Deferred Gross Profit on Sale of Property …………………… 57,200 Deferred Gross Profit on Sale of Property ……………… 9,553 Realized Gross Profit on Sale of Property ………………… Amount realized: (P25,000/150,000) x 57,200

9,553

2. 6/30x5: Cash …………………………………………………………………………… 30,000 Notes Receivable …………………………………………………… 30,000 Deferred Gross Profit on Sale of Property ………………… 11,440 Realized Gross Profit on Sale of Property ………………………… Amount realized (P30,000/P150,000) x 57,200 6/30/x6 Cash ………………………………………………………………………… Notes Receivable …………………………………………………… Deferred Gross Profit on Sale of Property …………… … 19,067 Realized Gross Profit on Sale of Property ………………………… Amount Realized: (P50,000/P150,000) X 57,200

11,440 50,000

19,067

6/30/x7 Cash ……………………………………………………………………… 15,000 Notes Receivable …………………………………………………… Deferred Gross Profit on Sale of Property ………………… 5,720 Realized Gross Profit on Sale of Property ………………………… Amount Realized: (P15,000/P150,000) X 57,200

50,000

15,000

5,720

Problem X Installment Contracts Receivable …………………………… 200,000 Installment Sales ……………………………………………………… Cost of Installment Sales …………………………………………… 120,000 Merchandise Inventory ………………………………………………

200,000 120,000

Cost of Sales: 60% of P200,000 Installment Sales ………………………………………………………… 200,000 Cost of Installment Sales …………………………………………… 120,000 Deferred Gross Profit on Installment Sales ……………………… 60,000 Cash ………………………………………………………………………………. 124,000 Installment on Contracts Receivable – 20x4…………… 30,000 Installment on Contracts Receivable – 20x5………………… 34,000 Installment on Contracts Receivable – 20x6………………… 60,000 Deferred Gross Profit on Installment Sales -20x4 …………… 13,800 Deferred Gross Profit on Installment Sales-20x5 ………… 14,280 Deferred Gross Profit on Installment Sales -20x6 ………… 24,000 Realized Gross Profit on Installment Sales ……………………… …… Realized Gross Profit 20x4: 46% of P30,000 or P13,800 20x5: 42% of P34,000 or P14,280 20x6: 40% of P60,000 or P24,000

52,080

Problem XI 1. Calculation of gross profit percentage on installment sales 20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment sales 20x6 20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts receivable 20x5 20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts receivable 20x4 2.

WW EQUIPMENT, Inc. Balance Sheet December 31, 20x6 Assets Cash ………………………………………………………………………………..................... Installment Accounts Receivable 20x6 …………………………... P 55,000 20x5 ………………………….. 12,000 20x4 ………………………….. 3,000 Accounts receivable …………………………………………………………………………. Inventory ……………………………………………………………… ……………………….. Other Assets …………………………………………………………………… ………………... Total Assets ………………………………………………………………… …………………… P Liabilities Accounts payable …………………… ………………………………………… Deferred Gross Profit 20x6 …… ……………………… P 15,125 20x5 ………… ………………… 3,600 20x4 …………… ……………… 960 Total Liabilities

70,000 17,000 60,000 40,000 214,500

P 40,000 19,685

Stockholders’ Equity Capital Stock …………………………………………………………………….. P 100,000 Retained Earnings ……………………………………………….. P 68,400 Balance, Jan. 1, 20x6 ………………………………………. 13,585 Balance, Dec. 31, 20x6 ……………………………………………………. 54,185 Total Stockholder’s Equity ……………………………………………………… Total Liabilities and Stockholder’s Equity ……………………………………. WW EQUIPMENT, Inc. Income Statement For Year Ended December 31, 20x6

Sales ………………………………………………………............ Cost of goods sold: Merchandise Inventory, Jan. 1 ………………P 52,000 Purchases ………………………….................. 350,000 Merchandise Available for sale ................. 402,000 Less: Merchandise Inv. Dec. 31 ………… 60,000 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 19X34 ………………………… Realized Gross Profit on current year’s sales ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. Total Realized Gross Profit ……………………………………. Operating Expenses …………………………………………... Net Loss …………………………………………………………..

P27,500

Installment Sales P320,000

Regular Sales P125,000

232,000 P88,000 15,125 P78,875

110,000 P15,000 P15,000

P

59,685

P154,815 P 214,500

Total P445,000

342,000 P103,000 15,125 P87,875 50,040 P137,915 151,500 P 13,585

27.5% 30% 32%

WW EQUIPMENT, Inc. Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement For Year Ended December 31, 20x6

Deferred Gross profit on installment sales, 20x6 Installment contracts receivable, P320,000 less collections P265,000 Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125 Realized Gross Profit:

20x6 Collections on Installment Contracts Receivable ………... P265,000 Installment sales gross profit percentage ………………….. 27.5% Realized Gross Profit …………………………………………….. P 72,875

20x5 P138,000 30% P 41,400

20x4 P27,000 32% P 8,640

Installment Sales …………………………………………………… 320,000 Cost of Installment Sales …………………………………………. 232,000 Deferred Gross profit -20x6……………………………………………… 88,000 Deferred Gross Profit, 20x6 ……………………………............... 72,875 Deferred Gross Profit, 20x5 ……………………………............... 41,400 Deferred Gross Profit, 20x4 ……………………………............... 8,640 Realized Gross Profit on Installment sales…………… 122,915 Income Summary ………………………………………………… Shipment on Installment of Sales ……………………………… Merchandise Inventory, Jan. 1, 20x6 ………………. Purchases ………………………………………………

170,000 232,000

Merchandise Inventory, Dec. 31, 20x6 …………………….. Income Summary ……………………………………

60,000

Sales ………………………………………………………………. Income Summary ……………………………………. Realized Gross Profit on Installment Sales………..………... Income Summary …………………………………….

125,000

Income Summary ……………………………………………… Operating Expenses ………………………………...

151,500

Retained Earnings …………………………………………….. Income Summary …………………………………...

13,585

122,915

52,000 350,000 60,000 125,000 122,915 151,500 13,585

Problem XII 1. Calculation of gross profit percentage on installment sales 20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment sales 20x6 …………………………………………………………………………………… 38% 20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment accounts receivable 20x5 ………………………………………………………………. 40% 20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment accounts receivable 20x4 ………………………………………………………………. 45%

2.

Deferred Gross Profit, 20x6……………………………… Deferred Gross profit, 20x5……………………………… Deferred Gross Profit, 20x4……………………………… Loss on Repossessions………………………….. Cancellation of deferred gross profit, balances upon repossessions: 20x6: 38% of P5,000, or P1,900 20x5: 40% of P10,000, or P4,000 20x4: 45% of P8,000, or P3,600

1,900 4,000 3,600

9,500

GG SALES CORPORATION Income Statement For Year Ended December 31, 20x6

Sales ………………………………………………………............ Cost of goods sold: Merchandise Inventory, Jan. 1 …………… P 30,000 Purchases ………………………….................. 445,000 Repossessed Merchandise ……………….. 10,000 Merchandise Available for sale ................. 495,000 Less: Merchandise Inv. Dec. 31 ………… 35,000 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 20x6 sales (see schedule) Realized Gross Profit on current year’s sales ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ……………….

Installment Sales P500,000

Regular Sales P192,000

310,000 P190,000 32,300 P157,700

150,000 P42,000

Total P692,000

460,000 P103,000 32,300 P199,700

P42,000

100,650 P300,350 3,500 P296,850 300,000 P 3,150

Deduct loss on repossession …………………………………. Total Realized Gross Profit ……………………………………. Operating Expenses …………………………………………… Net Loss ………………………………………………………….. Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement For Year Ended December 31, 20x6

Deferred gross profit on Installment sales – before defaults, 19X8: Installment contracts receivable, P500,00, less collections, P415,000, or P85,000; P85,000 x 38% ………………………………………………………. Realized Gross Profit:

P 32,300

20x4 20x6 20x5 Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000 38% 40% 45% Installment sales gross profit percentage ……….. Realized gross profit …………………………………..P157,700 P 84,000 P 16,650

GG SALES CORPORATION Balance Sheet December 31, 20x6 Assets Cash …………………………………………………………………………………... P 25,000 Installment Accounts Receivable 20x6 …………………P 80,000 20x5 ………………… 20,000 20x4 ………………… 5,000 105,000 Accounts receivable ………………………………………………………………….. 40,000 Inventory …………………………………………………………………………………. 35,000 Other Assets ……………………………………………………………………………… 52,000 Total Assets ……………………………………………………………………………….P 257,000 Liabilities Accounts payable ……………………………………………………. Deferred Gross Profit 20x6 ………………………………. P 30,400 20x5 ………………………………. 8,000 20x4 ………………………………. 2,250 Total Liabilities Stockholders’ Equity Capital Stock …………………………………………………………. Retained Earnings ………………………………………. P 44,500 Balance, Jan. 1, 20x6 ……………………………… 3,150 Balance, Dec. 31, 20x6 …………………………… Total Stockholder’s Equity …………………………………………. Total Liabilities and Stockholder’s Equity ………………………..

P 75,000 40,650

P

115,650

P100,000 41,350

4. Installment Sales ……………………………………………………………….. Cost of Installment Sales ……………………………………………….. Deferred Gross Profit, 20x6 ……………………………………………..

500,000

Deferred Gross Profit, 20x6 …………………………………………………… Deferred Gross Profit, 20x5 …………………………………………………… Deferred Gross Profit, 20x4 …………………………………………………… Realized Gross Profit on Installment Sales… …………………………

157,500 84,000 16,650

Income Summary ……………………………………………………………… Shipment on Installment Sales ……………………………………………… Merchandise Inv, January 1, 20x6 ……………………………………. Purchases …………………………………………………………………. Repossessed Merchandise ……………………………………………..

185,000 310,000

Merchandise Inv, December 31, 20x6……..………………………………. Income Summary ………………………………………………………..

35,000

Sales …………………………………………………………………………….... Income Summary …………………………………………………………

192,000

Realized Gross Profit on Installment Sales………………………………….. Income Summary ………………………………………………………..

258,350

141,350 P 257,000 310,000 190,000

258,350

30,000 455,000 10,000 35,000 192,000 258,350

Income Summary ……………………………………………………………… Loss on Repossession …………………………………………………….

3,500

Income Summary ……………………………………………………………… Operating Expenses ……………………………………………………..

300,000

Retained Earnings ……………………………………………………………… Income Summary ………………………………………………………….

3,150

3,500 300,000 3,150

Problem XIII 1. Deferred gross profit – 20x4……….……………………………………. 8,407.00 Deferred gross profit – 20x5……….……………………………………. 93,438.80 Deferred gross profit – 20x6……….……………………………………. 71,006.70 Realized Gross Profit on Installment Sales (20x4 – 20x6)….. 172,852.50 Computation of GP rates: 20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35% 20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34% 20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37% Calculation of collections in 20x6: 20x4: Beginning balance P 24,020 20x5: P344,460 (beginning balance) – P67,440 (ending balance) – P2,200 (write-offs on default) 274,820 20x6: P602,000 (sales) – P410,090 (ending balance) 191,910 Calculation of realized gross profit: 20x4: 35% x P24,020 20x5: 34% x P274,820 20x6; 37% x P191,910 Total

P

8,407.00 93,438.80 71,006.70 P172,852.50

2. Deferred gross profit 20x5……………………………………………………… Inventory of Repossessed Merchandise……………………………….

748.00

Loss on repossession…………………………………………………………….. Inventory of repossessed merchandise………………………………..

381.00

To reduce by 20x5 deferred gross profit related to defaulted contract and requiring cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date); inventory now reported at P2,200 (balance of installment contract), less P748 or P1,452.

To reduce inventory to “market” as follows: to realize a gross profit of 37% on a resale estimated at P1,700, the repossessed merchandise should be reported at a value of 63% of P1,700, or P1,071; the inventory then requires a further write-down of P381 (P1,452 – P1,071)

748.00

381.00

Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248 (P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation. Recording the goods at resale value reduced by the company’s usual profit margin on sales is

recommended, for such practice will charge the next period with no more than the utility of the goods carried forward. Problem XIV – HH Instruments 1. Installment Contracts Receivable ……………………………………. Merchandise Inventory (Piano) ……………………………… Deferred Gross Profit on Installment Sales …………………

1,600.00

Cash ……………………………………………………….......................... Installment Contracts Receivable ……………………………

160.00

Cash …………………………………………………………........................ Interest Income …………………………………………………… Installment Contracts Receivable …………………………….

160.00

Cash ……………………………………………………………...................... Interest Income ……………………………………………………. Installment Contracts Receivable ………………………………

160.00

3.

Deferred Gross Profit on Installment of Sales ………………………….. Realized Gross Profit on Installment of Sales ………………… Gross Profit Percentage: 37.5% (P600/P1,600) Realized Gross Profit for 20x4: 37.5% of 601.19 (sum of payments on installment contract)

225.45

4.

Merchandise Inventory (piano) …………………………………………... 560.00 Deferred Gross Profit on Installment of Sales ……………………........... 374.55 Loss on Repossessions ………………………………………………………. 64.36 Installment Contracts Receivable ……………………………… Deferred Gross profit cancelled upon repossession: 37.5% of P998.81 (balance in installment contracts receivable account) or P 374.55

2.

Problem XV – Big Bear 20x4: Installment receivables Inventory Deferred gross profit Cash 20x5: Cash

Installment receivables

Installment receivables

Deferred gross profit Realized gross profit 20x6: Cash

Installment receivables

250,000

80,000

120,000 50,000

50,000

150,000 100,000 80,000

120,000 50,000

50,000

1,000.00 600.00 160.00 14.40 145.60 11.47 148.53 225.45

998.81

Installment receivables Inventory Deferred gross profit

300,000

Cash

135,000

Installment receivables

Deferred gross profit Realized gross profit

40,500

210,000 90,000 135,000 40,500

Gross profit deferred at sale = 30% x P300,000 = P90,000. Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500 (Or cash collected x GP% =P135,000 x 30% = P40,500) Problem XVI – Tappan Industrial (1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale. Determination of selling price: PV n = R(PVAF n/i ) Table IV PV n = P187,500 x 4.3553 n = 6, i = 10% PV n = P816,619 (rounded) Gross profit on sale: Sales Cost of sales Gross profit Interest revenue--4 months: P816,619 x 10% x 4/12 = Total income for 20x5 = P179,119 + P27,221 = (2) No reasonable assurance – assume the use of installment sales method Installment sale: Gross profit (P179,119/P816,619) = Gross profit earned in 20x5 (P0 x 22%) Interest revenue Total income for 20x5 Multiple Choice Problems 1. b – 20x4: P500,000 x 30% = P 150,000 20x5: P600,000 x 40% = 240,000 2. d

P816,619 637,500 P179,119 _ 27,221 P206,340 22% rounded P 0 27,221 P 27,221

P390,000

Realized Gross Profit on Installment Sales in 20x6: 20x4 sales: P10,000 x 22%P 20x5 sales: P50,000 x 25% 20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) Realized Gross Profit on Sales in 20x5 Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) Realized Gross Profit in 20x5 for 20x4 sales Divided by: Collections in 20x5 for 20x4 sales Gross Profit % for 20x4 sales

2,200 12,500 10,575 P 25,275 P 10,500 5,000 P 5,500 P 25,000 22%

3. a

Installment Sales Method: 20x3 Sales: P240,000 x 25/125P 20x4 Sales: P180,000 x 28/128 Realized Gross Profit on Installment Sales Cost Recovery Method: 20x3 Cost: P480,000 / 1.25 Less: Collections in 20x3 Collections in 20x4 Unrecovered Cost, 12/31/20x4

48,000 39,375 P 87,375 P384,000 140,000 240,000 P 4,000

Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all costs have been recovered, the recognized revenue after the cost recovery represents income (interest and realized gross profit). This method is used only when the circumstances surrounding a sale are so uncertain that earlier recognition is impossible. 4. a

P0.

5. c 6. e, 20x6 – 0; 20x7 - 0

Unrecovered costs,1/1/20x4 Less: Collections 1/1//20x4 Add: Sales on account Total Less: 1/1/20x5 Collections in 20x4 Unrecovered costs,1/1/20x5 1/1//20x5 Add: Sales on account Total Less: 1/1/20x6 Collections in 20x5 Unrecovered costs,1/1/20x6 1/1//20x6 Add: Sales on account Total Less: 1/1/20x7 Collections in 20x6 Unrecovered costs,1/1/20x7 1/1//20x7 Add: Sales on account Total Less: 1/1/20x8 Collections in 20x7 Unrecovered costs,1/1/20x8

7. b

20x4: P150,000 – (P568,620 x 10%) = P93,138. 20x5: (P568,620 – P93,138) x 10% = P47,548.

110,000 0 15,000 15,000 10,500 10,500 30,000 40,500 25,500 25,500 60,000 85,500 40,500 40,500 24,000 64,500 70,000

__4,500 105,500

15,000 90,500

45,000 45,500

____-045,500

8. a – refer to No. 3 for discussion. Cost, January 1, 20x4 Less: Collections including interest – 20x4 Unrecovered Cost, December 31, 20x4 9. c

P P

60,000 32,170 27,830

(P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3% (P3,600,000 × .20) + [(3,600,000 × .80) × 4/12)] = P1,680,000 P1,680,000 × 33 1/3% = P560,000.

10. b [(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000. 11. b – refer to No. 3 discussion. Cost, January 1, 20x4…………………………………………………………….P 500,000 Less: Collections including interest – 20x4……………………….P241,269 482,538 Collections including interest – 20x5……………………… 241,269 Unrecovered Cost, December 31, 20x5……………………………………….P 17,462 12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000. 13. c

P300,000 + P50,000 = P350,000 P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate) (P300,000 – P100,000) x 30% = P60,000.

14. c

P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate) P480,000 – (P288,000 ×.4) = P364,800.

15. d – [P225,000 + (P120,000/40%)] 16. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000. 17. d

Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP% 20x4 Sales: P120,000/ 30% P 400,000 1,100,000 20x5 Sales: P440,000/ 40% P 1,500,000

18. c Sale: Installment receivables Inventory Deferred gross profit Payment: Cash Installment receivables Deferred gross profit Realized gross profit Balance Sheet: Installment receivables (4,500,000 – 500,000) Deferred gross profit (900,000 – 100,000) Installment receivables (net)

4,500,000 500,000 100,000

3,600,000 900,000 500,000 100,000 P 4,000,000 800,000 P 3,200,000

19. b 12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000 Installment receivables 2,000,000 Deferred gross profit [P2,000,000 x (900/4,500)] 400,000 Realized gross profit 400,000 Balance sheet: Deferred gross profit: P800,000 400,000 = P400,000 Realized gross profit of P400,000 would be reported in the income statement. 20. No requirement 21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000 P450,000)/P900,000 = 50% 22. a Gross profit % = (P900,000 20x4: 50% x P300,000 = P150,000 23. c 20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50% 50% x P300,000 received in 2010 = P150,000 20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40% 40% x P400,000 received in 2010 = P160,000 Total: P150,000 + P160,000 = P310,000 24. c 20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = Deferred gross profit = P450,000 – P150,000 (x4 collections) - P150,000 (x5 collections) = Net installment receivable for 20x4 sales = 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= Deferred gross profit = P600,000 – P200,000 (x5 collections) = Net installment receivable for 20x5 = Total = 25. a - Costs not yet recovered. 26. c Cost, 20x4 20x4 cost recovery Remaining cost, 12/31/x4 20x5 collection Gross profit – 20x5

P 30,000 (20,000) P 10,000 15,000 P 5,000

27. d Cost 20x4 cost recovery 20x5 cost recovery Remaining cost

P 30,000 ( 20,000) ( 10,000) 0

The entire P20,000 payment received in 20x6 is recognized as gross profit.

P 300,000 150,000 P 150,000 P1,000,000 400,000 P 600,000 P 750,000

28. d

Sale:

Installment receivables Inventory Deferred gross profit

Payment: Cash Installment receivables

55,000

20,000

Balance Sheet: Installment receivables P55,000 – 20,000 Deferred gross profit Installment receivables (net) 29. a

Installment receivables Inventory Deferred gross profit

55,000

2008:

Cash

20,000

Cash

2009:

Installment receivables Deferred gross profit Realized gross profit

20,000 P 35,000 ( 25,000) P 10,000

Sale:

Installment receivables

30,000 25,000

15,000 5,000

Balance Sheet: Installment receivables Deferred gross profit Installment receivables (net)

30,000 25,000 20,000 15,000 5,000 P 20,000 ( 20,000) P 0

30. c Note: Since the collectibility of the note is reasonably assured, the accrual basis should be applied. Therefore, full gross profit is recognized in the year of sale. Gross profit on sale: Sales (P187,500 x 4.3553) P816,619 Cost of sales 637,500 Gross profit (realized) P179,119 31. c Total Income for 20x4: Gross profit (realized) – No. 51 Interest revenue—4 months: P816,619 x 10% x 4/12.. Total income for 20x4 32. b Total Income for 20x5: Gross profit (realized) – already recognized in 20x4 Interest revenue – 8 months in Year 1 (P81,662* x 8/12) 4 months in Year 2 (P71,078* x 4/12) Total Income for 20x5 *Schedule of Discount Amortization/Interest Income computation:

P179,119 _ 27,221 P206,340

P 54,441 23,693

P

0

78,134 P 78,134

Year 1 2

(1) Face Amount of Note1 P1,125,000 937,500

(2) Unamortized Discount P308,3813 226,7194

(3) Net Amount (1) – (2) P 816,6192 710,781

(4) Discount Amortization 10% × (3) 81,6625 71,078

1 P187,500

x 6 years = P1,125,000; every year P187,500 should be deducted on the previous balance. The present value of sales/receivables: P187,500 x 4.3553 = P816,619 3 P1,125,000 – P816,619 4 (2) – (4) 5 Discount amortization give rise to recognition of interest revenue/income. 2

33. a Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method should be applied. Also, if the there is high degree of uncertainty as to collectibility, the cost recovery method may be used. Installment sale: Gross profit (P179,119/P816,619) 22% (rounded) Gross profit earned in 20x4 (P0* x 22%) * no collections in 20x4. 34. a Total Income for 20x4: Gross profit earned in 20x4 (P0* x 22%) Interest revenue (refer to No. 52 Total income for 20x4. 35. d Collections in 20x5 (August 31, 20x5) Less: Interest revenue/income from September 1, 20x4 to August 31, 20x5 (refer to schedule of amortization in No. 53) Collection as to principal x: Gross Profit % (refer to No. 54) Gross profit realized in 20x5 Add: Interest revenue/income for 20x5 (refer to No. 53) Total Income for 20x5 36. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25% 37. a (P800,000 x .25) – P90,000 = P110,000, 38. d

P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.

39. a

(P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.

40. d

(P1,200,000 × .30) – P120,000 = P240,000.

41. a

P1,050,000 × .30 = P315,000 P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000.

42. b

P24,000 – P7,200 = P16,800

P

0

P

0 27,221 P 27,221

P 187,500 81,662 P 105,838 22% P 23,284 78,134 P 101,418

P16,800 – P13,500 = P3,300 loss. 43. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400. 44. d P8,400 – P5,880 = P2,520 (P3,000 – P300) – P2,520 = P180 gain. 45. d 20x4: P24,000 – P0 = P24,000 collections x 39%P 20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% Realized gross profit on installment sales in 20x6 46. b Market Values Less: Unrecovered Cost: IAR, unpaid balances x: Cost Ratio Gain (loss) 47. a

48. c

20x5 Sales P 4,500 P10,000 50%

5,800 P (1,300)

9,360 96,600 62,000 P167,960

P 5,000 60%

P

(1) Gain or Loss on repossession: Estimated selling price Less: Normal profit (37% x P1,700) Market value of repossessed merchandise Less: Unrecovered Cost: Unpaid balance – 20x3 Less: DGP – x3 (P2,200 x34%) Loss on repossession

3,000 500

P( 800)

P 1,700 629 P 1,071 P 2,200 748

(2) Realized gross profit on installment sales: 20x2 Sales: (P24,020 – P 0) x 35% 20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 20x4 Sales: (P602,000 – P410,090) x 37% Realized gross profit on installment sales

1,452 P( 381)

P

8,407.0 93,438.8 71,006.7 P 172,852.5

Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %) 20x2 Sales: P 0 20x3 Sales: (P67,440 x 34%. 20x4 Sales: (P410,090 x 37%)

49. d* Resale Value Less: Normal profit for 20x6 - year of repossession [(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 Market Value of Repossessed Merchandise Less: Unrecovered Costs – 20x5 Defaulted balance* (P27,000 – P16,000) Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x P11,000 Loss on repossession

Net

20x6 Sales P 3,500

22,929.6 151,733.3

P174,662.9 P 8,500 3,145 P 5,355

P 11,000 ___3,740

__7,260 P( 1,905)

Entry made: Inventory of RM* IAR-20x5

11,000

Correct Entry (Should be): Inventory of RM (at MV) DGP-20x5 Loss on repossession IAR-20x5

5,355 3,740 1,905

Correcting Entry: DGP-20x5 Loss on repossession Inventory of RM

3,740 1,905

50. c Installment Sales Less: Over-allowance: Trade-in allowance Less: MV of Trade-in Merchandise: Estimated Resale Price Less: Normal profit (25% x P1,400,000) Reconditioning costs Adjusted Installment Sales Less: Cost of I/S Gross Profit Gross profit rate: P500,000/ P3,000,000 x: Collections –Trade-in merchandise (at MV) RGP on I/S in 20x4 51. c

11,000

11,000

5,645** P 3,600,000

P1,500,000 P 1,400,000 350,000 150,000

Trade-in allowance Less: MV of trade-in allowance: Estimated resale price after reconditioning costs Less: Reconditioning costs Normal profit (15% x P36,000) Over-allowance Installment sales Less: Over-allowance Adjusted Installment Sales Less: Cost of Installment Sales Gross profit Gross profit rate: P21,600/P108,000

900,000

600,000 P 3,000,000 2,500,000 P 500,000 16 2/3% P 900,000 P 150,000

P43,200 P36,000 1,800 5,400 28,800 P 14,400 P122,400 14,400 P108,000 86,400 P 21,600 20%

Realized gross profit: Down payment Trade-in (at market value) Installment collections: (P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. Total collections in 2008 x: Gross profit rate Realized gross profit

P 7,200 28,800 21,600 P 57,600 20% P 11,520

52. d (Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is recognized in the year of sale, because collection of the receivable is reasonably assured.) Finley Company Computation of Income Before Income Taxes On Installment Sale Contract For the Year Ended December 31, 20x3

Sales Cost of Sales Gross Profit Interest Revenue (Schedule I) Income before Income Taxes Schedule I

Computation of Interest Revenue on Installment Sale Contract

Cash selling price (sales) Payment made on January 1, 20x3 Balance outstanding at 12/31/x3 Interest rate Interest Revenue

P4,584,000 3,825,000 759,000 328,320 P1,087,320

P4,584,000 936,000 3,648,000 9% P 328,320

Quiz - VII 1. P920,000 20x4: P1,200,000 x 30% = P 360,000 20x5: P1,400,000 x 40% = 560,000

P920,000

2. P190,000 (P300,000 ÷ P750,000) x P250,000 = P100,000 [(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000 3. P1,600– assume the use of installment sales method. It should be noted that if the collectability is highly uncertain or extremely uncertain, the use of cost recovery method is preferable. 4. Zero/Nil When the cost recovery method is used, gross profit is recognized only after all costs have been recovered. 20x5 P45,000 x 63% = P28,350 Cost of sale P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5. Costs still to be recovered. 5. P19,250 20x6 Relating to 20x5 sales: P19,000 - P4,350 = P14,650 Gross profit recognized Relating to 20x6 sales: P60,000 x 59% = P35,400 Cost of sale P40,000 - P35,400 = 4,600 Gross profit recognized P19,250 Recognized in 20x6

6. P21,000 20x7 Relating to 20x5 sales: Since all costs have been recovered, all cash collected is recognized as gross profit ...... Relating to 20x6 sales: Since all costs have been recovered, all cash collected is recognized as gross profit ...... Relating to 20x7 sales: P85,000 x 60% = P51,000 P53,000 - P51,000 = ..........

P 2,000

17,000 2,000

Cost of sale Gross profit recognized Recognized in 20x7

P21,000 7. P320,000 [(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000 8. 9.

P390,000 P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate) P720,000 – (P825,000 x 40%) = P390,000. P 128,000 Installment Accounts Receivable, end of 20x4 x: Gross profit rate (66 2/3 / 166 2/3) Deferred Gross Profit, end of 20x4

10. P25,168, determined as follows: Gross profit percentages: 20x3: P136,000/P160,000 = 85%; 100% x 85% = 15% 20x4: P158,240/P184,000 = 86%; 100% x 86% = 14% To deferred gross profit: 20x3: P160,000 x P136,000 = 20x4: P184,000 x P158,240 = Gross profit realized: 0.15 x P40,000 = 0.15 x P89,600 = 0.14 x P36,800 = Balance of Gross Profit Deferred: P49,760 - P24,592 = P25,168

P24,000 25,760 P49,760 P 6,000 13,440 5,152 P24,592

11. P 0 – all profit recognized in 20x5 12. P240 – (P1,200/P2,000) x P400 13. P100 - (100% of costs were fully recovered prior to 20x7 14. P10 million, the amount of sale 15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450

P 320,000 _____40% P 128,000

16. P50 gain Repossessed merchandise……………………………………… 500 Deferred gross profit……………………………………………… 300 Installment Accounts receivable…………………….. 750 Gain on repossession…………………………………… 50 17. 0

Unrecovered costs,1/1/20x4 Less: Collections Unrecovered costs,1/1/20x5 Less: Collections Profit – 20x5 Profit – 20x5

18. P10 – refer to No. 17 19. P30 –refer to No. 17 20. Zero

Unrecovered costs – 20x4 Less: Collections – 20x4 Unrecovered costs, 12/31/20x4 Additional costs – 20x5 Total costs Less: Collections – 20x5 Unrecovered costs, 12/31/20x5 Additional costs – 20x6 Total costs Less: Collections – 20x6 Unrecovered costs, 12/31/20x6 Additional costs – 20x7 Total costs Less: Collections – 20x7 Profit – 20x7

120,000 ______0 120,000 _20,000 140,000 80,000 60,000 20,000 80,000 40,000 40,000 10,000 50,000 100,000 50,000

Unrecovered costs – Cost of installment sales for 20x5 installment sales Less: Collections in 20x5 for 20x5 installment sales Unrecovered costs, 12/31/20x5 Less: Collections in 20x6 for 20x5 installment sales (balancing figure) Realized GP on I/S in 20x6 for 20x5 sales

56,050 _22,800 33,250 _43,700 *10,450

21. P50,000 profit – refer to No. 20 22. P105,000 = P68,250 / (100% - 35%) 23. P31,000 = P50,000 x (100% - 38%) 24. P43,700

*

100 70 30 40 10 30

Realized GP on I/S in 20x6 Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is already recovered in 20x5 equivalent to collection Realized GP on I/S in 20x6 for 20x5 installment sales

__5,600 *10,450

Unrecovered costs – Cost of installment sales for 20x4 (No. 23) Less: Collections in 20x4 for 20x4 installment sales Unrecovered costs, 12/31/20x4

31,000 _22,800 8,200

25. Zero – costs is not yet fully recovered, the profit should be recognized

26. P41,000

Unrecovered costs – Cost of installment sales for 20x4 installment sales Less: Collections in 20x4 for 20x4 installment sales Unrecovered costs, 12/31/20x4 Less: Collections in 20x5 for 20x4 installment sales

16,050

31,000 _25,600 5,400 46,400

Realized GP on I/S in 20x5 for 20x4 installment sales Realized GP on I/S in 20x5 for 20x5 installment sales: Unrecovered costs – Cost of installment sales for 20x5 installment Sales Less: Collections in 20x5 for 20x5 installment sales Unrecovered costs, 12/31/20x4 Realized GP on I/S in 20x5

41,000 56,050 22,800 33,250

____-041,000

27. P 45,000 Installment receivable = P200,000 Deferred gross profit = P80,000 (P200,000 x 40%) Fair value = P75,000 Repossessed inventory P 75,000 Deferred gross profit P 80,000 Loss on repossession (plug) P 45,000 Installment receivable 28. Zero P450,000 cost

P 200,000

P300,000 collections = P150,000 unrecovered costs

29. P300,000 20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of gross profit recognized in 20x5, leaving P300,000 recognized in 20x6. 20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of gross profit recognized in 20x6. Total: P300,000 + P0 = P300,000 30. d 20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = Deferred gross profit = P450,000 – P0 (all x4 collections to cost recovery - P150,000 (P150,000 of x5 collections to cost recovery) = Net installment receivable for 20x4 sales = 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= Deferred gross profit = P600,000 – P0 (all x5 collections to cost recovery) = Net installment receivable for 20x5 = Total = 31. 24%. Determined from the repossession entry: Deferred gross profit Installment accounts receivable

P2,400 ———— = 24% P10,000

P 300,000

P

300,000 0

P1,000,000 P 600,000 P 400,000 P 400,000

32. 35% Installment sales Cost of sales Gross profit

P120,000 78,000 P 42,000

Gross profit

P42,000 ————- = 35% gross profit rate P120,000

Installment sales 33.

a. 20x4 Deferred gross profit balance Gross profit rate Beginning accounts receivable Beginning accounts receivable Ending accounts receivable Cash collected

P 12,000 ÷ 25% P 48,000 P 48,000 (20,000) P 28,000

b. 20x5 Deferred gross profit balance Gross profit rate Beginning accounts receivable* Beginning accounts receivable* Ending accounts receivable* Cash collected

P 26,400 ÷ 24% P110,000 P110,000 (50,000) P 60,000

c. 20x6 Installment sales—20x6 Accounts receivable—20x6 Cash collected

P120,000 (90,000) P 30,000

34. P31,900 Total realized gross profit in 20x6 From 20x4 P28,000 × 25% = 20x5 P60,000 × 24% = 20x6 P30,000 × 35% =

P 7,000 14,400 10,500 P31,900 *Excluding accounts receivable for repossessed merchandise.

35. 20x4 (2010), P33,750; 20x5 (2011), P95,250 Gross profit realized in 20x4 (2010): [(P300,000  P165,000)/P300,000] x P75,000 = Installment sales = Gross profit realized in 20x5 (2011): [(P300,000  P165,000)/P300,000] x P105,000 = From 20x4 sales = From 20x5 sales =

[(P450,000  P270,000)/P450,000] x P120,000 =

P33,750 P47,250 48,000 P95,250

36. 20x4 (2010), P148,750; 20x5 (2011), P275,250

Sales Cost of sales Gross profit Gross profit realized on installment sales Total gross profit 37. 20x4 (2010), P148,750; 20x5 (2011), P275,250 . Installment accounts receivable Less: Deferred gross profit Net of deferred gross profit Theories 1. False True 2. False 3. True 4. True 5. 30.

31. 32. 33. 34. 60.

61. 62. 63. 64.

c b b b c

C B b c

d

6.

7. 8. 9. 10.

True False True False True

11.

12. 13. 14. 15.

35.

b

40.

36. 37. 38. 39.

d

41. 42. 43. 44.

65.

b b d

66. 67. 68. 69.

d e c

d

c

True False False True True a e b b

d

16.

True True False False True

45.

b c c

17. 18. 19. 20. 46. 47. 48. 49.

c

d

20x4 (2010) P450,000 335,000 P115,000 33,750 P148,750

20x5 (2011 P450,000 270,000 P180,000 95,250 P275,250

20x4 (2010) P225,000 101,250 P123,750

20x5 (2011 P450,000 186,000 P264,000

21.

True True True True True

26. 27. 28. 29.

True True False True

50.

d c b

55. 56. 57. 58. 59.

d b d

22. 23. 24. 25. 51. 52. 53. 54.

a

b

c

c

Chapter 8 Problem I 1. Input Measure - Percentage of Completion Method (Cost to Cost Method) 2008: Contract price P 1,800,000 Actual costs to date P 450,000 Estimated costs to complete 1,200,000 Total estimated project costs 1,650,000 Estimated total gross profit 150,000 Percentage of completion: P450,000 / P,1650,000 27.27% Gross profit recognized P 40,905 2009: Contract price

Total cost Total gross profit Recognized in 2008 Recognized in 2009

P 1,800,000 Costs incurred: 2008 2009

2. Input Measure - Cost Recovery Method 2008: (all costs not yet recovered) 2009: Contract price Costs incurred: Total cost Total gross profit

P 450,00 1,100,000

1,550,000 250,000 40,905 P 209,095 P -0-

2008 2009

P 450,000 1,100,000

1,800,00 1,550,000 P 250,000

Problem II 1. Input Measure - Percentage of Completion Method (Cost to cost Method) Years Gross Profit (or Loss) Supporting computations recognized 2008 P 2 million (P108 – 90) x (P30/P90) = P6 million 2009 ( P18 million) Total loss is (P108 –120) = (P12 million) To date, P6 million was recorded: therefore, (P12 million) – P6 million = (P18 million) in 2009 2010 P 10 million Total loss is P 108 – 110) = (P2 million) To date, (P 12 million was recorded: therefore, ( P2 million) – (P12 million) = P10 million in 2010

2. Input Measure - Cost Recovery Method Years Gross Profit (or Loss) 2008 P -02009 2010

(P 12 million) P 10 million

Supporting computations ( P108 – 90) = P18 anticipated gross profit, so no need to recognized a gross loss Total loss is ( P108 – 120) = (12 million) Total loss is (P108- 110) – ( P2 million) To date, ( P12 million was recorded: therefore, ( P2 million) – ( P12 million) = P10 million in 2010

Problem III 1. Journal Entries a. Input Measure – Percentage of completion – (cost-to-cost method) The following analysis is to determine the percentage of completion: Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date (1)…..… Add: Estimated costs to complete….. Total estimated costs (3)……..………… Estimated gross profit…………………… Percentage of completion (1) / (3)

20x3

20x4

20x5

P528,000 _______P528,000 P 126,048 _______P126,048 _358,752 P484,800 P 43,200 26%

P528,000 __12,000 P540,000 *P244,032 _126,048 *P370,080 _121,920 P492,000 P 48,000 **74%

P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000 100%

* including the P7,200 additional costs in 20x4. ** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue (P528,000 x 26%) Costs/Expenses (P484,800 x 26%) Gross Profit (P43,200 x 26%)

To date P 137,280 126,048 P 11,232

Recognized in prior years -

Recognized in current year P 137,280 126,048 P 11,232

20x4 Revenue (P540,000 x 74%) Costs/Expenses (P492,000 x 74%) Gross Profit (P48,000 x 74%)

To date P 399,600 _364,080 P 35,520

Recognized in prior years P 137,280 _126,048 P 11,232

Recognized in current year P 262,320 238,032 P 24,288

20x5 Revenue (P540,000 x 100%) Costs/Expenses (P492,000 x 100%) Gross Profit (P48,000 x 100%)

To date P 540,000 _492,000 P 48,000

Recognized in prior years P 399,600 _364,080 P 35,520

Recognized in current year P 140,400 _127,920 P 12,480

Alternatively, the gross profit recognized each year may also be computed as follows: Contract price: Initial amount of contract………….......

20x3

P528,000

20x4

P528,000

20x5

P528,000

Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date (1)…..……. Add: Estimated costs to complete……… Total estimated costs (3)……..……………. Estimated gross profit……………………… Percentage of completion (1) / (3)……... Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year -% of completion Gross profit in current year –cost recovery method

_______P528,000 P126,048 _______P126,048 _358,752 P484,800 P 43,200 ____26% P 11,232 _______P 11,232 P 0

Following are the entries for the years 20x3 to 20x5: Percentage of Completion Method 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

20x3

126,048 144,000

3. To record collections: Cash…………………………………..... Accounts receivable……………

120,000

4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… Construction in Progress*..……….... Revenue from Construction......

20x4

126,048

2. To record progress billings: Accounts receivable……………….. Progress billings*.………………….

126,048 11,232

__12,000 P540,000 P240,032 _126,048 P370,080 _121,920 P492,000 P 48,000 ____74% P 35,520 ___11,232 P 24,288 P 0

144,000

120,000

137,280

232,032 6,000

240,000

228,000

238,032 24,288

Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date……....… Add: Estimated costs to complete….. Total estimated costs ….……..…………

20x3

P528,000 _______P528,000 P126,048 _______P126,048 ____ _? P ?

20x5 127,920

244,032

240,000

228,000

262,320

5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

b. Input Measure – Cost Recovery Method The following table shows the data needed for further analysis:

12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __35,520 P 12,480 P 48,000

156,000

192,000

127,920 12,480

540,000

20x4 P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _? P ?

6,000 121,920

156,000

192,000

140,400

540,000

20x5 P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 126,048 126,048 P 0

Recognized in prior years -

Recognized in current year P 126,048 126,048 P 0

20x4 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 364,080 _364,080 P 0

Recognized in prior years P 126,048 126,048 P 0

Recognized in current year P 238,032 238,032 P 0

To date

Recognized in prior years

Recognized in current year

20x5 Revenue (P540,000 x 100%)

P 540,000

Costs/Expenses (P492,000 x 100%)

P 364,080

_492,000

Gross Profit (P48,000 x 100%)

P 48,000

P 175,200

364,080

127,920

0

P 48,000

P

Alternatively, the gross profit recognized each year may also be computed as follows: 20x3

Contract price: Initial amount of contract…………....... Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date ……...……. Add: Estimated costs to complete……… Total estimated costs …….…..……………. Estimated gross profit………………………. Percentage of completion……………….. Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year………………...

P528,000 _______P528,000 P 126,048 _______P 126,048 ____ _? P ? P 0 _ -___ P 0 _______P 0

Following are the entries for the years 20x3 to 20x5: 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

20x3

126,048 126,048

2. To record progress billings: Accounts receivable……………….. Progress billings*.………………….

144,000

3. To record collections: Cash…………………………………..... Accounts receivable……………

120,000

4. To recognize Revenue, Costs

144,000

120,000

20x4

20x5

P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _? P ? P 0 _ -___ P 0 _______P 0

P528,000 12,000 P540,000 P 121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __ 0 P 48,000

20x4 238,032 6,000

240,000

228,000

20x5 127,920

244,032

240,000

228,000

156,000

192,000

6,000 121,920

156,000

192,000

and Gross Profit: Construction Expenses……………… Construction in Progress*..……….... Revenue from Construction......

126,480

238,032 126,480

238,032

5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

2. Due from/Due to Customers a. Input Measure - Percentage of Completion Method Current Asset: Accounts receivable………………………. Other receivables: Construction In Progress………………… Less: Progress billings……………………. Gross amount due from customers…... Raw materials Inventory……………………

Current Liability: Payables (“Payments on Account”) Progress billings……………………………… Less: Construction In Progress……………. Gross amount due to customers…………

Construction In Progress

20x3 P 24,000

127,920 48,000

540,000

20x4 P 36,000

P

20x5

-

P399,600 _384,000 P 15,600 P 6,000

P144,000 _137,280 P 6,720

Progress Billings

20x3 CI 126,048 Pr 11,232

144,000 20x3

end of x3 137,280 20x4 CI 238,032 Pr 11,232

144,000 end of x3 240,000 20x4

end of x4 399,600 20x5 CI 127,920 Pr 12,480

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

b. Input Measure – Cost Recovery Method Current Asset: Accounts receivable………………………. Raw materials Inventory……………………

20x3 P 24,000

20x4 P 36,000 P 6,000

P

20x5

-

175,920

540,000

Current Liability: Payables (“Payments on Account”)

Progress billings……………………………… Less: Construction In Progress……………. Gross amount due to customers…………

Construction In Progress

P 137,280 _144,000 P 6,720

P384,000 _364,080 P 19,920

Progress Billings

20x3 CI 126,048 Pr 0

144,000 20x3

end of x3 126,048 20x4 CI 238,032 Pr 0

144,000 end of x3 240,000 20x4

end of x4 364,080 20x5 CI 127,920 Pr 48,000

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

3. Gross Profit a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 137,280 _126,048 P 11,232

20x4 P 262,320 _238,032 P 24,288

20x5 P 140,400 _127,920 P 12,480

b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 126,048 _126,048 P 0

20x4 P 238,032 _238,032 P 0

20x5 P 175,920 _127,920 P 48,000

Problem IV 1. Anticipated/Gross Loss a. Input Measure – Percentage of Completion (Cost-to-Cost Method)

2008: Contract price Actual cost to date Estimated costs to complete Total estimated project costs Estimated loss, recognized in 2008

P1,500,000 1,200,000

P2,500,000 2,700,000 P (200,000)

2009: Contract price Costs incurred: Total cost Total loss Recognized in 2008 Recognized in 2009

In 2008 In 2008

Loss in 20x4 Loss in 20x5

P1,500,000 1,300,000

2,800,000 P (300,000) (200,000) P (100,000)

P( 200,000) P (100,000)

2. Journal Entries a. Input Measure – Percentage of Completion (Cost-to-Cost Method) 2008: Construction in progress Various credits

1,500,000

Accounts receivable Billings on construction contract

1,200,000

Cash Accounts receivable

1,000,000

Cost of construction Construction in progress (loss) Revenue from long-term contracts* 2009: Construction in progress Various credits

1,588,889

Accounts receivable Billings on construction contract

1,300,000

Cash Accounts receivable

1,500,000

Cost of construction Construction in progress (loss) Revenue from long-term contracts**

1,211,111

Billings on construction contract Construction in progress

2,500,000

*P2,500,000 ** P2,500,000

P 2,500,000

(P1,500,000/P2,700,000) 1,388,889

1,300,000

1,500,000 1,200,000 1,000,000 200,000 1,388,889 1,300,000 1,300,000 1,500,000 100,000 1,111,111 2,500,000

a. Input Measure – Cost Recovery Method

Problem V Item to compute Total revenue recognized during 2009 (w): CIP contains cost + gross profit = revenue, so w = P50 Gross profit recognized during 2009 (x): P50 – P35 = P15 Billings on construction (y) : P14 + P 46 = P60 Net billings in excess of construction in progress (z): Billings of P60 – CIP of P50 Calculate the percentage of PAC that was completed during 2009: 50/150 = 33.33% Problem VI Item to compute Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R) Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22 gross pofit) At 12/31/2009, the estimated remaining costs to complete Cincy One (44/{44 + x})(300 – {44 + x}) = 22; x = 156 The percentage of Cincy One that wa completed during 2009 100 x (44/ {44 + 156}) Problem VII 1. Progress billings on construction contract Less accounts receivable Cash collected in 20x4 2.

Answer P50 million P 15 million P60million P10 million 333.33% Answer P65 million P44 million P156 million 22%

P562,000 150,500 P411,500

Gross profit from construction contract + Construction in progress = Revenue for 20x4 P301,000 + P602,000 = P903,000 P903,000/P7,525,000 = 12% Percentage completed in 20x4 P301,000/.12 = P2,508,333 Estimated income on construction contract

Problem VIII 1. Percentage of Completion Method (Cost-to-cost Approach) 20x4 Contract price ................... P250,000 Current year costs ............... 110,000 Costs to date .................... 110,000 Estimated cost to complete ....... 100,000 Estimated total cost ............. 210,000 Estimated total gross profit ..... 40,000 Percent complete ................. 52% Revenue to date .................. P130,000

20x4:

Revenue Costs (110/210 x 210) Gross profit

To Date at Dec. 31 P130,000 110,000 P 20,000

20x5 P250,000 120,000 230,000 20,000 245,000 5,000 94% P230,000

20x6 P250,000 15,000 245,000 0 240,000 5,000 100% P250,000

Previous Years

Current Year P130,000 110,000 P 20,000

20x5:

Revenue Costs (230/245 x 245) Gross profit (loss)

P235,000 230,000 P 5,000

P130,000 110,000 P 20,000

P105,000 120,000 P(15,000)

20x6:

Revenue Costs Gross profit

P250,000 245,000 P 5,000

P235,000 230,000 P 5,000

P 15,000 15,000 P 0

1. 2. 3. 4. 5.

Revenue recognized during the year Gross profit recognized during the year Balance in the construction in progress account at Dec. 31 . Balance in the progress billings account at Dec. 31 . Net (3-4) or (4-3) – due from (due to)

2. Cost Recovery Method 1. 2. 3. 4. 5.

Revenue recognized during the year Gross profit recognized during the year Balance in the construction in progress account at Dec. 31 . Balance in the progress billings account at Dec. 31 . Net (3-4) or (4-3) – due from (due to)

20x4

20x5

20x6

P130,000

P100,000

P15,000

20,000

(15,000)

0

130,000

235,000

0

125,000 5,000

250,000 (15,000)

0 0

20x4

20x5

20x6

P110,000

P120,000

P20,000

0

0

5,000

110,000

230,000

0

125,000 (15,000)

250,000 (20,000)

0 0

Problem IX 1. Percentage of Completion Method (Cost-to-cost Approach) Contract price Current year costs Costs to date Estimated cost to complete Estimated total cost Estimated total gross profit Percent complete

2005 P250,000 150,000 150,000 90,000 240,000 10,000 63%

2006 P250,000 100,000 250,000 20,000 270,000 (20,000) 93%

2007 P250,000 15,000 265,000 0 265,000 (15,000) 100%

Revenue to date

P157,500

P232,500

P250,000

2005:

Revenue ............ Costs (150/240 x 240) Gross profit ............

2006:

Revenue ............

To Date at Dec. 31 P157,500 150,000 P 7,500

Previous Years

Current Year P157,500 150,000 P 7,500

P232,500

P157,500

P 75,000

2007:

Costs ............ Gross profit (loss) ............

252,500 P(20,000)

150,000 P 7,500

102,500 P(27,500)

Revenue ............ Costs ............ Gross profit (loss) ............

P250,000 265,000 P(15,000)

P232,500 252,500 $(20,000)

P 17,500 12,500 P 5,000

20x4

20x5

1. Construction costs (expense) recognized during the year 2. Gross profit recognized during the year 3. Balance in the construction in progress account at Dec. 31 (after closing entries) 4. Balance in the progress billings account at Dec. 31 . 5. NNet (3-4) or (4-3) – due from (due to) Balance in accounts receivable at Dec. 31 (after closing entries)

20x6

P150,000

P102,500

P12,500

7,500

(27,500)

5,000

157,500

230,000*

0

110,000 47,500

230,000 0

0 0

10,000

10,000

0

*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss 2. Cost Recovery Method 1. Construction costs (expense) recognized during the year 2. Gross profit recognized during the year 3. Balance in the construction in progress account at Dec. 31 (after closing entries) 4. Balance in the progress billings account at Dec. 31 . 5. NNet (3-4) or (4-3) – due from (due to)

20x4 P150,000 0

20x5

20x6

P 80,000*

P20,000**

(20,000)

5,000

150,000

***230,000

0

110,000 40,000

230,000 0

0 0

Balance in accounts receivable at Dec. 31 (after closing entries) 10,000 10,000 0 *P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5 ** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5 ***P150,000 + P100,000 – P20,000 Multiple Choice Problems 1. a Costs incurred each year (2.5 M + 2.0 M + 1 M* + .5 M) Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs

P P

6M 0 6M

P 18 M

Percentage of completion 6 M / 18M Administrative cost as long as reimbursable is included in the construction costs. Marketing costs are considered as expenses. Depreciation of idle equipment is charged to expenses. 2. b

3. c

P7,200,000 ——————————— x (P15,000,000 – P12,000,000) = P1,800,000. P7,200,000 + $4,800,000 P1,170,000 —————- x (P3,300,000 – P1,950,000) = P810,000 P1,950,000 (P3,300,000 – P2,010,000) – P810,000 = P480,000.

4. d Under the percentage of completion method, the Construction-In-Progress account is used for cost incurred during the year and any realized gross profit (loss). The following T-account is prepared:

5. b

6.

c

7.

a

CI in 2004 RGP in 20x4 (?) End of 20x4 CI in 20x5 RGP in 20x5 (?)

Construction-In-Progress 210,000 34,000 244,000 384,000 100,000

End of 20x5

728,000

P1,200,000 ————— x (P7,200,000 – P4,800,000) = P600,000. P4,800,000 P7,200,000 – P4,875,000 =P2,325,000.

Contract Price x: Percentage-of-completion Recognized Revenue to date Less: Costs incurred to date Gross Profit to date Less: GP in prior year Gross profit in current year 8.

a

9.

b

P3,600,000 ————— x (P8,400,000 – P6,000,000) = P1,440,000. P6,000,000 P8,400,000 – P5,600,000 = P2,800,000.

20x4 P4,800,000 _______75% P3,600,000 P3,400,000 P 200,000 _______-0P 200,000

Items 10 and 11 No number requirement identified, if percentage-of-completion then the answer would (a) a [P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000 (P5,500,000 – P3,350,000) – P1,350,000 = P800,000. 10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000. 11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross profit should be realized. 12. c

13. a

14. b

P600,000 —————————— x (P1,500,000 – P1,000,000) = P300,000 P600,000 + P400,000 (P1,500,000 – P1,050,000) – P300,000 = P150,000. Contract Price Less: Total Estimated Costs Costs Incurred-1/10/x4 to 12/31/x5 Add: Estimated costs to complete Less: Costs incurred to date Multiplied by: % of completion Gross Profit to date Less: GP in prior year (given) Gross profit in current year

P6,000,000 P3,600,000 1,200,000

20x4: Cost to date – P7,500,000 x 20% 20x5: Cost to date – P8,000,000 x 60% Cost incurred during 20x5

4,800,000 P1,200,000 ___3.6/4.8 P 900,000 ___600,000 P 300,000 P1,500,000 4,800,000 P3,300,000

15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000. 16. b

Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account Less: Progress billings Construction In Progress account (net) or Due from customers

P260,000 P 50,000 -0P 50,000 150,000 P200,000 P60,000) __50/200

50,000

15,000 65,000 30,000 35,000

17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery method must be used). 18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000. 19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.

20. d 21. d

Recognized gross profit (loss) to date………….. Less: Recognized gross profit in prior years……. Recognized gross profit each year……………..

P( 100,000) ____20,000 P (120,000)

22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000. 23. c Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Recognized gross profit (loss) to date………….. Less: Recognized gross profit in prior years……. Recognized gross profit each year……………..

Prior year P7,000,000

P600,000

Current year P7,000,000 P5,000,000 2,800,000 P7,800,000 (P 800,000) _____100% (P 800,000) ___600,000 (P1,400,000)

24. c

P7,440,000 × .30 = P2,232,000.

25. d

(P7,200,000 × .75) – (P7,100,000 × .30) = P3,270,000.

26. b

(P7,440,000 × .75) – (P620,000 × 8) = P620,000 debit.

27. c

P7,440,000 × .25 = P1,860,000 P7,500,000 – (P7,200,000 × .75) = P2,100,000.

28. b

(P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000.

29. c

P3,795,000 + P345,000 = P4,140,000.

30. d

P3,500,000 –P1,350,000 – P1,525,000 = P625,000.

31. b

P240,000 – P100,000 = P140,000.

32. d

P300,000 – P60,000 = P240,000 P240,000 ————————— x (P2,400,000 – Total estimated cost) = P60,000 Total estimated cost Total estimated cost = P1,920,000 P2,400,000 – P1,920,000 =P480,000.

33. c

(P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.

34. a

(P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.

P6,325,000 + P575,000 = P6,900.000. 35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zero-profit approach) of construction accounting, revenue is recognized up to the extent of costs incurred as long as it is probable will be recoverable. 36. b - 20x5: P12,000,000 > P11,870,000, No loss; 20x6: P12,000,000 – P12,400,000 = P400,000 loss. 37. a - Revenue recognized to the extent of costs incurred 38. c

P3,200,000 – P2,150,000 = P1,050,000.

39. c

P1,500,000 – P820,000 = P680,000.

40. a Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 – P150,000, loss) – P1,900,000, billings = P200,000 is classified as due from customers. Under the US FASB, the excess of P200,00 is considered as an inventory account. 41. c

Costs of construction Construction in progress Revenue for long-term contracts

1,200,000 800,000

Percentage complete = P1,200,000 / (P1,200,000 +P600,000) = 2/3 Revenue recognized = 2/3 P3,000,000 = P2,000,000 Cost recognized = P1,200,000 Gross profit recognized = P2,000,000 P1,200,000 = P800,000

42. a

43. b

Costs of construction Profit Construction In Progress Less: Progress billings Excess (Due from customers)

2,000,000

P1,200,000 800,000 P2,000,000 1,500,000 P 500,000

Costs of construction Construction in progress Revenue for long-term contracts

600,000 400,000

Costs of construction Revenue for long-term contracts

1,200,000

1,000,000

Total revenue P3,000,000 revenue previously recognized P2,000,000 = Revenue to recognize this year P1,000,000. Cost recognized = P600,000 Gross profit recognized = P1,000,000 P600,000 = P400,000 44. d

1,2000,000

Under cost recovery method, revenue should be recognized up to the extent of costs incurred. 45. b

46. d

Costs of construction Profit Construction In Progress Less: Progress billings Excess (Due to customers)

P1,200,000 0 P1,200,000 1,500,000 P( 300,000)

Costs of construction Construction in progress Revenue for long-term contracts

600,000 1,200,000

1,800,000

Under the cost recovery method, record equal amounts of revenue and cost until cost recovered, and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000, so record remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5. 47. a Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiply by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year % of Completion / Cost Recovery Method: Construction in Progress

CI CI

4,920,000 4,680,000 3,720,000 7,920,000

20x4 P 9,600,000 P 4,920,000 4,920,000 P 9,840,000 P(240,000) 100% P (240,000) _________ P (240,000)

20x5 P10,080,000 P 8,640,000 2,160,000 P 10,800,000 P (720,000) 100% P (720,000) (240,000) P (480,000)

Progress Billings

240,000 loss

5,280,000 5,280,000 3,420,000

480,000 loss due to customers P780,000

8,700,000

Note: If there is an anticipated loss, the Construction-in-Progress for both methods will exactly be the same in the year the loss was incurred. 48. d

Percentage of Completion: Contract price………………………….. Cost incurred each year………………. Add: Cost incurred in prior year……… Costs incurred to date………………… Add: Estimated costs to compute……. Total estimated costs………………….

Project 6 P500,000 P375,000 _________ P375,000 ________ P375,000

Project 7 P700,000 P100,000 ________ P100,000 400,000 P500,000

Project 8 P250,000 P100,000 ________ P100,000 100,000 P200,000

Estimated gross profit………………… Multiply by: percentage of completion. Recognized gross profit to date……… Less: Recognized gross profit in prior years Recognized gross profit each year….

P125,000 100% P125,000 _________ P125,000

P200,000 20% P 40,000 _________ P 40,000

P 50,000 50% P 25,000 _________ P 25,000

Project 6 P500,000*

Project 7 P100,000

Project 8 P100,000

375,000 P125,000

100,000 P 0

100,000 P 0

Cost Recovery Method of Construction Accounting:

Recognized Revenue………..……….. Less: Costs of long-term construction contract…………………………….. Recognized gross profit each year….

* Since the contract is completed then the full amount of P500,000 contract price should be recognized as revenue.

Percentage of Completion Construction in Progress Pr. 6 - Cl. 375,000 500,000 Pr. 6 Pr. 125,000 Pr. 7 – Cl. 100,000 Pr. 40,000 Pr. 8. Cl 100,000 Pr. 100,000 765,000 500,000 12/31 265,000 (d) 49. a

Cost Recovery Method of Construction Construction in Progress Pr. 6 - Cl. 375,000 500,000 Pr. 6 Pr. 125,000 Pr. 7 – CI 100,000 Pr. 8 – CI 100,000 700,000 500,000 12/31 200,000 (d)

Input Measures: Efforts-Expended Method - using timbers laid Year 2 Timers laid Each Year 300 Add: Timbers laid in Prior Years 150 Timbers laid to date 450 Add: Additional support timbers to be laid 520 Total Estimated Timbers 970 Percentage-of-Completion 45/97 x: CONTRACT PRICE P 800,000 Recognized Revenue to Date P 371,134 Recognized Revenue in Prior Years Recognized Revenue in Current Yr. Output Measures – Number of trail feet Trail feet Each Year Add: Trail fees in Prior Years Trail feet to date Add: Additional trail feet to be constructed Total Estimated Trail feet Percentage-of-Completion x: CONTRACT PRICE Recognized Revenue to Date

Year 2 7,500 3,000 10,500 8,200 18,700 105/187 P 800,000 P 449,198

Year 3 500 450 950 -0950 100% P 800,000 P 800,000 371,134 P 428,866 Year 3 8,000 10,500 18,500 ___-018,500 100% P 800,000 P 800,000

Recognized Revenue in Prior Years Recognized Revenue in Current Yr. 50. b Contract price………………………….. Cost incurred each year………………. Add: Cost incurred in prior year……… Costs incurred to date………………… Add: Estimated costs to complete Total estimated costs…………………. Estimated gross profit………………… Multiply by: percentage of completion. Recognized gross profit to date……… Less: Recognized gross profit in prior years Recognized gross profit each year….

449,198 P 350,802 2006 P5,000,000 P 900,000

P 100,000 -0P 100,000

2007 P5,000,000 900,000 P2,550,000 1,700,000 P4,250,000 P 750,000 60% P 450,000 100,000 P 350,000

2008 P5,000,000 P2,050,000 2,550,000 P4,600,000 -0P4,600,000 P 400,000 100% P 400,000 450,000 P( 50,000)

51. d – refer to No. 50 52. c Contract Price……………………………………………… Less: Total Estimated Costs Cost Incurred to Date……………………………… P26,000,000 Add: Estimated Costs to Complete……………… 25,000,000 Estimated Gross Profit……………………………………. Multiplied by: % of completion…………………………. Recognized gross profit to date……………………….. Less: RGP in prior years…………………………………… Recognized gross profit in current year……………… Construction-in-progress Account: Costs incurred to date………………………………….. GP in the current year…………………………………… Less: Progress billings…………………………………….. Due from customer (net)………………………………. 53. c

54. c

55. a

P60,000,000 51,000,000 P 9,000,000 30% P 2,700,000 _________0 P 2,700,000 P 26,000,000 2,700,000 P 28,700,000 5,000,000 P 23,700,000

Contract Price Multiplied by: Gross Profit Rate Estimated Gross Profit of the entire contract Multiplied by: Percentage of Completion for first year Gross Profit realized for current year

P100,000,000 _________25% P 25,000,000 _________50% P 12,500,000

Contract Price x: Mobilization Fee Collection in 20x4 Note: Billings for 20x4 will be collected in January 20x5.

P120,000,000 10% P 12,000,000

Mobilization Fee: 5% x P10M

P 5.0 M

Collection on Billings: Contract price x: Progress billings, net of 10% and 8% (50% - 10% - 8%) Progress billings x: Collections net of contract retention of 10% Collections in 20x4

P 100 M 32% P 32 M 90%

28.8 M P 33.8 M

56. b – cost recovery method is used. At the end of 20x4 the contractor must recognized only to the extent of recoverable contract costs incurred (i.e., P5,000 contract revenue and P5,000 construction costs/expenses). Quiz- VIII 1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000 P1,000,000 – P900,000 = P100,000. 2. P150,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiply by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year 3. P150,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year 4. P80,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

4,500,000 1,350,000 _2,700,000 4,050,000 450,000 1,350/4,050 150,000 ____-0150,000 20x5 3,000,000 2,250,000 750,000 300,000

20x6 3,000,000 1,800,000 _600,000 2,400,000 600,000 1,800/2,400 450,000 _300,000 150,000 20x5 1,600,000 240,000 _960,000 1,200,000 400,000 240/1,200 80,000 ______0 80,000

5. P20,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 1,400,000 400,000 _____-0400,000 _400,000 800,000 600,000 400/800 300,000 ______0 300,000

20x6 1,400,000 400,000 400,000 800,000 200,000 1,000,000 400,000 800/1,000 320,000 300.000 20,000

6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost recovered, and then record gross profit 7.P240,000 Profit Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year 8. P102,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 4,000,000 960,000 _______0 960,000 3,200,000 800,000 960/3,200 240,000 _______0 240,000 20x5 850,000 238,000 _______0 238,000 357,000 595,000 255,000 238/595 102,000 _______0 102,000

9. P990,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date* Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

* total estimated costs x % of completion

20x5 3,000,000 450,000

20x6 3,000,000 990,000 450,000 1,440,000

2,250,000 750,000 ____20% 150,000 ______0 150,000

2,400,000 600,000 _____60% 360,000 150.000 210,000

10. P50,000

20x5 1,500,000 465,000 _______0 465,000 1,085,000 1,550,000 ( 50,000) 100% ( 50,000) _______0 ( 50,000)

Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year 11. P625,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 3,500,000 1,350,000 -01,350,000 1,350,000 2,700,000 800,000 -0-0-

20x6 3,500,000 1,525,000 1,350,000 2,875,000 _______0 2,875,000 625,000 ___100% 625,000 _______0 625,000

12. P550

Costs Incurred………………………………………………………………………. Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account……………………

P2,750 P 400 ___-0P 400 _1,600 P2,000 P 750 400/2,000

13. P1,200,000 The term “completed” should be “cost recovery”

Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account

P2,000,000 P 700,000 ______-0P 700,000 __800,000 P1,500,000 P 500,000 ________0

Costs incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account

P2,000,000 P 600,000 _700,000 P1,300,000) __800,000 P(2,100,000) P (100,000) ________0

14. P32,000 = P47,000 – P15,000

20x5

400

150 550

700,000

_______0 700,000 600,000

_(100,000) 1,200,000

15. P782,000 Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account Costs incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account Less: Progress billings (P260,000 + P210,000) Construction In Progress account (net) – Due from customers

20x5 P850,000 P238,000 ______-0P238,000 _357,000 P595,000 P255,000 _238/595 20x6 P850,000 P319,600 _238,000 P557,600 _139,400 P697,000 P153,000 _557.6/697

238,000

102,000 340,000 319,600

_122,400 782,000 470,000 312,000

16. P312,000 17. same with no.16 – P312,000 18. (P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000. 19.P3,795,000 + P345,000 = P4,140,000. 20. P2,750,000 P1,650,000 ————— × P5,000,000 = P2,750,000 P3,000,000 21.

Accounts Receivable ................................................................................ 1,650,000 Billings on Construction in Process ...........................................

1,650,000

22.

Construction Expenses .............................................................................. 1,650,000 Construction in Process ............................................................................. 1,100,000 Revenue from Long-Term Contracts ........................................

2,750,000

23. P875,000 Revenue Costs Total gross profit Recognized in 20x5 Recognized in 20x6 Or Total revenue Recognized in 20x5

P5,000,000 3,025,000 1,975,000 (1,100,000) P 875,000 P5,000,000 (2,750,000)

Recognized in 20x6 Costs in 20x6 Gross profit in 20x6

24. 25. 26.

20x5 20x6 20x7

2,250,000 (1,375,000) P 875,000

Percentage-of-Completion Gross Profit P750,000a P210,000b P440,000c

aP1,500,000

————— × P2,000,000 = P4,000,000 bP2,640,000

P750,000

————— × P1,600,000 = P4,400,000

P960,000

Less 20x5 gross profit 20x6 gross profit

(750,000) P210,000

cTotal

revenue Total costs Total gross profit Recognized to date 20x7 gross profit

dTotal

revenue Total costs Total gross profit

20x5 20x6 20x7

Completed-Contract Gross Profit — — P1,400,000d

P6,000,000 4,600,000 1,400,000 (960,000) P 440,000 P6,000,000 4,600,000 P1,400,000

27. P312,500 Revenue

= [P250,000/(P250,000 + P750,000)]  P1,250,000 = P312,500 Gross profit = P312,500  P250,000 = P62,500 Construction in progress = P250,000 + P62,500 = P312,500

28. P125,000 (2) Current Assets Inventories

Construction in progress* P1,000,000 Less: Partial billings** (875,000) Costs and recognized profit not P 125,000 yet billed *Revenue to date = (P250,000 + P600,000)/(P250,000 + P600,000 + P212,500)  1,250,000 = P1,000,000 Construction in progress = P250,000 + P600,000 + P150,000 = P1,000,000 **Partial billings = P375,000 + P500,000 = P875,000

29. P60,00

Revenue to date Revenue from previous periods Revenue for 20x7 Costs incurred in 20x7 Gross profit for 20x7

P1,250,000 _1,000,000 P 250,000 _ 190,000 P 60,000

THEORIES 1. 2. 3. 4. 5.

False True True False False

37. 38. 39. 40.

36.

False True True False False

41.

b

42. 43. 44. 45.

c

b c b

6. 7. 8. 9. 10,

False False False True False

11. 12. 13. 14. 15,

False True False True False

16. 17. 18. 19. 20.

True False True False True

21. 22. 23. 24. 25.

True False False False False

26. 27. 28. 29. 30.

True True False False True

31. 32. 33. 34. 35.

46.

a

51.

c

56.

d

61.

d

66.

c

47. 48. 49. 50.

d

52. 53. 54. 55.

b c b

57. 58. 59. 60.

b

62. 63. 64. 65.

b a c d

67. 68. 69. 70.

b

c

c a

a

c

c c

a

d

C

False False True False True

Chapter 9 Problem I 1. Jollibee has substantially performed all material services, the refund period has expired, and the collectibility of the note is reasonably assured. Jollibee recognizes revenue as follows: Cash……….. Notes receivable……………. Franchise revenue……………………..

240,000 600,000

840,000

2. The refund period has expired and the collectibility of the note is reasonably assured, but Jollibee has not substantially performed all material services. Jollibee does not recognize revenue, but instead recognizes a liability as follows: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..

240,000 600,000

840,000

Franchisor will recognize the unearned franchise fees as revenue when it has performed all material services, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….…….

840,000

840,000

3. Jollibee has substantially performed all services and the collectibility of the note is reasonably assured, but the refund period has not expired. Jollibee does not recognize revenue, but instead recognizes a liability as follows: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..

240,000 600,000

840,000

The franchisor will recognize the unearned franchise fees as revenue when the refund period expires, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….……………………………….. 4.

840,000

840,000

Jollibee has substantially performed all services and the refund period has expired, but the collectibility of the note is not reasonably assured. Jollibee recognizes revenue by the installment or cost recovery method. If we assume that Jollibee uses the installment method, it recognizes revenue of P240,000 as follows: Cash……….. Notes receivable……………. Franchise revenue…………………….. Unearned franchise revenue……………

240,000 600,000

240,000 600,000

The franchisor is using the installment method, it recognizes the unearned franchise fees as revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of franchise, the entry would be as follows:

Unearned franchise revenue…………… Franchise revenue……………………..

120,000

120,000

This revenue recognition may be true only in the event there is no cost of franchise at all. On the other hand, it may be somewhat misleading since under the installment sales method; gross profit is earned or realized thru collections. 5. The refund period has expired, but Jollibee has not substantially performed all services and there is no basis for estimating the collectibility of the note. Jollibee does not recognize the note as an asset. Instead, it uses a form ·of the deposit method. For example, suppose Jollibee has developed an entirely new product whose success is uncertain and the franchisee will pay the note from the cash flows from the sale of the product, if any. Jollibee records the initial transaction as follows: Cash……….. Unearned franchise revenue……………………..

240,000

240,000

The franchisor may recognize the unearned franchise fees as revenue under the accrual method in the normal manner at the completion of the services to be performed (if collectibility is reasonably assured), the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….………………………………..

240,000

240,000

Alternatively, it may recognize revenue under the installment method if it has no basis for estimating the collectibility of the note. 6.

Now assume that Jollibee has earned only P360,000 from providing initial services, with the balance being a down payment for continuing services. If the refund period has expired and the collectibility of the note is reasonably assured, Jollibee recognizes revenue of P360,000 as follows: Cash……….. Notes receivable……………. Franchise revenue…………………….. Unearned franchise revenue…………..

240,000 600,000

360,000 480,000

The franchisor recognizes the unearned franchise revenue of P480,000 as revenue when it performs the continuing services, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….………………………………..

480,000

480,000

In all these cases except the fifth, the franchisor accounts for the collection of interest and principal on the note receivable in the usual manner. In the fifth situation, it does not recognize the note and revenue until a future event occurs. In addition, the franchisor accounts for its costs

in the same way as its revenue recognition. That is, if it defers revenue, then it defers the related cost of goods sold. Then, when it recognizes revenue, it matches the cost of goods sold against the revenues. The franchisee accounts for its payments as an intangible asset. Sometimes the franchisor collects the initial franchise fee far in advance of performing its services. At other times collection of part of the initial franchise fee is deferred until the franchise is operating successfully. Problem II 1. Cash ......................................... Unearned Franchise Fee ..................... 2. Cash ......................................... Note Receivable .............................. Unearned I.I. or Discount on Note Receivable Revenue from Franchise Fee .................

75,000

75,000 120,000

75,000

28,881 166,119

[P{75,000 + (P30,000 x 3.0373)] = P116,119 (Table IV n = 4, i = 12%) 3. Cash ......................................... Note Receivable .............................. Unearned I.I. or Discount on Note Receivable Revenue from Franchise Fee ................. Unearned Franchise Fee .....................

75,000 120,000

28,881 75,000 91,119

Problem III 1. If there is a reasonable expectation that the down payment may be refunded and substantial future services remain to be performed by Pizza, Inc., the entry should be: Cash……….. Notes receivable……………. Unearned interest income (or Discount on notes receivable) Unearned franchise revenue……………………..

120,000.00 480,000.00

80,583.20 419,416,80

2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be: Cash……….. Notes receivable……………. Unearned interest income (or Discount on notes receivable) Franchise revenue……………………..

3.

120,000.00 480,000.00

96,699.84 503,300.16

If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of services still to be performed by the franchisor in future periods, and collectibility of the note is reasonably assured, the entry should be: Cash……….. Notes receivable……………. Unearned interest income (or Discount on notes receivable)

120,000.00 480,000.00

96,699.84

Franchise revenue…………………….. Unearned franchise revenue

120,000.00 383,300.16

4. If the initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be: Cash……….. Franchise revenue……………………..

120,000.00

120,000.00

Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by means of cash collection using the cost recovery method. 5.

If the initial down payment is refundable or substantial services are yet to be performed, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be: Cash……….. Unearned franchise revenue……………………..

120,000

120,000

Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by means of cash collection using the cost recovery method. Problem IV 1. If the down payment is refundable, and no services have been rendered at the time the arrangement is made, and collection on the note is reasonably certain, the entry should be: Cash……….. Notes receivable……………. Unearned interest income (or Discount on notes receivable) Unearned franchise revenue……………………..

120,000.00 180,000.00

37,354.50 262,645.50

2. Initial services are determined to be substantially performed, the refund period has expired and the collection of the note is reasonably assured, the full accrual method would be used. Assume that substantial performance of the initial services costs P52,529.1 the entry should be: Cash……….. Notes receivable……………. Unearned interest income (or Discount on notes receivable) Franchise revenue……………………..

120,000.00 180,000.00

Cost of franchise revenue Cash, etc……………

52,529.10

37,354.50 262,645.50

52,529.10

Few months after, the collectibility of the note becomes doubtful or no reasonable assurance, the installment sales method could be used as a general rule. In addition to the entries above, following entries would be required: a. To set-up cost of franchise: No entry required, already set-up previously. b. To defer gross profit on franchise: Franchise revenue

262,645.50

Cost of franchise revenue Deferred gross profit on franchise

52,529.10 210,116.40

c. Adjustments to recognize gross profit on franchise: Deferred gross profit on franchise Realized gross profit on franchise Franchise revenue……….. Less: Cost of franchise revenue Gross profit……….. Gross profit rate (210,116.4/262,645.5) Collections as to principal……. Multiplied by: Gross profit rate……. Realized gross profit on franchise…..

96,000.00

96,000.00

262,645.5 52,529.1 210,116.4 80% P120,000.00 80% P 96,000.00

Problem V If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and the permits on February 1, 20x5, and operations commence at that time, the following journal entries would be appropriate: July 1, 20x4: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..

120,000 480,000

600,000

Deferral of revenue recognition is required when “substantial performance" of franchisor services has not been completed. It would call for deferral of revenue recognition until evidence of service performance was available. The best evidence, of course, would be the commencement of operations of the franchise outlet and at this point in time, revenue is recognized. During 20x4: Deferred cost of franchise revenue…. Cash…………..………..

360,000

December 31, 20x4: Interest receivable (P480,000 x 14% x 6/12)………….. Cash…………..……….. February 1, 20x5: Unearned franchise revenue…………………….. Franchise revenue……………………..

33,600

600,000

Cost of franchise revenue…………………….. Deferred cost of franchise revenue……………………..

360,000

360,000

33,600

600,000

360,000

Problem VI

January 1, 20x4 Cash………….. Notes receivable…….

Reasonably Assured 1,500,000 4,500,000

No reasonable assurance 1,500,000 4,500,000

Unearned franchise revenue…….

6,000,000

6,000,000

Receipt of initial franchise fee.

Conditions to be met: Services Period of refund Collectibility 1/1/20x4 Balance Status December 31, 20x4 Cash………….. Notes receivable……. Interest income (P3,750,000 x 10%)

Cash No Yes

1,500,000 Liability 1,575,000

Annual collection.

Deferred cost of franchise Cash…………………

1,800,000

To defer cost of franchise since substantial services had not been performed.

Operating expenses Cash…………………

120,000

To record expenses.

Adjustments: Cost of franchise Deferred cost of franchise

1,800,000

To recognize cost of franchise.

Unearned franchise revenue……. Franchise revenue

:

6,000,000

Notes No Yes Reasonably assured 4,500,000 Liability

1,125,000 450,000

1,800,000

120,000

Cash No Yes

1,500,000 Liability 1,575,000

1,800,000

120,000

Notes No Yes No reasonable assurance 4,500,000 Liability

1,125,500 450,000

1,800,000

120,000

1,800,000

6,000,000

To recognize franchise revenue based on the following analysis

Conditions to be met: Services Period of refund Collectibility 1/1/20x4 Balance………………….. 12/31/20x4: Collection as to principal 12/31/20x4 Balance Status

Cash Yes Yes 1,500,000 1,125,000 2,625,000 Revenue

Notes Yes Yes Reasonably assured 4,500,000 (1,125,000) 2,625,000 Revenue

Adjustments (Installment sales method) a. To set-up cost of franchise: No entry* b. To set-up deferred gross profit Unearned franchise revenue Deferred cost of franchise revenue Deferred gross profit

6,000,000

1,800,000 4,200,000

*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-6 for alternative treatment to set-up cost of franchise.

Conditions to be met: Services Period of refund

Cash Yes Yes

Collectibility 1/1/20x4 Balance………………….. 12/31/20x4: Collection as to principal 12/31/20x4 Balance Status

1,500,000 1,125,000 2,625,000 Revenue – I/S Method

. To recognize realized gross profit on franchise: Deferred gross profit Realized gross profit on franchise

Notes Yes Yes No reasonabe assurance 4,500,000 (1,125,000) 2,625,000 Liability

1,837,500

1,837,500

Collections – principal x gross profit rate P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500

2. Income Statement, 12/31/20x4: Franchise revenue (accrual method)* Less: Cost of franchise (accrual method)* Gross profit on regular franchise (accrual)* Add: Gross profit on franchise (installment sales method) Gross profit on franchise Less: Operating expenses

Reasonably Assured

Add: Interest income…………….. Net income…………….

No reasonable assurance

P6,000,000 1,800,000

P

0 0

P4,200,000

P

0

-0P4,200,000 120,000 P4,080,000 450,000 P4,530,000

*1,837,500 P1,837,500 120,000 P1,717,500 450,000 P2,167,500

Problem VII

1.

January 1, 20x4 Cash………….. Notes receivable……. Unearned interest income* Unearned franchise revenue……. Receipt of initial franchise fee.

Reasonably Assured 1,440,000 3,840,000

796,896 4,483,104

No reasonable assurance 1,440,000 3,840,000

796,896 4,483,104

Conditions to be met: Services** Period of refund – until date of Opening Collectibility 1/1/20x4 Balance Status

Cash No

Notes (PV) No

Cash No

Notes (PV) No

No

No Reasonably assured

No

1,440,000 Liability

3,043,104*** Liability

1,440,000 Liability

No No reasonable assurance 3,043,104*** Liability

*Unearned interest income or discount on notes receivable: P3,840,000 – P3,043,104 = P796,896. * *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred and subsequent direct cost of franchise should also be deferred. ***P960,000 x 3.1699 = P2,535,920

February 2, 20x4: Deferred cost of franchise Cash…………………

144,931.20

To defer cost of franchise since substantial services had not been performed.

June 13, 20x4: General expenses Cash…………………

60,000

To record expenses.

August 8, 20x4: Deferred cost of franchise Cash…………………

360,000

November 2, 20x4: Deferred cost of franchise Cash…………………

840,000

To defer cost of franchise since substantial services had not been performed.

To defer cost of franchise since substantial services had not been performed.

144,931.20

60,000

360,000

840,000

144,931.20

60,000

360,000

840,000

144,931.20

60,000

360,000

840,000

November 2, 20x4: Substantial completion of services. December 31, 20x4: Cash………….. Notes receivable…………………

960,000

Annual collections.

Adjustments: Unearned interest income Interest income To recognize interest income thru amortization as follows: 10% x P3,043,104 = P304,310.4. Cost of franchise Deferred cost of franchise To recognize cost of franchise.

304,310.40

1,344,931.20

960,000

304,310.40

1,344,931.20

960,000

304,310.40

960,000

304,310.40

Unearned franchise revenue……. Franchise revenue

4,438,1040

4,438,1040

To recognize franchise revenue based on the following analysis:

Conditions to be met: Services** Period of refund – outlet already opened. Collectibility 1/1/20x4 Balance 12/31/20x4: Collection……………..... . P960,000

Less: Interest collection… 304,310.40 Collection – Principal…….P655,689.60

Status Adjustments (Installment sales method) a. To set-up cost of franchise: Cost of franchise revenue….. Deferred cost of franchise revenue b. To set-up deferred gross profit: Unearned franchise revenue Cost of franchise revenue Deferred gross profit

Cash Yes

Notes (PV) Yes

Yes

Yes Reasonably assured 4,438,104

1,440,000

655,689.60

2,095,689.60 Revenue

( 655,689.60) 2,387,414.40 Revenue

1,344,931.20

3,483,104

1,344,931.20

1,344,931.20 2,138,172.80

*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-5 for alternative treatment to set-up cost of franchise.

Conditions to be met: Services** Period of refund – outlet already opened. Collectibility 1/1/20x4 Balance 12/31/20x4: Collection……………..... . P960,000 Less: Interest collection… 304,310.40 Collection – Principal…….P655,689.60 Status

. To recognize realized gross profit on franchise: Deferred gross profit Realized gross profit on franchise Collections – principal x gross profit rate

Cash Yes

Notes (PV) Yes

Yes

Yes No reasonable assurance 304,104

1,440,000

655,689.60 2,095,689.60 Revenue – I/S Method

1,466,983.20

( 655,689.60) 2,387,414.4 Liability

1,466,983.20

P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20

2. Income Statement, 12/31/20x4: Franchise revenue (accrual method)* Less: Cost of franchise (accrual method)* Gross profit on regular franchise (accrual)* Add: Gross profit on franchise (installment sales method) Gross profit on franchise Less: Operating expenses

No reasonable assurance

Reasonably Assured P 4,471,1040

P

0 0

P

0

1,344,931.20

P3,138,172.8

Add: Interest income…………….. Net income…………….

-0P3,138,172.8 60,000 P3,078,172.8

*1,466,983.20 P1,466,983.20 60,000 P1,406,983.20

304,310.40 P3,382,483.20

304,310.40 P1,771,293.60

*Note: This item represents regular franchise sales-type transaction. If the collectibility of the fee (note receivable) is reasonably assured, the permissible method to be applied should be the accrual method. It should be observed that in the event, there is cost of franchise and the installment sales method is used, the concept of revenue recognition does literally apply to franchise revenue but to the recognition of realized gross profit on franchise thru collections as to principal multiplied by gross profit rate. Alternatively, computation of interest and principal collections are as follows: Date 1/03/20x4 1/03/20x4 12/31/20x4 Total

Collection

Interest (10% of Unpaid Balance)

Principal

1,440,000 960,000 2,400,000

-0304,310.40 304,310.40

1,440,000 655,689.60 2,095,689.60

Unpaid Balance 4,483,104 3,043,104 2,387,414.40

Problem VIII 1. The fee is earned for providing continuing services: Cash or Accounts receivable………… Franchise revenue – continuing franchise fee

2. If P10,000 of the fee is for national advertising:

Cash or Accounts receivable………… Franchise revenue – continuing franchise fee Unearned franchise revenue – continuing franchise fee……

108,000

108,000

108,000

96,000 12,000

The franchisor recognizes the unearned franchise fees as revenue when it performs the advertising services and also records the costs as expenses, the entries should be: Advertising expenses………… Cash, etc……………….. Unearned franchise revenue – continuing franchise fee…… Franchise revenue – continuing franchise fee

xxx

12,000

xxx

12,000

Problem IX March 20:

Cash Notes receivable Unearned franchise fee

June 15:

Unearned franchise revenue Franchise revenue

July 15:

Cash Service revenue

5,000 20,000

25,000

500

25,000

25,000

500

Problem X Cash or Accounts receivable… Franchise revenue – supplies sales…………….. Cost of franchise – supplies sales……… Supplies inventory……….

117,600

90,000

117,600

90,000

Problem XI Cash……………. Notes receivable (P108,000 – P21,600) Unearned interest income (P86,400 – P69,978) Franchise revenue (P21,600 + 69,978 – P4,800*) Unearned franchise revenue – equipment sale*

21,600 86,400

16,422 86,778 4,800

All the criteria to recognize initial franchise fee as revenue was met, except that an amount of P4,800 equivalent to indicated profit (P24,000, selling price less P19,200 option price) will be deferred. When the franchisee subsequently purchases the equipment, the entries are as follows: Cash or Accounts receivable… Unearned franchise revenue – equipment sale Franchise revenue – equipment sale……………..

19,200 4,800

Cost of franchise - equipment sale………. Equipment inventory……….

19,200

24,000

19,200

Problem XII April 1, 20x4: Cash……………. Notes receivable………… Franchise revenue (P21,600 + P86,400 – P4,800*) December 31, 20x4: Franchise revenue – initial franchise fee

288,000 192,000

480,000

480,000

Interest income (P192,000 x 8% x 9/12) Cash (P153,600 – P11,520)…………. Notes receivable…………… Gain or revenue from repossessed franchise……………

11,520 142,080 192,000 134,400

Problem XIII Cash Notes receivable………… Deferred franchise purchase option liability…….

72,000 360,000

Deferred cost of franchise revenue…………… Cash, etc………

288,000

Investment………………………….. Deferred franchise purchase option liability……. Deferred cost of franchise revenue…………… Cash, etc………

120,000 432,000

432,000

288,000

288,000 264,000

Multiple Choice Problems 1. a – following conditions should be observed to recognize revenue: Services – none Period of Refund – expired Collectibility of the note – reasonably assured There was failure on one condition; therefore, no revenue should be recognized. 5. a

6. b

7. a

Cash Notes receivable Unearned franchise fee

6,000 30,000

Unearned franchise fee Franchise fee revenue

36,000

Cash Notes receivable Franchise fee revenue

6,000 30,000

36,000

36,000

36,000

9. b In this problem, since there is doubtful of collection, it is safely assumed to used installment method. Therefore, the realized gross profit would be: Collections in 20x4……………………………………………………………..P 200,000 x: Gross profit rate [100% - (P150,000/P500,000)]…………………………. 70% Realized gross profit in 20x4…………………………………………………. P 140,000 Revenue Analysis: Cash N/R

Services Period of Refund Collectibility Status

Yes Yes 200,000 Rev – I/S Method

Yes Yes No Reas. Assured 300,000 Liability

10. d In this problem, full accrual method is used to recognized the initial franchise fee of Initial Franchise Fee: Services Period of Refund Collectibility Status

Cash Yes Yes P20,000 Revenue

Notes Receivable Yes Yes Reasonably Assured P80,000 Revenue

Substantial performance of services has been rendered because commencement of operations by the franchisee shall be presumed to be the earliest point of which substantial performance has occurred, unless it can be demonstrated that substantial performance of all obligations, including services rendered voluntarily, has occurred before that time. Period of refunding the initial franchise fee and collectibility of the notes is not anymore a problem (they depend on the profitability of its first year of operations) because the result of operations in the first year is profitable. Therefore, the initial franchise fee of P100,000 (P20,000 + P P80,000) is considered as revenue, and a continuing franchise fee of P5,000 (1% x P500,000) should be also be recognized as revenue – continuing fanchise. Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus P5,000 continuing). 11. a Initial franchisee revenue (since all services had been performed and assumed that period of refunding already expired)………………………….. P100,000 Add: Continuing franchise revenue (5% x P800,000)…………………………………… 40,000 Total Revenue from franchise………………………………………………………………. P140,000 12. d There is already substantial performance of services rendered since, the franchise outlet started operations and it is assumed that period of refund has expired. The continuing franchise fee is recognized also as revenue since it is earned at the time it was received. The net income would be: Franchise Revenue: Initial Franchise Fee: Down payment…………………………………………… P 30,000 PV of installment (P10,000 x 1.7355)……………………. 17,355 P47,355 Continuing Franchise Fee (5% x P500,000) 25,000 Total Franchise Revenue………………………………………………………………… P72,355

Add: Interest Income (10% x P17,355)………………………………………………… Total Revenue/Net Income………………………………………………………………

1,735 P74,090

13. a All conditions that initial franchise fee be recognized as revenue had been met as follows: Revenue Analysis for IFF Cash N/R Services Yes Yes Period of Refund Yes Yes (note) Collectibility Reas. Assured 200,000 300,000 Status Revenue Revenue The Net Income then would be as follows: Franchise Revenue………………………………………………………………..P 500,000 Less: Cost of Franchise…………………………………………………………… 150,000 Net Income…………………………………………………………………………P 350,000 14. d In this problem, full accrual method is used to recognized the initial franchise fee of P100,000 analyze as follows: Revenue Analysis for IFF Cash N/R Services Yes Yes Period of Refund Yes Yes (note) Collectibility Reas. Assured 20,000 80,000 Status Revenue Revenue Note: Period of refunding the initial franchise fee was presumed to have been expired since the business operates profitably in its first year of operation. Continuing Franchise Fee: Considered revenue the moment continuing services had been rendered amounted to P5,000 (1% x P500,000). Initial Franchise Fee…………………………………………………………P 100,000 5,000 Continuing franchise fee…………………………………………………. Total…………………………………………………………………………… P 105,000 15,000 Less: Indirect cost of franchise…………………………………………… Net income……………………………………………………………………P 90,000

15. d Revenue = P400,000 Interest income = P160,000 × 8% ×9/12 = P9,600 Cash = P128,000 – P9,600 = P118,400 Repossession revenue: P240,000 – P128,000 = P112,000. 16. c

Cash = P560,000 + P48,000 = P608,000

Franchise Fee Revenue = P560,000 Unearned Franchise Fees = P48,000 × 20% = P9,600 Revenue from Continuing Franchise Fees = P48,000 – P9,600 = P38,400. 17. b - P200,000 + P545,872 – P24,000 = P721,872. 18. b

Franchisee frequently purchases all of the equipment, products, and supplies from the franchisor. The franchisor would account for these sales as if, it would be a product sales. Sometimes, however, the franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies after the initial franchise fee is paid. If the bargain price is lower that the normal selling price of the same product or it does not provide the franchisor the reasonable profit, then, a portion of the initial franchise fee should be deferred. The deferred portion would be accounted for as adjustment of the selling price when the franchisee subsequently purchases the equipment or supplies. Therefore, the amount of revenue would be P90,234 computed as follows: Services Period of Refund Collectibility Status

Cash Yes Yes P25,000 Revenue

Notes Receivable Yes Yes Reasonably Assured P68,234 Revenue except P3,000 reasonable profit on sale of equipment

The revenue from franchise would be: Cash……………………………………………………………………………………………… P 25,000 PV of Note…………………………………………………………………………..P68,234 Less: Reasonable profit on sale of 65,234 Equipment P15,000 – P12,000)………………………………………….… 3,000 P 90,234 Incidentally, the entries would be: Upon receipt of IFF: Cash………………………………………………………………………… 25,000 Notes Receivable………………………………………………………… 90,000 Unearned Interest Income (P90,000 – P68,234)…………. 21,766 Franchise Revenue……………………………………………. 90,234 Unearned Franchise Revenue………………………………. 3,000 If equipment was sold: Cash or Accounts Receivable………………………………………… 12,000 Unearned Franchise Revenue………………………………………… 3,000 Franchise Revenue – Equipment…………………………… 15,000 Cost of Sales – equipment……………………………………………… 12,000 Equipment Inventory………………………………………….. 12,000

Chapter 10 Problem I 1. The journal entries shown below would be made on the consignor’s and consignee’s books (assume the use of perpetual inventory): Transactions Shipment of goods on consignment.

2. Payment of expenses by consignor. 3. Payment of expenses by consignee. Advances by Consignor Sale of merchandise

6. Notification of sale to consignor and payment of cash due. Commission: 10% x P48,000 = P4,800

7. To record cost of goods sold and related costs. ** (P60,000 + P600 + P2,400) x ½ = P31,500

Entries on Consignor’s Books (Herbalife Supplier) Inventory on Consigment…… 60,000 Finished Goods Inventory*.... Inventory on Consignment….. Cash…….. Inventory on Consignment…… Consignee Payable……… Cash……… Advances from Consignee…..

600

60,000

No entry 600 Consignor Receivable

2,400 3,360

2,400 3,360

No entry.

Commission expense Advances from Consignee…… Cash……. Consignee Payable Consignment Sales Revenue.. Cost of goods sold** Inventory on Consignment

Entries on Consignee’s Books (Conrado Enterprises) No entry (memorandum entry only)

4,800 3,360 37,440 2,400 48,000

Cash……………. Advances to Consignor Cash Cash Consignor payable Consignor Payable.. Commission Revenue…….. Consignor Receivable ….. Cash……… Advances from Consignee……

2,400

3,360 48,000

2,400

3,360 48,000

48,000 4,800 2,400 37,440 3,360

31,500 31,500

*if periodic method is used, the credit should be “consignment shipments” account treated as reduction in the Costs of goods available for sale to arrive at Cost of Goods Sold Available for Regular Sale.

2. The remittance amounting to P37,440 can be determined by preparing the Account Sales as follows: Sold for the Account of: Jingka Juice Sales (60 sachets of herbal goods) P48,000 Charges: Finishing costs…………………….. P 2,400 Commission (P48,000 x 10%)……………….. 4,800 7200 Due to Consignor……………………………. P40,800 Less: Advances………………. 3,360 Balance………………………… P37,440 Remittance Enclosed……………… 37,440 Balance Due…………… P 0 Items on Hand (50 sachets of herbal goods): P60,000 x 50% P30,000 Problem II 1. The account sales: Sold for the Account of: AA Company Sales (8 sets @ P24,000)……………… Charges: Freight-in…………… Advertising expense………… Deliveries and installation expenses Repairs expense – on units sold.. Commissions, 25% of sales Due to Consignor……………………………. Less: Advances………………. Balance………………………… Remittance Enclosed……………… Balance Due…………… Items on Hand………… Items Returned (defective)….…….

P 192,000 P 6,000 2,400 9,600 4,800 48,000

2. The inventory on consignment amounted to P189,000 computed as: Charge Analysis Sales Inventory (8 sets) (15 sets) Charges by consignor: Cost of consigned goods (@P12,000/set) P 96,000 P180,000 Freight-out (P9,000/25 sets = P360 per set) 3,600* 5,400 Charges by consignee: Freight-in (P6,000/25 sets =P240 per set) 2,400* 3,600 Advertising expense………….. 2,400 0 Delivery and installation 9,600 0 Repairs expense…………… 4,800 0 Commissions [25% of sales (8 sets x P24,000 per set] 48,000 0 Total P166,800 P189,000 * Freight on sets returned is charged against sales of the period.

70,800 P121,200 0 P121,200 30,000 P 91,200 15 sets 2 sets

Total (25 sets) P 300,000 9,000 6,000 2,400 9,600 4,800 ___48,000 P379,800

** Normally, the term “freight-out” is synonymous to “delivery expense” which is classified as selling expenses if we are dealing with a third party. But, for consignment accounting where the transfer of merchandise if from consignor to consignee, the usage of the term “freight-out” does not construed to be a selling expense but still an inventoriable cost (which is part of freight-in). The consignment net income amounted to P25,200 computed as: Consignment Sales (8 sets x P24,000 per set) Less: Costs and expenses: Charges by Consignor: Cost of consigned goods @P12,000/set) Freight-out (P9,000/25 sets = P360 per set) Charges by consignee: Freight-in (P6,000/25 sets =P240 per set) Advertising expense………….. Delivery and installation Repairs expense…………… Commissions [25% of sales (8 sets x P24,000 per set] Net Income

P 192,000 P 96,000 3,600* P 2,400* 2,400 9,600 4,800 48,000

99,600

67,200 P 25,200

Problem III Summit Electronics Company Inventory on Consignment (800 @ P570) Finished Goods Inventory

456,000

Consignment Expense (P368,000 x 30%) Accounts Receivable--Consignee Sales Sales Revenue—Consignment (P920 x 400)

110,400 257,600

Cost of Consigned Goods Sold (P570 x 400) Inventory on Consignment

228,000

Cash [(P920 x 70%) x 380] Accounts Receivable--Consignee Sales

244,720

456,000

368,000 228,000 244,720

Farley Hardware No entry upon receipt of consigned merchandise. Cash (P920 x 400) Consignor Payable Commission Revenue

368,000

Consignor Payable Cash

244,720

257,600 110,400 244,720

Multiple Choice Problem 1. c – P1,200 Commission = 25% x Sales price P400 = 25% x Sales price Sales price = P400 ÷ 25% = P1,600 = 8 tapes Number of units sold = Selling price = __P1,600__ Price per tape P200 per tape Sales ……………………………………………………………….. P1,600 Less Commission of consignee………………………………... 400 Amount remitted by Beta View Store………………………...P1,200 2. a – P 370

Consignor’s charges: Cost Freight-out Consignee’s charge - Commission Total Sales price Consignment profit

Total Charges (25) P2,500 75 __400__ P2,975

Charges Related to Consignment Inventory on Sales Consignment (8) (15) P800 30 __400__ 1,230 _1,600_ _P370_

P1,500 45 _______ _P1,545_

3. a – P1,545 (refer to No. 2 for computation) 4. b

5. c

Sales (P2,250 / 15%) Divided by: Selling price per unit Number of units sold

P15,000 P 1,000 15 units

Sales Less Charges: Commission Advertising Delivery expense Due to Consignor Less: Advances Value of note – sight draft: (100 beds x P600 per bed) x 60% Multiplied by: Proportional number of beds sold Amount remitted

P15,000 P 2,250 1,500 ___750 P36,000 15/100

__4,500 P10,500 __5,400 P 5,100

6. d – P1,500 Sales Less Charges: Consignor’s charge: Cost of beds (P600 per bed x 15 beds) Consignee’s charges: Commission Advertising Delivery expense Consignment net income

P15,000 9,000 P2,250 1,500 ___750

7. a – no items were sold in November; Sales (unknown) Less Charges: Commission Remittance

P

x

15% x P 27,200

x – 15%x = P27,200 85%x = P27,200 x = P32,000 8. c – P16,800 Sales (unknown) Less Charges: Advertising Delivery and installation charges Commission (unknown) Remittance

x P500 100 20%x

_______ P 12,840

x – (P500 + P100 + 20%x) = P 12,840 x – 20%x = P12,840 + P600 80%x = P13,440 x = P16,800 9. b- P6,080 Cost (P150 per unit x 40 units) Freight on shipment (P200 x 40/100) Cost of inventory on consignment 10. c - 6 Sales (unknown) Less Charges: Commission (unknown) Advertising Delivery and installation Cartage on consigned goods Remittance x – (20%x + P1,000 + P600 + P500) = P21,900 x – 20%x = P21,900 + P2,100 80%x = P24,000

P6,000 80 P6,080 x 20%x P1,000 600 500

P21,900

__4,500 P1,500

x = P30,000 =6 Number of units sold = _P30,000_ P5,000 per set 11. b – P2,300

Consignor’s charges: Cost Freight-out Consignee’s charges: Commission (20% x P30,000) Advertising Delivery and installation Cartage Total Sales price Profit on Consignment

Total Charges (10)

Charges Related to Consignment Inventory on Sales Consignment (6) (3)

P30,000 2,500

P18,000 1,750

6,000 1,000 600 __500__ P40,600

6,000 1,000 600 __350__ 27,700 _30,000_ __P2,300__

P9,000 750

__150__ _P9,900_

12. d – None of the above (P9,900) – refer to No. 11 for computation. 13. No answer available - P17,625 Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900 .8 Sales = P14,100 Sales = P17,625. 14. a (P270 x 50) + [(P600 ÷ 80) x 50] = P13,875. AA Sales - Nos. 15 to 17: 15. a Gross collection (P15,000 x 70% x 80%) Less: Cash discount taken by customer (P8,400 x 2%) Net collection Less Charges: Expenses Commission (P8,400 x 15%) Due to Consignor Less: Advances Amount remitted

P 8,400 __168 P 8,232 P 800 _1,260

__2,060 P 6,172 _6,000 P 172

16. b

Consignor’s charges: Cost Freight Consignee’s charges: Expenses Commission (15% x P10,500) Cash discount (P10,500 x 80% x 2%) Total Sales price (70% x P15,000) Profit on Consignment

Total Charges (100%)

Charges Related to Consignment Inventory on Sales Consignment (70%) (30%)

P10,000 120

P 7,000 84

800 1,575 168 P12,663

800 1,575 168 P 9,627 _10,500_ P 873

P 3,000 36

_P3,036_

17. b – refer to No. 16 for computation RR Products Company – Nos. 19 to 21 19. c Collection made pertaining to: May sale Down payment (3 x P50) Monthly payment thereafter (3 x P10) June sale Down payment (1 x P50) Total Less: Commission (P230 x 20%) Amount remitted

P 150 30

___50 P 230 ___46 P 184

20. d – P140

Consignor’s charges: Cost Freight Consignee’s charges: Commission Total Sales price (4 units x P250/unit) Profit on Consignment

P 180

Total Charges (5)

Charges Related to Consignment Inventory on Sales Consignment (4) (1

P 775 50

P 620 40

P 155 10

200 P1,025

200 P 860 _ 1,000 P 140

____ P165

21. b – refer to No. 20 for computation 22. b Collection made: Cash sale (P1,500 x 2)

P 3,000

Credit sale (P1,800 x 25%) Total Less: Charges Freight Commission [(P3,000 + P1,800) x 15%] Amount remitted

___450 P3,450 P 320 __720

23. a

Consignor’s charges: Cost Freight Consignee’s charges: Freight Commission Total Sales price Profit on Consignment

Total Charges (5)

__1,040 P 2,410

Charges Related to Consignment Inventory on Sales Consignment (3) (2)

P4,000 200

P 2,400 120

P 1,600 80

320 720 P5,240

192 720 P 3,432 4,800 P 1,368

128 ______ P1,808

24. b – P1,808 – refer to No. 23 for computation 25. d – 244,600 Sales on credit (14,000 per unit x 12 units) + (13,000 x 10) Less: Sales allowance granted Bad debts Commission [2% x (P298,000 – P2,000)] Amount still due from BB, Inc 26. d – P67,280

Consignor’s charges: Cost Freight-out Consignee’s charges: Sales allowance Bad debts Commission [15% x (P298,000 – P2,000)] Total Sales price [P14,000 per unit x 12 units) + (P13,000 per unit x 10 units)] Consignment profit 27. d – refer to No. 26 for computation

Total Charges (30)

P 2,000 7,000 _44,400

P298,000 __53,400 P 244,600

Charges Related to Consignment Inventory on Sales Consignment (22) (8)

P240,000 1,800

P176,000 1,320

2,000 7,000

2,000 7,000

44,400 P295,200

44,400 P230,720 298,000 P 67,280

P64,000 480

_P64,480_

28. b – 395 Sales (unknown) Less Charges: Commission (unknown)

x

( )

__x__ P10 P100 __P45__

Delivery expense Remittance x-

________ P35,505

[( _x__ ) P10 + P45 ] = P35,505 100

x – _P10x_ = P35,550 P100 P100x – P10x = P3,555,000 P90x = P3,555,000 x = P39,500 Number of ballpens sold = _P39,500_ = P395 P100 per unit 29. b Sales Cost of sales Gross profit Operating expenses: Commission (P30,000 x 5%) Freight-in (P260 x P19,500*/P26,000) Others Regular (P15,150 x P19,500/P26,000) Consignment (P15,150 x P30,000/P150,000) Total Net profit

*P26,000 – P6,500 = P19,500

30. d – P5,775 (refer to No. 29 for computation) 31. a – (P18,000 + P900) = P18,900

Regular Sales P120,000 84,000 P 36,000

Consignment Sales P30,000 19,500* P10,500

Total P150,000 103,500 P 46,500

P 1,500 1,950

P 1,500 1,950

3,030 P 4,725 P 5,775

3,030 _P16,845_ P29,655

12,120 _______ P 12,120 P 23,880

Problem III 1. • Contributions of cash by the operators Cash KK Company Cerise Company Contribution by joint operators.

Chapter 11

360,000

• Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96,000 Cash Loans payable – machinery and equipment Contribution by joint operators. Materials Accounts payable Acquisition of materials. • Labor incurrence Payroll Cash Accrued payroll Annual labor. • Loans from the bank Cash Bank loans payable Amount borrowed.

180,000 180,000

60,000 36,000

78,000

86,400

72,000

• Repayment of loan – machinery and equipment and other factory expenses Loan payable – machinery and equipment 12,000 Cash Partial payment of loan. Accounts payable Cash Payment of trade creditors. Factory overhead control – heat, light and power Cash Payment of manufacturing expenses such as heat, light and power. • Depreciation of machinery and equipment Factory overhead control – depreciation Accumulated depreciation Depreciation of equipment. • Transfer of materials, labor and overhead to Work-in-Process

50,400

156,000

9,600

78,000

84,000 2,400

72,000

12,000

50,400

156,000

9,600

Work-in-process Payroll Materials Factory overhead control – heat, light and power Factory overhead control – depreciation Allocation of costs to work-in-process • Transfer of Work-in-Process to Finished Goods Inventory. Finished goods Work-in-process Allocation to finished goods

309,600

216,000

• Transfer of Finished Goods Inventory to Joint Operators throughout the year KK Company 96,000 DD Company 96,000 Finished goods Delivery of output to joint operators.

86,400 57,600 156,000 9,600

216,000

192,000

2. Cash Contribution – Drei Contribution – Cerise Bank loan Balance, 12/31/x4

180,000 180,000 60,000 57,600

60,000 84,000 12,000 50,400 156,000

Work-in-Process Labor 86,400 Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600 3.

a. Total assets, P282,000 b. KK’s investment, P84,000 c. DD’s investment, P84,000 December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment Less: Accumulated depreciation Total Assets

Machinery and equipment Labor Machinery and equipment Accounts payable Factory overhead control

216,000

to Finished Goods

P 57,600 24,000 93,600 20,400 P 96,000 9,600

P 195,600 86,400 P282,000

Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 Cost of inventory distributed DD Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity

P

2,400 27,600

P 60,000 24,000

P 180,000 ( 96,000) P 180,000 ( 96,000)

P 30,000 __84,000 P 114,000 168,000 P282,000

P 84,000 P 84,000 P168,000

Problem VI The joint operator, Entity K account for their interests in the joint operation as follows: January 1, 20x4 (P12,000,000 / 5 = P2,400,000) Property, plant and equipment (interest in an aircraft) Cash To recognize the purchase of an ownership-interest in a jointly controlled aircraft. In 20x4 Cash Profit or loss (rental income) To recognize income earned in renting to others the use of the aircraft in 20x4.

2,400,000

12,000

Profit or loss (aircraft operating expenses) Cash To recognize the costs of running an aircraft in 20x4.

180,000

Profit or loss (depreciation expense) Accumulated depreciation (interest in an aircraft To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5 operators = P120,000 share for each joint operator.

120,000

2,400,000

12,000

180,000

120,000

Problem VII 1. The following are the summaries of the above transactions for a joint operation in the form of a partnership: Event a. b. c. d. e. f. * NI** Cash*** Settlement Totals

Investment in Joint Operation Dr. Cr. P 12,000 120,000 6,000 180,000 P588,000 ________ P318,000 _297,000 P597,000

6,000 ___3,000 P597,000 ________ P597,000

_______ P597,000

________ P597,000

Dr.

P204,000 3,600

AA

Cr. P12,000 120,000 120,000

BB

Dr.

Cr.

Dr.

P60,000

P312,000 3,600

CC

Cr. P 6,000

___3,000 P210,600 ________ P210,600

________ P252,000 __112,200 P364,200

________ P315,600 ________ P315,600

______ P 60,000 _147,000 P195,000

P72,000 3,600 6,000 _______ P81,600 _______ P81,600

_153,600 P364,200

________ P364,200

________ P315,600

_120,600 P315,600

_______ P81,600

10,800 _______ P 16,800 31,800 P48,600 _33,000 P81,600

* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000. **NI – Net Income Allocation Allowance for cleaning-up operations Commission: Aljon: 40% of P204,000 Elerie: 40% of P312,000 Mac: 40% of P72,000 Balance (75%: 25%) Total

AA P81,600

BB

CC P 3,000

Total P 3,000

30,600

10,200

28,800 _______

81,600 124,800 28,800 40,800

P112,200

P135,000

P31,800

P279,000

P124,800

**Total credits of P597,000 – Total debits of P318,000 = P279,000, net income. 2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows: AA, capital 153,600 BB, capital 120,600 CC, capital 33,000 Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations.

Problem VIII Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)

P2,016,000 P 1,080,000 324,000 72,000 288,000 180,000 ( 252,000) ( 360,000)

P

1,404,000 612,000

P

Positive excess: Goodwill (excess of cost over fair value)

252,000 P 360,000

The over/under valuation of assets and liabilities are summarized as follows: Anton Co. Anton Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 Land 1,080,000 2,040,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 Equipment – net ( 7 year remaining life) 1,440,000 600,000 Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) Net P4,320,000 P5,160,000

(Over) Under Valuation P 240,000 960,000 600,000 ( 840,000) ( 120,000) P 840,000

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventories (sold in 20x4) Land Buildings – net ( 10 year remaining life) Equipment – net ( 7 year remaining life) Bonds payable (due January 1, 20x9) Net

P ( ( P

Over/ Under 240,000 960,000 600,000 840,000) 120,000) 840,000

30% thereof P 72,000 288,000 180,000 ( 252,000) ( 36,000) P 252,000

Life

1 10 7 5

Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800

The following are entries recorded by the parent in 20x4 in relation to its investment in joint venture: January 1, 20x4: (1) Investment in DD Company Cash Acquired 30% joint control in DD Company. January 1, 20x4 – December 31, 20x4: (2) Cash Investment in DD Company (P720,000 x 30%) Record dividends from DD Company.

2,016,000

216,000

2,016,000

216,000

December 31, 20x4: (3) Investment in DD Company Investment income (P1,440,000 x 30%) Record share in net income of DD Company.

432,000

December 31, 20x4: (4) Investment income Investment in DD Company……………………. Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.

46,800

432,000

46,800

Thus, the investment balance and investment income in the books of TT Company is as follows: Investment in Joint Venture (DD Company) Cost, 1/1/x4 2,016,000 216,000 NI of Anton 46,800 (1,440,000 x 30%) 432,000 Balance, 12/31/x4 2,185,200 Investment Income Amortization

46,800

432,000 385,200

Dividends – Son (720,000x 80%) Amortization

NI of Son (P1,440,000 x 30%) Balance, 12/31/x4

To check the balance of Investment in Joint Venture (DD Company): DD Company’s Stockholders’ Equity, 12/31/20x4: Common stock Retained earnings Retained earnings,1/1/20x4 P 1,080,000 Net income – 20x4 1,440,000 Dividends – 20x4 ( 720,000) Book value of stockholders’ equity of DD Company,12/31/20x4 Multiplied by: Interest in Joint Venture Book value of Interest in Joint Venture Add: Unamortized allocated excess – 30% thereof P252,000 – P46,800, amortization) Goodwill Investment in Joint Venture (DD Company) – equity method

P3,600,000

1,800,000 P5,400,000 30% P1,620,000 205,200 360,000 P2,185,200

Multiple Choice Problems 30. a

Books of X Inv. in JO 4,000 6,500 2,500

X, capital 2,500

Journal entry for settlement should be: Z, capital……………………….. 6,500 X, capital…………………… 2,500 Y, capital…………………… 4,000

Books of Y Inv. in JO 2,500 4,000

6,500

Inv. in JO

Y. capital 4,000

Books of Z

2,500 4,000

Z, capital 6,500

6,500 31. Total credits - Investment in Joint Operations…………………………………P 25,810 Total debits - Investment in Joint Operations…………………………………. 19,750 Net income or total gain (credit balance)…………………………………….P 6,060 32. d

Jose, capital 8,500 investment 1,212 share in net income (P6,060 x 2/10) 9,712

33. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40 per share) 34. b 20,000 shares at P40/share Expenses

Joint operation loss *

Jose, capital P800,000 P 198,000 (4,500 x P44) – Sales 3,000 125,000 (5,000 x P25) 4,700 13,600* (13,600 x P1) - Cash dividend 168,000 (6,000 x P28) - Sales 266,000 (7,600 x P35) P807,700 P 770,600 P 37,100

9/30 Shares issued (6,000 + 10,000 + 4,000) 10/20 Sold 11/ 1 Stock dividend (20,000 – 4,500) x 20% 11/15 Sold Balance of shares outstanding before cash dividend

Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares)

20,000 (4,500) 3,100 (5,000) 13,600

35. c

Investment in Joint Operations P400,000 Investment (10,000 shares x P40) P18,550 P381,450

Share in net loss P37,100 x (10,000/20,000) 36. b

Unrealized loss due to decline in the value of shares at the time of investment (P62 – P40) x 4,000 shares Share in joint operation (P37,100 x 4/20) Reduction of loss by cash dividend (P13,600 x 4/20)

37. a before net income or loss

P68,000 __7,420 P98,140

Investment in Joint Operations 15,000 25,000 ending inventory 10,000 net income

38. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%) 39. a Purchases Contr/Invest Expenses

Joint Operations 20,000 77,000 Sales (?) 20,000 800 1,800 42,600

Anson, Capital Unsold merchandise 600 20,000 18,600 Profit(50%) 600

38,600 38,000 to Alas

77,000 34,400 (P16,000 + P18,400) 2,800 (P600 + P2,200) Unsold merchandise 37,200 Net profit

40. c – refer to No. 39 computation. 41. a Purchases Freight-in Freight-out

Investment in Joint Operations 10,000 7,200 sales 240 5,120 unsold 260 (P10,000 + P240) x 1/2 10,500 12,320 1,820

Santo, capital 10,000 Contribution/Invest 910 Share in NI 10,910

42. a – refer to No. 41 for computation 43. c

Investment in Joint Operations 6,500 3,500 Sales 3,000

before sale Net loss N, capital 1,100 14,500 13,400

O, capital 1,100 6,500 5,400

Distribution of Loss: Salary Balance, equally

M 300 (1,100) P ( 900)

P

P

N

(1,100) P(1,100)

P

O

(1,100) P(1,100)

Total 300 (3,300) P(3,000)

P

44. a – refer to No. 43 for computation 45. b Revenues Total cash receipts (P78,920 + P65,245) Less: Cash investments (P30,000 + P20,000) Cash sales Add: Proceeds from sale of remaining assets Total Revenue Less: Expenses (P62,275 + P70,695) Net income

P144,345 50,000 P 94,345 60,000 P154,345 132,970 P 21,375

46. c Receipts

Benin, capital 78,920 30,000 Contribution 62,275 Disbursement 12,825 Share in NI (3/5) 78,920 105,100 26,180

Receipts

Sucat, capital 65,425 20,000 Contribution 70,695 Disbursement 8,550 Share in NI (2/5) 65,425 99,245 33,820

47. d N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should receive net cash of P2,000: O, capital 3,000 Cash 2,000 P, capital 5,000 O’s books: it shows P5,000 receivable from P, and P2,000 payable to N; thus, O should receive net cash of P3,000: N, capital 2,000 Cash 3,000 P, capital 5,000 P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively: N, capital 2,000 O, capital 3,000 Cash 5,000 50. b – refer to No. 25 for further discussion. The Income from Investment in Basket Co. on December 31 is as follows: Share in net income (P90,000 x 40%] Amortization of allocated excess Income from Investment on December 31

P 36,000 ( 16,400) P 19,600

51. d The joint arrangement is a joint venture because it needs unanimous consent to all parties involved. The parties recognize their rights to the net assets of Harrison Company as investments and account for them using the equity method. The Investment in Goldman Co. as of December 31, 2015 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income [(P140,000 x 3 years) x 40%] Share in dividends [(P50,000 x 3 years) x 40%] Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired (40% x P1,200,000) Allocated excessP 120,000 Less: Over/undervaluation of assets and liabilities Goodwill

P 600,000 168,000 (60,000) ( 0) P 708,000 P 600,000 480,000 0 P 120,000

There is no indication as to impairment of goodwill.

52. d To determine whether a contractual arrangement gives parties control of an arrangement collectively, it is necessary first to identify the relevant activities of that arrangement. That is, what are the activities that significantly affect the returns of the arrangement? When identifying the relevant activities, consideration should be given to the purpose and design of the arrangement. In particular, consideration should be given to the risks to which the joint arrangement was designed to be exposed, the risks the joint arrangement was designed to pass on to the parties involved with the joint arrangement, and whether the parties are exposed to some or all of those risks. In many cases, directing the strategic operating and financial policies of the arrangement will be the activity that most significantly affects returns. Often, the arrangement requires the parties to agree on both of these policies. However, in some cases, unanimous consent may be required to direct the operating policies, but not the financial policies (or vice versa). In such cases, since the activities are directed by different parties, the parties would need to assess which of those two activities (operating or financing) most significantly affects returns, and whether there is joint control over that activity. This would be the case whenever there is more than one activity that significantly affects returns of the arrangements, and those activities are directed by different parties. Based on the ownership structure, even though Wallace can block any decision, Wallace does not control the arrangement, because Wallace needs Zimmerman to agree — therefore joint control between Wallace and Zimmerman (since their votes and only their votes, together meet the requirement). Because they are the only combination of parties that collectively control the arrangement, it is clear that Wallace and Zimmerman must unanimously agree. The appropriate method for the joint venture is the equity method. Investment in Gold Co. on December 31, 2015 is as follows:

The Income from

Share in net income (P140,000 x 40%) Amortization of allocated excess Income from Investment on December 31, 2015

P 56,000 ( 0) P 56,000