advanced accounting solution manual antonio j. dayag
TRANSCRIPT
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
Invested
by John
Invested
by Jeff
Invested
by Jane
Cash P100,000 - - - - - -
Equipment P 110,000 - - -
Total assets 100,000 P 110,000 0
Note payable assumed by partnership - - - 30,000 - - -
Net assets invested P100,000 P 80,000 P 0
1. Bonus Method
2. Goodwill Method (Revaluation of Asset)
Cash 100,000
Cash 100,000 Equipment 110,000
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 51,000
Cash 12,000
Accounts Receivable 6,000
Office Supplies 800
Land 30,000
Accounts Payable 5,000
Mortgage Payable 18,800
Julie, Capital 25,000
(b) Tom, Drawing 15,000
Cash 15,000
Julie, Drawing 12,000
Cash 12,000
(c) Income Summary 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
2. TOM AND JULIE PARTNERSHIP
Statement of Changes in Partners' Capital
For the Year Ended December 31, 20x4
Tom Julie Total
Capital balances, Jan. 1 P 0 P 0 P 0
Add: Additional investments 51,000 25,000 76,000
Net income allocation 33,553 16,447 50,000
Totals P 84,553 P 41,447 P126,000
Less: Withdrawals 15,000 12,000 27,000
Capital balances, Dec. 31 P 69,553 P 29,447 P99,000
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
Individual
*Books of
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……………………………. 1,800
Additional provision computed as follows:
Required allowance: 10% x P48,000 = P 4,800
Less: Previous balance………………… 3,000
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……………………………………………………………… 116,100
Initial investment computed as follows:
Unadjusted capital of H………………………………P 246,000
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 P 236,100
Accounts receivables P 48,000
Less: Allowance for doubtful accounts………........... 4,800 43,200
Notes receivable……................................................... 60,000
Interest receivable……………….................................. 3,600
Merchandise Inventory................................................ 21,000
Prepaid expenses………….......................................... 2,400
Equipment (net)…………............................................. P 72,000
Less: Accumulated depreciation………………........ 10,800 61,200
Total Assets.................................................................... 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
Sole Proprietor
(Baker)
Books of
Sole Proprietor
(Carter)
*New Set of
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
Allowance for doubtful
Accounts………………….. 7,200
Worthless accounts.
b. K, capital……….…………………. 3,000
Allowance for doubtful
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………….................. 1,200
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……………… 6,000
Under-depreciated.
g. K, capital……………………………12,000
Accumulated depreciation-
Furniture 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
Add(deduct): adjustments:
a. Worthless merchandise……..( 12,000)
b. Worthless accounts………….( 7,200)
c. Rent income……………….…. 12,000
e. Office supplies expense…….( 8,400)
f. Additional depreciation……( 6,000)
h. Interest expense………………( 1,800)
Adjusted capital of J…………………P348,600
Unadjusted capital of K..……………...P432,000
Add(deduct): adjustments:
a. Merchandise revaluation…….. 6,000
b. Worthless accounts…………….( 3,000)
c. Salaries…………….…….………..( 9,600)
d. Interest income………………….. 1,200
g. Additional depreciation………( 12,000)
h. Patent………….……….…………. 48,000
Adjusted capital of K….………………..P462,600
b. To close the books:
Books of J Books of K
Allowance for doubtful
accounts................................. 12,000
Accumulated depreciation –
equipment…………………… 60,000
Accounts payable……………159,600
Notes payable………………… 60,000
Interest payable………………. 1,800
J, capital…….………………….348,600
Cash………………………… 90,000
Accounts receivable……. 216,000
Merchandise inventory…. 180,000
Allowance for doubtful
accounts................................. 9,000
Accumulated depreciation –
furniture and fixtures ………. 36,000
Accounts payable……………. 120,000
Salaries payable………………. 9,600
K, capital…….…………………. 462,600
Cash…………………………. 54,000
Accounts receivable…….. 180,000
Notes receivable…………. 60,000
Interest receivable………... 1,200
Office supplies……………. 24,000
Equipment…………………. 120,000
Rent receivable…………... 12,000
Close the books of J.
Merchandise inventory….. 150,000
Furniture and fixtures.…….. 144,000
Patent………….……………. 48,000
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……………………. 9,000
Accounts payable……………………………………….. 120,000
Salaries payable….………………………………………. 9,600
K, capital…………………………………………………… 462,600
3.
H I
Unadjusted capital (refer to 1a) P372,000 P432,000
Adjusted capital (refer to 1b) 348,600 462,600
Net adjustments (debit)/credit (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 Liabilities and Capital
Cash 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 P 260,000
Mortgage Payable M, Capital ___294,000
__________ Total Capital P 554,000
Total Assets P1,094,000 Total Liabilities and Capital P 1,094,000
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
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
Cash P20,000 P 30,000
Inventory - 15,000
Building - 40,000
Furniture and equipment 15,000 -
Total P35,000 P 85,000
Less mortgage assumed
by partnership (10,000)
Amounts credited to capital P35,000 P 75,000
9.c
Evan Helen
Unadjusted capital 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 P 370,000
Less Liabilities (Mortgage payable) 90,000
Net assets (equal to FF’s capital account) P 280,000
14. d
FF, capital (see no.13) P 280,000
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 65,000
Cash to be invested by CC P 55,000
15. a
Agreed Fair Values Invested
by John
Invested
by Jeff
Invested
by Jane
Cash 100,000 - - - - - -
Equipment 110,000 - - -
Total assets 100,000 110,000 0
Note payable assumed by partnership - - - 30,000 - - -
Net assets invested 100,000 80,000 0
Bonus Method
Goodwill Method
Cash 100,000
Cash 100,000 Equipment 110,000
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
18. c
GG’s adjusted capital (see no. 17) P 40,500
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
19. d
Total capital of the new partnership (see no. 20) P 296,875
Multiply by RR’s interest 20%
Cash to be invested by RR P 59,375
20. (a)
OO PP Total
(60%) (40%)
Unadjusted capital balances P133,000 P108,000 P241,000
Adjustments:
Allowance for bad debts ( 2,700) ( 1,800) ( 4,500)
Inventories 3,000 2,000 5,000
Accrued expenses ( 2,400) ( 1,600) ( 4,000)
Adjusted capital balances P130,900 P106,600 P237,500
Total capital before the formation of the new partnership (see above) P 237,500
Divide by the total percentage share of OO and PP (50% + 30%) 80%
Total capital of the partnership after the admission of RR P 296,875
21. a
Agreed Capital Contributed Capital Settlement
OO P148,437.50 (50% x P296,875) P 130,900 P 17,537.50
PP 89,062.50 (30% x P296,875) 106,600 (17,537.50)
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 P211,200
Add Accounts payable 49,600
Total assets (excluding cash) 260,800
Less Noncash assets (96,000 + P144,000) 240,000 P20,800
Accounts receivable (96,000 – P1,920) 94,080
Merchandise inventory 160,000
Prepaid expenses 5,200 P 280,080
Cash invested by DD 113,640
Total assets of the partnership 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 P 132,000
Required capital of JJ 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 Blue Crown
Cash P50,000
Property P 80,000
Mortgage assumed (35,000)
Equipment P 55,000
Amount credited to
capital accounts P50,000 P 45,000 P 55,000
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
11. P375,000 = P400,000 – P25,000
12. P50,000
13. P280,000
Pane Sills
Cash P 40,000 P 30,000
Machinery and equipment 100,000
Building .. 350,000
Subtotal P140,000 P380,000
Less: Liability assumed by the partnership .. (100,000)
Capital balances, 7/1/06 P140,000 P280,000
14. d
Adjusted capital of LL P 165,900
Contributed capital of MM 82,950
Total capital 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
GG, capital:
Unadjusted balance P 49,500
Adjustments:
Accumulated depreciation ( 4,500)
Allowance for doubtful account ( 4,500)
Adjusted balance P 40,500
THEORIES
Completion statements:
1. accounting
2. GAAP
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………… 345,600 X, drawing……. 144,000 Y, drawing……. 201,600
X, capital, January 1……….. P 360,000 X, capital, January 1……….. 504,000 Total capitals P 864,000
X’s share of net income: 360/864 of P345,600 P 144,000 Y’s share of net income 504/864of P345,600 201,600 Total capitals P 345,600
2. Ending Capital.
Income summary………… 345,600 X, drawing……. 153,600 Y, drawing……. 192,000
X, capital, December 31……….. P 432,000 X, capital, December 31……….. 540,000 Total capitals P 972,000
X’s share of net income: 432/972 of P345,600 P 153,600 Y’s share of net income 540/972 of P345,600 192,000 Total P 345,600
3. Interest on Excess Average Capital Balance.
Income summary………… 4,320 Y, drawing……. 4,320 Interest allowed based on average capitals.
Y’s interest on excess average capital: 6% of (P486,000 – P414,000)…………………..
P 4,320
X:
Capital balance
No. of Mos. Unchanged
1/1/x4: P360,000 x 3 P1,080,000 4/1/x4: 432,000 x 9 3,888,000 12 P4,968,000 Average P 414,000
Y:
Capital balance
No. of Mos. Unchanged
1/1/x4: P504,000 x 2 P 1,008,000 3/1/x4: 468,000 X 8 3,744,000 11/1/x4: 540,000 x 2 1,080,000 12 P5,832,000 Average P 486,000 Total P 900,000
The net effect of the foregoing on capitals is:
X Y Total Interest on excess average capital……
P 4,320 P 4,320
Balance (1:2)……….. P 113,760 227,520 341,280 Total P 113,760 P 231,840 P345,600
The allocation of net income may be summarized in a single entry as follows:
Income summary……………. 345,600 X, drawing……. 113,760 Y, drawing……. 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 = Bonus B = 20% of Net income B = 20% of P504,000 B = P100,800
2. A bonus of 20% of net income after deduction of the bonus, the bonus would be computed as
follows:
Let B = Bonus B = 20% of Net income after Bonus B = 20% (P504,000 – B)
B = P100,800 - .20B 1.20 B = P100,800
B = 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: A B Total Bonus…. P 100,800 P 100,800 Salaries……… 48,000 P 72,000 120,000 Interest…………. 14,400 9,600 24,000 Balance (2;1)………. 172,800 86,400 259,200 Total P336,000 P168,000 P504,000
2. 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: A B Total Bonus…. P 84,000 P 84,000 Salaries……… 48,000 P 72,000 120,000 Interest…………. 14,400 9,600 24,000 Balance (2;1)………. 184,000 92,000 276,000 Total P330,400 P173,600 P504,000
3. Bonus is based on net income after bonus and salaries but before interest:
Let B = Bonus; S = Salaries; and I = Interest. B = 20% of Net income after Bonus and Salaries before Interest B = 20% (P504,000 – B – S)
B = 20% (P504,000 – B – P120,000) B = 20% (P384,000 – B) B = P76,800 - .20B
1.20 B = P76,800 B = P64,000
Proof:
Net income before bonus, salaries and interests…………… P504,000 Less: Bonus……………… 64,000 Salaries……………0 120,000 Net income after bonus, salaries before interests…………… P320,000 Multiplied by: Bonus rate…………. 20% Bonus………… P 64,000
The schedule showing the allocation of net income is presented as follows:
A B Total Bonus…. P 64,000 P 64,000 Salaries……… 48,000 P 72,000 120,000 Interest…………. 14,400 9,600 24,000 Balance (2;1)………. 197,333 98,667 296,000 Total P323,733 P180,267 P504,000
4. Bonus is based on net income after bonus, salaries and interest:
Let B = Bonus; S = Salaries; and I = Interest. B = 20% of Net income after Bonus, Salaries and Interest B = 20% (P504,000 – B – S - I)
B = 20% (P504,000 – B – P120,000 – P24,000) B = 20% (P360,000 – B) B = P72,000 - .20B
1.20 B = P72,000 B = P60,000
Proof:
Net income before bonus, salaries and interests…………… P504,000 Less: Bonus……………… 60,000 Salaries…………… 120,000 Interest…………….. 24,000 Net income after bonus, salaries before interests…………… P300,000 Multiplied by: Bonus rate…………. 20% Bonus………… P 60,000
The schedule showing the allocation of net income is presented as follows:
A B Total Bonus…. P 60,000 P 60,000 Salaries……… 48,000 P 72,000 120,000 Interest…………. 14,400 9,600 24,000 Balance (2;1)………. 200,000 100,000 300,000 Total P322,400 P181,600 P504,000
5. Bonus is based on net income after salaries but before bonus and interest: Let B = Bonus; S = Salaries; and I = Interest.
B = 20% of Net income after Salaries before Bonus and Interest B = 20% (P504,000 – S)
B = 20% (P504,000 – P120,000) B = 20% (P384,000) B = P76,800
Refer to Note of No. 3. 6. Bonus is based on net income after interest but before bonus and salaries:
Let B = Bonus; S = Salaries; and I = Interest. B = 20% of Net income after Interest before Bonus and Salaries B = 20% (P504,000 – P24,000I
B = 20% (P480,000) B = 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 = Bonus; B = 20% (P504,000 – T)
B = P100,800 - .20T
Let T = Income tax T = 35% (P504,000)
T = P176,400 Substituting the equation for T in the equation for B:
Let B = P100,800 - .20 (P176,400) B = P100,800 – P35,280
B = P65,520
Proof: Net income before bonus and income tax…………… P504,000 Less: Bonus……………… 65,520 Net income before bonus after income tax…….. P438,480 Less: Income tax…………… _176,400 Net income after bonus and income tax……… P262,080
Bonus as computed above:
Net income before bonus and income tax…………… P504,000 Less: Income tax (35% x P504,000) 176,400 Net income after income tax before bonus…….. P327,600 Multiplied by: Bonus rate……… ____ 20% Net income after bonus and income tax……… P 65,520
8. Bonus is based on net income, that is, after bonus and income tax:
Let B = Bonus; T = Income tax B = 20% (P504,000 – B - T)
B = P100,800 - .20B - .20T
Let T = Income tax T = 35% (P504,000)
T = P176,400
Substituting the equation for T in the equation for B: Let B = P100,800 - .20B - .20T
B = P100,800 - .2B - .20 (P176,400) 1.20B = P100,800 – P35,280
1.20B = P65,520 B = P54,600
Proof:
Net income before bonus and income tax…………… P504,000 Less: Bonus……………… 54,600 Net income before income tax…….. P449,400 Less: Income tax (35% x P504,000) 176,400 Net income after bonus and income tax……… P273,000
Bonus as computed above:
Net income after bonus and income tax……… P273,000 Multiplied by: Bonus rate……… ____ 20% Bonus…………… 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
James Keller Rivers Totals Interest (8%) P4,400 (below) P5,600 P7,200 P17,200 Salary 13,000 15,000 20,000 48,000
Remaining income (loss):
P30,000 (17,200) (48,000)
P(35,000) (7,040) (10,560) (17,600) (36,200) Totals P10,360 P10,040 P9,600 P30,000
CALCULATION OF JAMES INTEREST ALLOCATION
Balance, January 1 – June 1 (P48,000 x 5 months) P240,000 Balance, June 1 – December 31 (60,000 x 7 months) 420,000 Total P660,000 Months ÷ 12 Average monthly capital balance P 55,000 Interest rate x 8% Interest allocation (above) _P 4,400
STATEMENT OF PARTNERS’ CAPITAL James Keller Rivers Totals Beginning balances P 48,000 P70,000 P90,000 P208,000 Additional contribution 12,000 0 0 12,000 Income (above) 10,060 10,040 9,600 30,000 Drawings (P1,000/month) (12,000) (12,000) (12,000) (36,000) Ending capital balances P58,360 P68,040 P87,600 P214,000
Problem VI
1: Net income is P360,000 P Q Total Salaries P 80,000 P 100,000 P180,000 Bonus on net income 21,600 43,200 64,800 Interest on average capital balances 9,800 16,800 26,600 Remainder is P 88,600 (positive) ___53,160 __35,440 ___88,600 Totals P 164,560 P195,440 P 360,000
2. Net income is P240,000
P Q Total Salaries P 80,000 P 100,000 P 180,000 Bonus on net income 14,400 28,800 43,200 Interest on average capital balances 9,800 16,800 26,600 Remainder is P 9,800 (negative) _(4,900) __(4,900) __(9,800) Totals P 99,300 P 140,700 P240,000
3. Net loss is P40,000
P Q Total Salaries P 80,000 P 100,000 P 180,000 Bonus (no distribution) 0 0 0 Interest on average capital balances 9,800 16,800 26,600 Remainder is P 246,600 (negative) (123,300) (123,300) (246,600) Totals (P33,500) (P 6,500) (P 40,000)
Problem VII: 1 and 2. Total Carey Drew Total to allocate: P150,000 As Bonus (Note A below) (25,000) P25,000 As Salaries (72,000) 36,000 P36,000 As Interest (Note B below) (10,720) 6,560 4,160 Subtotal: P 42,280 P67,560 P40,160 Residual Profit-sharing (42,280) 21,140 21,140 Final Allocations: P 0 P88,700 P61,300 Note A (Bonus):
Bonus = .20(Net Income Bonus) 1.2Bonus = .20(P150,000) 1.2Bonus = 30,000
Bonus = P25,000
Note B (Interest): Capital Fraction Interest Carey: Amount of Year Rate = Subtotal P100,000 1/12 0.08 P 667 (12,000) 88,000 6/12 0.08 3,520 (12,000) 76,000 3/12 0.08 1,520 (12,000) P 64,000 2/12 0.08 853 1.0000 P6,560 Capital Fraction Interest Drew: Amount of Year Rate = Subtotal P70,000 1/12 0.08 P 467 (12,000) 58,000 6/12 0.08 2,320 (12,000) 46,000 3/12 0.08 920 (12,000) P34,000 2/12 0.08 453 1.0000 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: Capital Gross Balance # of Months Capital 1/1 to 4/1 20,000 3 60,000 4/1 to 10/1 25,000 6 150,000 10/1 to 12/31 30,000 3 90,000 Total 300,000 Average 25,000
Katch: Capital Gross Balance # of Months Capital 1/1 to 3/1 40,000 2 80,000 3/1 to 9/1 30,000 6 180,000 9/1 to 11/1 20,000 2 40,000 11/1 to 12/31 30,000 2 60,000 Total 360,000 Average 30,000
2. Olsen Katch Total Salaries P48,000 P36,000 P 84,000 Bonus 10,000 10,000 Interest* 2,000 2,400 4,400 Remainder 39,960 26,640 66,600 Final Profit: P89,960 P75,040 P165,000 *see part 'a' solution for weighted average capital calculation
Problem X Weighted Average Capital Calculation:
Matt
Cap Bal # months Gross Cap
1/1 to 6/1 35,000 5 175,000 6/1 to 10/1 45,000 4 180,000 10/1 to 12/31 50,000 3 150,000 Total 505,000 Average 42,083
Jeff Cap Bal # months Gross Cap 1/1 to 3/1 25,000 2 50,000 3/1 to 9/1 35,000 6 210,000 9/1 to 11/1 25,000 2 50,000 11/1 to 12/1 20,000 1 20,000 12/1 to 12/31 28,000 1 28,000
Total 358,000 Average 29,833
1. Matt Jeff Total Salary P N/A P N/A P 0 Bonus N/A N/A 0 Interest 4,208 2,983 7,191 Subtotal P 4,208 P 2,983 P 7,191 Remainder 29,404 29,405 58,809 Total P33,612 P32,388 P66,000 2. Matt Jeff Total Salary P 0 P 9,000 P 9,000 Bonus N/A N/A 0 Interest 5,000 2,800 7,800 Subtotal P 5,000 P11,800 P16,800 Remainder 29,520 19,680 49,200 Total P34,520 P31,480 P66,000 3. Matt Jeff Total Salary P10,000 P15,000 P25,000 Bonus N/A N/A 0 Interest N/A N/A 0 Subtotal P10,000 P15,000 P25,000 Remainder 23,992 17,008 41,000 Total P33,992 P32,008 P66,000 4. Matt Jeff Total Salary P20,000 P35,000 P55,000 Bonus* 6,000 N/A 6,000 Interest 4,208 2,983 7,191 Subtotal P30,208 P37,983 P68,191 Remainder (1,096) (1,095) (2,191) Total P29,112 P36,888 P66,000
Problem XI 1. Allocation/Distribution of Net Income
AA BB CC Total Salaries 14,400 12,000 13,600 40,000 Interest-12% of Ave. Cap. 12,960 17,280 24,840 55,080 Balance/Remainder (4:3:3) ( 1,200) ( 900) ( 900) ( 3,000) Share in Net Income 26,160 28,380 37,540 92,080
2. Statement of Partners’ Capital
AA BB CC Total Capital, January 2, 2010 96,000 144,000 216,000 456,000 Additional Investments (Withdrawals)
24,000
(36,000)
(12,000)
Net Income 26,160 28,380 37,540 92,080 Personal Withdrawals ( 9,000) ( 9,000) ( 9,000) (27,000)
Capital, December 31, 2010 137,160 163,380 208,540 509,080 3. Allocation/Distribution of Net Income
AA BB CC Total Interest-12% of Ave. Cap. 12,960 17,280 24,840 55,080 Balance/Remainder (4:3:3) ( 1,200) ( 900) ( 900) ( 3,000) Share in Net Income 11,760 16,380 23,940 52,080*
*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
Incidentally, the entry to record the salaries would be: Operating expenses (for salaries)…………………. 40,000 AA, capital……………………………………………………….. 14,400 BB, capital……………………………………………………….. 12,000 CC, capital……………………………………………………….. 13,600 3. Statement of Partners’ Capital
AA BB CC Capital, January 2, 2010 96,000 144,000 216,000 Addit’l. Inv. (Withdrawals) 24,000 ( 36,000) Net Income 11,760 16,380 23,940 Sal. (refer to entry above) 14,400 12,000 13,600 Personal Withdrawals ( 9,000) ( 9,000) ( 9,000) Capital. December 31, 2010 137,160 163,380 208,540
Problem XII Partners Cumulative Components of Allocation Durand Price Russell Total Profit/loss percentage .................................... 35% 25% 40% ................ Gain on sale of equipment ........................... P 5,000 P 5,000 P 5,000 P 15,000 Salaries .............................................................. 40,000 20,000 45,000 105,000 Bonus (Note A) ................................................. .............. 5,000 .............. 5,000 Bonus (Note A) ................................................. 2,692 2,692 2,692 8,076 Interest on capital (Note B) ........................... 7,958 11,417 6,750 26,125 Remaining profit (loss) .................................... 14,280 10,200 16,319 40,799 Profit (loss) allocation .................................... P 69,930 P 54,309 P75,761 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 Russell P75,000 × 5/12 = P 31,250 P125,000 × 1/12 = P 10,417 P40,000 × 1/12 = P 3,333 85,000 × 4/12 = 28,333 120,000 × 2/12 = 20,000 70,000 × 11/12 = 64,167 80,000 × 3/12 = 20,000 115,000 × 3/12 = 28,750 110,000 × 6/12 = 55,000 P 79,583 P 114,167 P 67,500 10% 10% 10% P 7,958 P 11,417 P 6,750
Problem XIII 1. Distribution of income for 20x4:
Norr Caylor Total Interest P 12,000 P 9,600 P 21,600 Compensation __10,000 __14,000 __24,000 Subtotals P 22,000 P 23,600 P 45,600 Allocation of remainder __14,640 __9,760 __24,400 Totals P 36,640 P 33,360 P 70,000
2. Capital account balances at the end of 20x4:
Norr Caylor Beginning capital balances P 100,000 P 80,000 Share of income 36,640 33,360 Withdrawals _(12,000) _(12,000) Ending capital balances P 124,640 P 101,360
3. Distribution of income for 20x5:
Norr Caylor Total Interest P 14,957 P 12,163 P 27,120 Compensation __8,000 __12,000 __240,000 Subtotals P 22,957 P 24,163 P 47,120 Allocation of remainder __13,872 __9,248 _(23,120) Totals P 9,085 P 14,915 P 24,000
4. Capital account balances at the end of 20x5:
Norr Caylor Beginning capital balances P 124,640 P 101,360 Share of income 9,085 14,915 Withdrawals _(12,000) _(12,000) Ending capital balances P 121,725 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 ......................................................................................... 5,000 Repair Expense ................................................................................... 5,000 (To reclassify payment made to repair personal residence.)
Page, Capital ............................................................................................. 13,000 Childers, Capital ........................................................................................ 11,000 Page, Drawings (adjusted) .............................................................. 13,000 Childers, Drawings ............................................................................. 11,000 (To close drawings accounts for 2008.)
Revenues ................................................................................................. 90,000 Expenses (adjusted by first entry) .................................................... 59,000 Income Summary ............................................................................... 31,000 (To close revenue and expense accounts for 2008.) Income Summary ...................................................................................... 31,000 Page, Capital ..................................................................................... 11,000 Childers, Capital ................................................................................ 20,000 (To close net income to partners' capital–see allocation plan shown below.) Allocation of Income Page Childers
Interest (10% of beginning balance) P 8,000 P 3,000 Salary allowances 5,000 20,000 Remaining income (loss):
P31,000 (11,000) (25,000) P (5,000) (2,000) (40%) (3,000) (60%)
P11,000 P20,000 4. Total capital (original balances of P110,000 plus 2008 net income less drawings) ................................................................ P117,000
Investment by Smith .................................................................................. 43,000 Total capital after investment ................................................................. P160,000 Ownership portion acquired by Smith ................................................... 20% 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 ........................................................................................................ 43,000
Smith, Capital (20% of total capital) .............................................. 32,000 Page, Capital ..................................................................................... 4,400 Childers, Capital ................................................................................ 6,600
Multiple Choice Problems 1. c
Capital, Beg 45,000 Additional Investment 50,000 Withdrawal (800 x 12) (96,000) Net income (?) 31,000 Capital, Ending P 30,000
2. b
A B 10M Salaries 2,000 25,000 45,000 Bonus 8,000 0 8,000 Interest (20% x average capital) 8,000 10,000 18,000 Balance - equally 8,500 8,500 1,700 10M 44,500 8,800
*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
A B Total Salaries 30,000 P 45,000 P 75,000 Bonus* 3,600 3,600 Interest: 10% x Ave. capital 5,000 6,500 11,500 1:3 4,625 18,500 Total P 43,225 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
A B Total Salaries P 40,000 P 45,000 P 85,000 Bonus (refer to Note) 0 Interest on average capital (15%) 6,000 9,000 15,000 Balance (2:1) (32,000) (16,000) (48,000) Total P 14,000 P 38,000 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 A B C Total Salaries P 40,000 P 40,000 P 80,000 Bonus* P 1,000 1,000 3:4:3 __3,000 4,000 _3,000 10,000 Total P 43,000 P 4,000 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
A B Total Salaries P 41,600 P 38,400 P 80,000 Bonus (refer to Note) 0 Interest on average capital (10%) 2,000 3,500 5,500 Balance (1:2) (16,500) (49,500) Total P 27,100 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
Mack Ruben Total Salaries P 90,000 P 60,000 P 150,000 6:4 _30,000 __20,000 50,000 Total P120,000 P 80,000 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 Total Salary 60,000 48,000 36,000 144,000 Interest: 10% x average capital 7,500 48,750 Balance: equally 5,000 5,000 5,000 15,000 207,750
X: P100,000 x 6 = P600,000 P160,000 x 6 = 960,000 P1,560,000 / 12 = P 130,000
Y (same with beginning since no additional investments or withdrawals were made) 150,000
Z: P225,000 x 9 = P2,025,000 P155,000 x 3 = 465,000 P2,490,000/12 = 207,500 P 487,500 x 10% = P48,750 19. d - ASSIGNMENT OF INCOME ARTHUR BAXTER CARTWRIGHT TOTAL Interest—10% of beginning capital P 6,000 P 8,000 P10,000 P24,000 Salary ........................................................ 20,000 20,000 Allocation of remaining income (P6,000 divided on a 3:3:4 basis) ............ 1,800 1,800 2,400 6,000 Totals ............................................ P 7,800 P29,800 P12,400 P50,000 STATEMENT OF CAPITAL ARTHUR BAXTER CARTWRIGHT TOTAL Beginning capital ...................................... P60,000 P80,000 P100,000 P240,000 Net income (above) ................................ 7,800 29,800 12,400 50,000 Drawings (given) ....................................... (5,000) (5,000) (5,000) (15,000) Ending capital ........................................... P62,800 P104,800 P107,400 P275,000 20. a ASSIGNMENT OF INCOME—YEAR ONE WINSTON DURHAM SALEM TOTAL Interest—10% of beginning capital ........ P11,000 P 8,000 P11,000 P30,000 Salary ........................................................ 20,000 -0- 10,000 30,000 Allocation of remaining loss (P80,000 divided on a 5:2:3 basis) ........... (40,000) (16,000) (24,000) (80,000) Totals ............................................ P(9,000) P (8,000) P (3,000) P (20,000) STATEMENT OF CAPITAL—YEAR ONE WINSTON DURHAM SALEM TOTAL Beginning capital ...................................... P110,000 P80,000 P110,000 P300,000 Net loss (above) ........................................ (9,000) (8,000) (3,000) (20,000) Drawings (given) ....................................... (10,000) (10,000) (10,000) (30,000) Ending capital .................................... P 91,000 P62,000 P 97,000 P250,000 ASSIGNMENT OF INCOME—YEAR TWO WINSTON DURHAM SALEM TOTAL Interest—10% of beginning capital P 9,100 P 6,200 P 9,700 P25,000 Salary ........................................................ 20,000 -0- 10,000 30,000 Allocation of remaining loss (P15,000 divided on a 5:2:3 basis) .......... (7,500) (3,000) (4,500) (15,000) Totals ............................................ P21,600 P3,200 P15,200 P40,000 STATEMENT OF CAPITAL—YEAR TWO WINSTON DURHAM SALEM TOTAL Beginning capital (above) ...................... P 91,000 P62,000 P 97,000 P250,000 Net income (above) ................................ 21,600 3,200 15,200 40,000 Drawings (given) ....................................... (10,000) (10,000) (10,000) (30,000) Ending capital .................................... P102,600 P55,200 P102,200 P260,000
21. a Capital, Beginning Additional investment 25,000 Withdrawals (130,000) Net income 45,000 / 30% = P 150,000 Net Decrease (60,000)
22. a
F G H Total 10% interest a Average capital 12,000 6,000 4,000 22,000 Salaries 30,000 20,000 50,000 Equally (35,000) ________ _________ (105,000) 7,000 (33,000)
23. d, P66,200; E, P34,100; F, P29,700
D E F Total Salaries 25,000 20,000 25,000 70,000 Bonus on income (10% x P130,000) 13,000 13,000 Remainder (6:3:1) 28,200 14,100 _4,700 47,000 66,200 34,100 29,700 130,000
24. a
C W N Total Capital, 1/1/x4 100,000 150,000 200,000 450,000 Net Income – 20x4 29,000 63,000 58,000 150,000 Withdrawal – personal (12,000) (12,000) (12,000) (36,000) Capital, 12/31/x4 117,000 20,100 24,600 564,000
Net income – 20x4 C W N Total 10% interest on beginning capital 10,000 15,000 20,000 45,000 Salary - 10,000 - 10,000 20% : 40% : 40% 19,000 38,000 38,000 95,000 29,000 63,000 58,000 150,000
Capital, 1/1/x5 117,000 201,000 246,000 564,000 Net income 34,420 75,540 70,040 180,000 Withdrawals – personal (12,000) (12,000) (12,000) (36,000) Capital, 12/31/x5 139,420 264,540 304,040 708,000
Net income – 20x5 117,000 201,000 246,000 564,000 10% interest a beginning capital 34,420 75,540 70,040 180,000 Salary (12,000) (12,000) (12,000) (36,000) 20% : 40% : 40% 139,420 264,540 304,040 708,000
25. d - refer to No.24 26. b - refer to No.24 27. c - refer to No.24
28. b Y E I Total Capital, 1/1/Year 1 143,000 104,000 143,000 390,000 Net income (loss) (11,700) (10,400) (3,900) (26,000) Withdrawals – personal (13,000) (13,000) (13,000) (39,000) Capital, 12/31/ Year I 118,300 80,600 126,100 325,000
Year I Net loss Salary 26,000 - 13,000 3,900 Interest – 10% x beginning capital 14,300 10,400 14,300 3,900 5:2:3 (52,000) (20,800) (31,200) (10,400) Total (11,700) (10,400) (3,900) (2,600)
Capital, 1/1/Year2 118,300 80,600 126,100 325,000 Net income (loss) 28,080 76,700 19,760 52,000 Withdrawals – personal (13,000) (13,000) (13,000) (3,900) Capital, 12/31/ Year 2 133,380 144,300 132,860 338,000
Year 2 Net loss 26,000 - 13,000 3,900 Salary 11,830 8,060 12,610 32,500 Interest – 10% x beginning capital (9,750) (3,900) (5,850) (19,500) 5:2:3 28,080 76,700 19,750 52,000
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
J P B Total Salaries P 50,000 P 60,000 P 30,000 P140,000 Bonus* 16,000 8,000 16,000 40,000 Remainder (3:4:3) (6,000) (8,000) (6,000) (20,000) Total P 60,000 P 60,000 P 40,000 P160,000
*since problem is silent it should be based on net income before any deductions. 38. c
A P B Total Salaries P 30,000 P 10,000 P 40,000 P 80,000 Bonus (10% of average capital) 5,000 3,000 2,000 10,000 Remainder (4:4:2) _ 24,000 __24,000 _12,000 60,000 Total P 59,000 P 37,000 P 54,000 P150,000
39. c
A P B Total Salaries P 30,000 P 10,000 P 40,000 P 80,000 Bonus (10% of average capital) 5,000 3,000 2,000 10,000 Remainder (4:4:2) (16,000) (16,000) ( 8,000) (40,000) Total P 19,000 (P3,000) P 34,000 P 50,000
40. b
Total agreed capital = total contributed capital* (P200,000 + P100,000 + P100,000) P 400,000 Multiplied by: Capital interests of May _____35% P 140,000
*No goodwill or asset adjustment 41 d 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
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 Total Salaries 18,000 24,000 42,000 Interest (10% of Ave. Cap.) 15,000 20,000 35,000 Balance/Remainder (60%:40%) 25,800 17,200 __43,000 Share in Net Income 58,800 61,200 120,000*
*P 500,000 – P100,000 (excluding salaries and int. – P100,000 Statement of Partners’ Capital
DD EE Total Capital, March 1, 2011 150,000 180,000 330,000 Additional Investments 60,000 60,000 Net Income 58,800 61,200 1240,000 Personal Withdrawals (18,000) (24,000) ( 42,000) Capital, March 1, 2012 190,800 277,200 468,000
Allocation/Distribution of Net Income
DD EE Total Interest on Average Capital – 10% P 15,000 P20,000 P 35,000 Balance/Remainder – 60%:40% 51,000 34,000 85,000 Share in Net Income P 66,000 P54,000 P 120,000
Statement of Partners’ Capital
DD EE Capital balance, 2/28/20x4 P 150,000 P 180,000 Additional Investment 60,000 Share in Net Income 66,000 54,000 Salaries 18,000 24,000 Salary withdrawals ( 18,000) ( 24,000) Capital balance, March 1, 20x5 P 216,000 P 294,000
46. a – refer to No. 45 47. b – refer to No. 45 48. c – refer to No. 45
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
Old P & L Interests Acquired New P & L Abe 70% 59.50% Bert 20% 85% 17.00% Carl 10% 8.50% Dave 15% 15.00% Total 100% 100% 100%
55. b
Unadjusted net income, 20x5 P 15,000 Add (deduct): adjustments - Accrued expense – 20x5 (1,050) Accrued income – 20x5 875 Prepaid expense – 20x4 (1,400) Deferred or unearned income – 20x4 __1,225 Adjusted net income, 20x5 P 14,650 Multiplied by: P& L of Dave _____17% Share in net income – 20x5 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 Nick Joe Mike Total 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 P4,500 x .30 ______ _______ 1,290 4,300 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 Salt Total Salary 60,000 24,000 84,000 Interests – 10% on beginning 4,000 4,800 3,200 12,000 Equally 4,000 4,000 4,000 12,000 Total 8,000 68,800 108,000
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 Keller Rivers Total Interest – 8% 4,400 5,600 7,200 17,200 Salary 13,000 15,000 20,000 48,000 2:3:5 (7,040) (10,560) (17,600) (35,200) Total 10,360 10,040 9,600 30,000
Interest: James: P48,000 x 5 = P240,000 P60,000 x 7 = 420,000 P660,000/12 = P55,000 x 8% = P4,400
Capital, beginning 48,000 70,000 90,000 208,000 Additional investments 12,000 12,000 Net income (loss) 10,360 10,040 9,600 30,000 Withdrawals – P1,000 per month (12,000) (12,000) (12,000) (36,000) Capital, ending 58,360 68,040 87,600 214,000
20. JJ, P27,000; KK, P24,000; LL, P39,000 JJ KK LL Total Bonus (20%) ..................................... P18,000 P -0- P -0- P18,000 Interest (15% of average capital) 15,000 30,000 45,000 90,000 Remaining loss ($18,000) .............. (6,000) (6,000) (6,000) (18,000) Income assignment ....................... P27,000 P24,000 P39,000 P90,000
21. PP, P64,600; SS, P49,000; TT, P2,000 PP SS TT Totals Interest (10%) 6,600 (below) 4,000 2,000 12,600 Salary 18,000 25,000 8,000 51,000 Remaining income (loss) (16,000) ( 8,000) (16,000) (40,000) Totals 8,600 21,000 (6,000) 23,600 CALCULATION OF PURKERSON'S INTEREST ALLOCATION Balance, January 1—April 1 (P60,000 × 3) P180,000 Balance, April 1—December 31 (P68,000 × 9) 612,000 Total ................................................................................................... P792,000 Months ............................................................................................... ÷ 12 Average monthly capital balance ............................................. P 66,000 Interest rate ...................................................................................... × 10% Interest allocation (above) ........................................................... P 6,600
STATEMENT OF PARTNERS' CAPITAL PP SS TT Totals Beginning balances ......................... 60,000 40,000 20,000 120,000 Additional contribution ................... 8,000 -0- -0- 8,000 Income (above) ............................ 8,600 21,000 (6,000) 23,600 Drawings (P1,000 per month) ......... (12,000) (12,000) (12,000) (36,000) Ending capital balances ................. 64,600 49,000 2,000 115,600 22. Ending capital balances: 20x4 .......................................... 4,720 32,400 32,880 70,000 20x5 .......................................... 4,766 30,088 37,146 72,000 20x6 ……………………………. 9,610 36,243 36,147 82,000
INCOME ALLOCATION—20x4
LL CC RR Total Interest (12% of beginning capital) 2,400 7,200 6,000 15,600 Salary 12,000 8,000 -0- 20,000 Remaining income/loss (19,680) (32,800) (13,120) (65,600) Totals (5,280) (17,600) (7,120) (30,000)
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4 LL CC RR Total Beginning balances ..................... 20,000 60,000 50,000 130,000 Income allocation ........................ (5,280) (17,600) (7,120) (30,000) Drawings ........................................ (10,000) (10,000) (10,000) (30,000) Ending balances .................... 4,720 32,400 32,880 70,000
INCOME ALLOCATION—20x5 LL CC RR Total Interest(12% of beginning capital above) *566 3,888 3,946 8,400 Salary ............................................. 12,000 8,000 -0- 20,000 Remaining income/loss: (2,520) (4,200) (1,680) (8,400) Totals ...................... 10,046 7,688 2,266 20,000 *Rounded
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6 LL CC RR Total Beginning balances (above) 4,720 32,400 32,880 70,000 Additional investment ................. -0- -0- 12,000 12,000 Income allocation ........................ 10,046 7,688 2,266 20,000 Drawings ........................................ (10,000) (10,000) (10,000) (30,000) Ending balances .................... 4,766 30,088 37,146 72,000
INCOME ALLOCATION—20x6 LL CC RR Total Interest (12% of beginning capital above)* ................................... 572 3,611 4,457 8,640 Salary ............................................. 12,000 8,000 -0- 20,000 Remaining income ........................ 2,272 4,544 4,544 11,360 Totals .................................. 14,844 16,155 9,001 40,000 *Rounded
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6 LL CC RR Total Beginning balances (above) 4,766 30,088 37,146 72,000 Income allocation 14,844 16,155 9,001 40,000 Drawings (10,000) (10,000) (10,000) (30,000) Ending balances 9,610 36,243 36,147 82,000 23. Julio, P2,820 decrease; Fong, P120 increase
Short-term prepayments 2,700 Julio, Capital 2,820 Fong, Capital 120 Salaries Payable 5,400 The correction to partners' capital accounts is
computed as follows:
Julio Fong Inventories understated by P12,000, Dec. 31, 20x5 P 6,000 P 6,000 Inventories understated by P12,000, Jan. 1, 20x6 (7,200) (4,800) Accrued salaries of P5,400 not recorded, Dec. 31, 20x6 (3,240) (2,160) Short-term prepayments of P2,700 not recorded, Dec. 31, 20x6 1,620 1,080 Net corrections to partners' capital accounts P(2,820) P 120
THEORIES True of False 1. False 6. False 11. True 16. True 21. False 26. False 2. True 7. True 12. True 17. False 22. True 27. True 3. True 8. False 13. False 18. False 23. False 28. False 4. False 9. True 14. True 19. True 24. True 5. True 10. False 15. False 20. True 25. 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 34. d 39. b 44. c 30. d 35. d 40. e 45. a 31. c 36. c 41. c 46. b 32. d 37. d 42. b 47. C 33. a 38. a 43. d
Chapter 3 Problem I 1.
Ben, capital 350,000 Pet, capital (50% x P700,000) 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 E F (book value) Total_
Capital before admission…P 72,000 P 48,000 P120,000 x: Interest remained……….. ¾ ¾ ________ Capital after admission….. P54,000 P 36,000 P 30,000 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 Divided by (capitalized at): Interest acquired ¼ 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: D E F (amount paid) Total_
Capital before admission… P 72,000 P 48,000 P120,000 Revaluation upward………. 16,0800 7,200 24,000 Capital balance after revaluation………………. P 88,800 P 55,200 P144,000
x: Interest remained……….. ¾ ¾ ________ Capital after admission….. P66,600 P 41,400 P 36,000 P144,000 Capital interest %.............. 25 P & L %: D (3/4 x 70%)…… 52.50 E (3/4 x 30%)…… 22.50 F (1/4)…………… 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) Divided by: Interest acquired………………….. ¼ 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 E F (amount paid) Total_
Capital before admission…P 72,000 P 48,000 P120,000 Revaluation downward…… 10,080 4,320 14,400 Capital balance after revaluation……………….. P 61,920 P 48,680 P 105,600
x: Interest remained………… ¾ ¾ ________ Capital after admission….. P46,440 P 32,760 P 26,400 P 105,600 Capital interest %.............. 25 P & L %: D (3/4 x 70%)…… 52.50 E (3/4 x 30%)…… 22.50 F (1/4)…………… 25 Comparison between b.3.1 and b.3.2: Schedule of Account Balances Net Goodwill/Asset Capital__________ Assets Revaluation = D E F___ Book Value Approach Balances before admission P120,000 P 72,000 P 48,000 Admission ( 18,000) (12,000) P 30,000 Balances after admission of F P 120,000 P -0- P 54,000 P 36,000 P 30,000 Revaluation Approach Balances before admission P120,000 P 72,000 P 48,000 Revaluation P 24,000 16,800 7,200 Admission ( 22,200) (13,800) P 36,000 Balances after admission of F P120,000 P 24,000 P 66,600 P 41,400 P 36,000 Depreciation/impairment* ( 24,000) ( 12,600) ( 5,400) ( 6,000) Totals P120,000 P -0- P 54,000 P 36,000 P 30,000 *new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)
The two methods will yield the same results computed as follows; Capital__________ D E F___ Balances after admission of F (BV approach) P 54,000 P 36,000 P 30,000 Balances after admission of F (Revaluation approach) 54,000 36,000 30,000 Gain or (loss) through use of book value approach 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 -0-
The 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 -0-
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 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 -0-
The 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 -0-
The 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 revaluation (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
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 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 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 -0-
The 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 -0-
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 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 revaluation (goodwill) should be recognized as follows:
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
Less: J’s agreed capital (P48,000 x 50%)……………… 24,000 Total agreed capital of the old partners……………… P 24,000 Less: G’s agreed capital (P24,000 x 60%)………………P 14,400 H’s agreed capital (P24,000 x 40%)……………… 9,600 24,000
G’s withdrawal: P24,000 – P14,400……………………… P 9,600 H’s withdrawal: P12,000 – P9,600……………………….. 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 -0-
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 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 H _ J____ Capital interest %.............. 40 P & L %: G (60% x 75%)…… 45 H (40% x 75%)…… 30 J ……..…………… 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 Net Goodwill/Asset Capital__________ Assets Revaluation = G H J___ Bonus Approach Balances after admission of J P 54,000 P -0- P 21,840 P 10,560 P 21,600 Revaluation Approach Balances after admission of J P 54,000 P 6,000 P 24,000 P 12,000 P 24,000 Depreciation/impairment* ( 6,000) ( 2,700) ( 1,800) ( 1,500) Totals P 54,000 P -0- 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; Capital__________ G H J__ Balances after admission of J (Bonus approach) P 21,840 P10,560 P 21,600 Balances after admission of J (Revaluation approach) 21,300 10,200 22,500 Gain or (loss) through use of bonus approach 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 -0-
The 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 -0- The 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 H _ J____ Capital interest %.............. 30 P & L %: G (60% x 60%)…… 36 H (40% x 60%)…… 24 J ……..…………… 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 J, capital…………………………………………………....... 16,200 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 Net Goodwill/Asset Capital__________ Assets Revaluation = G H J___ Bonus Approach Balances after admission of J P 54,000 P -0- P 25,080 P 12,720 P 16,200 Revaluation Approach Balances after admission of J P 54,000 P 6,000 P 27,600 P 14,400 P 18,000 Depreciation/impairment* ( 6,000) ( 2,160) ( 1,440) ( 2,400) Totals P 54,000 P -0- 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; Capital__________ G H J__ Balances after admission of J (Bonus approach) P 25,080 P 12,720 P 16,200 Balances after admission of J (Revaluation approach) 25,440 12,960 15,600 Gain or (loss) through use of bonus approach P( 360) P( 240) P 600 Problem IV 1. Phoenix, Capital 22,500 Dallas, Capital 22,500 2. Phoenix, Capital 18,000 Tucson, Capital 10,000 Dallas, Capital 28,000 3. Cash 60,000 Phoenix, Capital (P60,000 - P40,000) × .50 10,000 Tucson, Capital 10,000 Dallas, Capital 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 20,000 Phoenix, Capital 10,000 Tucson, Capital 10,000 P40,000/0.20 = P200,000 Goodwill = P200,000 - (P90,000 + P50,000 + P40,000) = P$20,000 Cash 40,000 Dallas, Capital 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 120,000 Brown, Capital (0.60 × P15,000) 9,000 Coss, Capital (0.40 × P15,000) 6,000 Moore, Capital 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) × 31
= P100,000
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)] P360,000 Minus current capital balance + Moore's investment (P180,000 + P120,000) 300,000 Goodwill P60,000 Goodwill 60,000 Brown, Capital (0.60 × P60,000) 36,000 Coss, Capital (0.40 × P60,000) 24,000 Cash 120,000 Moore, Capital 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 40,000 Brown, Capital (0.60 × P15,000) 9,000 Coss, Capital (0.40 × P15,000) 6,000 Moore, Capital 55,000 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.
Goodwill Method
Total capital P225,000 Minus recorded value of net assets + Moore's investment (P180,000 + P35,000) 215,000 Goodwill P10,000 Cash 35,000 Goodwill 10,000 Moore, Capital 45,000 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 150,000 Brown, Capital (0.60 × P40,000) 24,000 Coss, Capital (0.40 × P40,000) 16,000 Moore, Capital 110,000 Goodwill Method
Net value of firm implied by contract [P150,000/(1/3)] P450,000 Minus current capital + Moore's investment (P180,000 + P150,000) 330,000 Goodwill P120,000 Goodwill 120,000 Brown, Capital (0.60 × P120,000) 72,000 Coss, Capital (0.40 × P120,000) 48,000 Land 150,000 Moore, Capital 150,000 7. Bonus Method
Brown, Capital (0.30 × P92,000) 27,600 Coss, Capital (0.30 × P88,000) 26,400 Moore, Capital 54,000 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
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
Good- Other Mason Norris Oster will__ Assets Capital Capital Capital When goodwill method is used….. P4,200 P15,800 P8,520 P6,480 P5,500 When bonus method is used……… P15,800 P6,630 P5,220 P3,950 Add recognition of goodwill (gain distributed in profit and loss ratio, equally)………………………. P4,200 1,400 1,400 1,400 P4,200 P15,800 P8,030 P6,620 P5,350 Gain (loss) through use of bonus method………………………. (P 490) P 140 P350
COMPARISON WHEN GOODWILL IS NOT REALIZED
Good- Other Mason Norris Oster will__ Assets Capital Capital Capital When bonus method is used……… P15,800 P6,630 P5,220 P3,950 When goodwill method is used….. P4,200 P15,800 P8,520 P6,480 P5,500 Deduct write-off of goodwill (loss distributable equally)………… P4,200 1,400 1,400 1,400 P15,800 P7,120 P5,080 P3,600 Gain (loss) through use of bonus method…………………… (P 490) P 140 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
Good- Other Mason Norris Oster will__ Assets Capital Capital Capital When goodwill method is used….. P2,200 P15,800 P6,000 P4,800 P7,200 When bonus method is used……… P15,800 P5,208 P4,272 P6,320 Add recognition of goodwill (gain distributed in profit and loss ratio, equally)………………………. P2,200 733.33 733.33 733.34 P2,200 P15,800 P5,941.33 P5,005.33 P7,053.34 Gain (loss) through use of bonus method………………………. (P 58.67) P 205.33 (P146.66)
COMPARISON WHEN GOODWILL IS NOT REALIZED
Good- Other Mason Norris Oster will__ Assets Capital Capital Capital When bonus method is used……… P15,800 P5,208 P4,272 P3,950 When goodwill method is used….. P2,200 P15,800 P6,000 P4800 P7,200 Deduct write-off of goodwill (loss distributable equally)………… P2,200 733.33 733.33 733.34 P15,800 P5,266.67 P4,066.67 P6,466.66 Gain (loss) through use of bonus method………………………. (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 Goodwill/Asset Capital__________ Revaluation L M_____ Bonus Approach Balances after retirement of K P -0- P 56,571 P 21,429 Partial Revaluation (Goodwill) Approach Balances after retirement of K* P 4,800** P 60,000 P 22,800 Depreciation/impairment*** ( 4,800) ( 3,429) ( 1,371) Totals P -0- P 58,971 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** P 68,000 P 26,000 Depreciation/impairment*** ( 16,000) ( 11,429) ( 4,571) Totals P -0- P 56,571 P 21,429 *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)
The three methods will yield the same results computed as follows; Total_______ L M__ Balances after retirement of K (Bonus approach) P 56,571 P 21,249 Balances after retirement of K (Partial Revaluation approach) P 56,571 P 21,249 Balances after retirement of K (Total Revaluation approach) 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) 210,000
Portney, Capital (P20,000 × 3/4) 15,000 Ross, Capital (P20,000 × 1/4) 5,000
Cash 230,000 2. Goodwill (P20,000 ÷ 2/6) 60,000
Portney, Capital 30,000 Grey, Capital 20,000
Ross, Capital 10,000
Grey, Capital 230,000 Cash 230,000
Problem IX 1. (a) C, Capital 105,000 A, Capital 21,000 B, Capital 14,000 Cash 140,000 (b) Goodwill 35,000 C, Capital 35,000 C, Capital 140,000 Cash 140,000 (c) 0.5X =P35,000 X =P70,000 Goodwill 70,000
A, Capital 21,000 B, Capital 14,000 C, Capital 35,000
C, Capital 140,000 Cash 140,000 2. 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400 Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . 480 Accumulated Depreciation of Equipment (P36,600 – P31,200). . 5,400 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,760 BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 To adjust assets and liabilities to agreed amounts and to divide net gain of P22,200 between partners in 4:1 ratio
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,348 BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,652 Common stock (P10 par x 9,000 shares) . . . . . . . . . . . . . . . . . . . . 90,000 Paid-in capital in excess of par [(P11 – P10) x 9,000 shares] . . . . 9,000 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400 Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . 480 Accumulated Depreciation of Equipment (P36,600 – P31,200). . 5,400 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,760 BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 To adjust assets and liabilities to agreed amounts and to divide net gain of P22,200 between partners in 4:1 ratio
Receivable from A&B Corporation (P76,800 + P22,200) . . . . . . . . . . 99,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . . 36,600 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,720 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 To record transfer of assets and liabilities to A&B Corporation. Common Stock of A & B Corporation (9,000 shares x P11) . . . . . . . 99,000 Receivable from A & B Corporation . . . . . . . . . . . . . . . . . . . . . . . 99,000 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.
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,348 BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,652 Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . 99,000 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
In the Accounting Records of the Corporation:
Entries in the Books of the New Corporation: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,720 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Equipment (P84,000 - P36,600). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,400 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . 1,200 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320 Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . ............. 99,000 To record acquisition of assets and liabilities from A&B Partnership.
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . . . . . 99,000 Common stock, P10 par (9,000 x P10) . . . . . . . . . . . . . . . . . . . . . 90,000 Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
To record issuance of 9,000 shares of common stock valued at P11 a share in payment for net assets of A&B Partnership.
Problem XII
Cash 8,700 Trade Accounts Receivable 13,250 Inventories 28,000 Equipment 35,000 Allowance for Doubtful Accounts 800 Notes Payable 10,000 Trade Accounts Payable 9,800 Payable to Sade and Tipp 64,350 To record acquisition of net assets from Sade & Tipp LLP.
Payable to Sade and Tipp 64,350 Common Stock, P1 par 10,000 Paid-in Capital Excess of Par 54,350 To record issuance of 10,000 shares of common stock to Sade and Tipp.
Problem XII 1. Cash 20,000 Inventory 15,000 Equipment 67,000 Snow, Capital 102,000 Cash 50,000 Land 120,000 Mortgage Payable 40,000 Waite, Capital 130,000 2. Snow, Capital 7,680 Waite, Capital 16,320 Income Summary 24,000 Snow Waite Total Net loss to be allocated Interest on capital investment P102,000 × 10% P10,200 P130,000 × 10% P13,000 P23,200 Salaries to partners 15,000 20,000 35,000 58,200 Allocation 40:60 (32,880) (49,320) (82,200) Net loss allocated to partners P(7,680) P(16,320) P(24,000) 3. Cash 70,000 Snow, Capital (P13,400 × 40%) 5,360 Waite, Capital (P13,400 × 60%) 8,040 Young, Capital 83,400 Capital interest of Snow (P102,000 - P7,680) P94,320 Capital interest of Waite (P130,000 - P16,320) 113,680 Investment of Young 70,000 Total capital interest in new partnership 278,000 Percentage acquired by Young 30% Capital interest of Young 83,400 Investment by Young (70,000) Bonus to Young P13,400 4. Income Summary 150,000 Snow, Capital (P150,000 × 20%) 30,000 Waite, Capital (P150,000 × 50%) 75,000 Young, Capital (P150,000 × 30%) 45,000 5. Snow, Capital* 118,960 Waite, Capital (P18,960 × 50/80) 11,850
Young, Capital (P18,960 × 30/80) 7,110 Cash 40,000 Note Payable 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 P40,000 Less: Book value of interest acquired:
(P140,000 x ¼) 35,000 Excess P 5,000 Capitalized at: P&L of W 1/4 Goodwill/revaluation 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 Divided by: Capital Interest…………………………………………………………....... 40%
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
Amount paid P132,000 Less: Book value of interest acquired
(P444,000 x 1/5) 88,800 Gain- personal (to N, S & J) P 43,200
7. c
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,
Total contributed capital………………………………………….. . P375,000 Multiplied by: Capital interest of Jones (new partner)………... 20% Investment or contribution of new partner..................................P 75,000
8. b
Total Agreed Capital P180,000 Multiplied by: Interest acquired by K 1/3 Agreed capital of K P 60,000 Cash investment by K 50,000 Bonus to K P 10,000 Therefore, E= P70,000 – (P10,000 x 70%) = P63,000
D= P60,000 – (P10,000 x 30%) = P57,000 J= P50,000 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 P 80,000 Investment by new partner 15,000
Total of new partnership capital P 95,000 Capital amount credited to Johnson (P95,000 x .20) 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 P 150,000 Total net assets not including goodwill (P110,000 + P40,000) (150,000) Estimated goodwill 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 Multiplied by: interest acquired by new partner.............................................. 20% Capital of new partner Chapman...................................................................... P 28,000
Less: Investment by Chapman............................................................................. 40,000 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 P 36,000 New partner's proportionate book value [(P120,000 + P36,000) x .20] (31,200) Difference (investment > book value) P 4,800 Method: Goodwill to prior partners 1/5 estimated total resulting capital P 36,000 Estimated total resulting capital (P36,000 / .20) P 180,000
Estimated total resulting capital P 180,000
Total net assets not including goodwill (P120,000 + P36,000) (156,000) Estimated goodwill/adjustment to prior partners P 24,000 (Use the same procedure in Nos. 9 and 10) 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,
18. c
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 P 260,000 Multiplied by: Interest acquired 20% Capital credited to Ole P 52,000 or,
Contributed Capital
Agreed Capital
Old Partners: (P120,000+P70,00 - P30,000 + P60,000)
P 220,000
New Partner: Ole __40,000 P 52,000 20%* P 260,000 P 260,000 P -0-
* 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.
Contributed Capital
Agreed Capital
Goodwill
Riley [P500,000 + (P40,000 x 60%)] P 524,000 P 560,000 P 36,000 60% Smith [P400,000 + (P40,000 x 40%)] 416,000 24,000 40% P 940,000 P1,000,000 P 60,000 Tyler 250,000 250,000 / 20% -0- Total P 1,190,000 P1,250,000 100% P 60,000
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% P900,000 (100%) Less: BV of interest acquired – (P220,000 + P160,000 + P110,000) x 30%….... 147,000 490,000 (100%) Excess……………………………………………….. P123,000 Divided by: Interest acquired………………….. 20% Goodwill or revaluation of Asset …………….. P410,000 P410,000 (100%) The entry would be as follows; Goodwill/Asset 410,000 Williams (40%) 164,000
Jennings (40%) 164,000 Bryan (20%) 82,000
Williams [P220,000 + (P410,000 x 40%)] x 30% 115,200 Jennings [P160,000 + (P410,000 x 40%)] x 30% 97,200 Bryan [P110,000 + (P410,000 x 20%)] x 30% 57,600 Darrow 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 Contributed Capital (CC) Agreed Capital (AC)
W 220,000 11,200 40% J 160,000 171,200 11,200 40% B 110,000 _______ 5,600 20% 490,000 518,000 28,000
D 250,000 222,000 30% 28,000 Total 740,000 740,000 0
21. d As specified no bonus or goodwill recognized. 5/6 estimated total resulting capital P 150,000 Estimated total resulting capital (P150,000 / 5/6) 180,000 Required investment (P180,000 x 1/6) P 30,000 22. d Direct purchase; reclassify CCs capital only (if silent – book value).
23. d
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 50,000 Goodwill/assets 10,000 David, capital (1/4 x P240,000) 60,000 25. b
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 Amount paid (P34,000 + P10,000) P 44,000 Less: Book value of Allen and Daniel (1/5) x P180,000 ) 36,000 Partial goodwill/revaluation adjustment P 8,000 Capitalized at 1/5 Revaluation of land P 40,000
28. a.
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
29. b
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 P220,000 Multiplied by: Interest acquired by David 1/5 Agreed capital of David P 44,000 Cash investment by David 40,000 Bonus to David P 4,000
Cash 40,000 Allen (P4,000 x 3/4) 3,000 Daniel (P4,000 x 1/4) 1,000 David 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 Amount paid P 102,000 Less: Book value of Williams
P70,000 + (P360,000 – P300,000) x 20% 82,000 Partial goodwill/revaluation adjustment P 20,000 Capitalized at P&L of Dixon 20%
Goodwill/revaluation P100,000 Brown: P65,000 + (P60,000 x 20%) + (P100,000 x 20%) P 97,000 Lowe: P150,000 + (P60,000 x 60%) + (P100,000 x 60%) P246,000
36. a
Amount paid P 74,000 Less: Book value of Dixon (20%): (P210,000 – P160,000) 50,000 Partial goodwill/revaluation adjustment P 24,000 Capitalized at P&L of Dixon 20%
Goodwill/revaluation P120,000
37. b 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 50,000 Ron (P10,000 x3/5) 6,000 Stella (P10,000 x 2/5) 4,000 Cash 60,000
39. a – refer to No. 38 (P80,000 – P6,000 = P74,000) 40. d
Amount paid P 56,000 Less: Book value of Tiffany (1/6) ) 50,000 Partial goodwill/revaluation adjustment P 6,000 Capitalized at 1/6 Goodwill/revaluation
P 36,000 41. c - Roberts receives an additional P60,000 above her capital balance.
Amount paid P 160,000 Less: Book value of Robert (40%) 100,000 Partial goodwill/revaluation adjustment P 60,000 Capitalized at 40% Goodwill/revaluation
P 150,000
Goodwill/assets 150,000 Peter (20%) 30,000 Robert (40%) 60,000 Dana (40%) 60,000 Robert (P100,000 + P60,000) 160,000 Cash 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) P240,000 Add: Goodwill/revaluation of asset 150,000 Less: Cash paid 160,000 Total assets after retirement 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)
P 570,000
Less: Total liabilities ( P110,000 + P200,000) __310,000 P 260,000 Less; Total Capital of M Total assets, fair value (P30,000 + P56,000 + P114,000 + P280,000 + P44,000)
P 524,000
Less: Total liabilities ( P80,000 + P150,000) 230,000 294,000 Goodwill 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 Less: Book value of interest acquired (P100,000 x 30%)) 30,000 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: Adams Brown Call Goodwill Method is used…………………. P72,000 P48,000 P36,000 BV/Bonus Method is used………………… P60,000 P40,000 P30,000 Add: Goodwill *……................................... 8,400 5,600 6,000 P68,400 P45,600 P36,000 (Gain) loss – BV/bonus method…………. P 3,600 P 2,400 P 0 Adams: 70% x 6/10 = 42% Brown: 70% x 4/10 = 28% Call 30% Alternative 2: If goodwill is not realized and written-off as a loss: Adams Brown Call Goodwill Method is used…………………. P 72,000 P48,000 P36,000 Less: Write-off of goodwill *………………. 8,400 5,600 6,000 P63,600 P42,400 P30,000 BV/Bonus Method is used………………… P60,000 P40,000 P30,000 (Gain) loss – bonus method………………. P 3,600 P 2,400 P 0 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 Multiplied by: OO’s capital interest…………………………………………..... 25% Agreed capital to be credited to OO………………………………………... P 3,950 Contributed/Invested capital of OO…………………………………….......... 5,000 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 OO……………………………………………………………………………… 3,950 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: MM NN OO Goodwill Method is used…………………. P8,520 P6,480 P5,000 Bonus Method is used……………………... P6,630 P5,220 P3,950 Add: Goodwill (allocated equally)…….. 1,400 1,400 1,400 P8,030 P6,620 P5,350 (Gain) loss – bonus method………………. P 490 P (140) P 350 (d) Alternative 2: If goodwill is not realized and written-off as a loss: MM NN OO Goodwill Method is used…………………. P8,520 P6,480 P5,000 Less: Write-off of goodwill (allocated equally)…………………. 1,400 1,400 1,400 P7,120 P5,080 P3,600 Bonus Method is used……………………... P6,630 P5,220 P3,950 (Gain) loss – bonus method………………. P 490 P (140) 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 CC……………………………………………………………………………… 500,000
Total agreed capital………………………………………………………….. P 2,000,000 Bonus Method: Total agreed capital (P600,000+P480,000+P500,000)………………... P 1,580,000 Multiply by: CC’s capital interest………………………………………… 25% Agreed capital to be credited to CC………………………………….. P 395,000 Contributed/Invested capital of CC……………………………………. 500,000 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 CC………………………………………………………………………………. 395,000 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 Goodwill Method is used…………………. P852,000 P648,000 P500,000 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 Roy Gil Capital, before adjustment………………… P309,000 P94,800 P214,200 Less: Net adjustment*……………………….. 35,400 11,800 23,600 Capital, after adjustment………………….. P273,600 P83,000 P190,600 Less: Portion covered by common stock, par P10 (720 share to each partner).. 14,400 7,200 7,200 Portion to be covered by preferred stock, par P100…………………………………..... P259,200 P75,800 P183,400 Shares to be issued: Preferred stock………………………. 2,592 758 1,834 Common stock……………………… 1,440 720 720 *FV, P40,000 + P68,000 + P180,600 – BV, P60,000 + 90,000 + P174,000. 51. d
Fair value of the assets (P200,000 + P24,000)……………………………. P224,000 Less: Total liabilities……………………………………………………………. 40,000 Fair value of Net Assets……………………………………………………… P184,000 Less: Common stock at P1 par (10,000 shares x 2 x 1 par)…………… 20,000 Additional paid-in capital………………………………………………… P164,000
52. b 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 53. c
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 Revaluation of equipment (P72,000 – P60,000)………………... 12,000
Adjusted asset balance............................................................................. P146,000 54. c
Adjusted asset balance............................................................................. P146,000 Less: Liabilities (P16,400 + P750).................................................................. 17,150 Adjusted net assets..................................................................................... P128,850 Less: Common stock, P5 par x 10,000 shares.....................……………... 50,000 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 P 17,000 New partner's proportionate book value [(P60,000 + P17,000) x 1/5] (15,400) Difference (investment > book value) P 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. P24,000 = (P250,000 - P210,000)(45/75) 24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75) 25. P172,500 = P150,000 + (P75,000 x .3) 26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60) 27. 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 P 80,000 Less: Book value of Anne (40%) 50,000 Partial goodwill/revaluation adjustment P 30,000 Capitalized at 40% Goodwill/revaluation
P 75,000 Goodwill/assets 75,000 Donald (20%) 15,000 Anne (40%) 30,000 Todd (40%) 30,000
Anne (P50,000 + P30,000) 80,000 Cash 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 50,000 Donald (P30,000 x 2/6) 10,000 Todd (P30,000 x 4/6) 20,000 Cash 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)] P852,000 YY: [P480,000 + (P420,000 x 2/5)] 648,000 ZZ: 500,000 Total agreed capital P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000 Multiplied by; ZZ’s capital interest 25% Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000 Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000 YY: [P480,000 + (P105,000 x 2/5)] 522,000 ZZ 395,000 Total agreed capital 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 ZZ Goodwill Method is used P 852,000 P 648,000 P 500,000 Less: Write-off of goodwill (equally) 140,000 140,000 140,000 P 712,000 P 508,000 P 360,000 Bonus Method is used 663,000 522,000 395,000 (Gain) Loss – Bonus method P 49,000 P (140,000) 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)] 648,000 ZZ: 500,000 Total agreed capital P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000 Multiplied by; ZZ’s capital interest 25% Agreed capital to be credited to ZZ P 395,000 Contributed / invested capital of ZZ 500,000 Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000 YY: [P480,000 + (P105,000 x 2/5)] 522,000 ZZ 395,000 Total agreed capital 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 YY ZZ Goodwill Method is used P 852,000 P 648,000 P 500,000 Less: Write-off of goodwill* 189,000 126,000 105,000 P 633,000 P 522,000 P 395,000 Bonus Method is used 663,000 522,000 395,000 (Gain) Loss – Bonus method P 0 P 0 P 0
32. Be indifferent for the goodwill (revaluation) or bonus methods are the same. *Goodwill (revaluation) method:
Amount paid P300,000 Less: Book value of interest – Neal (40%)) 250,000 Partial goodwill/revaluation adjustment P 50,000 Capitalized at 40%
Goodwill/revaluation P125,000 Neal Palmer Ruppe Capital balances before withdrawal 250,000 150,000 100,000 Allocate goodwill* 50,000 37,500 37,500 300,000 187,500 137,500 Withdrawal of Neal (300,000) _______ _______ 187,500 137,500 Write-off Impaired Goodwill (125,000 × 0.50) _______ (62,500) (62,500)
0 125,000 75,000 Capital balances using the bonus method** 125,000 75,000 33. Prefer bonus method due to Palmer’s gain of P12,500 Neal Palmer Ruppe Capital balances before withdrawal 250,000 150,000 100,000 Allocation of goodwill* 50,000 37,500 37,500 300,000 187,500 137,500 Withdrawal of Neal (300,000) _______ _______ - 0 - 187,500 137,500 Write-off Impaired Goodwill 125,000 × 0.60 (75,000) 125,000 × 0.40 ________ _______ (50,000) - 0 - 112,500 87,500 Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500 **The excess paid to Neal of P50,000 would have been divided equally between Palmer and Ruppe as
follows: Palmer Ruppe 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 (P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240 Fair value of net assets………………………………………………………. P 64,350 Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000 Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
THEORIES True or False 1. False 6. False 11. True 16. True 21. False 26. False 31. True 2. True 7. False 12. True 17. True 22. True 27. True 32. True 3. False 8. True 13. True 18. False 23. False 28. False 4. True 9. False 14. False 19. False 24. True 29. True 5. False 10. False 15, True 20. True 25. False 30. False
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 43. c 47. a 53. c 58. a 63. c 34 d 39. e 44. c 48. c 54. c 59. c 64. d 35. d 40. d 45. d 50. c 55. c 60. b 65. c 36. d 41. d 46. c 51. a 56. b 61. b 66. d 37. d 42. b 47. b 52. d 57. b 62. b 67. d
68. 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
Cash
Non- Cash Assets Liabilities Q, Loan
Q, Capital
30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Realization and distribution of gain 96,000 (84,000) _____
______ 3,600 6,000 2,400
Balances after realization 120,000
12,000 2,400 13,200 54,000 38,400 Payment of liabilities (12,000)
(12,000)
Balances after payment of liabilities 108,000
2,400 13,200 54,000 38,400
Payment to partners - loan (2,400)
(2,400) ______ ______ _______ Balances after payment of partners’ loans 105,600
13,200 54,000 38,400
Payment to partners - capital (105,600)
(13,200) (54,000) (38,400)
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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Realization and distribution of loss 48,000 (84,000) _____ ______ (10,800) (18,000) (7,200) Balances after realization 72,000
12,000 2,400 (1,200) 30,000 28,800
Payment of liabilities (12,000)
(12,000) Balances after payment of
liabilities 60,000
2,400 (1,200) 30,000
28,800 Offset deficit versus loans _______
(1,200) 1,200 _______ _______
Balances after offsetting 60,000
1,200
30,000 28,800 Payment to partners – loan (1,200)
(1,200)
_______ ______
Balances after payment of partners’ loans 58,800
30,000 28,800
Payment to partners - capital (58,800)
(30,000) (28,800)
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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Realization and distribution of loss 36,000 (84,000)
________ ________ (14,400) (24,000) (9,600)
Balances after realization 60,000
12,000 2,400 ( 4,800) 24,000 26,400 Payment of liabilities (12,000)
(12,000) ________ _______ _______ _______
Balances after payment of liabilities 48,000
2,400 ( 4,800) 24,000 26,400
Offset loan versus deficit – _______
(2,400) 2,400 _______ _______ Balances after offsetting partner’s loan 48,000
(2,400) 24,000 26,400
Additional investment by Q __2,400
2,400 _______ _______ Balances after additional Investment 50,400
24,000
26,400
Payment to partners - capital (50,400)
(24,000) (26,400)
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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Realization and distribution of gain 42,000 (84,000) _______ ________ (12,600) (21,000) (8,400) Balances after realization 66,000
12,000 2,400 ( 3,000) 27,000 27,600
Payment of liabilities (12,000)
(12,000) _______ _______ _______ _______ Balances after payment of liabilities 54,000
2,400 (3,000) 27,000 27,600
Offset loan versus deficit _______
(2,400) 2,400 ______ ______ Balances after offsetting 54,000
( 600) 27,000 27,600
Additional loss due to insolvency of Q _______
600 ( 429) ( 171)
Balances after additional , Loss 54,000
26,571 27,429
Payment to partners - capital (54,000)
(26,571) (27,429)
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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Realization and distribution of gain 24,000 (84,000) _______ _______ (18,000)
(30,000) (12,000)
Balances after realization 48,000
12,000 2,400 ( 8,400) 18,000 24,000 Payment of liabilities (12,000)
(12,000) _______ _______ _______ _______
Balances after payment of liabilities 36,000
2,400 ( 8,400) 18,000 24,000
Offset loan versus deficit ______
(2,400) 2,400 ______ _______ Balances after offsetting 36,000
(6,000), 18,000 24,000
Additional investment by Q _3,600
_ 3,600 ______ _______ Balances after additional investment 39,600
(2,400) 18,000 24,000
Additional loss due to insolvency of Q ______
2,400 (1,714) ( 686)
Balances after additional Loss 39,600
16,286 23,314
Payment to partners - capital (39,600)
(16,286) (23,314)
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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Payment of liquidation expenses (14,400) ______ ________ ________ (4,320) (7,200) (2,880) Balances after payment of liquidation expenses
9,600 84,000
12,000 2,400 5,280 40,800 33,120
Write-off goodwill and prepaid expenses _______ (72,000) _______ ________ (21,600) (36,000) (14,400)
Balances after write-offs
9,600 12,000 12,000 2,400 (16,320) 4,800 18,720 Realization and distribution of loss 1,200 (12,000) _______ ________ ( 3,240) ( 5,400) ( 2,160) Balances after realization 10,800
12,000 2,400 ( 19,560) ( 600) 16,560
Payment of liabilities (10,800)
(10,800) ________ _______ ________ _______ Balances after payment of Liabilities -0-
1,200 2,400 (19,560) ( 600) 16,560
Offset loan versus deficit ______
_______ (2,400) 2,400 _______ _______ Balances after offsetting -0-
1,200
(17,160) ( 600) 16,560
Additional investment by Q and R
17,760
_______
17,160 600 ______
Balances after additional Investment
17,760
1,200
16,560
Payment of liabilities (1,200)
(1,200)
_______ Balances after payment of Liabilities
16,560
16,560
Payment to partners - Capital (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
Cash
Non-Cash Assets Liabilities Q, Loan
Q, capital (30%)
R, Capital (50%)
S, Capital (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000 Increase in equipment
1,200
360 600 240
Decrease in furniture ______ (600) _______ ______ _(180) (300) (120) Balances after revaluation 24,000 84,600 12,000 2,400 9,780 48,300 36,120 Refund of prepaid expenses _6,960 (8,400) _______ ______ _(432) (720) (288) Balances after refunds 30,960 76,200 12,000 2,400 9,348 47,580 35,832 Received noncash assets ______ (10,200) _______ ______ _____ (7,200) (3,000) Balances after receipt of noncash assets 30,960 66,000
12,000 2,400 9,348 40,380 32,832
Realization and distribution of loss 32,400 (66,000) _______ ______
( 10,080) ( 16,800) ( 8,064)
Balances after realization 63,360
12,000 2,400 ( 732) 23,580 26,112 Payment of liabilities (12,000)
(12,000) _______ _______ _______ _______
Balances after payment of liabilities 51,360
2,400 ( 732) 23,580 26,112
Offset loan versus deficit _______
( 732) 732 ______ ______ Balances after offsetting 51,360
1,668
23,580 26,112
Payment to partners - loan (1,668)
(1,668) ______
_______
Balances after payment of loans 49,692
23,580
26,112
Payment to partners- capitals (49,692)
(23,580)
(26,112)
Problem II
DISCOUNT PARTNERSHIP Schedule of Partnership Liquidation
January 14, 20x4
Capital Balances Explanation Cash Other
Assets Liabilities Dawson Feeney Hardin
Balances before realization P25,000 P120,000 P(40,000) P(31,000) P(65,000) P(9,000) Sales of noncash assets 60,000 (120,000) ______ 18,000 24,000 18,000 Balances 85,000 0 (40,000) (13,000) (41,000) 9,000 Payment of liabilities (40,000) __________ 40,000 ________ ________ ________ Balances 45,000 0 0 (13,000) (41,000) 9,000 Allocation of Hardin's debit
balance
______ __________ ______ 3,857 5,143 (9,000) Balances 45,000 0 0 (9,143) (35,857) 0 Distribution of cash to partners (45,000) __________ ______ 9,143 35,857 ________ Balances P 0 P 0 P 0 P 0 P 0 P 0
Problem III 1.
CDG Partnership Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6 Capital Balances Noncash Carlos Dan Gail Cash Assets Liabilities 20% 40% 40% Preliquidation balances 25,000 475,000 (270,000) (120,000) (50,000) (60,000) Sale of assets and distribution of P215,000 loss 260,000 (475,000) 43,000 86,000 86,000 285,000 -0- (270,000) (77,000) 36,000 26,000 Cash contributed by Gail to extent of positive net worth 25,000 (25,000) 310,000 -0- (270,000) (77,000) 36,000 1,000 Distribution of deficit of insolvent partner: (1,000) 20/60(P1,000) 333 40/60(P1,000) 667 310,000 -0- (270,000) (76,667) 36,667 -0- Contribution by Dan to remedy deficit
36,667 (36,667)
346,667 -0- (270,000) (76,667) -0- -0- Payment to creditors (270,000) 270,000 76,667 -0- -0- (76,667) -0- -0- Payment to partner (76,667) 76,667 Post-liquidation balances -0- -0- -0-
-0- -0- -0-
2.
CDG Partnership Net Worth of Partners December 10, 20X6
Carlos Dan Gail Personal assets, excluding partnership capital interests 250,000 300,000 350,000 Personal liabilities (230,000) (240,000) (325,000) Personal net worth, excluding partnership capital interests, Dec. 1, 20X6 20,000 60,000 25,000 Contribution to partnership (36,667) (25,000) Liquidating distribution from partnership 76,667 -0- -0- Net worth, December 10, 20X6 96,667 23,333 -0-
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 Noncash Capital and Loan Balances Cash Assets Liabilities Merz Dechter Flowers Beginning balances P 25,000 P200,000 P165,000 P 40,000 P30,000 P(10,000) Liquidation expense (20,000) (8,000) (8,000) (4,000) Sale of non-cash assets 160,000 (200,000) (16,000) (16,000) (8,000) Payment of liabilities (165,000) (165,000) Contribution by Flowers 10,000 10,000 Allocation of Flower's
(6,000) (6,000) 12,000
Distribution to partners (10,000) (10,000) 0 0 Ending balances 0 0 0 0 0 0
Problem V Cash Liabilities Able Bower Cramer Beginning: P20,000 P(30,000) P(10,000) P5,000 P15,000 Payment of liabilities (20,000) 20,000 P 0 P(10,000) P(10,000) P5,000 P15,000 Cramer/Bower pay in from personal worth to cover deficit balances: 12,000 ________ ________ (2,000) (10,000) P12,000 P(10,000) P(10,000) P3,000 P 5,000 Payment of liabilities (10,000) 10,000 P 2,000 P 0 P(10,000) P3,000 P 5,000 Allocation of deficit balances: ______ ________ 8,000 (3,000) (5,000) P 2,000 P 0 P (2,000) P 0 P 0 Able paid: (2,000) 2,000 P 0 P 0 P 0 P 0 P 0
Problem VI Answer: Cash 70,000
Arthur, Capital 6,000 Baker, Capital 15,000 Casey, Capital 9,000 Other Assets 100,000 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 65,000 Cash 65,000 To record payment of liabilities. Arthur, Capital 20,000 Loan Receivable from Arthur 20,000 To offset Arthur's loan account against Arthur's capital account. Arthur, Capital 14,000 Loan Payable to Baker 20,000 Casey, Capital 1,000 Cash 35,000 To record payments to partners, computed as follows: Arthur Baker Casey
Capital account balances P70,000 P80,000 P55,000 Add: Loan payable to Baker 30,000 Less: Loan receivable from Arthur (20,000) Loss on realization of assets, P30,000 (6,000) (15,000) (9,000) Balances P44,000 P95,000 P46,000 Maximum potential additional loss of P150,000 (P250,000 – P100,000 = P150,000) divided in 2:5:3 ratio (30,000) (75,000) (45,000) Cash payments P14,000 P20,000 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
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: 25%
Lang 25%
Maas 50%
Neal
Total
Equities P 30,000 P 130,000 P 150,000 P 310,000 Loss to eliminate Lang
(
30,000
)
(
30,000
)
(
60,000
)
(
120,000
)
0 P 100,000 P 90,000 P 190,000 Loss to eliminate Neal
(
45,000
)
(
90,000
)
(
135,000
)
P 55,000 P 0 P 55,000 14. c JJ CC TT Total Profit ratio 40% 50% 10% 100% Prior capital (160,000) (45,000) (55,000) (260,000) Loss on sale of inventory 24,000 30,000 6,000 60,000 (136,000) (15,000) (49,000) (200,000) 15. a Prior capital (160,000) (45,000) (55,000) (260,000) Loss on sale of inventory 72,000 90,000 18,000 180,000 (88,000) 45,000 (37,000) (80,000) Allocate Charles' capital deficit: (45,000) JJ = .40/.50 36,000 TT = .10/.50 9,000 (52,000) -0- (28,000) (80,000) 16. c – (P234,000 – P434,000) x 20% = P40,000 17. b T D H
Capital before realization 40,000 10,000 15,000 Loss on sale (85,000 – 33,000) (26,000) (15,600) (10,400) 14,000 ( 5,600) 4,600
Additional loss (5:2) (4,000) 5,600 ( 1,600) 10,000 3,000
18. a T D H
Capital before realization 40,000 10,000 15,000 Loss on sale (85,000 – 21,100) (31,950) (19,170) (12,780) 8,050 ( 9,170) 2,220
Additional loss (5:2) (6,550) 9,170 (2,620) 1,500 ( 400) Additional loss ( 400) 400 1,100 19. b K L M
Capital before realization 60,000 40,000 80,000 Liquidation expenses (2,000) ( 4,000) ( 4,000) Loss on sale (300 - 180) (24,000) (48,000) ( 48,000) 34,000 (12,000) 28,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000) 30,000 20,000 20. d H I J Total
Capital before realization 80,000 110,000 140,000 330,000 Loss on sale (2:4:4) (61,000) (122,000) (122,000) (305,000) 19,000 (12,000) 18,000 25,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000) 15,000 10,000 21. d – [(P240,000 – P96,000) /30% = P480,000] 22. a
Capital before realization – C 130,000 Liquidation expenses (12,000 x 50%) (6,000) Share on loss on realization (132,000) Capital balance after realization ( 8,000)
Total loss on realization: P132,000/50% (264,000) Non-cash assets 434,000 Proceeds 170,000 23. b Ding Laurel Ezzard Tillman Total
Capital before realization 60,000 67,000 17,000 96,000 240,000 Loss on sale (4:2:2:2) (52,800) ( 26,400) (26,400) (26,400) (132,000) 7,200 40,600 ( 9,400) 69,600 108,000
Possible insolvency loss (4:2:2) ( 4,700) ( 2,350) ( 9,400) ( 2,350) -0- Safe payments 2,500 38,250 0 67,250 108,000 24. e – refer to No. 23
25. b Gonda Herron Morse Total
Capital before realization 60,000 70,000 40,000 170,000 Loss on sale (30:45:25); [200 – 150] (15,000) ( 22,500) (12,500) (50,000) 45,000 47,500 27,500 120,000
26. c S D F Total
Capital 40,000 15,000 5,000 60,000 Loan ________ _______ 5,000 5,000 Total interests 40,000 15,000 10,000 65,000 Loss on sale (5:3:2) - [90,000 – 26,000] (32,000) ( 19,200) (12,800) (64,000) 8,000 ( 4,200) ( 2,800) 1,000 Possible insolvency (5:3) (1,750) ( 1,050) 2,800 0
6,250 ( 5,250) 1,000 Additional investment _______ 5,250 5,250 6,250 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 3,000 Gym, capital 1,000 Hob, capital 1,000 Ing, capital 1,000 Withdrawal of equipment: Accumulated depreciation (8,000 – 3,000) 5,000 Hob, capital 13,000 Equipment 18,000 30. b – 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 X Y Z Total
Capital before realization 90,000 60,000 30,000 180,000 Loss on sale (35%:35%:30%) (42,000) (42,000) (36,000) *(120,000) 48,000 18,000) ( 6,000) 60,000
*balancing figure – total reduction in capital
Quiz - IV 1. Zero/nil B P L S
Capital before realization 25,000 110,000 100,000 65,000 Loss on sale (3:2:1:4)) (45,000) ( 30,000) (15,000) (60,000) (20,000) 80,000 85,000 5,000
Additional loss (2:1:4) (20,000) ( 5,714) ( 2,857) (11,429) 74,286 82,143 ( 6,429) Additional loss (2:1) ( 4,286) ( 2,143) 6,429 70,000 80,000 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 A B C
Capital before realization 80,000 90,000 130,000 Liquidation expenses (3,600) (2,400) (6,000) Loss on sale (134 - 434) (90,000) (60,000) (300,000)
(13,600) 27,600 (176,000)
12. Tom, P30,000; Dick, P4,000 and harry, P11,000 T D H
Capital before realization 40,000 10,000 15,000 Loss on sale (85,000 – 65,000) (10,000) (6,000) (4,000) 30,000 4,000 11,000
13. P34,000 K L M
Capital before realization 60,000 40,000 80,000 Liquidation expenses (2,000) ( 4,000) ( 4,000) Loss on sale (300 - 180) (24,000) (48,000) ( 48,000) 34,000 (12,000) 28,000
Additional investment _____ 12,000 ______ 34,000 28,000 14. P25,000 Cash, beginning P90,000 Payment of liquidation expenses ( 5,000) Payment of liabilities ( 60,000) Payment to partners P25,000
15. P15,000 B P L S
Capital before realization 25,000 110,000 100,000 65,000 Loss on sale (4:2:1:3) (60,000) ( 30,000) (15,000) (45,000) (35,000) 80,000 85,000 20,000
Additional loss (2:1:3) (35,000) (11,667) ( 5,833) (17,500) 15,000 68,333 79,167 2,500 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 ................................................................ P300,000 Less: Bond’s share of P140,000 loss in liquidation (P140,000 × 50%) ........................................................................... (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
Assets
Debts
30% Jody
45% Kane
25% Lark
Balance, May 1 250,000 88,000 32,000 90,000 40,000 Plant sold 10,000 3,000 4,500 2,500 Inventory sold ( 6,000 ) ( 1,800 ) ( 2,700 ) ( 1,500 ) Balances before distribution 254,000 88,000 33,200 91,800 41,000 Offset loans ( 26,000 ) ( 10,000 ) ( 16,000 ) Pay creditors ( 88,000 ) ( 88,000 ) Partner equity 140,000 23,200 91,800 25,000 Possible loss: Plant assets 60,000 ) ( 18,000 ) ( 27,000 ) ( 15,000 ) Distribution 80,000 5,200 64,800 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
Cash
Non- Cash Assets
First Rank Debt
30% Oak Equity
20% Nebe Equity
50% Pang Equity
Jan 1 Balance 3,000 33,000 9,000 2,000 4,000 21,000 Sale of assets 17,000 ( 15,000 ) 600 400 1,000 Subtotal 20,000 18,000 9,000 2,600 4,400 22,000
Safe Payments Schedule Oak
Equity Nebe
Equity Pang
Equity
Partners’ pre-distribution balances 2,600 4,400 22,000 Possible losses on non-cash assets ( 5,400 ) ( 3,600 ) ( 9,000 ) ( 2,800 ) 800 13,000 Write off Oak 2/7 and 5/7 2,800 ( 800 ) ( 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
Cash
Ide Capital
Hanly Capital
Jen Capital
Total
Balance, Aug. 1 50,000 ( 60,000 ) 4,000 106,000 50,000 Ide’s personal contribution
40,000
40,000
40,000
90,000 ( 20,000 ) 4,000 106,000 90,000 Write-off Ide 20,000 ( 7,500 ) ( 12,500 ) 90,000 0 ( 3,500 ) 93,500 90,000 Hanly’s personal contribution
2,000
2,000
2,000
92,000 ( 1,500 ) 93,500 92,000 Write-off Hanly 1,500 ( 1,500 ) 92,000 0 92,000 92,000 Distribute cash 92,000 ) ( 92,000 ) ( 92,000 ) 0 0 0
Theories 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 or False 8. True 13. True 18. False 23. False 28. True 33. True 9. False 14. False 19. True 24. True 29. False 34. True
10. False 15. False 20. True 25. False 30. False 35. False 11. False 16. True 21. False 26. True 31. False 12. True 17. True 22. True 27. True 32. False
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 46. c 51. b 37. A 42. d 47. a 52. a 38. C 43. b 48. c 39. D 44. d 49. d 40. C 45. b 50. b
Chapter 5 Problem I 1.
A, B, C and D Partnership Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Cash
Non-Cash
Assets Liabilities A,
loan D, loan
A, capital (40%)
B, capital (20%)
C, capital (20%)
D, capital (20%)
Balances before Liquidation 181,800 84,000 6,000 3,000 26,400 25,800
20,400
16,200
January - Realization - Payment of expenses - Payment of liabilities
72,000
(1,200)
(66,000)
(90,000)
______ (66,000) _____
_____
(7,200)
( 480)
______
(3,600)
( 240)
______
(3,600)
( 240)
______
(3,600)
( 240)
______
Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360 February - Realization - Payment of expenses - Payment of liabilities
21,600
(1,320)
(18,000)
(30,000)
_______ (18,000) ______
______
(3,360)
( 528)
______
(1,680)
( 264)
_______
(1,680)
( 264) ______
(1,680)
( 264) ______
Balances before payment to partners 7,080 61,800 6,000 3,000 14,832 20,016
14,616
10,416 Payment to Partners (Sch. 1) ( 5,280) ______ ______ _____ ______ (5,280)
______
_____
Balances after February 1,800 61,800 6,000 3,000 14,832 14,736
14,616
10,416
March - Realization - Payment of expenses
19,200
( 1,440)
(24,000)
______ ______ _____
(1,920)
( 576)
( 960)
( 288)
( 960)
( 288)
( 960)
( 288)
Balances before payment to partners 19,560 31,500 6,000 3,000 12,336 13,488
13,368
9,168 Payment to Partners (Sch. 2) (18,360) ______ (2,736) (3,000) (5,688)
(5,568)
(1,368)
Balances after March 1,200 37,800 3,264 12,336 7,800
7,800
7,800
April - Realization - Payment of expenses
6,000
(4,800)
(19,800)
______
(5,520)
(1,920)
(2, 760)
( 960)
(2,760)
( 960)
(2,760)
( 960)
Balances before payment to partners 2,000 15,000 3,264 4,896 4,080
4,080
4,080 Payment to Partners (Note 1) (1,500) ______ ( 720) ( 360)
( 360)
( 360)
Balances after April 500 18,000 2,554 4,896 3,720
3,720
3,720
May - Realization - Payment of expenses
2,400
( 960)
(18,000)
_____
(6,240)
( 384)
(3,120)
( 192)
(3,120)
( 192)
(3,120)
( 192)
Balances before Offsetting 1,440 2,554 ( 1,728) 408
408
408
Offset deficit vs. Loan ______ (1,728) 1,728 _____
______
_____
Balances before payment 2,040 816 408
408
408
Payment to Partners (Note 2) (2,040) (816) (408)
(408)
(408)
2.
A, B, C and D Partnership Schedule of Safe Payments
Schedule 1 – February 28, 20x4 Computation of Distribution of Cash on February 28, 20x4
A, capital (40%)
B, capital (20%)
C, capital (20%)
D, capital (20%)
Balances before payment to partners: Loans 6,000 3,000 Capital 14,832 20,016 14,616 10,416 Total Interest 20,832 20,016 14,616 13,416 Restricted interest for possible losses: Unrealized non-cash assets P 61,800 Cash withheld 1,800
P 63,600 (25,440) (12,720) (12,720) (12,720) ( 4,608) 7,296 1,896 696 Restricted for possible insolvency of A (2:2:2) 4,608 (1,536) (1,536) (1,536) 5,760 360 ( 840) Restricted for possible insolvency of D (2:2) ( 420) ( 420) 840 5,340 ( 60) Restricted for possible insolvency of C ( 60) 60 Payment to partner (s) 5,280 Applied to: Loans -0- Capital 5,280 5,280
Schedule 2 – March 31, 20x4 Computation of Distribution of Cash on March 31, 20x4
A, capital (40%)
B, capital (20%)
C, capital (20%)
D, capital (20%)
Balances before payment to partners: Loans 6,000 3,000 Capital 12,336 13,488 13,488 9,168 Total Interest 18,336 13,488 13,488 12,168 Restricted interest for possible losses: Unrealized non-cash assets P 37,800 Cash withheld 1,200
P 39,000 (15,600) ( 7,800) ( 7,800) ( 7,800) 2,736 5,688 5,568 4,368 Applied to: Loans 2,736 -0- -0- 3,000 Capital ___-0- 5,688 5,568 1,368 2,736 5,688 5,568 4,368
3. T, U, V and W Partnership
Cash Payment Priority Program* January 31, 20x4
Interests Payments
T, capital (40%)
U, capital (20%)
V, capital (20%)
W, capital (20%)
T, capital (40%)
U, capital (20%)
V, capital (20%)
W, capital (20%)
Total Balances before liquidation:
Loans 6,000 3,000 Capital 26,400 25,800 20,400 16,200 Total Interests 32,400 25,800 20,400 19,200 Divided by: P & L % __40% ___20% __20% __20% Loss Absorption Abilities 81,000 129,000 102,000 96,000
Priority I ______ (27,000) _______ _______ 5,400 5,400 81,000 102,000 102,000 96,000 Priority II ______ ( 6,000) ( 6,000) _______ 1,200 1,200 2,400 81,000 96,000 96,000 96,000 Priority III ______ (15,000) (15,000) (15,000) _______ 3,000 3,000 3,000 9,000 81,000 81,000 81,000 81,000 ____-0- 9,600 4,200 3,000 16,800
*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan. 4.
T, capital
(40%) U, capital
(20%) V, capital
(20%) W, capital
(20%) Total Interests P 32,400 P 25,800 P 20,400 P 19,200 Divided by: P & L % ____40% ____20% ____20% ____20% Loss Absorption Abilities P 81,000 P129,000 P 102,000 P 96,000 Order of Cash Distribution (4) (1) (2) (3) Vulnerability Rankings (1 Is most vulnerable) (1) (4) (3) (2)
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 Creditors T U
V
W 1. First P70,000 100% 2. Next P 4,500 100% 3. Next P2,000 50% 50% 4. Next P7,500 33 1/3% 33 1/3% 33 1/3% 5. Remainder 40% 20% 20% 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 CC Cash Assets Payable 50% 30% 20% Balances before Liquidation, January 1,20x4
18,000 307,000 (53,000) (88,000) (110,000) (74,000)
January transactions: 1. Collection of accounts
receivable at a loss
of P15,000 51,000 (66,000) 7,500 4,500 3,000 2. Sale of inventory at a loss
of P14,000 38,000 (52,000) 7,000 4,200 2,800
3. Liquidation expenses paid (2,000) 1,000 600 400 4. Share of credit memorandum 3,000 (1,500) (900) (600) 5. Payments to creditors (50,000) 50,000 55,000 189,000 -0- (74,000) (101,600) (68,400) Safe payments to partners (Schedule 1)
(45,000)
__
26,600
18,400
10,000 189,000 -0- (74,000) (75,000) (50,000) February transactions: 6. Liquidation expenses paid
(4,000)
__
2,000
1,200
800 6,000 189,000 -0- (72,000) (73,800) (49,200) Safe payments to partners (Schedule 2)
-0-
__
___ -0-
-0-
-0-
6,000 189,000 -0- (72,000) (73,800) (49,200) March transactions: 8. Sale of M&Eq. at a loss of
P43,000 146,000 (189,000) 21,500 12,900 8,600
9. Liquidation expenses paid (5,000)
2,500
1,500
1,000
147,000 -0- -0- (48,000) (59,400) (39,600) 10. Payments to partners (147,000) 48,000 59,400 39,600 Balances at end of liquidation, March 31, 20x4
-0-
-0-
-0-
-0-
-0-
-0-
ABC Partnership Schedules of Safe Payments to Partners
AA BB CC Schedule 1: January 31, 20x4 50% 30% 20% Capital balances (74,000) (101,600) (68,400) Possible loss: Other assets (P189,000) and possible liquidation costs (P10,000) 99,500 59,700 39,800 25,500 (41,900) (28,600) Absorption of AA’s potential deficit balance (25,500) BB: (P25,500 x 3/5 = P15,300) 15,300 CC: (P25,500 x 2/5 = P10,200) 10,200 Safe payment, January 31, 20x4 -0- (26,600) (18,400) Schedule 2: February 27, 20x4 Capital balances (72,000) (73,800) (49,200) Possible loss: Other assets (P189,000) and possible liquidation costs (P6,000) 97,500 58,500 39,000 25,500 (15,300) (10,200) Absorption of AA’s potential deficit balance: (25,500) BB: (P25,500 x 3/5 = P15,300) 15,300 CC: (P25,500 x 2/5 = P10,200) 10,200 Safe payment, February 27, 20x4 -0- -0- -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 Capital Accounts PP EE TT PP EE TT Profit and loss percentages 50% 30% 20% Preliquidation capital balances (55,000) (45,000) (24,000) Loss absorption Power (Capital balances / Loss percent) (110,000) (150,000) (120,000) Decrease highest LAP to next highest: EE (P30,000 x .30) 30,000 9,000 (110,000) (120,000) (120,000) (55,000) (36,000) (24,000)
Decrease LAPs to next highest: EE (P10,000 x .30) 10,000 3,000 TT (P10,000 x .20) 10,000 2,000 (110,000) (110,000) (110,000) (55,000) (33,000) (22,000)
Summary of Cash Distribution (If Offer of P100,000 is Accepted)
Accounts PP EE TT Payable 50% 30% 20% Cash available P106,000 First (17,000) P17,000 Next (9,000) P 9,000 Next (5,000) 3,000 P 2,000 Additional paid in P&L ratio (75,000) ______ P37,500 22,500 15,000 P -0- P17,000 P37,500 P34,500 P17,000 Problem IV
PET Partnership Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Capital Noncash Accounts PP EE TT Cash Assets Payable 50% 30% 20% Preliquidation balances 6,000 135,000 (17,000) (55,000) (45,000) (24,000)
July: Assets Realized 26,500 (36,000) 4,750 2,850 1,900 Paid liquidation costs (1,000) 500 300 200 Paid creditors (17,000) 17,000 14,500 99,000 -0- (49,750) (41,850) (21,900) Safe Payments (Sch. 1) (6,500) 6,500
8,000 99,000 -0- (49,750) (35,350) (21,900)
August: Equipment withdrawn (4,000) (3,000) (1,800) 8,800 (allocate P6,000 gain) Paid liquidation costs (1,500) 750 450 300 6,500 95,000 -0- (52,000) (36,700) (12,800) Safe Payments (Sch. 2) (4,000) 4,000 2,500 95,000 -0- (52,000) (32,700) (12,800)
September: Assets Realized 75,000 (95.000) 10,000 6,000 4,000 Paid liquidation costs (1,000) 500 300 200 76,500 -0- -0- (41,500) (26,400) (8.600) Payments to partners (76,500) 41,500 26,400 8,600 Postliquidation balances -0- -0- -0- -0- -0- -0-
PET Partnership Schedules of Safe Payments to Partners
PP EE TT Schedule 1: July 31, 20x4 50% 30% 20% Capital balances (49,750) (41,850) (21,900) Possible loss on noncash assets (P99,000) 49,500 29,700 19,800 Cash retained (P8,000) 4,000 2,400 1,600 3,750 (9,750) (500) Absorption of Pen's potential deficit (3,750) EE: P3,750 x .30/.50 2,250 TT: P3,750 x .20/.50 1,500 -0- (7,500) 1,000 Absorption of TT’s potential deficit (1,000) EE P1,000 x .30/.30 1,000 Safe payment -0- (6,500) -0- Schedule 2: August 31, 20x4 Capital balances (52,000) (36,700) (12,800) Possible loss on noncash assets (P95,000) 47,500 28,500 19,000 Cash retained (P2,500) 1,250 750 500 (3,250) (7,450) 6,700 Absorption of TTs’ potential deficit (6,700) PP: P6,700 x .50/.80 4,188 EE: P6,700 x .30/.80 2,512 938 (4,938) -0- Absorption of PPs potential deficit (938) EE: P938 x .30/.30 938 Safe payment -0- (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
390,000 (510,000) 60,000 36,000 24,000
440,000 160,000 (405,000) (40,000) (104,000) (51,000) Liquidation expenses (2,500) 1,250 750 500 437,500 160,000 (405,000) (38,750) (103,250) (50,500) Payment to creditors (405,000) 405,000 32,500 160,000 -0- (38,750) (103,250) (50,500) Payments to partners (Sch. 1) (22,500) 22,500 10,000 160,000 -0- (38,750) (80,750) (50,500) August, 20x4: Sale of assets & distribution of P13,000 loss 22,000 (35,000) 6,500 3,900 2,600 32,000 125,000 -0- (32,250) (76,850) (47,900) Liquidation expenses (2,500) 1,250 750 500 29,500 125,000 -0- (31,000) (76,100) (47,400) Payments to partners (Sch. 2) (19,500) 13,700 5,800 10,000 125,000 -0- (31,000) (62,400) (41,600)
September, 20x4: Sale of assets
distribution of P70,000 loss 55,000 (125,000) 35,000 21,000 14,000 65,000 -0- -0- 4,000 (41,400) (27,600) Allocate D's deficit to S and V (4,000) 2,400 1,600 65,000 -0- -0- -0- (39,000) (26,000) Liquidation expenses (2,500) 1,500 1,000 62,500 -0- -0- -0- (37,500) (25,000) Payments to partners (62,500) -0- 37,500 25,000 Postliquidation balances -0- -0- -0- -0- -0- -0-
DSV Partnership
Schedule of Safe Payments to Partners D S V Schedule 1, July 31, 20x4: 50% 30% 20% Capital balances, July 31, Before cash distribution (38,750) (103,250) (50,500) Assume full loss of P160,000 on remaining noncash assets and P10,000 in possible future liquidation expenses 85,000 51,000 34,000 46,250 (52,250) (16,500) Assume D's potential deficit must be absorbed by S and V: (46,250) 30/50 x P46,250 27,750 20/50 x P46,250 18,500 -0- (24,500) 2,000 Assume V's potential deficit must be absorbed by S completely 2,000 (2,000) Safe payments to partners on July 31, 20x4 -0- (22,500) -0- Schedule 2, August 31, 20x4: Capital balances, August 31, before cash distribution (31,000) (76,100) (47,400) Assume full loss of P125,000 on remaining noncash assets and P10,000 in possible liquidation Expenses 67,500 40,500 27,000 36,500 (35,600) (20,400) Assume D's potential deficit must be absorbed by S and V: (36,500) 30/50 x P36,500 21,900 20/50 x P36,500 14,600 Safe payments to partners -0- (13,700) (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 Capital Accounts D S V D S V Profit and loss sharing ratio 50% 30% 20% Preliquidation capital balances (100,000) (140,000) (75,000) Loss absorption power (LAP) capital accounts / loss sharing percentage (200,000) (466,667) (375,000) Decrease highest LAP to next highest LAP: Decrease S by P91,667 91,667 (Cash distribution: P91,667 x .30) 27,500 (200,000) (375,000) (375,000) (100,000) (112,500) (75,000) Decrease LAP to next highest level:
Decrease S by P175,000 175,000 Cash distribution: P175,000 x .30) 52,500 Decrease V by P175,000 175,000 Cash distribution: P175,000 x .20) 35,000 (200,000) (200,000) (200,000) (100,000) (60,000) (40,000) Decrease LAPs by distributing cash in the P/L sharing ratio 50% 30% 20%
Summary of Cash Distribution Plan (Estimated on June 30, 20x4)
Liquidation Creditors Expenses D S V 1. First P405,000 100% 2. Next P10,000 100% 3. Next P27,500 100% 4. Next P87,500 60% 40% 5. Any additional distributions in the partners' profit and loss ratio 50% 30% 20%
b. Confirmation of cash distribution plan
DSV Partnership Capital Account Balances
June 30, 20x4, through September 30, 20x4 D S V Profit and loss ratio 50% 30% 20% Preliquidation balances, June 30 (100,000) (140,000) (75,000) July loss of P120,000 on disposal of assets and P2,500 paid in liquidation costs 61,250 36,750 24,500 (38,750) (103,250) (50,500) July 31 distribution of P22,500 of available cash to partners (Sch. 1) First P22,500 of P27,500 layer: 100% to S 22,500 (38,750) (80,750) (50,500) August loss of P13,000 on disposal of assets and P2,500 paid in liquidation costs 7,750 4,650 3,100 (31,000) (76,100) (47,400) 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 5,000 Next $14,500 of P87,500 layer: 60% to S 8,700 40% to V 5,800 (31,000) (62,400) (41,600) September loss of P70,000 on disposal of assets and P2,500 paid in liquidation Costs 36,250 21,750 14,500 5,250 (40,650) (27,100) Distribution of D's deficit (5,250) 3,150 2,100 -0- (37,500) (25,000) September 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 37,500 40% to V 25,000 Postliquidation balances -0- -0- -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 P10,000 Cash from sale of noncash assets 22,000 Less: Payment of actual liquidation expenses (2,500) Less: Amount held for possible future liquidation expenses (10,000) Cash available to partners, August 31, 20x4 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 P10,000 Cash received from sale of noncash assets 55,000 Less: Payment of actual liquidation expenses (2,500) Cash available to partners, September 30, 20x4 P62,500
Problem VII Cash distribution program: Creditors Ames Beard Craig
First P 50,000 100% Next 34,000 100% Next 48,000 33 1/3% 66 2/3% All over P132,000 40% 20% 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 60,000 Quanto, Capital 5,000 Rollo, Capital 3,000 Simms, Capital 2,000 Assets 70,000 To record realization of assets at a loss of $10,000, divided amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively. Liabilities 30,000 Cash 30,000 To record payment to creditors. Loan Payable to Quanto 9,500 Rollo, Capital 10,500 Simms, Capital 5,000 Cash 25,000
To record payment to partners, computed as follows: Quanto Rollo Simms
Capital (including Quanto's loan of P10,000) before liquidation P42,000 P30,000 P18,000 Loss on realization of assets (5,000) (3,000) (2,000) Balances P37,000 P27,000 P16,000 Maximum potential additional loss (P5,000 + P50,000 = P55,000) divided in 5:3:2 ratio (27,500) (16,500) (11,000) Cash payments P 9,500 P10,500 P 5,000
Multiple Choice Problems 1. c JJ CC TT Total Profit ratio 40% 50% 10% 100% Prior capital (160,000) (45,000) (55,000) (260,000) Loss on sale of inventory 24,000 30,000 6,000 60,000 (136,000) (15,000) (49,000) (200,000) 2. a
Capital balances Peter 300,000
Paul 350,000
Mary 400,000
Total 1,050,000
Loss on sale of assets (475,000 – 600,000) – 4:4:2 ( 50,000) (50,000) (25,000) (125,000) 250,000 300,000 375,000 925,000 Possible loss for unrealized assets P1,000,000 – P600,000 = 400,000 160,000 160,000 80,000 400,000 (90,000 140,000 295,000 525,000 3. d 4. d AA BB CC Capital balances 37,000 65,000 48,000 Divided by: Profit and loss ratio 40% 40% 20% Loss absorption power 92,500 162,500 240,000 Loss to reduce CC to BB: (77,500 x .20 = 15,500) 77,500 Balances 92,500 162,500 162,500 Loss to reduce BB & CC to AA: (B:70,000 x .40 = 28,000) 70,000 (C:70,000 x .20 = 14,000) 70,000 Balances 92,500 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
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 A B C Total
Capital before realization 37,000 65,000 48,000 150,000 Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000) 21,000 49,000 40,000 110,000 Possible loss P90,000, unrealized NCA (36,000) (36,000) (18,000) 90,000 (15,000) 13,000 22,000 20,000
Possible insolvency loss (2:1) 15,000 (10,000) ( 5,000) 0 3,000 17,000 8. b A B C Total
Capital before realization 37,000 65,000 48,000 150,000 Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000) 21,000 49,000 40,000 110,000 Possible loss P90,000, unrealized NCA plus P3,000 = P93,000
(37,200)
(37,200)
(18,600)
93,000
(16,200) 11,800 21,400 17,000 Possible insolvency loss (2:1) 16,200 (10,800) ( 5,400) 0 1,000 16,000 17,000 9. a AE BT KT Profit and loss ratio 40% 30% 30% Capital balances (40,000) (180,000) (30,000) Loss of P100,000 40,000 30,000 30,000 Remaining equities -0- (150,000) -0- AE will receive nothing; the entire P150,000 will be paid to BT.
10. c 11. d 12. d 13. c 14. a CC DD EE Total Profit and loss ratio 5/10 3/10 2/10 10/10 Beginning capital 80,000 90,000 70,000 240,000 Actual loss on assets (5:3:2) (15,000) (9,000) (6,000) ( 30,000) 65,000 81,000 64,000 210,000 Possible loss – unrealized NCA ( 50,000) (30,000) (20,000) ( 20,000) Safe payments 15,000 51,000 44,000 190,000
15. c X Y Z
Capital before realization 130,000 130,000 100,000 Divided by: 50% 30% 20% Loss absorption abilities 260,000 260,000 500,000
16. a 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
D R N J Capital balances 72,000 32,000 52,000 24,000 Divided by: Profit and loss ratio 40% 20% 20% 20% Loss absorption power 180,000 160,000 260,000 120,000 Loss to reduce N to D: (80,000 x .20 = 16,000) 80,000 ____0
18. d – Harding, P6,107; Jones, P12,275
H J S Total Capital balances 20,000 22,000 (10,000) 32,000 Potential loss from Sandy deficit (5,882) (4,118) 10,000 0 14,118 17,882 0 32,000 Loss to reduce H and J: (50:35) (8,011) (5,607) (13,618) Balances 6,107 12,275 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
H J S Capital balances 20,000 22,000 (10,000) Additional contribution 0 0 10,000 Capital balances 20,000 22,000 Divided by: Profit and loss ratio 50/85 35/85 Loss absorption power 34,000 53,429 Loss to reduce JJ to HH: (19,428 x 35/85 = 8,000) 19,428 Balances 34,000 34,000
Cash available P18,382 Less: Priority I to Jones (P19,428 x 35/85) 8,000 P 8,000 P10,382 Less: P& L (50:35) (10,382) P 6,107 4,275 P6,107 P 12,275 19. c 20. b
21. c A B C Total
Capital before realization 70,000 30,000 50,000 150,000 Loan 20,000 ______ ______ 20,000 Total interests 90,000 30,000 50,000 170,000 Loss on sale (240,000 – 195,000) (15,000) ( 15,000) (15,000) (45,000) 75,000 15,000 35,000 125,000
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 Divided by: P&L ratio………… 1/3 1/3 1/3 Loss absorption ability……….. P270,000 P 90,000 P150,000 Priority I…………………………. 120,000 - _______ P40,000 P40,000 P150,000 P90,000 P150,000 Priority II………………………… 60,000 0 60,000 20,000 0 P20,000 40,000 P 90,000 P90,000 P 90,000 P60,000 P 0 P20,000 P80,000 23. d A B C Total
Capital before realization 70,000 30,000 50,000 150,000 Loan 20,000 ______ ______ 20,000 Total interests 90,000 30,000 50,000 170,000 Loss on sale (240,000 – 195,000) (15,000) ( 15,000) (15,000) (45,000) 75,000 15,000 35,000 125,000 Payment of loans to partner (20,000) ______ _____ (20,000)
55,000 15,000 35,000 105,000 Asset received ______ ______ (30,000) (30,000) Payment to partners after payment of loan 55,000 15,000 5,000 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
D E F Capital balances 40,000 90,000 30,000 Less: Machine, at fair value ______ (35,000) ______ Capital balances 40,000 55,000 30,000 Divided by: Profit and loss ratio 1/3 1/3 1/3 Loss absorption power 120,000 165,000 90,000 Loss to reduce E to D: (45,000 x 1/3 = 15,000) (45,000) ____0 Balances 120,000 120,000 90,000
25. c K M B J Capital balances 59,000 39,000 34,000 34,000 Divided by: Profit and loss ratio 40% 30% 10% 20% Loss absorption power 147,500 130,000 340,000 170,000 Loss to reduce CC to BB: (170,000 x .10 = 17,000) 170,000 ____0 Balances 147,500 130,000 170,000 170,000
26. c
C P H M Capital balances 60,000 27,000 43,000 20,000 Divided by: Profit and loss ratio 40% 30% 20% 10% Loss absorption power 150,000 90,000 215,000 200,000 Loss to reduce CC to BB: (15,000 x .20 = 3,000) 15,000 ____0 Balances 150,000 90,000 200,000 200,000
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:
W J F R Capital balances (2,000) (5,000) 13,000 7,000 Loan ______ 3,000 _______ __ Total interests (2,000) (2,000) 13,000 7,000 Potential insolvency loss (3:2) 2,000 2,000 ( 2,400) (1,600) 10,600 5,400
28. b
A B C Total Capital balances (5,000) 18,000 6,000 19,000 Potential loss from A deficit (5:3) 5,000 (3,125) (1,875) 0 14,875 4,125 19,000 Loss to reduce H and J: (5:3) (8,750) (5,250) (14,000) 6,125 (1,125) 5,000
Possible insolvency loss (1,125) 1,125 0 5,000
29. a – installment liquidation (refer for more problems in Chapter 5) INTERESTS PAYMENTS ___ P Q R P Q R Total Balances before realization Totall interests………... P 70,000 P 50,000 P100,000 Divided by: P&L ratio………… 20% 40% 40% Loss absorption abilities……….. P350,000 P125,000 P250,000 Priority I…………………………. (100,000) 0 P20,000 P20,000 P250,000 P125,000 P250,000 Priority II………………………… (125,000) (125,000) 25,000 P50,000 75,000 P125,000 P125,000 P125,000 P75,000 P 4,500 P50,000 P95,000 Cash, beginning P 90,000 Add (deduct): Liquidation expenses paid ( 8,000) Payment of liabilities (170,000) Proceeds from sale of assets (?) 108,000 Payment to partner before payment to Renquist (priority I only) P 20,000 30. d – Justice P15,533
J Z D Total Capital balances 23,000 22,000 (14,000) 31,000 Potential loss from Douglass (40:35) (7,467) (6,533) 14,000 0 15,533 15,467 0 31,000
Note: 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 D Capital balances 23,000 22,000 (14,000) Additional contribution 0 0 14,000 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 P31,000 Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875 P29,125 Less: P& L (40:35) (29,125) P15,533 13,592 P15,533 P15,467
31. d INTERESTS PAYMENTS ___ D K R D K R Total Balances before realization Loans………………….. P 0 P 10,000 P(20,000) Capital………………... 170,000 170,000 100,000 Total interests………... P170,000 P180,000 P 80,000 Divided by: P&L ratio………… 50% 30% 20% Loss absorption abilities……….. P340,000 P600,000 P400,000 Priority I…………………………. - (200,000) 0 P60,000 P60,000 P340,000 P400,000 P400,000 Priority II………………………… - (60,000) (60,000) 18,000 18,000 36,000 P340,000 P340,000 P340,000 P – P 78,000 P18,000 P 96,000 Cash received by the partner Kemp P 60,000 Add (deduct): Liabilities paid 250,000 Expenses paid 5,000 Contingency 10,000 Cash, beginning (120,000) Proceeds from sale of other assets P205,000 32. b INTERESTS PAYMENTS ___ T N D T N D Total Balances before realization Loans………………….. P 0 P 0 P 0 Capital………………... 22,000 15,500 14,000 Total interests………... P 22,000 P15,500 P 14,000 Divided by: P&L ratio………… 2/4 1/4 1/4 Loss absorption abilities……….. P 44,000 P62,000 P 56,000 Priority I………………………… - ( 6,000) 0 P 1,500 P1,500 P 44,000 P56,000 P56,000 Priority II………………………… - (12,000) (12,000) __ 3,000 P 3,000 6,000 P 44,000 P44,000 P44,000 P – P 4,500 P 3,000 P 7,500 Cash received by Tree P 6,250 Divided by: P & L ratio 2/4 Amount in excess of P7,500 P 12,500 Total cash payments – refer to program 7,500 Payment to partners P 20,000 33. d Cash, beginning P 12,000 Add (deduct): Proceeds from sale of certain assets 32,000 Liquidation expenses paid ( 1,000) Payment of liabilities ( 5,400) Payment to partners (refer to No. 30) ( 20,000) Cash withheld P 17,600
34. d Priority Creditors Mattews Norell Reams Total First P300,000………. P300,000 P300,000 Next P80,000 (7:3)… P56,000 P24,000 80,000 Next P70,000 (3:4)… 30,000 P40,000 70,000 Remainder*……….. 22,000 34,000 44,000 100,000 P300,000 P108,000 P58,000 P84,000 P550,000 (d) *P550,000 – P300,000 – P80,000 – P70,000 = P100,000 INTERESTS PAYMENTS______ P Q R P Q R Total Balances before realization Loans………………….. P 6,000 P(10,000) Capital………………... 24,000 P36,000 60,000 Total interests………... P30,000 P36,000 P50,000 Divided by: P&L ratio………… 3/10 3/10 4/10 Loss absorption abilities…….. P100,000 P120,000 P125,000 Priority I…………………………. - - (5,000) P 2,000 P 2,000 P100,000 P120,000 P120,000 Priority II………………………… - (20,000) (20,000) P6,000 8,000 14,000 (d) P100,000 P100,000 P100,000 P – P6,000 P10,000 P16,000 35. d Priority Creditors Mattews Norell Reams Total First P300,000………. P300,000 P300,000 Next P80,000 (7:3)… P56,000 P24,000 80,000 Next P70,000 (3:4)… 30,000 P40,000 70,000 Remainder*……….. 22,000 34,000 44,000 100,000 P300,000 P108,000 P58,000 P84,000 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 -0- 25,000
*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) P 6,000 Second allocation (H) (P380,000 - P300,000) (.30) P24,000 (F) (P380,000 - P300,000) (.25) 20,000 44,000 Third allocation, share based on profit and loss ratios 10,000
Harold: P6,000 + P24,000 + (P10,000 x .30)
13. P2,500
First allocation (H) (P400,000 - P380,000) (.30) P 6,000 Second allocation (H) (P380,000 - P300,000) (.30) P24,000 (F) (P380,000 - P300,000) (.25) 20,000 44,000 Third allocation, share based on profit and loss ratios 10,000
Sheldon: (P10,000 x .25)
14. P24,500
First allocation (H) (P400,000 - P380,000) (.30) P 6,000 Second allocation (H) (P380,000 - P300,000) (.30) P24,000 (F) (P380,000 - P300,000) (.25) 20,000 44,000 Third allocation, share based on profit and loss ratios 10,000
Fred: P20,000 + (P10,000 x .45)
15. P147,000
Losses 40% Hara
30% Ives
30% Jack
Equities 135,000 216,000 49,000 Possible loss on remaining assets 200,000 ( 80,000 ) ( 60,000 ) ( 60,000 ) Contingencies 10,000 ( 4,000 ) ( 3,000 ) ( 3,000 ) Subtotals 51,000 153,000 ( 14,000 ) Eliminate Jack’s debit balance ( 8,000 ) ( 6,000 ) 14,000 Safe payments 43,000 147,000 0
16. P495,000 = (P162,000 + P36,000) / .40
17. c P Q R
Capital before realization 70,000 50,000 100,000 Liquidation expenses (1,600) ( 3,200) ( 3,200) 68,400 46,800 96,800 Divided by: 20% 40% 40% Loss absorption abilities 342,000 117,000 242,000
Selling Price 183,000 Book value 300,000 Loss (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 Less: Cash received by Quincy (minimum)……………………………………. 0 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 Xin Yates Total Equities,Jun 30 8,000 15,000 6,000 29,000 Inventory loss ( 2,000 ) ( 3,000 ) ( 5,000 ) ( 10,000 ) Contingency fund ( 400 ) ( 600 ) ( 1,000 ) ( 2,000 ) Subtotals 5,600 11,400 0 17,000 Possible losses on remaining assets ( 3,000 ) ( 4,500 ) ( 7,500 ) ( 15,000 ) Subtotals 2,600 6,900 ( 7,500 ) 2,000 Eliminate Yates’s Deficit ( 3,000 ) ( 4,500 ) 7,500 Subtotals ( 400 ) 2,400 0 2,000 Eliminate Warle’s Deficit 400 ( 400 ) Cash distribution 0 2,000 0 2,000
THEORIES True or False
1. False 6. True 11. False 16. False 2. True 7. True 12. True 17. True 3. False 8. False 13. False 4. False 9. True 14. True 5. True 10. True 15, 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. Multiple Choice
18. b 23. a 28. b 33. b 38. c 43. d 19. b 24. d 29. e 34. d 39. d 44. b 20. a 25. d 30. a 35. b 40. b 45. c 21. a 26. a 31. a 36. a 41. a 46. d 22. d 27. d 32. c 37. b 42. b
Chapter 6 Problem I 1. Statement of Affairs - Formal
MINER COMPANY Statement of Affairs
May 31, 2012 Book Value
Assets Realizable
Value Assets Pledged with Fully Secured Creditors:
P 50,000 Notes Receivable P39,800 1,200 Accrued Interest Rec. 1,000 P 40,800
Notes Payable 40,000 Accrued Interest Pay. 800 40,800
119,000 Building 75,000 Note Payable 20,000 Accrued Interest Pay. 800 20,800 P 54,200 Assets Pledged with Partially Secured Creditors:
13,200 Equipment 4,200 Note Payable 10,000 Free Assets
6,000 Cash 6,000 61,000 Accounts Receivable 50,000 60,000 Inventory 30,000
1,100 Prepaid Insurance 400 8,500 Goodwill 0
Total Net Realizable Value 140,600 Liabilities having Priority – Wages 6,000 Taxes 2,400 8,400 Net Free Assets 132,200 Estimated Deficiency to Unsecured Creditors 53,600
P 320,000 P 185,800
Book Value
Equities
Unsecured
Liabilities Having Priority: P 6,000 Accrued Wages P 6,000
2,400 Taxes Payable 2,400 P 8,400 Fully Secured Creditors:
60,000 Notes Payable 60,000 1,600 Accrued Interest Payable 1,600 61,600
Partially Secured Creditors:
10,000 Note Payable 10,000 Equipment 4,200 P 5,800
Unsecured Creditors:
170,000 Accounts Payable 170,000 10,000 Notes Payable 10,000
Stockholders’ Equity
110,000 Common Stock ( 50,000) Retained Earnings (Deficit) P 320,000 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 P 110,000 Notes Receivable 10,400 Retained Earnings (50,000) Inventory 30,000 Estimated Deficiency to Buildings 44,000 Unsecured Creditors 53,600 Equipment 9,000 Prepaid Insurance 700 Goodwill 8,500 P113,600 P 113,600
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15% Problem II 1. Formal
Down Dog Corporation Statement of Affairs
June 30, 2014 Deficiency Account Book Value Assets Realizable Value (Loss/Gain)
Pledged with partially secured creditors P165,000 Equipment-net P87,000 (78,000) Less: Note payable and accrued interest (96,000) P 0 Unsecured amount (See below) (9,000) Free Assets 3,000 Cash 3,000 72,000 Accounts receivable-net 48,000 (24,000) 60,000 Inventories 72,000 12,000 Total net realizable value 123,000 Less: Priority liabilities – wages payable (45,000) Total available for unsecured creditors 78,000 ______ Estimated deficiency to unsecured creditors 30,000 ______ P300,000 P108,000 (90,000)
Unsecured Book Value Equities Liabilities Priority liabilities P 45,000 Wages payable (assumed under
P4,650 per employee) P 45,000
Partially secured creditors 96,000 Note payable and accrued interest P 96,000 Less: Equipment pledged as security (87,000) P 9,000 Unsecured creditors 72,000 Accounts payable 72,000 27,000 Rent payable 27,000 Stockholders’ equity 180,000 Capital stock 180,000 (120,000) Retained earnings (deficit) ______ (120,000) P300,000 P108,000 P 60,000 Estimated Deficiency P(30,000) 2. Estimated payments per dollar for unsecured creditors Cash available P210,000 Distribution to partially secured and unsecured priority creditors: Note payable and interest P87,000 Administrative expenses 24,000 Wages payable 45,000 (156,000) Available to unsecured nonpriority creditors P 54,000 Note payable and interest (unsecured portion) P 9,000 Accounts payable 72,000 Rent payable 27,000 Unsecured nonpriority claims 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 P87,000 Unsecured portion (P9,000 × 0.50) 4,500 P91,500 Unsecured priority Administrative expenses P24,000 Wages payable 45,000 69,000 Unsecured nonpriority Accounts payable (P72,000 × 0.50 P36,000 Rent payable (P27,000 × 0.50) 13,500 49,500
Total payments P210,000
Problem III Realizable value of all assets (P635,000 + P300,000 + P340,000) P1,275,000 Allocated to: Fully secured creditors (316,000) Partially secured creditors (300,000) Unsecured creditors with priority (100,000) Remainder available to general unsecured creditors P559,000 Payment rate to general unsecured creditors (Including balance due to partially secured creditors) P559,000 / (P1,165,000 + (P400,000 - P300,000)) 44.2% Realizable value of assets: Assets pledged to fully secured creditors P635,000 Assets pledged to partially secured creditors 300,000 Free assets 340,000 Total realizable value P1,275,000 Amounts to be paid to: Fully secured creditors P316,000 Partially secured creditors [P300,000 + (0.442 × P100,000)] 344,200 Unsecured creditors with priority 100,000 General unsecured creditors (0.442 × P1,165,000) 514,800* Total P1,275,000 *Rounded P130 Problem IV Free Assets: Current Assets ................................................................................. P 35,000 Buildings and Equipment .............................................................. 110,000 Total ........................................................................................ P145,000 Liabilities with Priority: Administrative Expenses ................................................................ P 20,000 Salaries Payable (only P3,000 per employee) ........................... 6,000 Income Taxes ................................................................................. 8,000 Total ........................................................................................ 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) ......................... P 30,000 Accounts Payable .......................................................................... 85,000 Bonds Payable ................................................................................ 70,000 Total ........................................................................................ P185,000
Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %
Payment On Notes Payable: Value of Security (land) ................................................................ P 90,000 60% of Remaining P30,000 ............................................................ 18,000 Total Collected by holders ........................................................... P108,000 Problem V
Free Assets: Cash ........................................................................................ P30,000 Receivables (30 percent collectible) .......................................... 15,000 Inventory ........................................................................................ 39,000 Land (value in excess of secured note: P120,000 – P110,000) ................................................................ 10,000 Total ........................................................................................ P94,000 Less: Liabilities with priority Salary payable (below maximum)........................................ (10,000) Free assets available ................................................................ P84,000 Unsecured Liabilities: Accounts payable .......................................................................... P90,000 Bonds payable (less secured interest in building: P300,000 – P180,000) ................................................ 120,000 Unsecured liabilities .................................................................. 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) ........................................................................................ P10,000 Accounts payable (unsecured—will collect 40% of debts of P90,000) .................................................................. P36,000 Note payable (fully secured by land—will collect entire balance) ........................................................................ P110,000 Bonds payable (partially secured—will collect P180,000 from building and 40 percent of the remaining P120,000) ................................................................. P228,000
Problem VI
Class of Creditors Total Creditor’s
Claims
Total Amounts
Expected to be
Recovered
% of Total Claims
Expected to be
Recovered Fully secured liabilities Partially secured liabilities Unsecured liabilities with priority Unsecured liabilities without
priority
183,600 54,600 30,810
182,500
183,600 51,720 30,810
116,800
100.0 94.7
100.0 64.0
Problem VII 1. 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 claims P410,000 2. Unsecured portion of notes payable and interest (P500,000 + P30,000 – P150,000) P380,000 Accounts payable 260,000 Total claims ofunsecured creditors P640,000 Dividend to Unsecured Creditors P410,000 ÷ P640,000 = 64.1% 3. Unsecured portion of notes payable and Interest P380,000 Dividend on unsecured amount 64.1% Amount received on unsecured portion P243,580 Proceeds from receivables and inventory 150,000 Total Received P393,580 Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
Problem VIII 1.
WILBUR CORPORATION STATEMENT OF AFFAIRS
DECEMBER 31, 20x4 Assets
Book Value
Estimated Current Values
Estimated Amount
Available to Unsecured
Claims
Estimated
Gain (Loss) on
Realization (1) Assets pledged with fully secured
creditors:
P 40,000 Accounts receivable (net) P 40,000 Less: 10% note payable and
interest
38,500
P 1,500
50,000 Land P 65,000 P 15,000
110,000 Plant and equipment (net) 100,000 (10,000) P165,000 Less: Mortgages payable and
interest
(157,500)
7,500
(2) Assets pledged with partially
secured creditors:
20,000 Marketable securities P 16,000 (4,000) Less: 10% note payable and
interest
(20,800)
35,000 Inventory P 32,000 (3,000)
Less: Accounts payable (60,000) (3) Free assets:
4,000 Cash P 4,000 4,000 35,000 Accounts receivable (net) 35,000 35,000 55,000 Inventory 50,000 50,000 (5,000)
6,000 Prepaid insurance 1,000 1,000 (5,000) 140,000 Plant and equipment (net) 60,000 60,000 (80,000)
48,000 Franchises 15,000 15,000 (33,000) Estimated amount available P 174,000 Less: Creditors with priority (43,000) Net available to unsecured creditors P 131,000 Estimated deficiency 45,000
P 543,000 (P 125,000) Total unsecured debt P 176,000
2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%
Problem IX
Smith Company Statement of Realization and Liquidation
Assets
Assets to be realized Assets Realized Old Receivebles, net P 50,000 Old Receivbles P 28,000 Marketable Securities 20,000 New Receivbles 65,000 Old Inventory 72,000 Marketable Securities 15,000 Depreciable Assets, net 120,000 Sales of Inventory 100,000 Assets Acquired Assets Not Realized New Receivables 100,000 Old Receivables, net 22,000 New Receivables, net 35,000 Depreciable Assets 96,000
Supplementary Items Supplementary Charges Supplementary Credits Old Current Payables P 31,000 Net Loss P 7,000
Liabilities Liabilities Liquidated Liabilities to be Liquidated Old Current Payables P 31,000 Old Current Payables P 65,000 Liabilities Not Liquidated Liabilities Incurred Old Current Payables P 34,000 ________
P433,000 P 433,000 Problem X
Mallory Corporation Statement of Realization and Liquidation For the Three Months Ended July 31, 20x5
Assets Assets Cash Non-Cash
Beginning balances assigned 5/1/x5 P 4,000 P720,000 Cash Receipts: Collection of Accounts Receivable 60,000 (70,000) Sale of inventory 170,000 (200,000) Sale of land and building 20,000 (340,000) Sale of machinery 70,000 (100,000) Cash Disbursements: Payment of salaries payable (60,000) Partial payment of accounts pay. (170,000) Partial payment of bank loan (70,000) Ending balance P24,000 P10,000
Liabilities Unsecured Fully Partially With Without Owner's
Assets Secured Secured Priority Priority Equity Beginning balances assigned
P240,000 P270,000 P94,000 P 0 P120,000
Cash Receipts: Collection of Accounts
(10,000)
Sale of inventory (30,000) Sale of land and building (240,000) (80,000) Sale of machinery (30,000) Cash Disbursements: Payment of salaries payable (60,000) Partial payment of accounts
(180,000) 10,000
Partial payment of bank loan ________ (90,000) ________ 20,000 ________ Ending balance P 0
P 0
P34,000 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…………. P 1,375,000 Assets Realized…………………..P 1,200,000 Assets Acquired……………….. 750,000 Assets Not Realized…………… 1,375,000 Liabilities Liquidated…………. 1,875,000 Liabilities to be Liquidated…. 2,250,000 Liabilities Not Liquidated……. 1,700,000 Liabilities Assumed………….. 1,625,000 Supplementary charges/ Supplementary credits……… 2,800,000 debits……………………… 3,125,000 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 P440,000 Less distributions to unsecured claims with priority: Wages payable P 10,000 Taxes payable 20,000 30,000 Amount available for unsecured claims/net free assets 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) P380,000 Accounts payable 260,000 Total claims of unsecured creditors 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 P380,000 Dividend on unsecured amount x 64.1% Amount received on unsecured portion P243,580 Proceeds from receivables and inventory 150,000 Total Received 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 Less: Unsecured creditors without priority (No. 20) 640,000 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
Estimated
Net Realizable
Value
Estimated Amt Avail for
Unsecured Creditors
Estimated Gain or (Loss)on
Liquidation Book
Value Assets
Assets pledged with fully secured creditors:
98,500 Land and Bldg 92,800 22,200 (5,700) 5,800 Investment in Calandir 15,000 4,625 9,200
Total 107,800 Assets pledged with partially
secured creditors:
41,000 Inventory 20,000 (21,000) 43,000 Equipment 8,000 (35,000)
Free Assets: 1,850 Cash 1,850 1,850 0 21,200 Accounts Rec 17,000 17,000 (4,200) 15,000 Note Rec 15,000 15,000 0
Estimated Amount Avail for unsecured creditors with and without priority 60,675
Less unsecured creditors with priority (3,775) Estimated amounts for unsecured creditors
without priority (Net Free Assets):
Net Realizable Amount Avail 56,900 _______ Deficiency _______ 15,725 _______ 226,350 169,650 72,625 (56,700)
Estimated Estimated Unsecured Amount
Book Liabilities Secured With Without Value and Owners Equity Amount Priority Priority
Fully Secured Creditors: 600 Accrued Mtg Interest 600 70,000 Mortgage Payable 70,000
375 Accrued N/P Interest 375 10,000 Note Payable 10,000
Total 80,975 Partially Secured Creditors:
50,000 Accounts Payable 28,000 22,000 Unsecured Creditors with Priority:
3,775 Accrued Payroll 3,775 Unsecured creditors without Priority:
40,625 Accounts Payable 40,625 10,000 Other Accrued Liabilities _______ 10,000
185,375 Totals 108,975 3,775 72,625 40,975 Owner Equity 226,350
31. P56,900 – refer to No. 30 for computation 32. P72,625 – refer to No. for computation 33. Dividend - P56,900/P72,625 = P.78 – refer to No. 30 for further computation 34. P80,975 – refer to No. 30 for computation 35. P45,160 = P28,000 + (P22,000 x 78%) 36. P3,775
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 Owners' Cash Noncash Secured Secured Priority Priority Equity 6/1/x5 Balances: 1,850 224,500 80,975 50,000 3,775 50,625 40,975 Cash Receipts:
Securities Sale 16,000 (5,800) 10,200 N/R Collected 15,000 (15,000) 0 Equipment Sale
7,000 (43,000) (36,000)
Inventory Sale 22,000 (41,000) (19,000) Cash Disbursements: Bank Loan (10,375) (10,375) Part Pyt-A/P (29,000) ---------- --------- (50,000) ------- 21,000 ---------- 6/30 Balance 22,475 119,700 70,600 0 3,775 71,625 (3,825)
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
49. P150,900
Book Value Assets
Estimated Net
Realizable Value
Estimated Amount
Available for Unsecured Creditor
Estimated Gain or
(Loss) on Liquidation
Assets pledged with fully secured creditors: 57,000 Accounts receivable (net) 45,000 12,600 (12,000) 174,000 Land, plant and equipment (net) 150,000 77,400 (24,000)
Total 195,000 Free assets:
6,000 Notes receivable 6,000 6,000 0 900 Accrued interest receivable 900 900 0
90,000 Inventories (90,000 x 60%) 54,000 54,000 (36,000)
Estimated amount available for unsecured creditors with and without priority 150,900
Less unsecured creditors with priority (26,900)
Estimated amounts for unsecured
creditors without priority: Net realizable amount available 124,000
Deficiency 26,000 327,900 Totals 255,900 150,000 (72,000)
Estimated
Secured Amount
Estimated Unsecured Amount
With Priority Without Priority
Book Value Liabilities and Owners' Equity
Fully secured creditors: 3,600 Accrued interest 3,600 69,000 Note payable 69,000
2,400 Accrued interest 2,400 30,000 Note payable 30,000
Total 105,000 Unsecured creditors with priority:
24,900 Wages payable 24,900
0 Administration fees – accountant’s fee 2,000
Unsecured creditors without priority: 0 Accrued interest 0
18,000 Cash overdraft 18,000 6,000 Notes payable 6,000
126,000 Accounts payable -------- -------- 126,000 279,900 Totals 105,000 26,900 150,000
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%
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 ................................................................... P 120,000 Current value of assets pledged with these creditors ...................................... (80,000) Deficiency that is unsecured ................................................................................. P 40,000 Claims of other unsecured creditors .................................................................... 360,000 Total unsecured creditors claims ........................................................................ P 400,000 Amount available to unsecured creditors: Excess left over after paying fully secured creditors (P195,000 – P150,000) ........................................................................................... P 45,000 Current value of free assets (net of P45,000 to creditors with priority) ........................................................................................... 115,000 Amount available to unsecured creditors ........................................................ P160,000 Settlement to unsecured claims per dollar (P160,000/P400,000) ................... P .40 Total distribution to partially secured creditors: Current value of assets pledged ........................................................................ P 80,000 Deficiency of P40,000 × P.40 ................................................................................ 16,000 P 96,000 2. P144,000 = P360,000 x 40% 3. P56,000 Claims of partially secured creditors ................................................................... P 90,000 Current value of assets pledged with these creditors ...................................... (50,000) Deficiency that is unsecured ................................................................................. P 40,000 Claims of other unsecured creditors .................................................................... 200,000 Total unsecured creditors claims ........................................................................ P 240,000
Amount available to unsecured creditors: Excess left over after paying fully secured creditors (P300,000 – P250,000) ........................................................................................... P 50,000 Current value of free assets (net of P60,000 to creditors with priority) ........................................................................................... (14,000) Amount available to unsecured creditors ........................................................ P 36,000 Settlement to unsecured claims per peso (P36,000/P240,000) ....................... P .15 Total distribution to partially secured creditors: Current value of assets pledged ........................................................................ P 50,000 Deficiency of P40,000 × P.15 ................................................................................ 6,000 P 56,000 4. P30,000 = P200,000 x 15% 5. P35,000 = P20,000 + (P70,000 – P20,000) x 30%
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 (P150,800 – P91,000) 59,800 P163,800 12. P109,200 Total free assets P163,800 Less: Liabilities with priority 54,600 P109,200 13. P364,000 Unsecured creditors: Excess of partially secured liabilities over Pledged assets (P169,000 – P65,000) P104,000 Unsecured creditors 260,000 P364,000 14. P96,200 Payment of partially secured debt: Value of pledged assets P 65,000 30%* of remaining P104,000 31,200 P 96,200 *P109,200/P364,000 = 30% 15. P78,000 Cash P 65,000 Excess of pledged with secured liabilities (P117,000 – P104,000) 13,000 P 78,000 16. P52,000 Free assets after of liabilities with priority: Total free assets P 78,000 Less: Liabilities with priority 26,000 P 52,000 17. P260,000 Unsecured creditors: Excess of partially secured liabilities over pledged assets (P195,000 – P169,000) P 26,000 Accounts payable 234,000 P 260,000
18. P174,200 Payment on bond: Value of pledged assets P 169,000 20%* of remaining P26,000 5,200 P 174,200 Free after priority: P52,000/P260,000 = 20% 19. P247,000 Free assets P390,000 Excess from assets pledged with fully secured (P260,000 – P195,000) 65,000 Amount available P455,000 Unsecured liabilities with priority ( 208,000) Net free assets / available for unsecured P247,000 20. P32,000
Cash 120,000 Mortgage payable, paid in full ( 60,000 ) 60,000 Note payable to bank, secured portion ( 30,000 ) 30,000 Priority claims (P16,000 of administrative costs + P2,000 of customer deposits + P4,000 property tax) ( 22,000 ) Available for unsecured nonpriority claims 8,000 Unsecured, nonpriority claims: Unsecured portion of note payable to bank 10,000 Accounts payable 30,000 Total unsecured, nonpriority claims 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 35,000 Less: Portion secured by equipment ( 7,000 ) Unsecured portion 28,000 Estimated recovery on secured portion 7,000 Estimated recovery on unsecured portion (P28,000 x P.30) = 8,400 Recovery on mortgage note receivable 15,400
22. Mortgage note receivable 80,000 Less: Portion secured by marketable securities ( 60,000 ) Unsecured portion 20,000 Estimated recovery on secured portion 60,000 Estimated recovery on unsecured portion (20,000 x P.25) = 5,000
Recovery on mortgage note receivable 65,000
23. P30,000 Book value of assets P700,000 Net realizable of assets 370,000 P330,000 Less stockholders' equity (P700,000 – P400,000) 300,000 Deficiency 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) P380,000 Accounts payable 260,000 Total claims of unsecured creditors P640,000 Dividend to unsecured creditors: P410,000 ÷ P640,000 = 64.1% 28. Unsecured portion of notes payable and Interest P380,000 Dividend on unsecured amount x 64.1% Amount received on unsecured portion P243,580 Proceeds from receivables and inventory 150,000 Total Received P393,580 Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
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. False 14. False 19. False 24. c 29. b 34. b 39. b 10. False 15. True 20. False 25. a 30. b 35. d 40. c 11. False 16. True 21. c 26. d 31. b 36. b 41. b 12. True 17. True 22. a 27. c 32. a 37. c 42. a 13. False 18. True 23. a 28. e 33. c 38. a 43. c
44. a 49. c 54. d 59. a 45. c 50. d 55. c 60. c 46. c 51. a 56. d 47. a 52. d 57. b 48. b 53. b 58. a
Chapter 7 Problem I 1. Entries in 20x4:
Cash 3,500 Mortgage Notes Receivable 20,500
Real Estate ………………………………… 9,000 Gain on Sale of Real Estate 15,000
Cash 500 Mortgage Notes Receivable 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 ………………………………………………………………………… 500
Mortgage Notes Receivable ……………………………… 500 Receipt P500 cash in 20x4 applicable to principal of note Deferred Gross Profit on Installment Sales ……………… 2,500 Realized Gross Profit on Installment Sales……………… 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.. P 14,500 Less: Unrecovered cost: Unpaid balance…………………………P 20,000 Less: Deferred Gross Profit 20% x P20,000…………………… 4,000 16,000 Loss on repossession……………………. P 1,500
e. Expenses ……………………………………………………………………… 16,000
Cash …………………………………………………………………. 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……… 24,000 Realized Gross Profit on Installment Sales – 20x4 ………. 24,000
Realized Gross Profit: 20% of P120,000 (collections), or P24,000
d. Closing of nominal accounts. Realized Gross Profit on Installment Sales – 20x4………………… 24,000
Expenses ………………………………………………………. 16,000 Loss on Repossessions ………………………………………. 1,500 Income Summary ……………………………………………. 6,500
To close the accounts for 20x4. Problem IV 1.
January to December 31 20x4 20x5 (1) To record regular sales: Accounts receivable 600,000 1,080,000 Sales 600,00 1,080,000 (2) To record installment sale: Cash 60,000 144,000 Installment accounts receivable 300,000 336,000 Installment Sales 360,000 480,000 (3) To record cost of sales: Periodic Method: No entry Perpetual Method: Regular Sales: Cost of Sales 480,000 864,000 Merchandise inventory 480,000 864,000 Installment Sales: Cost of installment sales 252,000 312,000 Merchandise inventory 252,000 312,000 (4) To record collections: Regular Sales: Cash 144,000 360,000 Accounts receivable 144,000 360,000 Installment Sales: Cash 108,000 204,000 Installment Accounts receivable – 20x2 72,000 72,000 Installment Accounts receivable – 20x3 60,000 Interest income 36,000 72,000 (5) to record payment of operating expenses: Operating expenses 90,000 102,000 Cash 90,000 102,000
2. Adjusting entries (end of the year): (6) To recognize accrued interest receivable Interest receivable 1,440 2,880
Interest income 1,440 2,880 (7) To set-up Cost of Sales: Periodic Method: Cost of installment sales 480,000 864,000 Merchandise inventory 480,000 864,000 Perpetual Method: No entry (7) To set-up Cost of Installment Sales: Periodic Method: Cost of installment sales 252,000 312,000 Shipment s on installment sales 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 252,000 312,000 Deferred gross profit – 20x4 108,000 Deferred gross profit – 20x5 168,000
Gross profit rate – 20x4: P 108,000 / P360,000 = 30%. Gross profit rate – 20x5: P168,000 / P480,000 = 35%.
(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 42,600 Income summary 21,600 42,600 (11) To close other nominal accounts Sales 600,000 1,080,000
Interest income 37,440 74,880 Cost of sales 480,000 864,000 Operating expenses 90,000 102,000 Income summary 67,440 188,880 (12) To close results of operations: Income summary 89,040 231,480 Retained earnings 89,040 231,480
Problem V 1.
Type of Sale Amount Ratio to Total Sales Allocated Cost Regular Sales: Cash sales P 225,000 P *146,250 Credit sales ___450,000 **292,500 Total regular sales P 675,000 675/1,800 P 438,750 Installment Sales _ 1,125,000 1,125/1,800 __731,250 Total Sales P 1,800,000 P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250 **P450,000/P1,800,000 x P1,170,000 = P292,500
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.
2.
Type of Sale Amount Amount based on Cash Sales (100%)
Ratio to Total Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500 Credit sales 450,000 375,000* 375/1,500 292,500 Installment Sales 1,125,000 900,000** 900/1,500 __ 702,000 Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000 **P1,125,000 / 125% = P900,000 3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost* Cash sales P 225,000 30% 70% P 157,500 Credit sales 450,000 36% 64% 288,000 Installment Sales 1,125,000 40% 60% _ _675,000 Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.
Problem VI The entries are required under the periodic method:
Repossessed merchandise………………………………… 68,400 Deferred gross profit – 20x4……………………………… 48,000 Loss on repossession……………………………………………… 3,600 Installment accounts receivable – 20x4……………………. 120,000 To record repossessed merchandise.
Repossessed merchandise……………………………… 12,000 Cash, etc (or various credits)…………………… 12,000 To record reconditioning costs
The loss on repossession is computed as follows:
Estimated selling price after reconditioning costs P 108,000 Less: Reconditioning costs……………………………………… P 12,000 Costs to sell and dispose……………………………… 6,000 Normal profit (20% x 108,000)………………………… __21,600 __39,600 Market value before reconditioning costs………………… P 68,400 Less: Unrecovered cost Installment accounts receivable – 20x4, unpaid balance……………………………………
P120,000
Less: Deferred gross profit – 20x4 (P120,000 x 40%) __48,000 __72,000 Loss on repossession……………………………. P( 3,600)
Problem VII The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise……………………………… 840,000 Over-allowance on trade-in merchandise…………………. 360,000 Cash…………………………………………………………… 2,400,000 Installment accounts receivable – 20x4… 3,360,000 Installment sales…………………………… 6,960,000 To record installment sales with trade-in.
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……………………………… 840,000 Cash……………………………………………………………… 2,400,000 Installment accounts receivable – 20x4……… 3,360,000 Installment sales (net of over-allowance)… 6,600,000 To record installment sales with trade-in.
The over-allowance is computed as follows:
Trade-in allowance……………………………… P1,200,000 Less: Market value before reconditioning costs: Estimated resale price after reconditioning costs. P1,680,000 Less: Reconditioning costs…………………………… 420,000 Costs to sell (5% x P1,680,000)…………………… 84,000 Normal profit (20% x P1,680,000)……… __336,000 __840,000 Over-allowance…………………………………………………… P 360,000
The gross profit rate on installment sales is computed as follows: Installment sales……………………………………………………… P6,960,000 Less: Over-allowance………………………………………………………… ___360,000 Adjusted Installment Sales…………………………………………………… P6,600,000 Less: Cost of installment sales……………………………………………… __3,920,000 Gross profit…………………………………………………………………… P2,680,000 Gross profit rate (P2,680,000/P6,600,000)………………………… 40.60%
Further, the entry to record the reconditioning costs is as follows:
Trade-in Merchandise……………………………… 420,000 Cash, etc (or various credits)………………… 420,000 To record reconditioning costs.
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)……… P 840,000 Down payment…………………………………………………………………… 2,000,000 Installment collection (March 31 – December 31: P80,000 x 10 months) ___800,000 Total collections…………………………………………………………… P3,640,000 Multiplied by: Gross profit rate in 20x4………………………………… ___40.60% Realized gross profit on installment sales of new merchandise………… 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 ……………………………………………………………………… 600 Mortgage Notes Receivable …………………… 50.00 Interest Income ………………………………………………… 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 ………………………………………………………………………. 600.00 Mortgage Notes Receivable ………………………………… 50.50 Interest Received ……………………………………………… 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 ………………… 9,553 Amount realized: (P25,000/150,000) x 57,200
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 ………………………… 11,440 Amount realized (P30,000/P150,000) x 57,200 6/30/x6 Cash ………………………………………………………………………… 50,000 Notes Receivable …………………………………………………… 50,000 Deferred Gross Profit on Sale of Property …………… … 19,067 Realized Gross Profit on Sale of Property ………………………… 19,067 Amount Realized: (P50,000/P150,000) X 57,200 6/30/x7 Cash ……………………………………………………………………… 15,000 Notes Receivable …………………………………………………… 15,000 Deferred Gross Profit on Sale of Property ………………… 5,720 Realized Gross Profit on Sale of Property ………………………… 5,720 Amount Realized: (P15,000/P150,000) X 57,200
Problem X Installment Contracts Receivable …………………………… 200,000
Installment Sales ……………………………………………………… 200,000 Cost of Installment Sales …………………………………………… 120,000
Merchandise Inventory ……………………………………………… 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 ……………………… …… 52,080 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
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 27.5% 20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts receivable 20x5 30% 20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts receivable 20x4 32%
2.
WW EQUIPMENT, Inc. Balance Sheet
December 31, 20x6 Assets
Cash ………………………………………………………………………………..................... P27,500 Installment Accounts Receivable 20x6 …………………………... P 55,000 20x5 ………………………….. 12,000 20x4 ………………………….. 3,000 70,000 Accounts receivable …………………………………………………………………………. 17,000 Inventory ……………………………………………………………… ……………………….. 60,000 Other Assets …………………………………………………………………… ………………... 40,000 Total Assets ………………………………………………………………… …………………… P 214,500
Liabilities Accounts payable …………………… ………………………………………… P 40,000 Deferred Gross Profit 20x6 …… ……………………… P 15,125 20x5 ………… ………………… 3,600 20x4 …………… ……………… 960 19,685 Total Liabilities P 59,685
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 ……………………………………………………… P154,815 Total Liabilities and Stockholder’s Equity ……………………………………. P 214,500
WW EQUIPMENT, Inc. Income Statement
For Year Ended December 31, 20x6
Installment Sales
Regular Sales
Total
Sales ………………………………………………………............ P320,000 P125,000 P445,000 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 ………… 60,000 232,000 110,000 342,000 Gross Profit ……………………………………………………….. P88,000 P15,000 P103,000 Less: Deferred Gross Profit on 19X34 ………………………… 15,125 15,125 Realized Gross Profit on current year’s sales ………………. P78,875 P15,000 P87,875 Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. 50,040 Total Realized Gross Profit ……………………………………. P137,915 Operating Expenses …………………………………………... 151,500 Net Loss ………………………………………………………….. P 13,585
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 20x5 20x4
Collections on Installment Contracts Receivable ………... P265,000 P138,000 P27,000 Installment sales gross profit percentage ………………….. 27.5% 30% 32% Realized Gross Profit …………………………………………….. P 72,875 P 41,400 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 ………………………………………………… 170,000 Shipment on Installment of Sales ……………………………… 232,000
Merchandise Inventory, Jan. 1, 20x6 ………………. 52,000 Purchases ……………………………………………… 350,000
Merchandise Inventory, Dec. 31, 20x6 …………………….. 60,000 Income Summary …………………………………… 60,000
Sales ………………………………………………………………. 125,000 Income Summary ……………………………………. 125,000
Realized Gross Profit on Installment Sales………..………... 122,915 Income Summary ……………………………………. 122,915
Income Summary ……………………………………………… 151,500 Operating Expenses ………………………………... 151,500
Retained Earnings …………………………………………….. 13,585 Income Summary …………………………………... 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……………………………… 1,900
Deferred Gross profit, 20x5……………………………… 4,000 Deferred Gross Profit, 20x4……………………………… 3,600
Loss on Repossessions………………………….. 9,500 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
Installment Sales
Regular Sales
Total
Sales ………………………………………………………............ P500,000 P192,000 P692,000 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 ………… 35,000 310,000 150,000 460,000 Gross Profit ……………………………………………………….. P190,000 P42,000 P103,000 Less: Deferred Gross Profit on 20x6 sales (see schedule) 32,300 32,300 Realized Gross Profit on current year’s sales ………………. P157,700 P42,000 P199,700 Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. Deduct loss on repossession ………………………………….
100,650 P300,350 3,500
Total Realized Gross Profit ……………………………………. P296,850 Operating Expenses …………………………………………… 300,000 Net Loss ………………………………………………………….. P 3,150
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% ………………………………………………………. P 32,300
Realized Gross Profit: 20x6 20x5 20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000 Installment sales gross profit percentage ……….. 38% 40% 45% Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION Income Statement
For Year Ended December 31, 20x6
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 ……………………………………………………. P 75,000 Deferred Gross Profit 20x6 ………………………………. P 30,400 20x5 ………………………………. 8,000 20x4 ………………………………. 2,250 40,650 Total Liabilities P 115,650
Stockholders’ Equity Capital Stock …………………………………………………………. P100,000 Retained Earnings ………………………………………. P 44,500 Balance, Jan. 1, 20x6 ……………………………… 3,150 Balance, Dec. 31, 20x6 …………………………… 41,350 Total Stockholder’s Equity …………………………………………. 141,350 Total Liabilities and Stockholder’s Equity ……………………….. P 257,000
4. Installment Sales ……………………………………………………………….. 500,000 Cost of Installment Sales ……………………………………………….. 310,000 Deferred Gross Profit, 20x6 …………………………………………….. 190,000 Deferred Gross Profit, 20x6 …………………………………………………… 157,500 Deferred Gross Profit, 20x5 …………………………………………………… 84,000 Deferred Gross Profit, 20x4 …………………………………………………… 16,650 Realized Gross Profit on Installment Sales… ………………………… 258,350 Income Summary ……………………………………………………………… 185,000 Shipment on Installment Sales ……………………………………………… 310,000 Merchandise Inv, January 1, 20x6 ……………………………………. 30,000 Purchases …………………………………………………………………. 455,000 Repossessed Merchandise …………………………………………….. 10,000 Merchandise Inv, December 31, 20x6……..………………………………. 35,000 Income Summary ……………………………………………………….. 35,000 Sales …………………………………………………………………………….... 192,000 Income Summary ………………………………………………………… 192,000 Realized Gross Profit on Installment Sales………………………………….. 258,350 Income Summary ……………………………………………………….. 258,350
Income Summary ……………………………………………………………… 3,500 Loss on Repossession ……………………………………………………. 3,500 Income Summary ……………………………………………………………… 300,000 Operating Expenses …………………………………………………….. 300,000 Retained Earnings ……………………………………………………………… 3,150 Income Summary …………………………………………………………. 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 P 8,407.00 20x5: 34% x P274,820 93,438.80 20x6; 37% x P191,910 71,006.70 Total P172,852.50 2. Deferred gross profit 20x5……………………………………………………… 748.00 Inventory of Repossessed Merchandise………………………………. 748.00 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.
Loss on repossession…………………………………………………………….. 381.00 Inventory of repossessed merchandise……………………………….. 381.00 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)
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 ……………………………………. 1,600.00 Merchandise Inventory (Piano) ……………………………… 1,000.00
Deferred Gross Profit on Installment Sales ………………… 600.00
Cash ……………………………………………………….......................... 160.00 Installment Contracts Receivable …………………………… 160.00
2. Cash …………………………………………………………........................ 160.00
Interest Income …………………………………………………… 14.40 Installment Contracts Receivable ……………………………. 145.60
Cash ……………………………………………………………...................... 160.00
Interest Income ……………………………………………………. 11.47 Installment Contracts Receivable ……………………………… 148.53 3. Deferred Gross Profit on Installment of Sales ………………………….. 225.45
Realized Gross Profit on Installment of Sales ………………… 225.45 Gross Profit Percentage: 37.5% (P600/P1,600) Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract) 4. Merchandise Inventory (piano) …………………………………………... 560.00
Deferred Gross Profit on Installment of Sales ……………………........... 374.55 Loss on Repossessions ………………………………………………………. 64.36
Installment Contracts Receivable ……………………………… 998.81 Deferred Gross profit cancelled upon repossession: 37.5% of P998.81 (balance in installment contracts receivable account) or P 374.55
Problem XV – Big Bear 20x4: Installment receivables 250,000 Inventory 150,000 Deferred gross profit 100,000 Cash 80,000 Installment receivables 80,000 20x5: Cash 120,000 Installment receivables 120,000 Deferred gross profit 50,000 Realized gross profit 50,000 20x6: Cash 50,000 Installment receivables 50,000
Installment receivables 300,000 Inventory 210,000 Deferred gross profit 90,000 Cash 135,000 Installment receivables 135,000 Deferred gross profit 40,500 Realized gross profit 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: PVn = R(PVAFn/i) Table IV PVn = P187,500 x 4.3553 n = 6, i = 10% PVn = P816,619 (rounded)
Gross profit on sale: Sales P816,619 Cost of sales 637,500 Gross profit P179,119 Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221 Total income for 20x5 = P179,119 + P27,221 = P206,340
(2) No reasonable assurance – assume the use of installment sales method
Installment sale: Gross profit (P179,119/P816,619) = 22% rounded Gross profit earned in 20x5 (P0 x 22%) P 0 Interest revenue 27,221 Total income for 20x5 P 27,221
Multiple Choice Problems 1. b – 20x4: P500,000 x 30% = P 150,000 20x5: P600,000 x 40% = 240,000 P390,000 2. d Realized Gross Profit on Installment Sales in 20x6: 20x4 sales: P10,000 x 22%P 2,200 20x5 sales: P50,000 x 25% 12,500 20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) 10,575 P 25,275 Realized Gross Profit on Sales in 20x5 P 10,500 Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) 5,000 Realized Gross Profit in 20x5 for 20x4 sales P 5,500 Divided by: Collections in 20x5 for 20x4 sales P 25,000 Gross Profit % for 20x4 sales 22%
3. a Installment Sales Method: 20x3 Sales: P240,000 x 25/125P 48,000 20x4 Sales: P180,000 x 28/128 39,375 Realized Gross Profit on Installment Sales P 87,375 Cost Recovery Method: 20x3 Cost: P480,000 / 1.25 P384,000 Less: Collections in 20x3 140,000 Collections in 20x4 240,000 Unrecovered Cost, 12/31/20x4 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 110,000 Less: Collections 1/1//20x4 0 Add: Sales on account 15,000 Total 15,000 Less: 1/1/20x5 10,500 Collections in 20x4 __4,500 Unrecovered costs,1/1/20x5 105,500 1/1//20x5 10,500 Add: Sales on account 30,000 Total 40,500 Less: 1/1/20x6 25,500 Collections in 20x5 15,000 Unrecovered costs,1/1/20x6 90,500 1/1//20x6 25,500 Add: Sales on account 60,000 Total 85,500 Less: 1/1/20x7 40,500 Collections in 20x6 45,000 Unrecovered costs,1/1/20x7 45,500 1/1//20x7 40,500 Add: Sales on account 24,000 Total 64,500 Less: 1/1/20x8 70,000 Collections in 20x7 ____-0- Unrecovered costs,1/1/20x8 45,500
7. b 20x4: P150,000 – (P568,620 x 10%) = P93,138. 20x5: (P568,620 – P93,138) x 10% = P47,548.
8. a – refer to No. 3 for discussion. Cost, January 1, 20x4 P 60,000 Less: Collections including interest – 20x4 32,170 Unrecovered Cost, December 31, 20x4 P 27,830 9. c (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 Collections including interest – 20x5……………………… 241,269 482,538 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 20x5 Sales: P440,000/ 40% 1,100,000 P 1,500,000 18. c
Sale: Installment receivables 4,500,000 Inventory 3,600,000 Deferred gross profit 900,000 Payment: Cash 500,000 Installment receivables 500,000 Deferred gross profit 100,000 Realized gross profit 100,000 Balance Sheet: Installment receivables (4,500,000 – 500,000) P 4,000,000 Deferred gross profit (900,000 – 100,000) 800,000 Installment receivables (net) 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 22. a Gross profit % = (P900,000 P450,000)/P900,000 = 50% 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) = P 300,000 Deferred gross profit = P450,000 – P150,000 (x4 collections) - P150,000 (x5 collections) = 150,000 Net installment receivable for 20x4 sales = P 150,000 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000 Deferred gross profit = P600,000 – P200,000 (x5 collections) = 400,000 Net installment receivable for 20x5 = P 600,000 Total = P 750,000 25. a - Costs not yet recovered. 26. c
Cost, 20x4 P 30,000 20x4 cost recovery (20,000) Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000 Gross profit – 20x5 P 5,000 27. d Cost P 30,000 20x4 cost recovery ( 20,000) 20x5 cost recovery ( 10,000) Remaining cost 0 The entire P20,000 payment received in 20x6 is recognized as gross profit.
28. d Sale: Installment receivables 55,000 Inventory 30,000 Deferred gross profit 25,000 Payment: Cash 20,000 Installment receivables 20,000 Balance Sheet: Installment receivables P55,000 – 20,000 P 35,000 Deferred gross profit ( 25,000) Installment receivables (net) P 10,000 29. a
Sale: Installment receivables 55,000 Inventory 30,000 Deferred gross profit 25,000 2008: Cash 20,000 Installment receivables 20,000 Cash 15,000 Installment receivables 15,000 2009: Deferred gross profit 5,000 Realized gross profit 5,000 Balance Sheet: Installment receivables P 20,000 Deferred gross profit ( 20,000) Installment receivables (net) 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..
P179,119 _ 27,221
Total income for 20x4 P206,340 32. b Total Income for 20x5: Gross profit (realized) – already recognized in 20x4 P 0 Interest revenue – 8 months in Year 1 (P81,662* x 8/12) P 54,441 4 months in Year 2 (P71,078* x 4/12) 23,693 78,134
Total Income for 20x5 P 78,134 *Schedule of Discount Amortization/Interest Income computation:
(1) (2) (3) (4) Face Net Discount Amount Unamortized Amount Amortization Year of Note1 Discount (1) – (2) 10% × (3) 1 P1,125,000 P308,3813 P 816,6192 81,6625 2 937,500 226,7194 710,781 71,078 1 P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous balance. 2 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. 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%) P 0
* no collections in 20x4. 34. a
Total Income for 20x4: Gross profit earned in 20x4 (P0* x 22%) P 0 Interest revenue (refer to No. 52 27,221 Total income for 20x4. P 27,221
35. d Collections in 20x5 (August 31, 20x5) P 187,500 Less: Interest revenue/income from September 1, 20x4 to August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662 Collection as to principal P 105,838 x: Gross Profit % (refer to No. 54) 22% Gross profit realized in 20x5 P 23,284 Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134 Total Income for 20x5 P 101,418 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
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 9,360 20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 96,600 20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% 62,000 Realized gross profit on installment sales in 20x6 P167,960 46. b 20x5 Sales 20x6 Sales Net Market Values P 4,500 P 3,500 Less: Unrecovered Cost: IAR, unpaid balances P10,000 P 5,000 x: Cost Ratio 50% 5,800 60% 3,000 Gain (loss) P (1,300) P 500 P( 800) 47. a
(1) Gain or Loss on repossession: Estimated selling price P 1,700 Less: Normal profit (37% x P1,700) 629 Market value of repossessed merchandise P 1,071 Less: Unrecovered Cost: Unpaid balance – 20x3 P 2,200 Less: DGP – x3 (P2,200 x34%) 748 1,452
Loss on repossession P( 381) (2) Realized gross profit on installment sales: 20x2 Sales: (P24,020 – P 0) x 35% P 8,407.0 20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 93,438.8 20x4 Sales: (P602,000 – P410,090) x 37% 71,006.7 Realized gross profit on installment sales P 172,852.5 48. c Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0 20x3 Sales: (P67,440 x 34%. 22,929.6 20x4 Sales: (P410,090 x 37%) 151,733.3
P174,662.9 49. d*
Resale Value P 8,500 Less: Normal profit for 20x6 - year of repossession [(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 3,145 Market Value of Repossessed Merchandise P 5,355 Less: Unrecovered Costs – 20x5 Defaulted balance* (P27,000 – P16,000) P 11,000 Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x P11,000 ___3,740 __7,260 Loss on repossession P( 1,905)
Entry made: Inventory of RM* 11,000 IAR-20x5 11,000 Correct Entry (Should be): Inventory of RM (at MV) 5,355 DGP-20x5 3,740 Loss on repossession 1,905 IAR-20x5 11,000 Correcting Entry: DGP-20x5 3,740 Loss on repossession 1,905 Inventory of RM 5,645** 50. c Installment Sales P 3,600,000 Less: Over-allowance: Trade-in allowance P1,500,000 Less: MV of Trade-in Merchandise: Estimated Resale Price P 1,400,000 Less: Normal profit (25% x P1,400,000) 350,000 Reconditioning costs 150,000 900,000 600,000 Adjusted Installment Sales P 3,000,000 Less: Cost of I/S 2,500,000 Gross Profit P 500,000 Gross profit rate: P500,000/ P3,000,000 16 2/3% x: Collections –Trade-in merchandise (at MV) P 900,000 RGP on I/S in 20x4 P 150,000 51. c Trade-in allowance P43,200 Less: MV of trade-in allowance: Estimated resale price after reconditioning costs P36,000 Less: Reconditioning costs 1,800 Normal profit (15% x P36,000) 5,400 28,800 Over-allowance P 14,400 Installment sales P122,400 Less: Over-allowance 14,400 Adjusted Installment Sales P108,000 Less: Cost of Installment Sales 86,400 Gross profit P 21,600 Gross profit rate: P21,600/P108,000 20% Realized gross profit: Down payment P 7,200 Trade-in (at market value) 28,800 Installment collections: (P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600 Total collections in 2008 P 57,600 x: Gross profit rate 20% Realized gross profit 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 P4,584,000 Cost of Sales 3,825,000 Gross Profit 759,000 Interest Revenue (Schedule I) 328,320 Income before Income Taxes P1,087,320 Schedule I
Computation of Interest Revenue on Installment Sale Contract
Cash selling price (sales) P4,584,000 Payment made on January 1, 20x3 936,000 Balance outstanding at 12/31/x3 3,648,000 Interest rate 9% Interest Revenue 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 ...... P 2,000 Relating to 20x6 sales: Since all costs have been recovered, all cash collected is
recognized as gross profit ...... 17,000 Relating to 20x7 sales: P85,000 x 60% = P51,000 Cost of sale P53,000 - P51,000 = .......... 2,000 Gross profit
recognized P21,000 Recognized in 20x7
7. P320,000 [(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8. P390,000 P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate) P720,000 – (P825,000 x 40%) = P390,000. 9. P 128,000 Installment Accounts Receivable, end of 20x4 P 320,000 x: Gross profit rate (66 2/3 / 166 2/3) _____40% Deferred Gross Profit, end of 20x4 P 128,000 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 = P24,000 20x4: P184,000 x P158,240 = 25,760 P49,760 Gross profit realized: 0.15 x P40,000 = P 6,000 0.15 x P89,600 = 13,440 0.14 x P36,800 = 5,152 P24,592 Balance of Gross Profit Deferred: P49,760 - P24,592 = P25,168
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
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 100 Less: Collections 70 Unrecovered costs,1/1/20x5 30 Less: Collections 40 Profit – 20x5 10 Profit – 20x5 30
18. P10 – refer to No. 17 19. P30 –refer to No. 17 20. Zero
Unrecovered costs – 20x4 120,000 Less: Collections – 20x4 ______0 Unrecovered costs, 12/31/20x4 120,000 Additional costs – 20x5 _20,000 Total costs 140,000 Less: Collections – 20x5 80,000 Unrecovered costs, 12/31/20x5 60,000 Additional costs – 20x6 20,000 Total costs 80,000 Less: Collections – 20x6 40,000 Unrecovered costs, 12/31/20x6 40,000 Additional costs – 20x7 10,000 Total costs 50,000 Less: Collections – 20x7 100,000 Profit – 20x7 50,000
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
Unrecovered costs – Cost of installment sales for 20x5 installment sales 56,050 Less: Collections in 20x5 for 20x5 installment sales _22,800 Unrecovered costs, 12/31/20x5 33,250 Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700 Realized GP on I/S in 20x6 for 20x5 sales *10,450
* Realized GP on I/S in 20x6 16,050 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 __5,600 Realized GP on I/S in 20x6 for 20x5 installment sales *10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized Unrecovered costs – Cost of installment sales for 20x4 (No. 23) 31,000 Less: Collections in 20x4 for 20x4 installment sales _22,800 Unrecovered costs, 12/31/20x4 8,200
26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment sales 31,000 Less: Collections in 20x4 for 20x4 installment sales _25,600 Unrecovered costs, 12/31/20x4 5,400 Less: Collections in 20x5 for 20x4 installment sales 46,400
Realized GP on I/S in 20x5 for 20x4 installment sales 41,000 Realized GP on I/S in 20x5 for 20x5 installment sales: Unrecovered costs – Cost of installment sales for 20x5 installment Sales 56,050 Less: Collections in 20x5 for 20x5 installment sales 22,800 Unrecovered costs, 12/31/20x4 33,250 ____-0- Realized GP on I/S in 20x5 41,000
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 P 200,000
28. Zero P450,000 cost 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) = P 300,000 Deferred gross profit = P450,000 – P0 (all x4 collections to cost recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000 Net installment receivable for 20x4 sales = P 0 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000 Deferred gross profit = P600,000 – P0 (all x5 collections to
cost recovery) = P 600,000 Net installment receivable for 20x5 = P 400,000 Total = P 400,000 31. 24%. Determined from the repossession entry: Deferred gross profit P2,400 ———— = 24% Installment accounts receivable P10,000
32. 35% Installment sales P120,000 Cost of sales 78,000 Gross profit P 42,000 Gross profit P42,000 ————- = 35% gross profit rate Installment sales P120,000 33. a. 20x4 Deferred gross profit balance P 12,000 Gross profit rate ÷ 25% Beginning accounts receivable P 48,000 Beginning accounts receivable P 48,000 Ending accounts receivable (20,000) Cash collected P 28,000 b. 20x5 Deferred gross profit balance P 26,400 Gross profit rate ÷ 24% Beginning accounts receivable* P110,000 Beginning accounts receivable* P110,000 Ending accounts receivable* (50,000) Cash collected P 60,000 c. 20x6 Installment sales—20x6 P120,000 Accounts receivable—20x6 (90,000) Cash collected P 30,000 34. P31,900 Total realized gross profit in 20x6 From 20x4 P28,000 × 25% = P 7,000 20x5 P60,000 × 24% = 14,400 20x6 P30,000 × 35% = 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): Installment sales = [(P300,000 P165,000)/P300,000] x P75,000 = P33,750 Gross profit realized in 20x5 (2011): From 20x4 sales = [(P300,000 P165,000)/P300,000] x P105,000 = P47,250 From 20x5 sales = [(P450,000 P270,000)/P450,000] x P120,000 = 48,000 P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250 20x4 20x5 (2010) (2011 Sales P450,000 P450,000 Cost of sales 335,000 270,000 Gross profit P115,000 P180,000 Gross profit realized on installment sales 33,750 95,250 Total gross profit P148,750 P275,250 37. 20x4 (2010), P148,750; 20x5 (2011), P275,250 . 20x4 20x5 (2010) (2011 Installment accounts receivable P225,000 P450,000 Less: Deferred gross profit 101,250 186,000 Net of deferred gross profit P123,750 P264,000 Theories 1. False 6. True 11. True 16. True 21. True 26. True 2. True 7. False 12. False 17. True 22. True 27. True 3. False 8. True 13. False 18. False 23. True 28. False 4. True 9. False 14. True 19. False 24. True 29. True 5. True 10. True 15. True 20. True 25. True
30. c 35. b 40. a 45. b 50. d 55. d 31. b 36. d 41. e 46. c 51. c 56. b 32. b 37. d 42. b 47. c 52. b 57. d 33. b 38. e 43. b 48. c 53. a 58. c 34. c 39. c 44. d 49. d 54. b 59. c
60. C 65. b 61. B 66. b 62. b 67. d 63. c 68. d 64. d 69. 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: P 1,800,000 Contract price Costs incurred: 2008 P 450,00 2009 1,100,000 Total cost 1,550,000 Total gross profit 250,000 Recognized in 2008 40,905 Recognized in 2009 P 209,095
2. Input Measure - Cost Recovery Method
2008: (all costs not yet recovered) P -0- 2009: Contract price 1,800,00 Costs incurred: 2008 P 450,000 2009 1,100,000 Total cost 1,550,000 Total gross profit P 250,000
Problem II 1. Input Measure - Percentage of Completion Method (Cost to cost Method)
Years Gross Profit (or Loss) recognized
Supporting computations
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) Supporting computations 2008 P -0- ( P108 – 90) = P18 anticipated gross
profit, so no need to recognized a gross loss
2009 (P 12 million) Total loss is ( P108 – 120) = (12 million) 2010 P 10 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:
20x3 20x4 20x5 Contract price: Initial amount of contract…………... P528,000 P528,000 P528,000 Variation……………………………….. _______- __12,000 __12,000 Total contract price…………………….. P528,000 P540,000 P540,000 Costs incurred each year……………… P 126,048 *P244,032 P121,920 Add: Costs incurred in prior years……. _______- _126,048 _370,080 Actual costs incurred to date (1)…..… P126,048 *P370,080 P492,000 Add: Estimated costs to complete….. _358,752 _121,920 _______- Total estimated costs (3)……..………… P484,800 P492,000 P492,000 Estimated gross profit…………………… P 43,200 P 48,000 P 48,000 Percentage of completion (1) / (3) 26% **74% 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 To date Recognized in
prior years Recognized in current year
Revenue (P528,000 x 26%) P 137,280 - P 137,280 Costs/Expenses (P484,800 x 26%) 126,048 - 126,048 Gross Profit (P43,200 x 26%) P 11,232 - P 11,232
20x4 To date Recognized in
prior years Recognized in current year
Revenue (P540,000 x 74%) P 399,600 P 137,280 P 262,320 Costs/Expenses (P492,000 x 74%) _364,080 _126,048 238,032 Gross Profit (P48,000 x 74%) P 35,520 P 11,232 P 24,288
20x5 To date Recognized in
prior years Recognized in current year
Revenue (P540,000 x 100%) P 540,000 P 399,600 P 140,400 Costs/Expenses (P492,000 x 100%) _492,000 _364,080 _127,920 Gross Profit (P48,000 x 100%) P 48,000 P 35,520 P 12,480
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5 Contract price: Initial amount of contract…………....... P528,000 P528,000 P528,000
Variation…………………………………… _______- __12,000 12,000 Total contract price………………………… P528,000 P540,000 P540,000 Costs incurred each year…………………. P126,048 P240,032 P121,920 Add: Costs incurred in prior years……….. _______- _126,048 _370,080 Actual costs incurred to date (1)…..……. P126,048 P370,080 P492,000 Add: Estimated costs to complete……… _358,752 _121,920 _______- Total estimated costs (3)……..……………. P484,800 P492,000 P492,000 Estimated gross profit……………………… P 43,200 P 48,000 P 48,000 Percentage of completion (1) / (3)……... ____26% ____74% ___100% Gross profit to date…………………………. P 11,232 P 35,520 P 48,000 Less: Gross profit in prior years……………. _______- ___11,232 __35,520 Gross profit in current year -% of completion P 11,232 P 24,288 P 12,480 Gross profit in current year –cost recovery method P 0 P 0 P 48,000
Following are the entries for the years 20x3 to 20x5: Percentage of Completion Method
20x3 20x4 20x5 1. To record costs incurred: Construction In Progress*………...... 126,048 232,032 127,920 Materials Inventory………………….. 6,000 6,000 Cash, payables, etc…………….. 126,048 244,032 121,920 2. To record progress billings: Accounts receivable……………….. 144,000 240,000 156,000 Progress billings*.…………………. 144,000 240,000 156,000 3. To record collections: Cash…………………………………..... 120,000 228,000 192,000 Accounts receivable…………… 120,000 228,000 192,000 4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… 126,048 238,032 127,920 Construction in Progress*..……….... 11,232 24,288 12,480 Revenue from Construction...... 137,280 262,320 140,400 5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… 540,000 Construction In Progress………. 540,000
* 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:
20x3 20x4 20x5 Contract price: Initial amount of contract…………... P528,000 P528,000 P528,000 Variation……………………………….. _______- __12,000 __12,000 Total contract price…………………….. P528,000 P540,000 P540,000 Costs incurred each year……………… P126,048 P244,032 P121,920 Add: Costs incurred in prior years……. _______- _126,048 _370,080 Actual costs incurred to date……....… P126,048 P370,080 P492,000 Add: Estimated costs to complete….. ____ _? ____ _? _______- Total estimated costs ….……..………… P ? P ? P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3 To date Recognized in
prior years Recognized in current year
Revenue* P 126,048 - P 126,048 Costs/Expenses 126,048 - 126,048 Gross Profit P 0 - P 0
* equivalent to costs incurred
20x4 To date Recognized in
prior years Recognized in current year
Revenue* P 364,080 P 126,048 P 238,032 Costs/Expenses _364,080 126,048 238,032 Gross Profit P 0 P 0 P 0
* equivalent to costs incurred
20x5 To date Recognized in
prior years Recognized in current year
Revenue (P540,000 x 100%) P 540,000 P 364,080 P 175,200 Costs/Expenses (P492,000 x 100%) _492,000 364,080 127,920 Gross Profit (P48,000 x 100%) P 48,000 P 0 P 48,000
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5 Contract price: Initial amount of contract…………....... P528,000 P528,000 P528,000 Variation…………………………………… _______- __12,000 12,000 Total contract price………………………… P528,000 P540,000 P540,000 Costs incurred each year…………………. P 126,048 P244,032 P 121,920 Add: Costs incurred in prior years……….. _______- _126,048 _370,080 Actual costs incurred to date ……...……. P 126,048 P370,080 P492,000 Add: Estimated costs to complete……… ____ _? ____ _? _______- Total estimated costs …….…..……………. P ? P ? P492,000 Estimated gross profit………………………. P 0 P 0 P 48,000 Percentage of completion……………….. _ -___ _ -___ ___100% Gross profit to date…………………………. P 0 P 0 P 48,000 Less: Gross profit in prior years……………. _______- _______- __ 0 Gross profit in current year………………... P 0 P 0 P 48,000
Following are the entries for the years 20x3 to 20x5:
20x3 20x4 20x5 1. To record costs incurred: Construction In Progress*………...... 126,048 238,032 127,920 Materials Inventory………………….. 6,000 6,000 Cash, payables, etc…………….. 126,048 244,032 121,920 2. To record progress billings: Accounts receivable……………….. 144,000 240,000 156,000 Progress billings*.…………………. 144,000 240,000 156,000 3. To record collections: Cash…………………………………..... 120,000 228,000 192,000 Accounts receivable…………… 120,000 228,000 192,000 4. To recognize Revenue, Costs
and Gross Profit: Construction Expenses……………… 126,480 238,032 127,920 Construction in Progress*..……….... 48,000 Revenue from Construction...... 126,480 238,032 175,920 5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… 540,000 Construction In Progress………. 540,000
* 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:
20x3 20x4 20x5 Accounts receivable………………………. P 24,000 P 36,000 P - Other receivables: Construction In Progress………………… P399,600 Less: Progress billings……………………. _384,000 Gross amount due from customers…... P 15,600 Raw materials Inventory…………………… P 6,000
Current Liability: Payables (“Payments on Account”)
Progress billings……………………………… P144,000 Less: Construction In Progress……………. _137,280 Gross amount due to customers………… P 6,720
Construction In Progress Progress Billings 20x3 CI 126,048 144,000 20x3 Pr 11,232 end of x3 137,280 144,000 end of x3 20x4 CI 238,032 240,000 20x4 Pr 11,232 end of x4 399,600 384,000 end of x4 20x5 CI 127,920 156,000 20x5 Pr 12,480 540,000 540,000 540,000 540,000 where: CI - cost incurred each year Pr - profit b. Input Measure – Cost Recovery Method Current Asset:
20x3 20x4 20x5 Accounts receivable………………………. P 24,000 P 36,000 P - Raw materials Inventory…………………… P 6,000
Current Liability: Payables (“Payments on Account”)
Progress billings……………………………… P 137,280 P384,000 Less: Construction In Progress……………. _144,000 _364,080 Gross amount due to customers………… P 6,720 P 19,920
Construction In Progress Progress Billings 20x3 CI 126,048 144,000 20x3 Pr 0 end of x3 126,048 144,000 end of x3 20x4 CI 238,032 240,000 20x4 Pr 0 end of x4 364,080 384,000 end of x4 20x5 CI 127,920 156,000 20x5 Pr 48,000 540,000 540,000 540,000 540,000 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) 20x3 20x4 20x5 Revenue……………………………………… P 137,280 P 262,320 P 140,400 Less: Costs / Expenses……………………... _126,048 _238,032 _127,920 Gross Profit……………………………………. P 11,232 P 24,288 P 12,480
b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
20x3 20x4 20x5 Revenue……………………………………… P 126,048 P 238,032 P 175,920 Less: Costs / Expenses……………………... _126,048 _238,032 _127,920 Gross Profit……………………………………. P 0 P 0 P 48,000
Problem IV 1. Anticipated/Gross Loss a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008: Contract price P2,500,000 Actual cost to date P1,500,000 Estimated costs to complete 1,200,000 Total estimated project costs 2,700,000 Estimated loss, recognized in 2008 P (200,000)
a. Input Measure – Cost Recovery Method
Loss in 20x4 P( 200,000) Loss in 20x5 P (100,000) 2. Journal Entries a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
*P2,500,000 (P1,500,000/P2,700,000) ** P2,500,000 1,388,889
2009: Contract price P 2,500,000 Costs incurred: In 2008 P1,500,000 In 2008 1,300,000 Total cost 2,800,000 Total loss P (300,000) Recognized in 2008 (200,000) Recognized in 2009 P (100,000)
2008: Construction in progress 1,500,000
Various credits 1,500,000 Accounts receivable 1,200,000 Billings on construction contract 1,200,000 Cash 1,000,000 Accounts receivable 1,000,000 Cost of construction 1,588,889 Construction in progress (loss) 200,000 Revenue from long-term contracts* 1,388,889 2009: Construction in progress 1,300,000 Various credits 1,300,000 Accounts receivable 1,300,000 Billings on construction contract 1,300,000 Cash 1,500,000 Accounts receivable 1,500,000 Cost of construction 1,211,111 Construction in progress (loss) 100,000 Revenue from long-term contracts** 1,111,111 Billings on construction contract 2,500,000 Construction in progress 2,500,000
Problem V Item to compute Answer Total revenue recognized during 2009 (w): P50 million CIP contains cost + gross profit = revenue, so w = P50 P 15 million Gross profit recognized during 2009 (x): P50 – P35 = P15 Billings on construction (y) : P14 + P 46 = P60 P60million Net billings in excess of construction in progress (z): Billings of P60 – CIP of P50
P10 million
Calculate the percentage of PAC that was completed during 2009: 50/150 = 33.33% 333.33%
Problem VI
Item to compute Answer Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R) P65 million Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22 gross pofit)
P44 million
At 12/31/2009, the estimated remaining costs to complete Cincy One (44/{44 + x})(300 – {44 + x}) = 22; x = 156
P156 million
The percentage of Cincy One that wa completed during 2009 100 x (44/ {44 + 156})
22%
Problem VII 1.
Progress billings on construction contract P562,000 Less accounts receivable 150,500 Cash collected in 20x4 P411,500
2. 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 20x5 20x6 Contract price ................... P250,000 P250,000 P250,000 Current year costs ............... 110,000 120,000 15,000 Costs to date .................... 110,000 230,000 245,000 Estimated cost to complete ....... 100,000 20,000 0 Estimated total cost ............. 210,000 245,000 240,000 Estimated total gross profit ..... 40,000 5,000 5,000 Percent complete ................. 52% 94% 100% Revenue to date .................. P130,000 P230,000 P250,000
To Date Previous Current at Dec. 31 Years Year 20x4: Revenue P130,000 P130,000 Costs (110/210 x 210) 110,000 110,000 Gross profit P 20,000 P 20,000
20x5: Revenue P235,000 P130,000 P105,000 Costs (230/245 x 245) 230,000 110,000 120,000 Gross profit (loss) P 5,000 P 20,000 P(15,000) 20x6: Revenue P250,000 P235,000 P 15,000 Costs 245,000 230,000 15,000 Gross profit P 5,000 P 5,000 P 0
20x4 20x5 20x6 1. Revenue recognized during
the year
P130,000
P100,000
P15,000 2. Gross profit recognized during
the year
20,000
(15,000)
0 3. Balance in the construction in
progress account at Dec. 31 .
130,000
235,000
0 4. Balance in the progress
billings account at Dec. 31 .
125,000
250,000
0 5. Net (3-4) or (4-3) – due from (due to) 5,000 (15,000) 0
2. Cost Recovery Method
20x4 20x5 20x6 1. Revenue recognized during
the year
P110,000
P120,000
P20,000 2. Gross profit recognized during
the year
0
0
5,000 3. Balance in the construction in
progress account at Dec. 31 .
110,000
230,000
0 4. Balance in the progress
billings account at Dec. 31 .
125,000
250,000
0 5. Net (3-4) or (4-3) – due from (due to) (15,000) (20,000) 0
Problem IX 1. Percentage of Completion Method (Cost-to-cost Approach)
2005 2006 2007 Contract price P250,000 P250,000 P250,000 Current year costs 150,000 100,000 15,000 Costs to date 150,000 250,000 265,000 Estimated cost to complete 90,000 20,000 0 Estimated total cost 240,000 270,000 265,000 Estimated total gross profit 10,000 (20,000) (15,000) Percent complete 63% 93% 100% Revenue to date P157,500 P232,500 P250,000
To Date Previous Current at Dec. 31 Years Year 2005: Revenue ............ P157,500 P157,500 Costs (150/240 x 240) 150,000 150,000 Gross profit ............ P 7,500 P 7,500 2006: Revenue ............ P232,500 P157,500 P 75,000
Costs ............ 252,500 150,000 102,500 Gross profit (loss) ............ P(20,000) P 7,500 P(27,500) 2007: Revenue ............ P250,000 P232,500 P 17,500 Costs ............ 265,000 252,500 12,500 Gross profit (loss) ............ P(15,000) $(20,000) P 5,000
20x4 20x5 20x6 1. Construction costs (expense) recognized during the year
P150,000
P102,500
P12,500
2. Gross profit recognized during the year
7,500
(27,500)
5,000
3. Balance in the construction in progress account at Dec. 31 (after closing entries)
157,500
230,000*
0 4. Balance in the progress
billings account at Dec. 31 .
110,000
230,000
0 5. NNet (3-4) or (4-3) – due from (due to) 47,500 0 0
Balance in accounts receivable at Dec. 31 (after closing entries)
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
20x4 20x5 20x6 1. Construction costs (expense) recognized during the year
P150,000
P 80,000*
P20,000**
2. Gross profit recognized during the year
0
(20,000)
5,000
3. Balance in the construction in progress account at Dec. 31 (after closing entries)
150,000
***230,000
0 4. Balance in the progress
billings account at Dec. 31 .
110,000
230,000
0 5. NNet (3-4) or (4-3) – due from (due to) 40,000 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)
P 6 M
Add: Cost incurred in prior years 0 Costs incurred to date P 6 M Add: Estimated cost to complete Total estimated costs 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 P7,200,000 ——————————— x (P15,000,000 – P12,000,000) = P1,800,000. P7,200,000 + $4,800,000 3. c 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: Construction-In-Progress CI in 2004 210,000 RGP in 20x4 (?) 34,000 End of 20x4 244,000 CI in 20x5 384,000 RGP in 20x5 (?) 100,000 End of 20x5 728,000 5. b P1,200,000 ————— x (P7,200,000 – P4,800,000) = P600,000. P4,800,000 6. c P7,200,000 – P4,875,000 =P2,325,000. 7. a
20x4 Contract Price P4,800,000 x: Percentage-of-completion _______75% Recognized Revenue to date P3,600,000 Less: Costs incurred to date P3,400,000 Gross Profit to date P 200,000 Less: GP in prior year _______-0- Gross profit in current year P 200,000
8. a P3,600,000 ————— x (P8,400,000 – P6,000,000) = P1,440,000. P6,000,000 9. b P8,400,000 – P5,600,000 = P2,800,000.
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 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. 13. a
Contract Price P6,000,000 Less: Total Estimated Costs Costs Incurred-1/10/x4 to 12/31/x5 P3,600,000 Add: Estimated costs to complete 1,200,000 4,800,000 Less: Costs incurred to date P1,200,000 Multiplied by: % of completion ___3.6/4.8 Gross Profit to date P 900,000 Less: GP in prior year (given) ___600,000 Gross profit in current year P 300,000
14. b 20x4: Cost to date – P7,500,000 x 20% P1,500,000 20x5: Cost to date – P8,000,000 x 60% 4,800,000 Cost incurred during 20x5 P3,300,000 15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000. 16. b
Costs Incurred 50,000 Contract price………………………………………. P260,000 Cost incurred each year………………………….. P 50,000 Add: Cost incurred in prior year…………………. -0- Costs incurred to date…………………………….. P 50,000 Add: Estimated costs to complete……………… 150,000 Total estimated costs………………………………. P200,000 Estimated gross profit (loss)………….……………. P60,000) Multiplied by: percentage of completion……….. __50/200 15,000 Construction In Progress account 65,000 Less: Progress billings 30,000 Construction In Progress account (net) or Due from customers 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………….. P( 100,000) Less: Recognized gross profit in prior years……. ____20,000 Recognized gross profit each year…………….. P (120,000)
22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000. 23. c
Prior year Current year Contract price………………………………………. P7,000,000 P7,000,000 Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. P5,000,000 Add: Estimated costs to complete……………… 2,800,000 Total estimated costs………………………………. P7,800,000 Estimated gross profit (loss)………….……………. (P 800,000) Multiplied by: percentage of completion……….. _____100% Recognized gross profit (loss) to date………….. P600,000 (P 800,000) Less: Recognized gross profit in prior years……. ___600,000 Recognized gross profit each year…………….. (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 1,200,000 Construction in progress 800,000 Revenue for long-term contracts 2,000,000 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 Costs of construction P1,200,000 Profit 800,000 Construction In Progress P2,000,000 Less: Progress billings 1,500,000 Excess (Due from customers) P 500,000 43. b
Costs of construction 600,000 Construction in progress 400,000 Revenue for long-term contracts 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
Costs of construction 1,200,000 Revenue for long-term contracts 1,2000,000
Under cost recovery method, revenue should be recognized up to the extent of costs incurred. 45. b Costs of construction P1,200,000 Profit 0 Construction In Progress P1,200,000 Less: Progress billings 1,500,000 Excess (Due to customers) P( 300,000) 46. d
Costs of construction 600,000 Construction in progress 1,200,000 Revenue for long-term contracts 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
20x4 20x5 Contract price P 9,600,000 P10,080,000 Costs incurred to date P 4,920,000 P 8,640,000 Add: Estimated cost to complete 4,920,000 2,160,000 Total estimated costs P 9,840,000 P 10,800,000 Estimated Gross Profit (loss) P(240,000) P (720,000) Multiply by: % of completion 100% 100% Recognized Gross Profit (Loss) to date P (240,000) P (720,000) Less: Gross Profit (Loss) in prior year _________ (240,000) Recognized Gross Profit (Loss) in current year P (240,000) P (480,000)
% of Completion / Cost Recovery Method: Construction in Progress Progress Billings CI 4,920,000 240,000 loss 5,280,000 4,680,000 5,280,000 CI 3,720,000 480,000 loss 3,420,000 7,920,000 8,700,000 due to customers P780,000
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: Project 6 Project 7 Project 8 Contract price………………………….. P500,000 P700,000 P250,000 Cost incurred each year………………. P375,000 P100,000 P100,000 Add: Cost incurred in prior year……… _________ ________ ________ Costs incurred to date………………… P375,000 P100,000 P100,000 Add: Estimated costs to compute……. ________ 400,000 100,000 Total estimated costs…………………. P375,000 P500,000 P200,000
Estimated gross profit………………… P125,000 P200,000 P 50,000 Multiply by: percentage of completion. 100% 20% 50% Recognized gross profit to date……… P125,000 P 40,000 P 25,000 Less: Recognized gross profit in prior years _________ _________ _________ Recognized gross profit each year…. P125,000 P 40,000 P 25,000
Cost Recovery Method of Construction Accounting: Project 6 Project 7 Project 8 Recognized Revenue………..……….. P500,000* P100,000 P100,000 Less: Costs of long-term construction
contract……………………………..
375,000
100,000
100,000 Recognized gross profit each year…. P125,000 P 0 P 0
* Since the contract is completed then the full amount of P500,000 contract price should be recognized as revenue.
Percentage of Completion Cost Recovery Method of Construction Construction in Progress Construction in Progress
Pr. 6 - Cl. 375,000 Pr. 125,000
Pr. 7 – Cl. 100,000 Pr. 40,000
Pr. 8. Cl 100,000 Pr. 100,000
500,000 Pr. 6 Pr. 6 - Cl. 375,000 Pr. 125,000
Pr. 7 – CI 100,000 Pr. 8 – CI 100,000
700,000 12/31 200,000
500,000 Pr. 6 500,000 (d)
765,000 500,000 12/31 265,000 (d)
49. a Input Measures: Efforts-Expended Method - using timbers laid
Year 2 Year 3 Timers laid Each Year 300 500 Add: Timbers laid in Prior Years 150 450 Timbers laid to date 450 950 Add: Additional support timbers to be laid 520 -0- Total Estimated Timbers 970 950 Percentage-of-Completion 45/97 100% x: CONTRACT PRICE P 800,000 P 800,000 Recognized Revenue to Date P 371,134 P 800,000 Recognized Revenue in Prior Years 371,134 Recognized Revenue in Current Yr. P 428,866
Output Measures – Number of trail feet
Year 2 Year 3 Trail feet Each Year 7,500 8,000 Add: Trail fees in Prior Years 3,000 10,500 Trail feet to date 10,500 18,500 Add: Additional trail feet to be constructed 8,200 ___-0- Total Estimated Trail feet 18,700 18,500 Percentage-of-Completion 105/187 100% x: CONTRACT PRICE P 800,000 P 800,000 Recognized Revenue to Date P 449,198 P 800,000
Recognized Revenue in Prior Years 449,198 Recognized Revenue in Current Yr. P 350,802
50. b
2006 2007 2008 Contract price………………………….. P5,000,000 P5,000,000 P5,000,000 Cost incurred each year………………. P2,050,000 Add: Cost incurred in prior year……… 900,000 2,550,000 Costs incurred to date………………… P 900,000 P2,550,000 P4,600,000 Add: Estimated costs to complete 1,700,000 -0- Total estimated costs…………………. P4,250,000 P4,600,000 Estimated gross profit………………… P 750,000 P 400,000 Multiply by: percentage of completion. 60% 100% Recognized gross profit to date……… P 100,000 P 450,000 P 400,000 Less: Recognized gross profit in prior years -0- 100,000 450,000 Recognized gross profit each year…. P 100,000 P 350,000 P( 50,000)
51. d – refer to No. 50 52. c Contract Price……………………………………………… P60,000,000 Less: Total Estimated Costs Cost Incurred to Date……………………………… P26,000,000 Add: Estimated Costs to Complete……………… 25,000,000 51,000,000 Estimated Gross Profit……………………………………. P 9,000,000 Multiplied by: % of completion…………………………. 30% Recognized gross profit to date……………………….. P 2,700,000 Less: RGP in prior years…………………………………… _________0 Recognized gross profit in current year……………… P 2,700,000 Construction-in-progress Account: Costs incurred to date………………………………….. P 26,000,000 GP in the current year…………………………………… 2,700,000 P 28,700,000 Less: Progress billings…………………………………….. 5,000,000 Due from customer (net)………………………………. P 23,700,000 53. c
Contract Price P100,000,000 Multiplied by: Gross Profit Rate _________25% Estimated Gross Profit of the entire contract P 25,000,000 Multiplied by: Percentage of Completion for first year _________50% Gross Profit realized for current year P 12,500,000
54. c Contract Price P120,000,000 x: Mobilization Fee 10% Collection in 20x4 P 12,000,000 Note: Billings for 20x4 will be collected in January 20x5. 55. a Mobilization Fee: 5% x P10M P 5.0 M
Collection on Billings: Contract price P 100 M x: Progress billings, net of 10% and 8% (50% - 10% - 8%) 32% Progress billings P 32 M x: Collections net of contract retention of 10% 90% 28.8 M Collections in 20x4 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 4,500,000 Costs incurred to date 1,350,000 Add: Estimated cost to complete _2,700,000 Total estimated costs 4,050,000 Estimated Gross Profit (loss) 450,000 Multiply by: % of completion 1,350/4,050 Recognized Gross Profit (Loss) to date 150,000 Less: Gross Profit (Loss) in prior year ____-0- Recognized Gross Profit (Loss) in current year 150,000
3. P150,000
20x5 20x6 Contract price 3,000,000 3,000,000 Costs incurred to date 1,800,000 Add: Estimated cost to complete _600,000 Total estimated costs 2,250,000 2,400,000 Estimated Gross Profit (loss) 750,000 600,000 Multiplied by: % of completion 1,800/2,400 Recognized Gross Profit (Loss) to date 300,000 450,000 Less: Gross Profit (Loss) in prior year _300,000 Recognized Gross Profit (Loss) in current year 150,000
4. P80,000
20x5 Contract price 1,600,000 Costs incurred to date 240,000 Add: Estimated cost to complete _960,000 Total estimated costs 1,200,000 Estimated Gross Profit (loss) 400,000 Multiplied by: % of completion 240/1,200 Recognized Gross Profit (Loss) to date 80,000 Less: Gross Profit (Loss) in prior year ______0 Recognized Gross Profit (Loss) in current year 80,000
5. P20,000 20x5 20x6 Contract price 1,400,000 1,400,000 Costs incurred each year 400,000 400,000 Add: Cost incurred in prior years _____-0- 400,000 Costs incurred to date 400,000 800,000 Add: Estimated cost to complete _400,000 200,000 Total estimated costs 800,000 1,000,000 Estimated Gross Profit (loss) 600,000 400,000 Multiplied by: % of completion 400/800 800/1,000 Recognized Gross Profit (Loss) to date 300,000 320,000 Less: Gross Profit (Loss) in prior year ______0 300.000 Recognized Gross Profit (Loss) in current year 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
20x5 Contract price 4,000,000 Costs incurred each year 960,000 Add: Cost incurred in prior years _______0 Costs incurred to date 960,000 Add: Estimated cost to complete Total estimated costs 3,200,000 Estimated Gross Profit (loss) 800,000 Multiplied by: % of completion 960/3,200 Recognized Gross Profit (Loss) to date 240,000 Less: Gross Profit (Loss) in prior year _______0 Recognized Gross Profit (Loss) in current year 240,000
8. P102,000
20x5 Contract price 850,000 Costs incurred each year 238,000 Add: Cost incurred in prior years _______0 Costs incurred to date 238,000 Add: Estimated cost to complete 357,000 Total estimated costs 595,000 Estimated Gross Profit (loss) 255,000 Multiplied by: % of completion 238/595 Recognized Gross Profit (Loss) to date 102,000 Less: Gross Profit (Loss) in prior year _______0 Recognized Gross Profit (Loss) in current year 102,000
9. P990,000 20x5 20x6 Contract price 3,000,000 3,000,000 Costs incurred each year 990,000 Add: Cost incurred in prior years 450,000 Costs incurred to date* 450,000 1,440,000 Add: Estimated cost to complete Total estimated costs 2,250,000 2,400,000 Estimated Gross Profit (loss) 750,000 600,000 Multiplied by: % of completion ____20% _____60% Recognized Gross Profit (Loss) to date 150,000 360,000 Less: Gross Profit (Loss) in prior year ______0 150.000 Recognized Gross Profit (Loss) in current year 150,000 210,000
* total estimated costs x % of completion 10. P50,000
20x5 Contract price 1,500,000 Costs incurred each year 465,000 Add: Cost incurred in prior years _______0 Costs incurred to date 465,000 Add: Estimated cost to complete 1,085,000 Total estimated costs 1,550,000 Estimated Gross Profit (loss) ( 50,000) Multiplied by: % of completion 100% Recognized Gross Profit (Loss) to date ( 50,000) Less: Gross Profit (Loss) in prior year _______0 Recognized Gross Profit (Loss) in current year ( 50,000)
11. P625,000
20x5 20x6 Contract price 3,500,000 3,500,000 Costs incurred each year 1,350,000 1,525,000 Add: Cost incurred in prior years -0- 1,350,000 Costs incurred to date 1,350,000 2,875,000 Add: Estimated cost to complete 1,350,000 _______0 Total estimated costs 2,700,000 2,875,000 Estimated Gross Profit (loss) 800,000 625,000 Multiplied by: % of completion - ___100% Recognized Gross Profit (Loss) to date 625,000 Less: Gross Profit (Loss) in prior year -0- _______0 Recognized Gross Profit (Loss) in current year -0- 625,000
12. P550 Costs Incurred………………………………………………………………………. 400 Contract price………………………………………. P2,750 Cost incurred each year………………………….. P 400 Add: Cost incurred in prior year…………………. ___-0- Costs incurred to date…………………………….. P 400 Add: Estimated costs to complete……………… _1,600 Total estimated costs………………………………. P2,000 Estimated gross profit (loss)………….……………. P 750 Multiplied by: percentage of completion……….. 400/2,000 150 Construction In Progress account – inventory account…………………… 550
13. P1,200,000 The term “completed” should be “cost recovery”
Costs Incurred 700,000 Contract price………………………………………. P2,000,000 Cost incurred each year………………………….. P 700,000 Add: Cost incurred in prior year…………………. ______-0- Costs incurred to date…………………………….. P 700,000 Add: Estimated costs to complete……………… __800,000 Total estimated costs………………………………. P1,500,000 Estimated gross profit (loss)………….……………. P 500,000 Multiplied by: percentage of completion……….. ________0 _______0 Construction In Progress account – inventory account 700,000 20x5 Costs incurred 600,000 Contract price………………………………………. P2,000,000 Cost incurred each year………………………….. P 600,000 Add: Cost incurred in prior year…………………. _700,000 Costs incurred to date…………………………….. P1,300,000) Add: Estimated costs to complete……………… __800,000 Total estimated costs………………………………. P(2,100,000) Estimated gross profit (loss)………….……………. P (100,000) Multiplied by: percentage of completion……….. ________0 _(100,000) Construction In Progress account – inventory account 1,200,000
14. P32,000 = P47,000 – P15,000
15. P782,000
20x5 Costs Incurred 238,000 Contract price………………………………………. P850,000 Cost incurred each year………………………….. P238,000 Add: Cost incurred in prior year…………………. ______-0- Costs incurred to date…………………………….. P238,000 Add: Estimated costs to complete……………… _357,000 Total estimated costs………………………………. P595,000 Estimated gross profit (loss)………….……………. P255,000 Multiplied by: percentage of completion……….. _238/595 102,000 Construction In Progress account – inventory account 340,000 20x6 Costs incurred 319,600 Contract price………………………………………. P850,000 Cost incurred each year………………………….. P319,600 Add: Cost incurred in prior year…………………. _238,000 Costs incurred to date…………………………….. P557,600 Add: Estimated costs to complete……………… _139,400 Total estimated costs………………………………. P697,000 Estimated gross profit (loss)………….……………. P153,000 Multiplied by: percentage of completion……….. _557.6/697 _122,400 Construction In Progress account – inventory account 782,000 Less: Progress billings (P260,000 + P210,000) 470,000 Construction In Progress account (net) – Due from customers
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 P5,000,000 Costs 3,025,000 Total gross profit 1,975,000 Recognized in 20x5 (1,100,000) Recognized in 20x6 P 875,000 Or Total revenue P5,000,000 Recognized in 20x5 (2,750,000)
Recognized in 20x6 2,250,000 Costs in 20x6 (1,375,000) Gross profit in 20x6 P 875,000 Percentage-of-Completion Completed-Contract Gross Profit Gross Profit 24. 20x5 P750,000a 20x5 — 25. 20x6 P210,000b 20x6 — 26. 20x7 P440,000c 20x7 P1,400,000d aP1,500,000 ————— × P2,000,000 = P750,000 P4,000,000 bP2,640,000 ————— × P1,600,000 = P960,000 P4,400,000 Less 20x5 gross profit (750,000) 20x6 gross profit P210,000 cTotal revenue P6,000,000 Total costs 4,600,000 Total gross profit 1,400,000 Recognized to date (960,000) 20x7 gross profit P 440,000 dTotal revenue P6,000,000 Total costs 4,600,000 Total gross profit 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
yet billed P 125,000
* 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 P1,250,000 Revenue from previous periods _1,000,000 Revenue for 20x7 P 250,000 Costs incurred in 20x7 _ 190,000 Gross profit for 20x7 P 60,000 THEORIES 1. False 6. False 11. False 16. True 21. True 26. True 31. False 2. True 7. False 12. True 17. False 22. False 27. True 32. False 3. True 8. False 13. False 18. True 23. False 28. False 33. True 4. False 9. True 14. True 19. False 24. False 29. False 34. False 5. False 10, False 15, False 20. True 25. False 30. True 35. True
36. False 37. True 38. True 39. False 40. False
41. b 46. a 51. c 56. d 61. d 66. c 42. c 47. d 52. b 57. b 62. b 67. b 43. b 48. c 53. c 58. c 63. a 68. a 44. c 49. c 54. b 59. c 64. c 69. d 45. b 50. a 55. a 60. c 65. d 70. C
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……….. 240,000 Notes receivable……………. 600,000 Franchise revenue…………………….. 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……….. 240,000 Notes receivable……………. 600,000 Unearned franchise revenue…………………….. 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……………………... 840,000 Franchise revenue….……. 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……….. 240,000 Notes receivable……………. 600,000 Unearned franchise revenue…………………….. 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……………………... 840,000 Franchise revenue….……………………………….. 840,000
4. 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……….. 240,000 Notes receivable……………. 600,000 Franchise revenue…………………….. 240,000 Unearned franchise revenue…………… 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…………… 120,000 Franchise revenue…………………….. 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……….. 240,000 Unearned franchise revenue…………………….. 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……………………... 240,000 Franchise revenue….……………………………….. 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……….. 240,000 Notes receivable……………. 600,000 Franchise revenue…………………….. 360,000 Unearned franchise revenue………….. 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……………………... 480,000 Franchise revenue….……………………………….. 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 ......................................... 75,000 Unearned Franchise Fee ..................... 75,000
2. Cash ......................................... 75,000 Note Receivable .............................. 120,000 Unearned I.I. or Discount on Note Receivable 28,881 Revenue from Franchise Fee ................. 166,119 [P{75,000 + (P30,000 x 3.0373)] = P116,119 (Table IV n = 4, i = 12%)
3. Cash ......................................... 75,000 Note Receivable .............................. 120,000 Unearned I.I. or Discount on Note Receivable 28,881 Revenue from Franchise Fee ................. 75,000 Unearned Franchise Fee ..................... 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……….. 120,000.00 Notes receivable……………. 480,000.00 Unearned interest income (or Discount on notes receivable) 80,583.20 Unearned franchise revenue…………………….. 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……….. 120,000.00 Notes receivable……………. 480,000.00 Unearned interest income (or Discount on notes receivable) 96,699.84 Franchise revenue…………………….. 503,300.16
3. 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……….. 120,000.00 Notes receivable……………. 480,000.00 Unearned interest income (or Discount on notes receivable) 96,699.84
Franchise revenue…………………….. 120,000.00 Unearned franchise revenue 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……….. 120,000.00 Franchise revenue…………………….. 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……….. 120,000 Unearned franchise revenue…………………….. 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……….. 120,000.00 Notes receivable……………. 180,000.00 Unearned interest income (or Discount on notes receivable) 37,354.50 Unearned franchise revenue…………………….. 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……….. 120,000.00 Notes receivable……………. 180,000.00 Unearned interest income (or Discount on notes receivable) 37,354.50 Franchise revenue…………………….. 262,645.50
Cost of franchise revenue 52,529.10 Cash, etc…………… 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 52,529.10 Deferred gross profit on franchise 210,116.40 c. Adjustments to recognize gross profit on franchise: Deferred gross profit on franchise 96,000.00 Realized gross profit on franchise 96,000.00
Franchise revenue……….. 262,645.5 Less: Cost of franchise revenue 52,529.1 Gross profit……….. 210,116.4 Gross profit rate (210,116.4/262,645.5) 80% Collections as to principal……. P120,000.00 Multiplied by: Gross profit rate……. 80% Realized gross profit on franchise….. 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……….. 120,000 Notes receivable……………. 480,000 Unearned franchise revenue…………………….. 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…. 360,000 Cash…………..……….. 360,000
December 31, 20x4: Interest receivable (P480,000 x 14% x 6/12)………….. 33,600 Cash…………..……….. 33,600
February 1, 20x5: Unearned franchise revenue…………………….. 600,000 Franchise revenue…………………….. 600,000
Cost of franchise revenue…………………….. 360,000 Deferred cost of franchise revenue…………………….. 360,000
Problem VI
Reasonably Assured No reasonable
assurance January 1, 20x4 Cash………….. 1,500,000 1,500,000 Notes receivable……. 4,500,000 4,500,000
Unearned franchise revenue……. 6,000,000 6,000,000 Receipt of initial franchise fee.
Conditions to be met: Cash Notes Cash Notes Services No No No No Period of refund Yes Yes Yes Yes
Collectibility
Reasonably assured
No reasonable assurance
1/1/20x4 Balance 1,500,000 4,500,000 1,500,000 4,500,000 Status Liability Liability Liability Liability
December 31, 20x4 Cash………….. 1,575,000 1,575,000 Notes receivable……. 1,125,000 1,125,500 Interest income (P3,750,000 x 10%) 450,000 450,000 Annual collection.
Deferred cost of franchise 1,800,000 1,800,000 Cash………………… 1,800,000 1,800,000 To defer cost of franchise since substantial services had not been performed.
Operating expenses 120,000 120,000 Cash………………… 120,000 120,000 To record expenses.
Adjustments: Cost of franchise 1,800,000 Deferred cost of franchise 1,800,000 To recognize cost of franchise. Unearned franchise revenue……. 6,000,000 Franchise revenue 6,000,000 To recognize franchise revenue based on the following analysis :
Conditions to be met: Cash Notes Services Yes Yes Period of refund Yes Yes
Collectibility Reasonably
assured 1/1/20x4 Balance………………….. 1,500,000 4,500,000 12/31/20x4: Collection as to principal 1,125,000 (1,125,000) 12/31/20x4 Balance 2,625,000 2,625,000 Status Revenue Revenue
Adjustments (Installment sales method) a. To set-up cost of franchise: No entry* b. To set-up deferred gross profit Unearned franchise revenue 6,000,000 Deferred cost of franchise revenue 1,800,000 Deferred gross profit 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: Cash Notes Services Yes Yes Period of refund Yes Yes
Collectibility
No reasonabe assurance
1/1/20x4 Balance………………….. 1,500,000 4,500,000 12/31/20x4: Collection as to principal 1,125,000 (1,125,000) 12/31/20x4 Balance 2,625,000 2,625,000 Status
Revenue – I/S Method
Liability
. To recognize realized gross profit on
franchise: Deferred gross profit 1,837,500 Realized gross profit on franchise 1,837,500
Collections – principal x gross profit rate P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500 2.
Reasonably Assured No reasonable
assurance Income Statement, 12/31/20x4: Franchise revenue (accrual method)* P6,000,000 P 0 Less: Cost of franchise (accrual method)* 1,800,000 0 Gross profit on regular franchise (accrual)* P4,200,000 P 0 Add: Gross profit on franchise (installment sales method) -0- *1,837,500 Gross profit on franchise P4,200,000 P1,837,500 Less: Operating expenses 120,000 120,000 P4,080,000 P1,717,500 Add: Interest income…………….. 450,000 450,000 Net income……………. P4,530,000 P2,167,500
Problem VII 1.
Reasonably Assured No reasonable
assurance January 1, 20x4 Cash………….. 1,440,000 1,440,000 Notes receivable……. 3,840,000 3,840,000 Unearned interest income* 796,896 796,896 Unearned franchise revenue……. 4,483,104 4,483,104 Receipt of initial franchise fee.
Conditions to be met: Cash Notes (PV) Cash Notes (PV) Services** No No No No Period of refund – until date of Opening No No No No
Collectibility
Reasonably assured
No reasonable assurance
1/1/20x4 Balance 1,440,000 3,043,104*** 1,440,000 3,043,104*** Status Liability Liability Liability 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 144,931.20 144,931.20 Cash………………… 144,931.20 144,931.20 To defer cost of franchise since substantial services had not been performed.
June 13, 20x4: General expenses 60,000 60,000 Cash………………… 60,000 60,000 To record expenses.
August 8, 20x4: Deferred cost of franchise 360,000 360,000 Cash………………… 360,000 360,000 To defer cost of franchise since substantial services had not been performed.
November 2, 20x4: Deferred cost of franchise 840,000 840,000 Cash………………… 840,000 840,000 To defer cost of franchise since substantial services had not been performed.
November 2, 20x4: Substantial completion of services.
December 31, 20x4: Cash………….. 960,000 960,000 Notes receivable………………… 960,000 960,000 Annual collections.
Adjustments: Unearned interest income 304,310.40 304,310.40 Interest income 304,310.40 304,310.40 To recognize interest income thru amortization as follows: 10% x P3,043,104 = P304,310.4. Cost of franchise 1,344,931.20 Deferred cost of franchise 1,344,931.20 To recognize cost of franchise.
Unearned franchise revenue……. 4,438,1040 Franchise revenue 4,438,1040 To recognize franchise revenue based on the following analysis:
Conditions to be met: Cash Notes (PV) Services** Yes Yes Period of refund – outlet already opened. Yes Yes
Collectibility Reasonably
assured 1/1/20x4 Balance 1,440,000 4,438,104 12/31/20x4: Collection……………..... . P960,000 Less: Interest collection… 304,310.40 Collection – Principal…….P655,689.60 655,689.60
( 655,689.60) 2,095,689.60 2,387,414.40 Status Revenue Revenue
Adjustments (Installment sales method) a. To set-up cost of franchise: Cost of franchise revenue….. 1,344,931.20 Deferred cost of franchise revenue 1,344,931.20 b. To set-up deferred gross profit: Unearned franchise revenue 3,483,104 Cost of franchise revenue 1,344,931.20 Deferred gross profit 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: Cash Notes (PV) Services** Yes Yes Period of refund – outlet already opened. Yes Yes
Collectibility
No reasonable assurance
1/1/20x4 Balance 1,440,000 304,104 12/31/20x4: Collection……………..... . P960,000 Less: Interest collection… 304,310.40 Collection – Principal…….P655,689.60 655,689.60
( 655,689.60) 2,095,689.60 2,387,414.4 Status
Revenue – I/S Method
Liability
. To recognize realized gross profit on franchise: Deferred gross profit 1,466,983.20 Realized gross profit on franchise 1,466,983.20
Collections – principal x gross profit rate
P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20 2.
Reasonably Assured No reasonable
assurance Income Statement, 12/31/20x4: Franchise revenue (accrual method)* P 4,471,1040 P 0 Less: Cost of franchise (accrual method)* 1,344,931.20 0 Gross profit on regular franchise (accrual)* P3,138,172.8 P 0 Add: Gross profit on franchise (installment sales method) -0- *1,466,983.20 Gross profit on franchise P3,138,172.8 P1,466,983.20 Less: Operating expenses 60,000 60,000 P3,078,172.8 P1,406,983.20
Add: Interest income…………….. 304,310.40 304,310.40 Net income……………. P3,382,483.20 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
Collection
Interest (10% of Unpaid Balance)
Principal
Unpaid Balance
1/03/20x4 4,483,104 1/03/20x4 1,440,000 -0- 1,440,000 3,043,104 12/31/20x4 960,000 304,310.40 655,689.60 2,387,414.40 Total 2,400,000 304,310.40 2,095,689.60
Problem VIII 1. The fee is earned for providing continuing services:
Cash or Accounts receivable………… 108,000 Franchise revenue – continuing franchise fee 108,000
2. If P10,000 of the fee is for national advertising:
Cash or Accounts receivable………… 108,000 Franchise revenue – continuing franchise fee 96,000 Unearned franchise revenue – continuing franchise fee…… 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………… xxx Cash, etc……………….. xxx
Unearned franchise revenue – continuing franchise fee…… 12,000 Franchise revenue – continuing franchise fee 12,000
Problem IX March 20:
Cash 5,000 Notes receivable 20,000 Unearned franchise fee 25,000
June 15:
Unearned franchise revenue 25,000 Franchise revenue 25,000
July 15:
Cash 500 Service revenue 500
Problem X
Cash or Accounts receivable… 117,600 Franchise revenue – supplies sales…………….. 117,600
Cost of franchise – supplies sales……… 90,000 Supplies inventory………. 90,000
Problem XI
Cash……………. 21,600 Notes receivable (P108,000 – P21,600) 86,400 Unearned interest income (P86,400 – P69,978) 16,422 Franchise revenue (P21,600 + 69,978 – P4,800*) 86,778 Unearned franchise revenue – equipment sale* 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… 19,200 Unearned franchise revenue – equipment sale 4,800 Franchise revenue – equipment sale…………….. 24,000
Cost of franchise - equipment sale………. 19,200 Equipment inventory………. 19,200
Problem XII
April 1, 20x4: Cash……………. 288,000 Notes receivable………… 192,000 Franchise revenue (P21,600 + P86,400 – P4,800*) 480,000
December 31, 20x4: Franchise revenue – initial franchise fee 480,000
Interest income (P192,000 x 8% x 9/12) 11,520 Cash (P153,600 – P11,520)…………. 142,080 Notes receivable…………… 192,000 Gain or revenue from repossessed franchise…………… 134,400
Problem XIII
Cash 72,000 Notes receivable………… 360,000 Deferred franchise purchase option liability……. 432,000
Deferred cost of franchise revenue…………… 288,000 Cash, etc……… 288,000
Investment………………………….. 120,000 Deferred franchise purchase option liability……. 432,000 Deferred cost of franchise revenue…………… 288,000 Cash, etc……… 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 Cash 6,000 Notes receivable 30,000 Unearned franchise fee 36,000
6. b
Unearned franchise fee 36,000 Franchise fee revenue 36,000
7. a
Cash 6,000 Notes receivable 30,000 Franchise fee revenue 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 Yes Yes Period of Refund Yes Yes Collectibility No Reas.
Assured 200,000 300,000 Status Rev – I/S Method Liability
10. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee: Cash Notes Receivable Services Yes Yes Period of Refund Yes Yes Collectibility Reasonably Assured P20,000 P80,000 Status Revenue 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)………………………………………………… 1,735 Total Revenue/Net Income……………………………………………………………… 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 (note)
Yes Yes
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 (note)
Yes Yes
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 Continuing franchise fee…………………………………………………. 5,000 Total…………………………………………………………………………… P 105,000 Less: Indirect cost of franchise…………………………………………… 15,000 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:
Cash Notes Receivable Services Yes Yes Period of Refund Yes Yes Collectibility Reasonably Assured P25,000 P68,234 Status Revenue 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 Equipment P15,000 – P12,000)………………………………………….… 3,000 65,234 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 Entries on Consignor’s Books (Herbalife Supplier)
Entries on Consignee’s Books (Conrado Enterprises)
Shipment of goods on consignment.
Inventory on Consigment…… Finished Goods Inventory*....
60,000
60,000
No entry (memorandum entry only)
2. Payment of expenses by consignor.
Inventory on Consignment….. Cash……..
600
600
No entry
3. Payment of expenses by consignee.
Inventory on Consignment…… Consignee Payable………
2,400 2,400
Consignor Receivable Cash…………….
2,400
2,400
Advances by Consignor
Cash……… Advances from Consignee…..
3,360 3,360
Advances to Consignor Cash
3,360 3,360
Sale of merchandise
No entry.
Cash Consignor payable
48,000 48,000
6. Notification of sale to consignor and payment of cash due. Commission: 10% x P48,000 =
P4,800
Commission expense Advances from Consignee…… Cash……. Consignee Payable Consignment Sales Revenue..
4,800 3,360 37,440 2,400
48,000
Consignor Payable.. Commission Revenue…….. Consignor Receivable ….. Cash……… Advances from Consignee……
48,000
4,800 2,400 37,440 3,360
7. To record cost of goods sold and related costs. ** (P60,000 + P600 + P2,400) x ½ =
P31,500
Cost of goods sold** Inventory on Consignment
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)……………… P 192,000 Charges: Freight-in…………… P 6,000 Advertising expense………… 2,400 Deliveries and installation expenses 9,600 Repairs expense – on units sold.. 4,800 Commissions, 25% of sales 48,000 70,800 Due to Consignor……………………………. P121,200 Less: Advances………………. 0 Balance………………………… P121,200 Remittance Enclosed……………… 30,000 Balance Due…………… P 91,200 Items on Hand………… 15 sets Items Returned (defective)….……. 2 sets
2. The inventory on consignment amounted to P189,000 computed as:
Charge Analysis Sales
(8 sets) Inventory (15 sets)
Total (25 sets)
Charges by consignor: Cost of consigned goods (@P12,000/set)
P 96,000
P180,000
P 300,000
Freight-out (P9,000/25 sets = P360 per set) 3,600* 5,400 9,000 Charges by consignee: Freight-in (P6,000/25 sets =P240 per set) 2,400* 3,600 6,000 Advertising expense………….. 2,400 0 2,400 Delivery and installation 9,600 0 9,600 Repairs expense…………… 4,800 0 4,800 Commissions [25% of sales (8 sets x P24,000 per set]
48,000
0
___48,000
Total P166,800 P189,000 P379,800 * Freight on sets returned is charged against sales of the period.
** 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) P 192,000 Less: Costs and expenses: Charges by Consignor: Cost of consigned goods @P12,000/set) P 96,000 Freight-out (P9,000/25 sets = P360 per set) 3,600* 99,600 Charges by consignee: Freight-in (P6,000/25 sets =P240 per set) P 2,400* Advertising expense………….. 2,400 Delivery and installation 9,600 Repairs expense…………… 4,800 Commissions [25% of sales (8 sets x P24,000 per set] 48,000 67,200 Net Income P 25,200
Problem III
Summit Electronics Company Inventory on Consignment (800 @ P570) 456,000 Finished Goods Inventory 456,000
Consignment Expense (P368,000 x 30%) 110,400 Accounts Receivable--Consignee Sales 257,600 Sales Revenue—Consignment (P920 x 400) 368,000
Cost of Consigned Goods Sold (P570 x 400) 228,000 Inventory on Consignment 228,000
Cash [(P920 x 70%) x 380] 244,720 Accounts Receivable--Consignee Sales 244,720
Farley Hardware No entry upon receipt of consigned merchandise. Cash (P920 x 400) 368,000 Consignor Payable 257,600 Commission Revenue 110,400 Consignor Payable 244,720 Cash 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
Number of units sold = Selling price = __P1,600__ = 8 tapes 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
Charges Related to Total
Charges (25)
Consignment Sales
(8)
Inventory on Consignment
(15) Consignor’s charges: Cost P2,500 P800 P1,500 Freight-out 75 30 45 Consignee’s charge - Commission __400__ __400__ _______ Total P2,975 1,230 _P1,545_ Sales price _1,600_ Consignment profit _P370_
3. a – P1,545 (refer to No. 2 for computation) 4. b
Sales (P2,250 / 15%) P15,000 Divided by: Selling price per unit P 1,000 Number of units sold 15 units
5. c
Sales P15,000 Less Charges:
Commission P 2,250 Advertising 1,500
Delivery expense ___750 __4,500 Due to Consignor P10,500 Less: Advances Value of note – sight draft: (100 beds x P600 per bed) x 60% P36,000 Multiplied by: Proportional number of beds sold 15/100 __5,400 Amount remitted P 5,100
6. d – P1,500 Sales P15,000 Less Charges: Consignor’s charge:
Cost of beds (P600 per bed x 15 beds) 9,000 Consignee’s charges: Commission P2,250 Advertising 1,500
Delivery expense ___750 __4,500 Consignment net income P1,500
7. a – no items were sold in November;
Sales (unknown) P x Less Charges: Commission 15% x Remittance P 27,200
x – 15%x = P27,200 85%x = P27,200
x = P32,000 8. c – P16,800
Sales (unknown) x Less Charges: Advertising P500 Delivery and installation charges 100 Commission (unknown) 20%x _______ Remittance 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) P6,000 Freight on shipment (P200 x 40/100) 80 Cost of inventory on consignment P6,080
10. c - 6
Sales (unknown) x Less Charges:
Commission (unknown) 20%x Advertising P1,000
Delivery and installation 600 Cartage on consigned goods 500 Remittance P21,900
x – (20%x + P1,000 + P600 + P500) = P21,900 x – 20%x = P21,900 + P2,100 80%x = P24,000
x = P30,000
Number of units sold = _P30,000_ = 6 P5,000 per set 11. b – P2,300
Charges Related to Total
Charges (10)
Consignment Sales
(6)
Inventory on Consignment
(3) Consignor’s charges: Cost P30,000 P18,000 P9,000 Freight-out 2,500 1,750 750 Consignee’s charges: Commission (20% x P30,000) 6,000 6,000 Advertising 1,000 1,000 Delivery and installation 600 600 Cartage __500__ __350__ __150__ Total P40,600 27,700 _P9,900_ Sales price _30,000_ Profit on Consignment __P2,300__
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%) P 8,400 Less: Cash discount taken by customer (P8,400 x 2%) __168 Net collection P 8,232 Less Charges:
Expenses P 800 Commission (P8,400 x 15%) _1,260 __2,060
Due to Consignor P 6,172 Less: Advances _6,000 Amount remitted P 172
16. b Charges Related to Total
Charges (100%)
Consignment Sales (70%)
Inventory on Consignment
(30%) Consignor’s charges: Cost P10,000 P 7,000 P 3,000 Freight 120 84 36 Consignee’s charges: Expenses 800 800 Commission (15% x P10,500) 1,575 1,575 Cash discount (P10,500 x 80% x 2%) 168 168 Total P12,663 P 9,627 _P3,036_ Sales price (70% x P15,000) _10,500_ Profit on Consignment P 873
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) P 150 Monthly payment thereafter (3 x P10) 30 P 180 June sale Down payment (1 x P50) ___50 Total P 230 Less: Commission (P230 x 20%) ___46 Amount remitted P 184
20. d – P140
Charges Related to Total
Charges (5)
Consignment Sales
(4)
Inventory on Consignment
(1 Consignor’s charges: Cost P 775 P 620 P 155 Freight 50 40 10 Consignee’s charges: Commission 200 200 ____ Total P1,025 P 860 P165 Sales price (4 units x P250/unit) _ 1,000 Profit on Consignment P 140
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%) ___450 Total P3,450 Less: Charges Freight P 320 Commission [(P3,000 + P1,800) x 15%] __720 __1,040 Amount remitted P 2,410
23. a
Charges Related to Total
Charges (5)
Consignment Sales
(3)
Inventory on Consignment
(2) Consignor’s charges: Cost P4,000 P 2,400 P 1,600 Freight 200 120 80 Consignee’s charges: Freight 320 192 128 Commission 720 720 ______ Total P5,240 P 3,432 P1,808 Sales price 4,800 Profit on Consignment P 1,368
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) P298,000 Less: Sales allowance granted P 2,000 Bad debts 7,000 Commission [2% x (P298,000 – P2,000)] _44,400 __53,400 Amount still due from BB, Inc P 244,600
26. d – P67,280
Charges Related to Total
Charges (30)
Consignment Sales (22)
Inventory on Consignment
(8) Consignor’s charges: Cost P240,000 P176,000 P64,000 Freight-out 1,800 1,320 480 Consignee’s charges: Sales allowance 2,000 2,000 Bad debts 7,000 7,000 Commission [15% x (P298,000 – P2,000)]
44,400
44,400
Total P295,200 P230,720 _P64,480_ Sales price [P14,000 per unit x 12 units) + (P13,000 per unit x 10 units)]
298,000
Consignment profit P 67,280
27. d – refer to No. 26 for computation
28. b – 395 Sales (unknown) x Less Charges: Commission (unknown)
__x__ (P10) P100
Delivery expense __P45__ ________ Remittance P35,505
x - [( _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
Regular Sales
Consignment Sales
Total
Sales P120,000 P30,000 P150,000 Cost of sales 84,000 19,500* 103,500 Gross profit P 36,000 P10,500 P 46,500 Operating expenses: Commission (P30,000 x 5%) P 1,500 P 1,500 Freight-in (P260 x P19,500*/P26,000) 1,950 1,950 Others Regular (P15,150 x P19,500/P26,000) 12,120 Consignment (P15,150 x P30,000/P150,000)
_______
3,030
3,030
Total P 12,120 P 4,725 _P16,845_ Net profit P 23,880 P 5,775 P29,655
*P26,000 – P6,500 = P19,500 30. d – P5,775 (refer to No. 29 for computation) 31. a – (P18,000 + P900) = P18,900
Chapter 11 Problem III 1. • Contributions of cash by the operators
Cash 360,000 KK Company 180,000 Cerise Company 180,000 Contribution by joint operators.
• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment 96,000 Cash 60,000 Loans payable – machinery and equipment 36,000 Contribution by joint operators. Materials 78,000 Accounts payable 78,000 Acquisition of materials.
• Labor incurrence
Payroll 86,400 Cash 84,000 Accrued payroll 2,400 Annual labor.
• Loans from the bank
Cash 72,000 Bank loans payable 72,000 Amount borrowed.
• Repayment of loan – machinery and equipment and other factory expenses
Loan payable – machinery and equipment 12,000 Cash 12,000 Partial payment of loan. Accounts payable 50,400 Cash 50,400 Payment of trade creditors. Factory overhead control – heat, light and power 156,000 Cash 156,000 Payment of manufacturing expenses such as heat, light and power.
• Depreciation of machinery and equipment
Factory overhead control – depreciation 9,600 Accumulated depreciation 9,600 Depreciation of equipment.
• Transfer of materials, labor and overhead to Work-in-Process
Work-in-process 309,600 Payroll 86,400 Materials 57,600 Factory overhead control – heat, light and power 156,000 Factory overhead control – depreciation 9,600 Allocation of costs to work-in-process
• Transfer of Work-in-Process to Finished Goods Inventory.
Finished goods 216,000 Work-in-process 216,000 Allocation to finished goods
• Transfer of Finished Goods Inventory to Joint Operators throughout the year
KK Company 96,000 DD Company 96,000 Finished goods 192,000 Delivery of output to joint operators.
2.
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 P 57,600 Finished goods inventory 24,000 Work-in-Process inventory 93,600 Materials inventory 20,400 Total current assets P 195,600 Non-current Assets Equipment P 96,000 Less: Accumulated depreciation 9,600 86,400 Total Assets P282,000
Cash Contribution – Drei 180,000 60,000 Machinery and equipment Contribution – Cerise 180,000 84,000 Labor Bank loan 60,000 12,000 Machinery and equipment 50,400 Accounts payable 156,000 Factory overhead control Balance, 12/31/x4 57,600
Work-in-Process Labor 86,400 216,000 to Finished Goods Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600
Liabilities and Net Assets Current Liabilities Accrued payroll P 2,400 Accounts payable 27,600 P 30,000 Non-current Liabilities Bank loan payable P 60,000 Loan payable – machinery and equipment 24,000 __84,000 Total Liabilities P 114,000 Net Assets 168,000 Total Liabilities and Net Assets P282,000 Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 P 180,000 Cost of inventory distributed ( 96,000) P 84,000 DD Company: Contributions – January 1, 20x4 P 180,000 Cost of inventory distributed ( 96,000) P 84,000 Total Joint Operator’s Equity 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) 2,400,000 Cash 2,400,000 To recognize the purchase of an ownership-interest in a jointly controlled aircraft.
In 20x4
Cash 12,000 Profit or loss (rental income) 12,000 To recognize income earned in renting to others the use of the aircraft in 20x4.
Profit or loss (aircraft operating expenses) 180,000 Cash 180,000 To recognize the costs of running an aircraft in 20x4.
Profit or loss (depreciation expense) 120,000 Accumulated depreciation (interest in an aircraft 120,000 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.
Problem VII 1. The following are the summaries of the above transactions for a joint operation in the form of a partnership:
Event Investment in
Joint Operation AA BB CC Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
a. P 12,000 P12,000 b. 120,000 120,000
6,000 P 6,000 c. 180,000 120,000 P60,000 d. P588,000 P204,000 P312,000 P72,000 e. 3,600 3,600 3,600 10,800
6,000 6,000 f. * ________ ___3,000 ___3,000 ________ ________ ______ _______ _______
P318,000 P597,000 P210,600 P252,000 P315,600 P 60,000 P81,600 P 16,800 NI** _297,000 ________ ________ __112,200 ________ _147,000 _______ 31,800
P597,000 P597,000 P210,600 P364,200 P315,600 P195,000 P81,600 P48,600 Cash***
Settlement _______ ________ _153,600 ________ ________ _120,600 _______ _33,000 Totals P597,000 P597,000 P364,200 P364,200 P315,600 P315,600 P81,600 P81,600
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000. **NI – Net Income Allocation
AA BB CC Total Allowance for cleaning-up operations P 3,000 P 3,000 Commission: Aljon: 40% of P204,000 P81,600 81,600 Elerie: 40% of P312,000 P124,800 124,800 Mac: 40% of P72,000 28,800 28,800 Balance (75%: 25%) 30,600 10,200 _______ 40,800
Total
P112,200 P135,000 P31,800 P279,000 **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 P2,016,000 Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) P 1,080,000 Retained earnings (P1,080,000 x 30%) 324,000 1,404,000 Allocated excess (excess of cost over book value) P 612,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) P 72,000 Increase in land (P960,000 x 30%) 288,000 Increase in building (P600,000 x 30%) 180,000 Decrease in equipment (P840,000 x 30%) ( 252,000) Increase in bonds payable (P120,000 x 30%) ( 360,000) 252,000 Positive excess: Goodwill (excess of cost over fair value) P 360,000
The over/under valuation of assets and liabilities are summarized as follows:
Anton Co. Book value
Anton Co. Fair value
(Over) Under Valuation
Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000 Land 1,080,000 2,040,000 960,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 600,000 Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000) Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) ( 120,000) Net P4,320,000 P5,160,000 P 840,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be amortized Over/ Under
30% thereof Life
Current Year(20x4)
Inventories (sold in 20x4) P 240,000 P 72,000 1 P 72,000 Land 960,000 288,000 - - Buildings – net ( 10 year remaining life) 600,000 180,000 10 18,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) 7 (36,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) 5 ( 7,200) Net P 840,000 P 252,000 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 2,016,000 Cash 2,016,000 Acquired 30% joint control in DD Company. January 1, 20x4 – December 31, 20x4: (2) Cash 216,000 Investment in DD Company (P720,000 x 30%) 216,000 Record dividends from DD Company.
December 31, 20x4: (3) Investment in DD Company 432,000 Investment income (P1,440,000 x 30%) 432,000 Record share in net income of DD Company. December 31, 20x4: (4) Investment income 46,800 Investment in DD Company……………………. 46,800 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.
Thus, the investment balance and investment income in the books of TT Company is as follows:
To check the balance of Investment in Joint Venture (DD Company):
DD Company’s Stockholders’ Equity, 12/31/20x4: Common stock P3,600,000 Retained earnings Retained earnings,1/1/20x4 P 1,080,000 Net income – 20x4 1,440,000 Dividends – 20x4 ( 720,000) 1,800,000 Book value of stockholders’ equity of DD Company,12/31/20x4 P5,400,000 Multiplied by: Interest in Joint Venture 30% Book value of Interest in Joint Venture P1,620,000 Add: Unamortized allocated excess – 30% thereof P252,000 – P46,800, amortization) 205,200 Goodwill 360,000 Investment in Joint Venture (DD Company) – equity method P2,185,200
Multiple Choice Problems 30. a Books of X Inv. in JO X, capital Journal entry for settlement should be: Z, capital……………………….. 6,500 4,000 6,500 2,500 X, capital…………………… 2,500 2,500 Y, capital…………………… 4,000
Investment in Joint Venture (DD Company) Cost, 1/1/x4 2,016,000 216,000 Dividends – Son (720,000x 80%) NI of Anton 46,800 Amortization (1,440,000 x 30%) 432,000 Balance, 12/31/x4 2,185,200
Investment Income Amortization 46,800 NI of Son 432,000 (P1,440,000 x 30%) 385,200 Balance, 12/31/x4
Books of Y Inv. in JO Y. capital 2,500 6,500 4,000 4,000 Books of Z Inv. in JO Z, capital 2,500 6,500 4,000 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
Jose, capital 20,000 shares at P40/share P800,000 P 198,000 (4,500 x P44) – Sales Expenses 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 Joint operation loss P 37,100
*
9/30 Shares issued (6,000 + 10,000 + 4,000) 20,000 10/20 Sold (4,500) 11/ 1 Stock dividend (20,000 – 4,500) x 20% 3,100 11/15 Sold (5,000) Balance of shares outstanding before cash dividend 13,600
Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares)
35. c Investment in Joint Operations
Share in net loss P400,000 Investment (10,000 shares x P40) P37,100 x (10,000/20,000) P18,550 P381,450
36. b
Unrealized loss due to decline in the value of shares at the time of investment (P62 – P40) x 4,000 shares
P68,000
Share in joint operation (P37,100 x 4/20) __7,420 Reduction of loss by cash dividend (P13,600 x 4/20) P98,140
37. a
Investment in Joint Operations before net income or loss 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 Joint Operations Anson, Capital Purchases 20,000 77,000 Sales (?) Unsold merchandise 600 20,000 Contr/Invest 20,000 18,600 Profit(50%) Expenses 800 1,800 600 38,600 42,600 77,000 38,000 to Alas 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
42. a – refer to No. 41 for computation 43. c
Investment in Joint Operations before sale 6,500 3,500 Sales Net loss 3,000
Investment in Joint Operations Santo, capital Purchases 10,000 7,200 sales 10,000 Contribution/Invest Freight-in 240 5,120 unsold 910 Share in NI Freight-out 260 (P10,000 + P240) x 1/2 10,500 12,320 10,910 1,820
N, capital O, capital 1,100 14,500 1,100 6,500 13,400 5,400
Distribution of Loss: 44. a – refer to No. 43 for computation 45. b
Revenues Total cash receipts (P78,920 + P65,245) P144,345 Less: Cash investments (P30,000 + P20,000) 50,000 Cash sales P 94,345 Add: Proceeds from sale of remaining assets 60,000 Total Revenue P154,345 Less: Expenses (P62,275 + P70,695) 132,970 Net income P 21,375
46. c
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%] P 36,000 Amortization of allocated excess ( 16,400) Income from Investment on December 31 P 19,600
M N O Total Salary P 300 P - P - P 300 Balance, equally (1,100) (1,100) (1,100) (3,300) P ( 900) P(1,100) P(1,100) P(3,000)
Benin, capital Sucat, capital Receipts 78,920 30,000 Contribution Receipts 65,425 20,000 Contribution 62,275 Disbursement 70,695 Disbursement 12,825 Share in NI (3/5) 8,550 Share in NI (2/5) 78,920 105,100 65,425 99,245 26,180 33,820
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 P 600,000 Add (deduct): Share in net income [(P140,000 x 3 years) x 40%] 168,000 Share in dividends [(P50,000 x 3 years) x 40%] (60,000) Amortization of allocated excess ( 0) Investment balance on December 31 P 708,000
Cost of investment P 600,000 Less: Book value of interest acquired (40% x P1,200,000) 480,000 Allocated excessP 120,000 Less: Over/undervaluation of assets and liabilities 0 Goodwill 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. The Income from Investment in Gold Co. on December 31, 2015 is as follows:
Share in net income (P140,000 x 40%) P 56,000 Amortization of allocated excess ( 0) Income from Investment on December 31, 2015 P 56,000