Chapter 1
Partnership Formation
PROBLEM 1: TRUE OR FALSE
1. TRUE
6.
2. TRUE
7.
8.
3. TRUE
4. FALSE 700
9.
10.
5. FALSE
TRUE
FALSE 1,000
TRUE (1,000 + 1,000) x 70%
TRUE
FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
A
2.
D
3. Solution:
Requirement (a):
Cash
Accounts receivable
Inventories
Land
Building
Furniture & fixtures
Intangible assets
Total assets
Mr. A
28,000
180,000
114,000
600,000
50,000
500,000
35,000
Totals
90,000
740,000
307,000
600,000
500,000
85,000
972,000
1,350,000
2,322,000
Accounts payable
Other liabilities
Total liabilities
180,000
200,000
380,000
250,000
350,000
600,000
430,000
550,000
980,000
Adjusted capital balances
592,000
750,000
1,342,000
1
Ms. B
62,000
560,000
193,000
Requirement (b):
Cash
90,000
Accounts receivable
740,000
Inventories
307,000
Land
600,000
Building
500,000
Furniture & fixtures
85,000
Accounts payable
Other liabilities
A, Capital
B, Capital
430,000
550,000
592,000
750,000
4. Solution:
Cash
A, Capital (184,000 ÷ 2)
B, Capital (184,000 ÷ 2)
92,000
92,000
5. Solution:
Cash
A, Capital (184,000 ÷ 2)
B, Capital (184,000 ÷ 2)
184,000
184,000
92,000
92,000
The cash settlement among the partners is not recorded in the partnership’s
books because this is not a transaction of the partnership but rather a
transaction among the partners themselves.
6.
Answer: None. The PFRSs permit the recognition of goodwill only when
it arises from a business combination.
2
PROBLEM 3: EXERCISES
1.
Solution:
Mr. A
20,000
Cash
Inventory
Building
Furniture & equipment
Mortgage payable
Adjusted capital balances
Ms. B
30,000
15,000
40,000
15,000
35,000
(10,000)
75,000
2. Solutions:
Requirement (a):
Mr. Ann
50,000
300,000
216,000
1,080,000
Cash
Accounts receivable
Inventories
Land
Building
Equipment
Total assets
90,000
1,736,000
Accounts payable
Mortgage payable
Total liabilities
Adjusted capital balances
Ms. Buoy
120,000
760,000
340,000
900,000
130,000
2,250,000
450,000
436,000
180,000
616,000
450,000
886,000
180,000
1,066,000
1,120,000
1,800,000
2,920,000
Requirement (b):
Cash
170,000
Accounts receivable 1,060,000
Inventories
556,000
Land
1,080,000
Building
900,000
Equipment
220,000
Accounts payable
Mortgage payable
Ann, Capital
Buoy, Capital
886,000
180,000
1,120,000
1,800,000
3
Totals
170,000
1,060,000
556,000
1,080,000
900,000
220,000
3,986,000
3.


Solution:
Mr. Angot, Capital = 18,000, the sale of the land on partnership
agreement date provides information on the land’s fair value on that
date.
M. Banglo, Capital = 40,000 cash contribution.
4.
Solution:
A
500,000
Cash
Land
Equipment
Mortgage payable
Adjusted capital balances
B
C
800,000
550,000
500,000
(350,000)
450,000
550,000
PROBLEM 4: CLASSROOM ACTIVITY
Solutions:
Requirement (a):
Cash
Accounts receivable
Land
Building
Total assets
Partner 1
281,250
430,000
1,500,000
1,400,000
3,611,250
Partner 2
1,800,000
800,000
330,000
400,000
375,657
2,600,000
Totals
2,081,250
1,230,000
1,500,000
1,400,000
6,211,250
Accounts payable
Notes payable
Provision for probable loss
Real property tax payable
Total assets
300,000
40,000
670,000
775,657
730,000
375,657
300,000
40,000
1,445,657
Adjusted capital balances
2,941,250
1,824,343
4,765,593
Requirement (b):
Cash
2,081,250
Accounts receivable
1,230,000
Land
1,500,000
Building
1,400,000
Accounts payable
Notes payable
Provision for probable loss
4
730,000
375,657
300,000
Real property tax payable
Partner 1, Capital
Partner 2, Capital
40,000
2,941,250
1,824,343
Variation #1:
Solutions:
Requirement (a) and (b):
Total net asset contributions
Divide by:
Equal credits to capital accounts
4,765,593
2
2,382,796
Partner 1
2,382,796
2,941,250
(558,454)
Equal credits to capital accounts
Fair value of net asset contribution
Bonus
Partner 2
2,382,796
1,824,343
558,454
Answers: Partner 2 receives a bonus of ₱558,454.
Requirement (c): The bonus is treated as an adjustment to the equity
accounts of the partners. Partner 1’s capital shall be decreased while Partner
2’s capital shall be increased by the ₱558,454 bonus.
Requirement (d):
Cash
2,081,250
Accounts receivable
1,230,000
Land
1,500,000
Building
1,400,000
Accounts payable
Notes payable
Provision for probable loss
Real property tax payable
Partner 1, Capital
Partner 2, Capital
730,000
375,657
300,000
40,000
2,382,796
2,382,796
Variation #2:
Solutions:
Requirement (a):
Total net asset contributions
Divide by:
Equal credits to capital accounts
4,765,593
2
2,382,796
5
Partner 1
2,382,796
2,941,250
(558,454)
Equal credits to capital accounts
Fair value of net asset contribution
(Receipt) Payment
Partner 2
2,382,796
1,824,343
558,454
Answer: Partner 1 shall receive cash of ₱558,454 from Partner 2.
Requirement (b):
The cash receipt and cash payment are not recorded in the partnership
books.
Requirement (c):
Cash
2,081,250
Accounts receivable
1,230,000
Land
1,500,000
Building
1,400,000
Accounts payable
Notes payable
Provision for probable loss
Real property tax payable
Partner 1, Capital
Partner 2, Capital
730,000
375,657
300,000
40,000
2,382,796
2,382,796
Variation #3:
Solutions:
Requirements (a) and (b):
Total net asset contributions
Divide by:
Equal credits to capital accounts
4,765,593
2
2,382,796
Using first Partner 1’s capital, let us determine if Partner 2’s capital
contribution has any deficiency.
Partner 1, Capital
Divide by: Partner 1’s equity interest
Total
Multiply by: Partner 2's interest
Minimum capital required of Partner 2
Partner 2's capital
6
2,941,250
50%
5,882,500
50%
2,941,250
1,824,343
Deficiency on Partner 2's capital contribution
1,116,907
Answer: Partner 2 should provide additional cash contribution of
₱1,116,907 to make his contribution proportionate to his/her interest.
Using Partner 2’s capital, let us determine if Partner 1’s capital
contribution has any deficiency.
Partner 2, Capital
1,824,343
Divide by: Partner 2’s equity interest
50%
Total
3,648,685
Multiply by: Partner 1's interest
50%
Minimum capital required of Partner 1
1,824,343
Partner 1's capital
2,941,250
Deficiency on Partner 1's capital contribution
Conclusion: Partner 1’s contribution is not deficient.
Variation #4:
Solution:
Total net asset contributions
Divide by:
Equal credits to capital accounts
4,765,593
2
2,382,796
Equal credits to capital accounts
Fair value of net asset contribution
(Withdrawal) Additional investment
Partner 1
2,382,796
2,941,250
(558,454)
Partner 2
2,382,796
1,824,343
558,454
Answer:
Partner 1 shall withdraw ₱558,454 while Partner 2 shall make an additional
investment of ₱558,454.
7
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. A
2.
A
3.
A
4.
A
5.
A
6.
C
7.
B
8.
D
9.
C
10.
D
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B (20K + 15K) = 35,000; (30K + 15K + 40K – 10K) = 75,000
2. C Algee = 50K; Beldger 80K – 35K = 45K; Ceda = 55K
3. B AAA 50K; BBB 80K-35= 45K; CCC = 55K
4. C XX 75K; YY 68K; ZZ 82.5K
5. D No goodwill (‘unidentifiable asset’) is recognized under the
bonus approach
6.
7.
8.
A (100,000 + 200,000) = 300,000
C (100,000 + 200,000) x 20% = 60,000
B
Cash
200,000
B, capital (300,000 x 20%)
A, capital (squeeze)
60,000
140,000
9. D
Solution:
Cash
Equipment
Loan payable (40K x ½)
A
50,000
B
40,000
150,000
50,000
Equal interest (210 ÷ 3)
120,000
Cash receipt (payment) (70,000)
190,000
120,000
70,000
10. C
Solution:
Agreed initial capital
C
Partnership
140,000
230,000
150,000
(20,000)
(20,000)
120,000
360,000
120,000
360,000
-
300,000
8
A's required capital balance (300K x 25%)
B's required capital balance (300K x 75%)
Actual contributions
Required capital balance
Additional (Withdrawal)
A
100,000
75,000
(25,000)
9
75,000
225,000
B
200,000
225,000
25,000
Totals
300,000
300,000
-
Chapter 2
Partnership Operations
PROBLEM 1: TRUE OR FALSE
6.
1.
2.
FALSE
TRUE
3.
4.
5.
TRUE
TRUE
FALSE (10 – 2) x 50% = 4
7.
8.
9.
10.
TRUE (20 x 10%) + (20 x
90% x 50%) = 11
FALSE (20 X 50%) = 10
FALSE [50 + (100 – 50 –
30) x 50%]
FALSE
TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
C
2.
C
3.
D
4.
D
5.
D
6.
Solutions:
Case #1:
A
Amount being allocated
Allocation:
1. Salaries
2. Bonus (100K - 20K) x 10%
3. Interest on cap.
B
C
Total
100,000
8,000
20,000
8,000
6,000
12,000
28,000
12,000
8,000
(100K x 10%);(60K x 10%);(120K x 10%) 10,000
4. Allocation of remainder:
(100K - 20K - 8K - 28K) = 44K;
(44K x 40%); (44K x 30%); (44K x 30%)
17,600
13,200
13,200
44,000
As allocated
47,600
19,200
33,200
100,000
1
Case #2:
A
Amount being allocated
Allocation:
1. Salaries
2. Bonus (N/A)
2. Interest on cap.
B
C
Total
10,000
12,000
-
(100K x 10%);(60K x 10%);(120K x 10%)
10,000
6,000
8,000
20,000
-
12,000
28,000
3. Allocation of remainder
(10K - 20K - 28K) = -38K
(-38K x 40%); (-38K x 30%); (-38K x 30%) (15,200) (11,400) (11,400) (38,000)
As allocated
6,800
(5,400)
8,600
10,000
A
B
C
Total
Case #3:
Amount being allocated
Allocation:
1. Salaries
2. Bonus (N/A)
2. Interest on cap.
(20,000)
12,000
-
(100K x 10%);(60K x 10%);(120K x 10%)
10,000
6,000
8,000
20,000
-
12,000
28,000
3. Allocation of remainder
(-20K - 20K - 28K) = -68K
(-68K x 40%); (-68K x 30%); (-68K x 30%) (27,200) (20,400) (20,400) (68,000)
As allocated
7. Solution:
Balance, Jan. 1, 20x1
Additional investment, July 1
Withdrawal, August 1
(5,200)
252,000
72,000
(27,000)
Weighted average capital
(14,400)
12/12
6/12
5/12
(400)
(20,000)
252,000
36,000
(11,250)
276,750
Multiply by:
10%
Interest
27,675
2
PROBLEM 3: EXERCISES
1.
Solutions:
Case #1:
A
Amount being allocated
Allocation:
1. Bonus (10% x 100,000)
2. Interest on cap.
B
C
Total
100,000
10,000
(80K x 6%); (50K x 6%); (30K x 6%)
10,000
4,800
3,000
1,800
9,600
26,800
41,600
26,800
29,800
26,800
28,600
80,400
100,000
A
B
C
Total
3. Allocation of remainder
(100K - 10K - 9.6K) = 80.4K ÷ 3
As allocated
Case #2:
Amount being allocated
Allocation:
1. Bonus (none)
2. Interest on cap.
(20,000)
-
4,800
(80K x 6%); (50K x 6%); (30K x 6%)
3,000
1,800
9,600
3. Allocation of remainder
(-20K - 9.6K) = -29.6K ÷ 3
As allocated
2. Solution:
Balance, Mar. 1, 20x1
Additional investment, June 1
Withdrawal, Sept. 1 (15K - 10K)
Weighted average capital
Multiply by:
Interest on capital
(9,867)
(9,867)
(9,867)
(29,600)
(5,067)
(6,867)
(8,067)
(20,000)
50,000
20,000
(5,000)
10/12
7/12
4/12
41,666.67
11,666.67
(1,666.67)
51,667
12%
6,200
3. Solutions:
Case #1:
Partner A:
Balance, Jan. 1, 20x1
Withdrawal, May 1
Additional investment, Aug. 1
Withdrawal, Oct. 1
120,000
(20,000)
10,000
(10,000)
3
12/12
8/12
5/12
3/12
120,000
(13,333)
4,167
(2,500)
Weighted Ave. Capital
Partner B:
Balance, Jan. 1, 20x1
Withdrawal, May 1
Additional investment, July 1
Withdrawal, Oct. 1
Weighted Ave. Capital
Partners
A
B
Total
108,333
80,000
(10,000)
20,000
(5,000)
12/12
8/12
6/12
3/12
A
B
80,000
(6,667)
10,000
(1,250)
82,083
Wtd. Ave. Cap.
108,333
82,083
190,417
Amount being allocated
Allocation:
(240K x 108,333/190,417);
(240K x 82,083/190,417)
As allocated
Total
240,000
136,543
103,457
240,000
136,543
103,457
240,000
Case #2:
A
Amount being allocated
Allocation:
1. Interest on cap. (see computations below)
2. Allocation of remainder
(240K - 37K) = 203K ÷ 2
As allocated
20,000
17,000
37,000
101,500
101,500
203,000
121,500
118,500
240,000
10,000
(10,000)
100,000
0
20,000
4
Total
240,000
Partner A
120,000
(20,000)
Balance, Jan. 1, 20x1
Withdrawal, May 1
Additional investment, July 1
Additional investment, Aug. 1
Withdrawal, Oct. 1
Ending balances
Multiply by:
Interest on ending balance
B
Partner B
80,000
(10,000)
20,000
(5,000)
85,000
0
17,000
4.
Solutions:
Case #1:
A
Amount being allocated
Allocation:
1. Salary
2. Bonus (see computation below)
3. Allocation of remainder
(480K – 120K - 60K) = 300K ÷ 2
As allocated
B
Total
480,000
60,000
60,000
60,000
120,000
60,000
150,000
150,000
300,000
270,000
210,000
480,000
The bonus is computed as follows:
Profit before salaries and before bonus
Salaries (60K x 2)
Profit after salaries but before bonus
B
=
P
-
480,000
(120,000)
360,000
P
1 + Br
Where: B = bonus
P = profit before bonus and tax but after salaries
Br = bonus rate or bonus percentage
B
=
360,000
-
B
B
=
360,000
= 60,000
-
360,000
1 + 20%
300,000
Case #2:
A
B
Total
480,000(a)
Amount being allocated
Allocation:
1. Salary
2. Bonus
3. Allocation of remainder
(480K – 120K - 60K) = 300K ÷ 2
As allocated
60,000
60,000(b)
(a)
60,000
120,000
60,000
150,000
150,000
300,000
270,000
210,000
360,000
Profit before salaries and bonus is computed as follows:
Profit after salaries but before bonus
360,000
Salaries (60K x 2)
120,000
Profit before salaries and bonus
480,000
5
(b)
The bonus is computed as follows:
B
=
P
-
P
1 + Br
Where: B = bonus
P = profit before bonus and tax but after salaries
Br = bonus rate or bonus percentage
360,000(c)
B
=
B
B
=
360,000
= 60,000
(c)
-
360,000
1 + 20%
300,000
This is amount of profit given in the problem.
Case #3:
A
60,000
60,000(b)
(a)
Profit before salaries and bonus
Salaries (60K x 2)
Bonus (see computation below)
Profit after salaries and bonus

5.
Total
480,000(a)
Amount being allocated
Allocation:
1. Salary
2. Bonus
3. Allocation of remainder
(480K – 120K - 60K) = 300K ÷ 2
As allocated
(b)
B
60,000
120,000
60,000
150,000
150,000
300,000
270,000
210,000
360,000
480,000
(120,000)
(60,000)
300,000
(squeeze)
(start)
The bonus is computed as follows:
The problem states that the bonus is computed based on “Profit after
salaries and after bonus.” The “Profit after salaries and after bonus” is
actually the ₱300,000 amount given in the problem. Thus, to compute for
the bonus, the ₱300,000 amount is simply multiplied by the 20% bonus
percentage, i.e., (300,000 x 20%) = ₱60,000.
Answer: 0
6
PROBLEM 4: CLASSROOM ACTIVITY
The answers vary depending on the assumptions made by the students.
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. A
2.
D
3.
D
4.
A
5.
A
PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Red
White
Amount being allocated
Allocation:
1. Salaries
55,000
45,000
2. Allocation of remaining profit
(80K profit – 100K salaries) = -20K
(-20 x 60%); (-20K x 40%)
(12,000)
43,000
As allocated
(8,000)
37,000
Total
80,000
100,000
(20,000)
80,000
2. A
Solution:
Fox
Amount being allocated
Allocation:
1. Salaries
2. Interest on capital
3. Allocation of balance
(-33K – 50K - 22K) = -105K / 3
As allocated
Greg
Howe
Total
(33,000)
30,000
12,000
6,000
(35,000) (35,000)
7,000
(29,000)
20,000
4,000
50,000
22,000
(35,000)
(11,000)
(105,000)
(33,000)
3. C
Solution:
Axel
Amount being allocated
Berg
Cobb
Total
250,000
Allocation:
7
1. Bonus to A
First 100K (100K x 10%)
Over 100K [(250K - 100K) x 20%]
2. Bonus to Berg and Cobb
(250K - 10K - 30K - 150K) x 5%
3. Allocation of bal. (204K / 3)
As allocated
10,000
30,000
10,000
30,000
68,000
3,000
68,000
108,000
71,000
3,000
68,000
71,000
6,000
204,000
250,000
4. B [140K + (40K x 6/12) – (15K x 5/12) = 153.75K x 10% = 15,375
5.
B
Solution:
Let: X = profit after salaries and bonus
10%X = bonus after bonus
Choice #1
40,000 salary
=
Choice #2
25,000 salary + 10%X
X is computed from the equation above:
40,000 = 25,000 + 10%X
10%X = 40,000 – 25,000
X = 15,000 / 10%
X = 150,000
Profit after salaries and bonus (X)
Multiply by: Bonus rate
Bonus
150,000
10%
15,000
Profit after salaries and bonus
Add back: Salaries (25K to Mr. A + 100K to other partners)
Add back: Bonus
Profit before salaries and bonus
150,000
125,000
15,000
290,000
6. B
7. C
Solution:
Profit (given)
Add back: Annual salary (1,000 x 12 mos.)
Add back: Interest on capital (25K x 5%)
Profit before annual salary and interest but after bonus
8
46,750
12,000
1,250
60,000
Profit before salary and interest but after bonus
Divide by: (100% less 20% bonus rate)
Profit before salary, interest and bonus
Multiply by: Bonus rate
Bonus (bonus before bonus scheme)
9
60,000
80%
75,000
20%
15,000
Chapter 3
Partnership Dissolution
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. TRUE
3. TRUE
4. FALSE
5. FALSE
6. TRUE
7. FALSE (50% x 80%) = 40%
8. TRUE
9. TRUE
10. FALSE (1,000 – 100 payment) = 900
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
Solutions:
Case #1:
Requirement (a):
The capital balances of the existing partners are adjusted as follows:
Cash
Accounts receivable
Inventory
Prepaid asset
Accounts payable
Accrued liabilities
Net assets
A, Capital (60%)
B, Capital (40%)
Carrying
amts.
26,000
120,000
180,000
Fair
values
26,000
116,400
205,000
3,600
(62,000)
(4,000)
285,000
(62,000)
264,000
Unadjusted
170,000
94,000
264,000
Sh. in adjustment
(21K x 60%) = 12,600
(21K x 40%) = 8,400
1
Increase
(Decrease)
(3,600)
25,000
3,600
(4,000)
21,000
Adjusted
182,600
102,400
285,000
Date
B, Capital (182,600 x 1/2)
C, Capital (182,600 x 1/2)
51,200
51,200
to record the admission of C to the partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before admission
182,600
102,400
285,000
Admission of C
(51,200)
51,200
-
Requirement (c):
Partner
Before admission
A
60%
B
40%
C
100%
Admission of C
-20%
20%
After admission
182,600
51,200
51,200
285,000
After admission
60%
20%
20%
100%
Case #2: Scenario A
Requirement (a):
The fair value of the 20% interest acquired by C is computed as follows:
Adjusted net assets before admission of C
285,000
Divide by: Interest of old partners (100% - 20%)
80%
Grossed-up fair value
356,250
Multiply by: Interest of C
20%
Fair value of C's interest
71,250
Date
Cash
C, Capital
71,250
71,250
to record the admission of C to the partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before admission
182,600
102,400
Admission of C
71,250
71,250
285,000
2
After admission
182,600
102,400
71,250
356,250
Requirement (c):
Partner
Before admission
A
60%
B
40%
C
100%
Admission of C
(100% - 20%) x 60%
(100% - 20%) x 40%
20%
After admission
48%
32%
20%
100%
Case #2: Scenario B
Requirement (a):
Date
Cash
A, Capital (100K – 71,250) x 60%
B, Capital (100K – 71,250) x 40%
C, Capital
71,250
17,250
11,500
100,000
to record the admission of C to the partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before admission
182,600
102,400
Admission of C
(17,250)
(11,500)
100,000
71,250
285,000
After admission
165,350
90,900
100,000
356,250
Case #3:
Solution:
Adjusted net assets
Divide by: Existing partners' interest
Total net assets after investment by C
Multiply by: C's interest
Amt. of contribution by C
285,000
3/5
475,000
2/5
190,000
3. Solutions:
Requirement (a):
April
A, Capital
320,000
3
1,
20x1
B, Capital (360K – 320K) x 30%/50%
C, Capital (360K – 320K) x 20%/50%
Cash
24,000
16,000
360,000
to record the retirement of A from the
partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before retirement
320,000
192,000
128,000
640,000
Requirement (c):
Partner
Before retirement
A
50%
B
30%
C
20%
100%
Retirement of A
(320,000)
(24,000)
(16,000)
(360,000)
After retirement
168,000
112,000
280,000
Retirement of A
-50%
30% / (30% + 20%)
20% / (30% + 20%)
After retirement
60%
40%
100%
4
PROBLEM 3: EXERCISES
1.
Solutions:
Case #1:
Requirement (a):
The capital balances of the existing partners are adjusted as follows:
Carrying
Fair
Increase
amts.
values
(Decrease)
Cash
30,000
30,000
Accounts
140,000
receivable
120,000
(20,000)
Inventory
200,000
160,000
(40,000)
Equipment
500,000
450,000
(50,000)
Accounts payable
(80,000)
(80,000)
Accrued liabilities
(20,000)
(20,000)
Net assets
790,000
660,000
(130,000)
Apple, Capital (60%)
Banana, Capital (40%)
Unadjusted
515,000
275,000
Adjustment
-130K x 60% = -78K
-130K x 40% = -52K
Adjusted
437,000
223,000
660,000
790,000
Date
B, Capital (223,00 x 1/2)
C, Capital (223,00 x 1/2)
111,500
111,500
to record the admission of C to the partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before admission
Admission of C
After admission
437,000
223,000
-
(111,500)
111,500
437,000
111,500
111,500
660,000
-
660,000
Admission of C
After admission
60%
20%
20%
100%
Requirement (c):
Partner
Before admission
A
60%
B
40%
C
100%
-20%
20%
5
Case #2:
Requirement (a):
The fair value of the 20% interest acquired by C is computed as follows:
Adjusted net assets before admission of C
660,000
Divide by: Interest of old partners (100% - 20%)
80%
Grossed-up fair value
825,000
Multiply by: Interest of C
20%
Fair value of C's interest
Date
165,000
Cash
C, Capital
165,000
165,000
to record the admission of C to the partnership
Requirement (b):
Before admission
A, Capital
B, Capital
C, Capital
Admission of C
After admission
-
165,000
437,000
223,000
165,000
660,000
165,000
825,000
437,000
223,000
Requirement (c):
Partner
Before admission
A
60%
B
40%
C
100%
Admission of C
(100% - 20%) x 60%
(100% - 20%) x 40%
20%
After admission
48%
32%
20%
100%
Case #3:
Requirement (a):
Date
Cash
A, Capital (165K – 100K) x 60%
B, Capital (165K – 100K) x 40%
C, Capital
to record the admission of C to the partnership
6
100,000
39,000
26,000
165,000
Requirement (b):
A, Capital
B, Capital
C, Capital
Before admission
437,000
223,000
Admission of C
-
(39,000)
(26,000)
165,000
After admission
398,000
197,000
165,000
660,000
100,000
760,000
Case #4:
Requirement (a):
Date
Cash
C, Capital
A, Capital (165K – 125K) x 60%
B, Capital (165K – 125K) x 40%
165,000
125,000
24,000
16,000
to record the admission of C to the partnership
Requirement (b):
Before admission
A, Capital
437,000
B, Capital
223,000
C, Capital
-
Admission of C
660,000
24,000
16,000
125,000
After admission
461,000
239,000
125,000
165,000
825,000
Case #5:
Adjusted net assets
Divide by: Existing partners' interest
Total net assets after investment by Carrots
Multiply by: Carrots’ interest
Amt. of contribution by Carrots
660,000
3/5
1,100,000
2/5
440,000
7
2.
Solutions:
Case #1:
The adjusted capital balances of the partners on the date of A’s retirement
are computed as follows:
Jan. 1
Sh. In profit
Drawings
Sept. 1
A (50%)
320,000
400,000
(40,000)
680,000
B (30%)
192,000
240,000
(60,000)
372,000
C (20%)
128,000
160,000
(30,000)
258,000
Requirement (a):
Sept.
1,
20x1
A, Capital
B, Capital (700K – 680K) x 30%/50%
C, Capital (700K – 680K) x 20%/50%
Cash
680,000
12,000
8,000
700,000
to record the retirement of A from the
partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
Before retirement
680,000
372,000
258,000
Retirement of A
(680,000)
(12,000)
(8,000)
After retirement
360,000
250,000
1,310,000
(700,000)
610,000
Requirement (c):
Partner
Before retirement
A
50%
B
30%
C
20%
100%
Retirement of A
-50%
30% / (30% + 20%)
20% / (30% + 20%)
8
After retirement
60%
40%
100%
Case #2:
Solutions:
Requirement (a):
Sept.
1,
20x1
A, Capital
Cash
B, Capital (680K – 650K) x 30%/50%
C, Capital (680K – 650K) x 20%/50%
680,000
650,000
18,000
12,000
to record the retirement of A from the
partnership
Requirement (b):
A, Capital
B, Capital
C, Capital
3.
Before retirement
680,000
372,000
258,000
Retirement of A
(680,000)
18,000
12,000
After retirement
390,000
270,000
1,310,000
(650,000)
660,000
Solution:
Cash
Equipment
Capital balances - Jan. 1
Sh. In profit
(120K x 150K/480K (a));
(120K x 160K/480K);
(120K x 170K/480K)
Capital balances - Dec. 31
A
100,000
50,000
150,000
B
160,000
160,000
C
50,000
120,000
170,000
Total
310,000
170,000
480,000
37,500
187,500
40,000
200,000
42,500
212,500
120,000
600,000
Since the problem does not state the partnership agreement on the sharing of
profits and losses, it is assumed that the sharing is based on the partners’
respective contributions.
4. Solutions:
Requirement (a):
The adjustments to the capital balances of A and B are computed as follows:
A
B
600K x 20% [187.5K ÷ (187.5K + 200K)]
(58,065)
600K x 20% [200K ÷ (187.5K + 200K)]
(61,935)
9
Jan.
1,
20x2
A, Capital
B, Capital
D, Capital (600,000 x 20%)
58,065
61,935
120,000
to record the admission of D to the partnership
Requirement (b):
Before admission
Admission of D
After admission
5.
A
187,500
(58,065)
129,435
B
200,000
(61,935)
138,065
C
212,500
212,500
D
120,000
120,000
Total
600,000
600,000
Solutions:
Requirement (a):
Dec. 31,
20x1
B, Capital
Cash
A, Capital (200K – 164K) x 40%/60%
C, Capital (200K – 164K) x 20%/60%
200,000
164,000
24,000
12,000
Requirement (b):
Before withdrawal
Withdrawal of B
After withdrawal
A
187,500
24,000
211,500
Requirement (c):
Partner
Before retirement
A
40%
B
40%
C
20%
100%
B
200,000
(200,000)
-
C
212,500
12,000
224,500
Retirement of A
40% / (40% + 20%)
-40%
20% / (40% + 20%)
10
Total
600,000
(164,000)
436,000
After retirement
66.67%
33.33%
100%
6. Solutions:
Requirements (a) and (b):
A
11,000
214,536
114,535
603,000
Cash
Accounts receivable
Inventory
Land
Building
Equipment
Other assets
Total assets
Accounts payable
Notes payable
Net assets
B
22,354
532,890
253,402
50,345
993,416
(178,940)
(200,000)
614,476
Requirement (c):
Adjusted net assets
Divide by: (100% - 20%)
Grossed up fair value
Multiply by: C's interest
Amount of need contribution
428,267
34,789
1,271,702
(243,650)
(345,000)
683,052
Totals
33,354
747,426
367,937
603,000
428,267
85,134
2,265,118
(422,590)
(545,000)
1,297,528
1,297,528
80%
1,621,910
20%
324,382
Requirement (d):
A (40%)
B (40%)
C (20%)
Total
614,476
683,052
324,382
1,621,910
(1,621,910 x 40%);
(1,621,910 x 40%);
(1,621,910 x 20%)
648,764
648,764
324,382
1,621,910
Cash settlement
(payment)/ receipt
(34,288)
34,288
-
Fair value of net asset
contribution
Required capital
balance
Requirement (e):
Adjusted capital balances, Jan. 1
Share in profit (325K x 40%);
(325K x 40%); (325K x 20%)
Drawings
Capital balances, Dec. 31
11
A (40%)
648,764
B (40%)
648,764
C (20%)
324,382
130,000
(50,000)
728,764
130,000
(65,000)
713,764
65,000
(28,000)
361,382
7.
Solution:
Before retirement
Revaluation of equipt.
(24K ÷ 3)
Adjusted
Retirement of C
After retirement
A
600,000
B
600,000
C
400,000
Total
1,600,000
8,000
608,000
8,000
608,000
608,000
608,000
8,000
408,000
(408,000)
-
24,000
1,624,000
(408,000)
1,216,000
PROBLEM 4: CLASSROOM ACTIVITY
Case #1:
Solutions:
Income summary
50,000
A, Capital (50,000 x 40%)
B, Capital (50,000 x 60%)
20,000
30,000
Requirement (a):
B, Capital [(40,000 + 30,000) x ½]
C, Capital
35,000
35,000
Requirement (b):
A, Capital (40%) (160,000 + 20,000)
B, Capital (30%) (40,000 + 30,000 – 35,000)
C, Capital (30%)
180,000
35,000
35,000
Requirement (c):
No. It seems unfavorable because the ₱30,000 payment is lower than the
₱35,000 decrease in B’s capital account.
Case #2:
Solutions:
Income summary
50,000
A, Capital (50,000 x 40%)
B, Capital (50,000 x 60%)
Requirement (a):
A, Capital - Jan. 1
160,000
12
20,000
30,000
B, Capital - Jan. 1
Profit
Total net assets
Divide by: (100% - 20%)
Multiply by:
Investment by C
Cash
40,000
50,000
250,000
80%
312,500
20%
62,500
62,500
C, Capital
62,500
Requirement (b):
A, Capital (40% x 80% = 32%)
B, Capital (60% x 80% = 48%)
C, Capital (
20%)
(160,000 + 20,000)
(40,000 + 30,000)
180,000
70,000
62,500
Case #3:
Solution:
Land
100,000
A, Capital (100,000 x 40%)
B, Capital (100,000 x 60%)
40,000
60,000
Requirement (a):
Cash
60,000
C, Capital
60,000
Requirement (b):
A, Capital (40% x 80% = 32%)
B, Capital (60% x 80% = 48%)
C, Capital (
20%)
(160,000 + 40,000)
(40,000 + 60,000)
Case #4:
Solution:
Cash
50,000
C, Capital
50,000
Income summary
100,000
A, Capital (100,000 x 32%)
32,000
13
200,000
100,000
60,000
B, Capital (100,000 x 48%)
C, Capital (100,000 x 20%)
48,000
20,000
Requirement (a):
B, Capital (40,000 + 48,000)
A, Capital (32,000 x 32/52)
C, Capital (32,000 x 20/52)
Cash
88,000
19,692
12,308
120,000
Requirement (b):
A, Capital (32%/52% = 61.5%) (160,000 + 32,000 – 19,692)
C, Capital (20%/52% = 38.5%) (50,000 + 20,000 – 12,308)
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. C
2. B
3. C
4. A
5. A
6. B
7. D
8. D
9. C
10. D
14
172,308
57,692
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B
Solution:
Total capital after admission
Multiply by: Interest of Lind
Capital credit to Lind
Contribution of Lind
Bonus to Lind
Multiply by: Old P/L ratio of Blau
Deduction to Blau's capital
Interest of Blau before admission of Lind
Deduction to Blau's capital
Adjusted capital of Blau after admission
150,000
1/3
50,000
(40,000)
10,000
60%
6,000
60,000
(6,000)
54,000
2. D (60K + 20K + 15K) = 95K total capital after admission x 20% =
19,000
3. A Recognition of goodwill from non-business combination
transactions is prohibited under PFRSs.
4. A
Solution:
Payment to Eddy
Capital balance of Eddy
Excess payment to Eddy
180,000
160,000
20,000
Capital balances before retirement
Share in excess payment to Eddy
Capital balances after retirement
5. B
Solution:
Eddy, capital
Fox, capital
Grimm, capital
Investment of Hamm
Total partnership capital after admission
Multiply by: Interest of Hamm
Capital credit to Hamm
15
Fox
96,000
(12,000)
84,000
Grimm
64,000
(8,000)
56,000
160,000
96,000
64,000
140,000
460,000
25%
115,000
Investment of Hamm
Bonus to old partners
140,000
(25,000)
Eddy, capital (before admission)
Share in bonus to old partners (25K x 50%)
Eddy, capital (after admission)
160,000
12,500
172,500
6. C
Solution:
Unadjusted capital balance
Share in revaluation gain
[(216K – 180) x
(20%; 20% & 50%)]
Adjusted capital balance
Coll
(20%)
42,000
Maduro
(30%)
39,000
Prieto
(50%)
90,000
Total
171,000
7,200
49,200
7,200
46,200
21,600
111,600
36,000
207,000
The entry to record the settlement of Coll’s interest is as follows:
July
Coll, loan
9,000
1,
Coll, Capital
49,200
20x1
Maduro, Capital (sh. in excess payment) (3K x 2/8)
750
Prieto, Capital (sh. in excess payment) (3K x 6/8)
2,250
Cash
61,200
Adjusted capital of Maduro before retirement
46,200
Share in excess payment to Coll
(750)
Adjusted capital of Maduro after retirement
45,450
7. D (40K + 40K + 12K) = 92K fair value of net assets – [(5,000 x 2)
x 1 = 10,000 aggregate par value of shares issued] = 82,000
credit to share premium
8.
C (1M + 300K profit – 200K payment to Partner A) = 1.1M
9. A
<List A> [(60,000 + 20,000) / 80%] x 20% = 20,000
<List B> 20,000, unaffected
10. A [50,000 + (10,000 x 4/6)] = 56,667
16
Chapter 4
Partnership Liquidation
PROBLEM 1: TRUE OR FALSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
FALSE
FALSE
TRUE
FALSE - ₱3 - ₱1 liabilities = ₱2
TRUE
TRUE
TRUE
TRUE
TRUE
TRUE
FALSE - ₱2 net proceeds (squeeze) - ₱5 carrying amount = (₱3 loss)
TRUE
FALSE - ₱6 - ₱1 liabilities = ₱5 available to partners x 50% = ₱2.5
TRUE
FALSE - ₱3
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
D
3.
Solutions:
Case #1: Lump-sum liquidation
Net cash proceeds
Carrying amount of non-cash assets
50,000
(80,000)
Total loss on sale
(30,000)
Capital balances before liquidation
Loans payable to partners
Total
Allocation of loss
(-30K x 80%); (-30K x 20%)
Amounts received by the partners
1
A (80%)
20,000
10,000
30,000
B (20%)
18,000
17,000
35,000
Totals
38,000
27,000
65,000
(24,000)
(6,000)
(30,000)
6,000
29,000
35,000
Checking:
Available cash (from sale)
Outside creditors
Available cash for distribution to partners
50,000
(15,000)
35,000
Case #2: Installment liquidation
Net cash proceeds - first sale
Carrying amount of all non-cash assets
45,000
(80,000)
Loss
(35,000)
Capital balances before liquidation
Loans payable to partners
Total
Allocation of loss
(-35K x 80%); (-35K x 20%)
Amounts received by the partners - 1st sale
A (80%)
20,000
10,000
30,000
B (20%)
18,000
17,000
35,000
Totals
38,000
27,000
65,000
(28,000)
(7,000)
(35,000)
2,000
28,000
30,000
Checking:
Available cash (from 1st sale)
Outside creditors
Available cash for distribution to partners
45,000
(15,000)
30,000
Case #3: Installment liquidation
Net cash proceeds - first sale
Carrying amount of all non-cash assets
15,000
(80,000)
Loss
(65,000)
Capital balances before liquidation
Loans payable to partners
Total
Allocation of loss
(-65K x 80%); (-65K x 20%)
Amounts received by the partners - 1st sale
2
A (80%)
B (20%)
Totals
30,000
20,000
50,000
(28,000)
10,000
(18,000)
2,000
30,000
32,000
(52,000)
(13,000) (65,000)
(2,000)
(31,000) (33,000)
Answer: The partners receive nothing from the 1st sale.
Checking:
Available cash (from sale)
Outside creditors
Available cash for distribution to partners
4.
15,000
(15,000)
-
Solutions:
Case #1: Lump-sum liquidation
42,000
20,000
310,000
(12,000)
360,000
Collection from accounts receivable (60K x 70%)
Sale of inventory
Sale of equipment
Liquidation costs
Net proceeds
Carrying amt. of all non-cash assets,
except Receivable from A (60K + 120K +290K)
Loss
Capital balances before liquidation
Payable to (Receivable from) partners
Total
Allocation of loss
(-110K x 60%); (-110K x 40%)
Amounts received by the partners
(470,000)
(110,000)
A (60%)
250,000
(10,000)
240,000
B (40%)
200,000
20,000
220,000
Totals
450,000
10,000
460,000
(66,000)
174,000
(44,000)
176,000
(110,000)
350,000
Checking:
Available cash (20K on hand + 360K from sale)
Outside creditors
Available cash for distribution to partners
380,000
(30,000)
350,000
Case #2: Lump-sum liquidation
Collection from accounts receivable (60K x 1/2)
Sale of inventory
Liquidation expenses
Estimated liquidation costs
Net proceeds
Carrying amt. of all non-cash assets, except Receivable from A
Loss
3
30,000
20,000
(12,000)
(5,000)
33,000
(470,000)
(437,000)
Capital balances before liquidation
Payable to (Receivable from) partners
Total
Allocation of loss
(-437K x 60%); (-437K x 40%)
Total
Allocation of deficiency to other partner
Amount received by partners
A (60%)
250,000
(10,000)
240,000
B (40%)
200,000
20,000
220,000
Totals
450,000
10,000
460,000
(262,200)
(174,800)
(437,000)
(22,200)
22,200
-
45,200
(22,200)
23,000
23,000
-
Checking:
Available cash (20K on hand + 33K from sale, net)
Outside creditors
Available cash for distribution to partners
23,000
53,000
(30,000)
23,000
PROBLEM 3: EXERCISES
1. Solution:
Net cash proceeds
Carrying amount of non-cash assets
32,000
(40,000)
Total loss on sale
(8,000)
Capital balances before liquidation
Allocation of loss (-8K x 50%); (-8K x 50%)
A (50%)
20,000
(4,000)
B (50%)
15,000
(4,000)
Totals
35,000
(8,000)
Amounts received by the partners
16,000
11,000
27,000
2.
Solution:
Net cash proceeds
Carrying amount of non-cash assets
32,000
(120,000)
Total loss on sale
(88,000)
Capital balances before liquidation
Allocation of loss
(-88K x 50%); (-88K x 50%)
4
A (50%)
60,000
B (50%)
45,000
Totals
105,000
(44,000)
(44,000)
(88,000)
Amounts received by the partners
16,000
1,000
3. Solution:
Net proceeds
Carrying amt. of other assets
300,000
(450,000)
Loss
(150,000)
A (40%)
Capital balances
before liquidation
Allocation of loss
Amounts received by
the partners
4.
17,000
B (30%)
C (30%)
Totals
60,000
270,000
45,000
375,000
(60,000)
(45,000)
(45,000)
(150,000)
-
225,000
-
225,000
Solutions:
Case #1: Lump-sum liquidation
Net cash proceeds (50,000 – 5,000)
Carrying amount of non-cash assets
45,000
(80,000)
Total loss on sale
(35,000)
Capital balances before liquidation
Loans payable to partners
Total
Allocation of loss
(-35K x 80%); (-35K x 20%)
Amounts received by the partners
A (80%)
36,000
10,000
46,000
B (20%)
22,000
17,000
39,000
Totals
58,000
27,000
85,000
(28,000)
(7,000)
(35,000)
18,000
32,000
50,000
Checking:
Available cash (on hand + from sale, net) 20K + 45K
Outside creditors
Available cash for distribution to partners
65,000
(15,000)
50,000
Case #2: Installment liquidation
Net cash proceeds - first sale (45K – 5K)
Carrying amount of all non-cash assets
40,000
(80,000)
Loss
(40,000)
5
Capital balances before liquidation
Loans payable to partners
Total
Allocation of loss
(-40K x 80%); (-40K x 20%)
Amounts received by the partners - 1st sale
A (80%)
36,000
10,000
46,000
B (20%)
22,000
17,000
39,000
Totals
58,000
27,000
85,000
(32,000)
(8,000)
(40,000)
14,000
31,000
45,000
Checking:
Available cash (on hand + from 1st sale, net) 20K + 40K
Outside creditors
Available cash for distribution to partners
5.
60,000
(15,000)
45,000
Solutions:
Case #1: Lump-sum liquidation
Collection from accounts receivable (60% x 180K)
Sale of inventory
Sale of equipment
Liquidation costs
Net proceeds
Carrying amt. of all non-cash assets,
except Receivable from B (180K + 160K +310K)
Loss
Capital balances before liquidation
Payable to (Receivable from) partners
Total
Allocation of loss
(-192K x 60%); (-192K x 40%)
Amount received by partners
108,000
50,000
310,000
(10,000)
458,000
(650,000)
(192,000)
A (60%)
240,000
20,000
260,000
B (40%)
190,000
(10,000)
180,000
Totals
430,000
10,000
440,000
(115,200)
(76,800)
(192,000)
144,800
103,200
248,000
Case #2: Lump-sum liquidation
Collection from accounts receivable (50% x 180K)
Sale of inventory
Sale of equipment
Liquidation expenses
6
90,000
20,000
120,000
(10,000)
Estimated liquidation costs
Net proceeds
Carrying amt. of all non-cash assets,
except Receivable from B (180K + 160K +310K)
Loss
Capital balances before liquidation
Payable to (Receivable from) partners
Total
Allocation of loss
(-192K x 60%); (-192K x 40%)
Total
Allocation of deficiency to other partner
Amount received by partners
(5,000)
215,000
(650,000)
(435,000)
A (60%)
240,000
20,000
260,000
B (40%)
190,000
(10,000)
180,000
Totals
430,000
10,000
440,000
(261,000)
(174,000)
(435,000)
(1,000)
1,000
-
6,000
(1,000)
5,000
5,000
5,000
PROBLEM 4: CLASSROOM ACTIVITY
Solutions:
Case #1: Lump-sum liquidation
The total loss on the sale is computed as follows:
Collection on accounts receivable
Sale of inventory
Sale of equipment
Liquidation expenses
Net cash proceeds
Carrying amount of non-cash assets
(120K + 60K + 180K +600K)
Total loss on sale
100,000
140,000
500,000
(4,000)
736,000
(960,000)
(224,000)
The final settlement to partners is computed as follows:
Capital balances before
liquidation
Payable to B
Total
Allocation of loss
[224K x (20%; 30% & 50%)]
A
(20%)
B
(30%)
200,000
C (50%)
Totals
400,000
200,000
300,000
40,000
340,000
400,000
900,000
40,000
940,000
(44,800)
(67,200)
(112,000)
(224,000)
7
Amounts received by the
partners
155,200
272,800
288,000
Case #2:
The total loss on the sale is computed as follows:
Collection on account receivable
Sale of inventory
Sale of equipment
Actual liquidation expenses
Estimated liquidation expenses
Cash retained for future expenses
Net cash proceeds – (net of all costs)
Carrying amount of all non-cash assets
(120K + 60K + 180K +600K)
Total loss on sale
716,000
60,000
80,000
240,000
(4,000)
(2,000)
(18,000)
356,000
(960,000)
(604,000)
The partial settlement to partners is computed as follows:
Capital balances before
liquidation
Payable to B
Total
Allocation of loss
[604K x (20%; 30% &
50%)]
Amounts received by the
partners
A
B
C
Totals
200,000
300,000
400,000
900,000
200,000
40,000
340,000
400,000
40,000
940,000
(120,800)
(181,200)
(302,000)
(604,000)
79,200
158,800
98,000
316,000
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B
2.
A
3.
C
4.
A
5.
A
8
PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL
1. D (348K + 232K) = 580K ÷ 80% = 725K capital after admission x
20% = 145,000
2. B
Solution:
The total loss on the sale is computed as follows:
Sale of other assets
Carrying amount of other assets
Total loss on sale
500,000
(625,000)
(125,000)
The partial settlement to partners is computed as follows:
Alpha
348,000
Capital balances before liquidation
Receivable from Beda
Total
Allocation of loss
[125K x (60% & 40%)]
Amounts received by the partners
348,000
Beda
232,000
(20,000)
212,000
Totals
580,000
(20,000)
560,000
(75,000)
273,000
(50,000)
162,000
(125,000)
435,000
3. A
Solution:
The total loss on the sale is computed as follows:
Sale of other assets
Carrying amount of other assets
Total loss on sale
The partial settlement to partners is computed as follows:
Capital balances before liquidation
Receivable from Beda
Total
Allocation of loss
[65K x (60% & 40%)]
Amounts received by the partners
Smith
195,000
(20,000)
175,000
Jones
155,000
155,000
Totals
350,000
(20,000)
330,000
(39,000)
136,000
(26,000)
129,000
(65,000)
265,000
4. A
Solution:
The total loss on the sale is computed as follows:
Sale of other assets
Carrying amount of all other assets
Total loss on sale
9
385,000
(450,000)
(65,000)
120,000
(250,000)
(130,000)
The partial settlement to partners is computed as follows:
Cobb
80,000
Davis
90,000
Eddy
70,000
Totals
240,000
(65,000)
15,000
(39,000)
51,000
(26,000)
44,000
(130,000)
110,000
Capital balances
Allocation of loss
[130K x (50%; 30% & 20%)]
Amounts received
5. B
Solution:
The loss is determined as follows:
Given information
Loss (squeeze)
Adjusted balances
A
=
L
+
E
0
=
30,000
+
0
=
30,000
+
570,000
(600,000)
(30,000)
A (30%)
Cap. bal. - unadjusted
Allocation of loss: -600K
x 30%; x 20%; x 50%
Total
Allocation of deficiency
(-90K x 3/5); (-90K x 2/5)
Total
Additional contributions
Total
B (20%)
C (50%)
Totals
210,000
150,000
210,000
570,000
(180,000)
(120,000)
(300,000)
(600,000)
30,000
30,000
(90,000)
(30,000)
(54,000)
(24,000)
24,000
-
(36,000)
(6,000)
6,000
-
90,000
-
(30,000)
30,000
-
Allocation of loss
Allocation of deficiency
Decrease in A's capital balance
(180,000)
(54,000)
(234,000)
6. A (Refer to solution above)
7. B (equal to carrying amount of partner’s claim)
8. A
Solution:
A
=
L
+
E
Given information
Loss (squeeze)
500,000
not equal to
200,000
+
490,000
(190,000)
Adjusted balances
500,000
=
200,000
+
300,000
10
Capital balances – unadjusted
Allocation of loss
Total
Jack (30%)
Beans (70%)
Totals
300,000
(57,000)
243,000
190,000
(133,000)
57,000
490,000
(190,000)
300,000
9. D
Solution:
A
=
L
+
E
Given information
Loss (squeeze)
120,000
not equal to
-
+
490,000
(370,000)
Adjusted balances
120,000
=
-
+
120,000
Capital balances – unadjusted
Allocation of loss
Total
Jack (30%)
Beans (70%)
Totals
300,000
(111,000)
189,000
190,000
(259,000)
(69,000)
490,000
(370,000)
120,000
10. A
Solution:
Capital balances – unadjusted
Allocation of loss
Total
Beans (70%)
190,000
(91,000)
99,000
(squeeze)
(start)
Total loss = (91,000) ÷ 70% = (130,000)
Capital balances – unadjusted
Allocation of loss (-130K x 30%)
Total
Jack (30%)
300,000
(39,000)
261,000
11. A
Solution:
Capital balances – unadjusted
Allocation of loss
Total
Jack (30%)
300,000
(39,000)
261,000
Total loss = (39,000) ÷ 30% = (130,000)
11
(squeeze)
(start)
Capital balances – unadjusted
Allocation of loss (-130K x 70%)
Total
Beans (70%)
190,000
(91,000)
99,000
Amount received by Jack
Amount received by Beans
Settlement of liabilities
Net proceeds from sale
261,000
99,000
200,000
560,000
12. B
Solution:
Cap. bal. before liquidation
Allocation of loss
Total
Allocation of deficiency
Total
A (50%)
76,000
(78,000)
(2,000)
2,000
-
13. C
Solution:
Net proceeds
Carrying amount of all other assets
Loss
Cap. bal. before liquidation
Payable to partners
Total
Allocation of loss
Total
Additional contribution
Total
B (25%)
64,000
(39,000)
25,000
(1,000)
24,000
C (25%)
56,000
(39,000)
17,000
(1,000)
16,000
Totals
196,000
(156,000)
40,000
-
C (20%)
40,000
20,000
60,000
(80,000)
(20,000)
20,000
-
Totals
376,000
84,000
460,000
(400,000)
520,000
20,000
540,000
320,000
(720,000)
(400,000)
A (50%)
250,000
250,000
(200,000)
50,000
B (30%)
86,000
64,000
150,000
(120,000)
30,000
50,000
30,000
14. C
Solution:
Personal assets
Personal liabilities
Net free assets
A
90,000
(75,000)
15,000
12
B
240,000
(150,000)
90,000
C
180,000
(216,000)
(36,000)
15. A (100,000 x 40%) = 40,000
13
Chapter 5
Corporate Liquidation and Reorganization
PROBLEM 1: THEORY
1. D
6.
D
7.
E
2.
D
3.
A
8.
B
4.
D
9.
A
5.
D
10.
C
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Land
Loan payable
Available for unsecured creditors
Assets pledged to partially secured creditors:
Equipment - net
Notes payable
Available for unsecured creditors
Free assets:
Excess of land over loan payable
Cash
Accounts receivable
Total free assets
Unsecured liabilities with priority:
Administrative expenses
Salaries payable
Net free assets
1,300,000
(750,000)
550,000
150,000
(500,000)
-
550,000
200,000
450,000
1,200,000
(180,000)
(800,000)
220,000
1
Requirement (b):
Unsecured liabilities with priority:
Administrative expenses
Salaries payable
180,000
800,000
980,000
Fully secured creditors:
Loan payable
750,000
Partially secured creditors:
Notes payable
500,000
Unsecured liabilities without priority:
Notes payable - excess
Accounts payable
350,000
700,000
1,050,000
Requirement (c):
2,100,000
Total realizable value of assets
Less: Unsecured liabilities with priority
Salaries
Administrative expenses
(800,000)
(180,000)
(980,000)
Less: Fully secured liabilities
Loan payable
(750,000)
Less: Secured portion of partially secured
Liabilities
Notes payable (fair value of equipment)
(150,000)
Excess available to unsecured liabilities without
priority (Net free assets)
220,000
Less: Unsecured liabilities without priority
Notes payable - excess over fair value of
equipment (500K - 150K)
Accounts payable
(350,000)
(700,000)
Estimated deficiency to unsecured nonpriority creditors
(830,000)
2
Requirement (d):
Estimated recovery percentage
of unsecured creditors without
priority
=
Net free assets
Total unsecured liabilities
without priority
= 220,000 ÷ 1,050,000 (see requirement ‘b’) = 20.95%
Requirement (e):
500,000 x 20.95% = 104,761.90
Requirement (f):
BYE-BYE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book
values
1,000,000
600,000
200,000
500,000
2,300,000
Book
values
ASSETS
Assets pledged to fully
secured creditors:
Land
Loan payable
Assets pledged to partially
secured creditors:
Equipment - net
Notes payable
Free assets:
Cash
Accounts receivable
Total free assets
Less: Unsecured liabilities
with priority (see below)
Net free assets
Estimated
deficiency
(squeeze)
Totals
LIABILITIES
Unsecured liabilities with
priority:
3
Realizable
values
Available for
unsecured
creditors
1,300,000
(750,000)
550,000
150,000
(500,000)
-
200,000
450,000
650,000
1,200,000
(980,000)
220,000
830,000
1,050,000
Realizable
values
Unsecured
non-priority
liabilities
800,000
Administrative expenses
Salaries payable
180,000
800,000
-
750,000
Fully secured creditors:
Loan payable
750,000
-
500,000
(150,000)
350,000
700,000
700,000
-
1,050,000
500,000
Partially
creditors:
Notes payable
Equipment - net
secured
700,000
Unsecured creditors:
Accounts payable
(450,000)
2,300,000
Shareholders' equity
Totals
2.
A
3.
A
4.
D
5.
C - Classes 1 through 6 have higher priority than Class 7.
PROBLEM 3: EXERCISES
EXERCISE 1:
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Building - net
Mortgage payable
Available for unsecured creditors
Assets pledged to partially secured creditors:
Machinery - net
Short-term bank loan
Available for unsecured creditors
4
1,000,000
(700,000)
300,000
300,000
(500,000)
-
Free assets:
Excess of building over mortgage payable
Cash
Accounts receivable
Inventories
Total free assets
Unsecured liabilities with priority:
Legal and other fees
Income tax payable
Net free assets
300,000
100,000
500,000
500,000
1,400,000
(60,000)
(1,000,000)
340,000
Requirement (b):
Unsecured liabilities with priority:
Legal and other fees
Income tax payable
60,000
1,000,000
1,060,000
Fully secured creditors:
Mortgage payable
700,000
Partially secured creditors:
Short-term bank loan
500,000
Unsecured creditors without priority
Short-term bank loan - excess
Accrued payables
Accounts payable
200,000
300,000
700,000
1,200,000
Requirement (c):
Total realizable value of assets
2,400,000
Less: Unsecured liabilities with priority
Income tax payable
Legal and other fees
Less: Fully secured liabilities
Mortgage payable
(1,000,000)
(60,000)
(1,060,000)
(700,000)
Less: Secured portion of partially secured
5
liabilities
Short-term
machinery)
bank
loan
(fair
value
of
(300,000)
Excess available to unsecured liabilities
without priority (Net free assets)
Less: Unsecured liabilities without priority
Accrued payables
Accounts payable
Short-term bank loan - excess (500K - 300K)
Estimated deficiency to unsecured nonpriority creditors
340,000
(300,000)
(700,000)
(200,000)
(1,200,000)
(860,000)
Requirement (d):
Estimated recovery percentage
of unsecured creditors without
priority
=
Net free assets
Total unsecured liabilities
without priority
= 340,000 ÷ 1,200,000 (see requirement ‘b’) = 28.33%
Requirement (e):
100,000 x 28.33% = 28,330
Requirement (f):
None.
Requirement (g):
GONE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book values
800,000
600,000
Realizable
values
ASSETS
Assets pledged to fully secured
creditors:
Building - net
1,000,000
Mortgage payable
(700,000)
Assets pledged to partially secured
creditors:
Machinery - net
300,000
6
Available for
unsecured
creditors
300,000
Short-term bank loan
100,000
600,000
900,000
3,000,000
Book values
1,000,000
700,000
500,000
(500,000)
Free assets:
Cash
100,000
Accounts receivable
500,000
Inventories
500,000
Total free assets
Less: Unsecured liabilities with priority
(see below)
Net free assets
Estimated deficiency (squeeze)
Totals
Realizable
LIABILITIES
values
Unsecured liabilities with priority:
Legal and other fees
Income tax payable
(200,000)
3,000,000
Shareholders' equity
Totals
(1,060,000)
340,000
860,000
1,200,000
Unsecured
non-priority
liabilities
-
700,000
-
Partially secured creditors:
Short-term bank loan
500,000
Machinery - net
(300,000)
Unsecured creditors:
Accrued payables
Accounts payable
1,100,000
1,400,000
60,000
1,000,000
Fully secured creditors:
Mortgage payable
300,000
700,000
-
300,000
700,000
-
200,000
1,000,000
1,200,000
EXERCISE 2:
1. Solution:
Realizable
value
Assets pledged to fully
secured creditors
Fully secured creditors
370,000
(260,000)
7
Available for unsecured
creditors
110,000
Free assets
Total free assets
Liabilities with priority
Net free assets
2.
320,000
430,000
(70,000)
360,000
Solution:
Partially secured creditors
Assets pledged with partially
secured creditors
Secured and
Priority claims
200,000
Unsecured liabilities
without priority
(120,000)
80,000
Unsecured creditors
Total unsecured liabilities
without priority
540,000
Net free assets
Divide by: Total unsecured liabilities without priority
Recovery percentage
360,000
620,000
58.06%
620,000
3. Solution:
Assets pledged with partially secured creditors
Partially secured creditors
Assets pledged with partially secured creditors
Excess to be paid from net free assets
Multiply by: Recovery percentage
Total amount paid to partially secured creditors
4. Solution:
Unsecured creditors
Multiply by: Recovery percentage
Amount paid to unsecured creditors
8
120,000
200,000
(120,000)
80,000
58.06%
46,448
166,448
540,000
58.06%
313,524
PROBLEM 4: CLASSROOM ACTIVITY
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Building - net
Notes payable
Available for unsecured creditors
Assets pledged to partially secured creditors:
Inventories
Short-term bank loan
Available for unsecured creditors
1,300,000
(700,000)
600,000
300,000
(500,000)
-
Free assets:
Excess of building over loan payable
Cash
Total free assets
Unsecured liabilities with priority:
Net defined benefit liability
Legal and other fees
Net free assets
600,000
200,000
800,000
(600,000)
(100,000)
100,000
Requirement (b):
Unsecured liabilities with priority:
Net defined benefit liability
Legal and other fees
600,000
100,000
700,000
Fully secured creditors:
Notes payable
700,000
Partially secured creditors:
Short-term bank loan
500,000
Unsecured creditors without priority:
Short-term bank loan - excess (500K - 300K)
Accounts payable
9
200,000
300,000
500,000
Requirement (c):
Total realizable value of assets
1,800,000
Less: Unsecured liabilities with priority
Net defined benefit liability
(600,000)
Legal and other fees
(100,000)
(700,000)
Less: Fully secured liabilities
Notes payable
(700,000)
Less: Secured portion of partially secured liabilities
Short-term bank loan (fair value of inventories)
(300,000)
Excess available to unsecured liabilities without
priority (Net free assets)
100,000
Less: Unsecured liabilities without priority
Short-term bank loan - excess over fair value of
inventories (500K - 300K)
(200,000)
Accounts payable
(300,000)
Estimated deficiency to unsecured non-priority
creditors
(400,000)
Requirement (d):
Estimated recovery percentage
of unsecured creditors without
priority
=
Net free assets
Total unsecured liabilities
without priority
= 100,000 ÷ 500,000 (see requirement ‘b’) = 20%
Requirement (e):
Amount
of claim
Unsecured liabilities with
priority:
10
Estimated
recovery %
Estimated
recovery
Net defined benefit liability
Legal and other fees
600,000
100,000
100%
100%
600,000
100,000
Fully secured creditors:
Notes payable
700,000
100%
700,000
Partially
secured
creditors:
Short-term bank loan (fair
value of inventories)
Excess - unsecured portion
Total
300,000
200,000
500,000
100%
300,000
20%
40,000
340,000
Unsecured
creditors
without priority:
Accounts payable
300,000
20%
60,000
1,000,000
0%
-
Shareholders' equity
Share capital
Total realizable value of
assets
1,800,000
Requirement (f):
FIREWOOD CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book
values
800,000
450,000
200,000
100,000
ASSETS
Assets pledged to
secured creditors:
Building - net
Notes payable
1,300,000
(700,000)
600,000
300,000
(500,000)
-
fully
Assets pledged to partially
secured creditors:
Inventories
Short-term bank loan
Free assets:
Cash
Prepaid assets
Total free assets
Realizable
values
Available
for
unsecured
creditors
200,000
800,000
11
Less: Unsecured liabilities
with priority (see below)
Net free assets
Estimated
deficiency
(squeeze)
Totals
1,550,000
Book values
600,000
LIABILITIES
Unsecured liabilities with
priority:
Net defined benefit liability
Legal and other fees
700,000
Fully secured creditors:
Notes payable
Partially secured creditors:
Short-term bank loan
Inventories
500,000
300,000
Unsecured creditors:
Accounts payable
(550,000)
1,550,000
Shareholders' equity
Totals
PROBLEM 5: THEORY
1. B
6.
D
2.
C
7.
B
3.
A
8.
D
4.
D
9.
A
5.
C
10.
D
12
(700,000)
100,000
400,000
500,000
Realizable
values
Unsecured
non-priority
liabilities
600,000
100,000
-
700,000
-
500,000
(300,000)
200,000
300,000
300,000
-
500,000
PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL
1. B
Solution:
Assets pledged to fully secured
creditors:
Accounts receivable
Notes payable
Land and building
Bank loan
Realizable
value
320,000
(280,000)
Available for
unsecured creditors
40,000
450,000
(250,000)
200,000
Estimated amount out of assets pledged with
fully secured creditors
240,000
2. C
Solution:
Assets pledged to fully
secured creditors:
Accounts receivable
Notes payable
Land and building
Bank loan
Inventories
Inventories pledged to partially
secured creditors
Realizable
value
320,000
(280,000)
450,000
(250,000)
Available for unsecured
creditors
40,000
200,000
70,000
(40,000)
Net free assets
30,000
270,000
3. B
Solution:
Realizable value
Assets pledged with fully
secured creditors
Fully secured creditors
190,000
(130,000)
Free assets
Total free assets
Liabilities with priority
Net free assets
Available for
unsecured creditors
60,000
140,000
200,000
(20,000)
180,000
Secured and
13
Unsecured liabilities
Partially secured creditors
Assets pledged with partially
secured creditors
Priority claims
100,000
without priority
(60,000)
40,000
Unsecured creditors
Total unsecured liabilities
without priority
260,000
300,000
Net free assets
Divide by: Total unsecured liabilities without
priority
Recovery percentage
Assets pledged with partially secured creditors
Partially secured creditors
Assets pledged with partially secured creditors
Excess to be paid from net free assets
Multiply by: Recovery percentage
Total amount paid to partially secured creditors
180,000
300,000
60.00%
60,000
100,000
(60,000)
40,000
60.00%
24,000
84,000
4. D
Solution:
Unsecured creditors
Multiply by: Recovery percentage
Amount paid to unsecured creditors
14
260,000
60.00%
156,000
Chapter 6
Joint Arrangements
PROBLEM 1: TRUE OR FALSE
6. TRUE
1. FALSE
11.
FALSE
16.
TRUE
2.
TRUE
7.
FALSE
12.
FALSE
17.
TRUE
3.
FALSE
8.
FALSE
13.
FALSE
18.
TRUE
4.
TRUE
9.
TRUE
14.
TRUE
19.
FALSE
5.
TRUE
10.
FALSE
15.
FALSE
20.
FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
C
2.
A
3.
C
4.
B
5.
A
6.
B
7.
C
8.
Solutions:
Case #1: No separate books
Requirement (a):
Books of Cow
a. Joint operation 300
Inventory
300
b. Joint operation
500
Payable to Chicken 500
c. No entry
d.
e.
Receivable from Chicken 800
Joint operation
800
No entry
1
Books of Chicken
Joint operation
300
Payable to Cow
JO - Cash
300
Cash
Joint operation
100
JO – Cash
JO - Cash
800
Joint operation
Joint operation
200
JO - Cash
300
300
100
800
200
Requirement (b):
Merchandise contributions (a)
Purchases (c)
Expenses (e)
Joint operation
300
100
800
200
50
250
Sales (d)
Unsold invty. (g)
Credit balance - Profit
Requirement (c):
Merchandise contribution (a)
Share in profit (250K x 50%)
Joint operation - Cow
300
125
50
Cash receipt (Dr. bal.)
Inventory taken (g)
375
Cash contribution (b)
Share in profit (250K x 50%)
Joint operation - Chicken
300
125
Cash receipt (Dr. bal.)
425
Reconciliation:
Cash contribution (b)
Sales (d)
JO - Cash
300
800
100
200
Cash balance (Dr. bal.)
800
JO - cash balance
Additional purchases (c)
Expenses paid (e)
800
Allocation:
Cash distribution to Cow
Cash distribution to Chicken
Total
375
425
800
As allocated
-
2
Requirement (d):
Books of Cow
g. Inventory
50
Joint operation
50
h. Joint operation
250
Payable to Chicken
125
Sh. in profit
125
i.
Cash (squeeze)
375
Payable to Chicken 425
Receivable from Chicken 800
Books of Chicken
Payable to Cow
50
Joint operation
50
Joint operation
250
Payable to Cow
125
Sh. in profit
125
Cash (squeeze)
425
Payable to Cow
375
JO – cash
800
T-account analyses:
Cow’s books:
Joint operation - Cow's books
(a)
300
(b)
300
800
50
(h)
250
-
(d)
(g)
Payable to Chicken
(i)
300
125
425
(b)
(h)
-
(d)
Receivable from Chicken
800
800
-
(i)
Chicken’s books:
(a)
(c)
(e)
(h)
Joint operation - Chicken's
books
300
100
800
200
50
250
-
3
(d)
(g)
Payable to Cow
(g)
(i)
300
125
50
375
(a)
(h)
JO - Cash
(b)
(d)
300
800
100
200
800
-
(c)
(e)
(i)
Case #2: Separate books
Requirement (a):
Books of Cow
a.
Books of Chicken
b.
Int. in JO
300
Inventory
300
No entry
c.
No entry
Int. in JO 500
Cash
No entry
d.
No entry
No entry
e.
No entry
No entry
COGS
350
Inventory
Expenses 200
Cash
No entry
Requirement (b):
Sales
Cost of sales (300 + 100 -50)
Gross profit
Expenses
800
(350)
450
(200)
Profit
250
4
Joint operation’s
Books
Inventory 300
Cow, capital 300
Cash
500
Chicken, cap. 500
Inventory 100
Cash
100
Cash
800
Sales
800
350
200
Requirement (c):
Merchandise contribution (a)
Share in profit (250K x 50%)
Int. JO - Cow
300
125
50
Cash receipt (Dr. bal.)
375
Inventory taken (g)
Cash contribution (b)
Share in profit (250K x 50%)
Int. in JO - Chicken
300
125
Cash receipt (Dr. bal.)
425
Reconciliation:
Cash
Cash contribution (b)
Sales (d)
300
800
Cash balance (Dr. bal.)
800
100
200
Additional purchases (c)
Expenses paid (e)
Alternative solution:
Inventory taken (g)
Cow, capital
300
50
125
375
Merchandise contribution (a)
Share in profit (250K x 50%)
Cash receipt (Cr. bal.)
Chicken, capital
300
125
425
9.
Cash contribution (b)
Share in profit (250K x 50%)
Cash receipt (Cr. bal.)
Solution:
beg.
Sh. In profit
(1.2M x 30%)
Investment in Joint Venture
800,000
360,000
60,000
1,100,000
Sh. In dividends
(200K x 30%)
end
10. C - Pulham Corp. shall use the equity method to account for its
investment in joint venture. Accordingly, in its financial statements (that
are not ‘separate financial statements’), Pulham shall use the ‘one-line’
5
consolidation concept. Pulham’s share in the net changes in Angels
Corp.’s net assets is accounted for in its “investment” account (balance
sheet) and “share in profit or loss of joint venture” account (statement of
comprehensive income). Therefore, the receivable is not eliminated.
PROBLEM 3: EXERCISES
1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. Solution:
Joint operation - Big
Contributions
Share in profit – (400K x 35%)
Cash settlement – receipt
200K
140K
310K
30K
Inventory
taken
6. Solutions:
Requirement (a):
a.
b.
c.
d.
e.
f.
Books of A
Joint operation 200
Inventory
200
Joint operation 10
Cash
10
Joint operation 400
Payable to C
400
Joint operation 100
Payable to B
100
Receivable
from B
1,600
Joint operation1,600
Joint operation 110
Payable to B
110
Books of B
Joint operation 200
Payable to A 200
Joint operation 10
Payable to A 10
JO – Cash
400
Payable to C 400
Joint operation 500
JO – Cash
400
Accounts
payable
100
JV - Cash 1,600
Joint
operation 1,600
Joint operation 110
Cash in bank 110
6
Books of C
Joint operation 200
Payable to A 200
Joint operation 10
Payable to A
10
Joint operation 400
Cash
400
Joint operation 100
Payable to B 100
Receivable
from B
1,600
Joint operation1,600
Joint operation 110
Payable to B 110
Books of A
h.1
to charge unsold
inventory to C
h.2
h.3
Books of B
Books of C
Payable to C
60
Payable to C 60
Inventory
60
Joint operation 60
Joint operation 60
Joint operation 60
to charge unsold
inventory to C
to record the receipt of
inventory from the joint
operation
Joint operation 840
Joint operation 840
Joint operation 840
Payable to B
280
Payable to A
280
Payable to A
280
Payable to C
280 Payable to C
280
Payable to B
280
Sh. in profit of JO 280 Sh. in profit of
Sh. in profit of JO 280
JO
280
to record share in profits
and to close the JO
account in each joint
operator’s books
to record share in profits
to record share in profits and to close the JO
account in each
and to close the JO
operator’s books
account in each
operator’s books
Payable to B 490
Payable to C 620
Cash*
490
Receivable
from B
1,600
Payable to A 490
Payable to C 620
Cash*
490
JO - Cash 1,600
Payable to A 490
Payable to B 490
Cash*
620
Receivable
from B
1,600
to record cash settlement
to record cash
settlement
to record cash
settlement
Requirement (b):
Books of B
No entry
Books of C
No entry
No entry
No entry
c.
Books of A
Interest in JO 200
Inventory
200
Interest in JO 10
Cash
10
No entry
No entry
d.
No entry
e.
f.
No entry
No entry
Interest in JO 100
Accounts
payable
100
No entry
Interest in JO 110
Cash
110
Interest in JO 400
Cash
400
No entry
a.
b.
7
No entry
No entry
a.
b.
c.
d.
e.
f.
h.1
h.2
h.3
g.
h.1
h.2
Separate books of the
Joint Operation
Inventory
200
A, Capital
200
Freight-in
10
A, Capital
10
Cash
400
C, Capital
400
Purchases
500
Cash
400
B, Capital
100
Cash
1,600
Sales
1,600
Expenses
110
B, Capital
110
Books of A
Books of B
Books of C
Interest in JO 280
Interest in JO 280
Interest in JO 280
Sh. profit of JO 280
Sh. profit of JO 280
Sh. profit of JO 280
No entry
No entry
Inventory
60
Interest in JO 60
Cash
490
Cash
490
Cash
620
Interest in JO 490
Interest in JO 490
Interest in JO 620
Separate books of the
Joint operation
Inventory, end. 60
Sales
1,600
Inventory, beg.
200
Freight-in
10
Purchases
500
Expenses
110
Income summary 840
Income summary 840
A, Capital
280
B, Capital
280
C, Capital
280
C, Capital
60
Inventory, end.
60
8
h.3
A, Capital
B, Capital
C, Capital
Cash
490
490
620
1,540
7. Solutions:
Requirement (a):
Merchandise – A
Purchases - A's cash
Merchandise – B
Freight - in – B
Expenses – C
Salaries expense - C
Bonus expense**
Joint operation
400 1,600 Sales – C
200
800
420 Unsold inventory charged to C*
40
400
Profit before salary and bonus
180
- Credit balance
60
Profit after salary but before
120
bonus - Credit balance
24
96
Profit after salary and bonus
*Unsold inventory: (P800 plus P40 freight-in) multiplied by one-half.
**Bonus is computed as follows:
P
B = P 1 + Br
B = 120 – (120 ÷ 1.25%) = 24
Requirement (b):
Profit is allocated to the joint operators as follows:
Allocation to:
A
B
Profit before salary and bonus
Salary to C
Bonus to C
Profit after salary and bonus
Interest on capital:
A - (600 x 10%)
60
9
C
60
24
Totals
180
(60)
(24)
96
(60)
B - (840 x 10%)
Profit after interests on capital
Allocation (24 ÷ 3)
Net share - as allocated
84
(16)
44
(16)
68
(16)
68
(84)
(48)
48
-
Cash settlement is determined as follows:
Joint operation – A
Inventory contributed by A
200
Cash contribution
400
Net share in profit
44
Cash settlement – receipt
644
Joint operation - B
800
40
68
908
Inventory contributed
Freight paid
Net share in profit
Cash settlement – receipt
Joint operation –
C
Expenses paid
Net share in profit
Cash settlement - receipt
400
68
48
10
420
Cost of
inventory taken
PROBLEM 4: CLASSROOM ACTIVITY
1. Solutions:
Case #1: No separate books
Requirement (a):
Books of Tom
a. Joint operation 400
Payable to Jerry
b. Joint operation
500
Cash
c. No entry
d.
e.
400
500
Receivable from Chicken 900
Joint operation
900
No entry
Books of Jerry
Joint operation
400
Inventory
JO - Cash
500
Payable to Tom
Joint operation
200
JO – Cash
JO - Cash
900
Joint operation
Joint operation
100
JO - Cash
400
500
200
900
100
Requirement (b):
Merchandise contributions (a)
Purchases (c)
Expenses (e)
Joint operation
400
200
900
100
100
300
Sales (d)
Unsold invty. (g)
Credit balance - Profit
Requirement (c):
Cash contribution (b)
Share in profit (300K x 50%)
Cash receipt (Dr. bal.)
Mdse. contribution (a)
Share in profit (300K x 50%)
Cash receipt (Dr. bal.)
Joint operation - Tom
500
150
200
Cash taken (h)
450
Joint operation - Jerry
400
150
100
450
Reconciliation:
JO - Cash
11
Inventory taken (g)
Cash contribution (b)
Sales (d)
500
900
Cash balance (Dr. bal.)
900
200
100
200
Additional purchases (c)
Expenses paid (e)
Cash taken back (h)
JO - cash balance
900
Allocation:
Cash distribution to Tom
Cash distribution to Jerry
Total
450
450
900
As allocated
-
Requirement (d):
g.
h.
i.
j.
Books of Tom
Payable to Jerry
100
Joint operation
Cash
200
Joint operation
Joint operation
300
Payable to Jerry
Sh. in profit
Cash (squeeze)
450
Payable to Jerry
450
Receivable from Jerry
100
200
150
150
900
Books of Jerry
Inventory
100
Joint operation
Payable to Tom
200
JO - Cash
Joint operation
300
Payable to Tom
Sh. in profit
Cash (squeeze)
450
Payable to Tom
450
JO – cash
Requirement (e):
Tom’s books:
Joint operation - Tom's books
(a)
400
(b)
500
900
(i)
300
100
200
-
(d)
Receivable from Jerry
900
12
(d)
(g)
(h)
100
200
150
150
900
900
-
Payable to Jerry
100
400
450
150
(g)
(j)
(j)
(a)
(i)
Jerry’s books:
(a)
(c)
(e)
(i)
(h)
(j)
Joint operation - Jerry's books
400
200
900
100
100
300
-
(d)
(g)
Payable to Tom
500
200
150
450
(b)
(i)
JO - Cash
(b)
(d)
500
900
200
100
200
900
-
13
(c)
(e)
(i)
(j)
Case #2: Separate books
Requirement (a):
Books of Tom
a.
No entry
b.
c.
Int. in JO 500
Cash
500
No entry
d.
No entry
e.
No entry
Books of Jerry
Joint operation’s
Books
Int. in JO
400
Inventory 400
Inventory
400
Jerry, capital 400
No entry
Cash
500
Tom, cap.
500
No entry
Inventory 200
Cash
200
No entry
Cash
900
Sales
900
COGS
500
Inventory
Expenses 100
Cash
No entry
Requirement (b):
Sales
Cost of sales (400 + 200 -100)
Gross profit
Expenses
500
100
900
(500)
400
(100)
Profit
300
Requirement (c):
Cash contribution (b)
Share in profit
(300K x 50%)
Cash receipt (Dr. bal.)
Int. in JO – Tom
500
150
200
Cash taken(h)
450
Merchandise contribution (a)
Share in profit (300K x 50%)
Int. JO - Jerry
400
150
100
Cash receipt (Dr. bal.)
450
14
Inventory taken (g)
Reconciliation:
Cash
Cash contribution (b)
Sales (d)
500
900
Cash balance (Dr. bal.)
900
200
100
200
Additional purchases (c)
Expenses paid (e)
Unused cash (h)
Alternative solution:
Cash withdrawal (h)
Inventory taken (g)
Tom, capital
500
200
150
450
Jerry, capital
400
100
150
450
Cash contribution (b)
Share in profit (300K x 50%)
Cash receipt (Cr. bal.)
Merchandise contribution (a)
Share in profit (300K x 50%)
Cash receipt (Cr. bal.)
2. Solutions:
Requirement (a):
Joint operation
Mdse. contributions
(100K + 20K)
Purchases
Expenses
120,000
150,000
180,000
900,000
30,000
Sales (d)
Unsold invty. [(100K + 20K x 1/4]
480,000
Credit balance - Profit
Requirement (b):
A
Amount being allocated
Allocation:
1. Bonus (480K x 10%)
2. Allocation of remaining profit
[(480K - 48K) ÷ 3]
As allocated
B
C
Total
480,000
48,000
144,000
192,000
15
48,000
144,000
144,000
144,000
144,000
432,000
480,000
Requirement (c):
Mdse. Contribution
Sh. In profit
Cash receipt (Dr. bal.)
Int. in JO - A
120,000
192,000
30,000
282,000
Cash contribution
Sh. In profit
Cash receipt (Dr. bal.)
Int. in JO – B
150,000
144,000
294,000
Cash contribution
Sh. In profit
Cash receipt (Dr. bal.)
Int. in JO – C
180,000
144,000
324,000
3.
Mdse. Taken
Solution:
Requirement (a):
Joint operation
Purchases
Expenses
1,800,000
50,000
2,700,000
850,000
Sales
Credit balance - Profit
OR
Sales
Cost of sales (1M + 800K – 200K unsold)
Gross profit
Expenses
Loss from unsold tickets
Profit
2,700,000
(1,600,000)
1,100,000
(50,000)
(200,000)
850,000
16
Requirement (b):
Ey
Amount being allocated
Allocation:
1. 5% commission on purchases
2. 20% commission on sales
2. Allocation of remaining profit
(850K - 90K - 540K) / 2
As allocated
Bee
Total
850,000
50,000
240,000
40,000
300,000
110,000
400,000
110,000
450,000
90,000
540,000
220,000
850,000
Requirement (c):
Purchases
Expenses
Sh. In profit
Cash receipt (Dr. bal.)
Int. in JO - Ey
1,000,000
20,000
400,000
1,200,000
220,000
Int. in JO – Bee
800,000
30,000
450,000
1,500,000
Purchases
Expenses
Sh. In profit
220,000
Sales
Sales
Cash payment
(Cr. bal.)
 In the final settlement, Bee pays Ey ₱220,00.
4.
Solution:
beg.
Sh. In profit
(500K x 40%)
Investment in Joint Venture
300,000
200,000
160,000
340,000
5.
Sh. In dividends
(400K x 40%)
end
Solutions:
Feb. 6
Mar. 31
Held for Trading Securities
Commission expense
Cash .............................
40,000
225
Investment in Joint Venture
Cash .............................
600,000
17
40,225
600,000
June 20
June 30
Sept. 4
Dec. 31
Cash (1,000 x ₱2.20) ...............
Dividend income .................
Investment in Joint Venture
Share in profit of Joint Venture
(30% x 40,000)
Investment in FVOCI Securities
[(4,000 x 30) + 600] ............
Cash .............................
2,200
2,200
12,000
12,000
120,600
120,600
Held for trading securities
Unrealized gain (P/L)
(₱45 - ₱40) x 1,000
5,000
Unrealized loss (OCI) .........................
Investment in FVOCI securities
(₱28 x 4,000) – 120,600
8,600
5,000
PROBLEM 5: MULTIPLE CHOICE - THEORY
6.
B
1. B
7.
A
2. A
8.
D
3. C
9.
A
4. D
10.
A
5. C
18
8,600
PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Joint operation
Merchandise-A
8,500
20,400 Cash sales-C
Merchandise-B
7,000
4,200 Cash sales-C
Freight-in-C
200
1,210 Merchandise-B
Purchases-C
3,500
540 Unsold mdse. charged to A
Selling expenses-C
550
6,600 Profit - excess credit
2. A
Solution:
Joint operation - A
8,500
1,320
540 Unsold mdse. charged to A
9,280 Receipt - excess debit
Merchandise - A
3. C
Solution:
Merchandise-A
Merchandise-B
Expenses
Joint operation
25,000
25,000
(1,850 + 2,600)
4,450
92,650
38,200
Sales (squeeze)
Credit balances (18K + 20.2K)
4. C
Solution:
Merchandise-A
Merchandise-B
Expenses
5.
Joint operation
25,000
25,000
92,650 Sales
4,450
2,800 Inventory taken
41,000 Profit - excess credit
D
Solution:
The joint operation profit is computed as follows:
Account with LL
Account with MM
Joint operation
16,000
18,000
32,000
42,000
12,000
19
Account with NN
Unused supplies
Profit - excess credit
The joint operation profit is distributed to the joint operators as follows:
Bonus to LL
Allocation of
balance
As allocated
LL
1,200
MM
NN
Total
1,200
3,600
4,800
3,600
3,600
3,600
3,600
10,800
12,000
The net cash settlements are computed as follows:
Balance
Sh. In profit
Joint operation - LL
16,000
4,800 42,000 Inventory taken
21,200 Payment - excess credit
Joint operation – MM
Balance
32,000
Sh. In profit
3,600
Receipt - excess debit
35,600
Sh. In profit
Inventory taken
Joint operation – NN
18,000 Balance
3,600
Inventory taken
14,400 Payment - excess credit
From the above computations:
 LL has a net payment of 21,200.
 MM has a net receipt of 35,600.
 NN has a net payment of 14,400.
Since LL is the designated manager, he holds the joint operation’s
cash. Therefore, LL is the one who will distribute the final cash
settlement. The final settlement is as follows:
LL shall pay MM his net receipt of 35,600. In turn, LL shall
receive NN’s net payment of 14,400.
20
PROBLEM 7: MULTIPLE CHOICE – PFRS FOR SMEs
1.
D
2.
A
3.
B
4.
D
5.
C
6.
B
7. D
Solution:
20x1: Fair value less cost to sell (102K – 4K) = ₱98,000 lower than cost of
₱101K (cost of 100K + transaction cost of 1K).
20x2: Cost of ₱101,000 = previous carrying amount of 98K + 3K reversal of
impairment loss.
20x3: Fair value less cost to sell (90K – 4K) = ₱86,000 lower than previous
carrying amount of ₱101K.
8. E – at the year-end fair values given in the problem. Costs to sell
are ignored.
9.
C
10. D
21
Chapter 7
Construction Contracts
PROBLEM 1: TRUE OR FALSE
6. TRUE
1. FALSE
2.
FALSE
7.
TRUE
3.
FALSE
8.
FALSE
4.
TRUE
9.
FALSE
5.
TRUE
10.
TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
D
3.
A
4.
C
5.
D
6.
C
7.
D
8.
C
9.
D
10. C
11. C
12. Solutions:
Requirement (a):
July 1 to
Dec. 31,
20x1
Construction in progress
Cash (or other appropriate accounts)
120,000
120,000
to record the contract costs
The percentage of completion as of December 31, 20x1 is computed as
follows:
1

(a)
(b)

The gross profit earned in 20x1 is computed as follows:
Total contract price
Costs incurred to date
Estimated costs to complete
Estimated total contract costs (see ‘bill of materials’)
Expected gross profit from contract
Multiply by: Percentage of completion (a) ÷ (b)
Gross profit earned to date
Less: Gross profit earned in previous years
Gross profit for the year
600,000
120,000
240,000
360,000
240,000
33 1/3%
80,000
80,000
The revenue and cost of construction in 20x1 are computed as
follows:
Total contract price
Multiply by: Percentage of completion
Revenue to date
Less: Revenue recognized in previous yrs.
Revenue for the year
Cost of construction (squeezed)
Gross profit for the year (see computation above)
600,000
33 1/3%
200,000
200,000
(120,000)
80,000
The year-end adjusting entry to recognize revenue is as follows:
Dec. 31, Cost of construction
120,000
20x1
Construction in progress (gross profit)
80,000
Revenue
200,000
Dec.
31,
20x1
Receivable (600K x 33 1/3%)
Progress billings (given)
200,000
180,000
20,000
Contract liability
to record the billing to the customer
“Receivable” is debited instead of “Contract asset” because Contractor Co.
has an unconditional right to consideration for progress made on the
contract.
The excess of the receivable (i.e., unconditional right to consideration) over
the amount invoiced to the customer (i.e., progress billing) is recognized as a
contract liability.
Contract liability – is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or the amount is
due) from the customer.
2
Dec.
31,
20x1
Cash
Receivable
60,000
60,000
to record the collection on the billing
Requirement (b):
Contractor Co.
Statement of financial position
As of December 31, 20x1
Current assets
Receivable (200,000 - 60,000)
140,000
20,000
160,000
Contract asset*
Total current assets
Current liabilities
Contract liability (see journal entries above)
20,000
Total current liabilities
20,000
*Construction in progress (120,000 + 80,000)
Progress billing
Contract asset
200,000
(180,000)
20,000
Contractor Co.
Statement of profit or loss
For the year ended December 31, 20x1
Revenue
Cost of construction
200,000
(120,000)
80,000
-
Gross profit
Other operating expenses
Profit for the year
80,000
13. Solutions:
(a)
(b)
Total contract price
Costs incurred to date
Estimated costs to complete (squeeze)
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
3
20x1
9,000,000
3,900,000
3,900,000
7,800,000
1,200,000
50%
600,000
-
20x2
9,000,000
6,300,000
1,800,000
8,100,000
900,000
77.7778%
700,000
(600,000)
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
600,000
100,000
20x1
9,000,000
50%
4,500,000
4,500,000
(3,900,000)
600,000
20x2
9,000,000
77.7778%
7,000,000
(4,500,000)
2,500,000
(2,400,000)
100,000
20x1
3,900,000
3,900,000
(3,900,000)
-
20x2
6,300,000
(3,900,000)
2,400,000
(2,400,000)
-
14. Solutions:
Contract revenue to date (a)
Contract revenue in prior years
Contract revenue for the year
Cost of construction (b)
Profit (loss) for the year
(a)
Equal to the “Cumulative contract costs incurred.”
Equal to the costs incurred during the year. The cost incurred in 20x2 is
computed as follows: (6,300,000 – 3,900,000) = 2,400,000.
(b)
15. Solution:
No revenue shall be recognized during the course of construction. Revenue
(and cost of construction) will be recognized only when the construction is
complete and legal title over the constructed building is transferred to the
customer.
16. Solutions:
 The costs incurred to date include the cost of an uninstalled materials
(i.e., elevators).
 Because all the conditions under PFRS 15 are met, the entity shall adjust
its measure of progress to recognize revenue only to the extent of the
costs of the uninstalled elevators. The cost of goods sold recognized
in 20x1 will also include this cost. Consequently, the entity recognizes
zero profit from the elevators in 20x1.
Total costs incurred to date
Percentage of
=
completion
Estimated total contract costs
= (500,000 costs incurred, excluding cost of elevator) ÷ (2.5M ‘other costs’
only, excluding cost of elevator)
Percentage of completion = 20%
Requirement (a): Revenue in 20X2
4
[(5M transaction price – 1.5M cost of elevator) x 20%] + 1.5M cost of elevator
= ₱2,200,000 revenue in 20X2
Requirement (b): Profit in 20X2
Cost of goods sold in 20X2
[(2.5M ‘other costs’ only, excluding cost of elevator) x 20%] + 1.5M cost of
elevator = ₱2,000,000 cost of goods sold in 20X2
Profit in 20X2 = 2.2M – 2M = ₱200,000
17. Solutions:
Analysis:
Since the additional goods or services to be provided in the modified contract
are not distinct, they are essentially a part of a single performance obligation
that is only partially satisfied. Therefore, the contract modification is
accounted for as if it were a part of the existing contract.
Accordingly, the effect of the contract modification on the transaction price,
and on the entity’s measure of progress towards complete satisfaction of the
performance obligation, is recognized as an increase or decrease in revenue
at the date of the contract modification. The adjustment to revenue is
made on a cumulative catch-up basis.
The percentage of completion is computed as follows:
(a)
(b)
Costs incurred to date
Estimated costs to complete
Estimated total contract costs (given)
Percentage of completion (a) ÷ (b)
20x1
420,000
ignored
700,000
60%
Contract
modification date
in 20x2
420,000
ignored
820,000 (1)
51.2%
(1)
The revised estimated total contract costs as of the date of contract
modification in 20x2 is computed as (700K original estimate of total contract
costs + 120K increase due to the contract modification in 20x2) = 820K.
The revenue in 20x1 and the cumulative catch-up adjustment to
revenue in 20x2 are computed as follows:
Total contract price
Multiply by: % of completion
Revenue to date
Less: Revenue recognized in prior yrs.
5
20x1
1,000,000
60%
600,000
-
Contract
modification
date in 20x2
1,350,000 (2)
51.2%
691,200
(600,000)
Revenue in 20x1 /
Cumulative catch-up adjustment to
revenue in 20x2
Cost of construction
Gross profit for the year /
Cumulative catch-up adjustment to gross
profit in 20x2
600,000
(420,000)
180,000
(
91,200
- )
91,200
(2)
The bonus is included in the transaction price only in 20x2 when it became
highly probable that the entity will receive the bonus. The revised
transaction price on contract modification date in 20x2 is computed as (1M
contract price + 150,000 contract modification + 200,000 bonus =
1,350,000).
PROBLEM 3: EXERCISES
1.
Solutions:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (squeeze)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
20,000,000
2,000,000
14,000,000
16,000,000
4,000,000
12.50%
500,000
500,000
20,000,000
12.50%
2,500,000
2,500,000
(2,000,000)
500,000
2.
Solutions:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (given)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
4,500,000
1,350,000
2,700,000
4,050,000
450,000
33 1/3%
150,000
150,000
4,500,000
33 1/3%
6
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
1,500,000
1,500,000
(1,350,000)
150,000
3. Solutions:
Requirement (a):
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (given)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
1,200,000
590,000
410,000
1,000,000
200,000
59%
118,000
118,000
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
1,200,000
59%
708,000
708,000
(590,000)
118,000
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
590,000
118,000
708,000
4. Solutions:
Requirement (a):
Contract revenue for the year (equal to cost incurred)
Cost of construction (squeeze)
Profit (loss) for the year
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
590,000
590,000
5. Solutions:
Requirement (a):
7
590,000
(590,000)
-
Contract revenue for the year
Cost of construction
Profit (loss) for the year
-
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
6.
590,000
590,000
Solutions:
(a)
(b)
Total contract price
Costs incurred to date
Estimated costs to complete
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
7.
20x1
6,000,000
2,250,000
2,250,000
4,500,000
1,500,000
50%
750,000
750,000
20x2
6,000,000
4,800,000
4,800,000
1,200,000
100%
1,200,000
(750,000)
450,000
20x1
6,000,000
50%
3,000,000
3,000,000
(2,250,000)
750,000
20x2
6,000,000
100%
6,000,000
(3,000,000)
3,000,000
(2,550,000)
450,000
20x1
2,250,000
2,250,000
(2,250,000)
-
20x2
6,000,000
(2,250,000)
3,750,000
(2,550,000)
1,200,000
Solutions:
Contract revenue to date (a)
Contract revenue in prior years
Contract revenue for the year
Cost of construction (b)
Profit (loss) for the year
(a)
The contract revenue to date in 20x1 is equal to the ₱2,250,000 costs
incurred during that year. The contract revenue to date in 20x2 is equal to the
₱6,000,000 contract price because the construction is 100% complete.
(b)
Equal to the costs incurred during the year.
8
8.
Solutions:
20x1
-
Contract revenue to date (a)
Contract revenue in prior years
Contract revenue for the year
Cost of construction (b)
Profit (loss) for the year
20x2
6,000,000
6,000,000
(4,800,000)
1,200,000
(a) No revenue is recognized during the construction period because the
performance obligation is satisfied at a point in time. The whole of the
transaction price is recognized as revenue only in 20x2 when the construction
is completed.
(b) The costs incurred during the construction period are deferred and
recognized in full only in 20x2 when the related revenue is recognized.
9.
Solutions:
Construction in progress, ending balances
Contract costs incurred to date (a)
Profit to date
Profit in previous years
Profit for the year
20x1
122,000
(105,000)
17,000
17,000
20x2
364,000
(297,000)
67,000
(17,000)
50,000
(a)
The contract costs incurred to date in 20x2 is computed as follows: (105,000 +
192,000 = 297,000).
Revenue for the year (squeeze)
Cost of construction (equal to costs incurred each yr.) (b)
Profit for the year
20x1
122,000
(105,000)
17,000
20x2
242,000
(192,000)
50,000
(b)
Under the ‘cost-to-cost’ method of measuring progress, the “cost of
construction” each year is equal to the contract cost incurred during the year.
Requirement (b):
Solution:
Progress billings, 20x2
Receivable, 20x2
Total collections
420,000
(300,000)
120,000
10. Solution:
The costs incurred to date are computed as follows:
(a)
(b)
Costs incurred to date (squeeze)
Estimated costs to complete
Estimated cost at completion (given)
9
20x1
978,750
ignored
6,525,000
20x2
4,524,000
ignored
6,960,000
(a) ÷ (b)
Percentage of completion (given)
15%
The costs of construction are computed as follows:
20x1
Costs incurred to date
978,750
Costs incurred in previous years
Costs incurred during the year
978,750
65%
20x2
4,524,000
(978,750)
3,545,250
The profits are computed as follows:
Total contract price (given)
(a) Costs incurred to date (ignored)
Estimated costs to complete (ignored)
(b) Estimated cost at completion (given)
Expected profit (loss)
Multiply by: % of completion (given)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
20x1
8,700,000
20x2
8,700,000
6,525,000
2,175,000
15%
326,250
326,250
6,960,000
1,740,000
65%
1,131,000
(326,250)
804,750
11. Solution:
Contract 1
420,000
240,000
120,000
360,000
-
Contract price
Costs incurred during the year
Estimated costs to complete
Total expected contract costs
Expected loss
Contract 2
300,000
280,000
40,000
320,000
(20,000)
Answer: Red Hot Co. recognizes a loss of ₱20,000 in 20x1. The loss is
recognized as a provision for onerous contract in accordance with PAS 37.
12. Solution:
(a)
(b)
Total contract price
Costs incurred to date
Estimated costs to complete
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Contract 1
420,000
240,000
120,000
360,000
60,000
66.67%
40,000
40,000
Contract 2
300,000
280,000
40,000
320,000
(20,000)
N/A
(20,000)
(20,000)
Answer: Red Hot Co. recognizes a net profit of ₱20,000 (40,000 profit –
20,000 loss) in 20x1. The loss is recognized as a provision for onerous
contract in accordance with PAS 37.
10
13. Solution:
Contract 1
420,000
240,000
120,000
360,000
-
Contract price
Costs incurred during the year
Estimated costs to complete
Total expected contract costs
Expected loss
Contract 2
300,000
280,000
40,000
320,000
(20,000)
Answer: Red Hot Co. recognizes a loss of ₱20,000 in 20x1. The loss is
recognized as a provision for onerous contract in accordance with PAS 37.
14. Solutions:
Requirement (a):
Contract
1
500,000
Contract
2
700,000
Contract
3
250,000
Costs incurred to date (a)
Estd. costs to complete
Estd. total contract costs
(b)
Expected profit (loss)
% of completion (a) ÷ (b)
375,000
-
100,000
400,000
100,000
100,000
375,000
500,000
200,000
125,000
100%
200,000
20%
50,000
50%
Profit (loss) to date
Profit in prior years
125,000
-
40,000
-
25,000
-
Profit (loss) for the yr.
125,000
40,000
25,000
Total contract price
Total contract price
Multiply by: % of completion
Contract revenue to date
Revenue in prior years
Revenue for the yr.
Costs incurred (squeeze)
Profit (loss) for the year
Contract
1
500,000
100%
500,000
500,000
(375,000)
Contract
2
700,000
20%
140,000
140,000
(100,000)
125,000
(100,000)
125,000
40,000
25,000
11
Contract
3
250,000
50%
125,000
Total
190,000
Totals
765,000
(575,000)
190,000
Requirement (b):
Costs incurred
Profit (loss) for the year
Total
Closing entry (a)
Balance
Contract 1
375,000
125,000
500,000
(500,000)
-
Contract 2
100,000
40,000
140,000
140,000
Contract 3
100,000
25,000
125,000
125,000
Totals
265,000
(a)
The CIP balance of Contract 1 is zeroed out because it is already
complete.
15. Solution:
Revenue for the yr.
Costs incurred (squeeze)
Profit (loss) for the year
Contract
1
500,000
(375,000)
Contract
2
-
Contract
3
-
125,000
-
-
Contract
1
500,000
(375,000)
Contract
2
100,000
(100,000)
Contract
3
100,000
(100,000)
125,000
-
-
Totals
500,000
(375,000)
125,000
16. Solution:
Revenue for the yr.
Costs incurred (squeeze)
Profit (loss) for the year
Totals
700,000
(575,000)
125,000
The revenues recognized in contracts 2 and 3 are equal to the costs incurred
on those contracts during the year.
17. Solutions:
Requirement (a):
Contract revenue for the year (squeeze)
Cost of construction
Profit (loss) for the year
(a)
(b)
20x1
3,000,000
(2,250,000)
750,000
20x2
3,000,000
(2,550,000) (a)
450,000 (b)
(4.8M – 2.250M = 2.550M)
(1.2M – .750M = .450M)
Requirement (b):
Since the contract is 100% complete in 20x2, the transaction price is equal to
the sum of the revenues recognized in 20x1 and 20x2, i.e., 6,000,000 (3M +
3M).
12
18. Solution:
20x1
3,000,000
20%
600,000
600,000
(450,000)
150,000
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
(a)
20x2
3,000,000
60%
1,800,000
(600,000)
1,200,000
(990,000)
210,000(a)
(360,000 -150,000) = 210,000
19. Solutions:
Requirement (a): Profit in 20x2
(a)
(b)
Total contract price
Costs incurred to date
Estimated costs to complete, Dec. 31, 20x2
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years (given)
Profit (loss) for the year
20x1
3,000,000
2,250,000
750,000
40%
300,000
300,000
20x2
3,000,000
1,800,000
600,000
2,400,000
600,000
75%
450,000
(300,000)
150,000
Requirement (b): Estimated costs to complete – Dec. 31, 20x1
(a)
(b)
(a) ÷ (b)
Costs incurred to date (3rd step) – (2.250M x 40%)
Estimated costs to complete (Last step) – (squeeze)
Estimated cost at completion (2nd step) – (given)
Percentage of completion (1st step) – (given)
20x1
900,000
1,350,000
2,250,000
40%
Requirement (c): Contract costs incurred in 20x2
Costs incurred to date, Dec. 31, 20x2 (given)
Costs incurred in 20x1 (see solution in 'b' above)
Costs incurred in 20x2
1,800,000
(900,000)
900,000
Requirement (d): Revenues and Costs of construction – 20x1 & 20x2
20x1
13
20x2
Total contract price
Multiply by: % of completion (see ‘a’ above)
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (see ‘b’ and ‘c’ above)
Profit (loss) for the year
3,000,000
40%
1,200,000
1,200,000
(900,000)
300,000
20. Solutions:
Requirement (a):
Transaction price
Costs incurred to date, Dec. 31, 20x3 (squeeze)
Profit to date, Dec. 31, 20x3 (400K + 1.4M - 200K)
3,000,000
75%
2,250,000
(1,200,000)
1,050,000
(900,000)
150,000
20,000,000
(18,400,000)
1,600,000
Costs incurred to date, Dec. 31, 20x3
Costs incurred in 20x1 & 20x3 (3.6M + 8.2M)
Costs incurred in 20x2
18,400,000
(11,800,000)
6,600,000
Requirement (b):
20x1
Total contract price (given) - Step 6
% of completion - (12M ÷ 20M) - Last step
Contract revenue to date (squeeze) - Step 4
Contract revenue in prior years - Step 5
Contract revenue for the year (squeeze) - Step 3
Costs incurred each year (see 'a' above) - Step 2
Profit for the year (given) - Step 1
4,000,000
4,000,000
(3,600,000)
20x2
20,000,000
60%
12,000,000
(4,000,000)
8,000,000
(6,600,000)
400,000
1,400,000
Requirement (c):
(a)
(b)
(a) ÷ (b)
20x1
Costs incurred to date (3.6M + 6.6M) (2nd step)
10,200,000
Estimated costs to complete (squeeze) - (Last step)
6,800,000
Estimated cost at completion (10.2M ÷ 60%) (3rd step) 17,000,000
Percentage of completion (see ‘b’ above) - (1st step)
60%
21. Solution:
20x1
Total contract price
Costs incurred to date (a)
Estimated costs to complete
Estimated total contract costs (b)
20x2
20x3
10,000,000
3,000,000
5,000,000
9,500,000
6,500,000
1,600,000
9,500,000
8,200,000
-
8,000,000
8,100,000
8,200,000
14
Expected profit (loss)
% of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Costs incurred each year (given)
2,000,000
37.50%
750,000
-
1,400,000
80.25%
1,123,500
(750,000)
1,300,000
100.00%
1,300,000
(1,123,500)
750,000
373,500
176,500
20x1
10,000,000
37.50%
3,750,000
3,750,000
(3,000,000)
20x2
9,500,000
80.25%
7,623,750
(3,750,000)
3,873,750
(3,500,000)
20x3
9,500,000
100%
9,500,000
(7,623,750)
1,876,250
(1,700,000)
750,000
373,750
176,250
Profit (loss) for the year
The differences in the profits (20x2 and 20x3) are due to the
rounding-off of the percentage of completion in 20x2.
22. Solution:
Requirement (a):
20x1
5,000,000
50.00%
2,500,000
2,500,000
Expected gross profit (given)
Multiply by: % of completion (given)
Profit to date
Profit in previous years
Profit for the year
Requirement (b):
Collection from mobilization fee (20M x 5%)
Unadjusted progress billings (20M x 50%)
Billing accepted in the following yr. (20M x 10%)
Billing due in the following year (20M x 8%)
Adjusted progress billings
Multiply by: (100% - 10% retention)
Collections from progress billings
Total collections in 20x1
15
1,000,000
10,000,000
(2,000,000)
(1,600,000)
6,400,000
90%
5,760,000
6,760,000
PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for accounting under PFRS 15
because all of the requirements of “Step 1” are met.
a.
b.
c.
d.
e.
The contract is approved and the parties are committed to perform their
respective obligations;
Each party’s rights regarding the goods or services to be transferred can
be identified from the contract;
The payment terms for the goods or services to be transferred can be
identified from the contract;
The contract has commercial substance; and
The consideration in the contract is probable of collection.
Step 2: Identify the performance obligations in the contract
Analysis: Performance obligations
There are three (3) promises in the contract: the promise to transfer the lot, to
provide the house design, and to construct the house.
However, these promises are not distinct on their own but rather a distinct
bundle of goods and services because of the following reasons:
a. The customer cannot benefit from the lot, the house design, and the
house separately because the contract requires the customer to
purchase those goods and services as a bundle. Moreover, Entity X
does not regularly sell those goods and services separately.
b. Each promise is not separately identifiable from the other promises in
the contract. This is because:
i.
Each good or service is an input to a combined output specified by
the customer.
ii.
Each good or service significantly modifies another good or service
promised in the contract.
iii.
Each good or service is highly interrelated with the other goods or
services promised in the contract. For example, the customer’s
decision of not purchasing the house affects its ability to purchase
the lot.
Conclusion:
Requirement (b):
The promises to transfer the lot, the house design and the house shall be
combined and treated as a single performance obligation.
16
Analysis: Satisfaction of performance obligations
A performance obligation is satisfied over time if one of the following criteria
is met:
a. The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs.
b.
The entity’s performance creates or enhances an asset (e.g., work in
progress) that the customer controls as the asset is created or
enhanced.

c.
Criteria (a) and (b) are not met because the following reasons:
a. Entity X retains control of the lot, the design, and the house
during the construction period. This precludes the customer
from simultaneously receiving and consuming the benefits
provided by the entity’s performance as the entity performs.
b. In case of default, Entity X forfeits the properties in its favor.
The entity’s performance does not create an asset with an alternative
use to the entity and the entity has an enforceable right to payment for
performance completed to date.

Criterion (c) is not met because the following reasons:
a. The entity’s performance creates an asset with an alternative
use. This is evidenced by the fact that Entity X can resell
forfeited properties without much modification because the
design is standard and not unique to the customer.
b. Entity X’s right to payment is not directly correlated with
performance completed to date, i.e., the monthly payments are
due irrespective of the stage of completion of the house.
Conclusion:
Requirement (c):
The performance obligation is satisfied at a point in time.
Step 3: Determine the transaction price
Analysis:
The transaction price includes a variable consideration because of the
stipulated penalty (i.e., a reduction of 2% of contract price for every month of
delay in the completion of the construction). However, since Entity X does not
expect any delays on the construction, Entity X is not required to estimate the
variable consideration. This holds true until there is a subsequent change in
circumstances, in which case Entity X will be required to estimate the variable
consideration.
17
Conclusion:
Requirement (d):
The transaction price is ₱6,000,000. Using the practical expedient allowed
under PFRS 15, Entity X need not discount the installment payments
because they are due within 1 year.
Step 4: Allocate the transaction price to the performance obligations
Requirement (e):
Since the promises are treated as a distinct bundle of goods and services,
there is no need to allocate the transaction price to each of those promises.
Instead, the transaction price is allocated in its entirety to the single
performance obligation of transferring the lot together with the house
design and the house.
Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation
Requirement (d):
Since the performance obligation is satisfied at a point in time, revenue shall
be recognized at the point in time when control over the property (i.e., lot,
house design, and house) is transferred to the customer and the customer
accepts the property (i.e., the constructed house meets the specifications in
the contract).
Requirement (e):
Apr.
1,
20x1
Cash (6M x 20%)
Receivable (6M x 80%)
Contract liability
1,200,000
4,800,000
6,000,000
“Receivable” is debited instead of “Contract asset” because Entity X has an
unconditional right to the consideration. This is because:
a. The contract is non-cancellable and the installment payments are
not dependent on performance completed to date.
b. The installment payments are conditioned only on the passage of
time (i.e., the installment payments are due at each month-end).
PFRS 15 states that, “A right to consideration is unconditional if only
the passage of time is required before payment of that consideration
is due, even if the amount is subject to refund in the future.”
Month-end entries:
Every
end of
the
month
Cash (6M x 80%) ÷ 18 months
Receivable
18
266,666.67
266,666.67
Apr.
1,
20x2
Contract liability
Revenue
6,000,000
6,000,000
ACTIVITY #2:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for accounting under PFRS 15
because all of the requirements of “Step 1” are met.
a.
b.
c.
d.
e.
The contract is approved and the parties are committed to perform their
respective obligations;
Each party’s rights regarding the services to be transferred can be
identified from the contract;
The payment terms for the services to be transferred can be identified
from the contract;
The contract has commercial substance; and
The consideration in the contract is probable of collection.
Step 2: Identify the performance obligations in the contract
Analysis: Performance obligations
The contract includes the promises to provide the construction services and
the designs (architectural, engineering, electrical, plumbing and other
necessary designs).
However, these promises are not distinct on their own but rather a distinct
bundle of services because of the following reasons:
a. Each promise is not separately identifiable from the other promises in
the contract. This is because:
i.
Each service is an input to a combined output specified by the
customer.
Indicators:

The designs constitute an integral part of the contract (see
ARTICLE 6 of the contract).

The customer is precluded from subcontracting any of the
specific works that constitute the contract (see ARTICLE 9 of
the contract).

The contract does not indicate separate billings for each of the
design works stated in the contract (see ‘bill of materials’).
19
ii.
Each good or service significantly modifies another good or service
promised in the contract.
Indicator:

A change in any of the design works would affect the
construction work.
iii.
Each good or service is highly interrelated with the other goods or
services promised in the contract.
Indicators:

See indicators in (a.i) above.

Since the customer is precluded from subcontracting any of the
works specified in the contract, the customer’s decision of not
acquiring a specific work from the contractor affects the other
services covered in the contract. For example, if the customer
does not acquire the designs from Entity Y, Entity Y will not
perform the construction services, and vice-versa.
b.
Although the customer can benefit from each of the promised services
(Entity Y regularly sells those services separately), the customer’s ability
to benefit from those services individually is limited because of the
reasons stated in (a) above.
Conclusion:
Requirement (b):
The promises to provide the designs and construction service shall be
combined and treated as a single performance obligation.
Analysis: Satisfaction of performance obligations
A performance obligation is satisfied over time if one of the following criteria
is met:
a. The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs.
b.
The entity’s performance creates or enhances an asset (e.g., work in
progress) that the customer controls as the asset is created or
enhanced.

Criteria (a) and (b) are met because, although Entity Y has the right
to supervise the construction activity, the customer retains
ownership over any structure built on the lot. This is evidenced by
the fact that, in case the contract is cancelled, any progress on the
contract inures to the benefit of the customer.
20
c.
The entity’s performance does not create an asset with an alternative
use to the entity and the entity has an enforceable right to payment for
performance completed to date.

Criterion (c) is met because of the following reasons:
a. In case the contract is cancelled, any structure built inures to
the benefit of the customer. Therefore, any asset created has
no alternative use to Entity Y.
Moreover, the lot belongs to the customer. Even if Entity Y
retains ownership over any structure built on the lot, Entity Y
would incur significant losses to direct the asset for another use
in case the contract is cancelled.
b.
Entity Y has an enforceable right to payment for performance
completed to date. This is evidenced by the following:
i.
Subsequent billings are based on Entity Y’s progress on
the contract.
ii.
If the contract is cancelled, Entity Y has the right to
payment for any progress on the contract.
Conclusion:
Requirement (c):
The performance obligation is satisfied over time because the criteria above
are met.
Step 3: Determine the transaction price
Requirement (d):
The transaction price is equal to the fixed fee of ₱8,000,000.
Entity Y does not need to discount the transaction price because the timing of
agreed payments do not provide either the customer or Entity Y with a
significant benefit of financing, i.e., the payments on quarterly billings are due
within a short period of time.
Step 4: Allocate the transaction price to the performance obligations
Requirement (e):
Since the promises are treated as a distinct bundle of goods and services,
there is no need to allocate the transaction price to each of those promises.
Instead, the transaction price is allocated in its entirety to the single
performance obligation of completing the construction of the house in
accordance with the agreed specifications.
21
Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation
Requirement (f):
Since the performance obligation is satisfied over time, revenue shall be
recognized over the construction period based on Entity Y’s measure of its
progress towards the complete satisfaction of the performance obligation.
Entity Y shall determine an appropriate method for measuring its progress on
the contract. Because of insufficient information given in the problem, the
appropriate measure of progress is presumed to be the “cost-to-cost”
method, an application of the inputs method.
Requirement (g):
Sept.
1,
20x1
Cash (8M x 15%)
Contract liability
1,200,000
1,200,000
to record the mobilization fee
Oct. 1 to
Dec. 31,
20x1
Construction in progress
2,422,000
2,422,000
Cash (or other appropriate accounts)
to record the contract costs
The percentage of completion as of December 31, 20x1 is computed as
follows:

(a)
(b)

The gross profit earned in 20x1 is computed as follows:
Total contract price
Costs incurred to date
Estimated costs to complete (squeeze)
Estimated total contract costs (see ‘bill of materials’)
Expected gross profit from contract
Multiply by: Percentage of completion (a) ÷ (b)
Gross profit earned to date
Less: Gross profit earned in previous years
Gross profit for the year
8,000,000
2,422,000
4,498,000
6,920,000
1,080,000
35%
378,000
378,000
The revenue and cost of construction in 20x1 are computed as
follows:
Total contract price
Multiply by: Percentage of completion
Revenue to date
Less: Revenue recognized in previous yrs.
Revenue for the year
22
8,000,000
35%
2,800,000
2,800,000
Cost of construction (squeezed)
Gross profit for the year (see computation above)
(2,422,000)
378,000
The year-end adjusting entry to recognize revenue is as follows:
Dec.
Cost of construction
2,422,000
31,
Construction in progress (gross profit)
378,000
20x1
Revenue
2,800,000
Dec.
31,
20x1
Contract liability (the mobilization fee)
Receivable (squeeze)
Progress billings (8M x 35%)
1,200,000
1,600,000
2,800,000
to record the first quarterly progress billing
“Receivable” is debited instead of “Contract asset” because Entity Y has an
unconditional right to consideration for progress made on the contract (see
discussion in ‘Step 2’ above).
Dec.
31,
20x1
Cash [(2.8M – 1.2M) x 90%]*
Receivable
1,440,000
1,440,000
to record the collection on the first quarterly
progress billing
* Total progress billing
Less: Mobilization fee
Progress billing, net of mobilization fee
Less: 10% retention on subsequent billings (1.6M x 10%)
Collection
2,800,000
(1,200,000)
1,600,000
(160,000)
1,440,000
Requirement (h):
Entity Y
Statement of financial position
As of December 31, 20x1
Current assets
Receivable (1,600,000 - 1,440,000)
160,000
160,000
Contract asset*
Total current assets
Current liabilities
Contract liability*
-
Total current liabilities
-
23
*Construction in progress
Progress billing
Contract asset/ Contract liability
2,800,000
(2,800,000)
-
Entity Y
Statement of profit or loss
For the year ended December 31, 20x1
Revenue
Cost of construction
2,800,000
(2,422,000)
378,000
-
Gross profit
Other operating expenses
Profit for the year
378,000
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B
6. C
11.
D
2.
A
7.
A
12.
C
3.
B
8.
D
13.
D
4.
D
9.
A
14.
D
5.
A
10.
B
15.
D
24
Chapter 8
Accounting for Franchise Operations –
Franchisor
PROBLEM 1: TRUE OR FALSE
1.
FALSE
6.
FALSE
2.
FALSE
7.
FALSE
3.
FALSE
8.
FALSE
4.
FALSE
9.
TRUE
5.
FALSE
10.
TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
6 A
1 C
2
C
7
C
3
B
8
B
4
A
9
B
5
B
10
D
11.
B
12.
D
13. Solutions:
Step 2: Identify the performance obligations in the contract
There is only one performance obligation in the contract, i.e., the promise to
grant the license.
Since the promise to grant the license is distinct, the entity shall apply the
specific principles to determine whether the license provides the customer a
right to access or a right to use the entity’s intellectual property.
Analysis:
a. The contract requires ABC Co. to undertake activities that significantly
affect the intellectual property to which the customer has rights (i.e., ABC
Co. is continually involved in developing further the brand).
b. The customer is exposed to any positive or negative effects of those
activities.
c. Those activities do not result in the transfer of a good or a service to the
customer as those activities occur.
1
Conclusion:
The license provides the customer the right to access the entity’s intellectual
property as it exists throughout the license period. Therefore, the
performance obligation is satisfied over time.
Step 3: Determine the transaction price
The transaction price is the fixed payment of ₱1,400,000.
Step 4: Allocate the transaction price to the performance obligations
The ₱1,400,000 transaction price is allocated to the single performance
obligation of granting the license.
Step 5: Recognize revenue when (or as) a performance obligation is
satisfied
Since the performance obligation is satisfied over time, the entity recognizes
revenue over the license period by measuring its progress towards the
complete satisfaction of the performance obligation. The entity shall apply the
general principles of PFRS 15 to identify the method that best depicts its
performance in the license.
Because the contract provides the customer with unlimited use of the
licensed characters for a fixed term (i.e., 7 years), the most appropriate
measure of progress may be a time-based method (i.e., straight-line
method).
Journal entries:
Jan. 1,
Cash on hand
20x1
Contract liability
1,400,000
1,400,000
to record the non-refundable initial
franchise fee
July 1,
20x1
Dec. 31,
20x1
No entry
Contract liability (1.4M ÷ 7) x 6/12
Revenue
100,000
100,000
to recognize revenue from the franchise
PROBLEM 3: EXERCISES
1.
Solutions:
Requirement (a):
Step 2: Identify the performance obligations in the contract
There is only one performance obligation in the contract, i.e., the promise to
grant the license.
The additional activities associated with the license (i.e., the creation of new
characters and the changes to the images of the characters) do not directly
2
transfer a good or service to the customer because they are part of the
entity’s promise to grant a license and, in effect, change the intellectual
property to which the customer has rights.
Since the promise to grant the license is distinct, the entity shall apply the
specific principles to determine whether the license provides the customer a
right to access or a right to use the entity’s intellectual property.
Analyses:
The problem states the following:
a. “However, newly created characters appear regularly and the images of
the characters evolve over time.”
b. “The contract requires the customer to use the latest images of the
characters.”
From the above statements, we can infer that the intellectual property to
which the customer has rights changes throughout the license period. This is
because new characters are continually created and that the images of the
characters are continually changed. Also, the contract requires the customer
to use the latest images of the characters.
Requirements (b) and (c):
Accordingly, the license provides the customer the right to access the
entity’s intellectual property as it exists throughout the license period.
Therefore, the performance obligation is satisfied over time.
Moreover, the following criteria under PFRS 15 are met:
a. The customer reasonably expects (arising from the entity’s customary
business practices) that the entity will undertake activities that will affect
the intellectual property to which the customer has rights (i.e., the
characters). Those activities include development of the characters and
the publishing of a weekly comic strip that includes the characters.
b. The rights granted by the license directly expose the customer to any
positive or negative effects of the entity’s activities because the contract
requires the customer to use the latest characters.
c. Even though the customer may benefit from those activities through the
rights granted by the license, they do not transfer a good or service to
the customer as those activities occur.
Requirement (d):
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
Since the performance obligation is satisfied over time, the entity recognizes
revenue over the license period by measuring its progress towards the
complete satisfaction of the performance obligation. The entity shall apply the
general principles of PFRS 15 to identify the method that best depicts its
performance in the license.
Because the contract provides the customer with unlimited use of the
licensed characters for a fixed term (i.e., 4 years), the most appropriate
measure of progress may be a time-based method.
3
2. Solutions:
Requirement (a):
The only performance obligation in the contract is the promise to grant the
license.
Requirement (b):
The transaction price includes a variable consideration (i.e., sales-based
royalty).
Requirement (c):
The transaction price allocated to the single performance obligation of
granting the license.
Requirement (d):
Regardless of whether the license provides the customer the right to access
or the right to use the entity’s intellectual property, the entity recognizes
revenue as and when the ticket sales occur.
This is because the consideration for the license is a sales-based royalty and
the entity has already transferred the license to the movie to which the salesbased royalty relates.
3. Solutions:
Requirement (a):
Step 2: Identify the performance obligations in the contract
There is only one performance obligation in the contract, i.e., the promise to
grant the license.
Since the promise to grant the license is distinct, the entity shall apply the
specific principles to determine whether the license provides the customer a
right to access or a right to use the entity’s intellectual property.
Analyses:
The problem states that “The customer can determine how and when to use
the right without further performance by Pongcuter Co. and does not expect
that Pongcuter Co. will undertake any activities that significantly affect the
intellectual property to which the customer has rights.”
From the statement above, it can be inferred that the intellectual property to
which the customer has rights will not change because the entity does not
undertake activities that significantly affect the intellectual property to which
the customer has rights.
Requirement (a.i):
Therefore, the nature of the entity’s promise in transferring the license is to
provide a right to use the entity’s intellectual property in the form and the
4
functionality with which it exists at the point in time that it is granted to the
customer.
Requirement (a.ii):
Consequently, the license is a performance obligation satisfied at a point in
time.
Requirement (b):
Step 3: Determine the transaction price
The transaction price is the fixed fee of ₱1,000,000.
Requirement (c):
Step 4: Allocate the transaction price to the performance obligations
The ₱1,000,000 transaction price is allocated to the single performance
obligation of granting the license.
Requirement (d):
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
Pongcuter Co. recognizes the ₱1,000,000 fee as revenue on April 1, 20x1
when the customer has the ability to use the software.
Requirement (e):
Jan. 1,
20x1
Feb. 1,
20x1
Apr. 1,
20x1
4.
Cash on hand
Contract liability
1,000,000
1,000,000
No entry
Contract liability
Revenue
1,000,000
1,000,000
Solutions:
Step 2: Identify the performance obligations in the contract
The promise to grant the license and the promise to transfer the equipment
are distinct because:
a. The customer can benefit from each promise on their own or together
with other resources that are readily available. (That is, the customer can
benefit from the license together with the equipment that is delivered
before the opening of the franchise and the equipment can be used in
the franchise or sold for an amount other than scrap value.)
b. The license and equipment are separately identifiable.
Moreover, the fact that ABC Co. regularly sells the license and the equipment
separately indicates that a customer can benefit from each of the license and
the equipment on its own or with other readily available resources.
Conclusion:
There are two separate performance obligations in the contract:
5
1.
2.

License; and
Equipment.
Since the license is distinct, the entity applies the specific principles to
determine whether the license provides the customer the right to access
or the right to use the entity’s intellectual property.
The problems states that the license provides the customer the right to use
the entity’s intellectual property as it exists at the point in time at which the
license is granted. Therefore, the performance obligation of transferring the
license is satisfied at a point in time.

ABC Co. uses the general principles to identify whether the performance
obligation of transferring the equipment is satisfied over time or at a point
in time.
Since control over the equipment transfers to the customer upon delivery, the
performance obligation is also satisfied at a point in time.
Summary of answers to Requirement (a):
The two separate performance obligations in the contract are as follows:
1. License (satisfied at a point in time)
2. Equipment (satisfied at a point in time)
Requirement (b):
Step 3: Determine the transaction price
The transaction price is sum of the 20% cash down payment and the present
value of the future cash flows from the note receivable. This is computed as
follows:
Cash down payment (100,000 x 20%)
PV of note receivable:
[(100K x 80%) ÷ 4] x PV of ordinary annuity @12%, n=4
Transaction price
20,000
60,747
80,747
Requirement (c):
Step 4: Allocate the transaction price to the performance obligations
The transaction price is allocated to the performance obligations in the
contract on the basis of their stand-alone selling prices. The allocation is
done as follows:
Performance
obligations
Stand-alone
selling prices
License
38,000
Equipment
Totals
40,000
78,000
6
Allocation
(80,747 x
38K/78K)
(80,747 x
40K/78K)
Transaction
price
39,338
41,409
80,747
Requirement (d):
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
The ₱41,409 allocated to the equipment will be recognized as revenue on
January 15, 20x1 while the ₱39,338 allocated to the license will be
recognized as revenue on February 1, 20x1.
Requirement (e):
The entry on January 1, 20x1 is as follows:
Jan. 1,
Cash on hand
20x1
Note receivable
Contract liability
Unearned interest income
20,000
80,000
80,747
19,253
Jan. 15,
20x1
Contract liability
Revenue
41,409
Jan. 15,
20x1
Cost of sales
Inventory
30,000
41,409
30,000
The entry on March 1, 20x1 is as follows:
Feb. 1,
Contract liability
20x1
Revenue
PROBLEM 4: CLASSROOM ACTIVITY
1. A
2. A
3. B
4. A
5. D (400,000 ÷ 5) = 80,000 x 1/12 = 6,666.67
PROBLEM 5: THEORY
1. D
6.
B
2.
C
7.
A
3.
D
8.
B
4.
B
9.
B
5.
D
10.
D
7
39,338
39,338
Chapter 9
Consignment Sales
PROBLEM 1: TRUE OR FALSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
TRUE
TRUE
FALSE
FALSE
FALSE
TRUE
FALSE
FALSE
TRUE
FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. A
2.
3.
4.
5.
D
B
A
Solutions:
Requirement (a):
The commission expense is computed as follows:
Net remittance
Freight out
Installation costs
Total
Divide by:
Gross selling price of goods sold
Multiply by:
Commission expense
232,000
16,000
8,000
256,000
80%
320,000
20%
64,000
Cost of goods sold is computed as follows:
Unit cost
Freight cost per unit (3,000 ÷ 20)
Total unit cost
Multiply by: Number of water heaters sold
Cost of goods sold
1
10,000
150
10,150
16
162,400
Profit is computed as follows:
Gross selling price of goods sold
Cost of goods sold
Gross profit
Freight out
Installation costs
Commission expense
Profit
320,000
(162,400)
157,600
(16,000)
(8,000)
(64,000)
69,600
Requirement (b):
10,000
150
10,150
4
40,600
Unit cost
Freight cost per unit (3,000 ÷ 20)
Total unit cost
Multiply by: Unsold units (20 - 16)
Ending inventory
PROBLEM 3: EXERCISE
Solutions:
Requirement (a):
The publisher’s suggested retail price is computed as follows:
Let X = Book sales at the publisher’s suggested retail price
2%X + 20%X = 69,300
20%X = 69,300
X = 69,300 / 22%
X = 315,000
315,000 ÷ 700 books sold = 450 publisher’s suggested retail price per book
The publisher’s profit is computed as follows:
Revenue (450 x 700)
Cost of goods sold (a)
Gross profit
Tax expense (2% x 315,000)
Commission expense (20% x 315,000)
Profit
2
315,000
(225,400)
89,600
(6,300)
(63,000)
20,300
(a)
The cost of goods sold is computed as follows:
No. of books sold
700
Unit cost
300
210,000
Total
Freight (22 x 700)
15,400
Cost of goods sold
225,400
Requirement (b):
Commission based on publisher's suggested retail price
(315,000 x 20%)
Mark up on publisher's suggested retail price
(315,000 x 15%)
Commission income
63,000
47,250
110,250
Requirement (c):
No. of unsold books
Unit cost before freight
Total
Freight (22 x 300)
Ending inventory
300
300
90,000
6,600
96,600
PROBLEM 4: CLASSROOM ACTIVITY
Solution:
Requirement (a):
Total sales [2,100,000 x (8-3)]
Cost of goods sold (a)
Gross profit
Commission (b)
Finder's fee (5% x 1,750,000)
Delivery, installation and testing (50,000 x 5) - 5,000 scrap
Profit
(a) Cost of goods sold is computed as follows:
Unit cost
Freight per machine (200,000 ÷ 8)
Total unit cost
Multiply by: No. of machines sold
Cost of goods sold
3
10,500,000
(5,125,000)
5,375,000
(1,750,000)
(87,500)
(245,000)
3,292,500
1,000,000
25,000
1,025,000
5
5,125,000
(b)
The commission is computed as follows:
We will use the following formula for bonus after bonus:
B = P – [P ÷ (1 + Br)]
Commission = Gross sales – [Gross sales ÷ (1 + Commission rate)]
Commission = 10,500,000 – [10,500,000 ÷ (1 + 20%)]
Commission = 10,500,000 – 8,750,000
Commission = 1,750,000
Requirement (b):
Total sales [2,100,000 x (8-3)]
Commission
Finder's fee
Delivery, installation and testing (50,000 x 5) - 5,000 scrap
Net remittance
Requirement (c):
Unit cost before freight
Freight per machine (200,000 ÷ 8)
Total unit cost
Multiply by: No. of unsold machines
Ending inventory
1,000,000
25,000
1,025,000
3
3,075,000
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B
2.
B
3.
C
4.
D
5.
B
10,500,000
(1,750,000)
(87,500)
(245,000)
8,417,500
4
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A (See solution in the second requirement)
2. B
Solution
The total unit cost is computed as follows:
Cost of consigned goods (1M x 8)
Freight
Total goods available for sale (in pesos)
Divide by: TGAS (in units)
Total unit cost
8,000,000
200,000
8,200,000
8
1,025,000
The number of unsold units is computed as follows:
Ending inventory
Divide by: Total unit cost
Unsold units
3,075,000
1,025,000
3
The number of units sold is computed as follows:
TGAS (in units)
Unsold units
No. of units sold
8
(3)
5
Profit is computed as follows:
Total sales (2,100,000 x 5)
Cost of goods sold (a)
Gross profit
Commission (b)
Finder's fee
Delivery, installation and testing (50,000 x 5) - 5,000 scrap
Profit
10,500,000
(5,125,000)
5,375,000
(1,750,000)
(87,500)
(245,000)
3,292,500
(a)
Cost of goods sold is computed as follows:
Total unit cost
No. of units sold
Cost of goods sold
(b)
The commission is computed as follows:
We will use the following formula for bonus after bonus:
B = P – [P ÷ (1 + Br)]
Commission = Gross sales – [Gross sales ÷ (1 + Commission rate)]
Commission = 10,500,000 – [10,500,000 ÷ (1 + 20%)]
5
1,025,000
5
5,125,000
Commission = 10,500,000 – 8,750,000
Commission = 1,750,000
3.
A (20 x 1,600) = 32,000
4.
C (505 – 5) x ₱100 x 90% = 45,000
5.
D (8,500 ÷ 85%) = 10,000
6.
B (5,000 + 7,000 + 50,000) = 62,000
7.
D (18,000 + 900) = 18,900
8.
D (40,000 x 40%) + 27,000 = 43,000
9. C
Solution:
Sales revenue (7,700 x 5)
Cost of goods sold (6,000 x 5) + (720 x 5/12)
Gross profit
Commission based on sales net of commission (a)
Marketing expense based on commission (3,500 x 10%)
Delivery and installation (30 x 5)
Profit
(a)
38,500
(30,300)
8,200
(3,500)
(350)
(150)
4,200
We will use a formula similar to the formula of bonus after bonus:
Commission based on sales after commission
=
38,500
-
38,500
1+10%
Commission based on sales after commission = 3,500
10. A
Solution:
Sales
Commission based on sales net of commission
Marketing expense based on commission (3,500 x 10%)
38,500
(3,500)
(350)
Delivery and installation (30 x 5)
Net remittance to consignor
(150)
34,500
6
Chapter 10
Installment Sales Method
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. FALSE ₱0.80 = (₱1 x 8/10)
3. TRUE ₱4 = (₱5 x 8/10)
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. FALSE 40%
11. FALSE (5 / .20) = 25
12. FALSE (100 – 25) = 75
13. FALSE 540
(DGP, end. 10 / 100 receivable, end. = 10% GPR)
(100 receivable, end. + 500 collections) = 600 sale x 90% cost ratio =
540 cost of sale
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. D
2.
Solutions:
Requirement (a):
20x1
20x2
20x3
₱500,000 x 30% = 150,000
₱300,000 x 30% = 90,000
₱200,000 x 30% = 60,000
Requirement (b):
20x1
20x2
20x3
1M - 500,000 = 500,000
1M – 500K – 300K = 200,000
1M – 500K – 300K – 200K = 0
Requirement (c):
20x1
20x2
500,000, ending A/R x 30% = 150,000
200,000, ending A/R x 30% = 60,000
1
20x3
3.
D
4.
B
0, ending A/R x 30% = 0
5. C (200,000 ÷ 25%) = 800,000 ending A/R
1M sale price – 800,000 ending A/R = 200,000 collections during the year
6.
D 1M sale price – 750K cost of sale = 250K total gross profit – 200K
deferred = 50K realized
7.
D 1M sale price – 750K cost of sale = 250K total gross profit – 220K
realized = 30K deferred
8.
A 1M sale price – 750K cost of sale = 250K total gross profit – 180K
realized = 70K deferred ÷ 25% = 280,000
9.
B 1M sale price – 750K cost of sale = 250K total gross profit – 160K
realized = 90K deferred ÷ 25% = 360,000 ending A/R;
1M sale price – 360,000 ending A/R = 640,000 collection
10. Solution:
Requirement (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price
12,000
Reconditioning costs
(2,000)
Normal profit margin (year of repossession) (12K x 30%)
(3,600)
Fair value of repossessed property
6,400
The gain or loss on repossession is computed as follows:
Date
Inventory (at fair value)
Deferred gross profit (25K x 20%)
Loss on repossession (squeeze)
Installment account receivable
6,400
5,000
1,600
13,000
Requirements (b) and (c):
The collections in 20x2 from the 20x1 and 20x2 sales are computed
as follows:
2
Installment
receivable - 20x1
Beg.
90,000
13,000
Installment
receivable - 20x2
47,000
Write-off
Collection
(squeeze)
30,000
End.
Beg.
-
-
Sale
240,000
60,000
Write-off
Collection
(squeeze)
180,000
End.
The profit in 20x2 is computed as follows:
Realized gross profit from:
- 20x1 sale (47K x 20%)
- 20x2 sale (60K x 30%)
Total realized gross profit in 20x2 – Requirement (b)
Loss on repossession
Profit in 20x2 – Requirement (c)
9,400
18,000
27,400
(1,600)
25,800
11. D
12. Solutions:
Scenario 1
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
4,000
Fair value of merchandise traded-in
(4,000)
Over (Under) allowance
Requirement (a):
The journal entry to record the sale is as follows:
Date
Inventory – traded-in (at fair value)
Installment account receivable (squeeze)
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
(Over) Under allowance
Adjusted installment sale price
Cost of sale
16,000
16,000
(10,000)
3
4,000
12,000
16,000
Gross profit
6,000
Gross profit rate
37.5%
The realized gross profit is computed as follows:
Trade-in value granted to customer
(Over) under allowance
Subsequent collections
Total collections on installment sale
Multiply by: Gross profit rate
Realized gross profit - 20x1
4,000
6,000
10,000
37.5%
3,750
Scenario 2
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
4,000
Fair value of merchandise traded-in
(3,000)
Over allowance
1,000
Requirement (a):
The journal entry to record the sale is as follows:
Date Inventory – traded-in (at fair value)
Over allowance on trade-in
Installment account receivable (squeeze)
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
16,000
Over allowance
(1,000)
Adjusted installment sale price
15,000
Cost of sale
(10,000)
Gross profit
5,000
Gross profit rate
33.33%
4
3,000
1,000
12,000
16,000
The realized gross profit is computed as follows:
Trade-in value granted to customer
4,000
(Over) under allowance
(1,000)
Subsequent collections
6,000
Total collections on installment sale
9,000
Multiply by: Gross profit rate
33.33%
Realized gross profit - 20x1
3,000
Scenario 3
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
4,000
Fair value of merchandise traded-in
(6,000)
Under allowance
(2,000)
Requirement (a):
The journal entry to record the sale is as follows:
Date Inventory – traded-in (at fair value)
Installment account receivable (squeeze)
Installment sale
Under allowance on trade-in
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
Under allowance
Adjusted installment sale price
Cost of sale
Gross profit
16,000
2,000
18,000
(10,000)
8,000
Gross profit rate
55.56%
The realized gross profit is computed as follows:
Trade-in value granted to customer
4,000
(Over) under allowance
2,000
Subsequent collections
6,000
Total collections on installment sale
12,000
Multiply by: Gross profit rate
55.56%
Realized gross profit - 20x1
6,667
5
6,000
12,000
16,000
2,000
13. C
14. Solution:
Total collections from 20x1 sales
Cost of 20x1 sales
Gross profit - 20x1 sales
Total collections from 20x2 sales
Cost of 20x2 sales
Gross profit - 20x2 sales
Gross profit recognized in 20x2
10,000
(8,000)
2,000
12,000
(9,000)
3,000
5,000
15. A
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Installment sales
Cost of sales
Deferred gross profit - unadjusted balance
1,000,000
(800,000)
200,000
Requirement (b):
Installment sales
Installment accounts receivable - Dec. 31, 20x1
Collections in 20x1
1,000,000
(600,000)
400,000
Requirement (c):
Installment sales
Cost of sales
Deferred gross profit - unadjusted balance
Gross profit rate based on sales (200K / 1M)
1,000,000
(800,000)
200,000
20%
Requirement (d):
Collections in 20x1
Multiply by: Gross profit rate based on sales
Realized gross profit - 20x1
400,000
20%
80,000
Requirement (e):
Deferred gross profit - unadjusted balance
Realized gross profit - 20x1
Deferred gross profit - adjusted balance
200,000
(80,000)
120,000
OR
6
Installment accounts receivable - Dec. 31, 20x1
Multiply by: Gross profit rate based on sales
Deferred gross profit - adjusted balance
600,000
20%
120,000
2. Solutions:
Requirement (a):
Deferred gross profit (before year-end adjustment)
Divide by: Gross profit based on sales
Installment sales
200,000
20%
1,000,000
Requirement (b):
Installment sales
Collections in 20x1
Installment accounts receivable - Dec. 31, 20x1
1,000,000
(400,000)
600,000
Requirement (c):
Collections in 20x1
Multiply by: Gross profit rate based on sales
Realized gross profit - 20x1
Requirement (d):
Deferred gross profit (before year-end adjustment)
Realized gross profit - 20x1
Deferred gross profit - Dec. 31, 20x1
400,000
20%
80,000
200,000
(80,000)
120,000
Reconciliations:
Collections in 20x1
Installment accounts receivable - Dec. 31, 20x1
Installment sales
400,000
600,000
1,000,000
Installment accounts receivable - Dec. 31, 20x1
Multiply by: Gross profit rate based on sales
Deferred gross profit - Dec. 31, 20x1
600,000
20%
120,000
Deferred gross profit - Dec. 31, 20x1
Divide by: Gross profit based on sales
Installment accounts receivable - Dec. 31, 20x1
120,000
20%
600,000
3. Solution:
Installment sales
Installment accounts receivable, Dec. 31, 20x1
Collections in 20x1
900,000
500,000
400,000
7
Multiply by: (100% - 60%)
Realized gross profit - 20x1
40%
160,000
4. Solutions:
Requirement (a):
Deferred gross profit, before year-end adjustment
Divide by: Gross profit on sales
Total sales
Installment accounts receivable, Dec. 31, 20x1
Collections - 20x1
560,000
40%
1,400,000
(800,000)
600,000
Requirement (b):
Collections - 20x1
Multiply by: Gross profit on sales
Realized gross profit - 20x1
5.
600,000
40%
240,000
Solution:
20x1 installment accounts
Multiply by: Gross profit rate based on sales
Deferred gross profit (after adjustment) - 20x1 sales
16,250
30%/130%
3,750
20x2 installment accounts
Multiply by: Gross profit rate based on sales
Deferred gross profit (after adjustment) - 20x2 sales
90,000
33 1/3%/133 1/3%
22,500
Total deferred gross profit (after adjustment)
26,250
Deferred gross profit (before adjustment)
Deferred gross profit (after adjustment)
Realized gross profit - 20x2
Expenses relating to installment sales
Profit from installment sales - 20x2
6. Solutions:
Requirement (a):
The gross profit rates are computed as follows:
20x1
Installment sales
300,000
Cost of sales
225,000
Gross profit
75,000
Gross profit rate based on sales
25%
8
38,000
(26,250)
11,750
(1,500)
10,250
20x2
375,000
285,000
90,000
24%
20x3
360,000
252,000
108,000
30%
20x1 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x1 Installment accounts receivable, Dec. 31, 20x3
25%
-
20x2 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x2 Installment accounts receivable, Dec. 31, 20x3
9,000
24%
37,500
20x3 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x3 Installment accounts receivable, Dec. 31, 20x3
72,000
30%
240,000
Total installment accounts receivable, Dec. 31, 20x3
277,500
Requirement (b):
20x1 Deferred gross profit, Dec. 31, 20x2
Divide by: Gross profit rate
20x1 Installment accounts receivable, Dec. 31, 20x2
20x1 Installment accounts receivable, Dec. 31, 20x3
Collection during 20x3 from 20x1 sales
15,000
25%
60,000
60,000
20x2 Deferred gross profit, Dec. 31, 20x2
Divide by: Gross profit rate
20x2 Installment accounts receivable, Dec. 31, 20x2
20x2 Installment accounts receivable, Dec. 31, 20x3
Collection during 20x3 from 20x2 sales
54,000
24%
225,000
37,500
187,500
Installment sales - 20x3
20x3 Installment accounts receivable, Dec. 31, 20x3
Collection during 20x3 from 20x3 sales
360,000
240,000
120,000
Total collections during 20x3
367,500
Requirement (c):
Collection during 20x3 from 20x1 sales
Multiply by: Gross profit rate - 20x1 sales
Realized gross profit in 20x3 from 20x1 sales
60,000
25%
15,000
Collection during 20x3 from 20x2 sales
Multiply by: Gross profit rate - 20x2 sales
9
187,500
24%
Realized gross profit in 20x3 from 20x2 sales
45,000
Collection during 20x3 from 20x3 sales
Multiply by: Gross profit rate - 20x3 sales
Realized gross profit in 20x3 from 20x3 sales
120,000
30%
36,000
Total realized gross profit in 20x3
96,000
7. Solutions:
Requirement (a):
20x1 installment account receivable, Dec. 31, 20x2
20x1 installment account receivable, Dec. 31, 20x3
Collections in 20x3 from 20x1 sales
Multiply by: Gross profit rate - 20x1
Realized gross profit in 20x3 from 20x1 sales
112,500*
(60,000)
52,500
30%
15,750
20x2 installment account receivable, Dec. 31, 20x2
20x2 installment account receivable, Dec. 31, 20x3
Collections in 20x3 from 20x2 sales
Multiply by: Gross profit rate - 20x2
Realized gross profit in 20x3 from 20x2 sales
300,000
(195,000)
105,000
40%
42,000
20x3 installment sales
20x3 installment account receivable, Dec. 31, 20x3
Collections in 20x3 from 20x3 sales
Multiply by: Gross profit rate - 20x3
Realized gross profit in 20x3 from 20x1 sales
495,000
(390,000)
105,000
35%
36,750
Total realized gross profit - 20x3
94,500
* (135,000 less 22,500 unpaid balance in repossessed merchandise) =
112,500
Requirement (b):
20x3 Inventory (at fair value)
Deferred gross profit (22.5K x 30%)
Loss on repossession (squeeze)
Installment account receivable
10
15,000
6,750
750
22,500
8. Solution:
Cash down payment
Collection from installment payment (900K + 540K)
Total collections
Cost of sale
Excess of collection over cost
600,000
1,440,000
2,040,000
(4,000,000)
-
Since total collections do not exceed the cost of sale, no income shall be
recognized by Sound Co.
PROBLEM 4: CLASSROOM ACTIVITY
1. Solutions:
Requirement (a):
20x1
20x2
20x3
₱400,000 x 25% = 100,000
₱150,000 x 25% = 37,500
₱ 50,000 x 25% = 12,500
Requirement (b):
20x1
20x2
20x3
600K – 400K = 200,000
600K – 400K – 150K = 50,000
600K – 400K – 150K – 50K = 0
Requirement (c):
20x1
20x2
20x3
200,000, ending A/R x 25% = 50,000
500,000, ending A/R x 25% = 12,500
0, ending A/R x 25% = 0
2. Solutions:
Case 1: 112,000 ÷ 35% = 320,000
Case 2: 269,500 ÷ 35% = 770,000 A/R, end
900,000 – 770,000 = 130,000
Case 3: 900K – 585K = 315K total gross profit – 200K deferred = 115,000
realized
Case 4: 300,000 x 35% = 105,000 realized
900K – 585K = 315K total gross profit – 105K realized = 210,000
deferred
11
Case 5: 900K – 585K = 315K total gross profit – 220K realized = 95,000
deferred
Case 6: 900K – 585K = 315K total gross profit – 180K realized = 135,000
deferred ÷ 35% = 385,714 A/R, end.
Case 7:
If the realized gross profit is ₱147,000, how much is the total collections
during the year?
147K ÷ 35% = 420,000 total collections
3. Solution:
Requirement (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price
24,000
Reconditioning costs
(4,000)
Normal profit margin (year of repossession) (24K x 30%)
(7,200)
Fair value of repossessed property
12,800
The gain or loss on repossession is computed as follows:
Date
Inventory (at fair value)
Deferred gross profit (25K x 20%)
12,800
10,000
3,200
Loss on repossession (squeeze)
Installment account receivable
26,000
Requirements (b) and (c):
The collections in 20x2 from the 20x1 and 20x2 sales are computed
as follows:
Installment
receivable - 20x1
Beg.
180,000
26,000
Installment
receivable - 20x2
94,000
Write-off
Collection
(squeeze)
60,000
End.
Beg.
Sale
The profit in 20x2 is computed as follows:
Realized gross profit from:
12
480,000
120,000
Write-off
Collection
(squeeze)
360,000
End.
- 20x1 sale (94K x 20%)
- 20x2 sale (120K x 30%)
Total realized gross profit in 20x2 – Requirement (b)
Loss on repossession
Profit in 20x2 – Requirement (c)
18,800
36,000
54,800
(3,200)
51,600
4. Solution:
Scenario 1
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
8,000
Fair value of merchandise traded-in
(8,000)
Over (Under) allowance
Requirement (a):
The journal entry to record the sale is as follows:
Date
Inventory – traded-in (at fair value)
Installment account receivable (squeeze)
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
(Over) Under allowance
Adjusted installment sale price
Cost of sale
Gross profit
32,000
32,000
(20,000)
12,000
Gross profit rate
37.5%
The realized gross profit is computed as follows:
13
8,000
24,000
32,000
Trade-in value granted to customer
(Over) under allowance
Subsequent collections
Total collections on installment sale
Multiply by: Gross profit rate
Realized gross profit - 20x1
8,000
12,000
20,000
37.5%
7,500
Scenario 2
Solution:
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
8,000
Fair value of merchandise traded-in
(6,000)
Over allowance
2,000
Requirement (a):
The journal entry to record the sale is as follows:
Date Inventory – traded-in (at fair value)
Over allowance on trade-in
Installment account receivable (squeeze)
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
32,000
Over allowance
(2,000)
Adjusted installment sale price
30,000
Cost of sale
(20,000)
Gross profit
10,000
Gross profit rate
33.33%
The realized gross profit is computed as follows:
Trade-in value granted to customer
8,000
(Over) under allowance
(2,000)
Subsequent collections
12,000
Total collections on installment sale
18,000
Multiply by: Gross profit rate
33.33%
Realized gross profit - 20x1
6,000
14
6,000
2,000
24,000
32,000
Scenario 3
Solution:
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer
8,000
Fair value of merchandise traded-in
(12,000)
Under allowance
(4,000)
Requirement (a):
The journal entry to record the sale is as follows:
Date Inventory – traded-in (at fair value)
Installment account receivable (squeeze)
Installment sale
Under allowance on trade-in
12,000
24,000
32,000
4,000
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price
Under allowance
Adjusted installment sale price
Cost of sale
Gross profit
32,000
4,000
36,000
(20,000)
16,000
Gross profit rate
55.56%
The realized gross profit is computed as follows:
Trade-in value granted to customer
8,000
(Over) under allowance
4,000
Subsequent collections
12,000
Total collections on installment sale
24,000
Multiply by: Gross profit rate
55.56%
Realized gross profit - 20x1
13,334
5.
Solution:
Total collections from 20x1 sales
Cost of 20x1 sales
Gross profit - 20x1 sales
Total collections from 20x2 sales
20,000
(19,000)
4,000
24,000
15
Cost of 20x2 sales
Gross profit - 20x2 sales
Gross profit recognized in 20x2
(18,000)
6,000
10,000
PROBLEM 10-5: THEORY
1.
2.
3.
4.
5.
C
C
C
A
B
6.
7.
8.
9.
10.
C
B
A
B
B
11.
12.
13.
14.
15.
C
A
B
C
D
PROBLEM 10-7: MULTIPLE CHOICE (COMPUTATIONAL)
Solutions:
1.
A 200K – 60K = 140K realized ÷ 25% = 560,000
2.
C
Date
9/30/x1
9/30/x1
10/31/x1
11/30/x1
12/31/x1
Totals
Collection
Interest
Amortization
4,800
4,800
4,800
4,800
19,200
432
388
344
1,165
4,800
4,368
4,412
4,456
18,035
Principal
48,000
43,200
38,832
34,420
29,965
18,035 x 37.5% = 6,763
3. A
Inventory
Deferred gross profit (29,965 x 37.5%)
Loss on repossession
Receivable
16
16,800
11,237
1,928
29,965
4.
C
The 20x1 sale is computed as follows:
Date
Date of sale
20x1
(a)
Collection
Interest
71,000
(squeeze)
Amortization Principal
158,000
7,000
(given)
(squeeze)
94,000(a)
64,000
(given)
(start)
108,000 N/R – 14,000 discount on N/R = 94,000 carrying amount 12/31/x1
The cost of goods sold is computed as follows:
Inventory
beg.
-
Purchases
100,850
90,850
COGS
(squeeze)
10,000
end.
The gross profit rate in 20x1 is computed as follows:
Sales
COGS
Gross profit
158,000
(90,850)
67,150
Gross profit rate
42.50%
The realized gross profit rate is computed as follows:
Collections of principal
64,000
Gross profit rate
42.50%
27,200
Realized gross profit
5.
B
The collection on principal of 20x1 receivable in 20x2 is computed as follows:
Date
Date of sale
20x1
Collection
Interest
Amortization
71,000
7,000
64,000
17
Principal
158,000
94,000
20x2
(b)
60,000 (b)
(start)
34,000
(squeeze)
72,000 N/R – 12,000 discount on N/R = 60,000 carrying amount 12/31/x2
The collection on principal of 20x2 receivable in 20x2 is computed as follows:
Total collection on principal in 20x2
Less: Collection from 20x1 receivable
Collection from 20x2 receivable
100,000
(34,000)
66,000
The 20x2 sale is computed as follows:
Date
Date of sale
Collection
Interest
Amortization Principal
170,000
20x2
66,000
(see above)
104,000
(start)
(squeeze)
(c)
(c)
120,000 N/R – 16,000 discount on N/R = 104,000 carrying amount
12/31/x1
The cost of goods sold is computed as follows:
Inventory
beg.
Purchases
105,250
89,250
16,000
The gross profit rate in 20x1 is computed as follows:
Sales
COGS
Gross profit
170,000
(89,250)
80,750
Gross profit rate
47.50%
The realized gross profit rate is computed as follows:
From 20x2 sale:
Collections of principal from 20x2 sale
Gross profit rate – 20x2
Realized gross profit in 20x2 from 20x2 sale
From 20x1 sale:
18
66,000
47.50%
31,350
COGS
(squeeze)
end.
Collections of principal from 20x1 sale
(see amortization table above)
Gross profit rate – 20x1
(see solution in previous problem)
Realized gross profit in 20x2 from 20x1 sale
34,000
42.50%
14,450
Total realized gross profit in 20x2: (31,350 + 14,450) = 45,800
19
Chapter 11
Home office, Branch and Agency Accounting
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. TRUE
3. TRUE
4. TRUE
5. FALSE
6. FALSE
7. FALSE
8. FALSE
9. FALSE
10. TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. Solutions:
Requirement (a):
Home office books
Branch books
Jan . 1, 20x1
Jan . 1, 20x1
Investment in branch……...500K
Cash………………………….…500K
Cash……………………...500K
Home office..…………… 500K
(a)
(a)
Investment in branch……...100K
Accounts payable……………100K
Inventory…………………200K
Accounts payable
100K
Home office………………100K
(b)
(b)
No entry
Equipment………………120K
Cash……………………….120K
(c)
(c)
Investment in branch……... 60K
Accum. depreciation…..……300K
Equipment………………….. 360K
Equipment……………….60K
Home office………………..60K
(d)
(d)
No entry
Cash ……………………..600K
Sales………………………600K
Cost of goods sold……...180K
1
(200K – 20K unsold)
Inventory…………………180K
(e)
(e)
Cash…………………………..80K
Investment in branch………..80K
Home office……………80K
Cash……………………….80K
(f)
(f)
Investment in branch………25K
Expenses…………………….25K
Expenses(150K + 25K) 175K
Depreciation expense…. 10K
Cash………………………150K
Accum. depn………………10K
Home office……………….25K
(g)Closing entries:
(g) Closing entries:
Sales……………………..600K
Cost of goods sold………180K
Expenses…………………175K
Depreciation expense…….10K
Income summary……….. 235K
Investment in branch…..235K
Income summary…………….235K
Income summary………235K
Home office……………235K
Requirement (b):
Investment in branch
Jan. 1
500,000
(a)
100,000
(c)
60,000
80,000
(f)
25,000
(g)
235,000
Home office
500,000
100,000
80,000
60,000
25,000
235,000
(e)
840,000
840,000
Requirement (c):
Cash
Inventory
Equipment
Accum. Depreciation
Total assets
750,000
20,000
180,000
(10,000)
940,000
Accounts payable
Home office
Total liabilities & equity
100,000
840,000
940,000
2
Jan. 1
(a)
(c)
(f)
(g)
Sales
Cost of goods sold
Gross profit
Expenses
Depreciation expense
Profit
2.
600,000
(180,000)
420,000
(175,000)
(10,000)
235,000
Solution:
Home office
500,000
1,000,000
680,000
400,000
2,000,000
4,000,000
8,580,000
Branch
200,000
400,000
300,000
-
Accounts payable
Ordinary share capital
Share premium
Retained earnings
Home office
4,000,000
2,000,000
200,000
2,380,000
500,000
400,000
Total liabilities & equity
8,580,000
900,000
Cash
Accounts receivable
Inventory
Investment in branch
Land
Building-net
Total assets
3.
900,000
Combined
700,000
1,400,000
980,000
2,000,000
4,000,000
9,080,000
4,500,000
2,000,000
200,000
2,380,000
9,080,000
Solutions:
Requirement (a):
Home office books
Branch books
(a)
(a)
Investment in branch……...470K
(300K x 150%) + 20K
Shipments to branch…….. 300K
Allowance for mark-up…… 150K
Cash………………………… 20K
Shipments from HO…..450K
Freight-in……………… 20K
Home office…………… 470K
(b)
(b)
No entry
Purchases……………..100K
Freight-in…………………2K
Cash……………………….102K
3
(c)
(c)
No entry
Cash…………………..500K
Sales………………………500K
(d)
(d)
Inventory – end.,,,,,,, 235K
(470K x ½)
Income summary……..235K
Requirement (b):
Sales
Cost of goods sold:
Shipments from HO
Freight-in
Purchases
Ending inventory
Individual gross profit
500,000
450,000
22,000
100,000
(235,000)
Requirement (c):
Sales
Cost of goods sold:
Shipments from HO
Freight-in
Purchases
Ending inventory
Individual gross profit
(337,000)
163,000
500,000
300,000
22,000
100,000
(160,000)
Requirement (d):
150,000 allow. for markup x 50% sold = 75,000
4
(262,000)
238,000
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Home office books
Branch books
Jan . 1, 20x1
Jan . 1, 20x1
Investment in branch……...600K
Cash………………………….…600K
Cash……………………...600K
Home office..…………… 600K
(a)
(a)
Investment in branch……...25K
Accounts payable…………… 25K
Prepaid supplies………100K
Accounts payable …………75K
Home office……………… 25K
(b)
(b)
No entry
Equipment………………80K
Cash……………………….80K
(c)
(c)
Investment in branch……...120K
Accum. depreciation…..…… 80K
Equipment………………….. 200K
Equipment……………….120K
Home office………………120K
(d)
(d)
Accounts payable……..25K
Cash………………………….25K
No entry
(e)
(e)
No entry
Accounts payable ………50K
Cash……………………….50K
(f)
(f)
No entry
Cash ……………………..800K
Service fees………………800K
(g)
(g)
Cash…………………………..180K
Investment in branch………180K
Home office……………180K
Cash……………………….180K
(h)
(h)
Investment in branch………60K
Expenses…………………….60K
Expenses……………… 250K
Depreciation expense…. 40K
Advertising expense …….60K
Supplies expense………..95K
Cash………………………250K
Accum. depn………………40K
Home office……………….60K
Prepaid supplies…………. 95K
5
(i)Closing entries:
(i) Closing entries:
Service fees…………….800K
Expenses……………… 250K
Depreciation expense…. 40K
Advertising expense …….60K
Supplies expense………..95K
Income summary……….. 355K
Investment in branch…..355K
Income summary…………….355K
Requirement (b):
Investment in branch
Jan. 1
600,000
(a)
25,000
(c)
120,000
180,000
(h)
60,000
(i)
355,000
980,000
Requirement (c):
Cash
Prepaid supplies
Equipment
Accum. Depreciation
Total assets
Income summary………355K
Home office……………355K
(g)
Home office
600,000
25,000
180,000 120,000
60,000
355,000
980,000
840,000
5,000
200,000
(40,000)
1,005,000
Accounts payable
Home office
Total liabilities & equity
25,000
980,000
1,005,000
Service fees
Expenses
Depreciation expense
Advertising expense
Supplies expense
Profit
800,000
(250,000)
(40,000)
(60,000)
(95,000)
355,000
6
Jan. 1
(a)
(c)
(h)
(i)
2.
Solution:
Cash
Accounts receivable
Inventory
Investment in branch
Land
Building-net
Total assets
Accounts payable
Ordinary share capital
Share premium
Retained earnings
Home office
Total liabilities & equity
3.
Home office
600,000
1,200,000
816,000
480,000
2,400,000
4,800,000
10,296,000
4,800,000
2,400,000
240,000
2,856,000
10,296,000
Branch
240,000
480,000
360,000
1,080,000
600,000
480,000
1,080,000
Combined
840,000
1,680,000
1,176,000
2,400,000
4,800,000
10,896,000
5,400,000
2,400,000
240,000
2,856,000
10,896,000
Solutions:
Requirement (a):
Home office books
Branch books
(a)
(a)
Investment in branch……...500K
(400K x 120%) + 20K
Shipments to branch…….. 400K
Allowance for mark-up……
80K
Cash………………………… 20K
Shipments from HO…..480K
Freight-in……………… 20K
Home office…………… 500K
(b)
(b)
No entry
Purchases……………..80K
Freight-in…………………2K
Cash……………………….82K
(c)
(c)
No entry
Cash…………………..600K
Sales………………………600K
(d)
(d)
Inventory – end…… 125K
(500K x ¼ )
Income summary……..125K
7
Requirement (b):
Sales
Cost of goods sold:
Shipments from HO
Freight-in
Purchases
Ending inventory
Individual gross profit
600,000
480,000
22,000
80,000
(125,000)
Requirement (c):
Sales
Cost of goods sold:
Shipments from HO
Freight-in
Purchases
Ending inventory
Individual gross profit
(457,000)
143,000
600,000
400,000
22,000
80,000
(105,000)
(397,000)
203,000
Requirement (d):
80,000 allow. for markup x ¾ sold = 60,000
4.
Answer: 250,000 - Only the sales by the branch to outside parties. Intracompany billings are eliminated in the combined financial statements.
8
PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solutions:
Requirement (a):
Home office books
Branch books
Jan . 1, 20x1
Jan . 1, 20x1
Investment in branch……...10M
Cash………………………….… 10M
Cash……………………...10M
Home office..…………… 10M
(a)
(a)
Investment in branch……...30M
Cash………………..………… 30M
Land………………………10M
Building…………………..20M
Home office……………… 30M
(b)
(b)
Investment in branch……20.5M
Shipments to the branch……..20M
Cash………………………… 500K
Shipments from HO……20M
Freight-in………………..500K
Home office…………… 20.5M
(c)
(c)
Investment in branch……... 5M
Shipments to the branch……. 5M
Shipments from HO…… 5M
Freight-in………………..100K
Home office……………… 5M
Cash………………………100K
(d)
(d)
Equipment…………… 900K
Investment in branch……900K
Home office……………900K
Cash………………………900K
(e)
(e)
No entry
Furniture………… ……600K
Cash………………………600K
(f)
(f)
No entry
Purchases…………….. 10M
Accounts payable………..10M
(g)
(g)
No entry
Cash……………………50M
Accounts receivable….50M
Sales…………………….100M
(h)
(h)
Cash…………………………10M
Investment in branch………10M
Cash……………………30M
Home office…………...10M
Accounts receivable……..40M
9
(i)
(i)
Cash…………………….35M
Home office………………….35M
Home office……….35M
Cash…………………….35M
(j)
(j)
No entry
Accounts payable……8M
Cash…………………..8M
(k)
(k)
Expenses…………………1M
Investment in branch………..1M
Expenses……………14M
Home office………….1M
Cash…………………..15M
(l)
(i)
Investment in branch……3M
Expenses……………………….3M
Expenses………………3M
Home office……………3M
(m)
(m) Adjusting entry:
No entry
Inventory – end. ………7.675M
(20.5M x ¼) + (5.1M x ½)
Income summary………7.675M
(o) Adjusting entry:
(o) Adjusting entry:
Investment in branch…..135K
Accum. Depn. – Equipt…….135K
Depreciation – Bldg.
1M
Depreciation – Equpt. 135K
Depreciation – Furn.
75K
Acc. Dep. – Bldg………. 1M
Acc. Dep. – Furn……… 75K
Home office………….. 135K
(p)Closing entries:
(p) Closing entries:
Investment in branch…..53.865M
Income summary…………53.865M
Sales…………….
100M
Income summary (m) 7.675M
Shipments from HO…….25M
Freight-in………………. 600K
Purchases………………..10M
Expenses……………… 17M
Depreciation expense….1.21M
Income summary……53.865M
Income summary……53.865M
Home office…………53.865M
10
Requirement (b):
Investment in branch
Jan. 1 10,000,000
(a)
30,000,000
900,000
(b)
20,500,000 10,000,000
(c)
5,000,000
35,000,000
(l)
3,000,000
1,000,000
(o)
135,000
(p)
53,865,000
Home office
(d)
(h)
(i)
(k)
900,000
10,000,000
35,000,000
1,000,000
10,000,000
30,000,000
20,500,000
5,000,000
3,000,000
135,000
53,865,000
75,600,000
Jan. 1
(a)
(b)
(c)
(l)
(o)
(p)
75,600,000
Requirement (c):
Cash
Accounts receivable
Inventory
Land
Building
Accum. Depn. - Bldg.
Furniture
Accum. Depn. - Furniture
30,400,000
10,000,000
7,675,000
10,000,000
20,000,000
(1,000,000)
600,000
(75,000)
Total assets
77,600,000
Accounts payable
Home office
Total liabilities & equity
2,000,000
75,600,000
77,600,000
Sales
Cost of goods sold:
Shipments from HO
Freight-in
Purchases
Ending inventory
Gross profit
Expenses
Depreciation expense
Profit
100,000,000
25,000,000
600,000
10,000,000
(7,675,000)
11
(27,925,000)
72,075,000
(17,000,000)
(1,210,000)
53,865,000
ACTIVITY #2:
Solutions:
Requirement (a):
Home office books
Branch books
(a)
(a)
Investment in branch……200
Shipments to the branch……..200
Shipments from HO……200
Home office…………… 200
No entry
Home office…………… 50
Shipments from HO……
50
(b)
(b)
Investment in branch……... 100
Cash………………………... 100
Cash……………… 150
Home office……………… 150
(c)
(c)
No entry
Home office………
20
Cash (or Expense) ……
(d)
(e)
Investment in branch …………10
Expense……………………….10
No entry
Requirement (b):
Investment in branch
Jan. 1
1,000
(a)
200
(b)
100
(d)
10
20
Home office
(a)
(c)
1,310
50
20
1,000
200
150
Jan. 1
(a)
(b)
1,280
Difference = 30
Requirement (c):
Home office books
Branch books
(a)
(a)
Shipments to the branch….. 50
Investment in branch……….. 50
(b)
(b)
Home office……….. 50
Cash………………………. 50
(c)
(c)
Expenses…………….. 20
Investment in branch………..20
12
(d)
(d)
Expense
10
Home office………………10
Requirement (d):
Investment in branch
Unadj.
1,310
50
20
Home office
(a)
(c)
(b)
1,240
1,280
Unadj.
10
(d)
50
1,240
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. B
6.
D
2. D
7.
D
8.
D
3. C
4. D
9.
A
5. C
10. A
PROBLEM 11-6: MULTIPLE CHOICE - COMPUTATIONAL
1. B
Solution:
Sales
112,500
Shipments from home office
120,000
Inventory, Dec. 31
(30,000)
(90,000)
Gross profit
22,500
Expenses
(8,100)
Profit
14,400
2. D
Solution:
Home office Current, unadjusted
Profit of branch
Adjusted balance of reciprocal accounts
90,000
14,400
104,400
3. A (see solutions below)
4. C
Solutions:
(Home office
13
(Branch
Unadjusted balances
(a) Charge recorded twice
(b) Mathematical mistake in
recording (895 – 89.5)
(c) Mathematical mistake in
recording (980-890)
(d) Mathematical mistake in
recording (400-350)
(e) Unrecorded charge
(f) Erroneous credit to investment
(g) Erroneous debit to HO account
(h) Erroneous correcting entry
Adjusted balances
books)
Investment
in Branch
175,520
books)
Home office
184,279.50
(500)
squeeze
805.50
90
50
425
5,000
180,520
370
(5,000)
180,520
Notes:
(d) A credit by the home office means a deduction to the “Investment”
account which should have a corresponding deduction also to the
“Home office” account. The deduction of ₱350 was recorded by the
branch as ₱400 resulting to over-deduction. Thus the adjustment is
an addition of ₱50.
(e) The branch failed to record the charge as a credit to the “Home
Office” Account. Instead, branch recorded the charge as a liability.
Thus, the proper adjustment is an increase to the “Home Office”
Account.
(f) No adjustment is needed for the “Home Office” account because
the branch did not take up initially (see ‘h’ below) the erroneous
credit by the home office.
(g) Initially, the branch did not take up the erroneous credit by the
home office in ‘f;’ however, on June 30, 20x1 (cut-off date), the
branch finally recorded the erroneous credit. The proper adjusting
entry is to reverse this. A credit to the “Home Office” account means
an increase; therefore, the correction is a decrease.
5. C
Solution:
Inventory, Dec. 31
Less: Inventory, Dec. 31 from local purchase
Inventory, Dec. 31 from home office at billed price
Divide by:
Inventory from home office at cost
Add: Inventory, Dec. 31, from local purchase
Total ending inventory at cost
6. D
14
28,000
(7,000)
21,000
140%
15,000
7,000
22,000
Solution:
Net sales
Merchandise from home office at cost (98K / 140%)
Merchandise purchased locally by branch
Total goods available for sale
Total ending inventory at cost
True gross profit
15
180,000
70,000
40,000
110,000
(22,000)
(88,000)
92,000
Chapter 12
Insurance Contracts
PROBLEM 1: TRUE OR FALSE
1. FALSE
2.
FALSE
3.
TRUE
4.
FALSE
5.
FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1. D
2. D
3. A
4. B
5. D
PROBLEM 3: MULTIPLE CHOICE
1. D
2. C
3. A
4. D
5. D
6. A
7. A
8. B
9. D
10. C
Chapter 13
Accounting for Build-operate-transfer (BOT)
PROBLEM 1: TRUE OR FALSE
1. FALSE
6. TRUE
2.
TRUE
7.
TRUE
3.
FALSE
8.
TRUE
4.
FALSE
9.
FALSE
5.
TRUE
10.
FALSE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
D
3.
D
4.
B
5.
A
6. C
Solution: (15M construction costs x 120%) = 18M
7. C
Solution: (5M operation costs x 105%) = 5.25M
8.
B
9.
D
10. C
Solution: (15M construction costs x 120%) = 18M
11. D
Solution: 20M, the fees collected from railway users
12. C
Solution:
Total construction costs (15M x 2 yrs.)
Multiply by:
Initial carrying amount of intangible asset
1
30
120%
36
Multiply by: (7 / 8) (a)
Carrying amount of intangible asset at the end of Year 3
7/8
31.50
(a) Denominator in the fraction: The intangible asset’s useful life is 8
years, i.e., Years 3 to 10 where the operator can exercise its right to
collect fees from railway users.
Numerator in the fraction: Amortization starts in Year 3 when the
operator obtains ability to exercise its rights. Thus, at the end of Year
3, the remaining useful life of the intangible asset is 7 years.
PROBLEM 3: EXERCISES
1.
A
2. B
Solution:
Date
Collections
Int.
income
Amortization
Revenue
a
b = PV x
9.10%
c=a-b
d
300
99
218
(99)
82
520
520
11
1/1/Yr. 1
12/31/Yr.1
12/31/Yr.2
12/31/Yr.3
The revenues are computed as follows:
Year
Performance obligation
Year 1 Construction services
(400M x 130%)
Year 2 Construction services
(400M x 130%)
Year 3 Operation services
(10M x 110%)
PV
e = prev.
bal. - c + d
520
1,139
1,068
Revenues
520
520
11
3. C
Solution:
Year 2
Revenue
Contract costs
Interest income
Profit
Year 3
520
(400)
99
219
4.
C (See solution in preceding question.)
5.
B
2
11
(10)
218
219
6.
D
7.
D
8. B
Solution:
Yr. 1
Yr. 1
Yr. 2
Yr. 2
Construction services
(400M x 130%)
Borrowing costs
(100M x 10%)
Construction services
(400M x 130%)
Borrowing costs
(100M x 10%)
Carrying amt. of intangible asset at the end of Yr. 2
Amortization expense in Year 3
Carrying amt. of intangible asset at the end of Yr. 3
520
10
520
10
1,060
(132.5)
927.50
The amortization expense is computed as follows (1,060 ÷ 8 = 132.5).
9. B
Solution:
Year 2
Revenue
Contract costs
Amortization expense
Interest expense
Profit (Loss)
520
(400)
(132.50)
(12.50)
10. A (See solution in preceding problem)
PROBLEM 4: THEORY
1. D
6.
D
2.
B
7.
C
3.
C
8.
B
4.
C
9.
A
5.
E
10.
B
3
Year 3
300
(10)
(132.50)
(10)
148