Advanced Accounting Solution Manual
Antonio J. Dayag
Chapter 1
Problem I
Requirement 1: Assuming that A and B agree that each partner is to receive a capital credit equal to
the agreed values of the net assets each partner invested:
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record investments:
Partnership books:
Cash………………………………………………………………………………. 120,000
Inventory…………………………………………………………………………. 120,000
Equipment……………………………………………………………………….. 240,000
A, capital………………………………………………………………...
480,000
Initial investment.
Cash……………………………………………………………………………….. 120,000
Land……………………………………………………………………………….. 240,000
Building……………………………………………………………………………. 480,000
Mortgage payable…………………………………………………….
240,000
B, capital………………………………………………………………..
600,000
Initial investment.
Requirement 2: Assuming that A and B agree that each partner is to receive an equal capital interest.
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record investments:
Partnership books:
Bonus Approach:
Cash…………………………………………………………………………… 120,000
Inventory……………………………………………………………………… 120,000
Equipment……………………………………………………………………. 240,000
A, capital……………………………………………………………..
480,000
Cash…………………………………………………………………………… 120,000
Land……………………………………………………………………………. 240,000
Building………………………………………………………………………… 480,000
Mortgage payable…………………………………………………
240,000
B, capital.……………………………………………………….……
600,000
B, capital……………………………………………………………………….. 60,000
A, capital………………………………………………………………
60,000
Total agreed capital (P480,000 + P600,000)….P 1,080,000
Multiplied by: Capital interest (equal)………...
1/2
Partner’s individual capital interest…………….P 540,000
Less: A’s capital interest………………………..….480,000
Bonus to A…….……………………………………..P 60,000
Revaluation (Goodwill) Approach:
Cash…………………………………………………………………………… 120,000
Inventory……………………………………………………………………… 120,000
Equipment………………………………………………………………… .... 240,000
A, capital……………………………………………………………..
480,000
Cash…………………………………………………………………………… 120,000
Land……………………………………………………………………………. 240,000
Building………………………………………………………………………... ..480,000
Mortgage payable…………………………………………………
240,000
B, capital.……………………………………………………….……
600,000
Assets (or goodwill or intangible asset)…………………………………... 120,000
A, capital…………………..………………………………………..
120,000
Total agreed capital (P600,000 / 1/2)………..….
P1,200,000
Less: Total contributed capital
(P480,000 + P 600,000)………………………………....… 1,080,000
Goodwill to A……………..………………………….
P 120,000
Problem II
Agreed Fair Values
Cash
Invested
Invested
Invested
by John
by Jeff
by Jane
P100,000
---
---
P 110,000
---
P 110,000
0
30,000
---
Equipment
Total assets
100,000
Note payable assumed by partnership
---
Net assets invested
P100,000
1. Bonus Method
P
80,000
P
0
2. Goodwill Method (Revaluation of Asset)
Cash
100,000
110,000
Cash
100,000
Equipment
Equipment
110,000
Goodwill
90,000
Note Payable
30,000
Note Payable
30,000
John, Capital
60,000
John, Capital
90,000
Jeff, Capital
60,000
Jeff, Capital
90,000
Jane, Capital
60,000
Jane, Capital
90,000
2. The bonus method is used when John and Jeff recognize that Jane is bringing something of value to
the firm other than a tangible asset, but they do not want to recognize an intangible asset. To
equalize the capital accounts, P40,000 is transferred from John's capital account and P20,000 is
transferred from Jeff's capital account.
The goodwill method is used when the partners recognize the intangible nature of the skills Jane is
bringing to the partnership. However, the capital accounts are equalized by recognizing an
intangible asset and a corresponding increase in the capital accounts of the partners. Unless the
intangible asset can be specifically identified, such as a patent being invested, it should not be
recognized, because of a lack of justification for goodwill in a new business.
Problem III
1.
(a)
Cash
13,000
Accounts Receivable
8,000
Office Supplies
2,000
Office Equipment
30,000
Accounts Payable
2,000
Tom, Capital
Cash
12,000
Accounts Receivable
Office Supplies
Land
(b)
51,000
6,000
800
30,000
Accounts Payable
5,000
Mortgage Payable
18,800
Julie, Capital
25,000
Tom, Drawing
15,000
Cash
Julie, Drawing
15,000
12,000
Cash
(c)
Income Summary
12,000
50,000
Tom, Capital P50,000 (P51,000/P76,000)
33,553
Julie, Capital P50,000 (P25,000/P76,000)
16,447
Tom, Capital
15,000
Julie, Capital
12,000
Tom, Drawing
15,000
Julie, Drawing
12,000
TOM AND JULIE PARTNERSHIP
2.
Statement of Changes in Partners' Capital
For the Year Ended December 31, 20x4
Tom
Julie
0
P0
Add: Additional investments
51,000
25,000
76,000
Net income allocation
33,553
16,447
50,000
P 84,553
P 41,447
P126,000
15,000
12,000
27,000
P 69,553
P 29,447
P99,000
Capital balances, Jan. 1
Totals
Less: Withdrawals
Capital balances, Dec. 31
P
Total
P
0
Problem IV
Book of H is to be retained by the new partnership.
The following procedures are to be followed:
Individual versus Sole Proprietor
Books of
*Books of
Individual
Sole Proprietor
Adjusting entries
N/A
Yes
Closing entries (real accounts)
N/A
No
Investments
Yes**
Balance Sheet
Yes
* Books of H; Partnership books
** Investments of individual; additional investments or withdrawals of sole proprietor.
1. Books of Sole Proprietor (H):
a. To record adjustments:
a. H, capital………………………………………………………………… 1,800
Allowance for doubtful accounts…………………………….
Additional provision computed as follows:
Required allowance: 10% x P48,000 = P 4,800
Less: Previous balance…………………
3,000
1,800
Additional provision…………………… P 1,800
b. Interest receivable or accrued interest income………………….
3,600
H, capital……………………………………………………………
3,600
Interest income for nine months computed as follows:
P60,000 x 8% x 9/12 = P3,000.
c. H, capital………………………………………………………………….. 6,000
Merchandise inventory…………………………………………..
6,000
Decline in the value of merchandise.
P27,000 – P21,000 = P6,000.
d. H, capital………………………………………………………………….
4,800
Accumulated depreciation…………………………………….
4,800
Under depreciation.
e. Prepaid expenses………………………………………………………...
2,400
H, capital……………………………………………………………
2,400
Expenses paid in advance.
H, capital…………………………………………………………………… 7,200
Accrued expenses………………………………………………….
7,200
Unrecorded expenses.
Note: All adjustment that reflects nominal accounts should be coursed through the
capital account, since all nominal accounts are already closed at the time of
formation.
b. To close the books: nothing to close since the books of H will be retained.
c. To record investment:
Cash……………………………………………………………………………. 116,100
I, capital………………………………………………………………
Initial investment computed as follows:
Unadjusted capital of H………………………………P 246,000
116,100
Add (deduct): adjustments:
a. Doubtful accounts...……………………...(
1,800)
b. Interest income……………………………..
3,600
c. Decline in the value of merchandise….(
6,000)
d. Under-depreciation……………………….(
4,800)
e. Prepaid expenses…………………………..
2,400
Accrued expenses………………………...(
7,200)
Adjusted capital balance of H……………..……...P 232,200
Divided by: Capital interest of H……………………
2/3
Total agreed capital…………………………….…….P 348,300
Multiplied by: Capital interest of I……………..……
1/3
Investment of I…………………………………………P 116,100
Note: The initial investment of H is already recorded since his books are already
retained. No further entry is required since there are no additional investments or
withdrawals made by H.
2. The balance sheet for both cases presented above is as follows:
HI Partnership
Balance Sheet
November 1, 20x4
Assets
Cash
Accounts receivables
Less: Allowance for doubtful accounts………...........
P 236,100
P 48,000
4,800
43,200
Notes receivable……...................................................
60,000
Interest receivable………………..................................
3,600
Merchandise Inventory................................................
21,000
Prepaid expenses…………..........................................
2,400
Equipment (net)………….............................................
Less: Accumulated depreciation………………........
Total Assets....................................................................
P 72,000
10,800
61,200
P 427,500
Liabilities and Capital
Liabilities
Accrued expenses…….. .......................................
P
7,200
Accounts payable...................................................
12,000
Notes payable…………...........................................
60,000
Total Liabilities................................................................
P 79,200
Capital...........................................................................
H, capital………………………..................................
P 232,200
I, capital…………………...........................................
116,100
Total Capital..................................................................
P 348,300
Total Liabilities and Capital..........................................
P 427,500
Problem V
New set of books. The following procedures are to be followed:
Sole Proprietor versus Sole Proprietor
Books of
Books of
Sole Proprietor
Sole Proprietor
*New Set of
(Baker)
(Carter)
Books
Adjusting entries
Yes
Yes
Closing entries (real accounts)
Yes
Yes
Investments
Yes**
Balance Sheet
Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors.
1. Books of Sole Proprietor
a. To record adjustments:
Books of J
Books of K
a. J, capital…………………………12,000
Merchandise Inventory……
12,000
Worthless inventory.
a. Merchandise Inventory………… 6,000
K, capital………………………
6,000
Upward revaluation.
b. J, capital………………………… 7,200
b. K, capital……….…………………. 3,000
Allowance for doubtful
Allowance for doubtful
Accounts…………………..
7,200
Worthless accounts.
accounts…………………….
3,000
Additional provision.
Required allowance:
5% x P180,000…….. P9,000
Less: Previous
Balance……….. 6,000
Additional
Provision....…………P3,000
c. Rent receivable…………………12,000
J, capital…………………….
12,000
Income earned.
c. K, capital……………………………. 9,600
Salaries payable……………….
9,600
Unpaid salaries.
d. Interest receivable…………………1,200
K, capital…………..................
Interest income from August
17 to October 1.
P60,000 x 16% x 45/360
e. J, capital………………………… 8,400
Office supplies……………….
8,400
Expired office supplies.
f. J, capital………………………… 6,000
Accumulated depreciation
- equipment………………
Under-depreciated.
6,000
1,200
g. K, capital……………………………12,000
Accumulated depreciationFurniture and fixtures………
12,000
Under-depreciated.
h. J, capital…………………………. 1,800
Interest payable…………….
1,800
Interest expense from
July 1 to October 1.
P60,000 x 12% x 3/12
i. Patent………………………………. 48,000
K, capital……………………..
48,000
Unrecorded patent.
Unadjusted capital of J…….……….P 372,000
Unadjusted capital of K..……………...P432,000
Add(deduct): adjustments:
Add(deduct): adjustments:
a. Worthless merchandise……..( 12,000)
a. Merchandise revaluation……..
6,000
b. Worthless accounts………….(
7,200)
b. Worthless accounts…………….(
3,000)
c. Rent income……………….….
12,000
c. Salaries…………….…….………..(
9,600)
e. Office supplies expense…….(
8,400)
d. Interest income…………………..
1,200
f. Additional depreciation……(
6,000)
g. Additional depreciation………( 12,000)
h. Interest expense………………( 1,800)
h. Patent………….……….…………. 48,000
Adjusted capital of J…………………P348,600
Adjusted capital of K….………………..P462,600
b. To close the books:
Books of J
Books of K
Allowance for doubtful
Allowance for doubtful
accounts................................. 12,000
Accumulated depreciation –
accounts.................................
9,000
Accumulated depreciation –
equipment…………………… 60,000
furniture and fixtures ……….
36,000
Accounts payable……………159,600
Accounts payable……………. 120,000
Notes payable………………… 60,000
Salaries payable……………….
Interest payable………………. 1,800
K, capital…….…………………. 462,600
J, capital…….………………….348,600
9,600
Cash………………………….
54,000
180,000
Cash…………………………
90,000
Accounts receivable……..
Accounts receivable…….
216,000
Notes receivable………….
Merchandise inventory….
180,000
Interest receivable………...
60,000
1,200
Office supplies…………….
24,000
Merchandise inventory…..
150,000
Equipment………………….
120,000
Furniture and fixtures.……..
144,000
Rent receivable…………...
12,000
Patent………….…………….
48,000
Close the books of J.
Close the books of K..
2. New Set of Books To record investments:
Cash……………………………………………………………….
90,000
Accounts receivable…………………………………………..
216,000
Merchandise inventory………………………………………..
180,000
Office supplies…………………………………………………..
24,000
Equipment (net)………………………………………………...
60,000
Rent Receivable………………………………………………..
12,000
Allowance for doubtful accounts…………………….
12,000
Accounts payable………………………………………..
39,600
Notes payable…………………………………………….
60,000
Interest payable…………………………………………..
1,800
J, capital……………………………………………………
468,600
Cash……………………………………………………………….
54,000
Accounts receivable…………………………………………..
180,000
Notes receivable……………………………………………….
60,000
Interest receivable……………………………………………..
1,200
Merchandise inventory………………………………………..
150,000
Furniture and fixtures (net)…..………………………………..
108,000
Patent…………..………………………………………………...
48,000
Allowance for doubtful accounts…………………….
3.
9,000
Accounts payable………………………………………..
120,000
Salaries payable….……………………………………….
9,600
K, capital……………………………………………………
462,600
H
Unadjusted capital (refer to 1a)
Adjusted capital (refer to 1b)
Net adjustments (debit)/credit
I
P372,000
P432,000
348,600
462,600
(P 23,400)
P 30,600
4. The balance sheet after formation is as follows:
J and K Partnership
Balance Sheet
October 1, 20x4
Assets
Cash...............................................................................
P 144,000
Accounts receivables.................................................
P396,000
Less: Allowance for doubtful accounts……….........
21,000
375,000
Notes receivable……...................................................
60,000
Interest receivable………………..................................
1,200
Rent receivable……………….......................................
12,000
Merchandise Inventory................................................
330,000
Office supplies...............................................................
24,000
Equipment (net)………….............................................
60,000
Furniture and fixtures (net)………………….................
108,000
Patent……………………...............................................
48,000
Total Assets....................................................................
P1,162,200
Liabilities and Capital
Liabilities
Salaries payable……………...................................
P
9,600
Accounts payable..................................................
159,600
Notes payable…………..........................................
60,000
Interest payable……………....................................
1,800
Total Liabilities...............................................................
P 231,000
Capital
J, capital………………………..................................
P 468,600
K, capital………………….........................................
462,600
Total Capital..................................................................
P 931,200
Total Liabilities and Capital..........................................
P1,162,200
Problem VI
1. Total assets – P1,094,000, at fair value
2. Total liabilities - P540,000, at fair value
3. Total capital - P554,000 (P1,094,000 – P540,000)
Balance Sheet
January 1, 2009
Assets
Cash
Liabilities and Capital
P 70,000
Liabilities
Account Receivable (net)
108,000
Accounts Payable
P 190,000
Merchandise Inventory
208,000
Mortgage Payable
__350,000
Building (net)
600,000
Total Liabilities
P 540,000
Furniture and Fixture (net)
108,000
Capital:
Accounts Payable
L, Capital
Mortgage Payable
M, Capital
Total Assets
P 260,000
___294,000
__________
Total Capital
P 554,000
P1,094,000
Total Liabilities and Capital
Multiple Choice Problems
1. c – P45,000
2.
d – the prevailing selling price which is also the fair market value.
3.
b - (P400,000 - P190,000) + [P270,000 - (P400,000 - P190,000)]/3 = P230,000
4. c
5. b - P60,000 + P80,000 + P100,000 = P240,000
6.
c - P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000 - P30,000 = P5,000
7. a
Total Agreed Capital (P50,000/40%)…………………………...............
P125,000
P 1,094,000
Less: Total Contributed Capital (P65,000 + P50,000)……..................
115,000
Goodwill (revaluation of assets upward)…………………..................
P 10,000
Assets, fair value (P20,000 + P60,000 + P15,000)…………………………P 95,000
Less: Liabilities assumed…………………………………………………..…
30,000
Bill, capital..…………………………………………………………………… P 65,000
8.
b
The capital balances of William (WW) and Martha (MM) at the date of partnership
formation are determined as follows:
William
Martha
P20,000
P 30,000
Inventory
-
15,000
Building
-
40,000
15,000
-
P35,000
P 85,000
Cash
Furniture and equipment
Total
Less mortgage assumed
by partnership
(10,000)
Amounts credited to capital
P35,000
P 75,000
9.c
Evan
Unadjusted capital
Helen
59,625
33,500
Add (deduct) adjustments:
Allowance
( 555)
(
405)
Depreciation
______
(
900)
Adjusted capital
59,070
32,195
10. c: Jones – P80,000 + P400,000 – P120,00 = P360,000
Smith – P40,000 + P280,000 – P60,000 = P260,000
11. c – P35,374 – refer to No. 12
12. c – P17,687
Unadjusted capital of CC………………………………………………………………….P 33,000
Add (deduct): adjustments-
Allowance for doubtful accounts (3% x P14,200)………………………………...(
426)
Increase in merchandise inventory (P23,000 – P20,000)…………………………
3,000
Prepaid salary…………………………………………………………………………....
600
Accrued rent expense…………………………………………………………………(
800)
Adjusted capital balance of CC………………………………………
P35,374
Divided by: Capital interest of CC……………………………………………………....
2/3
Total capital of the partnership……………………………………………………………P 53,061
Less: Adjusted capital balance of CC…………………………………………………..
35,374
Capital balance of DD…………………………………………………………………….. P 17,687
13. a
Total assets:
Cash
P 70,000
Machinery
75,000
Building
225,000
Less Liabilities (Mortgage payable)
P 370,000
90,000
Net assets (equal to FF’s capital account)
P 280,000
FF, capital (see no.13)
P 280,000
14. d
Divide by FF’s P & L share percentage
70%
Total partnership capital
P 400,000
Required capital of CC (P400,000 x 30%)
P 120,000
Less: Assets already contributed:
Cash
P 30,000
Machinery and equipment
25,000
Furniture and fixtures
10,000
Cash to be invested by CC
65,000
P 55,000
15. a
Agreed Fair Values
Cash
Invested
Invested
Invested
by John
by Jeff
by Jane
100,000
---
---
110,000
---
110,000
0
Equipment
Total assets
100,000
Note payable assumed by partnership
Net assets invested
---
30,000
---
100,000
80,000
0
Bonus Method
Goodwill Method
Cash
100,000
110,000
Cash
100,000
Equipment
Equipment
110,000
Goodwill
90,000
Note Payable
30,000
Note Payable
30,000
John, Capital
60,000
John, Capital
90,000
Jeff, Capital
60,000
Jeff, Capital
90,000
Jane, Capital
60,000
Jane, Capital
90,000
Note:
The bonus method is used when John and Jeff recognize that Jane is bringing something of value to the
firm other than a tangible asset, but they do not want to recognize an intangible asset. To equalize the
capital accounts, P40,000 is transferred from John's capital account and P20,000 is transferred from Jeff's
capital account.
The goodwill method is used when the partners recognize the intangible nature of the skills Jane is
bringing to the partnership. However, the capital accounts are equalized by recognizing an intangible
asset and a corresponding increase in the capital accounts of the partners. Unless the intangible asset
can be specifically identified, such as a patent being invested, it should not be recognized, because of a
lack of justification for goodwill in a new business.
16. c – refer to No. 15 for computation.
17. a
FF, capital:
Unadjusted balance
P 57,000
Adjustments:
Accumulated depreciation
( 1,500)
Allowance for doubtful account
(12,000)
Adjusted balance
P 43,500
GG, capital:
Unadjusted balance
P 49,500
Adjustments:
Accumulated depreciation
( 4,500)
Allowance for doubtful account
( 4,500)
Adjusted balance
P 40,500
GG’s adjusted capital (see no. 17)
P 40,500
18. c
Divide by GG’s P & L share percentage
40%
Total partnership capital
P 101,250
Multiply by FF’s P & L share percentage
60%
FF’s capital credit
60,750
FF’s contributed capital (see no. 1)
43,500
Additional cash to be invested by FF
P 17,250
Total capital of the new partnership (see no. 20)
P 296,875
19. d
Multiply by RR’s interest
20%
Cash to be invested by RR
P 59,375
20. (a)
Unadjusted capital balances
OO
PP
Total
(60%)
(40%)
P133,000
P108,000
P241,000
( 2,700)
( 1,800)
( 4,500)
3,000
2,000
5,000
( 2,400)
( 1,600)
( 4,000)
P130,900
P106,600
Adjustments:
Allowance for bad debts
Inventories
Accrued expenses
Adjusted capital balances
Total capital before the formation of the new partnership (see above)
Divide by the total percentage share of OO and PP (50% + 30%)
Total capital of the partnership after the admission of RR
P237,500
P 237,500
80%
P 296,875
21. a
Agreed Capital
OO
Contributed Capital
Settlement
P148,437.50 (50% x P296,875)
P 130,900
P 17,537.50
89,062.50 (30% x P296,875)
106,600
(17,537.50)
PP
Therefore, OO will pay PP P17,537.50
22. c
Total partnership capital (P113,640/1/3)
P 340,920
Less DD’s capital
113,640
CC’s capital after adjustments
P 227,280
Adjustments made:
Allowance for doubtful account (2% x P96,000)
1,920
Merchandise inventory
( 16,000)
Prepaid expenses
( 5,200)
Accrued expenses
3,200
CC’s capital before adjustments
P 211,200
23. a
Assets invested by CC:
Cash:
Capital
Add Accounts payable
P211,200
49,600
Total assets (excluding cash)
260,800
Less Noncash assets (96,000 + P144,000)
240,000
Accounts receivable (96,000 – P1,920)
Merchandise inventory
Prepaid expenses
Cash invested by DD
Total assets of the partnership
P20,800
94,080
160,000
5,200
P 280,080
113,640
P 393,720
24. d
Total partnership capital (P180,000/60%)
P 300,000
GG’s Capital (P300,000 x 40%)
P 120,000
Less Cash investment
30,000
Merchandise to be invested by GG
P 90,000
25. a
Adjusted capital of JJ:
Total assets (at agreed valuations)
P 180,000
Less Accounts payable
48,000
Required capital of JJ
P 132,000
180,000
Cash to be invested by JJ
P 48,000
Quiz-I
1. P276,000 = (P480,000 – P228,000) + [P324,000 - (P480,000 – P228,000)]/3
2. Philip, P100,000; Ray, P100,000 and Sarah, P90,000 (P300,000 – P210,000)
3. P330,000
P330,000 = P50,000 + (P310,000 - P30,000)
4. c
The capital balances of each partner are determined as follows:
Apple
Cash
Blue
Crown
P50,000
Property
P 80,000
Mortgage assumed
(35,000)
Equipment
P 55,000
Amount credited to
capital accounts
P50,000
P 45,000
5. P15,000
(P190,000 – P160,000) x 1/2 = P15,000
6. P18,000 – the prevailing selling price which is also the fair market value.
7.
8. P15,000
P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000
P50,000 - P35,000 = P15,000
9. P45,000
10. P225,000
P 55,000
11. P375,000 = P400,000 – P25,000
12. P50,000
13. P280,000
Pane
Cash
P 40,000
Machinery and equipment
Building
Less: Liability assumed by the partnership
Capital balances, 7/1/06
P 30,000
100,000
..
Subtotal
Sills
P140,000
350,000
P380,000
..
(100,000)
P140,000
P280,000
14. d
Adjusted capital of LL
Contributed capital of MM
Total capital
P 165,900
82,950
P 248,850
15. a
FF, capital:
Unadjusted balance
P 57,000
Adjustments:
Accumulated depreciation
( 1,500)
Allowance for doubtful account
(12,000)
Adjusted balance
P 43,500
Unadjusted balance
P 49,500
GG, capital:
Adjustments:
Accumulated depreciation
( 4,500)
Allowance for doubtful account
( 4,500)
Adjusted balance
THEORIES
Completion statements:
1. accounting
2. GAAP
P 40,500
3.
a. cash basis instead of accrual basis
b. prior period adjustments
c. use of fair (or current) values instead of historical cost
d. recognition of goodwill in situations not involving business combinations
4. drawings
5. fair (or current) values
6. achieving equity among the partners
7. capital balances
8. professional corporation
True or False
9
False
14.
True
19.
False
24.
False
29.
False
10.
True
15.
False
20.
True
25.
True
30.
True
11.
False
16.
False
21.
False
26.
False
12.
True
17.
False
22.
True
27.
True
13.
False
18.
True
23.
False
28.
True
Note for the following numbers:
17. Individuals, partnerships, and corporations are allowed to be partners in a partnership.
19. All of the general partners are liable for all the partnership’s debts.
21. Most small partnerships maintain their financial information using the tax basis.
23., While the partnership does not pay income taxes, it is responsible for other taxes such as payroll taxes and franchise taxes.
24. The proprietary theory is based on the notion that the business entity is an aggregation of the owners
26. This is an example of the proprietary theory of equity.
28. Any basis (i.e., carrying value, tax basis, or market value) can be used to value noncash assets contributed to a partnership
MULTIPLE-CHOICE QUESTIONS
31.
a
36.
d
41.
c
46.
a
51.
d
32.
B
37.
b
42.
c
47.
c
52.
b
33.
a
38.
c
43.
a
48.
b
53.
b
34.
e
39.
a
44.
d
49.
b
35.
d
40.
a
45.
b
50.
c
Chapter 2
Problem I
1. Beginning Capital.
Income summary…………
X, drawing…….
Y, drawing…….
345,600
X, capital, January 1………..
X, capital, January 1………..
Total capitals
P 360,000
504,000
P 864,000
X’s share of net income: 360/864 of P345,600
Y’s share of net income 504/864of P345,600
Total capitals
P 144,000
201,600
P 345,600
2. Ending Capital.
Income summary…………
X, drawing…….
Y, drawing…….
345,600
X, capital, December 31………..
X, capital, December 31………..
Total capitals
P 432,000
540,000
P 972,000
X’s share of net income: 432/972 of P345,600
Y’s share of net income 540/972 of P345,600
Total
P 153,600
192,000
P 345,600
3. Interest on Excess Average Capital Balance.
Income summary…………
Y, drawing…….
4,320
Interest allowed based on average capitals.
Y’s interest on excess average capital:
6% of (P486,000 – P414,000)…………………..
X:
1/1/x4:
4/1/x4:
Capital
balance
P360,000
432,000
x
x
Average
Y:
1/1/x4:
3/1/x4:
11/1/x4:
Average
Total
Capital
balance
P504,000
468,000
540,000
x
X
x
No. of Mos.
Unchanged
3
9
12
No. of Mos.
Unchanged
2
8
2
12
P 4,320
P1,080,000
3,888,000
P4,968,000
P 414,000
P 1,008,000
3,744,000
1,080,000
P5,832,000
P 486,000
P 900,000
144,000
201,600
153,600
192,000
4,320
The net effect of the foregoing on capitals is:
Interest on excess
average capital……
Balance (1:2)………..
Total
X
P 113,760
P 113,760
P
Y
4,320
227,520
P 231,840
P
Total
4,320
341,280
P345,600
The allocation of net income may be summarized in a single entry as follows:
Income summary…………….
X, drawing…….
Y, drawing…….
345,600
113,760
231,840
Problem II
1. A bonus of 20% of net income before the bonus is deducted, the bonus would be computed as
follows:
Let B
B
B
B
= Bonus
= 20% of Net income
= 20% of P504,000
= P100,800
2. A bonus of 20% of net income after deduction of the bonus, the bonus would be computed as
follows:
Let B
B
B
B
1.20 B
B
= Bonus
= 20% of Net income after Bonus
= 20% (P504,000 – B)
= P100,800 - .20B
= P100,800
= P84,000
Problem III
1. Bonus is based on net income before bonus, salaries and interest
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
2.
A
P 100,800
48,000
14,400
172,800
P336,000
B
P 72,000
9,600
86,400
P168,000
Total
P 100,800
120,000
24,000
259,200
P504,000
Bonus is based on net income after bonus but before salaries and interest
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
A
P 84,000
48,000
14,400
184,000
P330,400
B
P 72,000
9,600
92,000
P173,600
Total
P 84,000
120,000
24,000
276,000
P504,000
3. Bonus is based on net income after bonus and salaries but before interest:
Let B
B
B
B
B
B
1.20 B
B
= Bonus; S = Salaries; and I = Interest.
= 20% of Net income after Bonus and Salaries before Interest
= 20% (P504,000 – B – S)
= 20% (P504,000 – B – P120,000)
= 20% (P384,000 – B)
= P76,800 - .20B
= P76,800
= P64,000
Proof:
Net income before bonus, salaries and interests……………
Less: Bonus………………
Salaries……………0
Net income after bonus, salaries before interests……………
Multiplied by: Bonus rate………….
Bonus…………
P504,000
64,000
120,000
P320,000
20%
P 64,000
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
A
P 64,000
48,000
14,400
197,333
P323,733
B
P 72,000
9,600
98,667
P180,267
Total
P 64,000
120,000
24,000
296,000
P504,000
4. Bonus is based on net income after bonus, salaries and interest:
Let B
B
B
B
B
B
1.20 B
B
= Bonus; S = Salaries; and I = Interest.
= 20% of Net income after Bonus, Salaries and Interest
= 20% (P504,000 – B – S - I)
= 20% (P504,000 – B – P120,000 – P24,000)
= 20% (P360,000 – B)
= P72,000 - .20B
= P72,000
= P60,000
Proof:
Net income before bonus, salaries and interests……………
Less: Bonus………………
Salaries……………
Interest……………..
Net income after bonus, salaries before interests……………
Multiplied by: Bonus rate………….
Bonus…………
P504,000
60,000
120,000
24,000
P300,000
20%
P 60,000
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
A
P 60,000
48,000
14,400
200,000
P322,400
B
P 72,000
9,600
100,000
P181,600
Total
P 60,000
120,000
24,000
300,000
P504,000
5. Bonus is based on net income after salaries but before bonus and interest:
Let B
B
B
B
B
B
= Bonus; S = Salaries; and I = Interest.
= 20% of Net income after Salaries before Bonus and Interest
= 20% (P504,000 – S)
= 20% (P504,000 – P120,000)
= 20% (P384,000)
= P76,800
Refer to Note of No. 3.
6. Bonus is based on net income after interest but before bonus and salaries:
Let B
B
B
B
B
= Bonus; S = Salaries; and I = Interest.
= 20% of Net income after Interest before Bonus and Salaries
= 20% (P504,000 – P24,000I
= 20% (P480,000)
= P96,000
Refer to Note of No. 3.
7. Bonus is based on net income before bonus but after income tax (tax rate is 35%):
Let B
B
B
= Bonus;
= 20% (P504,000 – T)
= P100,800 - .20T
Let T
T
T
= Income tax
= 35% (P504,000)
= P176,400
Substituting the equation for T in the equation for B:
Let B
B
B
= P100,800 - .20 (P176,400)
= P100,800 – P35,280
= P65,520
Proof:
Net income before bonus and income tax……………
Less: Bonus………………
Net income before bonus after income tax……..
Less: Income tax……………
Net income after bonus and income tax………
Bonus as computed above:
Net income before bonus and income tax……………
Less: Income tax (35% x P504,000)
Net income after income tax before bonus……..
Multiplied by: Bonus rate………
Net income after bonus and income tax………
8. Bonus is based on net income, that is, after bonus and income tax:
Let B
B
B
= Bonus; T = Income tax
= 20% (P504,000 – B - T)
= P100,800 - .20B - .20T
Let T
T
T
= Income tax
= 35% (P504,000)
= P176,400
P504,000
65,520
P438,480
_176,400
P262,080
P504,000
176,400
P327,600
____ 20%
P 65,520
Substituting the equation for T in the equation for B:
Let B
B
1.20B
1.20B
B
= P100,800 - .20B - .20T
= P100,800 - .2B - .20 (P176,400)
= P100,800 – P35,280
= P65,520
= P54,600
Proof:
Net income before bonus and income tax……………
Less: Bonus………………
Net income before income tax……..
Less: Income tax (35% x P504,000)
Net income after bonus and income tax………
P504,000
54,600
P449,400
176,400
P273,000
Bonus as computed above:
Net income after bonus and income tax………
Multiplied by: Bonus rate………
Bonus……………
P273,000
____ 20%
P 54,600
Problem IV
B = Bonus to Rodgers
B = 0.20(Net Income - interest - salary - bonus)
B = 0.20(P168,000 - [0.08(P150,000)] - P60,000 – B)
B = 0.20(P96,000 - B)
B = P19,200 - 0.20B
1.20B = P19,200
B = P16,000
Problem V
Interest (8%)
Salary
James
P4,400 (below)
13,000
Remaining income (loss):
P30,000
(17,200)
(48,000)
P(35,000)
(7,040)
Totals
P10,360
Keller
P5,600
15,000
Rivers
P7,200
20,000
Totals
P17,200
48,000
(10,560)
P10,040
(17,600)
P9,600
(36,200)
P30,000
CALCULATION OF JAMES INTEREST ALLOCATION
Balance, January 1 – June 1 (P48,000 x 5 months)
Balance, June 1 – December 31 (60,000 x 7 months)
Total
Months
Average monthly capital balance
Interest rate
Interest allocation (above)
P240,000
420,000
P660,000
÷
12
P 55,000
x
8%
_P 4,400
STATEMENT OF PARTNERS’ CAPITAL
James
Keller
Beginning balances
P 48,000
P70,000
Additional contribution
12,000
0
Income (above)
10,060
10,040
Drawings (P1,000/month)
(12,000)
(12,000)
Ending capital balances
P58,360
P68,040
Problem VI
1: Net income is P360,000
Salaries
Bonus on net income
Interest on average capital balances
Remainder is P 88,600 (positive)
Totals
2. Net income is P240,000
Salaries
Bonus on net income
Interest on average capital balances
Remainder is P 9,800 (negative)
Totals
3. Net loss is P40,000
Salaries
Bonus (no distribution)
Interest on average capital balances
Remainder is P 246,600 (negative)
Totals
Problem VII:
1 and 2.
Total to allocate:
As Bonus (Note A below)
As Salaries
As Interest (Note B below)
Subtotal:
Residual Profit-sharing
Final Allocations:
Note A (Bonus):
Bonus = .20(Net Income
1.2Bonus = .20(P150,000)
1.2Bonus = 30,000
Bonus = P25,000
Rivers
P90,000
0
9,600
(12,000)
P87,600
Totals
P208,000
12,000
30,000
(36,000)
P214,000
P
P 80,000
21,600
9,800
___53,160
P 164,560
Q
P 100,000
43,200
16,800
__35,440
P195,440
Total
P180,000
64,800
26,600
___88,600
P 360,000
P
P 80,000
14,400
9,800
_(4,900)
P 99,300
Q
P 100,000
28,800
16,800
__(4,900)
P 140,700
Total
P 180,000
43,200
26,600
__(9,800)
P240,000
P
P 80,000
0
9,800
(123,300)
(P33,500)
Q
P 100,000
0
16,800
(123,300)
(P 6,500)
Total
P 180,000
0
26,600
(246,600)
(P 40,000)
Total
P150,000
(25,000)
(72,000)
(10,720)
P 42,280
(42,280)
P
0
Bonus)
Carey
Drew
P25,000
36,000
6,560
P67,560
21,140
P88,700
P36,000
4,160
P40,160
21,140
P61,300
Note B (Interest):
Carey:
Drew:
Capital
Amount
P100,000
(12,000)
88,000
(12,000)
76,000
(12,000)
P 64,000
Fraction
of Year
1/12
Interest
Rate
0.08
= Subtotal
P 667
6/12
0.08
3,520
3/12
0.08
1,520
2/12
1.0000
0.08
853
P6,560
Capital
Amount
P70,000
(12,000)
58,000
(12,000)
46,000
(12,000)
P34,000
Fraction
of Year
1/12
Interest
Rate
0.08
= Subtotal
P 467
6/12
0.08
2,320
3/12
0.08
920
2/12
1.0000
0.08
453
P4,160
Problem VIII
Jones would have to receive a bonus of P12,000 to be indifferent to the two profit-sharing options. Since
Cable would receive the same bonus, the total bonus would have to be P24,000. Therefore,
P24,000 = 10%  (Net income - Salaries - Bonuses)
P24,000 = 10%  (Net income - [30,000 + 40,000] - 24,000)
P24,000 = 10%  (Net income - 94,000)
P24,000 = 10%  Net income - 9,400
P33,400 = 10%  Net income
Net income P334,000
Problem IX
1. It should be noted that the order of priority is of no significance when it comes to allocation of net
income. Unless in cases, when there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the allocation
would still be to satisfy completely all provisions of the profit and loss agreement and use the profit
and loss ratios to absorb any deficiency or additional loss cause by such action.
Olsen
Katch
Total
Interest
P 2,000
P 2,400
P 4,400
Bonus
10,000
10,000
Salaries
48,000
36,000
84,000
Remainder (6:4)
__8,040
__5,360
_13,400
P58,040
P26,960
P85,000
Weighted Average Calculation:
Olsen:
1/1 to 4/1
4/1 to 10/1
10/1 to 12/31
Total
Average
Katch:
1/1 to 3/1
3/1 to 9/1
9/1 to 11/1
11/1 to 12/31
Total
Average
2.
Capital
Balance
20,000
25,000
30,000
Gross
# of Months
3
6
3
Capital
Balance
40,000
30,000
20,000
30,000
Gross
# of Months
2
6
2
2
Olsen
P48,000
Salaries
Bonus
Interest*
Remainder
Final Profit:
2,000
39,960
P89,960
Katch
P36,000
10,000
2,400
26,640
P75,040
*see part 'a' solution for weighted average capital calculation
Problem X
Weighted Average Capital Calculation:
Matt
Cap Bal
# months
1/1 to 6/1
6/1 to 10/1
10/1 to 12/31
1/1 to 3/1
3/1 to 9/1
9/1 to 11/1
11/1 to 12/1
12/1 to 12/31
35,000
45,000
50,000
5
4
3
Total
Average
Jeff
Cap Bal # months
25,000
2
35,000
6
25,000
2
20,000
1
28,000
1
Gross
Cap
175,000
180,000
150,000
505,000
42,083
Gross Cap
50,000
210,000
50,000
20,000
28,000
Capital
60,000
150,000
90,000
300,000
25,000
Capital
80,000
180,000
40,000
60,000
360,000
30,000
Total
P 84,000
10,000
4,400
66,600
P165,000
Total
Average
1.
2.
3.
4.
358,000
29,833
Salary
Bonus
Interest
Subtotal
Remainder
Total
Matt
P N/A
N/A
4,208
P 4,208
29,404
P33,612
Jeff
P N/A
N/A
2,983
P 2,983
29,405
P32,388
Total
P
0
0
7,191
P 7,191
58,809
P66,000
Salary
Bonus
Interest
Subtotal
Remainder
Total
Matt
P
0
N/A
5,000
P 5,000
29,520
P34,520
Jeff
P 9,000
N/A
2,800
P11,800
19,680
P31,480
Total
P 9,000
0
7,800
P16,800
49,200
P66,000
Salary
Bonus
Interest
Subtotal
Remainder
Total
Matt
P10,000
N/A
N/A
P10,000
23,992
P33,992
Jeff
P15,000
N/A
N/A
P15,000
17,008
P32,008
Total
P25,000
0
0
P25,000
41,000
P66,000
Salary
Bonus*
Interest
Subtotal
Remainder
Total
Matt
P20,000
6,000
4,208
P30,208
(1,096)
P29,112
Jeff
P35,000
N/A
2,983
P37,983
(1,095)
P36,888
Total
P55,000
6,000
7,191
P68,191
(2,191)
P66,000
AA
14,400
12,960
( 1,200)
26,160
BB
12,000
17,280
( 900)
28,380
CC
13,600
24,840
( 900)
37,540
Total
40,000
55,080
( 3,000)
92,080
AA
96,000
BB
144,000
CC
216,000
Total
456,000
24,000
26,160
( 9,000)
28,380
( 9,000)
(36,000)
37,540
( 9,000)
(12,000)
92,080
(27,000)
Problem XI
1. Allocation/Distribution of Net Income
Salaries
Interest-12% of Ave. Cap.
Balance/Remainder (4:3:3)
Share in Net Income
2. Statement of Partners’ Capital
Capital, January 2, 2010
Additional Investments
(Withdrawals)
Net Income
Personal Withdrawals
Capital, December 31, 2010
137,160
163,380
208,540
509,080
AA
BB
CC
Interest-12% of Ave. Cap.
12,960
17,280
24,840
Balance/Remainder (4:3:3)
( 1,200)
( 900)
( 900)
Share in Net Income
11,760
16,380
23,940
*Net income before partners’ salaries and interests…………………P 92,080
Less: Operating expenses (including salaries)……………………….. 40,000
Net Income after partners’ salaries but before interests……………P 52,080
Total
55,080
( 3,000)
52,080*
3. Allocation/Distribution of Net Income
Incidentally, the entry to record the salaries would be:
Operating expenses (for salaries)…………………. 40,000
AA, capital………………………………………………………..
BB, capital………………………………………………………..
CC, capital………………………………………………………..
3. Statement of Partners’ Capital
AA
96,000
24,000
11,760
14,400
( 9,000)
137,160
Capital, January 2, 2010
Addit’l. Inv. (Withdrawals)
Net Income
Sal. (refer to entry above)
Personal Withdrawals
Capital. December 31, 2010
Problem XII
Components of Allocation
Profit/loss percentage ....................................
Gain on sale of equipment ...........................
Salaries ..............................................................
Bonus (Note A) .................................................
Bonus (Note A) .................................................
Interest on capital (Note B) ...........................
Remaining profit (loss) ....................................
Profit (loss) allocation ....................................
Durand
35%
P 5,000
40,000
..............
2,692
7,958
14,280
P 69,930
BB
144,000
14,400
12,000
13,600
16,380
12,000
( 9,000)
163,380
CC
216,000
( 36,000)
23,940
13,600
( 9,000)
208,540
Partners
Price
25%
P 5,000
20,000
5,000
2,692
11,417
10,200
P 54,309
Russell
40%
P 5,000
45,000
..............
2,692
6,750
16,319
P75,761
Cumulative
Total
................
P 15,000
105,000
5,000
8,076
26,125
40,799
P200,000
Note A: Bonus to Price based on sales is 5% × (P1,100,000 – P1,000,000)
Bonus to all partners based on net income:
Bonus = 30% × [(net income – P150,000) – bonus]
Bonus = 30% × [(P185,000 – P150,000) – bonus]
130% Bonus = P10,500
Bonus = P8,076
The total bonus of P8,076 divided equally among the partners is P2,692 per partner.
Note B:
Calculation of weighted-average capital (capital is reduced by draws in excess of salaries):
Durand
Price
P75,000 × 5/12 =
85,000 × 4/12 =
80,000 × 3/12 =
P
31,250
28,333
20,000
P 79,583
10%
P
7,958
P125,000 × 1/12 =
120,000 × 2/12 =
115,000 × 3/12 =
110,000 × 6/12 =
P
P
P
10,417
20,000
28,750
55,000
114,167
10%
11,417
P40,000 ×
70,000 ×
Russell
1/12 =
11/12 =
P
3,333
64,167
P 67,500
10%
P
6,750
Problem XIII
1. Distribution of income for 20x4:
Interest
Compensation
Subtotals
Allocation of remainder
Totals
Norr
P 12,000
__10,000
P 22,000
__14,640
P 36,640
Caylor
P 9,600
__14,000
P 23,600
__9,760
P 33,360
Total
P 21,600
__24,000
P 45,600
__24,400
P 70,000
2. Capital account balances at the end of 20x4:
Beginning capital balances
Share of income
Withdrawals
Ending capital balances
Norr
P 100,000
36,640
_(12,000)
P 124,640
3. Distribution of income for 20x5:
Interest
Compensation
Subtotals
Allocation of remainder
Totals
Norr
P 14,957
__8,000
P 22,957
__13,872
P 9,085
Caylor
P 80,000
33,360
_(12,000)
P 101,360
Caylor
P 12,163
__12,000
P 24,163
__9,248
P 14,915
Total
P 27,120
__240,000
P 47,120
_(23,120)
P 24,000
4. Capital account balances at the end of 20x5:
Beginning capital balances
Share of income
Withdrawals
Ending capital balances
Norr
P 124,640
9,085
_(12,000)
P 121,725
Caylor
P 101,360
14,915
_(12,000)
P 104,275
Problem XIV
1.
The interest factor was probably inserted to reward Page for contributing P50,000 more to the partnership than
Childers. The salary allowance gives an additional P15,000 to Childers in recognition of the full-time (rather
than part-time) employment. The 40:60 split of the remaining income was probably negotiated by the partners
based on other factors such as business experience, reputation, etc.
2.
The drawings show the assets removed by a partner during a period of time. A salary allowance is added to
each partner's capital for the year (usually in recognition of work done) and is a component of net income
allocation. The two numbers are often designed to be equal but agreement is not necessary. For example, a
salary allowance might be high to recognize work contributed by one partner. The allowance increases the
appropriate capital balance. The partner might, though, remove little or no money so that the partnership
could maintain its liquidity.
3.
Page, Drawings .........................................................................................
Repair Expense ...................................................................................
(To reclassify payment made to repair personal residence.)
5,000
Page, Capital .............................................................................................
Childers, Capital ........................................................................................
Page, Drawings (adjusted) ..............................................................
Childers, Drawings .............................................................................
(To close drawings accounts for 2008.)
13,000
11,000
5,000
13,000
11,000
Revenues ................................................................................................. 90,000
Expenses (adjusted by first entry) ....................................................
Income Summary ...............................................................................
(To close revenue and expense accounts for 2008.)
Income Summary ......................................................................................
Page, Capital .....................................................................................
Childers, Capital ................................................................................
31,000
(To close net income to partners' capital–see allocation plan shown below.)
Allocation of Income
Page
Interest (10% of beginning balance)
P 8,000
Salary allowances
5,000
Remaining income (loss):
P31,000
(11,000)
(25,000)
P (5,000)
(2,000) (40%)
P11,000
4.
59,000
31,000
11,000
20,000
Childers
P 3,000
20,000
(3,000) (60%)
P20,000
Total capital (original balances of P110,000 plus 2008
net income less drawings) ................................................................
P117,000
43,000
Investment by Smith ..................................................................................
Total capital after investment .................................................................
P160,000
20%
Ownership portion acquired by Smith ...................................................
Smith, capital
......................................................................................... P 32,000
Amount paid
......................................................................................... 43,000
Bonus paid by Smith—assigned to original partners ............................ P 11,000
Bonus to Page (40%) .................................................................................
P4,400
Bonus to Childers (60%) ............................................................................
P6,600
Cash
........................................................................................................
Smith, Capital (20% of total capital) ..............................................
Page, Capital .....................................................................................
Childers, Capital ................................................................................
43,000
Multiple Choice Problems
1. c
Capital, Beg
Additional Investment
Withdrawal (800 x 12)
Net income (?)
Capital, Ending
2. b
Salaries
Bonus
Interest (20% x average capital)
Balance - equally
10M
45,000
50,000
(96,000)
31,000
P 30,000
A
2,000
8,000
8,000
8,500
44,500
B
25,000
0
10,000
8,500
10M
45,000
8,000
18,000
1,700
8,800
32,000
4,400
6,600
*Bonus= 10% (NI - B)
B= .10 (8,800 - B)
B= 8,800 - .10B
1.10B= 8,800
B= 8,000
3.
b
The net income of P80,000 is allocated to Blue and Green in the following
manner:
Blue
Green
Net Income
P 80,000
Salary allowances
P 55,000
P45,000
(100,000)
Remainder
P (20,000)
Allocation of the negative
remainder in the
60:40 ratio
(12,000)
(8,000)
20,000
Allocation of net income
P 43,000
P37,000
P
-0-
4. a
Salaries
Bonus*
Interest: 10% x Ave. capital
1:3
Total
A
30,000
3,600
5,000
4,625
P 43,225
B
P 45,000
A
P 40,000
B
P 45,000
6,000
(32,000)
P 14,000
9,000
(16,000)
P 38,000
6,500
Total
P 75,000
3,600
11,500
18,500
P 108,600
*Bonus = 12% (NI – S – B)
B = .12 (108,600 – 75,000 – B)
B = .12 (33,600 – B)
B = 4,032 - .12B
1.12B = 4,032
B = 3,600
5. a
Salaries
Bonus (refer to Note)
Interest on average capital (15%)
Balance (2:1)
Total
Total
P 85,000
0
15,000
(48,000)
P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to allocation of
net income. When there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the
allocation would still be to satisfy completely all provisions of the profit and loss agreement
and use the profit and loss ratios to absorb any deficiency or additional loss caused by such
action.
6. d
Salaries
Bonus*
3:4:3
Total
A
P 40,000
B
P 40,000
__3,000
P 43,000
4,000
C
P 1,000
_3,000
P 4,000
Total
P 80,000
1,000
10,000
P 91,000
*Bonus = 10% (NI – S – B)
B = .10 (91,000 – 80,000 – B)
B = .10 (11,000 – B)
B = 1,100 - .10B
1.10B = 1,100
B = 1,000
7. c
Salaries
Bonus (refer to Note)
Interest on average capital (10%)
Balance (1:2)
Total
A
P 41,600
B
P 38,400
2,000
(16,500)
P 27,100
3,500
Total
P 80,000
0
5,500
(49,500)
P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to allocation of
net income. When there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the
allocation would still be to satisfy completely all provisions of the profit and loss agreement
and use the profit and loss ratios to absorb any deficiency or additional loss caused by such
action.
8. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual is 12 months.
9. c
Salaries
6:4
Total
Mack
P 90,000
_30,000
P120,000
Ruben
P 60,000
__20,000
P 80,000
Total
P 150,000
50,000
P 200,000
10. c – Robbie, P50,000 x 90/150 = P30,000; Ruben, P50,000 x 60/150 = P20,000
11. c - B = .05(P180,000 - P150,000)
12. d - B = {[(P540,000 - P500,000)/P500,000] - .05} P120,000
13. d - (P60,000 - P50,000)(.60) + (P80,000 - P60,000)(.70)
14. c - (P300,000 - P200,000)(.75) + (P380,000 - P300,000)(.60)
15. c - (P300,000 - P100,000)(.35) + (P450,000 - P300,000)(.55)
16. d - (P120,000 - P50,000)(.40)
17. a - (P600,000 - P350,000)(.40 - .30)
18. b
XX
YY
ZZ
Salary
60,000
48,000
36,000
Interest: 10% x average capital
7,500
Balance: equally
5,000
5,000
5,000
X: P100,000 x 6 = P600,000
P160,000 x 6 = 960,000
P1,560,000 / 12 = P 130,000
Total
144,000
48,750
15,000
207,750
Y (same with beginning since no additional
investments or withdrawals were made)
Z: P225,000 x 9 = P2,025,000
P155,000 x 3 = 465,000 P2,490,000/12 =
19. d - ASSIGNMENT OF INCOME
Interest—10% of beginning capital
Salary ........................................................
Allocation of remaining income
(P6,000 divided on a 3:3:4 basis) ............
Totals ............................................
STATEMENT OF CAPITAL
Beginning capital ......................................
Net income (above) ................................
Drawings (given) .......................................
Ending capital ...........................................
20. a
ASSIGNMENT OF INCOME—YEAR ONE
Interest—10% of beginning capital ........
Salary ........................................................
Allocation of remaining loss
(P80,000 divided on a 5:2:3 basis) ...........
Totals ............................................
STATEMENT OF CAPITAL—YEAR ONE
Beginning capital ......................................
Net loss (above) ........................................
Drawings (given) .......................................
Ending capital ....................................
ASSIGNMENT OF INCOME—YEAR TWO
Interest—10% of beginning capital
Salary ........................................................
Allocation of remaining loss
(P15,000 divided on a 5:2:3 basis) ..........
Totals ............................................
STATEMENT OF CAPITAL—YEAR TWO
Beginning capital (above) ......................
Net income (above) ................................
Drawings (given) .......................................
Ending capital ....................................
150,000
207,500
P 487,500 x 10% = P48,750
ARTHUR
P 6,000
20,000
BAXTER
P 8,000
1,800
P 7,800
1,800
P29,800
ARTHUR
P60,000
7,800
(5,000)
P62,800
BAXTER
P80,000
29,800
(5,000)
P104,800
WINSTON
P11,000
20,000
DURHAM
P 8,000
-0-
CARTWRIGHT
P10,000
20,000
2,400
P12,400
CARTWRIGHT
P100,000
12,400
(5,000)
P107,400
TOTAL
P24,000
6,000
P50,000
TOTAL
P240,000
50,000
(15,000)
P275,000
SALEM
P11,000
10,000
TOTAL
P30,000
30,000
(40,000)
P(9,000)
(16,000)
P (8,000)
(24,000)
P (3,000)
(80,000)
P (20,000)
WINSTON
P110,000
(9,000)
(10,000)
P 91,000
DURHAM
P80,000
(8,000)
(10,000)
P62,000
SALEM
P110,000
(3,000)
(10,000)
P 97,000
TOTAL
P300,000
(20,000)
(30,000)
P250,000
WINSTON
P 9,100
20,000
DURHAM
P 6,200
-0-
SALEM
P 9,700
10,000
TOTAL
P25,000
30,000
(7,500)
P21,600
(3,000)
P3,200
(4,500)
P15,200
(15,000)
P40,000
WINSTON
P 91,000
21,600
(10,000)
P102,600
DURHAM
P62,000
3,200
(10,000)
P55,200
SALEM
P 97,000
15,200
(10,000)
P102,200
TOTAL
P250,000
40,000
(30,000)
P260,000
21. a
Capital, Beginning
Additional investment
Withdrawals
Net income
Net Decrease
25,000
(130,000)
45,000 / 30% = P 150,000
(60,000)
22. a
________
H
4,000
20,000
_________
Total
22,000
50,000
(105,000)
(33,000)
D
25,000
13,000
28,200
66,200
E
20,000
F
25,000
14,100
34,100
_4,700
29,700
Total
70,000
13,000
47,000
130,000
C
100,000
29,000
(12,000)
117,000
W
150,000
63,000
(12,000)
20,100
N
200,000
58,000
(12,000)
24,600
Total
450,000
150,000
(36,000)
564,000
C
10,000
19,000
29,000
W
15,000
10,000
38,000
63,000
N
20,000
38,000
58,000
Total
45,000
10,000
95,000
150,000
Capital, 1/1/x5
Net income
Withdrawals – personal
Capital, 12/31/x5
117,000
34,420
(12,000)
139,420
201,000
75,540
(12,000)
264,540
246,000
70,040
(12,000)
304,040
564,000
180,000
(36,000)
708,000
Net income – 20x5
10% interest a beginning capital
Salary
20% : 40% : 40%
117,000
34,420
(12,000)
139,420
201,000
75,540
(12,000)
264,540
246,000
70,040
(12,000)
304,040
564,000
180,000
(36,000)
708,000
10% interest a Average capital
Salaries
Equally
23. d, P66,200; E, P34,100; F, P29,700
Salaries
Bonus on income (10% x P130,000)
Remainder (6:3:1)
24. a
Capital, 1/1/x4
Net Income – 20x4
Withdrawal – personal
Capital, 12/31/x4
Net income – 20x4
10% interest on beginning capital
Salary
20% : 40% : 40%
25. d - refer to No.24
26. b - refer to No.24
27. c - refer to No.24
F
12,000
30,000
(35,000)
7,000
G
6,000
28. b
Capital, 1/1/Year 1
Net income (loss)
Withdrawals – personal
Capital, 12/31/ Year I
Y
143,000
(11,700)
(13,000)
118,300
E
104,000
(10,400)
(13,000)
80,600
I
143,000
(3,900)
(13,000)
126,100
Total
390,000
(26,000)
(39,000)
325,000
Year I Net loss
Salary
Interest – 10% x beginning capital
5:2:3
Total
26,000
14,300
(52,000)
(11,700)
10,400
(20,800)
(10,400)
13,000
14,300
(31,200)
(3,900)
3,900
3,900
(10,400)
(2,600)
Capital, 1/1/Year2
Net income (loss)
Withdrawals – personal
Capital, 12/31/ Year 2
118,300
28,080
(13,000)
133,380
80,600
76,700
(13,000)
144,300
126,100
19,760
(13,000)
132,860
325,000
52,000
(3,900)
338,000
8,060
(3,900)
76,700
13,000
12,610
(5,850)
19,750
3,900
32,500
(19,500)
52,000
Year 2 Net loss
Salary
Interest – 10% x beginning capital
5:2:3
26,000
11,830
(9,750)
28,080
29. d - refer to No.28
30. c - refer to No.28
31. a - refer to No.28
32. d
Because both partners have equal capital balances, NN's capital has to be increased to equal
that of MM's. Since MM's capital balance is P60,000 and NN's is P20,000, an additional P40,000 has
to be credited to NN's capital to make it equal MM's capital. This additional amount credited to
NN's capital is the goodwill that NN is bringing to the partnership.
33. a - MM's share of the net income of P25,000 is 60%, or P15,000.
34. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual - 12 months.
35. b
Interest: (P500,000 x 10%) = P50,000
Salary: (P10,000 + P20,000) = P30,000
Bonus: Condition not met = P0
Total allocations = P80,000 and over-allocations =
P80,000 - P60,000 = P20,000
36. b
Bloom:
Interest allocation: P20,000
Salary allocation: P10,000
Carnes:
Interest allocation: P30,000
Salary allocation: P20,000
There is a total of P80,000 for positive allocations. To bring them down to a P20,000 loss, a
residual adjustment of (P100,000) is needed which is allocated (P40,000) to Bloom and
(P60,000) to Carnes. After these amounts are assigned to the partners, each partner’s
capital account will be reduced by a net P10,000.
37. c
Salaries
Bonus*
Remainder (3:4:3)
Total
J
P 50,000
16,000
(6,000)
P 60,000
P
P 60,000
8,000
(8,000)
P 60,000
B
P 30,000
16,000
(6,000)
P 40,000
Total
P140,000
40,000
(20,000)
P160,000
Salaries
Bonus (10% of average capital)
Remainder (4:4:2)
Total
A
P 30,000
5,000
_ 24,000
P 59,000
P
P 10,000
3,000
__24,000
P 37,000
B
P 40,000
2,000
_12,000
P 54,000
Total
P 80,000
10,000
60,000
P150,000
Salaries
Bonus (10% of average capital)
Remainder (4:4:2)
Total
A
P 30,000
5,000
(16,000)
P 19,000
P
P 10,000
3,000
(16,000)
(P3,000)
B
P 40,000
2,000
( 8,000)
P 34,000
Total
P 80,000
10,000
(40,000)
P 50,000
*since problem is silent it should be based on net income before any deductions.
38. c
39. c
40. b
41 d
Total agreed capital = total contributed capital*
(P200,000 + P100,000 + P100,000)
Multiplied by: Capital interests of May
*No goodwill or asset adjustment
P60,000, salary = P25,000, salary + [.20 (NI – B)]
P60,000 = P25,000 + P35,000, bonus
Therefore, bonus would be P35,000
B = .20 (NI – B)
P35,000 = . 20 (NI – P35,000)
P35,000 = .20NI – P7,000
P35,000 + P7,000 = .20NI
P42,000 = .20NI
NI = P210,000
P 400,000
_____35%
P 140,000
42. c - P30,000 + P40,000 = P70,000, annual salary to allocate net income.
43. b
[P70,000 – (P40,000 + P10,000 +P2,000)]
Salary to partners is an allocation of net income (they are not expenses)
Partner’s withdrawals are deduction to capital accounts.
44. c
Bonus = 20% (NI before deduction on salaries, interests and bonus)
B = 20% (NI after deduction of salaries, interests and bonus + salaries + interests + bonus)
B = 20% [P46,750 + (P1,000 x 12 months) + (.05 x P25,000) + B]
B = .20 [P60,000 + B]
B = P12,000 + .20B
1.20 B = P12,000
B = P15,000
45. a
Allocation/Distribution of Net Income
DD
EE
Salaries
18,000
24,000
Interest (10% of Ave. Cap.)
15,000
20,000
Balance/Remainder (60%:40%)
25,800
17,200
Share in Net Income
58,800
61,200
*P 500,000 – P100,000 (excluding salaries and int. – P100,000
Statement of Partners’ Capital
Capital, March 1, 2011
Additional Investments
Net Income
Personal Withdrawals
Capital, March 1, 2012
Allocation/Distribution of Net Income
Interest on Average Capital – 10%
Balance/Remainder – 60%:40%
Share in Net Income
Statement of Partners’ Capital
Capital balance, 2/28/20x4
Additional Investment
Share in Net Income
Salaries
Salary withdrawals
Capital balance, March 1, 20x5
46. a – refer to No. 45
47. b – refer to No. 45
48. c – refer to No. 45
DD
150,000
Total
42,000
35,000
__43,000
120,000*
58,800
(18,000)
190,800
EE
180,000
60,000
61,200
(24,000)
277,200
Total
330,000
60,000
1240,000
( 42,000)
468,000
DD
P 15,000
51,000
P 66,000
EE
P20,000
34,000
P54,000
Total
P 35,000
85,000
P 120,000
DD
P 150,000
EE
P 180,000
60,000
54,000
24,000
( 24,000)
P 294,000
66,000
18,000
( 18,000)
P 216,000
49. a
NN
OO
Total
Salary allowances
P180,000
P
P180,000
Balance/Remainder: Equally
15,000
15,000
30,000
Net Income for 20x5
P195,000 P 15,000 P 210,000
Adjustment of net income for 20x4 – 60% : 40%
24,000
16,000
40,000
Total
P219,000
P31,000
P250,000
Note: Any adjustments related to a particular year, the profit and loss ratio existing on that year
should be used as a basis for allocating the required adjustments.
50 – 53: No requirement
54. b
Abe
Bert
Carl
Dave
Total
55. b
Old P & L
70%
20%
10%
100%
Unadjusted net income, 20x5
Add (deduct): adjustments Accrued expense – 20x5
Accrued income – 20x5
Prepaid expense – 20x4
Deferred or unearned income – 20x4
Adjusted net income, 20x5
Multiplied by: P& L of Dave
Share in net income – 20x5
Interests Acquired
85%
15%
100%
New P & L
59.50%
17.00%
8.50%
15.00%
100%
P
15,000
(1,050)
875
(1,400)
__1,225
P 14,650
_____17%
P2,490.50
Quiz – II
1. P47,500 = [(P0,000 x 4) + (P40,000 x 6) + (P65,000 x 2)]/12
2. P6,400 = [(P60,000 x 2) + (P90,000 x 5) + (P70,000 x 4) + P110,000] (.08)
3. P3,703 - B = .08(P250,000 - P200,000 - B)
4. P39,150 = (P130,000 - P10,000 - P15,000 - P18,000) .45
5. Nick, P44,075; Joe, P48,435; Mike, P57,490
Total
Nick
Joe
Mike
Interest on capital
P200,000 x .09
P18,000
P350,000 x .09
P31,500
P180,000 x .09
P16,200
P65,700
Salary
25,000
15,000
35,000
75,000
Bonus .1(P150,000 - P100,000)
5,000
5,000
Residual
P4,300 x .25
1,075
P4,300 x .45
1,935
4,300
P4,500 x .30
______
_______
1,290
Totals
P44,075 P48,435 P57,490 P150,000
6. P185,000 = P35,000 + (P500,000 - P35,000 - P50,000 - P40,000) .4
7. P78,000 = (P250,000 x .08) + [P300,000 - (P200,000 + P250,000 + P400,000)(.08)] .25
8. P10,000 = (P60,000 - P50,000)(.40) + (P80,000 - P60,000)(.30)
9. P57,000 = (P300,000 - P200,000)(.25) + (P380,000 - P300,000)(.40)
10. P197,500 = (P300,000 - P100,000)(.65) + (P450,000 - P300,000)(.45)
11. P42,000 = (P120,000 - P50,000)(.60)
12. P36,000 = (P200,000 - P120,000)(.45)
13. P105,000 = (P520,000 - P370,000)(.70)
14. P78,000 = (P650,000 - P520,000)(.60)
15. P13,000 increase = (P250,000 - P120,000)(.70 - .60)
16. P25,000 decrease = (P600,000 - P350,000)(.70 - .60)
17. P68,800
Garlic
Pepper
Salary
60,000
Interests – 10% on beginning
4,000
4,800
Equally
4,000
4,000
Total
8,000
68,800
Salt
24,000
3,200
4,000
Total
84,000
12,000
12,000
108,000
Rivers
7,200
20,000
(17,600)
9,600
Total
17,200
48,000
(35,200)
30,000
18. P310,000
Using bonus formula to solve for income:
Bonus = .20 (NI – Bonus – Salary)
35,000 = .20 NI – [.20 x P35,000] – [.20 x P100,000*]
62,000 = .2Income
P310,000 = income
*salaries 25,000 + 75,000
19. James, P58,360; Keller, P68,040; Rivers, P87,600
James
Interest – 8%
4,400
Salary
13,000
2:3:5
(7,040)
Total
10,360
Interest:
James: P48,000 x 5 = P240,000
P60,000 x 7 = 420,000 P660,000/12 =
Capital, beginning
Additional investments
Net income (loss)
Withdrawals – P1,000 per month
Capital, ending
20. JJ, P27,000; KK, P24,000; LL, P39,000
Keller
5,600
15,000
(10,560)
10,040
P55,000 x 8% = P4,400
48,000
12,000
10,360
(12,000)
58,360
JJ
Bonus (20%) .....................................
P18,000
Interest (15% of average capital) 15,000 30,000
Remaining loss ($18,000) ..............
(6,000)
Income assignment .......................
P27,000
70,000
90,000
10,040
(12,000)
68,040
9,600
(12,000)
87,600
KK
-045,000
(6,000)
P24,000
P
P
LL
-090,000
(6,000)
P39,000
208,000
12,000
30,000
(36,000)
214,000
Total
P18,000
(18,000)
P90,000
21. PP, P64,600; SS, P49,000; TT, P2,000
PP
Interest (10%)
6,600 (below)
Salary
18,000
Remaining income (loss)
(16,000)
Totals
8,600
SS
TT
4,000
2,000
25,000
8,000
( 8,000) (16,000)
21,000
(6,000)
CALCULATION OF PURKERSON'S INTEREST ALLOCATION
Balance, January 1—April 1 (P60,000 × 3)
Balance, April 1—December 31 (P68,000 × 9)
Total ...................................................................................................
Months ...............................................................................................
Average monthly capital balance .............................................
Interest rate ......................................................................................
Interest allocation (above) ...........................................................
STATEMENT OF PARTNERS' CAPITAL
PP
SS
Beginning balances .........................
60,000
40,000
Additional contribution ...................
8,000
-0Income (above) ............................
8,600
21,000
Drawings (P1,000 per month) .........
(12,000)
(12,000)
Ending capital balances .................
64,600
49,000
Totals
12,600
51,000
(40,000)
23,600
P180,000
612,000
P792,000
÷ 12
P 66,000
× 10%
P 6,600
TT
20,000
-0(6,000)
(12,000)
2,000
Totals
120,000
8,000
23,600
(36,000)
115,600
32,880
37,146
36,147
70,000
72,000
82,000
RR
6,000
-0(13,120)
(7,120)
Total
15,600
20,000
(65,600)
(30,000)
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4
LL
CC
RR
Beginning balances .....................
20,000
60,000
50,000
Income allocation ........................
(5,280)
(17,600)
(7,120)
Drawings ........................................
(10,000)
(10,000)
(10,000)
Ending balances ....................
4,720
32,400
32,880
Total
130,000
(30,000)
(30,000)
70,000
22. Ending capital balances:
20x4 ..........................................
20x5 ..........................................
20x6 …………………………….
4,720
4,766
9,610
32,400
30,088
36,243
INCOME ALLOCATION—20x4
LL
CC
Interest (12% of beginning capital)
2,400
7,200
Salary
12,000
8,000
Remaining income/loss
(19,680)
(32,800)
Totals
(5,280)
(17,600)
INCOME ALLOCATION—20x5
LL
CC
Interest(12% of beginning capital above)
*566
3,888
Salary .............................................
12,000
8,000
Remaining income/loss:
(2,520)
(4,200)
Totals ......................
10,046
7,688
*Rounded
RR
3,946
-0(1,680)
2,266
Total
8,400
20,000
(8,400)
20,000
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6
LL
CC
RR
Beginning balances (above)
4,720
32,400
32,880
Additional investment .................
-0-012,000
Income allocation ........................
10,046
7,688
2,266
Drawings ........................................
(10,000)
(10,000)
(10,000)
Ending balances ....................
4,766
30,088
37,146
Interest (12% of beginning capital
above)* ...................................
Salary .............................................
Remaining income........................
Totals ..................................
*Rounded
INCOME ALLOCATION—20x6
LL
CC
572
12,000
2,272
14,844
3,611
8,000
4,544
16,155
Total
70,000
12,000
20,000
(30,000)
72,000
RR
Total
4,457
-04,544
9,001
8,640
20,000
11,360
40,000
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6
LL
CC
RR
Beginning balances (above)
4,766
30,088
37,146
Income allocation
14,844
16,155
9,001
Drawings
(10,000)
(10,000)
(10,000)
Ending balances
9,610
36,243
36,147
23. Julio, P2,820 decrease; Fong, P120 increase
Short-term prepayments
Julio, Capital
Fong, Capital
Salaries Payable
The correction to partners' capital accounts is
computed as follows:
Inventories understated by P12,000,
Dec. 31, 20x5
Inventories understated by P12,000,
Jan. 1, 20x6
Accrued salaries of P5,400 not recorded,
Dec. 31, 20x6
Short-term prepayments of P2,700
not recorded, Dec. 31, 20x6
Net corrections to partners' capital
accounts
THEORIES
True of False
1. False
2. True
3. True
4. False
5. True
6.
7.
8.
9.
10.
False
True
False
True
False
11.
12.
13.
14.
15.
True
True
False
True
False
2,700
2,820
16.
17.
18.
19.
20.
120
5,400
Julio
Fong
P 6,000
P 6,000
(7,200)
(4,800)
(3,240)
(2,160)
1,620
1,080
P(2,820)
True
False
False
True
True
P
21.
22.
23.
24.
25.
Total
72,000
40,000
(30,000)
82,000
120
False
True
False
True
False
26.
27.
28.
False
True
False
Note for the following numbers:
1.
While the partnership law may have indicated that the partners cannot withdraw resources and make the
partnership insolvent, withdrawals are typically controlled by the articles of partnership.
4.
If the partnership agreement is silent with regard to profit and loss allocation, profits and losses are shared
equally.
6.
The interest component of partnership profit and loss allocation rewards partners for capital contributions.
8.
The interest on capital balances component of partnership profit and loss allocation may be based on the
beginning, ending, simple average capital balance, or weighted average capital balance.
10.
The salary component of the partnership profit and loss allocation would be expected to be renegotiated
periodically as the duties of the partners change.
13.
Partnerships can offer bonuses to anyone. The choice is up to the partners. On the other hand, there is no
requirement to ever offer a bonus.
15.
While many bonuses are based on a measure of income, it is not required. Bonus can be based on other
criteria such as market share, revenue, or average cost per unit.
17.
Residual interests may be equal but they are not required to be equal.
18.
While profit residual ratios and loss residual ratios are generally the same, they can differ.
21.
Residual profit and loss percentages are the last component of the profit and loss allocation process
applied because they are designed to allocate any remaining amount to the partners.
23.
There are several ways that the difference between market and book value of assets can be addressed
when the profit and loss ratios are changed. Revaluing the assets is one of the possibilities along with
maintaining a record of assets with market and book value differences as well as directly adjusting capital
accounts while leaving asset values unchanged.
Multiple Choice
29. c
30. d
31. c
32. d
33. a
34.
35.
36.
37.
38.
d
d
c
d
a
39.
40.
41.
42.
43.
b
e
c
b
d
44.
45.
46.
47.
c
a
b
C
Problem I
1.
Ben, capital
Pet, capital (50% x P700,000)
Chapter 3
350,000
350,000
2. The total capital of BIG Entertainment Galley remains at P1,480,000. The total amount paid by Pet to
Ben does not affect the partnership and Pet does not become a partner with the assignment of half
of Ben’s interest.
Problem II
1.
a.
D, capital…………………………………………………………… 24,000
F, capital………………………………………………….........
24,000
b.1.
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The capital balances of the partners after the admission of F would be as follows:
D
Capital before admission…P 72,000
x: Interest remained………..
¾
Capital after admission….. P54,000
E
P 48,000
¾
P 36,000
F (book value)
P 30,000
Total_
P120,000
________
P120,000
Therefore, the profit and loss ratio of the partners after the admission of F would be as follows:
D, capital (70% x ¾)……………………………………………… 52.50%
E, capital (30% x ¾)………………………………………………. 22.50%
F, capital (equivalent to interest acquired)…………………. 25.00%
Total………………………………………………………………….100.00%
b.2
b.2.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The positive excess of P6,000 represents a personal gain of D and E, computed as follows:
Amount paid (P21,600 + P14,400)…………………………………. P36,000
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………............................. 30,000
Excess (Gain of D and E – personal in nature)….……………….. P 6,000
The partnership does not record this gain because it was not benefited from it.
b.2.2
Assets (Goodwill)……………………………………………….. 24,000
D, capital (P24,000 x 70%).……………………………........
16,800
E, capital (P24,000 x 30%).…………………………….........
7,200
Or,
Amount paid (P21,600 + P14,400)…………….. P36,000 / ¼ P144,000 (100%)
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………... 30,000
120,000 (100%)
Excess……………………………………………….. P 6,000
¼
Divided by (capitalized at): Interest acquired
Revaluation of Asset Upward………………….. P24,000
P 24,000 (100%)
D, capital [(P72,000 + P16,800) x ¼]………………………… 22,200
E, capital [(P48,000 + P7,200) x ¼]…………………………… 13,800
F, capital…………………………………………………......
36,000
The capital balances of the partners after the admission of F would be as follows:
Capital before admission…
Revaluation upward……….
Capital balance after
revaluation……………….
x: Interest remained………..
Capital after admission…..
Capital interest %..............
P & L %: D (3/4 x 70%)……
E (3/4 x 30%)……
F (1/4)……………
D
P 72,000
16,0800
Total_
E
F (amount paid)
P 48,000
P120,000
24,000
7,200
P 88,800
¾
P66,600
P 55,200
¾
P 41,400
52.50
P 36,000
P144,000
________
P144,000
25
22.50
25
It should be observed that the total capital balance after the admission increases equivalent to
the revaluation of assets amounting to P24,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid.
b.3
b.3.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The negative excess of P3,600 represents a personal loss of D and E, computed as follows:
Amount paid ……………………….…………………………………. P 26,400
Less: BV of interest acquired –
(P 120,000 x ¼)…………………………….............................
30,000
Excess (Loss of D and E – personal in nature)….………………… P( 3,600)
b.3.2
The entry to record the transaction in the books follows:
D, capital (P14,400 x 70%).…………………………………….. 10,080
E, capital (P14,400 x 30%).……………………………………... 4,320
Assets …………………………………………………….....
14,400
Or,
Amount paid ………………………….………….. P 26,400 / ¼ P 105,600 (100%)
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………... 30,000
120,000 (100%)
Excess……………………………………………….. P( 3,600)
¼
Divided by: Interest acquired…………………..
Revaluation of Asset Downward..…………….. P(14,400)
P(14,400) (100%)
D, capital [(P72,000 – P10,080) x ¼]………………………. 15,480
E, capital [(P48,000 – P4,320) x ¼]………………………….. 10,920
F, capital…………………………………………………..
26,400
The capital balances of the partners after the admission of F would be as follows:
D
Capital before admission…P 72,000
Revaluation downward…… 10,080
Capital balance after
revaluation……………….. P 61,920
x: Interest remained…………
¾
Capital after admission….. P46,440
Capital interest %..............
P & L %: D (3/4 x 70%)……
E (3/4 x 30%)……
F (1/4)……………
E
P 48,000
4,320
F (amount paid)
P 48,680
¾
P 32,760
P 26,400
Total_
P120,000
14,400
P 105,600
________
P 105,600
25
52.50
22.50
25
Comparison between b.3.1 and b.3.2:
Schedule of Account Balances
Book Value Approach
Balances before admission
Admission
Net
Assets
P120,000
Balances after admission of F P 120,000
Revaluation Approach
Balances before admission
Revaluation
Admission
Balances after admission of F
Depreciation/impairment*
Totals
Goodwill/Asset
Revaluation
=
P120,000
P120,000
P120,000
P
-0-
D
Capital__________
E
F___
P 72,000 P 48,000
( 18,000) (12,000) P 30,000
P 54,000 P 36,000 P 30,000
P 24,000
P 24,000
( 24,000)
P -0-
*new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)
P 72,000
16,800
( 22,200)
P 66,600
( 12,600)
P 54,000
P 48,000
7,200
(13,800) P 36,000
P 41,400 P 36,000
( 5,400) ( 6,000)
P 36,000 P 30,000
The two methods will yield the same results computed as follows;
Balances after admission of F (BV approach)
Balances after admission of F (Revaluation approach)
Gain or (loss) through use of book value approach
Capital__________
D
E
F___
P 54,000 P 36,000 P 30,000
54,000
36,000
30,000
P
-0- P
-0- P
-0-
Problem III
a: No Bonus or No Revaluation.
The total agreed capital is equal to total agreed capital:
Total agreed capital (given)………………………………………….P 48,000
Less: Total agreed capital (P24,000 + P12,000 + P12,000)………. 48,000
Difference…………………………………………………………………P
-0The entry to record the transaction in the books follows:
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
b: Bonus to New Partner.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)…. 48,000
Difference………………………………………………………………..P
-0The new partner’s contributed capital is less than the agreed capital, the difference is attributable
to bonus to new partner:
J’s contributed capital (given)……………………………………...P 12,000
J’s agreed capital: (P48,000 x 35%)…………………………………. 16,800
Difference (bonus to new partner)………………………………….P 4,800
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 12,000
G, capital (P4,800 x 60%)………………………………………. 2,880
H, capital (P4,800 x 40%)………………………………………. 1,920
J, capital ……………..………………………………….
16,800
c: Revaluation (Goodwill) to New Partner
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital: (P18,000 / 1/3)……………………………….P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000
Difference (revaluation/goodwill)………………………………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a)
is attributable to revaluation/goodwill to new partner:
J’s contributed capital (given)……………………………………...P 12,000
J’s agreed capital (given) ………..…………………………………. 18,000
Difference (revaluation/goodwill to new partner)………………P 6,000
The entry to record the transaction in the books follows:
Cash………………………………………………………………..12,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
18,000
d: Bonus to Old Partners.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC
since it is a bonus method)……………………………………P 60,000
Less: Total contributed capital
[(P24,000 + P12,000 + (P30,000 – P6,000)]……………….…. 60,000
Difference………………………………………………………………..P
-0The new partner’s contributed capital is greater than his agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital (P30,000 – P6,000)………………………..P 24,000
J’s agreed capital: (P60,000 x 30%)………………………………... 18,000
Difference (bonus to old partners)..………………………………..P( 6,000)
The entry to record the transaction in the books follows:
Tangible asset…………………………………………………….30,000
Mortgage payable…………………………………….
6,000
J, capital ……………..………………………………….
18,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)……………………………..
2,400
e: Revaluation (Goodwill) to Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation should
be recognized as follows:
Total agreed capital (given) ………………………………………... P 76,800
Less: Total contributed capital (P24,000 + P12,000 +
P 8,400, revaluation + P28,800)…………………………. 73,200
Difference (revaluation/goodwill)………………..………………… P 3,600
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in (a)
is attributable to revaluation (goodwill) to old partners:
J’s contributed capital………………………………………………… P 28,800
J’s agreed capital: (P76,800 x 37.5%)….………………………….... 28,800
Difference …………………………..…………………………………… P
-0The entries to record the transaction in the books follows:
Equipment………………………………………………………… 8,400
G, capital (P8,400 x 60%)……………………………..
5,040
H, capital (P8,400 x 40%)………………………………
3,360
Cash………….…………………………………………………….28,800
Other assets………………………………………………………. 3,600
J, capital ……………..………………………………….
28,800
G, capital (P3,600 x 60%)……………………………..
2,160
H, capital (P3,600 x 40%)………………………………
1,440
f: Bonus and Revaluation (Goodwill) to New Partner.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000
Difference (revaluation/goodwill) …………………..……………..P 12,000
revaluation
The new partner’s contributed capital is less than the agreed capital, the difference of P15,000 are
composed of revaluation of P12,000 in (a) above and the balance is bonus to new partner:
J’s contributed capital (given)……………………………………... P 12,000
J’s agreed capital: (P60,000 x 45%)…………………………………. 27,000
Difference (total bonus and revaluation)..………………………...P 15,000
Less: Revaluation / goodwill to new partner………………………. 12,000
Bonus to new partner…………………………………………………... P 3,000
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 12,000
Assets (goodwill)………………………………………………… 12,000
G, capital (P3,000 x 60%)………………………………………. 1,800
H, capital (P3,000 x 40%)………………………………………. 1,200
J, capital ……………..………………………………….
27,000
To record the admission of J.
g: Bonus and Revaluation to Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 72,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000
Difference (revaluation/goodwill)…………………....…………….P 18,000
revaluation
The new partner’s contributed capital is greater than the agreed capital, the difference of P3,600 is
bonus to old partners since there is already a revaluation(goodwill) as indicated by (a) above.
J’s contributed capital (given).…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 20%)………………………………… 14,400
Difference (bonus to old partners)………………………………… P( 3,600)
Less: Revaluation / goodwill to old partners……………………… 18,000
Total bonus and revaluation to old partners.……………………. P 21,600
The P3,600 difference is considered as a bonus since there was a transfer of capital (as indicated by
the decrease in capital of the new partner) made by the new partner to the old partners.
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..…………………………………
14,400
G, capital (P21,600 x 60%)……………………………..
12,960
H, capital (P21,600 x 40%)……………………………..
8,640
h: Revaluation (Goodwill) to New and Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 72,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000
Difference (revaluation/goodwill ) …………………..……………. P 18,000
The new partner’s contributed capital is less than the agreed capital, the difference of P18,000 in (a)
is attributable to revaluation (goodwill) to new partner and old partners:
J’s contributed capital (given)…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 30%)………………………………... 21,600
Difference (revaluation/goodwill to new partner)..…………….P 3,600
Less: Revaluation / goodwill computed in (a)..…………………. 18,000
Revaluation/goodwill to old partners……….……………………..P 14,400
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..………………………………….
21,600
G, capital (P14,400 x 60%)……………………………
8,640
H, capital (P14,400 x 40%)…………………………….
5,760
i: Bonus to Old Partners with Bonus Amount Given.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC
since it is a bonus method)……………………………………P 60,000
Less: Total contributed capital
[(P24,000 + P12,000 + P24,000)……………...…………….…. 60,000
Difference………………………………………………………………..P
-0The new partner’s contributed capital is greater than his agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital…………………….. …………………………P 24,000
J’s agreed capital (P24,000 – P6,000).……………………………... 18,000
Difference (bonus to old partners)..……………………………….. P( 6,000)
The entry to record the transaction in the books follows:
Cash………………………………………………………………..24,000
J, capital ……………..………………………………….
18,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)……………………………..
2,400
j: Bonus to New Partner with an Indication of Bonus.
There is an overstatement of asset amounting to P2,400 (P6,000 – P3,600) that is needed to be
recorded to comply with the provisions of GAAP recognizing overvaluation of net assets. Therefore,
the contributed capital of partner G and H are as follows:
G, capital: P24,000 – (P2,400 x 60%)………………………….P 22,560
H, capital: P12,000 – (P2,400 x 40%)…………………………. 11,040
Total contributed capital before the admission………….. P 33,600
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC
since it is a bonus method)…………………………………… P 40,800
Less: Total contributed capital [P33,600 (a) + P7,200].………… 40,800
Difference………………………………………………………………..P
-0The new partner’s contributed capital is less than the agreed capital, the difference is attributable
to bonus to new partner:
J’s contributed capital (given)……………………………………...P 7,200
J’s agreed capital: (P40,800 x 30%)…………………………………. 12,240
Difference (bonus to new partner)………………………………….P 5,040
The entries to record the transaction in the books follows:
G, capital (P2,400 x 60%)………………………………………. 1,440
H, capital (P2,400 x 40%)………………………………………. 960
Equipments………………………………………………
2,400
Cash……………………………………………………………….. 7,200
G, capital (P5,040 x 60%)………………………………………. 3,024
H, capital (P5,040 x 40%)………………………………………. 2,016
J, capital ……………..………………………………….
12,240
k: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill).
There is an understatement of asset amounting to P6,000 (P12,600 – P6,600) that is needed to be
recorded (also even in cases of overstatement) as long as the revaluation (goodwill) approach is
being used. Therefore, the contributed capital of partner G and H are as follows:
G, capital: P24,000 + (P6,000 x 60%)………………………….P 27,600
H, capital: P12,000 + (P6,000 x 40%)………………………….. 14,400
Total contributed capital before the admission…………..P 42,000
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital (P18,000 / ¼ )*…..……….…………………...P 72,000
Less: Total contributed capital [P42,000 (a) + P18,000]………..… 60,000
Difference (revaluation/goodwill ) …………………..…………….P 12,000
*The old partner’s total contributed capital of P42,000 should not be used as a basis because it
will result to a negative revaluation. In cases of revaluation and there is no specification as to
upward or downward adjustments, the presumption should always be upward. The P18,000 was
capitalized by ¼ to determine the value of the partnership as a whole.
The new partner’s contributed capital is equal to the agreed capital, the difference of P12,000 in (a)
is attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given)……………………………………...P 18,000
J’s agreed capital……………………………………………………… 18,000
Revaluation/goodwill to new partner……….……………………...P
-0-
The entries to record the transaction in the books follows:
Other assets…………………………………………………….... 6,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)……………………………..
2,400
Cash……………………………………………………………….. 18,000
Assets (goodwill)………………………………………………… 12,000
J, capital ……………..………………………………….
18,000
G, capital (P12,000 x 60%)……………………………
7,200
H, capital (P12,000 x 40%)…………………………….
4,800
l: Revaluation (Goodwill) to New Partner with Revaluation Amount Given.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so
(goodwill) should be recognized as follows:
revaluation
Total agreed capital (TCC, P60,000 + P7,200, goodwill) ……….P 67,200
Less: Total contributed capital (P24,000 + P12,000 + P24,000)… 60,000
Difference (revaluation/goodwill ) …………………..……………..P 7,200
The new partner’s contributed capital is less than the agreed capital, the difference of P7,200 in (a)
is attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given)……………………………………...P 24,000
J’s agreed capital: (P24,000 + P7,200)……………………………… 31,200
Revaluation/goodwill to new partner……….……………………..P 7,200
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 24,000
Assets (goodwill)………………………………………………… 7,200
J, capital ……………..………………………………….
31,200
To record the admission of J.
m: Withdrawals Instead of Revaluation.
The total contributed capital (TCC) is greater than total agreed capital (TAC), so it should have
been a negative revaluation. Since there was an indication that capital balances should equal to
the profit and loss (old or new) ratio, then the difference should be considered as withdrawals (if it is
a positive revaluation it should have been additional investment and if the TCC = TAC, it should
have been settlement between partners) instead of negative revaluation.
Total agreed capital (given)………………………………………...P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P24,000).. 60,000
Difference (withdrawals)……………………………………………..P 12,000
The new partner’s contributed capital is less than the agreed capital, the difference is attributable
to bonus to new partner:
J’s contributed capital (given)……………………………………...P 24,000
J’s agreed capital: (P48,000 x 50%)…………………………………. 24,000
Difference……………………………..………………………………….P
-0-
The withdrawals of P12,000 should be attributable to the old partners computed as follows:
Total agreed capital (given)…………………………….
P 48,000
24,000
Less: J’s agreed capital (P48,000 x 50%)………………
Total agreed capital of the old partners………………
P 24,000
Less: G’s agreed capital (P24,000 x 60%)………………P 14,400
24,000
H’s agreed capital (P24,000 x 40%)……………… 9,600
G’s withdrawal: P24,000 – P14,400………………………
H’s withdrawal: P12,000 – P9,600………………………..
P 9,600
P 2,400
The entry to record the transaction in the books follows:
Cash (P24,000 – P12,000)………………………………………. 12,000
G, capital…………………………………………………………. 9,600
H, capital………………………………………………………….. 2,400
J, capital ……………..………………………………….
24,000
n: Bonus and Revaluation (Goodwill) When Not Specifically Stated.
n.1: Revaluation (Goodwill) or Bonus to New Partner.
n.1.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC,
since it is a bonus method)……………………………………P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference……………………………..…………………..…………….P
-0The new partner’s contributed capital is less than the agreed capital, the difference is
attributable to bonus to new partner:
J’s contributed capital (given).……………………………………...P 18,000
J’s agreed capital: (P54,000 x 40%)………………………………… 21,600
Difference (bonus to new partner)..………………………………..P 3,600
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
G, capital (P3,600 x 60%)……………………………………… 1,260
H, capital (P3,600 x 40%)………………………………………. 1,440
J, capital ……………..………………………………….
21,600
n.1.2: Revaluation (Goodwill) Approach.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital:
(P24,000 + P12,000) / (100% - 40%)…………………………...P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given).…………………………………….P 18,000
J’s agreed capital: (P60,000 x 40%)……………………………….. 24,000
Difference (revaluation/goodwill to new partner)..…………...P 6,000
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
24,000
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 40%, while his profit and loss is 25%, so the
new profit and loss interest of the new partnership is computed as follows:
____G
Capital interest %..............
P & L %: G (60% x 75%)……
45
H (40% x 75%)……
J ……..……………
H
_
30
J____
40
25
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)
- refer to Alternative 1 above:
G, capital (P24,000 – P2,160)………………………………P 21,840
H, capital (P12,000 – P1,440)……………………………… 10,560
J, capital…………………………………………………....... 21,600
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above:
G, capital……………………………………………………...P 24,000
H, capital……………………………………………………… 12,000
J, capital (P60,000 x 40%)………………………………….. 24,000
Total…………………………………………………………….P 60,000
Schedule of Account Balances
Bonus Approach
Balances after admission of J
Revaluation Approach
Net
Assets
P 54,000
P 54,000
Depreciation/impairment*
Totals
P 54,000
Balances after admission of J
Goodwill/Asset
Revaluation
=
P
-0-
P 6,000
( 6,000)
P -0-
G
P 21,840
Capital__________
H
J___
P 10,560 P 21,600
P 24,000 P 12,000 P 24,000
( 2,700) ( 1,800) ( 1,500)
P 21,300 P 10,200 P 22,500
*new profit and loss ratio (G, 45%; H, 30%, and J, 25%)
The two methods will yield the same results computed as follows;
Balances after admission of J (Bonus approach)
Balances after admission of J (Revaluation approach)
Gain or (loss) through use of bonus approach
Capital__________
G
H
J__
P 21,840 P10,560 P 21,600
21,300 10,200
22,500
P 540 P 360 P( 900)
n.2: Revaluation (Goodwill) or Bonus to Old Partners.
n.2.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC,
since it is a bonus method)……………………………………P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference……………………………..…………………..…………….P
-0The new partner’s contributed capital is greater than the agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital (given).……………………………………...P 18,000
J’s agreed capital: (P54,000 x 30%)………………………………… 16,200
Difference (bonus to old partners)..…………………………………P 1,800
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
J, capital ……………..………………………………….
16,200
G, capital (P1,800 x 60%)……………………………..
1,080
H, capital (P1,800 x 40%)………………………………
720
n.2.2: Revaluation (Goodwill) Approach.
The total contributed capital (TCC) is greater than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital: P18,000 / 30%...............…………………...P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is equal to the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given).…………………………………….P 18,000
J’s agreed capital: (P60,000 x 30%)……………………………….. 18,000
Difference………………………………………………....……………P
-0The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
18,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)………………………………
2,400
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 30%, while his profit and loss is 40%, so the
new profit and loss interest of the new partnership is computed as follows:
____G
Capital interest %..............
P & L %: G (60% x 60%)……
36
H (40% x 60%)……
J ……..……………
H
24
_
J____
30
40
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)
- refer to Alternative 1 above:
G, capital (P24,000 + P1,080)…..……………………………P 25,080
H, capital (P12,000 + P720)………………………………… 12,600
16,200
J, capital………………………………………………….......
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above:
G, capital (P24,000 + P3,600)……………………………...P 27,600
H, capital (P12,000 + P2,400)………………………………. 14,400
J, capital (P60,000 x 30%)………………………………….. 18,000
Total…………………………………………………………….P 60,000
Schedule of Account Balances
Bonus Approach
Balances after admission of J
Revaluation Approach
Balances after admission of J
Depreciation/impairment*
Totals
Net
Assets
Goodwill/Asset
Revaluation
P 54,000
P
P 54,000
P 6,000
( 6,000)
P -0-
P 54,000
-0-
=
G
P 25,080
Capital__________
H
J___
P 12,720 P 16,200
P 27,600 P 14,400 P 18,000
( 2,160) ( 1,440) ( 2,400)
P 25,440 P 12,960 P 15,600
*new profit and loss ratio (G, 36%; H, 24%, and J, 40%)
The two methods will yield the same results computed as follows;
Balances after admission of J (Bonus approach)
Balances after admission of J (Revaluation approach)
Gain or (loss) through use of bonus approach
Problem IV
1. Phoenix, Capital
Dallas, Capital
Capital__________
G
H
J__
P 25,080 P 12,720 P 16,200
25,440
12,960
15,600
P( 360) P( 240) P
600
22,500
2. Phoenix, Capital
Tucson, Capital
Dallas, Capital
18,000
10,000
3. Cash
60,000
Phoenix, Capital (P60,000 - P40,000) × .50
Tucson, Capital
Dallas, Capital
22,500
28,000
10,000
10,000
40,000
(P90,000 + P50,000) + P60,000 = P200,000; Therefore, no goodwill is to be recognized.
Dallas, capital = P200,000 × 0.20 = P40,000
4. Goodwill
Phoenix, Capital
Tucson, Capital
20,000
10,000
10,000
P40,000/0.20 = P200,000
Goodwill = P200,000 - (P90,000 + P50,000 + P40,000) = P$20,000
Cash
Dallas, Capital
40,000
40,000
Problem V
1. Book value of interest acquired = (P180,000 + P90,000) × 1/3 = $90,000
Bonus Method
Cash
90,000
Moore, Capital
90,000
2. Book value of interest acquired = (P180,000 + P120,000) × 0.45 = P135,000
Book value of interest is greater than assets invested.
Bonus Method
Cash
Brown, Capital (0.60 × P15,000)
Coss, Capital (0.40 × P15,000)
Moore, Capital
120,000
9,000
6,000
135,000
The goodwill method is not applicable because the partners agreed to total capital interest of P300,000.
3. Book value of interest acquired (P180,000 + P120,000) ×
1
= P100,000
3
Bonus method cannot be used because Moore will not accept less than P120,000 capital interest.
Goodwill Method
Total capital implied from contract [P120,000/(1/3)]
Minus current capital balance + Moore's investment (P180,000 + P120,000)
Goodwill
Goodwill
Brown, Capital (0.60 × P60,000)
Coss, Capital (0.40 × P60,000)
Cash
Moore, Capital
60,000
120,000
P360,000
300,000
P60,000
36,000
24,000
120,000
4. Book value of interest acquired (P180,000 + P40,000) × ¼ = P55,000
Book value of interest acquired is greater than assets invested.
Bonus Method
Cash
Brown, Capital (0.60 × P15,000)
Coss, Capital (0.40 × P15,000)
Moore, Capital
5. Book value of interest acquired (P180,000 + P35,000) × 0.20 = P43,000
Book value of interest acquired is greater than the asset invested.
40,000
9,000
6,000
55,000
Goodwill Method
Total capital
Minus recorded value of net assets + Moore's investment (P180,000 + P35,000)
Goodwill
P225,000
215,000
P10,000
Cash
Goodwill
Moore, Capital
45,000
35,000
10,000
6. Book value of interest acquired (P180,000 + P150,000) × (1/3) = P110,000
Book value of interest acquired is less than asset invested.
Bonus Method
Land
Brown, Capital (0.60 × P40,000)
Coss, Capital (0.40 × P40,000)
Moore, Capital
150,000
24,000
16,000
110,000
Goodwill Method
Net value of firm implied by contract [P150,000/(1/3)]
Minus current capital + Moore's investment (P180,000 + P150,000)
Goodwill
P450,000
330,000
P120,000
Goodwill
Brown, Capital (0.60 × P120,000)
Coss, Capital (0.40 × P120,000)
120,000
Land
150,000
Moore, Capital
72,000
48,000
150,000
7. Bonus Method
Brown, Capital (0.30 × P92,000)
Coss, Capital (0.30 × P88,000)
Moore, Capital
Problems- VI
1. (a) Goodwill method:
Cash………………………………………………………… 5,000
Goodwill…………………………………………………… 4,200
Mason, Capital…………………………………………
2,520
Norris, Capital…………………………………………..
1,680
Oster, Capital…………………………………………..
5,000
Computation of goodwill:
Total capital after adjustment for goodwill,
P5,000 / .25…………………………………………….. P20,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed old partners……………………..P 4,200
27,600
26,400
54,000
Distribution of goodwill:
Mason: 3/5 of P4,200…………………………………P 2,250
Norris: 2/5 of P4,200…………………………………… 1,680
P 4,200
(b) Bonus method:
Cash………………………………………………………… 5,000
Mason, Capital…………………………………………
630
Norris, Capital…………………………………………..
420
Oster, Capital…………………………………………..
3,950
Computation of bonus:
Amount invested by Oster………………………….. P 5,000
Oster’s interest, 25% of P 15,800………………..….. 3,950
Bonus allowed old partners………………………… P 1,050
Distribution of bonus:
Mason: 3/5 of P1,050…………………………………. P 630
Norris: 2/5 of P1,050…………………………………… 420
P 1,050
(c) The bonus method will be preferred by Oster, who will gain P350. Norris will gain P140,
while Mason will lose P490.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST
Goodwill__
P4,200
When goodwill method is used…..
When bonus method is used………
Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)………………………. P4,200
P4,200
Gain (loss) through use of
bonus method……………………….
Other
Assets
P15,800
P15,800
Mason
Capital
P8,520
P6,630
Norris
Capital
P6,480
P5,220
Oster
Capital
P5,500
P3,950
P15,800
1,400
P8,030
1,400
P6,620
1,400
P5,350
(P 490)
P 140
P350
COMPARISON WHEN GOODWILL IS NOT REALIZED
When bonus method is used………
When goodwill method is used…..
Deduct write-off of goodwill
(loss distributable equally)…………
Goodwill__
P4,200
P4,200
Other
Assets
P15,800
P15,800
Mason
Capital
P6,630
P8,520
1,400
P15,800
P7,120
Gain (loss) through use of bonus method…………………… (P 490)
Norris
Capital
P5,220
P6,480
Oster
Capital
P3,950
P5,500
1,400
P5,080
P 140
1,400
P3,600
P350
2. (a) Goodwill method:
Cash………………………………………………………… 5,000
Goodwill…………………………………………………… 2,200
Oster, Capital…………………………………………..
7,200
Computation of goodwill:
Total capital after adjustment for goodwill,
P10,800 / .60…………………………………………….P18,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed to Oster………………………….. P 2,200
(b)Bonus method:
Cash………………………………………………………… 5,000
Mason, Capital…………………………………………… 792
Norris, Capital…………………………………………….. 528
Oster, Capital…………………………………………..
6,320
Computation of bonus:
Oster’s interest, 40% of P 15,800………………..….. 6,320
Amount invested by Oster………………………….. P 5,000
Bonus allowed to Oster……………………………… P 1,320
Charge to partners for bonus allowed to Oster:
Mason: 3/5 of P1,320…………………………………. P 792
Norris: 2/5 of P1,320…………………………………… 528
P 1,320
(c) The goodwill method will be preferred by Oster, who will gain P146.66. Norris’ loss is
P205.33, and Mason’s gain is P58.67.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST
Goodwill__
P2,200
When goodwill method is used…..
When bonus method is used………
Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)………………………. P2,200
P2,200
Gain (loss) through use of
bonus method……………………….
Other
Assets
P15,800
P15,800
Mason
Capital
P6,000
P5,208
Norris
Capital
P4,800
P4,272
Oster
Capital
P7,200
P6,320
733.33
733.33 733.34
P15,800 P5,941.33 P5,005.33 P7,053.34
(P 58.67) P 205.33 (P146.66)
COMPARISON WHEN GOODWILL IS NOT REALIZED
Goodwill__
When bonus method is used………
When goodwill method is used….. P2,200
Deduct write-off of goodwill
(loss distributable equally)………… P2,200
Gain (loss) through use of
bonus method……………………….
Other
Assets
P15,800
P15,800
P15,800
Mason
Capital
P5,208
P6,000
Norris
Oster
Capital Capital
P4,272
P3,950
P4800
P7,200
733.34
733.33
733.33
P5,266.67 P4,066.67 P6,466.66
(P58.67)
P205.33 (P146.66)
Problem VII
1. The total interest of the retiring partner K amounted to:
Capital interest………………………………………………….P 36,000
Add (deduct):
Share in net income…………………………………….. 7,200
Loan receivable………………………………………….( 6,000)
Total Interest of K before his retirement............................P 37,200
2.
a. Payment at Book Value (Settlement price is equal to the interest of retiring partner).
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Cash………………………….…………………………..
37,200
b. Payment at More than Book Value ((Settlement price is greater than the interest of retiring partner).
b.1. Bonus to Retiring Partner. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
L, capital (P4,800 x 5/7)……………………………………….. 3,429
M, capital (P4,800 x 2/7)………………………………………. 1,371
Cash………………………….…………………………..
42,000
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Retiring Partner……………………………………… P 4,800
The following items should be observed:
1. It should be observed that under bonus approach, undervaluation of net assets should not be
recorded for this will be in contradiction of current accounting standards.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit – P3,429, bonus)………………P56,571
M, capital (P18,000 + P4,800 profit – P1,371, bonus)……………….. 21,429
Assuming the same data, except that by mutual agreement the inventory is to be adjusted to their
fair value. Then, the undervalued asset should be recorded first before the settlement.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)…………………………….
1,440
L, capital (P4,800 x 50%)……………………………..
2,400
M, capital (P4,800 x 20%)……………………………
960
K, capital………………………………………………………….38,640
L, capital (P3,360 x 5/7)……………………………………….. 2,400
M, capital (P3,360 x 2/7)……………………………………… 960
Cash………………………….………………………….
42,000
Amount paid………………………..…………………………... P 42,000
Less: BV of K’s total interest (30%) - (P37,200 + P1,440).... 38,640
Bonus to Retiring Partner……………………………………… P 3,360
b.2: Partial Revaluation (Goodwill) to Retiring Partner.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)……………………………..
1,440
L, capital (P4,800 x 50%)……………………………..
2,400
M, capital (P4,800 x 20%)…………………………….
960
K, capital…………………………………………………………. 38,640
Assets (Goodwill)……………………………………………….. 3,360
Cash………………………….…………………………..
42,000
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P37,200 + P1,440........ 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360
The following items should be observed:
1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill) of P3,360 that has
been purchased should be recorded.
2. The situation at bar is the same situation in admission by investment Case 9, that recognition of
understatement of assets is in compliance with GAAP under the revaluation (goodwill) approach.
3. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P2,400, adjustment).………P62,400
M, capital (P18,000 + P4,800, profit + P960 adjustment)…….…… 23,760
A modified version of this partial revaluation (goodwill) approach happens assuming that when assets
and liabilities are revalued only to the extent of the excess payment to K, the entry to record the
transaction is as follows:
K, capital…………………………………………………………. 37,200
Assets ……………)………………………………………………. 4,800
Cash………………………….…………………………..
42,000
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%)…………………….........
37,200
Partial revaluation (goodwill) to Retiring Partner………… P 4,800
b.3: Total Revaluation (Goodwill) to Retiring Partner.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)……………………………..
1,440
L, capital (P4,800 x 50%)……………………………..
2,400
M, capital (P4,800 x 20%)…………………………….
960
The excess is considered as revaluation (goodwill) to be recognized.
Assets (Goodwill)……………………………………………….. 11,200
K, capital (P11,200 x 30%)……………………………..
3,360
L, capital (P11,200 x 50%)……………………………..
5,600
M, capital (P11,200 x 20%)…………………………….
2,240
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 36,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K.............
30%
Total Revaluation (goodwill)…………………………………. P 11,200
*The P3,360 represents K’s 30% interest in revaluation (goodwill) of P11,200. Notice that the P3,360 represents K’s
interest in the gain, which would be realized if the revaluation (goodwill) were sold. Therefore, K’s percentage is
used to suggest the total value of the revaluation (goodwill).
K, capital (P 38,640 + P3,360)…………………………………. 42,000
Cash………………………….…………………………..
42,000
The following items should be observed:
1. Whether part or all of the goodwill is recognized, opponents of this procedure contend that
transactions between partners should not be viewed as arm’s length; therefore, the measure of
revaluation (goodwill) may not be determined objectively. Also, inequitable results may be produced if
the remaining partners subsequently changed their profit and loss ratio.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P2,400, adjustment + P5,600).P68,000
M, capital (P18,000 + P4,400, profit + P960 adjustment + P2,240)….. 26,000
For purposes of comparison, let us assume that there is no undervalued inventory amounting to P4,800 in
Case 2 above. Refer to the following schedule for comparison.
Schedule of Account Balances
Bonus Approach
Balances after retirement of K
Goodwill/Asset
Revaluation
P
Partial Revaluation (Goodwill) Approach
Balances after retirement of K*
P
Depreciation/impairment***
(
Totals
P
L
Capital__________
M_____
-0-
P
56,571
4,800**
4,800)
-0-
P 60,000
( 3,429)
P 58,971
P 21,429
P 22,800
( 1,371)
P 21,429
*excluding undervalued inventory of P2,400 and P960 for L and M, respectively.
** P42,000 – P37,200 = P4,800, partial revaluation
*** old profit and loss ratio (L, 5/7 and M, 2/7)
Total Revaluation (Goodwill) Approach
Balances after retirement of K*
P 16,000**
Depreciation/impairment***
( 16,000)
Totals
P
-0-
P 68,000
( 11,429)
P 56,571
*excluding undervalued inventory of P2,400 and P960 for L and M, respectively.
** P42,000 – P37,200 = P4,800, partial revaluation / 30% = P16,000.
L, capital: (P48,000 + P12,000) + (P16,000 x 50%) = P68,000
M, capital: (P18,000 + P4,800) + (P16,000 x 20%) = P 26,000
*** old profit and loss ratio (L, 5/7 and M, 2/7)
P 26,000
( 4,571)
P 21,429
The three methods will yield the same results computed as follows;
Balances after retirement of K (Bonus approach)
Balances after retirement of K (Partial Revaluation approach)
Balances after retirement of K (Total Revaluation approach)
Total_______
L
M__
P 56,571
P 21,249
P 56,571 P 21,249
P 56,571
P 21,249
c: Payment at Less than Book Value ((Settlement price is less than the interest of retiring partner).
c.1. Bonus to Remaining Partners. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Cash………………………….…………………………..
31,200
L, capital (P6,000 x 5/7)……………………………….
4,286
M, capital (P6,000 x 2/7)………………………………
1,714
Amount paid………………………..…………………………… P 31,200
Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Remaining Partners…………………………………. P 6,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P4,286, bonus)……………..P64,286
M, capital (P18,000 + P4,800 profit + P1,714, bonus)……………….. 24,514
c.2: Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner).
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Specific Asset…..………………………………………
6,000
Cash………………………….…………………………..
31,200
Amount paid………………………..…………………………… P 31,200
Less: BV of K’s total interest (30%)………………………....... 37,200
Partial revaluation/write-down of specific assets……..… P 6,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit)………………………….………P60,000
M, capital (P18,000 + P4,800, profit)…………………………….…… 22,800
c.3: Total Revaluation/Write-down of Assets (Entire Entity).
The entries to record the transaction in the books follows:
K, capital (P20,000 x 30%)…………………………………...... 6,000
L, capital (P20,000 x 50%)………………………………………10,000
M, capital (P20,000 x 20%)……………………………………. 4,000
Assets…………………………………………………….
20,000
To record write-down of assets computed as follows:
Amount paid………………………..…………………………….P 31,200
Less: BV of K’s total interest (30%)………………………........ 37,200
Partial revaluation/write-down of asset……………………..P 6,000*
Divided by (capitalized at): Profit and loss % of K............
30%
Total Revaluation/Write-down of assets….………………….P 20,000
*The P6,000 represents K’s 30% interest in write-down of assets of P20,000. Notice that the P6,000 represents
K’s interest in the loss.
K, capital (P 37,200 - P6,000)………………………………. 31,200
Cash………………………….………………………...
31,200
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit – P10,000)…………………………...P50,000
M, capital (P18,000 + P4,800, profit - P4,000)……………………….….. 18,800
Assets (Goodwill)……………………………………………….. 11,200
K, capital (P11,200 x 30%)……………………………..
3,360
L, capital (P11,200 x 50%)……………………………..
5,600
M, capital (P11,200 x 20%)…………………………….
2,240
To record total revaluation (goodwill) computed as follows:
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K.............
30%
Total Revaluation ……………………………………………….. 11,200
Problem VIII
1.
Grey, Capital P200,000 + (P30,000 × 2/6)
Portney, Capital (P20,000 × 3/4)
Ross, Capital (P20,000 × 1/4)
Cash
2.
Goodwill (P20,000 ÷ 2/6)
Portney, Capital
Grey, Capital
Ross, Capital
Grey, Capital
Cash
Problem IX
1.
(a)
(b)
C, Capital
A, Capital
B, Capital
Cash
Goodwill
C, Capital
C, Capital
Cash
(c)
210,000
15,000
5,000
60,000
230,000
105,000
21,000
14,000
35,000
140,000
230,000
30,000
20,000
10,000
230,000
140,000
35,000
140,000
0.5X =P35,000
X =P70,000
Goodwill
A, Capital
B, Capital
C, Capital
70,000
21,000
14,000
35,000
C, Capital
Cash
2.
140,000
140,000
The bonus method is more objective. That is, the bonus method does not require the allocation of a subjective
value to goodwill. Since this is not an arm’s length transaction, there is no objective basis to revalue the firm as
a whole.
Problem X
(1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of P80,000 (5/8
goodwill = P50,000), resulting in a total payment to Colter of P230,000. The entry would be:
Agler, Capital
50,000
Bates, Capital
30,000
Colter, Capital
150,000
Cash
230,000
(2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is recorded. Thus, the
payment to Colter was P210,000 (P150,000 + P60,000).
Under the total Goodwill, since P66,000 was credited, total goodwill of P220,000 (P66,000/0.3) is recorded. Colter
is allocated P44,000 (P220,000 × 0.20). Thus, the payment to Colter was P194,000 (P150,000 + P44,000).
Problem XI
1. Partnership Books Retained
Entries in the Books of the New Corporation using the Partnership Books:
Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P36,600 – P31,200). .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,400
12,000
12,000
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock (P10 par x 9,000 shares) . . . . . . . . . . . . . . . . . . . .
Paid-in capital in excess of par [(P11 – P10) x 9,000 shares] . . . .
75,348
23,652
To adjust assets and liabilities to agreed amounts and to divide net gain
of P22,200 between partners in 4:1 ratio
To record distribution of common stock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Total shares................................................ 9,000 shares
2. New Books Opened for the Corporation
Entries in the Books of the Partnership:
Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P36,600 – P31,200). .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,400
12,000
12,000
Receivable from A&B Corporation (P76,800 + P22,200) . . . . . . . . . .
99,000
To adjust assets and liabilities to agreed amounts and to divide net gain
of P22,200 between partners in 4:1 ratio
480
5,400
1,320
17,760
4,440
90,000
9,000
480
5,400
1,320
17,760
4,440
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,000
1,320
1,200
36,600
Common Stock of A & B Corporation (9,000 shares x P11) . . . . . . .
Receivable from A & B Corporation . . . . . . . . . . . . . . . . . . . . . . .
To record receipt of 9,000 shares of P10 par common stock
valued at P11 a share in payment for net assets transferred to A
& B Corporation.
99,000
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . .
75,348
23,652
To record transfer of assets and liabilities to A&B Corporation.
To record distribution of common stock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Total shares................................................ 9,000 shares
14,400
33,720
36,000
84,000
12,000
99,000
99,000
In the Accounting Records of the Corporation:
Entries in the Books of the New Corporation:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 - P36,600). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . .............
14,400
33,720
36,000
47,400
12,000
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par (9,000 x P10) . . . . . . . . . . . . . . . . . . . . .
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . .
To record issuance of 9,000 shares of common stock valued at
P11 a share in payment for net assets of A&B Partnership.
99,000
To record acquisition of assets and liabilities from A&B Partnership.
Problem XII
Cash
Trade Accounts Receivable
Inventories
Equipment
Allowance for Doubtful Accounts
Notes Payable
Trade Accounts Payable
Payable to Sade and Tipp
To record acquisition of net assets from Sade & Tipp LLP.
8,700
13,250
28,000
35,000
1,200
42,000
1,320
99,000
90,000
9,000
800
10,000
9,800
64,350
Payable to Sade and Tipp
Common Stock, P1 par
Paid-in Capital Excess of Par
To record issuance of 10,000 shares of common stock to
Sade and Tipp.
Problem XII
1. Cash
Inventory
Equipment
Snow, Capital
64,350
20,000
15,000
67,000
Cash
Land
50,000
120,000
Mortgage Payable
Waite, Capital
2. Snow, Capital
Waite, Capital
Income Summary
7,680
16,320
Snow
P10,200
15,000
P13,000
20,000
Allocation 40:60
Net loss allocated to partners
(32,880)
P(7,680)
(49,320)
P(16,320)
Capital interest of Snow (P102,000 - P7,680)
Capital interest of Waite (P130,000 - P16,320)
Investment of Young
Total capital interest in new partnership
Percentage acquired by Young
Capital interest of Young
Investment by Young
Bonus to Young
102,000
40,000
130,000
24,000
Total
Waite
Net loss to be allocated
Interest on capital investment
P102,000 × 10%
P130,000 × 10%
Salaries to partners
3. Cash
Snow, Capital (P13,400 × 40%)
Waite, Capital (P13,400 × 60%)
Young, Capital
10,000
54,350
70,000
5,360
8,040
P23,200
35,000
58,200
(82,200)
P(24,000)
83,400
P94,320
113,680
70,000
278,000
30%
83,400
(70,000)
P13,400
4. Income Summary
Snow, Capital (P150,000 × 20%)
Waite, Capital (P150,000 × 50%)
Young, Capital (P150,000 × 30%)
150,000
5. Snow, Capital*
Waite, Capital (P18,960 × 50/80)
118,960
30,000
75,000
45,000
11,850
Young, Capital (P18,960 × 30/80)
Cash
Note Payable
7,110
40,000
60,000
*P102,000 - P7,680 - P5,360 + P30,000 = P118,960
Problem XIV
Multiple Choice Problems
1. c
Note: A partnership is not dissolved when a partner assigns his or her interest in the partnership to a third party
because such an assignment does not in itself change the relations among partners. Such assignment only
entitles the assignee to receive the assigning interest partner’s interest in future partnership profits and in
partnership assets in the event of liquidation. The assignee does not become a partner, however, and does not
obtain the right to share in management of the partnership. If the assignee does not become a partner, the
only change required on the partnership books is for transfer of the capital interest of the assignor partner to the
assignee. The assignment by A to D of his 50% interest in the BIG Entertainment Company is recorded are
follows:
A, Capital (P168,000 x 1/4)................................................................. 42,000
D, Capital..............................................................................
42,000
The amount of the capital transfer is equal to the recorded amount of A’s capital at the time of the
assignment, and it is independent of the consideration received by A for his 1/4 interest. If the recorded
amount of A’s is P42,000, then the amount of the transfer entry is P42,000, regardless of whether D pay A P42,000
or some amount. Therefore, the capital of the partnership after the assignment of interest remains the same at
P480,000.
2. c
Amount paid……………………………………………………………………………….P 200,000
Less: Book value of interest acquired: (P100,000 + P200,000 + P300,000) x 25%.. 150,000
Excess – partial goodwill…………………………………………………………………P 50,000
Divided by: capitalization rate based on interest acquired………………….......
25%
Goodwill or revaluation of asset upward…………………………………………….P 200,000
Jethro: [P200,000 + (P200,000 x 30%)] x 75% = P195,000
3. b
Amount paid
Less: Book value of interest acquired:
(P140,000 x ¼)
Excess
Capitalized at: P&L of W
Goodwill/revaluation
P40,000
35,000
P 5,000
1/4
P20,000
E: [P80,000 + (P20,000 x 60%)] x 3/4 = P69,000
G: [P40,000 + (P20,000 x 30%)] x 3/4 = P34,500
D: [P20,000 + (P20,000 x 10%)] x 3/4 = P16,500
4. a
Amount paid………………………………………………………………………………P 60,000
Less: Book value of interest acquired: P120,000 x 40%…………………................ 48,000
Difference…………..……………………………………………………………………...P 12,000
40%
Divided by: Capital Interest………………………………………………………….......
Goodwill…………………………………………………………………………………….P 30,000
LL: P50,000 + (P30,000 x ½) = P65,000 – (P60,000 x ½) = P35,000
QQ: P70,000 + (P30,000 x ½) = P85,000 – (P60,000 x ½) = P55,000
DD: Since there is an adjustment, the capital of the new partner will always be the same with the
amount paid, P60,000.
5. d - The amount that Richard will pay Ray depends on many factors and cannot be determined from
the information provided here.
6.
b
7. c
Amount paid
Less: Book value of interest acquired
(P444,000 x 1/5)
Gain- personal (to N, S & J)
P132,000
88,800
P 43,200
Total agreed capital* (P74,000 + P130,000 + P96,000)/80% ............ P375,000
Less: Total contributed capital *...............…………………………..... 375,000
Difference .......................................………………..………………….. ..P
0
*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed
capital.
The contributed capital or investment of the new partner will be computed based on total
agreed capital.
Total contributed capital………………………………………….. . P375,000
Less: Total contributed capital of old partners............................ 300,000
Investment or contribution of new partner..................................P 75,000
or,
8. b
Total contributed capital………………………………………….. . P375,000
20%
Multiplied by: Capital interest of Jones (new partner)………...
Investment or contribution of new partner..................................P 75,000
Total Agreed Capital
Multiplied by: Interest acquired by K
Agreed capital of K
Cash investment by K
Bonus to K
Therefore, E= P70,000 – (P10,000 x 70%) = P63,000
D= P60,000 – (P10,000 x 30%) = P57,000
J=
P50,000
P180,000
1/3
P 60,000
50,000
P 10,000
9. b - Total capital is P200,000 (P110,000 + P40,000 + P50,000) after the new investment. As Kansas's
portion is to be 30 percent, the capital balance would be P60,000 (P200,000 × 30%). Since only
P50,000 was paid, a bonus of P10,000 must be taken from the two original partners based on
their profit and loss ratio: Bolcar –P7,000 (70%) and Neary – P3,000 (30%). The reduction drops
Neary's capital balance from P40,000 to P37,000.
10. d
Total of old partners' capital
Investment by new partner
P 80,000
15,000
Total of new partnership capital
Capital amount credited to Johnson
(P95,000 x .20)
P 95,000
P 19,000
11. b
LL invests P40,000 and total capital specified as P150,000:
Investment in partnership
P 40,000
New partner's proportionate book value
[(P110,000 + P40,000) x 1/3]
(50,000)
Difference (investment < book value)
P (10,000)
Method: Bonus or goodwill to new partner
Specified total resulting capital
Total net assets not including goodwill
(P110,000 + P40,000)
Estimated goodwill
P 150,000
(150,000)
P
-0-
Therefore, bonus of P10,000 to new partner
Boris' capital = P54,000 = P60,000 - (P10,000 x 6/10)
12. a – “preferable accounting method” refers to bonus method
Total agreed capital = Total contributed capital (under the bonus method)
(P70,000 + P30,000 + P40,000).......................................................................... P 140,000
20%
Multiplied by: interest acquired by new partner..............................................
Capital of new partner Chapman...................................................................... P 28,000
40,000
Less: Investment by Chapman.............................................................................
Bonus to old partners to be allocated equally to old partners –
Adams and Bye......................................................................................... P 12,000
13. c - [P120,000 - (P170,000 + P260,000 + P120,000)(.25)]
14. c
Scott invests P36,000 for a 1/5 interest:
Investment in partnership
New partner's proportionate book value
[(P120,000 + P36,000) x .20]
Difference (investment > book value)
Method: Goodwill to prior partners
1/5 estimated total resulting capital
Estimated total resulting capital
(P36,000 / .20)
Estimated total resulting capital
Total net assets not including goodwill
(P120,000 + P36,000)
Estimated goodwill/adjustment to prior partners
(Use the same procedure in Nos. 9 and 10)
P 36,000
P
(31,200)
4,800
P 36,000
P 180,000
P 180,000
(156,000)
P 24,000
15. b - Total capital is P270,000 (P120,000 + P90,000 + P60,000) after the new investment. However, the
implied value of the business based on the new investment is P300,000 (P60,000/20%). Thus,
goodwill of P30,000 must be recognized with the offsetting allocation to the original partners
based on their profit and loss ratio: Bishop – P18,000 (60%) and Cotton P12,000 (40%). The
increase raises Cotton's capital from P90,000 to P102,000.
16. c
Total agreed capital* P120,000 /60% ............................................. P300,000
Multiplied by: Capital interest of Jones (new partner)………......
60%
Agreed capital of R.............................................................................P180,000
Note: The investment of D is used as the basis to determine total agreed capital,
otherwise using the capital balance of D will lead to a “negative” goodwill or
revaluation downward.
17. c
Total agreed capital* (P250,000/20%)....................................... P 1,250,000
Less: Total contributed capital of R and S:
(P500,000 + P400,000 + P40,000) + P250,000................. 1,190,000
Goodwill or revaluation to old partners................................... P
60,000
Riley: P500,000 + (P40,000 x 60%) + (P60,000 x 60%) = P560,000
or,
Riley [P500,000 + (P40,000 x 60%)]
Smith [P400,000 + (P40,000 x 40%)]
Tyler
Total
18. c
Contributed
Capital
P 524,000
416,000
P 940,000
250,000
P 1,190,000
Agreed
Capital
P 560,000
P1,000,000
250,000 / 20%
P1,250,000 100%
Goodwill
P 36,000 60%
24,000 40%
P 60,000
-0P 60,000
Total agreed capital* ................................................................. P 260,000
Less: Total contributed capital of L, M, and N
(P120,000 + P70,000 – P30,000 + P60,000) + P40,000.... 260,000
Difference..................................................................................... P
0
Total agreed capital
Multiplied by: Interest acquired
Capital credited to Ole
or,
Old Partners: (P120,000+P70,00
- P30,000 + P60,000)
New Partner: Ole
P 260,000
20%
P 52,000
Contributed
Capital
Agreed
Capital
P 220,000
__40,000 P 52,000 20%*
P 260,000 P 260,000
* P52,000 is derived from multiplying P260,000 by 20%.
Notes:
1. The partners agreed that assets should revalued using fair value.
2. Since problem is silent, bonus method is used.
P
-0-
19. a - Admission by purchase. The implied value of the company is P900,000 (P270,000/30%). Since the
money is going to the partners rather than into the business, the capital total is P490,000 before
realigning the balances. Hence, goodwill of P410,000 must be recognized based on the implied
value (P900,000 – P490,000). This goodwill is assumed to represent unrealized business gains and is
attributed to the original partners according to their profit and loss ratio. They will then each
convey 30 percent ownership of the P900,000 partnership to Darrow for a capital balance of
P270,000.
Formal presentation:
Amount paid ………………………….………….. P 270,000 / 30%
Less: BV of interest acquired –
(P220,000 + P160,000 + P110,000) x 30%….... 147,000
Excess……………………………………………….. P123,000
20%
Divided by: Interest acquired…………………..
Goodwill or revaluation of Asset …………….. P410,000
The entry would be as follows;
Goodwill/Asset
Williams (40%)
Jennings (40%)
Bryan (20%)
Williams [P220,000 + (P410,000 x 40%)] x 30%
Jennings [P160,000 + (P410,000 x 40%)] x 30%
Bryan [P110,000 + (P410,000 x 20%)] x 30%
Darrow
P900,000 (100%)
490,000 (100%)
P410,000 (100%)
410,000
115,200
97,200
57,600
164,000
164,000
82,000
270,000
20. d - Admission by investment. Since the money goes into the business, total capital becomes
P740,000 (P490,000 + P250,000). Darrow is allotted 30 percent of this total or P222,000. Because
Darrow invested P250,000, the extra P28,000 is assumed to be a bonus to the original partners.
Jennings will be assigned 40 percent of this extra amount or P11,200. This bonus increases
Jennings’ capital from P160,000 to P171,200.
Formal presentation:
Total agreed capital* (same with total contributed capital)…... P740,000
Less: Total contributed capital (P220,000 + P160,000 +
P110,000 + P250,000)..............…………………………....... 740,000
Difference .......................................………………..………………… ..P
0
*since no goodwill or revaluation is allowed total agreed is the same with total contributed capital.
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in
(a) is attributable to revaluation (goodwill) to old partners:
Darrow’s contributed capital………………………………………… P250,000
Darrow’s agreed capital: (P740,000 x 30%)……………………....... 222,000
Bonus to old partners ........................………………………………… P 28,000
Jennings: [P160,000 + (P28,000 x 40%)] = P171,200
or, alternatively
W
J
B
Total
D
Contributed Capital (CC)
220,000
160,000
110,000
490,000
250,000
740,000
Agreed Capital (AC)
171,200
_______
518,000
222,000 30%
740,000
21.
d
As specified no bonus or goodwill recognized.
5/6 estimated total resulting capital
Estimated total resulting capital (P150,000 / 5/6)
Required investment (P180,000 x 1/6)
22.
d
Direct purchase; reclassify CCs capital only (if silent – book value).
23. d
11,200 40%
11,200 40%
5,600 20%
28,000
28,000
0
P 150,000
180,000
P 30,000
Total contributed capital*
(P140,000 + P40,000) / 4/5 ............................................. P225,000
Less: Total contributed capital of Allen and David................ 180,000
Investment by David......................................................................P 45,000
*since no goodwill or revaluation is allowed total agreed capital is the same with total
contributed capital.
24. c
Total agreed capital (140,000 + 40,000) / 3/4.............................P240,000
Less: Total contributed capital
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 10,000
Note: since the problem indicates that there is goodwill/revaluation of asset downward, total
agreed capital should be higher compared to total contributed capital (to achieve this
objective the capital of old partners should be used as a basis)
Cash
Goodwill/assets
David, capital (1/4 x P240,000)
25. b
50,000
10,000
60,000
Total agreed capital (P40,000) / 1/5............................................P200,000
Less: Total contributed capital
(P140,000 + P40,000 + P40,000)......................................... 220,000
Revaluation of asset / inventory decreased……..…………....P( 20,000)
Note: since the problem indicates that there is revaluation of asset downward, total agreed
capital should be lower compared to total contributed capital.
26. b – refer to No. 25 for computation
Allen: P140,000 – (P20,000 x 3/4) = P125,000
Daniel: P40,000 – (P20,000 x 1/4) = P35,000
27. d
28. a.
29. b
Amount paid (P34,000 + P10,000)
Less: Book value of Allen and Daniel (1/5) x P180,000 )
Partial goodwill/revaluation adjustment
Capitalized at
Revaluation of land
P 44,000
36,000
P 8,000
1/5
P 40,000
Allen: [P140,000 + (P40,000 x 3/4)] x 4/5 = P136,000
Daniel: [P40,000 + (P40,000 x 1/4)] x 4/5 = P40,000
Total agreed capital (given)........................................................P220,000
Less: Total contributed capital
(P140,000 + P40,000 + P40,000)......................................... 220,000
Difference..............................................………………..…………..P
0
Note: Since total agreed and total contributed are the same, therefore is no goodwill or
revaluation.
Total Agreed Capital
Multiplied by: Interest acquired by David
Agreed capital of David
Cash investment by David
Bonus to David
Cash
Allen (P4,000 x 3/4)
Daniel (P4,000 x 1/4)
David
P220,000
1/5
P 44,000
40,000
P 4,000
40,000
3,000
1,000
44,000
30. d – refer to No. 29
Allen = P140,000 – (P10,000 x 3/4) = P137,000
Daniel = P40,000 – (P10,000 x 1/4) = P39,000
31. a
Total agreed capital (P50,000) / 1/5............................................P250,000
Less: Total contributed capital
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 20,000
Note: since the problem indicates that there is goodwill/revaluation of asset downward, total
agreed capital should be higher compared to total contributed capital (to achieve this
objective the capital of the new partners should be used as a basis)
32. a - A P10,000 bonus is paid to Costello (P100,000 is paid rather than the P90,000 capital balance).
This bonus is deducted from the two remaining partners according to their profit and loss ratio
(2:3). A reduction of 60 percent (3/5) is assigned to Burns or a decrease of P6,000 which drops
that partner’s capital balance from P30,000 to P24,000.
33. a - (P121,000 − P100,000) x 35/60 = P12,250]
34. c - (P39,000 + P7,200 − P750 = P45,450)
35. b
36. a
37. b
Amount paid
Less: Book value of Williams
P70,000 + (P360,000 – P300,000) x 20%
Partial goodwill/revaluation adjustment
Capitalized at P&L of Dixon
Goodwill/revaluation
P 102,000
82,000
P 20,000
20%
P100,000
Brown: P65,000 + (P60,000 x 20%) + (P100,000 x 20%)
Lowe: P150,000 + (P60,000 x 60%) + (P100,000 x 60%)
P 97,000
P246,000
Amount paid
Less: Book value of Dixon (20%): (P210,000 – P160,000)
Partial goodwill/revaluation adjustment
Capitalized at P&L of Dixon
Goodwill/revaluation
P 74,000
50,000
P 24,000
20%
P120,000
Amount paid……………………………………………………………………………P 80,000
Less: Book value of Interest of Bolger
P60,000 + [(P170,000 + P210,000 + P100,000) – (P180,000 +
P200,000 + P75,000)] x 35%........................................................................ 68,750
Partial Goodwill (to retiring partner)……………………………………………….P 11,250
Incidentally, the entry for the retirement (payment to Bolger) would be:
Bolger, capital……………………………………………… 68,750
Goodwill……………………………………………………… 11,250
Cash………………………………………………..
80,000
Therefore, the capital of Grossman after the retirement of Bolger would be, P66,250 [P55,000 +
(45% x P25,000)].
38. c – no goodwill or revaluation therefore, bonus.
Tiffany
Ron (P10,000 x3/5)
Stella (P10,000 x 2/5)
Cash
39. a – refer to No. 38 (P80,000 – P6,000 = P74,000)
40. d
Amount paid
Less: Book value of Tiffany (1/6)
Partial goodwill/revaluation adjustment
Capitalized at
P 36,000
50,000
6,000
4,000
)
60,000
P 56,000
50,000
P 6,000
1/6
41. c - Roberts receives an additional P60,000 above her capital balance.
Amount paid
P 160,000
100,000
Less: Book value of Robert (40%)
Partial goodwill/revaluation adjustment
P 60,000
Capitalized at
40%
P 150,000
Goodwill/revaluation
Goodwill/revaluation
Goodwill/assets
Peter (20%)
Robert (40%)
Dana (40%)
150,000
Robert (P100,000 + P60,000)
Cash
160,000
60,000
30,000
60,000
160,000
Therefore: Peter: P80,000 + P30,000 = P110,000
42. d – refer to No. 41
Dana: P60,000 + P60,000 = P120,000
43. e – refer to No. 41
Total Assets before retirement (P80,000 + P100,000 + P60,000)
Add: Goodwill/revaluation of asset
Less: Cash paid
Total assets after retirement
P240,000
150,000
160,000
P230,000
44. e – same with No. 43
45. c
Total Capital of L (wherein goodwill should be generated)
Total assets, fair value (P40,000 + P52,000 + P94,000 +
P320,000 + P64,000)
Less: Total liabilities ( P110,000 + P200,000)
Less; Total Capital of M
Total assets, fair value (P30,000 + P56,000 + P114,000 +
P280,000 + P44,000)
Less: Total liabilities ( P80,000 + P150,000)
Goodwill
P 570,000
__310,000
P 524,000
230,000
P 260,000
294,000
P 34,000
46. c
L, Capital and M, Capital are each $P94,000 if L's goodwill is recognized. Total capital is P588,000,
and total liabilities and capital amount to P1,128,000.
47. d
(1) Goodwill (revaluation) method:
Amount paid
P 36,000
30,000
Less: Book value of interest acquired (P100,000 x 30%))
Partial goodwill/revaluation adjustment
P 6,000
Capitalized at
30%
Goodwill/revaluation
P 20,000
Therefore, the capital balances after the admission of OO:
Adams: [P60,000 + (P20,000 x 60%)] x 70%………………………P 72,000
Brown: [P40,000 + (P20,000 x 40%)] x 70%...…………………….. 48,000
Call.............................................……………………………………. __36,000
Total capital after admission…………………………………….. .P156,000
(2) If Book (or bonus) method is used, the capital balances would be:
Adams...............................................................……………………P 60,000
Brown..............................................................…………………….. 40,000
Call: (P60,000 + P40,000) x 30%…………………………………. ..__ 30,000
Total capital after admission…………………………………….. .P130,000
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
Brown
P48,000
P40,000
5,600
P45,600
P 2,400
Call
P36,000
P30,000
6,000
P36,000
P
0
Alternative 2: If goodwill is not realized and written-off as a loss:
Adams
Brown
Goodwill Method is used………………….
P 72,000
P48,000
Less: Write-off of goodwill *……………….
8,400
5,600
P63,600
P42,400
BV/Bonus Method is used…………………
P60,000
P40,000
(Gain) loss – bonus method……………….
P 3,600
P 2,400
Call
P36,000
6,000
P30,000
P30,000
P
0
Goodwill Method is used………………….
BV/Bonus Method is used…………………
Add: Goodwill *……...................................
(Gain) loss – BV/bonus method………….
Adams
P72,000
P60,000
8,400
P68,400
P 3,600
Adams: 70% x 6/10 = 42%
Brown: 70% x 4/10 = 28%
Call
30%
Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is
objective that is establishes total capital of the new partnership at an amount based on actual consideration
received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a
bonus to either old or new partners.
The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset
actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective
measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not
determined objectively and other factors may have influenced the amount of investment required from the new
partners.
Although either method can be used in achieving the required interest for the new partner, the two methods offer
the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon
admission are equal, and
2. When the former partners continue to share profits and losses between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.
48. d – refer to No. 47 for Note.
(1) Goodwill method: Using the capital balance of new partner as a basis of computing total
agreed capital,:
Total agreed capital (P5,000/25%)……………………………………. P20,000
Less: Total contributed capital (P6,000/P4,800+P5,000)…………… 15,800
Goodwill to old partners…………………………………………………. P 4,200
Therefore, the capital balances after the admission of OO:
MM: [P6,000+(P4,200x3/5)]…………………………………………………. P 8,520
NN: [P4,800+(P4,200x2/5)]…………………………………………………..
6,480
OO………………………………………………………………………………. 5,000
Total agreed capital………………………………………………………… P20,000
(2) If bonus method is used, the capital balances would be:
Total agreed capital (P6,000+P4,800+P5,000)………………………….......... P 15,800
25%
Multiplied by: OO’s capital interest………………………………………….....
Agreed capital to be credited to OO………………………………………... P 3,950
5,000
Contributed/Invested capital of OO……………………………………..........
Bonus to MM and NN (old partner)………………………………………......... P 1,050
The bonus would be added to MM and NN:
MM: [P60,000+(1,050,000x3/5)]……………………………………………. P 6.630
NN: [P4,800+(P1,050x2/5)]…………………………………………………..
5,220
3,950
OO………………………………………………………………………………
Total agreed capital……………………………………………………….. P 15,800
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
Goodwill Method is used………………….
Bonus Method is used……………………...
Add: Goodwill (allocated equally)……..
(Gain) loss – bonus method……………….
MM
P8,520
P6,630
1,400
P8,030
P 490
NN
P6,480
P5,220
1,400
P6,620
P (140)
OO
P5,000
P3,950
1,400
P5,350
P 350 (d)
Alternative 2: If goodwill is not realized and written-off as a loss:
Goodwill Method is used………………….
Less: Write-off of goodwill
(allocated equally)………………….
Bonus Method is used……………………...
(Gain) loss – bonus method……………….
MM
P8,520
NN
P6,480
OO
P5,000
1,400
P7,120
P6,630
P 490
1,400
P5,080
P5,220
P (140)
1,400
P3,600
P3,950
P 350 (d)
49. a – refer to No. 47 for Note.
Goodwill method: Using the capital balance of new partner as a basis of computing total agreed
capital.
Total agreed capital (P500,000/25%)……………………………………. P2,000,000
Less: Total contributed capital (P600,000/P480,000+P500,000)…….. 1,580,000
Goodwill to old partners…………………………………………………... P 420,000
Therefore, the capital balances after the admission of CC:
AA: [P600,000+(P420,000x3/5)]…………………………………………… P 852,000 (d)
BB: [P480,000+(P420,000x2/5)]…………………………………………….
648,000
500,000
CC………………………………………………………………………………
Total agreed capital………………………………………………………….. P 2,000,000
Bonus Method:
Total agreed capital (P600,000+P480,000+P500,000)………………... P 1,580,000
25%
Multiply by: CC’s capital interest…………………………………………
Agreed capital to be credited to CC………………………………….. P 395,000
500,000
Contributed/Invested capital of CC…………………………………….
Bonus to AA and BB (old partners)………………………………………. P 105,000
The bonus would be added to AA and BB:
AA: [P600,000+(1,050,000x3/5)]……………………………………………. P 663,000
BB: [P480,000+(P105,000x2/5)]………………………………………………
522,000
395,000
CC……………………………………………………………………………….
Total agreed capital………………………………………………………… P 1,580,000
For purposes of comparing bonus and goodwill, assume that goodwill is not realized and it should be
written-off as a loss:
AA
BB
CC
P500,000
Goodwill Method is used………………….
P852,000
P648,000
Add: Goodwill (allocated equally)……..
140,000
140,000
140,000
P712,000
P508,000
P360,000
Bonus Method is used……………………...
P663,000
P522,000
P395,000
(Gain) loss – bonus method……………….
P 49,000
P (14,000)
P 35,000
50. b
Total
Capital, before adjustment………………… P309,000
Less: Net adjustment*………………………..
35,400
Capital, after adjustment………………….. P273,600
Less: Portion covered by common stock,
par P10 (720 share to each partner)..
14,400
Portion to be covered by preferred stock,
par P100…………………………………..... P259,200
Shares to be issued:
Preferred stock………………………. 2,592
758
Common stock………………………
1,440
720
*FV, P40,000 + P68,000 + P180,600 – BV, P60,000 + 90,000 + P174,000.
51. d
Gil
P214,200
23,600
P190,600
Roy
P94,800
11,800
P83,000
7,200
7,200
P75,800
P183,400
1,834
720
Fair value of the assets (P200,000 + P24,000)……………………………. P224,000
Less: Total liabilities……………………………………………………………. 40,000
Fair value of Net Assets……………………………………………………… P184,000
20,000
Less: Common stock at P1 par (10,000 shares x 2 x 1 par)……………
Additional paid-in capital………………………………………………… P164,000
52. b
53. c
54. c
Unadjusted capital balances (P140,000 + P120,000)…………………… P260,000
Add (deduct): adjustments:
Allowances for doubtful accounts……………………………… (10000)
Revaluation of inventory (P160,000 - P140,000)………………...
20,000
Additional depreciation……………………………………………. (3,000)
Adjusted capital balances equivalent to the total shares issued……P267,000
Unadjusted assets (P10,500 + P15,900 + P42,000 + P60,000)……………. P128,400
Add (deduct): adjustments:
Allowances for doubtful accounts……………………………… ( 1,200)
Short-term prepayments...............................................................
800
Revaluation of inventory (P48,000 – P42,000)...………………...
6,000
12,000
Revaluation of equipment (P72,000 – P60,000)………………...
Adjusted asset balance............................................................................. P146,000
Adjusted asset balance............................................................................. P146,000
17,150
Less: Liabilities (P16,400 + P750)..................................................................
Adjusted net assets..................................................................................... P128,850
50,000
Less: Common stock, P5 par x 10,000 shares.....................……………...
Additional paid-in capital…………………………………………………… P 78,850
Quiz-III
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d
Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5]
Difference (investment > book value)
P 17,000
P
(15,400)
1,600
Method: Bonus to prior/old partners
PP's capital credit = P77,000 x 1/5
= P15,400
3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000
Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment. As Claudius's
portion is to be 20 percent, the new capital balance would be P90,000 (P450,000 × 20%). Since
P100,000 was paid, a bonus of P10,000 is being given to the two original partners based on their
profit and loss ratio: Messalina – P6,000 (60%) and Romulus – P4,000 (40%). The increase raises
Messalina's capital balance from P210,000 to P216,000 and Romulus's capital balance from P140,000
to P144,000.
4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)
5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)
7. Abele, P300,000; Boule, P480,000; Dann, P420,000
8. Brown, P156,000; Green, P99,000; Red, P45,000
9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250
10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the price paid by
Mary Ann.
11. P180,000
12. Net assets of the partnership will increase by P190,000, including Professor’s interest.
13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000
16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000
17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750
18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000
19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits and losses, this
allocation indicates total goodwill of P50,000.
20% of Goodwill = P10,000
.20 G = P10,000
G = P10,000/.20
G = P50,000
Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of this
goodwill, an entry that raises this partner's capital balance from P130,000 to P145,000.
20. a – [(P80,000 − P60,000) ÷ 3 + P6,667]
21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23.
24.
25.
26.
27.
P24,000 = (P250,000 - P210,000)(45/75)
P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
P172,500 = P150,000 + (P75,000 x .3)
P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)
Donald, P55,000; Todd, P60,000
Anne receives an additional P30,000 above her capital balance. Since she is assigned 40 percent
of all profits and losses, this extra allocation indicates total goodwill of P75,000, which must be split
among all partners. 40% of Goodwill = P30,000
Amount paid
Less: Book value of Anne (40%)
Partial goodwill/revaluation adjustment
Capitalized at
P 75,000
P 80,000
50,000
P 30,000
40%
Goodwill/assets
Donald (20%)
Anne (40%)
Todd (40%)
75,000
Anne (P50,000 + P30,000)
Cash
30,000
80,000
Goodwill/revaluation
15,000
30,000
80,000
Donald: P40,000 + P15,000 = P55,000
Todd: PP30,000 + P30,000 = P60,000
28. Donald, P30,000; Todd, P10,000
The P30,000 bonus is deducted from the remaining partners according to their relative profit and loss
ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Anne
Donald (P30,000 x 2/6)
Todd (P30,000 x 4/6)
Cash
50,000
10,000
20,000
80,000
Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000
29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)
30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%)
P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
1,580,000
Goodwill to old partners
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
P852,000
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
Agreed capital to be credited to ZZ
P 1,580,000
25%
P 395,000
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
500,000
P 105,000
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX
YY
ZZ
Goodwill Method is used
P 852,000
P 648,000
P 500,000
Bonus Method is used
P 663,000
P 522,000
P 395,000
Add: Goodwill (allocated equally)
140,000
140,000
140,000
P803,000
P 662,000
P 535,000
(Gain) Loss – Bonus method
P 49,000
P (140,000)
P 35,000
Alternative 2: If goodwill is not realized and written-off as a loss:
XX
YY
Goodwill Method is used
P 852,000
P 648,000
Less: Write-off of goodwill (equally)
140,000
140,000
P 712,000
P 508,000
Bonus Method is used
663,000
522,000
(Gain) Loss – Bonus method
P 49,000
P (140,000)
ZZ
P 500,000
140,000
P 360,000
395,000
P 35,000
Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is
objective that is establishes total capital of the new partnership at an amount based on actual consideration
received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a
bonus to either old or new partners.
The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset
actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective
measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not
determined objectively and other factors may have influenced the amount of investment required from the new
partners.
Although either method can be used in achieving the required interest for the new partner, the two methods offer
the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon
admission are equal, and
2. When the former partners continue to share profits and losses between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.
31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%)
P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
1,580,000
Goodwill to old partners
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
P852,000
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
Agreed capital to be credited to ZZ
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
P 1,580,000
25%
P 395,000
500,000
P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX
YY
ZZ
Goodwill Method is used
P 852,000
P 648,000
P 500,000
Bonus Method is used
P 663,000
P 522,000
P 395,000
Add: Goodwill* (45%: 30%:25%)
189,000
126,000
105,000
P852,000
P 648,000
P 500,000
(Gain) Loss – Bonus method
P
0
P
0
P
0
*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%
Alternative 2: If goodwill is not realized and written-off as a loss:
XX
Goodwill Method is used
P 852,000
Less: Write-off of goodwill*
189,000
P 633,000
Bonus Method is used
663,000
(Gain) Loss – Bonus method
P
0
YY
P 648,000
126,000
P 522,000
522,000
P
0
ZZ
P 500,000
105,000
P 395,000
395,000
P
0
32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid
P300,000
250,000
Less: Book value of interest – Neal (40%))
Partial goodwill/revaluation adjustment
P 50,000
Capitalized at
40%
Goodwill/revaluation
P125,000
Capital balances before withdrawal
Allocate goodwill*
Withdrawal of Neal
Write-off Impaired Goodwill (125,000 × 0.50)
Neal
250,000
50,000
300,000
(300,000)
_______
Palmer
150,000
37,500
187,500
_______
187,500
(62,500)
Ruppe
100,000
37,500
137,500
_______
137,500
(62,500)
0
Capital balances using the bonus method**
33. Prefer bonus method due to Palmer’s gain of P12,500
Neal
Capital balances before withdrawal
250,000
Allocation of goodwill*
50,000
300,000
Withdrawal of Neal
(300,000)
-0Write-off Impaired Goodwill
125,000 × 0.60
125,000 × 0.40
________
-0Capital balances using the bonus method**
(Gain) Loss – Bonus method
0
125,000
125,000
75,000
75,000
Palmer
150,000
37,500
187,500
_______
187,500
Ruppe
100,000
37,500
137,500
_______
137,500
(75,000)
_______
112,500
125,000
12,500
(50,000)
87,500
75,000
12,500
**The excess paid to Neal of P50,000 would have been divided equally between Palmer and Ruppe as
follows:
Ruppe
Palmer
Capital balance before withdraw
150,000
100,000
Allocation of excess paid to Neal
(25,000)
(25,000)
Capital balance using bonus method
125,000
75,000
34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000
35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
19,240
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]…
Fair value of net assets………………………………………………………. P 64,350
10,000
Less: Common stock, P1 par (10,000 shares x P1)……………………...
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
True or False
1. False
6.
2. True
7.
3. False
8.
4. True
9.
5. False
10.
THEORIES
False
False
True
False
False
11.
12.
13.
14.
15,
True
True
True
False
True
16.
17.
18.
19.
20.
True
True
False
False
True
21.
22.
23.
24.
25.
False
True
False
True
False
26.
27.
28.
29.
30.
False
True
False
True
False
31.
32.
True
True
Note for the following numbers:
1.
A dissolution occurs every time there is a change in relationship among the partners. This can occur when a
new partner enters the partnership or an existing partner leaves the partnership. A dissolution occurs when the
partnership is going out of business but the termination of business is not a requirement for a dissolution.
3. A new partner's liability for actions that occurred before joining the partnership is limited to the amount invested
in the partnership.
5. Regardless how a new partner enters a partnership, the other partners have to approve the admission because
they must accept unlimited liability due to actions of the new partner taken on behalf of the partnership.
6. There is no necessary relationship between the percentage of equity acquired and the amount of profit or loss
received. These are separate contractual issues.
7. There are three methods that may be used when a new partner is paying an amount more than book value for
the investment: revaluation of existing assets, bonus method, and goodwill method. The partners do not have
to choose one method. It would not be inconsistent to revalue the assets and apply either the bonus or the
goodwill method to record the investment.
9. Existing partners share the difference between market value and book value equally if that is the manner in
which profits and losses are shared. If profits and losses are shared in some other manner, then the difference
between market and book values are shared in that manner.
10. While it is possible that an error has been made, it is more likely that the existing partners recognized an
increase in their capital accounts via a bonus. The difference between the amount credited to the new
partner’s capital account and the amount invested is shared by the existing partners.
14. New partners may receive a bonus if they bring value to the partnership in excess of the tangible assets
invested. This additional amount may be from such things as expertise, experience, or business contacts. The
bonus allocated to the new partner is payment for these types of unidentifiable assets contributed to the
partnership.
18. Goodwill may be recognized with regard to the existing partners but it may also be recognized with regard to
the new partner.
19. When goodwill is recognized with regard to the new partner, the new partner’s capital account will be greater
than the amount invested by the recognized goodwill.
21. The articles of partnership may include an agreement on the length of advanced notice a partner must give
before withdrawing from a partnership. Failure to provide the agreed notice may result in the withdrawing
partner being liable for damages suffered by the partnership.
23. If existing partners acquire a withdrawing partner’s equity, they can divide the purchase of that equity among
themselves in any manner they choose.
25. Partnership assets may be revalued but they may also remain at their carrying value.
26. The revaluation of the partnership’s assets is unrelated to the purchase of the withdrawing partners ownership
interest in the partnership.
28. The revaluation of partnership assets at the time of a partner’s withdrawal has no impact on the recognition of a
bonus or goodwill.
30. While the partners can recognize either the withdrawing partner’s goodwill or the entire partnership’s goodwill,
there is no requirement to recognize any goodwill when a partner withdraws from a partnership.
Multiple Choice
33. b
38. e
34 d
39. e
35. d
40. d
36. d
41. d
37. d
42. b
43.
44.
45.
46.
47.
c
c
d
c
b
47.
48.
50.
51.
52.
a
c
c
a
d
53.
54.
55.
56.
57.
c
c
c
b
b
58.
59.
60.
61.
62.
a
c
b
b
b
63.
64.
65.
66.
67.
68.
c
d
c
d
d
a
Chapter 4
Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Payment to partners - loan
Balances after payment of
partners’ loans
Payment to partners capital
Cash
24,000
NonCash
Assets
84,000
Q,
Capital
30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
Liabilities
12,000
Q, Loan
2,400
_____
12,000
(12,000)
______
2,400
3,600
13,200
6,000
54,000
2,400
38,400
2,400
(2,400)
13,200
______
54,000
______
38,400
_______
105,600
13,200
54,000
38,400
(105,600)
(13,200)
(54,000)
(38,400)
96,000
120,000
(12,000)
(84,000)
108,000
(2,400)
2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset deficit versus loans
Balances after offsetting
Payment to partners – loan
Balances after payment of
partners’ loans
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_____
12,000
(12,000)
______
2,400
(10,800)
(1,200)
(18,000)
30,000
(7,200)
28,800
2,400
(1,200)
1,200
(1,200)
(1,200)
1,200
30,000
_______
30,000
_______
28,800
_______
28,800
______
58,800
30,000
28,800
(58,800)
(30,000)
(28,800)
Cash
24,000
48,000
72,000
(12,000)
60,000
_______
60,000
(1,200)
NonCash
Assets
84,000
(84,000)
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and
Made).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit –
Balances after offsetting
partner’s loan
Additional investment by Q
Balances after additional
Investment
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
________
12,000
(12,000)
________
2,400
________
(14,400)
( 4,800)
_______
(24,000)
24,000
_______
(9,600)
26,400
_______
2,400
(2,400)
( 4,800)
2,400
24,000
_______
26,400
_______
(2,400)
2,400
24,000
_______
26,400
_______
50,400
24,000
26,400
(50,400)
(24,000)
(26,400)
Cash
24,000
36,000
60,000
(12,000)
NonCash
Assets
84,000
(84,000)
48,000
_______
48,000
__2,400
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Additional loss due to
insolvency of Q
Balances after additional ,
Loss
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_______
12,000
(12,000)
________
2,400
_______
(12,600)
( 3,000)
_______
(21,000)
27,000
_______
(8,400)
27,600
_______
2,400
(2,400)
(3,000)
2,400
( 600)
27,000
______
27,000
27,600
______
27,600
( 429)
( 171)
54,000
26,571
27,429
(54,000)
(26,571)
(27,429)
Cash
24,000
42,000
66,000
(12,000)
54,000
_______
54,000
_______
NonCash
Assets
84,000
(84,000)
600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Additional investment by Q
Balances after additional
investment
Additional loss due to
insolvency of Q
Balances after additional
Loss
Payment to partners capital
NonCash
Assets
84,000
Cash
24,000
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
Liabilities
12,000
Q, Loan
2,400
_______
12,000
(12,000)
_______
2,400
_______
(18,000)
( 8,400)
_______
(30,000)
18,000
_______
(12,000)
24,000
_______
2,400
(2,400)
( 8,400)
2,400
(6,000),
_ 3,600
18,000
______
18,000
______
24,000
_______
24,000
_______
39,600
(2,400)
18,000
24,000
______
2,400
(1,714)
( 686)
39,600
16,286
23,314
(39,600)
(16,286)
(23,314)
24,000
48,000
(12,000)
(84,000)
36,000
______
36,000
_3,600
6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Payment of liquidation
expenses
Balances after payment of
liquidation expenses
Write-off goodwill and
prepaid expenses
Balances after write-offs
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
Liabilities
Offset loan versus deficit
Balances after offsetting
Additional investment by Q
and R
Balances after additional
Investment
Payment of liabilities
Balances after payment of
Liabilities
Payment to partners - Capital
Cash
24,000
NonCash
Assets
84,000
Liabilities
12,000
(14,400)
______
________
9,600
84,000
_______
Q, Loan
2,400
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
________
(4,320)
(7,200)
(2,880)
12,000
2,400
5,280
40,800
33,120
(72,000)
_______
________
(21,600)
(36,000)
(14,400)
9,600
12,000
12,000
2,400
(16,320)
4,800
1,200
10,800
(10,800)
(12,000)
_______
12,000
(10,800)
________
2,400
________
( 3,240)
( 19,560)
_______
( 5,400)
( 600)
________
( 2,160)
16,560
_______
1,200
_______
1,200
2,400
(2,400)
(19,560)
2,400
(17,160)
( 600)
_______
( 600)
16,560
_______
16,560
-0______
-017,760
_______
17,760
(1,200)
1,200
(1,200)
16,560
(16,560)
17,160
600
18,720
______
16,560
_______
16,560
(16,560)
7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Increase in equipment
Decrease in furniture
Balances after revaluation
Refund of prepaid
expenses
Balances after refunds
Received noncash assets
Balances after receipt
of noncash assets
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan versus deficit
Balances after offsetting
Payment to partners loan
Balances after payment
of loans
Payment to partnerscapitals
______
24,000
NonCash
Assets
84,000
1,200
(600)
84,600
_6,960
30,960
______
(8,400)
76,200
(10,200)
_______
12,000
_______
______
2,400
______
_(432)
9,348
_____
(720)
47,580
(7,200)
(288)
35,832
(3,000)
30,960
66,000
12,000
2,400
40,380
32,832
32,400
63,360
(12,000)
(66,000)
_______
12,000
(12,000)
______
2,400
_______
9,348
(
10,080)
( 732)
_______
( 16,800)
23,580
_______
( 8,064)
26,112
_______
23,580
______
23,580
26,112
______
26,112
______
_______
49,692
23,580
26,112
(49,692)
(23,580)
(26,112)
Cash
24,000
Q, Loan
2,400
_______
12,000
______
2,400
51,360
_______
51,360
2,400
( 732)
1,668
(1,668)
(1,668)
Problem II
(
R,
Capital
(50%)
48,000
600
(300)
48,300
S,
Capital
(20%)
36,000
240
(120)
36,120
732)
732
DISCOUNT PARTNERSHIP
Schedule of Partnership Liquidation
January 14, 20x4
Explanation
Cash
Balances before realization
Sales of noncash assets
Balances
Payment of liabilities
Balances
Allocation of Hardin's
balance
Liabilities
12,000
Q,
capital
(30%)
9,600
360
_(180)
9,780
debit
Balances
Distribution of cash to partners
Balances
P
Liabilities
Capital Balances
Dawson
Feeney
P25,000
Other
Assets
P120,000
Hardin
P(40,000)
P(31,000)
P(65,000)
P(9,000)
60,000
85,000
(120,000)
0
______
(40,000)
18,000
(13,000)
24,000
(41,000)
18,000
9,000
(40,000)
45,000
__________
0
40,000
0
________
(13,000)
________
(41,000)
________
9,000
______
45,000
__________
0
______
0
3,857
(9,143)
5,143
(35,857)
(9,000)
0
(45,000)
0
__________
P
0
______
P
0
9,143
P
0
35,857
P
0
________
P
0
Problem III
1.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
Liabilities
Carlos
20%
25,000
475,000
(270,000)
(120,000)
(50,000)
(60,000)
260,000
285,000
(475,000)
-0-
(270,000)
43,000
(77,000)
86,000
36,000
86,000
26,000
25,000
310,000
-0-
(270,000)
(77,000)
36,000
(25,000)
1,000
Cash
Preliquidation balances
Sale of assets and distribution
of P215,000 loss
Cash contributed by Gail to
extent of positive net worth
Distribution of deficit of
insolvent partner:
20/60(P1,000)
40/60(P1,000)
Contribution by Dan to
remedy deficit
Payment to creditors
Payment to partner
Post-liquidation balances
2.
Capital Balances
Dan
Gail
40%
40%
Noncash
Assets
333
310,000
-0-
(270,000)
(76,667)
36,667
(1,000)
667
36,667
-0-
(36,667)
346,667
-0-
(270,000)
(76,667)
-0-
-0-
(270,000)
76,667
-0-
270,000
-0-
(76,667)
-0-
-0-
-0-
-0-
(76,667)
-0-
76,667
-0-
-0-
CDG Partnership
Net Worth of Partners
December 10, 20X6
Personal assets, excluding
partnership capital interests
Personal liabilities
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6
Contribution to partnership
Liquidating distribution from partnership
Net worth, December 10, 20X6
-0-
Carlos
Dan
Gail
250,000
(230,000)
300,000
(240,000)
350,000
(325,000)
20,000
60,000
(36,667)
-023,333
25,000
(25,000)
-0-0-
76,667
96,667
This computation assumes that no other events occurred in the 10-day period that changed any of the
partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a
computation of net worth is current and timely.
The table shows the effects of the transactions between the partnership and each partner. A
presumption of this table is that the personal creditors of Dan or Gail would not seek court action to
block the settlement transactions with the partnership. Upon winding up and liquidation, the
partnership does not have any priority to the partner’s personal assets. Thus, the personal creditors may
seek to block the transactions with the partnership in order to provide more resources from which they
can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who
had to make additional contributions or even by a partnership creditor if the failed partner is liable to
the partnership creditor. But those claims are not superior to the other claims to the partner’s individual
assets.
When accountants provide professional services to partnerships and to its partners, the accountant
should expect, at some time, legal suits involving the partnership and/or individual partners. A strong
and thorough understanding of the legal and accounting foundations of partnerships will be very
important to that accountant.
Problem IV
Cash
Noncash
Assets
Liabilities
Beginning balances
P 25,000 P200,000 P165,000
Liquidation expense
(20,000)
Sale of non-cash assets
160,000 (200,000)
Payment of liabilities
(165,000)
(165,000)
Contribution by Flowers
10,000
Allocation of Flower's
Distribution to partners
(10,000)
Ending balances
0
0
0
Problem V
Beginning:
Payment of liabilities
Cramer/Bower pay in
from personal worth
to cover
deficit balances:
Payment of liabilities
Allocation of
deficit balances:
Able paid:
Capital and Loan Balances
Merz
Dechter Flowers
P 40,000
(8,000)
(16,000)
(6,000)
(10,000)
0
P30,000 P(10,000)
(8,000)
(4,000)
(16,000)
(8,000)
10,000
12,000
0
0
(6,000)
0
0
Cash
P20,000
(20,000)
P
0
Liabilities
P(30,000)
20,000
P(10,000)
Able
P(10,000)
Bower
P5,000
Cramer
P15,000
P(10,000)
P5,000
P15,000
12,000
P12,000
(10,000)
P 2,000
________
P(10,000)
10,000
P
0
________
P(10,000)
(2,000)
P3,000
(10,000)
P 5,000
P(10,000)
P3,000
P 5,000
______
P 2,000
(2,000)
P
0
________
P
0
8,000
P (2,000)
2,000
P
0
(3,000)
P
0
(5,000)
P
0
P
P
P
0
0
0
Problem VI
Answer:
Cash
70,000
Arthur, Capital
6,000
Baker, Capital
15,000
Casey, Capital
9,000
Other Assets
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.
Trade Accounts Payable
Cash
To record payment of liabilities.
65,000
Arthur, Capital
Loan Receivable from Arthur
To offset Arthur's loan account against Arthur's capital
account.
20,000
Arthur, Capital
Loan Payable to Baker
Casey, Capital
Cash
To record payments to partners, computed as follows:
14,000
20,000
1,000
Capital account balances
Add: Loan payable to Baker
Less: Loan receivable from Arthur
Loss on realization of assets,
P30,000
Balances
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio
Cash payments
Arthur
P70,000
100,000
Casey
P55,000
(6,000)
P44,000
(15,000)
P95,000
(9,000)
P46,000
(30,000)
P14,000
(75,000)
P20,000
(45,000)
P 1,000
Multiple Choice Problems
1. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000)
2. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000
3. c
4. a - Phil (P35,000 + P10,000); Harry P28,000; Bill (P27,000 - P5,000)
5. c - Rick P46,000; Mary (P39,000 - P15,000); Fran (P29,000 + P10,000)
6. d - P50,000 - (P15,000 - P9,500)(.25)
7. b - P45,000 - (P15,000 - P9,500)(.30)
8. a - P108,000 + [P10,000 - (P25,000 - P18,000)](.55)
9. c - P62,000 + [P10,000 - (P25,000 - P18,000)](.20)
10. b
11. c
12. d
13. c
20,000
35,000
Baker
P80,000
30,000
(20,000)
65,000
Vulnerability ranks:
Lang equity (P70,000 - P40,000)/.25 = P120,000 = 1
Maas equity (P80,000 + P50,0000/.25 = P520,000 = 3
Neal equity (P150,000/.5)
= P300,000 = 2
Assumed loss absorption:
Equities
Loss to eliminate
Lang
P
Loss to eliminate
Neal
14.
c
Profit ratio
Prior capital
Loss on sale
of inventory
15.
a
25%
Lang
30,000
Prior capital
Loss on sale
of inventory
Allocate Charles'
capital deficit:
JJ = .40/.50
TT = .10/.50
(
25%
Maas
130,000
P
30,000 ) (
0
P
30,000 )
100,000
(
P
(
P
45,000 )
55,000
(
P
JJ
CC
TT
Total
40%
50%
10%
100%
(160,000)
(45,000)
(55,000)
(260,000)
24,000
(136,000)
30,000
(15,000)
6,000
(49,000)
60,000
(200,000)
P
50%
Neal
150,000
P
Total
310,000
60,000 )
90,000
(
P
120,000 )
190,000
90,000 )
0
(
P
135,000 )
55,000
(160,000)
(45,000)
(55,000)
(260,000)
72,000
(88,000)
90,000
45,000
18,000
(37,000)
180,000
(80,000)
9,000
(28,000)
(80,000)
36,000
(52,000)
16. c – (P234,000 – P434,000) x 20% = P40,000
17. b
T
Capital before realization
40,000
Loss on sale (85,000 – 33,000)
(26,000)
14,000
Additional loss (5:2)
(4,000)
10,000
(45,000)
-0-
D
10,000
(15,600)
( 5,600)
5,600
H
15,000
(10,400)
4,600
( 1,600)
3,000
18. a
T
40,000
(31,950)
8,050
(6,550)
1,500
( 400)
1,100
Capital before realization
Loss on sale (85,000 – 21,100)
Additional loss (5:2)
Additional loss
19. b
Capital before realization
Liquidation expenses
Loss on sale (300 - 180)
Additional loss (2:4)
20. d
Capital before realization
Loss on sale (2:4:4)
Additional loss (2:4)
D
10,000
(19,170)
( 9,170)
9,170
H
15,000
(12,780)
2,220
(2,620)
( 400)
400
K
60,000
(2,000)
(24,000)
34,000
( 4,000)
30,000
L
40,000
( 4,000)
(48,000)
(12,000)
12,000
M
80,000
( 4,000)
( 48,000)
28,000
( 8,000)
20,000
H
80,000
(61,000)
19,000
( 4,000)
15,000
I
110,000
(122,000)
(12,000)
12,000
J
Total
140,000
330,000
(122,000)
(305,000)
18,000
25,000
( 8,000)
10,000
21. d – [(P240,000 – P96,000) /30% = P480,000]
22. a
Capital before realization – C
Liquidation expenses (12,000 x 50%)
Share on loss on realization
Capital balance after realization
130,000
(6,000)
(132,000)
( 8,000)
Total loss on realization: P132,000/50%
Non-cash assets
Proceeds
(264,000)
434,000
170,000
23. b
Capital before realization
Loss on sale (4:2:2:2)
Possible insolvency loss (4:2:2)
Safe payments
24. e – refer to No. 23
Ding
60,000
(52,800)
7,200
( 4,700)
2,500
Laurel
67,000
( 26,400)
40,600
( 2,350)
38,250
Ezzard
17,000
(26,400)
( 9,400)
( 9,400)
0
Tillman
96,000
(26,400)
69,600
( 2,350)
67,250
Total
240,000
(132,000)
108,000
-0108,000
25. b
Capital before realization
Loss on sale (30:45:25); [200 – 150]
26. c
Capital
Loan
Total interests
Loss on sale (5:3:2) - [90,000 – 26,000]
Possible insolvency (5:3)
Additional investment
Gonda
60,000
(15,000)
45,000
Herron
70,000
( 22,500)
47,500
Morse
40,000
(12,500)
27,500
Total
170,000
(50,000)
120,000
S
40,000
________
40,000
(32,000)
8,000
(1,750)
6,250
_______
6,250
D
15,000
_______
15,000
( 19,200)
( 4,200)
( 1,050)
( 5,250)
5,250
F
5,000
5,000
10,000
(12,800)
( 2,800)
2,800
Total
60,000
5,000
65,000
(64,000)
1,000
0
1,000
5,250
6,250
27. b
28. a –
Since the partnership currently has total capital of P350,000, the P150,000 that is available would
indicate maximum potential losses of P200,000 that is hypothetically split among the partners.
White
Sands
Luke
Total
Capital before realization
50,000
100,000
200,000
350,000
Loss on sale (30:20:50); [350 – 150]
(60,000)
( 40,000)
(100,000)
(200,000)
(10,000)
60,000
100,000
150,000
Possible insolvency (2:5)
10,000
(2,857)
(7,143)
0
Safe payments
57,143
92,857
150,000
29. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below)
Revaluation entry:
Accumulated depreciation
Gym, capital
Hob, capital
Ing, capital
3,000
1,000
1,000
1,000
Withdrawal of equipment:
Accumulated depreciation (8,000 – 3,000)
Hob, capital
Equipment
30. b –
13,000
5,000
18,000
Accumulated depreciation
70,000
K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000
Machinery, at cost
150,000
Rice [P110,000 – (P150,000 – P70,000)] x 1/3
10,000
Long [P110,000 – (P150,000 – P70,000)] x 1/3
10,000
31. c
Capital before realization
Loss on sale (35%:35%:30%)
X
90,000
(42,000)
48,000
*balancing figure – total reduction in capital
Y
60,000
(42,000)
18,000)
Z
30,000
(36,000)
( 6,000)
Total
180,000
*(120,000)
60,000
Quiz - IV
1. Zero/nil
Capital before realization
Loss on sale (3:2:1:4))
Additional loss (2:1:4)
B
25,000
(45,000)
(20,000)
(20,000)
Additional loss (2:1)
P
110,000
( 30,000)
80,000
( 5,714)
74,286
( 4,286)
70,000
2. Zero/nil – refer to No. 1
3. Page, P70,000 and Larry, P80,000 – refer to No. 1
4. P39,525 = P42,000 - (P15,000 - P9,500)(.45)
5. P56,750 = P56,000 + [P10,000 - (P25,000 - P18,000)](.25)
6. P(1,000) = P20,000 - [P30,000 + (P50,000 - P90,000)](.30)
7. P(1,500) = P30,000 - [P30,000 + (P50,000 - P90,000)](.45)
8. P(2,500) = P15,000 - [P30,000 + (P50,000 - P90,000)](.25)
9. P340,000 = (P147,000 + P28,000)/.35
10. P1,040,000 = (P260,000 / .25)
11. Abrams and Creighton
Capital before realization
Liquidation expenses
Loss on sale (134 - 434)
A
80,000
(3,600)
(90,000)
(13,600)
12. Tom, P30,000; Dick, P4,000 and harry, P11,000
T
Capital before realization
40,000
Loss on sale (85,000 – 65,000)
(10,000)
30,000
13. P34,000
Capital before realization
Liquidation expenses
Loss on sale (300 - 180)
Additional investment
14. P25,000
Cash, beginning
Payment of liquidation expenses
Payment of liabilities
Payment to partners
K
60,000
(2,000)
(24,000)
34,000
_____
34,000
B
L
100,000
(15,000)
85,000
( 2,857)
82,143
( 2,143)
80,000
C
90,000
(2,400)
(60,000)
27,600
130,000
(6,000)
(300,000)
(176,000)
D
10,000
(6,000)
4,000
H
15,000
(4,000)
11,000
L
40,000
( 4,000)
(48,000)
(12,000)
12,000
S
65,000
(60,000)
5,000
(11,429)
( 6,429)
6,429
M
80,000
( 4,000)
( 48,000)
28,000
______
28,000
P90,000
( 5,000)
( 60,000)
P25,000
15. P15,000
B
25,000
(60,000)
(35,000)
(35,000)
15,000
Capital before realization
Loss on sale (4:2:1:3)
Additional loss (2:1:3)
P
110,000
( 30,000)
80,000
(11,667)
68,333
L
100,000
(15,000)
85,000
( 5,833)
79,167
16. P2,500 - refer to No. 15
17. Page, P68,3333 and Larry, P79,167 – refer to No.15
18. Bond: P225,000; Hamm: P115,000; Zell: P –0–
Bond’s capital balance ................................................................
Less: Bond’s share of P140,000 loss in liquidation
(P140,000 × 50%) ...........................................................................
P300,000
(70,000)
P230,000
Less: Bond’s share of Zell’s capital deficiency of
P8,000 (5/8 of P8,000) ...................................................................
( 5,000)
P225,000
19. Alexa: P25,000; Bell: P75,000; Graham: P–0–
20. Jody, P5,200; Kane, P64,800; Lark, P10,000
Balance, May 1
Plant sold
Inventory sold
Balances before
distribution
Offset loans
Pay creditors
Partner equity
Possible loss:
Plant assets
Distribution
(
(
(
Assets
250,000
10,000
6,000)
254,000
26,000)
88,000) (
140,000
(
30%
Jody
32,000
3,000
1,800 )
(
33,200
10,000 )
Debts
88,000
88,000
88,000 )
S
65,000
(45,000)
20,000
(17,500)
2,500
45%
Kane
90,000
4,500
2,700 )
(
91,800
23,200
60,000)
80,000
(
(
25%
Lark
40,000
2,500
1,500 )
(
41,000
16,000 )
91,800
18,000 )
5,200
(
27,000 )
64,800
25,000
(
15,000 )
10,000
(Cash Distribution: P54,000 + P54,000 + P60,000 - P88,000 = P80,000)
May 1 Inventory Plant Creditors May 30
21. Oak, P0; Nebe, P0; and Pang, P11,000
NonCash
Cash
Assets
Jan 1 Balance
3,000
33,000
Sale of assets
17,000
( 15,000
Subtotal
20,000
18,000
Safe Payments Schedule
Partners’ pre-distribution balances
Possible losses on non-cash assets
Write off Oak 2/7 and 5/7
)
First
Rank
Debt
9,000
9,000
30%
Oak
Equity
2,000
600
2,600
Oak
Equity
2,600
( 5,400
( 2,800
2,800
20%
Nebe
Equity
4,000
400
4,400
Nebe
Equity
4,400
) ( 3,600
)
800
(
800
50%
Pang
Equity
21,000
1,000
22,000
Pang
Equity
22,000
) ( 9,000 )
13,000
) ( 2,000 )
Cash distribution to partners
0
0
11,000
Cash distribution plan on October 31:
First P9,000 goes to priority creditors, and then Pang receives P11,000.
22. Ide, P0; Hanly, P0; Jen, P92,000
Ide
Capital
(
60,000
Cash
50,000
Balance, Aug. 1
Ide’s personal
contribution
40,000
90,000
Write-off Ide
Hanly’s personal
contribution
40,000
( 20,000
20,000
0
90,000
)
)
Jen
Capital
106,000
4,000
7,500
3,500
106,000
12,500
93,500
(
(
2,000
(
1,500
1,500
0
92,000
Distribute cash
92,000
0
)(
)
)
)
(
(
93,500
1,500
92,000
92,000
0
Completion Statements
1. a. partnership creditors other than partners
b. partners’ loans—if subordinated
c. partners’ capital
2. statement of realization and liquidation
3. schedule of safe payments
4. marshalling of assets
5. rule of setoff
6. legal recourse against
7. bringing the capital balances into the profit and loss ratio
True
False
False
True
True
18.
19.
20.
21.
22.
)
False
True
True
False
True
23.
24.
25.
26.
27.
False
True
False
True
True
28.
29.
30.
31.
32.
True
False
False
False
False
40,000
90,000
90,000
2,000
Theories
True or False
8. True
13.
9. False
14.
10. False
15.
11. False
16.
12. True
17.
Total
50,000
2,000
92,000
Write-off Hanly
Hanly
Capital
4,000
33.
34.
35.
True
True
False
)
92,000
92,000
) (
92,000 )
0
Note for the following numbers:
9.
The accountant is liable if he/she fails to meet the fiduciary responsibility of protecting the creditors’ interest
during the liquidation process.
10.
The amount of cash distributed to each partner is a function of the capital balances and the profit and loss
ratios. It is unlikely that partners will receive the same amount of cash.
11.
Partnership creditors have priority claims against partnership assets and partner creditors have priority
claims against partner assets.
14.
Partner creditors have claims first against partner assets. They can also have a claim against partnership
assets to the extent of the partner’s equity in the partnership.
15.
The accountant has a fiduciary responsibility to the partnership’s creditors to ensure that sufficient assets
exist to pay the creditors. It does not mean that creditors must be fully paid before any partner distributions
occur.
18.
Gains and losses realized during the liquidation process are generally allocated using the residual profit
and loss ratio. Other profit and loss allocation components are not considered because these items are
generally relevant to the partnership’s operation and the current issue is the partnership’s liquidation.
21.
This is called an installment liquidation
23.
This document is called a Statement of Realization and Liquidation.
25.
The Statement of Realization and Liquidation does not include income statement accounts. All income
statement amounts are allocated directly to partnership equity.
Multiple Choice Theories
36. A
41. b
37. A
42. d
38. C
43. b
39. D
44. d
40. C
45. b
46.
47.
48.
49.
50.
c
a
c
d
b
51.
52.
b
a
Chapter 5
Problem I
1.
Balances before
Liquidation
January
- Realization
- Payment of
expenses
- Payment
of liabilities
Balances after Jan
February
- Realization
- Payment of
expenses
- Payment
of liabilities
Balances before
payment to
partners
Payment to
Partners (Sch. 1)
Balances after
February
March
- Realization
- Payment of
expenses
Balances before
payment to
partners
Payment to
Partners (Sch. 2)
Balances after
March
April
- Realization
- Payment of
expenses
Balances before
payment to
partners
Payment to
Partners (Note 1)
Balances after
April
May
- Realization
- Payment of
expenses
Balances before
Offsetting
Offset deficit vs.
Loan
Balances before
payment
Cash
NonCash
Assets
181,800
72,000
A, B, C and D Partnership
Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Liabilities
84,000
A,
loan
6,000
D, loan
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
3,000
26,400
25,800
20,400
16,200
(7,200)
(3,600)
(3,600)
(3,600)
( 480)
( 240)
( 240)
( 240)
______
18,720
______
21,960
______
16,560
______
12,360
(3,360)
(1,680)
(1,680)
(1,680)
( 528)
( 264)
(90,000)
(1,200)
(66,000)
4,800
______
91,800
21,600
(30,000)
(66,000)
18,000
_____
6,000
_____
3,000
(1,320)
______
______
______
_______
( 264)
______
( 264)
______
61,800
6,000
3,000
14,832
20,016
14,616
10,416
( 5,280)
______
______
_____
______
(5,280)
______
_____
1,800
61,800
6,000
3,000
14,832
14,736
14,616
10,416
19,200
(24,000)
(1,920)
( 960)
( 960)
( 960)
( 1,440)
______
______
_____
( 576)
( 288)
( 288)
( 288)
19,560
31,500
6,000
3,000
12,336
13,488
13,368
9,168
(18,360)
______
(2,736)
(3,000)
(5,688)
(5,568)
(1,368)
1,200
37,800
3,264
12,336
7,800
7,800
7,800
6,000
(19,800)
(5,520)
(2, 760)
(2,760)
(2,760)
(4,800)
______
(1,920)
( 960)
( 960)
( 960)
2,000
15,000
3,264
4,896
4,080
4,080
4,080
(1,500)
______
( 720)
( 360)
( 360)
( 360)
500
18,000
2,554
4,896
3,720
3,720
3,720
2,400
(18,000)
(6,240)
(3,120)
(3,120)
(3,120)
(18,000)
_______
7,080
(18,000)
( 960)
_____
( 384)
( 192)
( 192)
( 192)
1,440
2,554
( 1,728)
408
408
408
______
(1,728)
1,728
_____
______
_____
2,040
816
408
408
408
Payment to
Partners (Note 2)
(2,040)
2.
(816)
(408)
(408)
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
6,000
14,832
20,832
20,016
20,016
14,616
14,616
3,000
10,416
13,416
(12,720)
7,296
(1,536)
5,760
( 420)
5,340
( 60)
5,280
(12,720)
1,896
(1,536)
360
( 420)
( 60)
60
(12,720)
696
(1,536)
( 840)
840
A, B, C and D Partnership
Schedule of Safe Payments
Schedule 1 – February 28, 20x4
Computation of Distribution of Cash on February 28, 20x4
Balances before payment to partners:
Loans
Capital
Total Interest
Restricted interest for possible losses:
Unrealized non-cash assets
Cash withheld
(408)
P 61,800
1,800
P 63,600
Restricted for possible insolvency of A (2:2:2)
(25,440)
( 4,608)
4,608
Restricted for possible insolvency of D (2:2)
Restricted for possible insolvency of C
Payment to partner (s)
Applied to:
Loans
Capital
-05,280
5,280
Schedule 2 – March 31, 20x4
Computation of Distribution of Cash on March 31, 20x4
Balances before payment to partners:
Loans
Capital
Total Interest
Restricted interest for possible losses:
Unrealized non-cash assets
Cash withheld
Applied to:
Loans
Capital
P 37,800
1,200
P 39,000
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
6,000
12,336
18,336
13,488
13,488
13,488
13,488
3,000
9,168
12,168
(15,600)
2,736
( 7,800)
5,688
( 7,800)
5,568
( 7,800)
4,368
2,736
___-02,736
-05,688
5,688
-05,568
5,568
3,000
1,368
4,368
3.
Balances before
liquidation:
Loans
Capital
Total Interests
Divided by: P & L %
Loss Absorption
Abilities
Priority I
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests
Payments
T,
capital
(40%)
U,
capital
(20%)
6,000
26,400
32,400
__40%
25,800
25,800
___20%
V,
capital
(20%)
W,
capital
(20%)
T,
capital
(40%)
U,
capital
(20%)
Total Interests
Divided by: P & L %
Loss Absorption
Abilities
Order of Cash Distribution
Vulnerability Rankings (1
Is most vulnerable)
W,
capital
(20%)
Total
3,000
16,200
19,200
__20%
20,400
20,400
__20%
81,000
129,000
102,000
96,000
______ (27,000)
_______
_______
81,000
102,000
102,000
96,000
Priority II
______
( 6,000)
( 6,000)
_______
81,000
96,000
96,000
96,000
Priority III
______ (15,000)
(15,000)
(15,000)
_______
81,000
81,000
81,000
81,000
____-0*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.
4.
V,
capital
(20%)
5,400
5,400
1,200
1,200
3,000
9,600
3,000
4,200
2,400
3,000
3,000
T, capital
(40%)
P 32,400
____40%
U, capital
(20%)
P 25,800
____20%
V, capital
(20%)
P 20,400
____20%
W, capital
(20%)
P 19,200
____20%
P 81,000
(4)
P129,000
(1)
P 102,000
(2)
P 96,000
(3)
(1)
(4)
(3)
(2)
9,000
16,800
The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity were
reduced to zero with a partnership liquidation loss of P81,000. Partner U is least vulnerable because
his equity is sufficient to absorb his share of liquidation losses up to P129,000. This interpretation helps
explain why partner U received all the cash distributed to partner on the first installment distribution
(August 20x4).
Incidentally, the cash priority program developed will yield the same cash payment as the process
of computing safe payments each time cash is available. The cash distribution under the cash
priority program is as follows:
Order of Cash Distribution
1. First P70,000
2. Next P 4,500
3. Next P2,000
4. Next P7,500
5. Remainder
Creditors
100%
T
U
V
W
40%
100%
50%
33 1/3%
20%
50%
33 1/3%
20%
33 1/3%
20%
The first P84,000 available is, of course paid to the creditors. Cash may be held back from
distribution if it is anticipated that additional expenses will be incurred and unrecorded liabilities will
be discovered. The distribution of cash in excess of the reserve amount proceeds as determined.
Partner U will receive all of an additional ash up to P5,400. Additional cash in excess of P5,400 and
up to P7,800 is distributed 50:50 to partners U and V. Any amount in excess of P7,800up to P16,800 is
distributed 1: 1: 1 to partners U, V, and W, respectively. After P16,800 (P5,400 + P2,400 + P9,000) has
been distributed to the partners, the capital accounts are in the desired profit and loss ratio of
4:2:2:2. Any further distributions to the partners are made in accordance with the profit and loss
ratio.
Even though both methods produce the same results, the cash payment priority program is more
informative to both personal and partnership creditors, and to the partners. Interested parties now
know the order in which the individual partners will receive cash and the amounts that each may
receive at each period of the distribution process.
One requirement that must be satisfied in the development of the advance plan is that the
partners must share income in the same ratio that they share losses. If this were not the case the
potential amount of a new loss would need to be computed after every allocation to the partners’
capital accounts. This occurs because the allocation of liquidation gain alters the order of cash
distribution computed in the priority program.
Problem II
ABC Partnership
Statement of Partnership Realization and Liquidation
For the period from January 1, 20x4, through March 31, 20x4
Capital Balances
Other
Accounts
AA
BB
Cash
Assets
Payable
50%
30%
Balances before Liquidation,
18,000
307,000
(53,000)
(88,000)
(110,000)
January 1,20x4
January transactions:
1. Collection of accounts
receivable at a loss
of P15,000
51,000
(66,000)
7,500
4,500
2. Sale of inventory at a loss
38,000
(52,000)
7,000
4,200
of P14,000
3. Liquidation expenses paid
(2,000)
1,000
600
4. Share of credit memorandum
3,000
(1,500)
(900)
5. Payments to creditors
(50,000)
50,000
55,000
189,000
-0(74,000)
(101,600)
Safe payments to partners
(Schedule 1)
(45,000)
__
26,600
10,000
189,000
-0(74,000)
(75,000)
February transactions:
6. Liquidation expenses paid
(4,000)
__
2,000
1,200
6,000
189,000
-0(72,000)
(73,800)
Safe payments to partners
(Schedule 2)
-0__
___ -0-06,000
189,000
-0(72,000)
(73,800)
March transactions:
8. Sale of M&Eq. at a loss of
146,000
(189,000)
21,500
12,900
P43,000
9. Liquidation expenses paid
(5,000)
2,500
1,500
147,000
-0-0(48,000)
(59,400)
10. Payments to partners
(147,000)
48,000
59,400
Balances
at
end
of
liquidation, March 31, 20x4
-0-
-0-
-0-
-0-
-0-
CC
20%
(74,000)
3,000
2,800
400
(600)
(68,400)
18,400
(50,000)
800
(49,200)
-0(49,200)
8,600
1,000
(39,600)
39,600
-0-
ABC Partnership
Schedules of Safe Payments to Partners
Schedule 1: January 31, 20x4
Capital balances
Possible loss:
Other assets (P189,000) and possible
liquidation costs (P10,000)
Absorption of AA’s potential deficit balance
BB: (P25,500 x 3/5 = P15,300)
CC: (P25,500 x 2/5 = P10,200)
Safe payment, January 31, 20x4
Schedule 2: February 27, 20x4
Capital balances
Possible loss:
Other assets (P189,000) and possible
liquidation costs (P6,000)
Absorption of AA’s potential deficit balance:
BB: (P25,500 x 3/5 = P15,300)
CC: (P25,500 x 2/5 = P10,200)
Safe payment, February 27, 20x4
AA
50%
(74,000)
BB
30%
(101,600)
CC
20%
(68,400)
99,500
25,500
(25,500)
59,700
(41,900)
39,800
(28,600)
-0-
(26,600)
10,200
(18,400)
(72,000)
(73,800)
(49,200)
97,500
25,500
(25,500)
58,500
(15,300)
39,000
(10,200)
-0-
-0-
15,300
15,300
10,200
-0-
Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners. This is
due to the large book value of Other Assets still unrealized and the reservation of the $6,000 cash on hand for
possible future liquidation expenses.
Problem III: Cash Distribution Plan
PET Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power
Profit and loss
percentages
PP
EE
TT
Decrease highest LAP
to next highest:
EE
(P30,000 x .30)
PP
50%
Preliquidation
capital balances
Loss absorption
Power (Capital
balances /
Loss percent)
Capital Accounts
(110,000)
(150,000)
(120,000)
(110,000)
30,000
(120,000)
(120,000)
EE
30%
TT
20%
(55,000)
(45,000)
(24,000)
(55,000)
9,000
(36,000)
(24,000)
Decrease LAPs
to next highest:
EE
(P10,000 x .30)
TT
(P10,000 x .20)
10,000
(110,000)
Cash available
First
Next
Next
Additional paid
in P&L ratio
Problem IV
3,000
10,000
(110,000)
(110,000)
(55,000)
2,000
(22,000)
(33,000)
Summary of Cash Distribution
(If Offer of P100,000 is Accepted)
Accounts
PP
Payable
50%
P106,000
(17,000)
P17,000
(9,000)
(5,000)
EE
30%
TT
20%
P 9,000
3,000
P 2,000
(75,000)
P
-0-
22,500
P34,500
15,000
P17,000
______
P17,000
P37,500
P37,500
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Preliquidation balances
July:
Assets Realized
Paid liquidation costs
Paid creditors
Safe Payments (Sch. 1)
Cash
6,000
26,500
(1,000)
(17,000)
14,500
(6,500)
8,000
August:
Equipment withdrawn
(allocate P6,000 gain)
Paid liquidation costs
Safe Payments (Sch. 2)
September:
Assets Realized
Paid liquidation costs
Payments to partners
Postliquidation balances
Noncash
Assets
135,000
Accounts
Payable
(17,000)
(36,000)
99,000
99,000
75,000
(1,000)
76,500
(76,500)
-0-
Capital
EE
30%
(45,000)
TT
20%
(24,000)
17,000
-0-
4,750
500
2,850
300
1,900
200
(49,750)
(41,850)
6,500
(21,900)
-0-
(49,750)
(35,350)
(21,900)
(3,000)
(1,800)
8,800
300
(12,800)
4,000
200
(8.600)
8,600
-0-
(4,000)
(1,500)
6,500
(4,000)
2,500
PP
50%
(55,000)
95,000
-0-
750
(52,000)
95,000
-0-
(52,000)
450
(36,700)
4,000
(32,700)
-0-
-0-
-0-
-0-
10,000
500
(41,500)
41,500
-0-
6,000
300
(26,400)
26,400
-0-
(95.000)
(12,800)
PET Partnership
Schedules of Safe Payments to Partners
PP
Schedule 1: July 31, 20x4
50%
Capital balances
(49,750)
Possible loss on noncash assets (P99,000)
49,500
Cash retained (P8,000)
4,000
3,750
Absorption of Pen's potential deficit
(3,750)
EE: P3,750 x .30/.50
TT: P3,750 x .20/.50
-0Absorption of TT’s potential deficit
EE P1,000 x .30/.30
Safe payment
-0Schedule 2: August 31, 20x4
Capital balances
Possible loss on noncash assets (P95,000)
Cash retained (P2,500)
(52,000)
47,500
1,250
(3,250)
Absorption of TTs’ potential deficit
PP: P6,700 x .50/.80
EE: P6,700 x .30/.80
EE
30%
(41,850)
29,700
2,400
(9,750)
2,250
(7,500)
1,000
(6,500)
(36,700)
28,500
750
(7,450)
4,188
938
(938)
Absorption of PPs potential deficit
EE: P938 x .30/.30
Safe payment
-0-
TT
20%
(21,900)
19,800
1,600
(500)
1,500
1,000
(1,000)
-0-
(12,800)
19,000
500
6,700
(6,700)
2,512
(4,938)
-0-
938
(4,000)
-0-
Problem V
DSV Partnership
Statement of Partnership Realization and Liquidation — Installment Liquidation
From July 1, 20x4, through September 30, 20x4
Capital Balances
Noncash
D
S
V
Cash
Assets
Liabilities
50%
30%
20%
Preliquidation balances, 6/30
50,000
670,000
(405,000)
(100,000)
(140,000)
(75,000)
July, 20x4: Sale of assets and
distribution of P120,000 loss
Liquidation expenses
Payment to creditors
Payments to partners (Sch. 1)
August, 20x4: Sale of assets &
distribution of P13,000 loss
Liquidation expenses
Payments to partners (Sch. 2)
390,000
440,000
(2,500)
437,500
(405,000)
32,500
(22,500)
10,000
22,000
32,000
(2,500)
29,500
(19,500)
10,000
(510,000)
60,000
36,000
24,000
(40,000)
1,250
(38,750)
(104,000)
750
(103,250)
(51,000)
500
(50,500)
(38,750)
(103,250)
22,500
(80,750)
(50,500)
3,900
(76,850)
750
(76,100)
13,700
(62,400)
2,600
(47,900)
500
(47,400)
5,800
(41,600)
160,000
(405,000)
160,000
160,000
(405,000)
405,000
-0-
160,000
-0-
(35,000)
125,000
-0-
125,000
-0-
6,500
(32,250)
1,250
(31,000)
125,000
-0-
(31,000)
(38,750)
(50,500)
September, 20x4: Sale of
assets
distribution of P70,000 loss
Allocate D's deficit to S and V
Liquidation expenses
Payments to partners
Postliquidation balances
55,000
65,000
(125,000)
-0-
-0-
65,000
(2,500)
62,500
(62,500)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
35,000
4,000
(4,000)
-0-0-0-0-
DSV Partnership
Schedule of Safe Payments to Partners
D
50%
Schedule 1, July 31, 20x4:
Capital balances, July 31,
Before cash distribution
Assume full loss of P160,000 on
remaining noncash assets and
P10,000 in possible future
liquidation expenses
Assume D's potential deficit
must be absorbed by S and V:
30/50 x P46,250
20/50 x P46,250
Assume V's potential deficit
must be absorbed by S completely
Safe payments to partners
on July 31, 20x4
Schedule 2, August 31, 20x4:
Capital balances, August 31,
before cash distribution
Assume full loss of P125,000 on
remaining noncash assets and
P10,000 in possible liquidation
Expenses
Assume D's potential deficit
must be absorbed by S and V:
30/50 x P36,500
20/50 x P36,500
Safe payments to partners
21,000
(41,400)
2,400
(39,000)
1,500
(37,500)
37,500
-0-
S
30%
14,000
(27,600)
1,600
(26,000)
1,000
(25,000)
25,000
-0-
V
20%
(38,750)
(103,250)
(50,500)
85,000
46,250
51,000
(52,250)
34,000
(16,500)
(46,250)
27,750
(24,500)
18,500
2,000
2,000
(2,000)
-0-
(22,500)
-0-
(31,000)
(76,100)
(47,400)
67,500
36,500
40,500
(35,600)
27,000
(20,400)
-0-
(36,500)
-0-
21,900
(13,700)
14,600
(5,800)
Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power
D
Profit and loss sharing ratio
Preliquidation capital balances
Loss absorption power (LAP)
capital accounts /
loss sharing percentage
(200,000)
Decrease highest LAP to next
highest LAP:
Decrease S by P91,667
(Cash distribution: P91,667 x .30)
1.
2.
3.
4.
5.
(466,667)
V
(200,000)
(375,000)
S
V
50%
(100,000)
30%
(140,000)
20%
(75,000)
(100,000)
27,500
(112,500)
(75,000)
(375,000)
(375,000)
175,000
52,500
175,000
(200,000)
(200,000)
(200,000)
50%
30%
20%
Summary of Cash Distribution Plan
(Estimated on June 30, 20x4)
Liquidation
Creditors
Expenses
100%
100%
First P405,000
Next P10,000
Next P27,500
Next P87,500
Any additional distributions
in the partners' profit
and loss ratio
D
91,667
Decrease LAP to next highest
level:
Decrease S by P175,000
Cash distribution: P175,000 x .30)
Decrease V by P175,000
Cash distribution: P175,000 x .20)
Decrease LAPs by distributing
cash in the P/L sharing ratio
S
Capital Accounts
D
50%
35,000
(100,000)
(60,000)
S
V
100%
60%
40%
30%
20%
(40,000)
b. Confirmation of cash distribution plan
DSV Partnership
Capital Account Balances
June 30, 20x4, through September 30, 20x4
D
Profit and loss ratio
50%
Preliquidation balances, June 30
(100,000)
July loss of P120,000 on disposal of assets
and P2,500 paid in liquidation costs
61,250
(38,750)
July 31 distribution of P22,500 of
available cash to partners (Sch. 1)
First P22,500 of P27,500 layer:
100% to S
(38,750)
August loss of P13,000 on disposal of
assets and P2,500 paid in
liquidation costs
7,750
(31,000)
August 31 distribution of P19,500 of
available cash to partners (Sch. 2)
Remaining P5,000 of P27,500 layer
of which P22,500 paid on July 31:
100% to S
Next $14,500 of P87,500 layer:
60% to S
40% to V
(31,000)
September loss of P70,000 on disposal of
assets and P2,500 paid in liquidation
Costs
36,250
5,250
Distribution of D's deficit
(5,250)
-0September 30 distribution of P62,500 of
available cash to partners (Sch. 3)
Next P62,500 of P87,500 layer of which
P14,500 paid on August 31:
60% to S
40% to V
Postliquidation balances
-0-
S
30%
(140,000)
V
20%
(75,000)
36,750
(103,250)
24,500
(50,500)
22,500
(80,750)
(50,500)
4,650
(76,100)
3,100
(47,400)
5,000
8,700
(62,400)
5,800
(41,600)
21,750
(40,650)
3,150
(37,500)
14,500
(27,100)
2,100
(25,000)
37,500
-0-
25,000
-0-
Schedule 1, July 31, 20x4: Computation of P22,500 of cash available to be distributed to partners on
July 31, 20x4:
Cash balance, July 1, 20x4
P 50,000
Cash from sale of noncash assets
390,000
Less: Payment of actual liquidation expenses
(2,500)
Less: Payments to creditors
(405,000)
Less: Amount held for possible
future liquidation expenses
(10,000)
Cash available to partners, July 31, 20x4
P 22,500
Schedule 2, August 31, 20x4: Computation of P19,500 of cash available to be distributed to partners
on August 31, 20x4:
Cash balance, August 1, 20x4
Cash from sale of noncash assets
Less: Payment of actual liquidation expenses
Less: Amount held for possible
future liquidation expenses
Cash available to partners, August 31, 20x4
P10,000
22,000
(2,500)
(10,000)
P 19,500
Schedule 3, September 30, 20x4: Computation of P62,500 of cash available to be distributed to
partners on September 30, 20x4:
Cash balance, September 1, 20x4
Cash received from sale of noncash assets
Less: Payment of actual liquidation expenses
Cash available to partners, September 30, 20x4
P10,000
55,000
(2,500)
P62,500
Problem VII
Cash distribution program:
First
Next
Next
All over
P 50,000
34,000
48,000
P132,000
Creditors
100%
Ames
40%
Beard
Craig
100%
33 1/3%
20%
66 2/3%
40%
Working paper for cash distributions to partners during liquidation (not required):
Ames
Beard
Craig
Capital balances before liquidation
P60,000
P80,000 P92,000
Income-sharing ratio
4
4
2
Capital per unit of income sharing
P15,000
P40,000 P23,000
Reduce Beard's capital to next highest capital for Craig
______
(17,000)
______
Capital per unit of income sharing
P15,000
P23,000 P23,000
Reduce Beard's and Craig's capital to Ames's capital
______
(8,000)
(8,000)
Capital per unit of income sharing
P15,000
P15,000 P15,000
Problem VIII
Cash
Quanto, Capital
Rollo, Capital
Simms, Capital
Assets
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.
60,000
5,000
3,000
2,000
Liabilities
Cash
To record payment to creditors.
30,000
Loan Payable to Quanto
Rollo, Capital
Simms, Capital
Cash
9,500
10,500
5,000
70,000
30,000
25,000
To record payment to partners, computed as follows:
Capital (including Quanto's
loan of P10,000)
before liquidation
Loss on realization of assets
Balances
Maximum potential
additional
loss (P5,000 +
P50,000 = P55,000)
divided in 5:3:2 ratio
Cash payments
Multiple Choice Problems
1. c
d
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(77,500 x .20 = 15,500)
Balances
Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000)
(C:70,000 x .20 = 14,000)
Balances
P30,000
(3,000)
P27,000
P18,000
(2,000)
P16,000
(27,500)
P 9,500
(16,500)
P10,500
(11,000)
P 5,000
Total
40%
50%
10%
100%
(160,000)
(45,000)
(55,000)
(260,000)
24,000
(136,000)
30,000
(15,000)
6,000
(49,000)
60,000
(200,000)
Possible loss for unrealized assets
P1,000,000 – P600,000 = 400,000
4.
P42,000
(5,000)
P37,000
TT
Capital balances
Loss on sale of assets
(475,000 – 600,000) – 4:4:2
d
Simms
CC
2. a
3.
Rollo
JJ
Profit ratio
Prior capital
Loss on sale
of inventory
Quanto
Peter
300,000
Paul
350,000
Mary
400,000
Total
1,050,000
( 50,000)
250,000
(50,000)
300,000
(25,000)
375,000
(125,000)
925,000
160,000
(90,000
160,000
140,000
80,000
295,000
400,000
525,000
AA
37,000
40%
92,500
BB
65,000
40%
162,500
CC
48,000
20%
240,000
92,500
162,500
77,500
162,500
70,000
92,500
92,500
Cash of P20,000 after settlement of liabilities: CC receives first P15,500;
remaining P4,500 split 2/3 to BB and 1/3 to CC
70,000
92,500
5.
d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and
1/3 to CC.
6.
a If all partners received cash after the second sale, then the remaining 12,000 is
distributed in the loss ratio.
7.
b
Capital before realization
Loss on sale (2:2:1); [90 – 50]
Possible loss P90,000, unrealized NCA
Possible insolvency loss (2:1)
8.
b
Capital before realization
Loss on sale (2:2:1); [90 – 50]
Possible loss P90,000, unrealized NCA
plus P3,000 = P93,000
Possible insolvency loss (2:1)
9.
a
A
37,000
(16,000)
21,000
(36,000)
(15,000)
15,000
B
65,000
( 16,000)
49,000
(36,000)
13,000
(10,000)
3,000
C
48,000
( 8,000)
40,000
(18,000)
22,000
( 5,000)
17,000
Total
150,000
(40,000)
110,000
90,000
20,000
0
A
37,000
(16,000)
21,000
B
65,000
( 16,000)
49,000
C
48,000
( 8,000)
40,000
Total
150,000
(40,000)
110,000
(37,200)
(16,200)
16,200
(37,200)
11,800
(10,800)
1,000
(18,600)
21,400
( 5,400)
16,000
AE
40%
(40,000)
40,000
-0-
Profit and loss ratio
Capital balances
Loss of P100,000
Remaining equities
BT
30%
(180,000)
30,000
(150,000)
KT
30%
(30,000)
30,000
-0-
AE will receive nothing; the entire P150,000 will be paid to BT.
10.
11.
12.
13.
c
d
d
c
14. a
Profit and loss ratio
Beginning capital
Actual loss on assets (5:3:2)
Possible loss – unrealized NCA
Safe payments
CC
5/10
80,000
(15,000)
65,000
( 50,000)
15,000
DD
3/10
90,000
(9,000)
81,000
(30,000)
51,000
EE
2/10
70,000
(6,000)
64,000
(20,000)
44,000
Total
10/10
240,000
( 30,000)
210,000
( 20,000)
190,000
93,000
17,000
0
17,000
15. c
Capital before realization
Divided by:
Loss absorption abilities
16. a
X
Y
130,000
50%
260,000
130,000
30%
260,000
Z
100,000
20%
500,000
The loan payable to AA has the same legal status as the partnership’s other
liabilities. After payment of the loan, then any available cash can be
distributed to the partners using the safe payments computations.
17. a
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce N to D:
(80,000 x .20 = 16,000)
18. d – Harding, P6,107; Jones, P12,275
Capital balances
Potential loss from Sandy deficit
Loss to reduce H and J:
(50:35)
Balances
D
72,000
40%
180,000
R
32,000
20%
160,000
H
20,000
(5,882)
14,118
J
22,000
(4,118)
17,882
(8,011)
6,107
(5,607)
12,275
N
52,000
20%
260,000
J
24,000
20%
120,000
80,000
____0
S
(10,000)
10,000
0
Total
32,000
0
32,000
(13,618)
13,382
Note:
1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may
not be recovered for purposes of distribution of cash.
2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Harding
and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program
Capital balances
Additional contribution
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000)
Balances
Cash available
Less: Priority I to Jones (P19,428 x 35/85)
Less: P& L (50:35)
19. c
20. b
P18,382
8,000
P10,382
(10,382)
H
20,000
0
20,000
50/85
34,000
J
22,000
0
22,000
35/85
53,429
34,000
19,428
34,000
P 8,000
P 6,107
P6,107
4,275
P 12,275
S
(10,000)
10,000
21. c
Capital before realization
Loan
Total interests
Loss on sale (240,000 – 195,000)
A
70,000
20,000
90,000
(15,000)
75,000
B
30,000
______
30,000
( 15,000)
15,000
C
50,000
______
50,000
(15,000)
35,000
Total
150,000
20,000
170,000
(45,000)
125,000
22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the
one entitled to the first priority.
INTERESTS
PAYMENTS______
A
B
C
A
B
C
Total
Balances before realization
Loans………………….. P 20,000
Capital………………...
70,000 P 30,000 P 50,000
Total interests………... P 90,000 P 30,000 P 50,000
1/3
Divided by: P&L ratio…………
1/3
1/3
Loss absorption ability……….. P270,000 P 90,000 P150,000
P40,000
P40,000
Priority I…………………………. 120,000
_______
P150,000 P90,000 P150,000
40,000
Priority II…………………………
60,000
0
60,000
20,000
0 P20,000
P 90,000 P90,000 P 90,000
P60,000 P
0 P20,000 P80,000
23. d
A
70,000
20,000
90,000
(15,000)
75,000
Payment of loans to partner
(20,000)
55,000
Asset received
______
Payment to partners after payment of loan 55,000
Capital before realization
Loan
Total interests
Loss on sale (240,000 – 195,000)
B
30,000
______
30,000
( 15,000)
15,000
______
15,000
______
15,000
C
50,000
______
50,000
(15,000)
35,000
_____
35,000
(30,000)
5,000
Total
150,000
20,000
170,000
(45,000)
125,000
(20,000)
105,000
(30,000)
75,000
Note: The requirement is payment to partners after outside creditors and loans to partners had been paid, therefore, the
payment to partners is in so far as capital is concerned.
24. a
Capital balances
Less: Machine, at fair value
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce E to D:
(45,000 x 1/3 = 15,000)
Balances
D
40,000
______
40,000
1/3
120,000
E
90,000
(35,000)
55,000
1/3
165,000
F
30,000
______
30,000
1/3
90,000
120,000
(45,000)
120,000
____0
90,000
25. c
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(170,000 x .10 = 17,000)
Balances
26. c
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(15,000 x .20 = 3,000)
Balances
K
59,000
40%
147,500
M
39,000
30%
130,000
B
34,000
10%
340,000
J
34,000
20%
170,000
147,500
130,000
170,000
170,000
____0
170,000
C
60,000
40%
150,000
P
27,000
30%
90,000
H
43,000
20%
215,000
M
20,000
10%
200,000
150,000
90,000
15,000
200,000
____0
200,000
27. c - the P16,000 available cash can be distributed but should be done under the assumption that all
deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the
two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a
60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The
remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can
be immediately distributed.
or, alternatively:
Capital balances
Loan
Total interests
Potential insolvency loss (3:2)
28. b
Capital balances
Potential loss from A deficit (5:3)
Loss to reduce H and J:
(5:3)
Possible insolvency loss
W
(2,000)
______
(2,000)
2,000
A
(5,000)
5,000
J
(5,000)
3,000
(2,000)
2,000
F
13,000
_______
13,000
( 2,400)
10,600
R
7,000
__
7,000
(1,600)
5,400
B
18,000
(3,125)
14,875
C
6,000
(1,875)
4,125
Total
19,000
0
19,000
(8,750)
6,125
(1,125)
5,000
(5,250)
(1,125)
1,125
(14,000)
5,000
0
29. a – installment liquidation (refer for more problems in Chapter 5)
P
INTERESTS
Q
Balances before realization
Totall interests………... P 70,000 P 50,000
Divided by: P&L ratio…………
20%
40%
Loss absorption abilities……….. P350,000 P125,000
Priority I…………………………. (100,000)
P250,000 P125,000
Priority II………………………… (125,000)
P125,000 P125,000
R
PAYMENTS
Q
R
P
P100,000
40%
P250,000
0 P20,000
P250,000
(125,000) 25,000
P125,000 P75,000
P20,000
P 4,500
Cash, beginning
Add (deduct):
Liquidation expenses paid
Payment of liabilities
Proceeds from sale of assets (?)
Payment to partner before payment to Renquist (priority I only)
30. d – Justice P15,533
Capital balances
Potential loss from Douglass (40:35)
Note:
J
23,000
(7,467)
15,533
___
Total
Z
22,000
(6,533)
15,467
P50,000 75,000
P50,000 P95,000
P 90,000
( 8,000)
(170,000)
108,000
P 20,000
D
(14,000)
14,000
0
Total
31,000
0
31,000
1.
Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit
may not be recovered for purposes of distribution of cash.
2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice
and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)
J
Z
Capital balances
23,000
22,000
Additional contribution
0
0
Capital balances
23,000
22,000
Divided by: Profit and loss ratio
40/75
35/75
Loss absorption power
43,125
47,143
Loss to reduce Z to D:
(4,018 x 35/55 = 1,875)
4,018
Balances
43,125
43,125
Cash available
Less: Priority I to Douglass (P4,018 x 35/75)
Less: P& L (40:35)
P31,000
1,875
P29,125
(29,125)
P 1,875
P15,533
P15,533
13,592
P15,467
D
(14,000)
14,000
31. d
INTERESTS
K
D
R
D
Balances before realization
Loans………………….. P
0 P 10,000 P(20,000)
100,000
Capital………………... 170,000
170,000
Total interests………... P170,000 P180,000 P 80,000
20%
Divided by: P&L ratio…………
50%
30%
Loss absorption abilities……….. P340,000 P600,000 P400,000
Priority I………………………….
(200,000)
0
P340,000 P400,000 P400,000
Priority II…………………………
(60,000) (60,000)
P340,000 P340,000 P340,000
T
N
INTERESTS
D
Balances before realization
Loans………………….. P
0 P
0 P
0
14,000
Capital………………...
22,000 15,500
Total interests………... P 22,000 P15,500 P 14,000
1/4
Divided by: P&L ratio…………
2/4
1/4
Loss absorption abilities……….. P 44,000 P62,000 P 56,000
Priority I…………………………
( 6,000)
0
P 44,000 P56,000 P56,000
Priority II…………………………
(12,000) (12,000) __
P 44,000 P44,000 P44,000 P
Cash received by Tree
Divided by: P & L ratio
Amount in excess of P7,500
Total cash payments – refer to program
Payment to partners
33. d
Cash, beginning
Add (deduct):
Proceeds from sale of certain assets
Liquidation expenses paid
Payment of liabilities
Payment to partners (refer to No. 30)
Cash withheld
___
Total
P60,000
P60,000
18,000 36,000
18,000
P – P 78,000 P18,000 P 96,000
Cash received by the partner Kemp
Add (deduct):
Liabilities paid
Expenses paid
Contingency
Cash, beginning
Proceeds from sale of other assets
32. b
PAYMENTS
K
R
P 60,000
250,000
5,000
10,000
(120,000)
P205,000
PAYMENTS
N
D
T
P 1,500
–
___
Total
P1,500
3,000 P 3,000 6,000
P 4,500 P 3,000 P 7,500
P
6,250
2/4
P 12,500
7,500
P 20,000
P 12,000
32,000
( 1,000)
( 5,400)
( 20,000)
P 17,600
34. d
Priority
Creditors
First P300,000………. P300,000
Next P80,000 (7:3)…
Next P70,000 (3:4)…
Remainder*………..
P300,000
Mattews
P56,000
30,000
22,000
P108,000
Norell
Reams
P24,000
P40,000
44,000
P84,000
34,000
P58,000
Total
P300,000
80,000
70,000
100,000
P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
P
INTERESTS
Q
R
Balances before realization
Loans………………….. P 6,000
P(10,000)
60,000
Capital………………... 24,000 P36,000
Total interests………... P30,000 P36,000
P50,000
4/10
Divided by: P&L ratio…………
3/10
3/10
Loss absorption abilities…….. P100,000 P120,000 P125,000
Priority I………………………….
(5,000)
P100,000 P120,000 P120,000
Priority II…………………………
(20,000) (20,000)
P100,000 P100,000 P100,000
P
PAYMENTS______
Q
R
Total
P 2,000 P 2,000
P6,000
P – P6,000
8,000 14,000 (d)
P10,000 P16,000
35. d
Priority
Creditors
First P300,000………. P300,000
Next P80,000 (7:3)…
Next P70,000 (3:4)…
Remainder*………..
P300,000
Mattews
P56,000
30,000
22,000
P108,000
Norell
P24,000
34,000
P58,000
Reams
P40,000
44,000
P84,000
Total
P300,000
80,000
70,000
100,000
P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
Quiz - V
1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation principles.
M
K
C
Total
Capital before realization
100,000
175,000
75,000
350,000
Loss on sale (50%:30%:20%)
(162,500)
(97,500)
(65,000)
*(325,000)
( 62,500)
77,500
10,000
**25,000
Additional loss (3:2)
62,500
(37,500)
(25,000)
______40,000
(15,000)
25,000
Additional loss
(15,000)
15,000
-025,000
*balancing figure – total reduction in capital
Payment to partners: P200,000 – P25,000 – P150,000 = P25,000**
2. Homer, P54,000; Marge, P84,000; Bart, P177,000.
3. P150,000
4. Stan, P0; Kenney, P10,000; Cartman, P0
5. P500,000 = (P147,000 + P28,000)/.35
6. P1,040,000 = (P260,000 / .25)
7. P675,000 = (P285,000 - P15,000)/.40
8. a
9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000
10.
11. b
12. P33,000
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P24,000
20,000
P 6,000
44,000
10,000
Harold: P6,000 + P24,000 + (P10,000 x .30)
13. P2,500
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P24,000
20,000
P 6,000
44,000
10,000
Sheldon: (P10,000 x .25)
14. P24,500
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P24,000
20,000
P 6,000
44,000
10,000
Fred: P20,000 + (P10,000 x .45)
15. P147,000
Equities
Possible loss on
remaining assets
Contingencies
Subtotals
Losses
200,000
10,000
Eliminate Jack’s
debit balance
Safe payments
16. P495,000 = (P162,000 + P36,000) / .40
40%
Hara
135,000
30%
Ives
216,000
(
(
80,000 )
4,000 )
51,000
(
(
60,000 )
3,000 )
153,000
(
8,000 )
(
6,000 )
43,000
147,000
30%
Jack
49,000
(
(
(
60,000 )
3,000 )
14,000 )
14,000
0
17. c
P
70,000
(1,600)
68,400
20%
342,000
Capital before realization
Liquidation expenses
Divided by:
Loss absorption abilities
Selling Price
Book value
Loss
Q
50,000
( 3,200)
46,800
40%
117,000
R
100,000
( 3,200)
96,800
40%
242,000
183,000
300,000
(117,000)
or,
Quincy capital before liquidation………………………………………………..P 50,000
Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200
Quincy capital before realization of non-cash assets……………………….P 46,800
0
Less: Cash received by Quincy (minimum)…………………………………….
Share in the loss on realization……………………………………………………P 46,800
Divided by: Profit and loss ratio…………………………………………………..
40%
Loss on realization…………………………………………………………………..P117,000
Less; Non-cash assets………………………………………………...................... 300,000
Proceeds from sale…………………………………………………………………P183,000
18. P29,000
(P14,000 Warle capital + P10,000 Xin capital +
P6,000 Yates capital + P5,000 Loan from Xin P6,000 Loan to Warle)
19. P2,000
(P4,000 beginning balance + P3,000 cash collected + P4,000 for inventory
sold - P7,000 of accounts payable - P2,000 for expenses)
20. P2,000
Warle
8,000
2,000 )
400 )
5,600
Xin
15,000
3,000 )
600 )
11,400
Yates
6,000
5,000 )
1,000 )
0
Total
29,000
10,000 )
2,000 )
17,000
Equities,Jun 30
Inventory loss
Contingency fund
Subtotals
(
(
Possible losses on
remaining assets
Subtotals
(
3,000 )
2,600
(
4,500 )
6,900
(
(
3,000 )
400 )
(
4,500 )
2,400
7,500
0
2,000
400
0
(
400 )
2,000
0
2,000
Eliminate Yates’s
Deficit
Subtotals
Eliminate Warle’s
Deficit
Cash distribution
(
(
(
(
(
(
7,500 )
7,500 )
(
(
(
15,000 )
2,000
THEORIES
True or False
1. False
2. True
3. False
4. False
5. True
6.
7.
8.
9.
10.
True
True
False
True
True
Multiple Choice
18. b
19. b
20. a
21. a
22. d
23.
24.
25.
26.
27.
a
d
d
a
d
11.
12.
13.
14.
15,
False
True
False
True
True
16.
17.
False
True
Note for the following numbers:
1.
An installment liquidation occurs over an extended period of time and partners generally receive interim
(installment) distributions.
3.
The accountant must ensure that the partnership will have sufficient cash to pay current and prospective
creditors before distributions are made to partners.
4.
It may not be prudent for the accountant to pay creditors as quickly as possible. However, funds should be
set aside so that creditors can be paid in a timely manner.
8.
The size of the capital account must be evaluated in conjunction with the residual profit and loss ratio to
determine which partner is least likely to have a deficit occur during the partnership liquidation.
11.
The cash distribution plan indicates how a distribution will be allocated among the partners but it does not
guarantee that a distribution will be made.
13.
The loss absorption power indicates the amount of loss the partnership would have to occur before that
partner’s capital account balance is reduced to zero.
16.
The schedule of safe payments can be used for any partnership liquidation but it provides the same
distribution as the cash distribution plan under most circumstances.
28.
29.
30.
31.
32.
b
e
a
a
c
33.
34.
35.
36.
37.
b
d
b
a
b
38.
39.
40.
41.
42.
c
d
b
a
b
43.
44.
45.
46.
d
b
c
d
Chapter 6
Problem I
1. Statement of Affairs - Formal
Book Value
P 50,000
1,200
119,000
13,200
6,000
61,000
60,000
1,100
8,500
MINER COMPANY
Statement of Affairs
May 31, 2012
Assets
Assets Pledged with Fully Secured Creditors:
Notes Receivable
P39,800
Accrued Interest Rec.
1,000
P 40,800
Notes Payable
Accrued Interest Pay.
40,000
800
Building
Note Payable
Accrued Interest Pay.
20,000
800
40,800
75,000
20,800
Free Assets
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Goodwill
Total Net Realizable Value
Liabilities having Priority – Wages
Taxes
Net Free Assets
6,000
2,400
Estimated Deficiency to Unsecured Creditors
P 6,000
2,400
60,000
1,600
10,000
P 54,200
Assets Pledged with Partially Secured Creditors:
Equipment
4,200
Note Payable
10,000
Equities
Liabilities Having Priority:
Accrued Wages
Taxes Payable
Fully Secured Creditors:
Notes Payable
Accrued Interest Payable
Partially Secured Creditors:
Note Payable
Equipment
6,000
50,000
30,000
400
0
140,600
8,400
132,200
53,600
P 185,800
P 320,000
Book
Value
Realizable
Value
Unsecured
P 6,000
2,400
P 8,400
60,000
1,600
61,600
10,000
4,200
P 5,800
170,000
10,000
110,000
( 50,000)
P 320,000
Unsecured Creditors:
Accounts Payable
Notes Payable
170,000
10,000
Stockholders’ Equity
Common Stock
Retained Earnings (Deficit)
P 185,800
2. Deficiency Statement to determine estimated deficiency to unsecured creditors:
Deficiency Account
May 31, 2012
Estimated Losses:
Estimated Gains:
Accounts Receivable
P 11,000
Common Stock
Notes Receivable
10,400
Retained Earnings
Inventory
30,000
Estimated Deficiency to
Buildings
44,000
Unsecured Creditors
Equipment
9,000
Prepaid Insurance
700
Goodwill
8,500
P113,600
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%
Problem II
1. Formal
Book Value
P165,000
3,000
72,000
60,000
______
P300,000
P 110,000
(50,000)
53,600
P 113,600
Down Dog Corporation
Statement of Affairs
June 30, 2014
Assets
Pledged with partially secured creditors
Equipment-net
Less: Note payable and accrued interest
Unsecured amount (See below)
Free Assets
Cash
Accounts receivable-net
Inventories
Total net realizable value
Less: Priority liabilities – wages payable
Total available for unsecured creditors
Estimated deficiency to unsecured creditors
Realizable Value
P87,000
(96,000)
(9,000)
3,000
48,000
72,000
123,000
(45,000)
78,000
30,000
P108,000
P
0
Deficiency
Account
(Loss/Gain)
(78,000)
(24,000)
12,000
______
(90,000)
Unsecured
Equities
Book Value
P 45,000
96,000
72,000
27,000
180,000
(120,000)
P300,000
Priority liabilities
Wages payable (assumed under
P4,650 per employee)
P 45,000
Partially secured creditors
Note payable and accrued interest
Less: Equipment pledged as security
P 96,000
(87,000)
Unsecured creditors
Accounts payable
Rent payable
Liabilities
P 9,000
72,000
27,000
Stockholders’ equity
Capital stock
Retained earnings (deficit)
180,000
(120,000)
P 60,000
P(30,000)
______
P108,000
Estimated Deficiency
2. Estimated payments per dollar for unsecured creditors
Cash available
Distribution to partially secured and unsecured priority creditors:
Note payable and interest
P87,000
Administrative expenses
24,000
Wages payable
45,000
Available to unsecured nonpriority creditors
Note payable and interest (unsecured portion)
Accounts payable
Rent payable
Unsecured nonpriority claims
P210,000
(156,000)
P 54,000
P 9,000
72,000
27,000
P108,000
(P54,000 / P108,000 = P0.50 per peso)
Expected recovery for each class of claims
Partially secured
Note payable and interest
Secured portion
Unsecured portion (P9,000 × 0.50)
P87,000
4,500
P91,500
Unsecured priority
Administrative expenses
Wages payable
P24,000
45,000
69,000
Unsecured nonpriority
Accounts payable (P72,000 × 0.50
Rent payable (P27,000 × 0.50)
Total payments
P36,000
13,500
49,500
P210,000
Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000)
Allocated to:
Fully secured creditors
Partially secured creditors
Unsecured creditors with priority
Remainder available to general unsecured creditors
Payment rate to general unsecured creditors
(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000))
P1,275,000
(316,000)
(300,000)
(100,000)
P559,000
44.2%
Realizable value of assets:
Assets pledged to fully secured creditors
Assets pledged to partially secured creditors
Free assets
Total realizable value
P635,000
300,000
340,000
P1,275,000
Amounts to be paid to:
Fully secured creditors
Partially secured creditors [P300,000 + (0.442 × P100,000)]
Unsecured creditors with priority
General unsecured creditors (0.442 × P1,165,000)
Total
P316,000
344,200
100,000
514,800*
P1,275,000
*Rounded P130
Problem IV
Free Assets:
Current Assets .................................................................................
Buildings and Equipment ..............................................................
Total ........................................................................................
P 35,000
110,000
P145,000
Liabilities with Priority:
Administrative Expenses ................................................................
Salaries Payable (only P3,000 per employee) ...........................
Income Taxes .................................................................................
Total ........................................................................................
P 20,000
6,000
8,000
P 34,000
Free Assets After Payment of Liabilities with Priority
(P145,000 – P34,000) ......................................................................
P111,000
Unsecured Liabilities
Notes Payable (in excess of value of security) .........................
Accounts Payable ..........................................................................
Bonds Payable ................................................................................
Total ........................................................................................
P 30,000
85,000
70,000
P185,000
Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %
Payment On Notes Payable:
Value of Security (land) ................................................................
60% of Remaining P30,000 ............................................................
Total Collected by holders ...........................................................
P 90,000
18,000
P108,000
Problem V
Free Assets:
Cash
........................................................................................
Receivables (30 percent collectible) ..........................................
Inventory ........................................................................................
Land (value in excess of secured note:
P120,000 – P110,000) ................................................................
Total ........................................................................................
P30,000
15,000
39,000
10,000
P94,000
Less: Liabilities with priority
Salary payable (below maximum)........................................
Free assets available ................................................................
Unsecured Liabilities:
Accounts payable ..........................................................................
Bonds payable (less secured interest in
building: P300,000 – P180,000) ................................................
Unsecured liabilities ..................................................................
(10,000)
P84,000
P90,000
120,000
P210,000
Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%
Amounts to be paid for:
Salary payable (liability with priority to be paid
in full) ........................................................................................
Accounts payable (unsecured—will collect 40%
of debts of P90,000)..................................................................
Note payable (fully secured by land—will collect
entire balance) ........................................................................
Bonds payable (partially secured—will collect
P180,000 from building and 40 percent of the
remaining P120,000) .................................................................
Problem VI
Class of Creditors
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities with priority
Unsecured
liabilities
without
priority
Total Creditor’s
Claims
183,600
54,600
30,810
182,500
Total
Amounts
Expected to
be
Recovered
183,600
51,720
30,810
116,800
P10,000
P36,000
P110,000
P228,000
% of Total
Claims
Expected to
be
Recovered
100.0
94.7
100.0
64.0
Problem VII
1. Total estimated proceeds
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
Mortgage payable and interest (from
proceeds of land and building)
Total available to unsecured claimants.
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured claims
2.
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims ofunsecured creditors
Dividend to Unsecured Creditors
P410,000 ÷ P640,000 = 64.1%
3.
Unsecured portion of notes payable and
Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
P910,000
P150,000
320,000
470,000
P440,000
P 10,000
20,000
30,000
P410,000
P380,000
260,000
P640,000

P380,000
64.1%
P243,580
150,000
P393,580
Problem VIII
1.
Book Value
P 40,000
50,000
110,000
WILBUR CORPORATION
STATEMENT OF AFFAIRS
DECEMBER 31, 20x4
Assets
(1) Assets pledged with fully secured
creditors:
Accounts receivable (net)
Less: 10% note payable and
interest
Land
Plant and equipment (net)
Less: Mortgages payable and
interest
20,000
35,000
4,000
35,000
55,000
6,000
140,000
48,000
P 543,000
(2) Assets pledged with partially
secured creditors:
Marketable securities
Less: 10% note payable and
interest
Estimated
Current
Values
Estimated
Amount
Available to
Unsecured
Claims
Estimated
Gain
(Loss) on
Realization
P 40,000
38,500
P 1,500
P 65,000
100,000
P165,000
(157,500)
P 15,000
(10,000)
7,500
P 16,000
(4,000)
(20,800)
Inventory
Less: Accounts payable
P 32,000
(60,000)
(3) Free assets:
Cash
Accounts receivable (net)
Inventory
Prepaid insurance
Plant and equipment (net)
Franchises
P 4,000
35,000
50,000
1,000
60,000
15,000
(3,000)
4,000
35,000
50,000
1,000
60,000
15,000
Estimated amount available
Less: Creditors with priority
Net available to unsecured creditors
Estimated deficiency
P 174,000
(43,000)
P 131,000
45,000
Total unsecured debt
P 176,000
2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%
(5,000)
(5,000)
(80,000)
(33,000)
(P 125,000)
Problem IX
Smith Company
Statement of Realization and Liquidation
Assets
Assets Realized
Assets to be realized
Old Receivebles, net
Marketable Securities
Old Inventory
Depreciable Assets, net
P 50,000
20,000
72,000
120,000
Assets Acquired
New Receivables
Old Receivbles
New Receivbles
Marketable Securities
Sales of Inventory
Assets Not Realized
100,000
Old Receivables, net
New Receivables, net
Depreciable Assets
Supplementary Charges
Supplementary Items
Supplementary Credits
Old Current Payables
P 31,000
P 31,000
Liabilities Not Liquidated
Old Current Payables
Problem X
Net Loss
22,000
35,000
96,000
P 7,000
Liabilities
Liabilities to be Liquidated
Liabilities Liquidated
Old Current Payables
P 28,000
65,000
15,000
100,000
Old Current Payables
P 65,000
Liabilities Incurred
P 34,000
P433,000
________
P 433,000
Mallory Corporation
Statement of Realization and Liquidation
For the Three Months Ended July 31, 20x5
Assets
Beginning balances assigned 5/1/x5
Cash Receipts:
Collection of Accounts Receivable
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts pay.
Partial payment of bank loan
Ending balance
Assets
Cash
Non-Cash
P 4,000
P720,000
60,000
170,000
20,000
70,000
(70,000)
(200,000)
(340,000)
(100,000)
(60,000)
(170,000)
(70,000)
P24,000
P10,000
Assets
Beginning balances assigned
Cash Receipts:
Collection of Accounts
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts
Partial payment of bank loan
Ending balance
Fully
Secured
P240,000
Partially
Secured
P270,000
Liabilities
Unsecured
With
Without
Priority
Priority
P94,000
P0
(10,000)
(30,000)
(80,000)
(30,000)
(240,000)
(60,000)
(180,000)
________
(90,000) ________
P
0 P
0 P34,000
Owner's
Equity
P120,000
10,000
20,000
P30,000
________
P (30,000)
Multiple Choice Problems
1. d – since there is parent and subsidiary relationship, any intercompany accounts are eliminated from
consolidated point of view.
2. a - [P90,000 + P36,000 + P10,000 – P45,000 = P91,000 total estimated amount available; P91,000 –
(P4,500 + P10,000) = P76,500 estimated amount available for unsecured, non-priority creditors;
P76,500 ÷ P90,000 = 0.85]
3. c – it is a partially secured liability
4. d – [(P1,110,000 – P780,000) + P960,000] – P210,000 = P1,080,000
5. b – P25,000 + [.30 x (P75,000 – P25,000)] = P40,000
6. d – (P555,000 – P390,000) + P480,000 = P645,000 – P105,000 = P540,000
7. b – P30,000 + [.30 x (P90,000 – P30,000)] = P48,000
8. c – [ P110,000 + (P150,000 – P110,000) x 40%] = P128,000
9. d
10. c – P60,000 + [(P120,000 + P6,000) – (P30,000 + P35,000) = P121,000
11. b - P20,000 + P80,000 + [P170,000 – (P150,000 + P7,000)] = P113,000 – (P10,000 + P10,000)
= P93,000
12. c – P93,000/P121,000 = 77% rounded.
13. a
Net Free Assets:
(P700,000 – P300,000) + P70,000 + P230,000 = P700,000 – P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 – P300,000) + P600,000 = P700,000
14. c - Pension P10,000 + Salaries P35,000 (= P10,600 + P10,950 + P10,950 + P2,500) + Taxes P80,000 + Liq.
expenses P40,000 = P165,000.
15. c
Statement of Realization and Liquidation
Assets to be Realized………….
Assets Acquired………………..
Liabilities Liquidated………….
Liabilities Not Liquidated…….
Supplementary charges/
debits………………………
P 1,375,000
750,000
1,875,000
1,700,000
3,125,000
Assets Realized…………………..P 1,200,000
Assets Not Realized…………… 1,375,000
Liabilities to be Liquidated…. 2,250,000
Liabilities Assumed…………..
1,625,000
Supplementary credits………
2,800,000
P 8,825,000
P 9,250,000
Net Gain……………………….. P 425,000
16. No requirement
17. c
Total Liabilities (refer to Liabilities not liquidated–No. 14)…………………… P1,700,000
+: Stockholders’ Equity (P1,500,000 – P500,000)………………………………… 1,000,000
Total LSHE = Total Assets…………………………………………………………… P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14)……….……………… 1,375,000
Cash balance, ending………………………………………………………………P1,325,000
18. P440,000
Total Free Assets:
Fully secured:
Land and building: P650,000 – (P300,000 + P20,000) = P 330,000
Free assets:
Cash
10,000
Equipment
100,000 P440,000
Or,
Total estimated proceeds
P910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
P150,000
Mortgage payable and interest (from
proceeds of land and building)
320,000
470,000
Total available to unsecured claimants/total free
P440,000
19. P410,000
Total available to unsecured claimants/total free
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured
claims/net free assets
P440,000
P 10,000
20,000
30,000
P410,000
20. P640,000 = P260,000 + [(P50,000 + P100,000) – (P500,000 + 30,000), or
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims of unsecured creditors
P380,000
260,000
P640,000
21. 64.1%
Dividend to unsecured creditors
P410,000 ÷ P640,000 = 64.1%
22. P320,000 = P300,000 + P20,000
23. P393,580
Unsecured portion of notes payable and
interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
x
P380,000
64.1%
P243,580
150,000
P393,580
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
24. P30,000
25. P166,666 = P260,000 x 64.1
26. P910,247 = P320,000 + P393,580 + P30,000 + P166,666 (discrepancy of P247 due to rounding-off)
27. P230,000
Net free assets (No. 19)
P410,000
640,000
Less: Unsecured creditors without priority (No. 20)
P230,000
28. P340,000 = P910,000 – P1,250,000
29. P340,000, same with No. 28, since there are no unrecorded expenses liabilities)
30. P60,675 – you may the same procedure in Nos. 18 to 29 to solve this problem, the following is the
formal presentation of statement of affairs
Book
Value
98,500
5,800
41,000
43,000
1,850
21,200
15,000
_______
226,350
Assets
Assets pledged with fully secured
creditors:
Land and Bldg
92,800
Investment in Calandir
15,000
Total
107,800
Assets pledged with partially
secured creditors:
Inventory
20,000
Equipment
8,000
Free Assets:
Cash
1,850
Accounts Rec
17,000
Note Rec
15,000
Estimated Amount Avail for unsecured creditors
with and without priority
Less unsecured creditors with priority
Estimated amounts for unsecured creditors
without priority (Net Free Assets):
Net Realizable Amount Avail
Deficiency
_______
169,650
Book Liabilities
Value and Owners Equity
Fully Secured Creditors:
600
Accrued Mtg Interest
70,000
Mortgage Payable
375
Accrued N/P Interest
10,000
Note Payable
Total
Partially Secured
Creditors:
50,000
Accounts Payable
Unsecured Creditors with
Priority:
3,775
Accrued Payroll
Unsecured creditors without
Priority:
40,625
Accounts Payable
10,000
Other Accrued Liabilities
185,375
Totals
40,975
Owner Equity
226,350
31.
32.
33.
34.
35.
36.
Estimated
Net
Realizable
Value
Estimated
Secured
Amount
Estimated Amt
Avail for
Unsecured
Creditors
Estimated
Gain or
(Loss)on
Liquidation
22,200
4,625
(5,700)
9,200
(21,000)
(35,000)
1,850
17,000
15,000
0
(4,200)
0
60,675
(3,775)
56,900
15,725
72,625
_______
(56,700)
Estimated Unsecured Amount
With
Without
Priority
Priority
600
70,000
375
10,000
80,975
28,000
22,000
3,775
_______
108,975
3,775
P56,900 – refer to No. 30 for computation
P72,625 – refer to No. for computation
Dividend - P56,900/P72,625 = P.78 – refer to No. 30 for further computation
P80,975 – refer to No. 30 for computation
P45,160 = P28,000 + (P22,000 x 78%)
P3,775
40,625
10,000
72,625
37. P39,487.50 = 78% x (P40,625 + P10,000)
38. P169,397.50
No. 34……………..P 80.975
No. 35…………….. 45,160
No. 36……………..
3,775
No. 37…………….. 39,487.50
P169,397.50 (discrepancy around P250 plus due to rounding-off)
39. P15,725 – refer to No. 30 or P56,700, estimated net loss – P40,975, owners’ equity
40. P56,700 – refer to No. 30 or P169,650 – P226,350
41. P56,700 (same with No. 40 since there are no unrecorded expenses liabilities)
42. P22,475
Liabilities
Unsecured
Assets
Fully
Partial
With Without
Cash Noncash Secured Secured
Priority
Priority
6/1/x5 Balances:
1,850
224,500
80,975
50,000
3,775
50,625
Cash
Receipts:
Securities Sale
16,000
N/R Collected
15,000
Equipment
7,000
Sale
Inventory Sale
22,000
Cash Disbursements:
Bank Loan
(10,375)
Part Pyt-A/P
(29,000)
6/30 Balance
22,475
Owners'
Equity
40,975
(5,800)
(15,000)
(43,000)
10,200
0
(36,000)
(41,000)
(19,000)
---------119,700
43. P119,700 – refer to No. 42
44. P70,600 – refer to No. 42
45. None – refer to No. 42
46. P3,775 – refer to No. 42
47. P71,625 – refer to No. 42
48. (P3,825) deficit – refer to No. 42
(10,375)
--------70,600
(50,000)
0
------3,775
21,000
71,625
---------(3,825)
49. P150,900
Book
Value
57,000
174,000
6,000
900
90,000
327,900
Book
Value
3,600
69,000
2,400
30,000
24,900
0
0
18,000
6,000
126,000
Estimated
Net
Realizable
Assets
Value
Assets pledged with fully secured creditors:
Accounts receivable (net)
45,000
Land, plant and equipment (net)
150,000
Total
195,000
Free assets:
Notes receivable
6,000
Accrued interest receivable
900
Inventories (90,000 x 60%)
54,000
Estimated
amount
available for
unsecured creditors with and
without priority
Less unsecured creditors with priority
Estimated amounts for unsecured
creditors without priority:
Net realizable amount available
Deficiency
Totals
255,900
Estimated
Secured
Amount
Liabilities and Owners' Equity
Fully secured creditors:
Accrued interest
Note payable
Accrued interest
Note payable
Total
Unsecured creditors with priority:
Wages payable
Administration fees – accountant’s
fee
Unsecured creditors without priority:
Accrued interest
Cash overdraft
Notes payable
Accounts payable
279,900
Totals
48,000 Owners' equity--see Note A
327,900
Note A: Includes the effect of the P2,000 professional fee.
50. P124,000 – refer to No. 49
51. P150,000–
52. 82.67% = P124,000/P150,000
53. P105,000
54. None
55. P26,900
56. P124,005 = P150,000 x 82.67%
Estimated
Amount
Available for
Unsecured
Creditor
Estimated
Gain or
(Loss) on
Liquidation
12,600
77,400
(12,000)
(24,000)
6,000
900
54,000
0
0
(36,000)
150,900
(26,900)
124,000
26,000
150,000
(72,000)
Estimated Unsecured
Amount
With Priority
Without
Priority
3,600
69,000
2,400
30,000
105,000
24,900
2,000
--------
--------
0
18,000
6,000
126,000
105,000
26,900
150,000
57. P255,900 = P72,000 + P26,900 + P124,005 (discrepancy of P5)
58. P26,000 = (P72,000 + P2,000 unrecorded ) – P48,000 or P150,000 – P124,000
59. P72,000 – refer to No. 49
60. P74,000 = P72,000, loss of realization of assets + P2,000 unrecorded expenses
Quiz - VI
1. P96,000
Claims of partially secured creditors ...................................................................
Current value of assets pledged with these creditors ......................................
Deficiency that is unsecured .................................................................................
Claims of other unsecured creditors ....................................................................
Total unsecured creditors claims ........................................................................
P 120,000
(80,000)
P 40,000
360,000
P 400,000
Amount available to unsecured creditors:
Excess left over after paying fully secured creditors
(P195,000 – P150,000) ...........................................................................................
Current value of free assets (net of P45,000 to
creditors with priority)...........................................................................................
Amount available to unsecured creditors ........................................................
115,000
P160,000
Settlement to unsecured claims per dollar (P160,000/P400,000) ...................
P
Total distribution to partially secured creditors:
Current value of assets pledged ........................................................................
Deficiency of P40,000 × P.40 ................................................................................
2. P144,000 = P360,000 x 40%
3. P56,000
Claims of partially secured creditors ...................................................................
Current value of assets pledged with these creditors ......................................
Deficiency that is unsecured .................................................................................
Claims of other unsecured creditors ....................................................................
Total unsecured creditors claims ........................................................................
Amount available to unsecured creditors:
Excess left over after paying fully secured creditors
(P300,000 – P250,000) ...........................................................................................
Current value of free assets (net of P60,000 to
creditors with priority)...........................................................................................
Amount available to unsecured creditors ........................................................
Settlement to unsecured claims per peso (P36,000/P240,000) .......................
Total distribution to partially secured creditors:
Current value of assets pledged ........................................................................
Deficiency of P40,000 × P.15 ................................................................................
4. P30,000 = P200,000 x 15%
5. P35,000 = P20,000 + (P70,000 – P20,000) x 30%
P 45,000
.40
P 80,000
16,000
P 96,000
P 90,000
(50,000)
P 40,000
200,000
P 240,000
P 50,000
(14,000)
P 36,000
P
.15
P 50,000
6,000
P 56,000
6. P96,000 = Free assets P220,000 - priority claims P100,000 = P120,000
P120,000/P300,000 unsecured = payment of 40% on unsecured peso
40% x P240,000 A/P = P96,000
7. P474,000 = Land and building sold for P450,000 leaves P60,000 unsecured still owing. 40% x
P60,000 = P24,000
8. P295,000 = P200,000 + P95,000
9. P42,950 - (P10,950 + P2,000 + P20,000 + P10,000)
10. P76,050 - Excess of salaries, P1,050 + notes pay in excess of security P25,000 + accounts pay P50,000
11. P163,800
Free assets:
Other assets
P104,000
Excess from assets pledged with secured
59,800
(P150,800 – P91,000)
P163,800
12. P109,200
Total free assets
P163,800
54,600
Less: Liabilities with priority
P109,200
13. P364,000
Unsecured creditors:
Excess of partially secured liabilities over
Pledged assets (P169,000 – P65,000)
P104,000
260,000
Unsecured creditors
P364,000
14. P96,200
Payment of partially secured debt:
Value of pledged assets
P 65,000
31,200
30%* of remaining P104,000
P 96,200
*P109,200/P364,000 = 30%
15. P78,000
Cash
Excess of pledged with secured liabilities
(P117,000 – P104,000)
16. P52,000
Free assets after of liabilities with priority:
Total free assets
Less: Liabilities with priority
17. P260,000
Unsecured creditors:
Excess of partially secured liabilities over
pledged assets (P195,000 – P169,000)
Accounts payable
P 65,000
13,000
P 78,000
P 78,000
26,000
P 52,000
P
26,000
234,000
P 260,000
18. P174,200
Payment on bond:
Value of pledged assets
20%* of remaining P26,000
Free after priority: P52,000/P260,000 = 20%
19. P247,000
Free assets
Excess from assets pledged with fully secured
(P260,000 – P195,000)
Amount available
Unsecured liabilities with priority
Net free assets / available for unsecured
P 169,000
5,200
P 174,200
P390,000
65,000
P455,000
( 208,000)
P247,000
20. P32,000
Cash
Mortgage payable, paid in full
(
Note payable to bank, secured portion
(
Priority claims (P16,000 of administrative costs +
P2,000 of customer deposits + P4,000 property tax)
Available for unsecured nonpriority claims
(
22,000 )
8,000
Unsecured, nonpriority claims:
Unsecured portion of note payable to bank
Accounts payable
Total unsecured, nonpriority claims
10,000
30,000
40,000
P8,000 cash/P40,000 claims = P.20 on the dollar
Amount paid to bank:
P30,000 for secured portion + (P10,000 x .20) for unsecured
portion =
32,000
21. P15,400
Mortgage note receivable
Less: Portion secured by equipment
Unsecured portion
(
Estimated recovery on secured portion
Estimated recovery on unsecured portion
(P28,000 x P.30) =
Recovery on mortgage note receivable
22.
120,000
60,000 )
60,000
30,000 )
30,000
Mortgage note receivable
Less: Portion secured by marketable securities
Unsecured portion
Estimated recovery on secured portion
Estimated recovery on unsecured portion
(20,000 x P.25) =
35,000
7,000
28,000
)
7,000
8,400
15,400
(
80,000
60,000
20,000
60,000
5,000
)
Recovery on mortgage note receivable
23. P30,000
Book value of assets
Net realizable of assets
Less stockholders' equity
(P700,000 – P400,000)
Deficiency
65,000
P700,000
370,000
P330,000
300,000
P 30,000
24. P.75 Dividend = P370,000 – P250,000 – P30,000 / P400,000 – P250,000 – P30,000
25. P8,500 = P7,000 + [(P9,000 – P7,000) x .75]
26. P410,000
Total estimated proceeds
P910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
P150,000
Mortgage payable and interest (from
proceeds of land and building)
320,000
470,000
Total available to unsecured claimants.
P440,000
Less distributions to unsecured claims
with priority:
Wages payable
P 10,000
Taxes payable
20,000
30,000
Amount available for unsecured creditors
P410,000
27. 64.10%
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims of unsecured creditors
P380,000
260,000
P640,000
Dividend to unsecured creditors:
P410,000 ÷ P640,000 = 64.1%
28. Unsecured portion of notes payable and
Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
P380,000
x 64.1%
P243,580
150,000
P393,580
THEORIES
1. debtor
2. P5,000
3. inability to pay debts as they mature
4. a. administrative costs
b. certain postfiling “gap” claims in involuntary filings
c. wages, salaries, and commissions
d. employee benefit plans
e. deposits by individuals
f. taxes
5. infrequent
6. two-thirds, more than one-half
7. fraudulent, preferential
8. realization and liquidation
9.
10.
11.
12.
13.
44.
45.
46.
47.
48.
False
False
False
True
False
a
c
c
a
b
14.
15.
16.
17.
18.
False
True
True
True
True
c
50. d
51. a
52. d
53. b
49.
19.
False
False
20.
21. c
22. a
23. a
d
55. c
56. d
57. b
58. a
54.
c
25. a
26. d
27. c
28. e
24.
59. a
60. c
b
30. b
31. b
32. a
33. c
29.
b
35. d
36. b
37. c
38. a
34.
39.
40.
41.
42.
43.
b
c
b
a
c
Chapter 7
Problem I
1. Entries in 20x4:
Cash
Mortgage Notes Receivable
Real Estate …………………………………
Gain on Sale of Real Estate
Cash
Mortgage Notes Receivable
3,500
20,500
15,000
500
9,000
500
Entry in 20x5:
Real Estate …………………………………………………………
16,500
Loss on Repossession of Real Estate ……………………… 3,500
Mortgage Notes Receivable ……………………………… 20,000
2. Entries in 20x4
Cash ………………………………………………………………………… 3, 500
Mortgage Notes Receivable ………………………………… 20,500
Real Estate ……………………………………………………………
9,000
Deferred Gross Profit on Installment Sales ………… … 15,000
Cash …………………………………………………………………………
Mortgage Notes Receivable ………………………………
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ……………… 2,500
Realized Gross Profit on Installment Sales………………
500
500
2,500
Gross Profit Percentages
15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
Entry in 20x5
Real Estate……………………………………………………………
16,500
Deferred Gross Profit on Installment Sales ……………… 12,500
Mortgage Notes Receivable …………………………………… 20,000
Gain in Repossession of Real Estate ………………………… 9,000
Problem II
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.
20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales
20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem III
1.
a. Installment Contracts Receivable 19X8………………… 250,000
Installment Sales ……………………………………………………
250,000
b. Cash ………………………………………………………………………… 120,000
Installment Contracts Receivable 19X8 …………………… 120,000
c. Cost of Installment Sales ………………………………………… 200,000
Merchandise Inventory ……………………………………
200,000
d. Merchandise Repossessions …………………………………
14,500
Deferred Gross Profit on Installment Sales 19X8 …………
4,000
Loss on Repossession ……………………………………
1,500
Installment Contracts Receivable, 19X8 …………….
20,000
Gross Profit Percentages: 50,000/250,000, or 20%
Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise..
Less: Unrecovered cost:
Unpaid balance…………………………P 20,000
Less: Deferred Gross Profit
20% x P20,000…………………… 4,000
Loss on repossession…………………….
P 14,500
16,000
P 1,500
e. Expenses ………………………………………………………………………
Cash ………………………………………………………………….
16,000
16,000
2. Adjustment to Recognize Gross Profit on Installments Sales:
a. To set-up Cost of Installment Sales:
No entry (since perpetual inventory method is used)
b. To set-up Deferred Gross Profit on Installment Sales:
Installment Sales ……………………………………………………… 250,000
Cost of Installment Sales ………………………………….
200,000
Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000
c. Adjustment to Recognize Gross Profit on Installment Sales:
Deferred Gross Profit on Installment Sales – 20x4………
Realized Gross Profit on Installment Sales – 20x4 ……….
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
24,000
24,000
d. Closing of nominal accounts.
Realized Gross Profit on Installment Sales – 20x4…………………
Expenses ……………………………………………………….
Loss on Repossessions ……………………………………….
Income Summary …………………………………………….
To close the accounts for 20x4.
Problem IV
1.
January to December 31
(1) To record regular sales:
Accounts receivable
Sales
(2) To record installment sale:
Cash
Installment accounts receivable
Installment Sales
20x4
600,000
60,000
300,000
24,000
20x5
600,00
360,000
1,080,000
144,000
336,000
1,080,000
480,000
(3) To record cost of sales:
Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales
Merchandise inventory
Installment Sales:
Cost of installment sales
Merchandise inventory
(4) To record collections:
Regular Sales:
Cash
Accounts receivable
Installment Sales:
Cash
Installment Accounts receivable –
20x2
Installment Accounts receivable –
20x3
Interest income
2.
(5) to record payment of operating expenses:
Operating expenses
Cash
480,000
252,000
144,000
480,000
252,000
144,000
108,000
90,000
864,000
312,000
360,000
360,000
72,000
72,000
36,000
60,000
72,000
90,000
102,000
(6) To recognize accrued interest receivable
1,440
312,000
204,000
Adjusting entries (end of the year):
Interest receivable
864,000
2,880
102,000
16,000
1,500
6,500
Interest income
1,440
2,880
(7) To set-up Cost of Sales:
Periodic Method:
Cost of installment sales
480,000
Merchandise inventory
864,000
480,000
864,000
Perpetual Method: No entry
(7) To set-up Cost of Installment Sales:
Periodic Method:
Cost of installment sales
252,000
Shipment s on installment sales
312,000
252,000
312,000
Perpetual Method: No entry
(8) To set-up Deferred Gross Profit
Installment sales
360,000
480,000
Cost of installment sales
252,000
Deferred gross profit – 20x4
108,000
312,000
Deferred gross profit – 20x5
Gross profit rate – 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate – 20x5: P168,000 / P480,000 = 35%.
168,000
(9) To record realized gross profit on installment
sales:
Deferred gross profit – 20x4
25,200
25,200
Deferred gross profit – 20x5
21,000
Realized gross profit
25,200
46,200
20x4: Realized gross profit on installment sales:
Collections applying as to principal..……………………………P 72,000
Multiplied by: Gross profit rate…………………………………….
30%
Realized gross profit…………………………………………………P 21,600
20x5: Realized gross profit on installment sales;
20x4
20x5
Collections – principal……………
P 72,000
P 60,000
Multiplies by: Gross profit %..........
____30%
____35%
Realized gross profit………………
P 21,600
P 21,000
P 42,600
Closing entries:
(10) To close realized gross profit account:
Realized gross profit
21,600
Income summary
42,600
21,600
42,600
(11) To close other nominal accounts
Sales
600,000
1,080,000
Interest income
37,440
Cost of sales
74,880
480,000
864,000
Operating expenses
90,000
102,000
Income summary
67,440
188,880
(12) To close results of operations:
Income summary
89,040
Retained earnings
Problem V
1.
Type of Sale
Regular Sales:
Cash sales
Credit sales
Total regular sales
Installment Sales
Total Sales
Amount
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
2.
Ratio to Total Sales
P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000
675/1,800
1,125/1,800
231,480
Allocated Cost
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000
The allocation above was based on the assumptions that the markup for each type of sale is the
same. Normally, the selling prices of the merchandise are not the same for each type of sales.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
231,480
89,040
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
* Amount of sale x cost ratio.
Amount
P 225,000
450,000
1,125,000
P 1,500,000
Amount
225,000
450,000
1,125,000
P 1,800,000
P
Amount based on
Cash Sales (100%)
P 225,000
375,000*
900,000**
P 1,250,000
Ratio to Total
Sales
225/1,500
375/1,500
900/1,500
Gross profit rate
30%
36%
40%
Cost ratio
70%
64%
60%
Allocated Cost
P 175,500
292,500
__ 702,000
P 1,170,000
Allocated Cost*
P 157,500
288,000
_ _675,000
P 1,170,000
Problem VI
The entries are required under the periodic method:
Repossessed merchandise…………………………………
Deferred gross profit – 20x4………………………………
Loss on repossession………………………………………………
Installment accounts receivable – 20x4…………………….
68,400
48,000
3,600
Repossessed merchandise………………………………
Cash, etc (or various credits)……………………
12,000
To record repossessed merchandise.
To record reconditioning costs
The loss on repossession is computed as follows:
Estimated selling price after reconditioning costs
Less: Reconditioning costs………………………………………
Costs to sell and dispose………………………………
Normal profit (20% x 108,000)…………………………
Market value before reconditioning costs…………………
Less: Unrecovered cost
Installment accounts receivable – 20x4,
unpaid balance……………………………………
Less: Deferred gross profit – 20x4 (P120,000 x 40%)
Loss on repossession…………………………….
P 12,000
6,000
__21,600
P120,000
__48,000
120,000
12,000
P 108,000
__39,600
P 68,400
__72,000
P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise………………………………
Over-allowance on trade-in merchandise………………….
Cash……………………………………………………………
Installment accounts receivable – 20x4…
Installment sales……………………………
840,000
360,000
2,400,000
3,360,000
To record installment sales with trade-in.
6,960,000
Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment
sales, the entry would be as follows:
Trade-in Merchandise………………………………
Cash………………………………………………………………
Installment accounts receivable – 20x4………
Installment sales (net of over-allowance)…
840,000
2,400,000
3,360,000
To record installment sales with trade-in.
The over-allowance is computed as follows:
Trade-in allowance………………………………
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs.
Less: Reconditioning costs……………………………
Costs to sell (5% x P1,680,000)……………………
Normal profit (20% x P1,680,000)………
Over-allowance……………………………………………………
6,600,000
P1,200,000
P1,680,000
420,000
84,000
__336,000
__840,000
P 360,000
The gross profit rate on installment sales is computed as follows:
Installment sales………………………………………………………
Less: Over-allowance…………………………………………………………
Adjusted Installment Sales……………………………………………………
Less: Cost of installment sales………………………………………………
Gross profit……………………………………………………………………
Gross profit rate (P2,680,000/P6,600,000)…………………………
P6,960,000
___360,000
P6,600,000
__3,920,000
P2,680,000
40.60%
Further, the entry to record the reconditioning costs is as follows:
Trade-in Merchandise………………………………
Cash, etc (or various credits)…………………
420,000
To record reconditioning costs.
420,000
Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is
computed as follows:
Trade-in merchandise (market value before reconditioning costs)………
Down payment……………………………………………………………………
Installment collection (March 31 – December 31: P80,000 x 10 months)
Total collections……………………………………………………………
Multiplied by: Gross profit rate in 20x4…………………………………
Realized gross profit on installment sales of new merchandise…………
P
840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash ……………………………………………………………………… 20,000
Mortgage Notes Receivable ………………………………… 55,000
Real Estate ………………………………………………………
60,000
Deferred Gross Profit on Installment Sales …………… 15,000
Nov. 30 Cash ……………………………………………………………………… 1,150
Mortgage Notes Receivable …………………………………
600
Interest Income …………………………………………………
550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash ………………………………………………………………………… 1,144
Mortgage Notes Receivable ………………………………
600
Interest Income ……………………………………………………
544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales ……………… 4,240
Realized Gross Profit on Installment Sales ………………… 4,240
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the
contract:
Dec. 31 Cash ……………………………………………………………………… 20,000.00
Mortgage Notes Receivable ………………………………… 55,000.00
Real Estate ………………………………………………………
60,000.00
Deferred Gross Profit on Installment Sales …………
15,000.00
Nov. 30 Cash ………………………………………………………………………
Mortgage Notes Receivable ……………………
Interest Income …………………………………………………
600
50.00
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50, is
reduction in principal)
Dec. 31 Cash ……………………………………………………………………….
Mortgage Notes Receivable …………………………………
Interest Received ………………………………………………
600.00
50.50
549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in principal.
31 Deferred Gross Profit on Installment Sales ………………… 4,020.10
Realized Gross Profit on Installment Sales …………………
4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or P4,020.10
Problem IX
1. 6/30x4: Cash……………………………………………………………………………
25,000
Notes Receivable …………………………………………………………… 125,000
Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300
Depreciation Expense (1/2[2% of P90,000]) ……………………………
900
Land ……………………………………………………………………
10,000
Building ……………………………………………………………
90,000
Deferred Gross Profit on Sale of Property ……………………
57,200
Deferred Gross Profit on Sale of Property ………………
9,553
Realized Gross Profit on Sale of Property …………………
Amount realized: (P25,000/150,000) x 57,200
9,553
2. 6/30x5: Cash …………………………………………………………………………… 30,000
Notes Receivable ……………………………………………………
30,000
Deferred Gross Profit on Sale of Property ………………… 11,440
Realized Gross Profit on Sale of Property …………………………
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash …………………………………………………………………………
Notes Receivable ……………………………………………………
Deferred Gross Profit on Sale of Property …………… … 19,067
Realized Gross Profit on Sale of Property …………………………
Amount Realized: (P50,000/P150,000) X 57,200
11,440
50,000
19,067
6/30/x7 Cash ………………………………………………………………………
15,000
Notes Receivable ……………………………………………………
Deferred Gross Profit on Sale of Property ………………… 5,720
Realized Gross Profit on Sale of Property …………………………
Amount Realized: (P15,000/P150,000) X 57,200
50,000
15,000
5,720
Problem X
Installment Contracts Receivable …………………………… 200,000
Installment Sales ………………………………………………………
Cost of Installment Sales …………………………………………… 120,000
Merchandise Inventory ………………………………………………
200,000
120,000
Cost of Sales: 60% of P200,000
Installment Sales ………………………………………………………… 200,000
Cost of Installment Sales ……………………………………………
120,000
Deferred Gross Profit on Installment Sales ………………………
60,000
Cash ………………………………………………………………………………. 124,000
Installment on Contracts Receivable – 20x4……………
30,000
Installment on Contracts Receivable – 20x5…………………
34,000
Installment on Contracts Receivable – 20x6…………………
60,000
Deferred Gross Profit on Installment Sales -20x4 …………… 13,800
Deferred Gross Profit on Installment Sales-20x5 ………… 14,280
Deferred Gross Profit on Installment Sales -20x6 ………… 24,000
Realized Gross Profit on Installment Sales ……………………… ……
Realized Gross Profit
20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
52,080
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment sales 20x6
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts receivable 20x5
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts receivable 20x4
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ……………………………………………………………………………….....................
Installment Accounts Receivable 20x6 …………………………... P 55,000
20x5 ………………………….. 12,000
20x4 …………………………..
3,000
Accounts receivable ………………………………………………………………………….
Inventory ……………………………………………………………… ………………………..
Other Assets …………………………………………………………………… ………………...
Total Assets ………………………………………………………………… …………………… P
Liabilities
Accounts payable …………………… …………………………………………
Deferred Gross Profit
20x6 …… ……………………… P 15,125
20x5 ………… …………………
3,600
20x4 …………… ………………
960
Total Liabilities
70,000
17,000
60,000
40,000
214,500
P 40,000
19,685
Stockholders’ Equity
Capital Stock …………………………………………………………………….. P 100,000
Retained Earnings ……………………………………………….. P 68,400
Balance, Jan. 1, 20x6 ………………………………………. 13,585
Balance, Dec. 31, 20x6 …………………………………………………….
54,185
Total Stockholder’s Equity ………………………………………………………
Total Liabilities and Stockholder’s Equity …………………………………….
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Sales ………………………………………………………............
Cost of goods sold:
Merchandise Inventory, Jan. 1 ………………P 52,000
Purchases ………………………….................. 350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31 …………
60,000
Gross Profit ………………………………………………………..
Less: Deferred Gross Profit on 19X34 …………………………
Realized Gross Profit on current year’s sales ……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ……………….
Total Realized Gross Profit …………………………………….
Operating Expenses …………………………………………...
Net Loss …………………………………………………………..
P27,500
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
P88,000
15,125
P78,875
110,000
P15,000
P15,000
P
59,685
P154,815
P 214,500
Total
P445,000
342,000
P103,000
15,125
P87,875
50,040
P137,915
151,500
P 13,585
27.5%
30%
32%
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125
Realized Gross Profit:
20x6
Collections on Installment Contracts Receivable ………... P265,000
Installment sales gross profit percentage …………………..
27.5%
Realized Gross Profit …………………………………………….. P 72,875
20x5
P138,000
30%
P 41,400
20x4
P27,000
32%
P 8,640
Installment Sales …………………………………………………… 320,000
Cost of Installment Sales ………………………………………….
232,000
Deferred Gross profit -20x6………………………………………………
88,000
Deferred Gross Profit, 20x6 ……………………………............... 72,875
Deferred Gross Profit, 20x5 ……………………………............... 41,400
Deferred Gross Profit, 20x4 ……………………………............... 8,640
Realized Gross Profit on Installment sales……………
122,915
Income Summary …………………………………………………
Shipment on Installment of Sales ………………………………
Merchandise Inventory, Jan. 1, 20x6 ……………….
Purchases ………………………………………………
170,000
232,000
Merchandise Inventory, Dec. 31, 20x6 ……………………..
Income Summary ……………………………………
60,000
Sales ……………………………………………………………….
Income Summary …………………………………….
Realized Gross Profit on Installment Sales………..………...
Income Summary …………………………………….
125,000
Income Summary ………………………………………………
Operating Expenses ………………………………...
151,500
Retained Earnings ……………………………………………..
Income Summary …………………………………...
13,585
122,915
52,000
350,000
60,000
125,000
122,915
151,500
13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 …………………………………………………………………………………… 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 ………………………………………………………………. 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 ………………………………………………………………. 45%
2.
Deferred Gross Profit, 20x6………………………………
Deferred Gross profit, 20x5………………………………
Deferred Gross Profit, 20x4………………………………
Loss on Repossessions…………………………..
Cancellation of deferred gross profit,
balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
1,900
4,000
3,600
9,500
GG SALES CORPORATION
Income Statement
For Year Ended December 31, 20x6
Sales ………………………………………………………............
Cost of goods sold:
Merchandise Inventory, Jan. 1 …………… P 30,000
Purchases ………………………….................. 445,000
Repossessed Merchandise ………………..
10,000
Merchandise Available for sale .................
495,000
Less: Merchandise Inv. Dec. 31 …………
35,000
Gross Profit ………………………………………………………..
Less: Deferred Gross Profit on 20x6 sales (see schedule)
Realized Gross Profit on current year’s sales ……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ……………….
Installment
Sales
P500,000
Regular
Sales
P192,000
310,000
P190,000
32,300
P157,700
150,000
P42,000
Total
P692,000
460,000
P103,000
32,300
P199,700
P42,000
100,650
P300,350
3,500
P296,850
300,000
P 3,150
Deduct loss on repossession ………………………………….
Total Realized Gross Profit …………………………………….
Operating Expenses ……………………………………………
Net Loss …………………………………………………………..
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred gross profit on Installment sales – before defaults, 19X8:
Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% ……………………………………………………….
Realized Gross Profit:
P 32,300
20x4
20x6
20x5
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
38%
40%
45%
Installment sales gross profit percentage ………..
Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………...
P 25,000
Installment Accounts Receivable 20x6 …………………P 80,000
20x5 ………………… 20,000
20x4 ………………… 5,000
105,000
Accounts receivable …………………………………………………………………..
40,000
Inventory ………………………………………………………………………………….
35,000
Other Assets ………………………………………………………………………………
52,000
Total Assets ……………………………………………………………………………….P 257,000
Liabilities
Accounts payable …………………………………………………….
Deferred Gross Profit 20x6 ………………………………. P 30,400
20x5 ……………………………….
8,000
20x4 ……………………………….
2,250
Total Liabilities
Stockholders’ Equity
Capital Stock ………………………………………………………….
Retained Earnings ………………………………………. P 44,500
Balance, Jan. 1, 20x6 ………………………………
3,150
Balance, Dec. 31, 20x6 ……………………………
Total Stockholder’s Equity ………………………………………….
Total Liabilities and Stockholder’s Equity ………………………..
P 75,000
40,650
P
115,650
P100,000
41,350
4. Installment Sales ………………………………………………………………..
Cost of Installment Sales ………………………………………………..
Deferred Gross Profit, 20x6 ……………………………………………..
500,000
Deferred Gross Profit, 20x6 ……………………………………………………
Deferred Gross Profit, 20x5 ……………………………………………………
Deferred Gross Profit, 20x4 ……………………………………………………
Realized Gross Profit on Installment Sales… …………………………
157,500
84,000
16,650
Income Summary ………………………………………………………………
Shipment on Installment Sales ………………………………………………
Merchandise Inv, January 1, 20x6 …………………………………….
Purchases ………………………………………………………………….
Repossessed Merchandise ……………………………………………..
185,000
310,000
Merchandise Inv, December 31, 20x6……..……………………………….
Income Summary ………………………………………………………..
35,000
Sales ……………………………………………………………………………....
Income Summary …………………………………………………………
192,000
Realized Gross Profit on Installment Sales…………………………………..
Income Summary ………………………………………………………..
258,350
141,350
P 257,000
310,000
190,000
258,350
30,000
455,000
10,000
35,000
192,000
258,350
Income Summary ………………………………………………………………
Loss on Repossession …………………………………………………….
3,500
Income Summary ………………………………………………………………
Operating Expenses ……………………………………………………..
300,000
Retained Earnings ………………………………………………………………
Income Summary ………………………………………………………….
3,150
3,500
300,000
3,150
Problem XIII
1.
Deferred gross profit – 20x4……….…………………………………….
8,407.00
Deferred gross profit – 20x5……….……………………………………. 93,438.80
Deferred gross profit – 20x6……….……………………………………. 71,006.70
Realized Gross Profit on Installment Sales (20x4 – 20x6)…..
172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%
20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34%
20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37%
Calculation of collections in 20x6:
20x4: Beginning balance
P 24,020
20x5: P344,460 (beginning balance) – P67,440 (ending balance) –
P2,200 (write-offs on default)
274,820
20x6: P602,000 (sales) – P410,090 (ending balance)
191,910
Calculation of realized gross profit:
20x4: 35% x P24,020
20x5: 34% x P274,820
20x6; 37% x P191,910
Total
P
8,407.00
93,438.80
71,006.70
P172,852.50
2. Deferred gross profit 20x5………………………………………………………
Inventory of Repossessed Merchandise……………………………….
748.00
Loss on repossession……………………………………………………………..
Inventory of repossessed merchandise………………………………..
381.00
To reduce by 20x5 deferred gross profit related to defaulted contract and requiring
cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date); inventory
now reported at P2,200 (balance of installment contract), less P748 or P1,452.
To reduce inventory to “market” as follows: to realize a gross profit of 37% on a resale
estimated at P1,700, the repossessed merchandise should be reported at a value of
63% of P1,700, or P1,071; the inventory then requires a further write-down of P381
(P1,452 – P1,071)
748.00
381.00
Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on
sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit
margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248
(P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation.
Recording the goods at resale value reduced by the company’s usual profit margin on sales is
recommended, for such practice will charge the next period with no more than the utility of the
goods carried forward.
Problem XIV – HH Instruments
1.
Installment Contracts Receivable …………………………………….
Merchandise Inventory (Piano) ………………………………
Deferred Gross Profit on Installment Sales …………………
1,600.00
Cash ………………………………………………………..........................
Installment Contracts Receivable ……………………………
160.00
Cash …………………………………………………………........................
Interest Income ……………………………………………………
Installment Contracts Receivable …………………………….
160.00
Cash ……………………………………………………………......................
Interest Income …………………………………………………….
Installment Contracts Receivable ………………………………
160.00
3.
Deferred Gross Profit on Installment of Sales …………………………..
Realized Gross Profit on Installment of Sales …………………
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
225.45
4.
Merchandise Inventory (piano) …………………………………………... 560.00
Deferred Gross Profit on Installment of Sales ……………………........... 374.55
Loss on Repossessions ……………………………………………………….
64.36
Installment Contracts Receivable ………………………………
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
2.
Problem XV – Big Bear
20x4:
Installment receivables
Inventory
Deferred gross profit
Cash
20x5:
Cash
Installment receivables
Installment receivables
Deferred gross profit
Realized gross profit
20x6:
Cash
Installment receivables
250,000
80,000
120,000
50,000
50,000
150,000
100,000
80,000
120,000
50,000
50,000
1,000.00
600.00
160.00
14.40
145.60
11.47
148.53
225.45
998.81
Installment receivables
Inventory
Deferred gross profit
300,000
Cash
135,000
Installment receivables
Deferred gross profit
Realized gross profit
40,500
210,000
90,000
135,000
40,500
Gross profit deferred at sale = 30% x P300,000 = P90,000.
Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XVI – Tappan Industrial
(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PV n = R(PVAF n/i ) Table IV
PV n = P187,500 x 4.3553 n = 6, i = 10%
PV n = P816,619 (rounded)
Gross profit on sale:
Sales
Cost of sales
Gross profit
Interest revenue--4 months: P816,619 x 10% x 4/12 =
Total income for 20x5 = P179,119 + P27,221 =
(2) No reasonable assurance – assume the use of installment sales method
Installment sale: Gross profit (P179,119/P816,619) =
Gross profit earned in 20x5 (P0 x 22%)
Interest revenue
Total income for 20x5
Multiple Choice Problems
1. b –
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000
2. d
P816,619
637,500
P179,119
_ 27,221
P206,340
22% rounded
P
0
27,221
P 27,221
P390,000
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
20x5 sales: P50,000 x 25%
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
Realized Gross Profit on Sales in 20x5
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
Realized Gross Profit in 20x5 for 20x4 sales
Divided by: Collections in 20x5 for 20x4 sales
Gross Profit % for 20x4 sales
2,200
12,500
10,575
P 25,275
P 10,500
5,000
P 5,500
P 25,000
22%
3. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P
20x4 Sales: P180,000 x 28/128
Realized Gross Profit on Installment Sales
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25
Less: Collections in 20x3
Collections in 20x4
Unrecovered Cost, 12/31/20x4
48,000
39,375
P 87,375
P384,000
140,000
240,000
P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is
recovered through cash receipts. All cash receipts, both interest and principal portions, are applied
first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all
costs have been recovered, the recognized revenue after the cost recovery represents income
(interest and realized gross profit). This method is used only when the circumstances surrounding a
sale are so uncertain that earlier recognition is impossible.
4. a
P0.
5. c
6. e, 20x6 – 0; 20x7 - 0
Unrecovered costs,1/1/20x4
Less: Collections
1/1//20x4
Add: Sales on account
Total
Less: 1/1/20x5
Collections in 20x4
Unrecovered costs,1/1/20x5
1/1//20x5
Add: Sales on account
Total
Less: 1/1/20x6
Collections in 20x5
Unrecovered costs,1/1/20x6
1/1//20x6
Add: Sales on account
Total
Less: 1/1/20x7
Collections in 20x6
Unrecovered costs,1/1/20x7
1/1//20x7
Add: Sales on account
Total
Less: 1/1/20x8
Collections in 20x7
Unrecovered costs,1/1/20x8
7. b
20x4: P150,000 – (P568,620 x 10%) = P93,138.
20x5: (P568,620 – P93,138) x 10% = P47,548.
110,000
0
15,000
15,000
10,500
10,500
30,000
40,500
25,500
25,500
60,000
85,500
40,500
40,500
24,000
64,500
70,000
__4,500
105,500
15,000
90,500
45,000
45,500
____-045,500
8. a – refer to No. 3 for discussion.
Cost, January 1, 20x4
Less: Collections including interest – 20x4
Unrecovered Cost, December 31, 20x4
9. c
P
P
60,000
32,170
27,830
(P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3%
(P3,600,000 × .20) + [(3,600,000 × .80) × 4/12)] = P1,680,000
P1,680,000 × 33 1/3% = P560,000.
10. b [(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000.
11. b – refer to No. 3 discussion.
Cost, January 1, 20x4…………………………………………………………….P 500,000
Less: Collections including interest – 20x4……………………….P241,269
482,538
Collections including interest – 20x5……………………… 241,269
Unrecovered Cost, December 31, 20x5……………………………………….P 17,462
12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
13. c
P300,000 + P50,000 = P350,000
P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 – P100,000) x 30% = P60,000.
14. c
P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 – (P288,000 ×.4) = P364,800.
15. d – [P225,000 + (P120,000/40%)]
16. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000.
17. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30%
P 400,000
1,100,000
20x5 Sales: P440,000/ 40%
P 1,500,000
18. c
Sale: Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
Deferred gross profit
Realized gross profit
Balance Sheet:
Installment receivables (4,500,000 – 500,000)
Deferred gross profit (900,000 – 100,000)
Installment receivables (net)
4,500,000
500,000
100,000
3,600,000
900,000
500,000
100,000
P 4,000,000
800,000
P 3,200,000
19. b
12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000]
2,000,000
Installment receivables
2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)]
400,000
Realized gross profit
400,000
Balance sheet:
Deferred gross profit: P800,000
400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
P450,000)/P900,000 = 50%
22. a Gross profit % = (P900,000
20x4: 50% x P300,000 = P150,000
23. c
20x4 sales: Gross profit % = (P900,000
P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000
P900,000)/P1,500,000 = 40%
40% x P400,000 received in 2010 = P160,000
Total: P150,000 + P160,000 = P310,000
24. c
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 – P150,000 (x4 collections)
- P150,000 (x5 collections) =
Net installment receivable for 20x4 sales
=
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)=
Deferred gross profit
= P600,000 – P200,000 (x5 collections) =
Net installment receivable for 20x5
=
Total
=
25. a - Costs not yet recovered.
26. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit – 20x5
P 30,000
(20,000)
P 10,000
15,000
P 5,000
27. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
( 20,000)
( 10,000)
0
The entire P20,000 payment received in 20x6 is recognized as gross profit.
P 300,000
150,000
P 150,000
P1,000,000
400,000
P 600,000
P 750,000
28. d
Sale:
Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
55,000
20,000
Balance Sheet:
Installment receivables P55,000 – 20,000
Deferred gross profit
Installment receivables (net)
29. a
Installment receivables
Inventory
Deferred gross profit
55,000
2008:
Cash
20,000
Cash
2009:
Installment receivables
Deferred gross profit
Realized gross profit
20,000
P 35,000
( 25,000)
P 10,000
Sale:
Installment receivables
30,000
25,000
15,000
5,000
Balance Sheet:
Installment receivables
Deferred gross profit
Installment receivables (net)
30,000
25,000
20,000
15,000
5,000
P 20,000
( 20,000)
P
0
30. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should be applied.
Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553)
P816,619
Cost of sales
637,500
Gross profit (realized)
P179,119
31. c
Total Income for 20x4:
Gross profit (realized) – No. 51
Interest revenue—4 months: P816,619 x 10% x 4/12..
Total income for 20x4
32. b
Total Income for 20x5:
Gross profit (realized) – already recognized in 20x4
Interest revenue – 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
Total Income for 20x5
*Schedule of Discount Amortization/Interest Income computation:
P179,119
_ 27,221
P206,340
P 54,441
23,693
P
0
78,134
P 78,134
Year
1
2
(1)
Face
Amount
of Note1
P1,125,000
937,500
(2)
Unamortized
Discount
P308,3813
226,7194
(3)
Net
Amount
(1) – (2)
P 816,6192
710,781
(4)
Discount
Amortization
10% × (3)
81,6625
71,078
1 P187,500
x 6 years = P1,125,000; every year P187,500 should be deducted on the previous balance.
The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3 P1,125,000 – P816,619
4 (2) – (4)
5 Discount amortization give rise to recognition of interest revenue/income.
2
33. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method
should be applied. Also, if the there is high degree of uncertainty as to collectibility, the cost
recovery method may be used.
Installment sale: Gross profit (P179,119/P816,619)
22% (rounded)
Gross profit earned in 20x4 (P0* x 22%)
* no collections in 20x4.
34. a
Total Income for 20x4:
Gross profit earned in 20x4 (P0* x 22%)
Interest revenue (refer to No. 52
Total income for 20x4.
35. d
Collections in 20x5 (August 31, 20x5)
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
Collection as to principal
x: Gross Profit % (refer to No. 54)
Gross profit realized in 20x5
Add: Interest revenue/income for 20x5 (refer to No. 53)
Total Income for 20x5
36. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
37. a (P800,000 x .25) – P90,000 = P110,000,
38. d
P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
39. a
(P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
40. d
(P1,200,000 × .30) – P120,000 = P240,000.
41. a
P1,050,000 × .30 = P315,000
P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000.
42. b
P24,000 – P7,200 = P16,800
P
0
P
0
27,221
P 27,221
P 187,500
81,662
P 105,838
22%
P 23,284
78,134
P 101,418
P16,800 – P13,500 = P3,300 loss.
43. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.
44. d P8,400 – P5,880 = P2,520
(P3,000 – P300) – P2,520 = P180 gain.
45. d
20x4: P24,000 – P0 = P24,000 collections x 39%P
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42%
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40%
Realized gross profit on installment sales in 20x6
46. b
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
47. a
48. c
20x5 Sales
P 4,500
P10,000
50%
5,800
P (1,300)
9,360
96,600
62,000
P167,960
P 5,000
60%
P
(1) Gain or Loss on repossession:
Estimated selling price
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance – 20x3
Less: DGP – x3 (P2,200 x34%)
Loss on repossession
3,000
500
P( 800)
P 1,700
629
P 1,071
P 2,200
748
(2) Realized gross profit on installment sales:
20x2 Sales: (P24,020 – P 0) x 35%
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34%
20x4 Sales: (P602,000 – P410,090) x 37%
Realized gross profit on installment sales
1,452
P( 381)
P
8,407.0
93,438.8
71,006.7
P 172,852.5
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
20x4 Sales: (P410,090 x 37%)
49. d*
Resale Value
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500
Market Value of Repossessed Merchandise
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000)
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000
Loss on repossession
Net
20x6 Sales
P 3,500
22,929.6
151,733.3
P174,662.9
P 8,500
3,145
P 5,355
P 11,000
___3,740
__7,260
P( 1,905)
Entry made:
Inventory of RM*
IAR-20x5
11,000
Correct Entry (Should be):
Inventory of RM (at MV)
DGP-20x5
Loss on repossession
IAR-20x5
5,355
3,740
1,905
Correcting Entry:
DGP-20x5
Loss on repossession
Inventory of RM
3,740
1,905
50. c
Installment Sales
Less: Over-allowance:
Trade-in allowance
Less: MV of Trade-in Merchandise:
Estimated Resale Price
Less: Normal profit (25% x P1,400,000)
Reconditioning costs
Adjusted Installment Sales
Less: Cost of I/S
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections –Trade-in merchandise (at MV)
RGP on I/S in 20x4
51. c
11,000
11,000
5,645**
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000
Trade-in allowance
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs
Less: Reconditioning costs
Normal profit (15% x P36,000)
Over-allowance
Installment sales
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of Installment Sales
Gross profit
Gross profit rate: P21,600/P108,000
900,000
600,000
P 3,000,000
2,500,000
P 500,000
16 2/3%
P 900,000
P 150,000
P43,200
P36,000
1,800
5,400 28,800
P 14,400
P122,400
14,400
P108,000
86,400
P 21,600
20%
Realized gross profit:
Down payment
Trade-in (at market value)
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos.
Total collections in 2008
x: Gross profit rate
Realized gross profit
P 7,200
28,800
21,600
P 57,600
20%
P 11,520
52. d
(Note: For financial accounting purposes, the installment-sales method is not used, and the full gross
profit is recognized in the year of sale, because collection of the receivable is reasonably assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales
Cost of Sales
Gross Profit
Interest Revenue (Schedule I)
Income before Income Taxes
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales)
Payment made on January 1, 20x3
Balance outstanding at 12/31/x3
Interest rate
Interest Revenue
P4,584,000
3,825,000
759,000
328,320
P1,087,320
P4,584,000
936,000
3,648,000
9%
P 328,320
Quiz - VII
1. P920,000
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000
P920,000
2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000
3. P1,600– assume the use of installment sales method. It should be noted that if the collectability is
highly uncertain or extremely uncertain, the use of cost recovery method is preferable.
4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all costs have been
recovered.
20x5
P45,000 x 63% = P28,350
Cost of sale
P28,350 - P24,000 = P4,350
No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 =
P14,650
Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400
Cost of sale
P40,000 - P35,400 =
4,600
Gross profit recognized
P19,250
Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
Relating to 20x7 sales:
P85,000 x 60% = P51,000
P53,000 - P51,000 = ..........
P 2,000
17,000
2,000
Cost of sale
Gross profit
recognized
Recognized in 20x7
P21,000
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8.
9.
P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
P 128,000
Installment Accounts Receivable, end of 20x4
x: Gross profit rate (66 2/3 / 166 2/3)
Deferred Gross Profit, end of 20x4
10. P25,168, determined as follows:
Gross profit percentages:
20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%
To deferred gross profit:
20x3: P160,000 x P136,000 =
20x4: P184,000 x P158,240 =
Gross profit realized:
0.15 x P40,000 =
0.15 x P89,600 =
0.14 x P36,800 =
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168
P24,000
25,760
P49,760
P 6,000
13,440
5,152
P24,592
11. P 0 – all profit recognized in 20x5
12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450
P 320,000
_____40%
P 128,000
16. P50 gain
Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable……………………..
750
Gain on repossession……………………………………
50
17. 0
Unrecovered costs,1/1/20x4
Less: Collections
Unrecovered costs,1/1/20x5
Less: Collections
Profit – 20x5
Profit – 20x5
18. P10 – refer to No. 17
19. P30 –refer to No. 17
20. Zero
Unrecovered costs – 20x4
Less: Collections – 20x4
Unrecovered costs, 12/31/20x4
Additional costs – 20x5
Total costs
Less: Collections – 20x5
Unrecovered costs, 12/31/20x5
Additional costs – 20x6
Total costs
Less: Collections – 20x6
Unrecovered costs, 12/31/20x6
Additional costs – 20x7
Total costs
Less: Collections – 20x7
Profit – 20x7
120,000
______0
120,000
_20,000
140,000
80,000
60,000
20,000
80,000
40,000
40,000
10,000
50,000
100,000
50,000
Unrecovered costs – Cost of installment sales for 20x5 installment sales
Less: Collections in 20x5 for 20x5 installment sales
Unrecovered costs, 12/31/20x5
Less: Collections in 20x6 for 20x5 installment sales (balancing figure)
Realized GP on I/S in 20x6 for 20x5 sales
56,050
_22,800
33,250
_43,700
*10,450
21. P50,000 profit – refer to No. 20
22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)
24. P43,700
*
100
70
30
40
10
30
Realized GP on I/S in 20x6
Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is
already recovered in 20x5 equivalent to collection
Realized GP on I/S in 20x6 for 20x5 installment sales
__5,600
*10,450
Unrecovered costs – Cost of installment sales for 20x4 (No. 23)
Less: Collections in 20x4 for 20x4 installment sales
Unrecovered costs, 12/31/20x4
31,000
_22,800
8,200
25. Zero – costs is not yet fully recovered, the profit should be recognized
26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment sales
Less: Collections in 20x4 for 20x4 installment sales
Unrecovered costs, 12/31/20x4
Less: Collections in 20x5 for 20x4 installment sales
16,050
31,000
_25,600
5,400
46,400
Realized GP on I/S in 20x5 for 20x4 installment sales
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs – Cost of installment sales for 20x5 installment
Sales
Less: Collections in 20x5 for 20x5 installment sales
Unrecovered costs, 12/31/20x4
Realized GP on I/S in 20x5
41,000
56,050
22,800
33,250
____-041,000
27. P 45,000
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value
= P75,000
Repossessed inventory
P 75,000
Deferred gross profit
P 80,000
Loss on repossession (plug)
P 45,000
Installment receivable
28. Zero
P450,000 cost
P 200,000
P300,000 collections = P150,000 unrecovered costs
29. P300,000
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of
gross profit recognized in 20x5, leaving P300,000 recognized in 20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of cost
recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of gross
profit recognized in 20x6.
Total: P300,000 + P0 = P300,000
30. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) =
Net installment receivable for 20x4 sales
=
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)=
Deferred gross profit
= P600,000 – P0 (all x5 collections to
cost recovery) =
Net installment receivable for 20x5
=
Total
=
31. 24%.
Determined from the repossession entry:
Deferred gross profit
Installment accounts receivable
P2,400
———— = 24%
P10,000
P 300,000
P
300,000
0
P1,000,000
P 600,000
P 400,000
P 400,000
32. 35%
Installment sales
Cost of sales
Gross profit
P120,000
78,000
P 42,000
Gross profit
P42,000
————- = 35% gross profit rate
P120,000
Installment sales
33.
a. 20x4 Deferred gross profit balance
Gross profit rate
Beginning accounts receivable
Beginning accounts receivable
Ending accounts receivable
Cash collected
P 12,000
÷ 25%
P 48,000
P 48,000
(20,000)
P 28,000
b. 20x5 Deferred gross profit balance
Gross profit rate
Beginning accounts receivable*
Beginning accounts receivable*
Ending accounts receivable*
Cash collected
P 26,400
÷ 24%
P110,000
P110,000
(50,000)
P 60,000
c. 20x6 Installment sales—20x6
Accounts receivable—20x6
Cash collected
P120,000
(90,000)
P 30,000
34. P31,900
Total realized gross profit in 20x6
From 20x4
P28,000 × 25% =
20x5
P60,000 × 24% =
20x6
P30,000 × 35% =
P 7,000
14,400
10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.
35. 20x4 (2010), P33,750; 20x5 (2011), P95,250
Gross profit realized in 20x4 (2010):
[(P300,000  P165,000)/P300,000] x P75,000 =
Installment sales =
Gross profit realized in 20x5 (2011):
[(P300,000  P165,000)/P300,000] x P105,000 =
From 20x4 sales =
From 20x5 sales =
[(P450,000  P270,000)/P450,000] x P120,000 =
P33,750
P47,250
48,000
P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250
Sales
Cost of sales
Gross profit
Gross profit realized on installment sales
Total gross profit
37. 20x4 (2010), P148,750; 20x5 (2011), P275,250
.
Installment accounts receivable
Less: Deferred gross profit
Net of deferred gross profit
Theories
1.
False
True
2.
False
3.
True
4.
True
5.
30.
31.
32.
33.
34.
60.
61.
62.
63.
64.
c
b
b
b
c
C
B
b
c
d
6.
7.
8.
9.
10.
True
False
True
False
True
11.
12.
13.
14.
15.
35.
b
40.
36.
37.
38.
39.
d
41.
42.
43.
44.
65.
b
b
d
66.
67.
68.
69.
d
e
c
d
c
True
False
False
True
True
a
e
b
b
d
16.
True
True
False
False
True
45.
b
c
c
17.
18.
19.
20.
46.
47.
48.
49.
c
d
20x4
(2010)
P450,000
335,000
P115,000
33,750
P148,750
20x5
(2011
P450,000
270,000
P180,000
95,250
P275,250
20x4
(2010)
P225,000
101,250
P123,750
20x5
(2011
P450,000
186,000
P264,000
21.
True
True
True
True
True
26.
27.
28.
29.
True
True
False
True
50.
d
c
b
55.
56.
57.
58.
59.
d
b
d
22.
23.
24.
25.
51.
52.
53.
54.
a
b
c
c
Chapter 8
Problem I
1. Input Measure - Percentage of Completion Method (Cost to Cost Method)
2008:
Contract price
P 1,800,000
Actual costs to date
P 450,000
Estimated costs to complete
1,200,000
Total estimated project costs
1,650,000
Estimated total gross profit
150,000
Percentage of completion:
P450,000 / P,1650,000
27.27%
Gross profit recognized
P 40,905
2009:
Contract price
Total cost
Total gross profit
Recognized in 2008
Recognized in 2009
P 1,800,000
Costs incurred:
2008
2009
2. Input Measure - Cost Recovery Method
2008: (all costs not yet recovered)
2009:
Contract price
Costs incurred:
Total cost
Total gross profit
P 450,00
1,100,000
1,550,000
250,000
40,905
P 209,095
P -0-
2008
2009
P 450,000
1,100,000
1,800,00
1,550,000
P 250,000
Problem II
1. Input Measure - Percentage of Completion Method (Cost to cost Method)
Years
Gross Profit (or Loss)
Supporting computations
recognized
2008
P 2 million
(P108 – 90) x (P30/P90) = P6 million
2009
( P18 million)
Total loss is (P108 –120) = (P12 million)
To date, P6 million was recorded:
therefore, (P12 million) – P6 million =
(P18 million) in 2009
2010
P 10 million
Total loss is P 108 – 110) = (P2 million)
To date, (P 12 million was recorded:
therefore, ( P2 million) – (P12 million)
= P10 million in 2010
2. Input Measure - Cost Recovery Method
Years
Gross Profit (or Loss)
2008
P -02009
2010
(P 12 million)
P 10 million
Supporting computations
( P108 – 90) = P18 anticipated gross
profit, so no need to recognized a
gross loss
Total loss is ( P108 – 120) = (12 million)
Total loss is (P108- 110) – ( P2 million)
To date, ( P12 million was recorded:
therefore, ( P2 million) – ( P12 million)
= P10 million in 2010
Problem III
1. Journal Entries
a. Input Measure – Percentage of completion – (cost-to-cost method)
The following analysis is to determine the percentage of completion:
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date (1)…..…
Add: Estimated costs to complete…..
Total estimated costs (3)……..…………
Estimated gross profit……………………
Percentage of completion (1) / (3)
20x3
20x4
20x5
P528,000
_______P528,000
P 126,048
_______P126,048
_358,752
P484,800
P 43,200
26%
P528,000
__12,000
P540,000
*P244,032
_126,048
*P370,080
_121,920
P492,000
P 48,000
**74%
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
100%
* including the P7,200 additional costs in 20x4.
** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for
the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Revenue (P528,000 x 26%)
Costs/Expenses (P484,800 x 26%)
Gross Profit (P43,200 x 26%)
To date
P 137,280
126,048
P 11,232
Recognized in
prior years
-
Recognized in
current year
P 137,280
126,048
P 11,232
20x4
Revenue (P540,000 x 74%)
Costs/Expenses (P492,000 x 74%)
Gross Profit (P48,000 x 74%)
To date
P 399,600
_364,080
P 35,520
Recognized in
prior years
P 137,280
_126,048
P 11,232
Recognized in
current year
P 262,320
238,032
P 24,288
20x5
Revenue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
To date
P 540,000
_492,000
P 48,000
Recognized in
prior years
P 399,600
_364,080
P 35,520
Recognized in
current year
P 140,400
_127,920
P 12,480
Alternatively, the gross profit recognized each year may also be computed as follows:
Contract price:
Initial amount of contract………….......
20x3
P528,000
20x4
P528,000
20x5
P528,000
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date (1)…..…….
Add: Estimated costs to complete………
Total estimated costs (3)……..…………….
Estimated gross profit………………………
Percentage of completion (1) / (3)……...
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year -% of completion
Gross profit in current year –cost recovery method
_______P528,000
P126,048
_______P126,048
_358,752
P484,800
P 43,200
____26%
P 11,232
_______P 11,232
P
0
Following are the entries for the years 20x3 to 20x5:
Percentage of Completion Method
1. To record costs incurred:
Construction In Progress*………......
Materials Inventory…………………..
Cash, payables, etc……………..
20x3
126,048
144,000
3. To record collections:
Cash………………………………….....
Accounts receivable……………
120,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Revenue from Construction......
20x4
126,048
2. To record progress billings:
Accounts receivable………………..
Progress billings*.………………….
126,048
11,232
__12,000
P540,000
P240,032
_126,048
P370,080
_121,920
P492,000
P 48,000
____74%
P 35,520
___11,232
P 24,288
P
0
144,000
120,000
137,280
232,032
6,000
240,000
228,000
238,032
24,288
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date……....…
Add: Estimated costs to complete…..
Total estimated costs ….……..…………
20x3
P528,000
_______P528,000
P126,048
_______P126,048
____ _?
P
?
20x5
127,920
244,032
240,000
228,000
262,320
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
b. Input Measure – Cost Recovery Method
The following table shows the data needed for further analysis:
12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__35,520
P 12,480
P 48,000
156,000
192,000
127,920
12,480
540,000
20x4
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
6,000
121,920
156,000
192,000
140,400
540,000
20x5
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Revenue*
Costs/Expenses
Gross Profit
* equivalent to costs incurred
To date
P 126,048
126,048
P
0
Recognized in
prior years
-
Recognized in
current year
P 126,048
126,048
P
0
20x4
Revenue*
Costs/Expenses
Gross Profit
* equivalent to costs incurred
To date
P 364,080
_364,080
P
0
Recognized in
prior years
P 126,048
126,048
P
0
Recognized in
current year
P 238,032
238,032
P
0
To date
Recognized in
prior years
Recognized in
current year
20x5
Revenue (P540,000 x 100%)
P 540,000
Costs/Expenses (P492,000 x 100%)
P 364,080
_492,000
Gross Profit (P48,000 x 100%)
P 48,000
P 175,200
364,080
127,920
0
P 48,000
P
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date ……...…….
Add: Estimated costs to complete………
Total estimated costs …….…..…………….
Estimated gross profit……………………….
Percentage of completion………………..
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year………………...
P528,000
_______P528,000
P 126,048
_______P 126,048
____ _?
P
?
P
0
_ -___
P
0
_______P
0
Following are the entries for the years 20x3 to 20x5:
1. To record costs incurred:
Construction In Progress*………......
Materials Inventory…………………..
Cash, payables, etc……………..
20x3
126,048
126,048
2. To record progress billings:
Accounts receivable………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receivable……………
120,000
4. To recognize Revenue, Costs
144,000
120,000
20x4
20x5
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
P
0
_ -___
P
0
_______P
0
P528,000
12,000
P540,000
P 121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__
0
P 48,000
20x4
238,032
6,000
240,000
228,000
20x5
127,920
244,032
240,000
228,000
156,000
192,000
6,000
121,920
156,000
192,000
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Revenue from Construction......
126,480
238,032
126,480
238,032
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
2. Due from/Due to Customers
a. Input Measure - Percentage of Completion Method
Current Asset:
Accounts receivable……………………….
Other receivables:
Construction In Progress…………………
Less: Progress billings…………………….
Gross amount due from customers…...
Raw materials Inventory……………………
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
Construction In Progress
20x3
P 24,000
127,920
48,000
540,000
20x4
P 36,000
P
20x5
-
P399,600
_384,000
P 15,600
P 6,000
P144,000
_137,280
P 6,720
Progress Billings
20x3 CI 126,048
Pr 11,232
144,000 20x3
end of x3 137,280
20x4 CI 238,032
Pr
11,232
144,000 end of x3
240,000 20x4
end of x4 399,600
20x5 CI 127,920
Pr
12,480
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
b. Input Measure – Cost Recovery Method
Current Asset:
Accounts receivable……………………….
Raw materials Inventory……………………
20x3
P 24,000
20x4
P 36,000
P 6,000
P
20x5
-
175,920
540,000
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
Construction In Progress
P 137,280
_144,000
P 6,720
P384,000
_364,080
P 19,920
Progress Billings
20x3 CI 126,048
Pr
0
144,000 20x3
end of x3 126,048
20x4 CI 238,032
Pr
0
144,000 end of x3
240,000 20x4
end of x4 364,080
20x5 CI 127,920
Pr
48,000
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
3. Gross Profit
a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed
computation)
Revenue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 137,280
_126,048
P 11,232
20x4
P 262,320
_238,032
P 24,288
20x5
P 140,400
_127,920
P 12,480
b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
Revenue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 126,048
_126,048
P
0
20x4
P 238,032
_238,032
P
0
20x5
P 175,920
_127,920
P 48,000
Problem IV
1. Anticipated/Gross Loss
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Contract price
Actual cost to date
Estimated costs to complete
Total estimated project costs
Estimated loss, recognized in 2008
P1,500,000
1,200,000
P2,500,000
2,700,000
P (200,000)
2009:
Contract price
Costs incurred:
Total cost
Total loss
Recognized in 2008
Recognized in 2009
In 2008
In 2008
Loss in 20x4
Loss in 20x5
P1,500,000
1,300,000
2,800,000
P (300,000)
(200,000)
P (100,000)
P( 200,000)
P (100,000)
2. Journal Entries
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Construction in progress
Various credits
1,500,000
Accounts receivable
Billings on construction contract
1,200,000
Cash
Accounts receivable
1,000,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts*
2009:
Construction in progress
Various credits
1,588,889
Accounts receivable
Billings on construction contract
1,300,000
Cash
Accounts receivable
1,500,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts**
1,211,111
Billings on construction contract
Construction in progress
2,500,000
*P2,500,000
** P2,500,000
P 2,500,000
(P1,500,000/P2,700,000)
1,388,889
1,300,000
1,500,000
1,200,000
1,000,000
200,000
1,388,889
1,300,000
1,300,000
1,500,000
100,000
1,111,111
2,500,000
a. Input
Measure –
Cost
Recovery
Method
Problem V
Item to compute
Total revenue recognized during 2009 (w):
CIP contains cost + gross profit = revenue, so w = P50
Gross profit recognized during 2009 (x): P50 – P35 = P15
Billings on construction (y) : P14 + P 46 = P60
Net billings in excess of construction in progress (z): Billings of P60 – CIP of
P50
Calculate the percentage of PAC that was completed during 2009:
50/150 = 33.33%
Problem VI
Item to compute
Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R)
Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22
gross pofit)
At 12/31/2009, the estimated remaining costs to complete Cincy One
(44/{44 + x})(300 – {44 + x}) = 22; x = 156
The percentage of Cincy One that wa completed during 2009 100 x (44/
{44 + 156})
Problem VII
1.
Progress billings on construction contract
Less accounts receivable
Cash collected in 20x4
2.
Answer
P50 million
P 15 million
P60million
P10 million
333.33%
Answer
P65 million
P44 million
P156 million
22%
P562,000
150,500
P411,500
Gross profit from construction contract + Construction in progress = Revenue for 20x4
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12% Percentage completed in 20x4
P301,000/.12 = P2,508,333 Estimated income on construction contract
Problem VIII
1. Percentage of Completion Method (Cost-to-cost Approach)
20x4
Contract price ...................
P250,000
Current year costs ...............
110,000
Costs to date ....................
110,000
Estimated cost to complete .......
100,000
Estimated total cost .............
210,000
Estimated total gross profit .....
40,000
Percent complete .................
52%
Revenue to date ..................
P130,000
20x4:
Revenue
Costs (110/210 x 210)
Gross profit
To Date
at Dec. 31
P130,000
110,000
P 20,000
20x5
P250,000
120,000
230,000
20,000
245,000
5,000
94%
P230,000
20x6
P250,000
15,000
245,000
0
240,000
5,000
100%
P250,000
Previous
Years
Current
Year
P130,000
110,000
P 20,000
20x5:
Revenue
Costs (230/245 x 245)
Gross profit (loss)
P235,000
230,000
P 5,000
P130,000
110,000
P 20,000
P105,000
120,000
P(15,000)
20x6:
Revenue
Costs
Gross profit
P250,000
245,000
P 5,000
P235,000
230,000
P 5,000
P 15,000
15,000
P
0
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
2. Cost Recovery Method
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
20x4
20x5
20x6
P130,000
P100,000
P15,000
20,000
(15,000)
0
130,000
235,000
0
125,000
5,000
250,000
(15,000)
0
0
20x4
20x5
20x6
P110,000
P120,000
P20,000
0
0
5,000
110,000
230,000
0
125,000
(15,000)
250,000
(20,000)
0
0
Problem IX
1. Percentage of Completion Method (Cost-to-cost Approach)
Contract price
Current year costs
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
Percent complete
2005
P250,000
150,000
150,000
90,000
240,000
10,000
63%
2006
P250,000
100,000
250,000
20,000
270,000
(20,000)
93%
2007
P250,000
15,000
265,000
0
265,000
(15,000)
100%
Revenue to date
P157,500
P232,500
P250,000
2005:
Revenue ............
Costs (150/240 x 240)
Gross profit ............
2006:
Revenue ............
To Date
at Dec. 31
P157,500
150,000
P 7,500
Previous
Years
Current
Year
P157,500
150,000
P 7,500
P232,500
P157,500
P 75,000
2007:
Costs ............
Gross profit (loss) ............
252,500
P(20,000)
150,000
P 7,500
102,500
P(27,500)
Revenue ............
Costs ............
Gross profit (loss) ............
P250,000
265,000
P(15,000)
P232,500
252,500
$(20,000)
P 17,500
12,500
P 5,000
20x4
20x5
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
Balance in accounts receivable
at Dec. 31 (after closing entries)
20x6
P150,000
P102,500
P12,500
7,500
(27,500)
5,000
157,500
230,000*
0
110,000
47,500
230,000
0
0
0
10,000
10,000
0
*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss
2. Cost Recovery Method
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
20x4
P150,000
0
20x5
20x6
P 80,000*
P20,000**
(20,000)
5,000
150,000
***230,000
0
110,000
40,000
230,000
0
0
0
Balance in accounts receivable
at Dec. 31 (after closing entries)
10,000
10,000
0
*P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5
** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5
***P150,000 + P100,000 – P20,000
Multiple Choice Problems
1. a
Costs incurred each year
(2.5 M + 2.0 M + 1 M* + .5 M)
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
P
P
6M
0
6M
P 18 M
Percentage of completion
6 M / 18M
Administrative cost as long as reimbursable is included in the construction costs.
Marketing costs are considered as expenses.
Depreciation of idle equipment is charged to expenses.
2. b
3. c
P7,200,000
——————————— x (P15,000,000 – P12,000,000) = P1,800,000.
P7,200,000 + $4,800,000
P1,170,000
—————- x (P3,300,000 – P1,950,000) = P810,000
P1,950,000
(P3,300,000 – P2,010,000) – P810,000 = P480,000.
4. d
Under the percentage of completion method, the Construction-In-Progress account is used for cost
incurred during the year and any realized gross profit (loss). The following T-account is prepared:
5. b
6.
c
7.
a
CI in 2004
RGP in 20x4 (?)
End of 20x4
CI in 20x5
RGP in 20x5 (?)
Construction-In-Progress
210,000
34,000
244,000
384,000
100,000
End of 20x5
728,000
P1,200,000
————— x (P7,200,000 – P4,800,000) = P600,000.
P4,800,000
P7,200,000 – P4,875,000 =P2,325,000.
Contract Price
x: Percentage-of-completion
Recognized Revenue to date
Less: Costs incurred to date
Gross Profit to date
Less: GP in prior year
Gross profit in current year
8.
a
9.
b
P3,600,000
————— x (P8,400,000 – P6,000,000) = P1,440,000.
P6,000,000
P8,400,000 – P5,600,000 = P2,800,000.
20x4
P4,800,000
_______75%
P3,600,000
P3,400,000
P 200,000
_______-0P 200,000
Items 10 and 11
No number requirement identified, if percentage-of-completion then the answer would (a)
a
[P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000
(P5,500,000 – P3,350,000) – P1,350,000 = P800,000.
10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000.
11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross profit should be
realized.
12. c
13. a
14. b
P600,000
—————————— x (P1,500,000 – P1,000,000) = P300,000
P600,000 + P400,000
(P1,500,000 – P1,050,000) – P300,000 = P150,000.
Contract Price
Less: Total Estimated Costs
Costs Incurred-1/10/x4 to 12/31/x5
Add: Estimated costs to complete
Less: Costs incurred to date
Multiplied by: % of completion
Gross Profit to date
Less: GP in prior year (given)
Gross profit in current year
P6,000,000
P3,600,000
1,200,000
20x4: Cost to date – P7,500,000 x 20%
20x5: Cost to date – P8,000,000 x 60%
Cost incurred during 20x5
4,800,000
P1,200,000
___3.6/4.8
P 900,000
___600,000
P 300,000
P1,500,000
4,800,000
P3,300,000
15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000.
16. b
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account
Less: Progress billings
Construction In Progress account (net) or Due from customers
P260,000
P 50,000
-0P 50,000
150,000
P200,000
P60,000)
__50/200
50,000
15,000
65,000
30,000
35,000
17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery
method must be used).
18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000.
19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.
20. d
21. d
Recognized gross profit (loss) to date…………..
Less: Recognized gross profit in prior years…….
Recognized gross profit each year……………..
P( 100,000)
____20,000
P (120,000)
22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000.
23. c
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Recognized gross profit (loss) to date…………..
Less: Recognized gross profit in prior years…….
Recognized gross profit each year……………..
Prior year
P7,000,000
P600,000
Current year
P7,000,000
P5,000,000
2,800,000
P7,800,000
(P 800,000)
_____100%
(P 800,000)
___600,000
(P1,400,000)
24. c
P7,440,000 × .30 = P2,232,000.
25. d
(P7,200,000 × .75) – (P7,100,000 × .30) = P3,270,000.
26. b
(P7,440,000 × .75) – (P620,000 × 8) = P620,000 debit.
27. c
P7,440,000 × .25 = P1,860,000
P7,500,000 – (P7,200,000 × .75) = P2,100,000.
28. b
(P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000.
29. c
P3,795,000 + P345,000 = P4,140,000.
30. d
P3,500,000 –P1,350,000 – P1,525,000 = P625,000.
31. b
P240,000 – P100,000 = P140,000.
32. d
P300,000 – P60,000 = P240,000
P240,000
————————— x (P2,400,000 – Total estimated cost) = P60,000
Total estimated cost
Total estimated cost = P1,920,000
P2,400,000 – P1,920,000 =P480,000.
33. c
(P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.
34. a
(P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.
P6,325,000 + P575,000 = P6,900.000.
35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zero-profit
approach) of construction accounting, revenue is recognized up to the extent of costs incurred as
long as it is probable will be recoverable.
36. b - 20x5: P12,000,000 > P11,870,000, No loss;
20x6: P12,000,000 – P12,400,000 = P400,000 loss.
37. a - Revenue recognized to the extent of costs incurred
38. c
P3,200,000 – P2,150,000 = P1,050,000.
39. c
P1,500,000 – P820,000 = P680,000.
40. a
Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 – P150,000,
loss) – P1,900,000, billings = P200,000 is classified as due from customers.
Under the US FASB, the excess of P200,00 is considered as an inventory account.
41. c
Costs of construction
Construction in progress
Revenue for long-term contracts
1,200,000
800,000
Percentage complete = P1,200,000 / (P1,200,000 +P600,000) = 2/3
Revenue recognized = 2/3
P3,000,000 = P2,000,000
Cost recognized = P1,200,000
Gross profit recognized = P2,000,000
P1,200,000 = P800,000
42. a
43. b
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due from customers)
2,000,000
P1,200,000
800,000
P2,000,000
1,500,000
P 500,000
Costs of construction
Construction in progress
Revenue for long-term contracts
600,000
400,000
Costs of construction
Revenue for long-term contracts
1,200,000
1,000,000
Total revenue P3,000,000
revenue previously recognized P2,000,000 = Revenue to
recognize this year P1,000,000.
Cost recognized = P600,000
Gross profit recognized = P1,000,000
P600,000 = P400,000
44. d
1,2000,000
Under cost recovery method, revenue should be recognized up to the extent of costs incurred.
45. b
46. d
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due to customers)
P1,200,000
0
P1,200,000
1,500,000
P( 300,000)
Costs of construction
Construction in progress
Revenue for long-term contracts
600,000
1,200,000
1,800,000
Under the cost recovery method, record equal amounts of revenue and cost until cost recovered,
and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000, so record
remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5.
47. a
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
% of Completion / Cost Recovery Method:
Construction in Progress
CI
CI
4,920,000
4,680,000
3,720,000
7,920,000
20x4
P 9,600,000
P 4,920,000
4,920,000
P 9,840,000
P(240,000)
100%
P (240,000)
_________
P (240,000)
20x5
P10,080,000
P 8,640,000
2,160,000
P 10,800,000
P (720,000)
100%
P (720,000)
(240,000)
P (480,000)
Progress Billings
240,000 loss
5,280,000
5,280,000
3,420,000
480,000 loss
due to customers
P780,000
8,700,000
Note: If there is an anticipated loss, the Construction-in-Progress for both methods will exactly be
the same in the year the loss was incurred.
48. d
Percentage of Completion:
Contract price…………………………..
Cost incurred each year……………….
Add: Cost incurred in prior year………
Costs incurred to date…………………
Add: Estimated costs to compute…….
Total estimated costs………………….
Project 6
P500,000
P375,000
_________
P375,000
________
P375,000
Project 7
P700,000
P100,000
________
P100,000
400,000
P500,000
Project 8
P250,000
P100,000
________
P100,000
100,000
P200,000
Estimated gross profit…………………
Multiply by: percentage of completion.
Recognized gross profit to date………
Less: Recognized gross profit in prior years
Recognized gross profit each year….
P125,000
100%
P125,000
_________
P125,000
P200,000
20%
P 40,000
_________
P 40,000
P 50,000
50%
P 25,000
_________
P 25,000
Project 6
P500,000*
Project 7
P100,000
Project 8
P100,000
375,000
P125,000
100,000
P
0
100,000
P
0
Cost Recovery Method of Construction Accounting:
Recognized Revenue………..………..
Less: Costs of long-term construction
contract……………………………..
Recognized gross profit each year….
* Since the contract is completed then the full amount of P500,000 contract price should be recognized as
revenue.
Percentage of Completion
Construction in Progress
Pr. 6 - Cl.
375,000 500,000 Pr. 6
Pr. 125,000
Pr. 7 – Cl. 100,000
Pr.
40,000
Pr. 8. Cl
100,000
Pr. 100,000
765,000 500,000
12/31
265,000 (d)
49. a
Cost Recovery Method of Construction
Construction in Progress
Pr. 6 - Cl.
375,000 500,000 Pr. 6
Pr.
125,000
Pr. 7 – CI
100,000
Pr. 8 – CI
100,000
700,000 500,000
12/31
200,000 (d)
Input Measures: Efforts-Expended Method - using timbers laid
Year 2
Timers laid Each Year
300
Add: Timbers laid in Prior Years
150
Timbers laid to date
450
Add: Additional support timbers to be laid
520
Total Estimated Timbers
970
Percentage-of-Completion
45/97
x: CONTRACT PRICE
P 800,000
Recognized Revenue to Date
P 371,134
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
Output Measures – Number of trail feet
Trail feet Each Year
Add: Trail fees in Prior Years
Trail feet to date
Add: Additional trail feet to be constructed
Total Estimated Trail feet
Percentage-of-Completion
x: CONTRACT PRICE
Recognized Revenue to Date
Year 2
7,500
3,000
10,500
8,200
18,700
105/187
P 800,000
P 449,198
Year 3
500
450
950
-0950
100%
P 800,000
P 800,000
371,134
P 428,866
Year 3
8,000
10,500
18,500
___-018,500
100%
P 800,000
P 800,000
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
50. b
Contract price…………………………..
Cost incurred each year……………….
Add: Cost incurred in prior year………
Costs incurred to date…………………
Add: Estimated costs to complete
Total estimated costs………………….
Estimated gross profit…………………
Multiply by: percentage of completion.
Recognized gross profit to date………
Less: Recognized gross profit in prior years
Recognized gross profit each year….
449,198
P 350,802
2006
P5,000,000
P 900,000
P 100,000
-0P 100,000
2007
P5,000,000
900,000
P2,550,000
1,700,000
P4,250,000
P 750,000
60%
P 450,000
100,000
P 350,000
2008
P5,000,000
P2,050,000
2,550,000
P4,600,000
-0P4,600,000
P 400,000
100%
P 400,000
450,000
P( 50,000)
51. d – refer to No. 50
52. c
Contract Price………………………………………………
Less: Total Estimated Costs
Cost Incurred to Date……………………………… P26,000,000
Add: Estimated Costs to Complete……………… 25,000,000
Estimated Gross Profit…………………………………….
Multiplied by: % of completion………………………….
Recognized gross profit to date………………………..
Less: RGP in prior years……………………………………
Recognized gross profit in current year………………
Construction-in-progress Account:
Costs incurred to date…………………………………..
GP in the current year……………………………………
Less: Progress billings……………………………………..
Due from customer (net)……………………………….
53. c
54. c
55. a
P60,000,000
51,000,000
P 9,000,000
30%
P 2,700,000
_________0
P 2,700,000
P 26,000,000
2,700,000
P 28,700,000
5,000,000
P 23,700,000
Contract Price
Multiplied by: Gross Profit Rate
Estimated Gross Profit of the entire contract
Multiplied by: Percentage of Completion for first year
Gross Profit realized for current year
P100,000,000
_________25%
P 25,000,000
_________50%
P 12,500,000
Contract Price
x: Mobilization Fee
Collection in 20x4
Note: Billings for 20x4 will be collected in January 20x5.
P120,000,000
10%
P 12,000,000
Mobilization Fee: 5% x P10M
P 5.0 M
Collection on Billings:
Contract price
x: Progress billings, net of 10% and 8% (50% - 10% - 8%)
Progress billings
x: Collections net of contract retention of 10%
Collections in 20x4
P 100 M
32%
P 32 M
90%
28.8 M
P 33.8 M
56. b – cost recovery method is used.
At the end of 20x4 the contractor must recognized only to the extent of recoverable contract costs
incurred (i.e., P5,000 contract revenue and P5,000 construction costs/expenses).
Quiz- VIII
1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000
P1,000,000 – P900,000 = P100,000.
2. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
3. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
4. P80,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
4,500,000
1,350,000
_2,700,000
4,050,000
450,000
1,350/4,050
150,000
____-0150,000
20x5
3,000,000
2,250,000
750,000
300,000
20x6
3,000,000
1,800,000
_600,000
2,400,000
600,000
1,800/2,400
450,000
_300,000
150,000
20x5
1,600,000
240,000
_960,000
1,200,000
400,000
240/1,200
80,000
______0
80,000
5. P20,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
1,400,000
400,000
_____-0400,000
_400,000
800,000
600,000
400/800
300,000
______0
300,000
20x6
1,400,000
400,000
400,000
800,000
200,000
1,000,000
400,000
800/1,000
320,000
300.000
20,000
6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit
7.P240,000 Profit
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
8. P102,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
4,000,000
960,000
_______0
960,000
3,200,000
800,000
960/3,200
240,000
_______0
240,000
20x5
850,000
238,000
_______0
238,000
357,000
595,000
255,000
238/595
102,000
_______0
102,000
9. P990,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date*
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
* total estimated costs x % of completion
20x5
3,000,000
450,000
20x6
3,000,000
990,000
450,000
1,440,000
2,250,000
750,000
____20%
150,000
______0
150,000
2,400,000
600,000
_____60%
360,000
150.000
210,000
10. P50,000
20x5
1,500,000
465,000
_______0
465,000
1,085,000
1,550,000
( 50,000)
100%
( 50,000)
_______0
( 50,000)
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
11. P625,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
3,500,000
1,350,000
-01,350,000
1,350,000
2,700,000
800,000
-0-0-
20x6
3,500,000
1,525,000
1,350,000
2,875,000
_______0
2,875,000
625,000
___100%
625,000
_______0
625,000
12. P550
Costs Incurred……………………………………………………………………….
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inventory account……………………
P2,750
P 400
___-0P 400
_1,600
P2,000
P 750
400/2,000
13. P1,200,000
The term “completed” should be “cost recovery”
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inventory account
P2,000,000
P 700,000
______-0P 700,000
__800,000
P1,500,000
P 500,000
________0
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inventory account
P2,000,000
P 600,000
_700,000
P1,300,000)
__800,000
P(2,100,000)
P (100,000)
________0
14. P32,000 = P47,000 – P15,000
20x5
400
150
550
700,000
_______0
700,000
600,000
_(100,000)
1,200,000
15. P782,000
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inventory account
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inventory account
Less: Progress billings (P260,000 + P210,000)
Construction In Progress account (net) – Due from
customers
20x5
P850,000
P238,000
______-0P238,000
_357,000
P595,000
P255,000
_238/595
20x6
P850,000
P319,600
_238,000
P557,600
_139,400
P697,000
P153,000
_557.6/697
238,000
102,000
340,000
319,600
_122,400
782,000
470,000
312,000
16. P312,000
17. same with no.16 – P312,000
18. (P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000.
19.P3,795,000 + P345,000 = P4,140,000.
20. P2,750,000
P1,650,000
————— × P5,000,000 = P2,750,000
P3,000,000
21.
Accounts Receivable ................................................................................ 1,650,000
Billings on Construction in Process ...........................................
1,650,000
22.
Construction Expenses .............................................................................. 1,650,000
Construction in Process ............................................................................. 1,100,000
Revenue from Long-Term Contracts ........................................
2,750,000
23. P875,000
Revenue
Costs
Total gross profit
Recognized in 20x5
Recognized in 20x6
Or
Total revenue
Recognized in 20x5
P5,000,000
3,025,000
1,975,000
(1,100,000)
P 875,000
P5,000,000
(2,750,000)
Recognized in 20x6
Costs in 20x6
Gross profit in 20x6
24.
25.
26.
20x5
20x6
20x7
2,250,000
(1,375,000)
P 875,000
Percentage-of-Completion
Gross Profit
P750,000a
P210,000b
P440,000c
aP1,500,000
————— × P2,000,000 =
P4,000,000
bP2,640,000
P750,000
————— × P1,600,000 =
P4,400,000
P960,000
Less 20x5 gross profit
20x6 gross profit
(750,000)
P210,000
cTotal
revenue
Total costs
Total gross profit
Recognized to date
20x7 gross profit
dTotal
revenue
Total costs
Total gross profit
20x5
20x6
20x7
Completed-Contract
Gross Profit
—
—
P1,400,000d
P6,000,000
4,600,000
1,400,000
(960,000)
P 440,000
P6,000,000
4,600,000
P1,400,000
27. P312,500
Revenue
= [P250,000/(P250,000 + P750,000)] 
P1,250,000
= P312,500
Gross profit = P312,500  P250,000 = P62,500
Construction in progress = P250,000 + P62,500 = P312,500
28. P125,000
(2)
Current Assets
Inventories
Construction in progress*
P1,000,000
Less: Partial billings**
(875,000)
Costs and recognized profit not
P 125,000
yet billed
*Revenue to date = (P250,000 +
P600,000)/(P250,000 + P600,000 +
P212,500)  1,250,000 = P1,000,000
Construction in progress = P250,000 +
P600,000 + P150,000 = P1,000,000
**Partial billings = P375,000 + P500,000 =
P875,000
29. P60,00
Revenue to date
Revenue from previous periods
Revenue for 20x7
Costs incurred in 20x7
Gross profit for 20x7
P1,250,000
_1,000,000
P 250,000
_ 190,000
P 60,000
THEORIES
1.
2.
3.
4.
5.
False
True
True
False
False
37.
38.
39.
40.
36.
False
True
True
False
False
41.
b
42.
43.
44.
45.
c
b
c
b
6.
7.
8.
9.
10,
False
False
False
True
False
11.
12.
13.
14.
15,
False
True
False
True
False
16.
17.
18.
19.
20.
True
False
True
False
True
21.
22.
23.
24.
25.
True
False
False
False
False
26.
27.
28.
29.
30.
True
True
False
False
True
31.
32.
33.
34.
35.
46.
a
51.
c
56.
d
61.
d
66.
c
47.
48.
49.
50.
d
52.
53.
54.
55.
b
c
b
57.
58.
59.
60.
b
62.
63.
64.
65.
b
a
c
d
67.
68.
69.
70.
b
c
c
a
a
c
c
c
a
d
C
False
False
True
False
True
Chapter 9
Problem I
1. Jollibee has substantially performed all material services, the refund period has expired, and the
collectibility of the note is reasonably assured. Jollibee recognizes revenue as follows:
Cash………..
Notes receivable…………….
Franchise revenue……………………..
240,000
600,000
840,000
2. The refund period has expired and the collectibility of the note is reasonably assured, but
Jollibee has not substantially performed all material services. Jollibee does not recognize
revenue, but instead recognizes a liability as follows:
Cash………..
Notes receivable…………….
Unearned franchise revenue……………………..
240,000
600,000
840,000
Franchisor will recognize the unearned franchise fees as revenue when it has performed all
material services, the adjusting entry to record the revenue then would be:
Unearned franchise revenue……………………...
Franchise revenue….…….
840,000
840,000
3. Jollibee has substantially performed all services and the collectibility of the note is reasonably
assured, but the refund period has not expired. Jollibee does not recognize revenue, but
instead recognizes a liability as follows:
Cash………..
Notes receivable…………….
Unearned franchise revenue……………………..
240,000
600,000
840,000
The franchisor will recognize the unearned franchise fees as revenue when the refund period
expires, the adjusting entry to record the revenue then would be:
Unearned franchise revenue……………………...
Franchise revenue….………………………………..
4.
840,000
840,000
Jollibee has substantially performed all services and the refund period has expired, but the
collectibility of the note is not reasonably assured. Jollibee recognizes revenue by the installment
or cost recovery method. If we assume that Jollibee uses the installment method, it recognizes
revenue of P240,000 as follows:
Cash………..
Notes receivable…………….
Franchise revenue……………………..
Unearned franchise revenue……………
240,000
600,000
240,000
600,000
The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of
franchise, the entry would be as follows:
Unearned franchise revenue……………
Franchise revenue……………………..
120,000
120,000
This revenue recognition may be true only in the event there is no cost of franchise at all. On the
other hand, it may be somewhat misleading since under the installment sales method; gross profit
is earned or realized thru collections.
5. The refund period has expired, but Jollibee has not substantially performed all services and
there is no basis for estimating the collectibility of the note. Jollibee does not recognize the note
as an asset. Instead, it uses a form ·of the deposit method. For example, suppose Jollibee has
developed an entirely new product whose success is uncertain and the franchisee will pay
the note from the cash flows from the sale of the product, if any. Jollibee records the initial
transaction as follows:
Cash………..
Unearned franchise revenue……………………..
240,000
240,000
The franchisor may recognize the unearned franchise fees as revenue under the accrual
method in the normal manner at the completion of the services to be performed (if
collectibility is reasonably assured), the adjusting entry to record the revenue then would be:
Unearned franchise revenue……………………...
Franchise revenue….………………………………..
240,000
240,000
Alternatively, it may recognize revenue under the installment method if it has no basis for
estimating the collectibility of the note.
6.
Now assume that Jollibee has earned only P360,000 from providing initial services, with the
balance being a down payment for continuing services. If the refund period has expired and
the collectibility of the note is reasonably assured, Jollibee recognizes revenue of P360,000 as
follows:
Cash………..
Notes receivable…………….
Franchise revenue……………………..
Unearned franchise revenue…………..
240,000
600,000
360,000
480,000
The franchisor recognizes the unearned franchise revenue of P480,000 as revenue when it
performs the continuing services, the adjusting entry to record the revenue then would be:
Unearned franchise revenue……………………...
Franchise revenue….………………………………..
480,000
480,000
In all these cases except the fifth, the franchisor accounts for the collection of interest and
principal on the note receivable in the usual manner. In the fifth situation, it does not recognize
the note and revenue until a future event occurs. In addition, the franchisor accounts for its costs
in the same way as its revenue recognition. That is, if it defers revenue, then it defers the related
cost of goods sold. Then, when it recognizes revenue, it matches the cost of goods sold against
the revenues. The franchisee accounts for its payments as an intangible asset.
Sometimes the franchisor collects the initial franchise fee far in advance of performing its
services. At other times collection of part of the initial franchise fee is deferred until the franchise
is operating successfully.
Problem II
1.
Cash .........................................
Unearned Franchise Fee .....................
2.
Cash .........................................
Note Receivable ..............................
Unearned I.I. or Discount on Note Receivable
Revenue from Franchise Fee .................
75,000
75,000
120,000
75,000
28,881
166,119
[P{75,000 + (P30,000 x 3.0373)] = P116,119
(Table IV n = 4, i = 12%)
3.
Cash .........................................
Note Receivable ..............................
Unearned I.I. or Discount on Note Receivable
Revenue from Franchise Fee .................
Unearned Franchise Fee .....................
75,000
120,000
28,881
75,000
91,119
Problem III
1. If there is a reasonable expectation that the down payment may be refunded and substantial future
services remain to be performed by Pizza, Inc., the entry should be:
Cash………..
Notes receivable…………….
Unearned interest income (or Discount on notes receivable)
Unearned franchise revenue……………………..
120,000.00
480,000.00
80,583.20
419,416,80
2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services
to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and
substantial performance has occurred, the entry should be:
Cash………..
Notes receivable…………….
Unearned interest income (or Discount on notes receivable)
Franchise revenue……………………..
3.
120,000.00
480,000.00
96,699.84
503,300.16
If the initial down payment is not refundable, represents a fair measure of the services already
provided, with a significant amount of services still to be performed by the franchisor in future
periods, and collectibility of the note is reasonably assured, the entry should be:
Cash………..
Notes receivable…………….
Unearned interest income (or Discount on notes receivable)
120,000.00
480,000.00
96,699.84
Franchise revenue……………………..
Unearned franchise revenue
120,000.00
383,300.16
4. If the initial down payment is not refundable and no future services are required by the franchisor,
but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the
entry should be:
Cash………..
Franchise revenue……………………..
120,000.00
120,000.00
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by
means of cash collection using the cost recovery method.
5.
If the initial down payment is refundable or substantial services are yet to be performed, but
collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the
entry should be:
Cash………..
Unearned franchise revenue……………………..
120,000
120,000
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by
means of cash collection using the cost recovery method.
Problem IV
1. If the down payment is refundable, and no services have been rendered at the time the
arrangement is made, and collection on the note is reasonably certain, the entry should be:
Cash………..
Notes receivable…………….
Unearned interest income (or Discount on notes receivable)
Unearned franchise revenue……………………..
120,000.00
180,000.00
37,354.50
262,645.50
2. Initial services are determined to be substantially performed, the refund period has expired and the
collection of the note is reasonably assured, the full accrual method would be used. Assume that
substantial performance of the initial services costs P52,529.1 the entry should be:
Cash………..
Notes receivable…………….
Unearned interest income (or Discount on notes receivable)
Franchise revenue……………………..
120,000.00
180,000.00
Cost of franchise revenue
Cash, etc……………
52,529.10
37,354.50
262,645.50
52,529.10
Few months after, the collectibility of the note becomes doubtful or no reasonable assurance, the
installment sales method could be used as a general rule. In addition to the entries above, following
entries would be required:
a. To set-up cost of franchise:
No entry required, already set-up previously.
b. To defer gross profit on franchise:
Franchise revenue
262,645.50
Cost of franchise revenue
Deferred gross profit on franchise
52,529.10
210,116.40
c. Adjustments to recognize gross profit on franchise:
Deferred gross profit on franchise
Realized gross profit on franchise
Franchise revenue………..
Less: Cost of franchise revenue
Gross profit………..
Gross profit rate (210,116.4/262,645.5)
Collections as to principal…….
Multiplied by: Gross profit rate…….
Realized gross profit on franchise…..
96,000.00
96,000.00
262,645.5
52,529.1
210,116.4
80%
P120,000.00
80%
P 96,000.00
Problem V
If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and the permits
on February 1, 20x5, and operations commence at that time, the following journal entries would be
appropriate:
July 1, 20x4:
Cash………..
Notes receivable…………….
Unearned franchise revenue……………………..
120,000
480,000
600,000
Deferral of revenue recognition is required when “substantial performance" of franchisor services has
not been completed. It would call for deferral of revenue recognition until evidence of service
performance was available. The best evidence, of course, would be the commencement of
operations of the franchise outlet and at this point in time, revenue is recognized.
During 20x4:
Deferred cost of franchise revenue….
Cash…………..………..
360,000
December 31, 20x4:
Interest receivable (P480,000 x 14% x 6/12)…………..
Cash…………..………..
February 1, 20x5:
Unearned franchise revenue……………………..
Franchise revenue……………………..
33,600
600,000
Cost of franchise revenue……………………..
Deferred cost of franchise revenue……………………..
360,000
360,000
33,600
600,000
360,000
Problem VI
January 1, 20x4
Cash…………..
Notes receivable…….
Reasonably Assured
1,500,000
4,500,000
No reasonable
assurance
1,500,000
4,500,000
Unearned franchise revenue…….
6,000,000
6,000,000
Receipt of initial franchise fee.
Conditions to be met:
Services
Period of refund
Collectibility
1/1/20x4 Balance
Status
December 31, 20x4
Cash…………..
Notes receivable…….
Interest income (P3,750,000 x 10%)
Cash
No
Yes
1,500,000
Liability
1,575,000
Annual collection.
Deferred cost of franchise
Cash…………………
1,800,000
To defer cost of franchise since substantial
services had not been performed.
Operating expenses
Cash…………………
120,000
To record expenses.
Adjustments:
Cost of franchise
Deferred cost of franchise
1,800,000
To recognize cost of franchise.
Unearned franchise revenue…….
Franchise revenue
:
6,000,000
Notes
No
Yes
Reasonably
assured
4,500,000
Liability
1,125,000
450,000
1,800,000
120,000
Cash
No
Yes
1,500,000
Liability
1,575,000
1,800,000
120,000
Notes
No
Yes
No
reasonable
assurance
4,500,000
Liability
1,125,500
450,000
1,800,000
120,000
1,800,000
6,000,000
To recognize franchise revenue based on the
following analysis
Conditions to be met:
Services
Period of refund
Collectibility
1/1/20x4 Balance…………………..
12/31/20x4: Collection as to principal
12/31/20x4 Balance
Status
Cash
Yes
Yes
1,500,000
1,125,000
2,625,000
Revenue
Notes
Yes
Yes
Reasonably
assured
4,500,000
(1,125,000)
2,625,000
Revenue
Adjustments (Installment sales method)
a. To set-up cost of franchise:
No entry*
b. To set-up deferred gross profit
Unearned franchise revenue
Deferred cost of franchise revenue
Deferred gross profit
6,000,000
1,800,000
4,200,000
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to
set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-6 for
alternative treatment to set-up cost of franchise.
Conditions to be met:
Services
Period of refund
Cash
Yes
Yes
Collectibility
1/1/20x4 Balance…………………..
12/31/20x4: Collection as to principal
12/31/20x4 Balance
Status
1,500,000
1,125,000
2,625,000
Revenue –
I/S Method
. To recognize realized gross profit on
franchise:
Deferred gross profit
Realized gross profit on franchise
Notes
Yes
Yes
No
reasonabe
assurance
4,500,000
(1,125,000)
2,625,000
Liability
1,837,500
1,837,500
Collections – principal x gross profit rate
P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500
2.
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)*
Less: Cost of franchise (accrual method)*
Gross profit on regular franchise
(accrual)*
Add: Gross profit on franchise (installment
sales method)
Gross profit on franchise
Less: Operating expenses
Reasonably Assured
Add: Interest income……………..
Net income…………….
No reasonable
assurance
P6,000,000
1,800,000
P
0
0
P4,200,000
P
0
-0P4,200,000
120,000
P4,080,000
450,000
P4,530,000
*1,837,500
P1,837,500
120,000
P1,717,500
450,000
P2,167,500
Problem VII
1.
January 1, 20x4
Cash…………..
Notes receivable…….
Unearned interest income*
Unearned franchise revenue…….
Receipt of initial franchise fee.
Reasonably Assured
1,440,000
3,840,000
796,896
4,483,104
No reasonable
assurance
1,440,000
3,840,000
796,896
4,483,104
Conditions to be met:
Services**
Period of refund – until date of
Opening
Collectibility
1/1/20x4 Balance
Status
Cash
No
Notes (PV)
No
Cash
No
Notes (PV)
No
No
No
Reasonably
assured
No
1,440,000
Liability
3,043,104***
Liability
1,440,000
Liability
No
No
reasonable
assurance
3,043,104***
Liability
*Unearned interest income or discount on notes receivable: P3,840,000 – P3,043,104 = P796,896.
* *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred and
subsequent direct cost of franchise should also be deferred.
***P960,000 x 3.1699 = P2,535,920
February 2, 20x4:
Deferred cost of franchise
Cash…………………
144,931.20
To defer cost of franchise since substantial
services had not been performed.
June 13, 20x4:
General expenses
Cash…………………
60,000
To record expenses.
August 8, 20x4:
Deferred cost of franchise
Cash…………………
360,000
November 2, 20x4:
Deferred cost of franchise
Cash…………………
840,000
To defer cost of franchise since substantial
services had not been performed.
To defer cost of franchise since substantial
services had not been performed.
144,931.20
60,000
360,000
840,000
144,931.20
60,000
360,000
840,000
144,931.20
60,000
360,000
840,000
November 2, 20x4:
Substantial completion of services.
December 31, 20x4:
Cash…………..
Notes receivable…………………
960,000
Annual collections.
Adjustments:
Unearned interest income
Interest income
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.
Cost of franchise
Deferred cost of franchise
To recognize cost of franchise.
304,310.40
1,344,931.20
960,000
304,310.40
1,344,931.20
960,000
304,310.40
960,000
304,310.40
Unearned franchise revenue…….
Franchise revenue
4,438,1040
4,438,1040
To recognize franchise revenue based on the
following analysis:
Conditions to be met:
Services**
Period of refund – outlet already
opened.
Collectibility
1/1/20x4 Balance
12/31/20x4:
Collection……………..... . P960,000
Less: Interest collection…
304,310.40
Collection – Principal…….P655,689.60
Status
Adjustments (Installment sales method)
a. To set-up cost of franchise:
Cost of franchise revenue…..
Deferred cost of franchise revenue
b. To set-up deferred gross profit:
Unearned franchise revenue
Cost of franchise revenue
Deferred gross profit
Cash
Yes
Notes (PV)
Yes
Yes
Yes
Reasonably
assured
4,438,104
1,440,000
655,689.60
2,095,689.60
Revenue
( 655,689.60)
2,387,414.40
Revenue
1,344,931.20
3,483,104
1,344,931.20
1,344,931.20
2,138,172.80
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to
set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-5 for
alternative treatment to set-up cost of franchise.
Conditions to be met:
Services**
Period of refund – outlet already
opened.
Collectibility
1/1/20x4 Balance
12/31/20x4:
Collection……………..... . P960,000
Less: Interest collection… 304,310.40
Collection – Principal…….P655,689.60
Status
. To recognize realized gross profit on
franchise:
Deferred gross profit
Realized gross profit on franchise
Collections – principal x gross profit rate
Cash
Yes
Notes (PV)
Yes
Yes
Yes
No
reasonable
assurance
304,104
1,440,000
655,689.60
2,095,689.60
Revenue –
I/S Method
1,466,983.20
( 655,689.60)
2,387,414.4
Liability
1,466,983.20
P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20
2.
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)*
Less: Cost of franchise (accrual method)*
Gross profit on regular franchise
(accrual)*
Add: Gross profit on franchise (installment
sales method)
Gross profit on franchise
Less: Operating expenses
No reasonable
assurance
Reasonably Assured
P 4,471,1040
P
0
0
P
0
1,344,931.20
P3,138,172.8
Add: Interest income……………..
Net income…………….
-0P3,138,172.8
60,000
P3,078,172.8
*1,466,983.20
P1,466,983.20
60,000
P1,406,983.20
304,310.40
P3,382,483.20
304,310.40
P1,771,293.60
*Note: This item represents regular franchise sales-type transaction. If the collectibility of the fee (note
receivable) is reasonably assured, the permissible method to be applied should be the accrual method.
It should be observed that in the event, there is cost of franchise and the installment sales method is
used, the concept of revenue recognition does literally apply to franchise revenue but to the
recognition of realized gross profit on franchise thru collections as to principal multiplied by gross profit
rate.
Alternatively, computation of interest and principal collections are as follows:
Date
1/03/20x4
1/03/20x4
12/31/20x4
Total
Collection
Interest (10% of
Unpaid Balance)
Principal
1,440,000
960,000
2,400,000
-0304,310.40
304,310.40
1,440,000
655,689.60
2,095,689.60
Unpaid Balance
4,483,104
3,043,104
2,387,414.40
Problem VIII
1. The fee is earned for providing continuing services:
Cash or Accounts receivable…………
Franchise revenue – continuing franchise fee
2. If P10,000 of the fee is for national advertising:
Cash or Accounts receivable…………
Franchise revenue – continuing franchise fee
Unearned franchise revenue – continuing franchise fee……
108,000
108,000
108,000
96,000
12,000
The franchisor recognizes the unearned franchise fees as revenue when it performs the advertising
services and also records the costs as expenses, the entries should be:
Advertising expenses…………
Cash, etc………………..
Unearned franchise revenue – continuing franchise fee……
Franchise revenue – continuing franchise fee
xxx
12,000
xxx
12,000
Problem IX
March 20:
Cash
Notes receivable
Unearned franchise fee
June 15:
Unearned franchise revenue
Franchise revenue
July 15:
Cash
Service revenue
5,000
20,000
25,000
500
25,000
25,000
500
Problem X
Cash or Accounts receivable…
Franchise revenue – supplies sales……………..
Cost of franchise – supplies sales………
Supplies inventory……….
117,600
90,000
117,600
90,000
Problem XI
Cash…………….
Notes receivable (P108,000 – P21,600)
Unearned interest income (P86,400 – P69,978)
Franchise revenue (P21,600 + 69,978 – P4,800*)
Unearned franchise revenue – equipment sale*
21,600
86,400
16,422
86,778
4,800
All the criteria to recognize initial franchise fee as revenue was met, except that an amount of P4,800
equivalent to indicated profit (P24,000, selling price less P19,200 option price) will be deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows:
Cash or Accounts receivable…
Unearned franchise revenue – equipment sale
Franchise revenue – equipment sale……………..
19,200
4,800
Cost of franchise - equipment sale……….
Equipment inventory……….
19,200
24,000
19,200
Problem XII
April 1, 20x4:
Cash…………….
Notes receivable…………
Franchise revenue (P21,600 + P86,400 – P4,800*)
December 31, 20x4:
Franchise revenue – initial franchise fee
288,000
192,000
480,000
480,000
Interest income (P192,000 x 8% x 9/12)
Cash (P153,600 – P11,520)………….
Notes receivable……………
Gain or revenue from repossessed franchise……………
11,520
142,080
192,000
134,400
Problem XIII
Cash
Notes receivable…………
Deferred franchise purchase option liability…….
72,000
360,000
Deferred cost of franchise revenue……………
Cash, etc………
288,000
Investment…………………………..
Deferred franchise purchase option liability…….
Deferred cost of franchise revenue……………
Cash, etc………
120,000
432,000
432,000
288,000
288,000
264,000
Multiple Choice Problems
1. a – following conditions should be observed to recognize revenue:
Services – none
Period of Refund – expired
Collectibility of the note – reasonably assured
There was failure on one condition; therefore, no revenue should be recognized.
5. a
6. b
7. a
Cash
Notes receivable
Unearned franchise fee
6,000
30,000
Unearned franchise fee
Franchise fee revenue
36,000
Cash
Notes receivable
Franchise fee revenue
6,000
30,000
36,000
36,000
36,000
9. b
In this problem, since there is doubtful of collection, it is safely assumed to used installment method.
Therefore, the realized gross profit would be:
Collections in 20x4……………………………………………………………..P 200,000
x: Gross profit rate [100% - (P150,000/P500,000)]………………………….
70%
Realized gross profit in 20x4…………………………………………………. P 140,000
Revenue Analysis:
Cash
N/R
Services
Period of Refund
Collectibility
Status
Yes
Yes
200,000
Rev – I/S Method
Yes
Yes
No Reas.
Assured
300,000
Liability
10. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee:
Services
Period of Refund
Collectibility
Status
Cash
Yes
Yes
P20,000
Revenue
Notes Receivable
Yes
Yes
Reasonably Assured
P80,000
Revenue
Substantial performance of services has been rendered because commencement of operations
by the franchisee shall be presumed to be the earliest point of which substantial performance has
occurred, unless it can be demonstrated that substantial performance of all obligations, including
services rendered voluntarily, has occurred before that time.
Period of refunding the initial franchise fee and collectibility of the notes is not anymore a
problem (they depend on the profitability of its first year of operations) because the result of
operations in the first year is profitable. Therefore, the initial franchise fee of P100,000 (P20,000 + P
P80,000) is considered as revenue, and a continuing franchise fee of P5,000 (1% x P500,000)
should be also be recognized as revenue – continuing fanchise.
Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus P5,000
continuing).
11. a
Initial franchisee revenue (since all services had been performed
and assumed that period of refunding already expired)………………………….. P100,000
Add: Continuing franchise revenue (5% x P800,000)…………………………………… 40,000
Total Revenue from franchise………………………………………………………………. P140,000
12. d
There is already substantial performance of services rendered since, the franchise outlet started
operations and it is assumed that period of refund has expired.
The continuing franchise fee is recognized also as revenue since it is earned at the time it was
received.
The net income would be:
Franchise Revenue:
Initial Franchise Fee:
Down payment…………………………………………… P 30,000
PV of installment (P10,000 x 1.7355)…………………….
17,355 P47,355
Continuing Franchise Fee (5% x P500,000)
25,000
Total Franchise Revenue…………………………………………………………………
P72,355
Add: Interest Income (10% x P17,355)…………………………………………………
Total Revenue/Net Income………………………………………………………………
1,735
P74,090
13. a
All conditions that initial franchise fee be recognized as revenue had been met as follows:
Revenue Analysis for IFF
Cash
N/R
Services
Yes
Yes
Period of Refund
Yes
Yes
(note)
Collectibility
Reas. Assured
200,000
300,000
Status
Revenue
Revenue
The Net Income then would be as follows:
Franchise Revenue………………………………………………………………..P 500,000
Less: Cost of Franchise…………………………………………………………… 150,000
Net Income…………………………………………………………………………P 350,000
14. d
In this problem, full accrual method is used to recognized the initial franchise fee of P100,000
analyze as follows:
Revenue Analysis for IFF
Cash
N/R
Services
Yes
Yes
Period of Refund
Yes
Yes
(note)
Collectibility
Reas. Assured
20,000
80,000
Status
Revenue
Revenue
Note: Period of refunding the initial franchise fee was presumed to have been expired since the
business operates profitably in its first year of operation.
Continuing Franchise Fee: Considered revenue the moment continuing services had been
rendered amounted to P5,000 (1% x P500,000).
Initial Franchise Fee…………………………………………………………P 100,000
5,000
Continuing franchise fee………………………………………………….
Total…………………………………………………………………………… P 105,000
15,000
Less: Indirect cost of franchise……………………………………………
Net income……………………………………………………………………P 90,000
15. d
Revenue = P400,000
Interest income = P160,000 ×
8% ×9/12 =
P9,600
Cash = P128,000 – P9,600 = P118,400
Repossession revenue: P240,000 – P128,000 = P112,000.
16. c
Cash = P560,000 + P48,000 = P608,000
Franchise Fee Revenue = P560,000
Unearned Franchise Fees = P48,000 ×
20% =
P9,600
Revenue from Continuing Franchise Fees = P48,000 – P9,600 = P38,400.
17. b - P200,000 + P545,872 – P24,000 = P721,872.
18. b
Franchisee frequently purchases all of the equipment, products, and supplies from the franchisor. The
franchisor would account for these sales as if, it would be a product sales. Sometimes, however, the
franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies
after the initial franchise fee is paid. If the bargain price is lower that the normal selling price of the same
product or it does not provide the franchisor the reasonable profit, then, a portion of the initial franchise fee
should be deferred. The deferred portion would be accounted for as adjustment of the selling price when
the franchisee subsequently purchases the equipment or supplies. Therefore, the amount of revenue would
be P90,234 computed as follows:
Services
Period of Refund
Collectibility
Status
Cash
Yes
Yes
P25,000
Revenue
Notes Receivable
Yes
Yes
Reasonably Assured
P68,234
Revenue except
P3,000 reasonable
profit on sale of
equipment
The revenue from franchise would be:
Cash……………………………………………………………………………………………… P 25,000
PV of Note…………………………………………………………………………..P68,234
Less: Reasonable profit on sale of
65,234
Equipment P15,000 – P12,000)………………………………………….… 3,000
P 90,234
Incidentally, the entries would be:
Upon receipt of IFF:
Cash………………………………………………………………………… 25,000
Notes Receivable………………………………………………………… 90,000
Unearned Interest Income (P90,000 – P68,234)………….
21,766
Franchise Revenue…………………………………………….
90,234
Unearned Franchise Revenue……………………………….
3,000
If equipment was sold:
Cash or Accounts Receivable………………………………………… 12,000
Unearned Franchise Revenue………………………………………… 3,000
Franchise Revenue – Equipment……………………………
15,000
Cost of Sales – equipment……………………………………………… 12,000
Equipment Inventory…………………………………………..
12,000
Chapter 10
Problem I
1. The journal entries shown below would be made on the consignor’s and consignee’s books (assume
the use of perpetual inventory):
Transactions
Shipment of goods on
consignment.
2. Payment of
expenses by
consignor.
3. Payment of
expenses
by consignee.
Advances by
Consignor
Sale of merchandise
6. Notification of sale
to consignor and
payment of cash due.
Commission:
10% x P48,000 =
P4,800
7. To record cost of
goods sold and
related costs.
** (P60,000 + P600 +
P2,400) x ½ =
P31,500
Entries on Consignor’s Books
(Herbalife Supplier)
Inventory on
Consigment……
60,000
Finished Goods
Inventory*....
Inventory on
Consignment…..
Cash……..
Inventory on
Consignment……
Consignee
Payable………
Cash………
Advances from
Consignee…..
600
60,000
No entry
600
Consignor
Receivable
2,400
3,360
2,400
3,360
No entry.
Commission
expense
Advances from
Consignee……
Cash…….
Consignee
Payable
Consignment
Sales
Revenue..
Cost of goods
sold**
Inventory on
Consignment
Entries on Consignee’s Books
(Conrado Enterprises)
No entry
(memorandum
entry only)
4,800
3,360
37,440
2,400
48,000
Cash…………….
Advances to
Consignor
Cash
Cash
Consignor
payable
Consignor
Payable..
Commission
Revenue……..
Consignor
Receivable
…..
Cash………
Advances
from
Consignee……
2,400
3,360
48,000
2,400
3,360
48,000
48,000
4,800
2,400
37,440
3,360
31,500
31,500
*if periodic method is used, the credit should be “consignment shipments” account treated as
reduction in the Costs of goods available for sale to arrive at Cost of Goods Sold Available for Regular
Sale.
2. The remittance amounting to P37,440 can be determined by preparing the Account Sales as follows:
Sold for the Account of:
Jingka Juice
Sales (60 sachets of herbal goods)
P48,000
Charges:
Finishing costs……………………..
P 2,400
Commission (P48,000 x 10%)………………..
4,800
7200
Due to Consignor…………………………….
P40,800
Less: Advances……………….
3,360
Balance…………………………
P37,440
Remittance Enclosed………………
37,440
Balance Due……………
P
0
Items on Hand (50 sachets of herbal goods): P60,000 x
50%
P30,000
Problem II
1. The account sales:
Sold for the Account of:
AA Company
Sales (8 sets @ P24,000)………………
Charges:
Freight-in……………
Advertising expense…………
Deliveries and installation expenses
Repairs expense – on units sold..
Commissions, 25% of sales
Due to Consignor…………………………….
Less: Advances……………….
Balance…………………………
Remittance Enclosed………………
Balance Due……………
Items on Hand…………
Items Returned (defective)….…….
P 192,000
P 6,000
2,400
9,600
4,800
48,000
2. The inventory on consignment amounted to P189,000 computed as:
Charge Analysis
Sales
Inventory
(8 sets)
(15 sets)
Charges by consignor:
Cost of consigned goods
(@P12,000/set)
P 96,000
P180,000
Freight-out (P9,000/25 sets = P360 per set)
3,600*
5,400
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set)
2,400*
3,600
Advertising expense…………..
2,400
0
Delivery and installation
9,600
0
Repairs expense……………
4,800
0
Commissions [25% of sales (8 sets x
P24,000 per set]
48,000
0
Total
P166,800
P189,000
* Freight on sets returned is charged against sales of the period.
70,800
P121,200
0
P121,200
30,000
P 91,200
15 sets
2 sets
Total
(25 sets)
P 300,000
9,000
6,000
2,400
9,600
4,800
___48,000
P379,800
** Normally, the term “freight-out” is synonymous to “delivery expense” which is classified as selling
expenses if we are dealing with a third party. But, for consignment accounting where the transfer
of merchandise if from consignor to consignee, the usage of the term “freight-out” does not
construed to be a selling expense but still an inventoriable cost (which is part of freight-in).
The consignment net income amounted to P25,200 computed as:
Consignment Sales (8 sets x P24,000 per set)
Less: Costs and expenses:
Charges by Consignor:
Cost of consigned goods @P12,000/set)
Freight-out (P9,000/25 sets = P360 per set)
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set)
Advertising expense…………..
Delivery and installation
Repairs expense……………
Commissions [25% of sales (8 sets x P24,000 per set]
Net Income
P 192,000
P 96,000
3,600*
P 2,400*
2,400
9,600
4,800
48,000
99,600
67,200
P 25,200
Problem III
Summit Electronics Company
Inventory on Consignment (800 @ P570)
Finished Goods Inventory
456,000
Consignment Expense (P368,000 x 30%)
Accounts Receivable--Consignee Sales
Sales Revenue—Consignment (P920 x 400)
110,400
257,600
Cost of Consigned Goods Sold (P570 x 400)
Inventory on Consignment
228,000
Cash [(P920 x 70%) x 380]
Accounts Receivable--Consignee Sales
244,720
456,000
368,000
228,000
244,720
Farley Hardware
No entry upon receipt of consigned merchandise.
Cash (P920 x 400)
Consignor Payable
Commission Revenue
368,000
Consignor Payable
Cash
244,720
257,600
110,400
244,720
Multiple Choice Problem
1. c – P1,200
Commission = 25% x Sales price
P400 = 25% x Sales price
Sales price = P400 ÷ 25% = P1,600
= 8 tapes
Number of units sold = Selling price = __P1,600__
Price per tape P200 per tape
Sales ……………………………………………………………….. P1,600
Less Commission of consignee………………………………...
400
Amount remitted by Beta View Store………………………...P1,200
2. a – P 370
Consignor’s charges:
Cost
Freight-out
Consignee’s charge - Commission
Total
Sales price
Consignment profit
Total
Charges
(25)
P2,500
75
__400__
P2,975
Charges Related to
Consignment
Inventory on
Sales
Consignment
(8)
(15)
P800
30
__400__
1,230
_1,600_
_P370_
P1,500
45
_______
_P1,545_
3. a – P1,545 (refer to No. 2 for computation)
4. b
5. c
Sales (P2,250 / 15%)
Divided by: Selling price per unit
Number of units sold
P15,000
P 1,000
15 units
Sales
Less Charges:
Commission
Advertising
Delivery expense
Due to Consignor
Less: Advances
Value of note – sight draft: (100 beds x P600 per bed) x 60%
Multiplied by: Proportional number of beds sold
Amount remitted
P15,000
P 2,250
1,500
___750
P36,000
15/100
__4,500
P10,500
__5,400
P 5,100
6. d – P1,500
Sales
Less Charges:
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds)
Consignee’s charges:
Commission
Advertising
Delivery expense
Consignment net income
P15,000
9,000
P2,250
1,500
___750
7. a – no items were sold in November;
Sales (unknown)
Less Charges:
Commission
Remittance
P
x
15% x
P 27,200
x – 15%x = P27,200
85%x = P27,200
x = P32,000
8. c – P16,800
Sales (unknown)
Less Charges:
Advertising
Delivery and installation charges
Commission (unknown)
Remittance
x
P500
100
20%x
_______
P 12,840
x – (P500 + P100 + 20%x) = P 12,840
x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800
9. b- P6,080
Cost (P150 per unit x 40 units)
Freight on shipment (P200 x 40/100)
Cost of inventory on consignment
10. c - 6
Sales (unknown)
Less Charges:
Commission (unknown)
Advertising
Delivery and installation
Cartage on consigned goods
Remittance
x – (20%x + P1,000 + P600 + P500) = P21,900
x – 20%x = P21,900 + P2,100
80%x = P24,000
P6,000
80
P6,080
x
20%x
P1,000
600
500
P21,900
__4,500
P1,500
x = P30,000
=6
Number of units sold = _P30,000_
P5,000 per set
11. b – P2,300
Consignor’s charges:
Cost
Freight-out
Consignee’s charges:
Commission (20% x P30,000)
Advertising
Delivery and installation
Cartage
Total
Sales price
Profit on Consignment
Total
Charges
(10)
Charges Related to
Consignment
Inventory on
Sales
Consignment
(6)
(3)
P30,000
2,500
P18,000
1,750
6,000
1,000
600
__500__
P40,600
6,000
1,000
600
__350__
27,700
_30,000_
__P2,300__
P9,000
750
__150__
_P9,900_
12. d – None of the above (P9,900) – refer to No. 11 for computation.
13. No answer available - P17,625
Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.
14. a (P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.
AA Sales - Nos. 15 to 17:
15. a
Gross collection (P15,000 x 70% x 80%)
Less: Cash discount taken by customer (P8,400 x 2%)
Net collection
Less Charges:
Expenses
Commission (P8,400 x 15%)
Due to Consignor
Less: Advances
Amount remitted
P 8,400
__168
P 8,232
P 800
_1,260
__2,060
P 6,172
_6,000
P 172
16. b
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Expenses
Commission (15% x P10,500)
Cash discount (P10,500 x 80% x 2%)
Total
Sales price (70% x P15,000)
Profit on Consignment
Total
Charges
(100%)
Charges Related to
Consignment
Inventory on
Sales
Consignment
(70%)
(30%)
P10,000
120
P 7,000
84
800
1,575
168
P12,663
800
1,575
168
P 9,627
_10,500_
P 873
P 3,000
36
_P3,036_
17. b – refer to No. 16 for computation
RR Products Company – Nos. 19 to 21
19. c
Collection made pertaining to:
May sale
Down payment (3 x P50)
Monthly payment thereafter (3 x P10)
June sale
Down payment (1 x P50)
Total
Less: Commission (P230 x 20%)
Amount remitted
P 150
30
___50
P 230
___46
P 184
20. d – P140
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Commission
Total
Sales price (4 units x P250/unit)
Profit on Consignment
P 180
Total
Charges
(5)
Charges Related to
Consignment
Inventory on
Sales
Consignment
(4)
(1
P 775
50
P 620
40
P 155
10
200
P1,025
200
P 860
_ 1,000
P 140
____
P165
21. b – refer to No. 20 for computation
22. b
Collection made:
Cash sale (P1,500 x 2)
P 3,000
Credit sale (P1,800 x 25%)
Total
Less: Charges
Freight
Commission [(P3,000 + P1,800) x 15%]
Amount remitted
___450
P3,450
P 320
__720
23. a
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Freight
Commission
Total
Sales price
Profit on Consignment
Total
Charges
(5)
__1,040
P 2,410
Charges Related to
Consignment
Inventory on
Sales
Consignment
(3)
(2)
P4,000
200
P 2,400
120
P 1,600
80
320
720
P5,240
192
720
P 3,432
4,800
P 1,368
128
______
P1,808
24. b – P1,808 – refer to No. 23 for computation
25. d – 244,600
Sales on credit (14,000 per unit x 12 units) + (13,000 x 10)
Less: Sales allowance granted
Bad debts
Commission [2% x (P298,000 – P2,000)]
Amount still due from BB, Inc
26. d – P67,280
Consignor’s charges:
Cost
Freight-out
Consignee’s charges:
Sales allowance
Bad debts
Commission
[15% x (P298,000 – P2,000)]
Total
Sales price [P14,000 per unit x 12 units)
+ (P13,000 per unit x 10 units)]
Consignment profit
27. d – refer to No. 26 for computation
Total
Charges
(30)
P 2,000
7,000
_44,400
P298,000
__53,400
P 244,600
Charges Related to
Consignment
Inventory on
Sales
Consignment
(22)
(8)
P240,000
1,800
P176,000
1,320
2,000
7,000
2,000
7,000
44,400
P295,200
44,400
P230,720
298,000
P 67,280
P64,000
480
_P64,480_
28. b – 395
Sales (unknown)
Less Charges:
Commission (unknown)
x
( )
__x__ P10
P100
__P45__
Delivery expense
Remittance
x-
________
P35,505
[( _x__ ) P10 + P45 ] = P35,505
100
x – _P10x_ = P35,550
P100
P100x – P10x = P3,555,000
P90x = P3,555,000
x = P39,500
Number of ballpens sold = _P39,500_ = P395
P100 per unit
29. b
Sales
Cost of sales
Gross profit
Operating expenses:
Commission (P30,000 x 5%)
Freight-in (P260 x P19,500*/P26,000)
Others
Regular (P15,150 x P19,500/P26,000)
Consignment
(P15,150 x P30,000/P150,000)
Total
Net profit
*P26,000 – P6,500 = P19,500
30. d – P5,775 (refer to No. 29 for computation)
31. a – (P18,000 + P900) = P18,900
Regular Sales
P120,000
84,000
P 36,000
Consignment
Sales
P30,000
19,500*
P10,500
Total
P150,000
103,500
P 46,500
P 1,500
1,950
P 1,500
1,950
3,030
P 4,725
P 5,775
3,030
_P16,845_
P29,655
12,120
_______
P 12,120
P 23,880
Problem III
1.
• Contributions of cash by the operators
Cash
KK Company
Cerise Company
Contribution by joint operators.
Chapter 11
360,000
• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment
96,000
Cash
Loans payable – machinery and equipment
Contribution by joint operators.
Materials
Accounts payable
Acquisition of materials.
• Labor incurrence
Payroll
Cash
Accrued payroll
Annual labor.
• Loans from the bank
Cash
Bank loans payable
Amount borrowed.
180,000
180,000
60,000
36,000
78,000
86,400
72,000
• Repayment of loan – machinery and equipment and other factory expenses
Loan payable – machinery and equipment
12,000
Cash
Partial payment of loan.
Accounts payable
Cash
Payment of trade creditors.
Factory overhead control – heat, light and power
Cash
Payment of manufacturing expenses such as heat, light
and power.
• Depreciation of machinery and equipment
Factory overhead control – depreciation
Accumulated depreciation
Depreciation of equipment.
• Transfer of materials, labor and overhead to Work-in-Process
50,400
156,000
9,600
78,000
84,000
2,400
72,000
12,000
50,400
156,000
9,600
Work-in-process
Payroll
Materials
Factory overhead control – heat, light and power
Factory overhead control – depreciation
Allocation of costs to work-in-process
• Transfer of Work-in-Process to Finished Goods Inventory.
Finished goods
Work-in-process
Allocation to finished goods
309,600
216,000
• Transfer of Finished Goods Inventory to Joint Operators throughout the year
KK Company
96,000
DD Company
96,000
Finished goods
Delivery of output to joint operators.
86,400
57,600
156,000
9,600
216,000
192,000
2.
Cash
Contribution – Drei
Contribution – Cerise
Bank loan
Balance, 12/31/x4
180,000
180,000
60,000
57,600
60,000
84,000
12,000
50,400
156,000
Work-in-Process
Labor
86,400
Materials
57,600
Factory Overhead – heat, etc. 156,000
Factory Overhead – depreciation 9,600
Balance, 12/31/x4
93,600
3.
a. Total assets, P282,000
b. KK’s investment, P84,000
c. DD’s investment, P84,000
December 31, 20x4
Assets
Current Assets
Cash
Finished goods inventory
Work-in-Process inventory
Materials inventory
Total current assets
Non-current Assets
Equipment
Less: Accumulated depreciation
Total Assets
Machinery and equipment
Labor
Machinery and equipment
Accounts payable
Factory overhead control
216,000
to Finished Goods
P 57,600
24,000
93,600
20,400
P 96,000
9,600
P 195,600
86,400
P282,000
Liabilities and Net Assets
Current Liabilities
Accrued payroll
Accounts payable
Non-current Liabilities
Bank loan payable
Loan payable – machinery and equipment
Total Liabilities
Net Assets
Total Liabilities and Net Assets
Joint Operator’s Equity
KK Company: Contributions – January 1, 20x4
Cost of inventory distributed
DD Company: Contributions – January 1, 20x4
Cost of inventory distributed
Total Joint Operator’s Equity
P
2,400
27,600
P 60,000
24,000
P 180,000
( 96,000)
P 180,000
( 96,000)
P 30,000
__84,000
P 114,000
168,000
P282,000
P 84,000
P 84,000
P168,000
Problem VI
The joint operator, Entity K account for their interests in the joint operation as follows:
January 1, 20x4 (P12,000,000 / 5 = P2,400,000)
Property, plant and equipment (interest in an aircraft)
Cash
To recognize the purchase of an ownership-interest in a
jointly controlled aircraft.
In 20x4
Cash
Profit or loss (rental income)
To recognize income earned in renting to others the use of
the aircraft in 20x4.
2,400,000
12,000
Profit or loss (aircraft operating expenses)
Cash
To recognize the costs of running an aircraft in 20x4.
180,000
Profit or loss (depreciation expense)
Accumulated depreciation (interest in an aircraft
To recognize depreciation of an ownership-interest in a
jointly controlled aircraft in 20x4: P12,000,000/20 years =
P600,000/5 operators = P120,000
share for each joint operator.
120,000
2,400,000
12,000
180,000
120,000
Problem VII
1. The following are the summaries of the above transactions for a joint operation in the form of
a partnership:
Event
a.
b.
c.
d.
e.
f. *
NI**
Cash***
Settlement
Totals
Investment in
Joint Operation
Dr.
Cr.
P 12,000
120,000
6,000
180,000
P588,000
________
P318,000
_297,000
P597,000
6,000
___3,000
P597,000
________
P597,000
_______
P597,000
________
P597,000
Dr.
P204,000
3,600
AA
Cr.
P12,000
120,000
120,000
BB
Dr.
Cr.
Dr.
P60,000
P312,000
3,600
CC
Cr.
P 6,000
___3,000
P210,600
________
P210,600
________
P252,000
__112,200
P364,200
________
P315,600
________
P315,600
______
P 60,000
_147,000
P195,000
P72,000
3,600
6,000
_______
P81,600
_______
P81,600
_153,600
P364,200
________
P364,200
________
P315,600
_120,600
P315,600
_______
P81,600
10,800
_______
P 16,800
31,800
P48,600
_33,000
P81,600
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000.
**NI – Net Income Allocation
Allowance for cleaning-up operations
Commission:
Aljon: 40% of P204,000
Elerie: 40% of P312,000
Mac: 40% of P72,000
Balance (75%: 25%)
Total
AA
P81,600
BB
CC
P 3,000
Total
P 3,000
30,600
10,200
28,800
_______
81,600
124,800
28,800
40,800
P112,200
P135,000
P31,800
P279,000
P124,800
**Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.
2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as
follows:
AA, capital
153,600
BB, capital
120,600
CC, capital
33,000
Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint
operations.
Problem VIII
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Cost of investment
Consideration transferred
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%)
Retained earnings (P1,080,000 x 30%)
Allocated excess (excess of cost over book value)
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%)
Increase in land (P960,000 x 30%)
Increase in building (P600,000 x 30%)
Decrease in equipment (P840,000 x 30%)
Increase in bonds payable (P120,000 x 30%)
P2,016,000
P 1,080,000
324,000
72,000
288,000
180,000
( 252,000)
( 360,000)
P
1,404,000
612,000
P
Positive excess: Goodwill (excess of cost over fair value)
252,000
P 360,000
The over/under valuation of assets and liabilities are summarized as follows:
Anton Co.
Anton Co.
Book value
Fair value
Inventories (sold in 20x4)
P1,200,000
P1,440,000
Land
1,080,000
2,040,000
Buildings – net ( 10 year remaining life)
1,800,000
2,400,000
Equipment – net ( 7 year remaining life)
1,440,000
600,000
Bonds payable (due January 1, 20x9)
( 1,200,000)
(1,320,000)
Net
P4,320,000
P5,160,000
(Over) Under
Valuation
P 240,000
960,000
600,000
( 840,000)
( 120,000)
P 840,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be amortized
Inventories (sold in 20x4)
Land
Buildings – net ( 10 year remaining life)
Equipment – net ( 7 year remaining life)
Bonds payable (due January 1, 20x9)
Net
P
(
(
P
Over/
Under
240,000
960,000
600,000
840,000)
120,000)
840,000
30%
thereof
P 72,000
288,000
180,000
( 252,000)
( 36,000)
P 252,000
Life
1
10
7
5
Current
Year(20x4)
P 72,000
18,000
(36,000)
( 7,200)
P 46,800
The following are entries recorded by the parent in 20x4 in relation to its investment in joint
venture:
January 1, 20x4:
(1) Investment in DD Company
Cash
Acquired 30% joint control in DD Company.
January 1, 20x4 – December 31, 20x4:
(2) Cash
Investment in DD Company (P720,000 x 30%)
Record dividends from DD Company.
2,016,000
216,000
2,016,000
216,000
December 31, 20x4:
(3) Investment in DD Company
Investment income (P1,440,000 x 30%)
Record share in net income of DD Company.
432,000
December 31, 20x4:
(4) Investment income
Investment in DD Company…………………….
Record amortization of allocated excess of inventory,
equipment, buildings and bonds payable.
46,800
432,000
46,800
Thus, the investment balance and investment income in the books of TT Company is as follows:
Investment in Joint Venture (DD Company)
Cost, 1/1/x4
2,016,000 216,000
NI of Anton
46,800
(1,440,000 x 30%)
432,000
Balance, 12/31/x4
2,185,200
Investment Income
Amortization
46,800
432,000
385,200
Dividends – Son (720,000x 80%)
Amortization
NI of Son
(P1,440,000 x 30%)
Balance, 12/31/x4
To check the balance of Investment in Joint Venture (DD Company):
DD Company’s Stockholders’ Equity, 12/31/20x4:
Common stock
Retained earnings
Retained earnings,1/1/20x4
P 1,080,000
Net income – 20x4
1,440,000
Dividends – 20x4
( 720,000)
Book value of stockholders’ equity of DD Company,12/31/20x4
Multiplied by: Interest in Joint Venture
Book value of Interest in Joint Venture
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization)
Goodwill
Investment in Joint Venture (DD Company) – equity method
P3,600,000
1,800,000
P5,400,000
30%
P1,620,000
205,200
360,000
P2,185,200
Multiple Choice Problems
30. a
Books of X
Inv. in JO
4,000 6,500
2,500
X, capital
2,500
Journal entry for settlement should be:
Z, capital……………………….. 6,500
X, capital……………………
2,500
Y, capital……………………
4,000
Books of Y
Inv. in JO
2,500
4,000
6,500
Inv. in JO
Y. capital
4,000
Books of Z
2,500
4,000
Z, capital
6,500
6,500
31.
Total credits - Investment in Joint Operations…………………………………P 25,810
Total debits - Investment in Joint Operations…………………………………. 19,750
Net income or total gain (credit balance)…………………………………….P 6,060
32. d
Jose, capital
8,500 investment
1,212 share in net income (P6,060 x 2/10)
9,712
33. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40
per share)
34. b
20,000 shares at P40/share
Expenses
Joint operation loss
*
Jose, capital
P800,000 P 198,000 (4,500 x P44) – Sales
3,000
125,000 (5,000 x P25)
4,700
13,600* (13,600 x P1) - Cash dividend
168,000 (6,000 x P28) - Sales
266,000 (7,600 x P35)
P807,700 P 770,600
P 37,100
9/30 Shares issued (6,000 + 10,000 + 4,000)
10/20 Sold
11/ 1 Stock dividend (20,000 – 4,500) x 20%
11/15 Sold
Balance of shares outstanding before cash dividend
Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares)
20,000
(4,500)
3,100
(5,000)
13,600
35. c
Investment in Joint Operations
P400,000 Investment (10,000 shares x P40)
P18,550
P381,450
Share in net loss
P37,100 x (10,000/20,000)
36. b
Unrealized loss due to decline in the value of shares at the time of investment
(P62 – P40) x 4,000 shares
Share in joint operation (P37,100 x 4/20)
Reduction of loss by cash dividend (P13,600 x 4/20)
37. a
before net income or loss
P68,000
__7,420
P98,140
Investment in Joint Operations
15,000
25,000 ending inventory
10,000 net income
38. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%)
39. a
Purchases
Contr/Invest
Expenses
Joint Operations
20,000
77,000 Sales (?)
20,000
800
1,800
42,600
Anson, Capital
Unsold merchandise 600 20,000
18,600 Profit(50%)
600
38,600
38,000 to Alas
77,000
34,400 (P16,000 + P18,400)
2,800 (P600 + P2,200)
Unsold merchandise
37,200 Net profit
40. c – refer to No. 39 computation.
41. a
Purchases
Freight-in
Freight-out
Investment in Joint Operations
10,000
7,200 sales
240
5,120 unsold
260
(P10,000 + P240) x 1/2
10,500
12,320
1,820
Santo, capital
10,000 Contribution/Invest
910 Share in NI
10,910
42. a – refer to No. 41 for computation
43. c
Investment in Joint Operations
6,500
3,500 Sales
3,000
before sale
Net loss
N, capital
1,100
14,500
13,400
O, capital
1,100
6,500
5,400
Distribution of Loss:
Salary
Balance, equally
M
300
(1,100)
P ( 900)
P
P
N
(1,100)
P(1,100)
P
O
(1,100)
P(1,100)
Total
300
(3,300)
P(3,000)
P
44. a – refer to No. 43 for computation
45. b
Revenues
Total cash receipts (P78,920 + P65,245)
Less: Cash investments (P30,000 + P20,000)
Cash sales
Add: Proceeds from sale of remaining assets
Total Revenue
Less: Expenses (P62,275 + P70,695)
Net income
P144,345
50,000
P 94,345
60,000
P154,345
132,970
P 21,375
46. c
Receipts
Benin, capital
78,920
30,000 Contribution
62,275 Disbursement
12,825 Share in NI (3/5)
78,920
105,100
26,180
Receipts
Sucat, capital
65,425
20,000 Contribution
70,695 Disbursement
8,550 Share in NI (2/5)
65,425
99,245
33,820
47. d
N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should
receive net cash of P2,000:
O, capital
3,000
Cash
2,000
P, capital
5,000
O’s books: it shows P5,000 receivable from P, and P2,000 payable to N; thus, O should
receive net cash of P3,000:
N, capital
2,000
Cash
3,000
P, capital
5,000
P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P
should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively:
N, capital
2,000
O, capital
3,000
Cash
5,000
50. b – refer to No. 25 for further discussion.
The Income from Investment in Basket Co. on December 31 is as follows:
Share in net income (P90,000 x 40%]
Amortization of allocated excess
Income from Investment on December 31
P 36,000
( 16,400)
P 19,600
51. d
The joint arrangement is a joint venture because it needs unanimous consent to all parties
involved. The parties recognize their rights to the net assets of Harrison Company as
investments and account for them using the equity method.
The Investment in Goldman Co. as of December 31, 2015 is as follows:
Acquisition cost, January 1, 2013
Add (deduct):
Share in net income [(P140,000 x 3 years) x 40%]
Share in dividends [(P50,000 x 3 years) x 40%]
Amortization of allocated excess
Investment balance on December 31
Cost of investment
Less: Book value of interest acquired (40% x P1,200,000)
Allocated excessP 120,000
Less: Over/undervaluation of assets and liabilities
Goodwill
P 600,000
168,000
(60,000)
(
0)
P 708,000
P 600,000
480,000
0
P 120,000
There is no indication as to impairment of goodwill.
52. d
To determine whether a contractual arrangement gives parties control of an arrangement
collectively, it is necessary first to identify the relevant activities of that arrangement. That is,
what are the activities that significantly affect the returns of the arrangement?
When identifying the relevant activities, consideration should be given to the purpose and
design of the arrangement. In particular, consideration should be given to the risks to which
the joint arrangement was designed to be exposed, the risks the joint arrangement was
designed to pass on to the parties involved with the joint arrangement, and whether the
parties are exposed to some or all of those risks.
In many cases, directing the strategic operating and financial policies of the arrangement
will be the activity that most significantly affects returns. Often, the arrangement requires the
parties to agree on both of these policies. However, in some cases, unanimous consent may
be required to direct the operating policies, but not the financial policies (or vice versa). In
such cases, since the activities are directed by different parties, the parties would need to
assess which of those two activities (operating or financing) most significantly affects returns,
and whether there is joint control over that activity. This would be the case whenever there is
more than one activity that significantly affects returns of the arrangements, and those
activities are directed by different parties.
Based on the ownership structure, even though Wallace can block any decision, Wallace
does not control the arrangement, because Wallace needs Zimmerman to agree —
therefore joint control between Wallace and Zimmerman (since their votes and only their
votes, together meet the requirement). Because they are the only combination of parties
that collectively control the arrangement, it is clear that Wallace and Zimmerman must
unanimously agree.
The appropriate method for the joint venture is the equity method.
Investment in Gold Co. on December 31, 2015 is as follows:
The Income from
Share in net income (P140,000 x 40%)
Amortization of allocated excess
Income from Investment on December 31, 2015
P 56,000
(
0)
P 56,000