COVERAGE FOR 2ND FINAL EXAM - AFAR
MODULE 17
PARTNERSHIP
Accounting for partnerships
The Conceptual Framework for Financial Reporting and the Standard (or PFRS for SMEs, when
appropriate) are applicable to all reporting entities regardless of the type of organization. Thus, most
accounting procedures used for other types of business organizations are also applicable to
partnerships. The main distinction lies on the accounting for equity. In addition, the accounting for
partnerships should also comply with relevant provisions of the Civil Code of the Philippines.
The following are the major considerations in the accounting for the equity of a partnership:
•
•
•
•
Formation - accounting for initial investments to the partnership
Operation - division of profit or losses
Dissolution - admission of a new partner and withdrawal, retirement or death of a partner
Liquidation - winding- up of affairs
Formation
A contract of partnership is consensual. It is created by the agreement of the partnership which may
be constituted in any form, such as oral or written.
Division of profits and losses
The partner shall share in the profits or losses of a partnership in accordance with the
partnership agreement.
Art 1797 of the Philippine Civil Code provides the following additional rules in the profit or loss sharing
of partners:
If only the share of each partner in the profits has been agreed upon, the share of each in the
losses shall be in proportion to what he may have contributed. but the industrial partner
shall not be liable for the losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If besides his service he has
contributed capital, he shall also receive a share in the profits in proportion to his capital.
The designation of losses and profits cannot be entrusted to one of the partners (Art. 1798). A stipulation
which excludes one or more partners from any share in the profits or losses is void (Art 1799).
In addition the partnership agreement may also stipulate the following:
• Salaries - normally, an industrial partner receives salary in addition to his share in the partnership’s
office as compensation for his services to the partnership.
• Bonuses - the managing partner may be entitled to a bonus for excellent management performance.
Unlike for salaries, a partner is entitled to a bonus only if the partnership earns profit. The partner is not
entitled to any bonus if the partnership incurs loss.
• Interest on capital contributions - the partnership agreement may stipulate that each partner
is entitled to a per annum interest computed on his capital contributions.
Dissolution
As mentioned earlier, one of the characteristics of a partnership is that is has a “limited life,” in
the sense that the partnership agreement can be easily dissolve.
Dissolution is different from liquidation. Dissolution is the change in the relation of the partners cause by
any partner ceasing to be associated in the carrying on of the business. Liquidation is the termination of
business operations or the winding up of affairs.
Partnership dissolution does not necessarily terminate the business. The business continues until the
remaining partners decide to liquidate the business. If the business is continued after dissolution, new
articles of partnership should be drawn up.
The following are the major considerations in the accounting for partnership dissolutions.
• Admission of a partner.
• Withdrawal, retirement or death of a partner
• Incorporation of a partnership
COVERAGE FOR 2ND FINAL EXAM - AFAR
The admission of a new partner or the withdrawal, retirement or death of an existing partner dissolves
the original partnership agreement because it creates a change in the relation of the partners (e.g., a
change in the number of the partners in a partnership).
It should be noted that the admission of a new partner requires the consent of all the existing partners.
Admission of partner
The admission of a new partner may be effected either through:
• Purchase of interest in the partnership, or
• Investment in the partnership.
Purchase of interest
A new partner may be admitted when he purchases part or all the interest of one or more of the existing
partners.
This transaction is a personal transaction between and among the partners. As such, any consideration
paid or received is not recorded in the partnership books. The only entry to be made in the partnership
books is a transfer within equity. A new capital account is established for the new partner and a
corresponding decease is made on the capital account(s) of the selling partner(s). No gain or loss shall is
recognized in the partnership books.
Revaluation of asset
When a partnership is dissolve but not liquidated, a new partnership is created. The asset and liabilities
carried over to the new partnership are restated to fair values.
Any adjustments to the asset and liabilities is allocated first to the existing partners before
recording the admission of the new partner.
Investment in the partnership
Instead of purchasing interest from the existing partners, a new partner may be admitted by investing
directly in the business.
This transaction is a transaction between the new partner and the partnership. As such, any
consideration paid by the incoming partner shall be recorded in the partnership books.
However, since this is a transaction with an owner, no gain or loss shall be recognized.
Two things may happen when a new partner invests in a partnership:
• The new partner’s capital account is credited at an amount equal to the fair value of his investment;
or
• The new partner’s capital account is credited at an amount greater than or less than the fair value
of his investment.
Incorporation of partnership
There are various reasons for incorporating a partnership, which may include the following:
a. Limited liability of shareholders - shareholders are not liable to corporate creditors beyond
their investment in the corporation.
b. Ease of raising additional capital - greater capital can be raised from an increased number of
owners. Also, it is easier for a corporation to generate external financing, as lenders need not worry
about the death of the partners.
c. Privacy and confidentially - unlike in partnerships, the owners of a corporate are not agents
of the corporation.
d. Dispersion of risk - the risk of loss is dispersed to more owners.
e. Unlimited life - changes in the relationship of the owners of a corporation do not dissolve
the corporation.
f. Transferability of ownership - transferring an ownership in a corporation is made simply by selling
one’s share stocks. The corporation need not to be dissolved when a shareholder sells his interest in
the business.
g. Better public relations - many believes that wider ownership of a business results to better public
relations.
When a partnership is converted into a corporation, the corporation acquires and assumes the assets and
liabilities of the partnership in exchange for shares of stocks which shall be issued in settlement of the
partners’ respective interests.
COVERAGE FOR 2ND FINAL EXAM - AFAR
Liquidation
Liquidation is the termination of business operations or the winding up of affairs. It is a process by which
1 the assets of the business are converted into cash,
2 the liabilities of the business are settled, and
3 any remaining amount is distributed to the owners.
Liquidation may either be voluntary (e.g., per agreement of partners of a solvent partnership) or
involuntary (e.g., per government mandate or bankruptcy).
Conversion of non-cash assets into cash
The conversion of assets into cash is referred to as “realization” while the settlement of claims
or creditors and owners is referred to as “liquidation”. However, the term liquidation is used in a
broader sense to include the entire winding up process.
The winding up process starts with the conversion of non-cash assets into cash. As such, the timing of the
“realization” of non-cash assets determines the manner on which the “liquidation” (i.e., payment of
claims) is carried out.
Methods of liquidation
Liquidation may be accomplished either through.
1.
Lump-sum liquidation- all of the non-cash assets of the partnership are sold simultaneously or
within a very short period of time. The proceeds are then used to settle all of the liabilities first, and
any remaining amount is paid to the partners under a single, lump-sum payments.
Lump-sum liquidation is possible when there is a contracted buyer of all of the non-cash assets
of the partnership or the assets are sold on a “package deal” basis.
2.
Installment liquidation - is most cases, it would take some time before all of the assets of a
business are converted into cash. In such case, the partners’ claims are settled on installment basis as
cash becomes available, but only after all partnership liabilities are fully settled.
Settlement of claims
The available cash of the partnership is used to settle claims in the following descending order:
1. First, to outside creditors;
2. Second, to inside creditors (e.g., payables to partners);
3. Third, to owners’ interests
Right of off-set
As shown above, a loan payable to a partner has a higher priority over the partner’s capital balance but
a lower priority over the claims of outside creditors. However, the legal right of offset allows a deficit in
a partner’s capital account to be offset by a loan payable to that partner.
Lump-sum liquidation vs. Installment liquidation
The following procedures shall be observed when accounting for lump-sum liquidation or
installment liquidation:
Lump-sum
Installment
1. All of the non-cash assets are converted to cash.
2. The total gain or loss on the sale is allocated to the
partner’s capital balances based on their profit or loss
ratios.
3. Actual liquidation expenses are allocated to the
partners’ capital balances based on their profit or loss
ratios.
4. The liabilities to outside creditors are fully settled.
5. The liabilities to inside creditors are fully settled.
6. Any remaining cash is distributed to the owners in full
settlement of their interests.
1. Some of the non-cash assets are converted to cash.
2. The carrying amount of any unsold non-cash assets is
considered as a loss. This is allocated to the partners’
capital balances based on their profit and loss ratios.
3. Actual and estimated future liquidation expenses are
allocated to the partners’ capital balances based on their
profit or loss ratios.
4. The liabilities to outside creditors are partially or fully
settled.
5. The liabilities to inside creditors are partially or fully
settled but only after settlement of the liabilities to
outside creditors.
6. If both the liabilities to outside and inside creditors
are fully settled, any remaining cash less cash set aside
for future liquidation expenses is distributed to the
owners as partial settlement of their interest.
COVERAGE FOR 2ND FINAL EXAM - AFAR
Marshalling of assets
As mentioned earlier, one of the characteristics of a partnership is ‘unlimited liability”. This is because
the personal assets of the general partners are subject to the claims of partnership’s creditors in case of
partnership insolvency.
The legal doctrine of marshalling of assets is applied when the partnership and some of the partners
are insolvent. The following are the rules when applying this doctrine:
1. First, any available assets of the partnership is used to settle the partnership’s liabilities.
2. Second, in case the assets of the partnership are insufficient to pay all liabilities (i.e., insolvency),
the solvent general partners are required to provide additional funds their personal assets.
The claims to the personal assets of a partner shall rank in the following order:
a. Those owing to separate creditors.
b. Those owing to partnership creditors.
c. Those owing to partners by way of contribution.
3. Third, in case some partners are insolvent (or limited partners), their capital deficiency shall be offset
to the capital balances of the other partners. If after allocating the capital deficiency of an insolvent (or
limited) partner, a solvent partner’s capital balance result to a negative results to a negative amount, the
solvent partner is required to provide additional contribution.
Cash priority program
Another method of ensuring that there are no overpayments to partners is by preparing a “cash priority
program” or “cash distribution program.” This schedule determines which partner shall be paid first
and which partner shall be paid last, after all liabilities are settled. This schedule can be prepared even
prior to the sale of any asset.
The preparation of this schedule requires the application of the same concepts as those we have
applied earlier, namely:
a. Unsold non-cash assets are treated as loss; and
b. Expected future liquidation costs and potential unrecorded liabilities are recognized
immediately as losses.
An additional procedure when preparing a cash priority program is to rank the partners in accordance
to their maximum loss absorption capacity. The partner with the highest maximum loss absorption
capacity shall be paid first. The partner with the lowest maximum loss absorption capacity shall be paid
last. The formula in computing for the maximum loss absorption capacity is as follows:
Maximum loss
absorption
capacity
=
Total partner’s interest in the partnership
Partner’s profit or loss share percentage
COVERAGE FOR 2ND FINAL EXAM - AFAR
MODULE 18
•
•
•
An entity shall apply the principles in PFRS 15 in accounting for revenues from franchise contracts.
A construction contract is a contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interdependent in terms of their design, technology and
function or their ultimate purpose or use.
PFRS 15 requires the following steps when recognizing revenue from construction contracts:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) a performance obligations is satisfied
Step 1: (a) The contract must be approved and the contracting parties are committed to it; (b) rights and
payments terms are identifiable; (c) has commercial substance; and (d) the consideration is probable of
collection. No revenue is recognized if the contract does not meet the criteria above. Any consideration
received is recognized as liability.
Step 2: Each promise in a contract to transfer a distinct good or service is treated as a separate
performance obligation.
•
A good or service is distinct if:
The customer can benefit from it, either on its own or together with other resources that
are readily available to the customer (e.g., the good or service is regularly sold separately); and
The good or service is separately identifiable (i.e., not an input to a combined output, does
not significantly modify the other promises, or not highly interrelated with the other promises).
⚫
•
•
•
The entity shall determine whether a performance obligation is satisfied over time or a point in time.
A performance obligation is satisfied over time or at a point in time.
A performance obligation is satisfied over time if one of the following criteria is met:
The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.
The entity’s performance creates or enhances an asset (e.g., work in progress) that the
customer control as the asset is created or enhanced.
The entity’s performance does not create an asset with an alternative use to the entity and
the entity has an enforceable right to payment for performance completed to date.
If the entity cannot demonstrate that a performance obligation is satisfied over time, it is presumed
that the performance obligation is satisfied at a point in time.
•
If the performance obligation is satisfied overtime , the entity shall determine a measure of progress
that best depicts its performance.
•
Under the “cost-t-cost” method (an application of the inputs method), the entity’s measure
of progress is determined using any of the following formulas:
•
Percentage of completion = ( Total costs incurred to date ÷ Estimated total contract costs) OR
Percentage of completion = Total costs incurred to date ÷ (Total cost incurred to date +
Estimated costs to complete)
If the outcome of a performance obligation that is satisfied over time cannot be measured
reasonably, the entity shall recognize revenue only to the extent of costs incurred that are
expected to be recovered (i.e., zero-profit method).
• Changes in measure of progress are accounted for prospectively.
•
When a construction contract becomes onerous (e.g., the expected contact costs exceed
the transaction price), the entity shall recognize a provision in accordance with PAS 37.
COVERAGE FOR 2ND FINAL EXAM - AFAR
MODULE 19
•
•
an
•
An entity shall apply the principles in PFRS 15 in accounting for revenues from franchise contracts.
PFRS 15 defines a license as one that “establishes a customer’s right to the intellectual property on
entity.” Franchise is an example of a license.
PFRS 15 requires the following steps when recognizing revenue from franchise contracts:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when ( or as ) a performance obligation is satisfied
•
In addition to the general principles, PFRS 15 requires an entity to apply some specific principles when
determining whether a promise to transfer a license is satisfied over time or at a point in time.
•
•
•
If the performance obligation in a franchise contract is satisfied over time, revenue is recognized
over the duration of the franchise contract as the performance obligation is satisfied. The entity shall
determine an appropriate method of measurement of its progress towards the complete satisfaction
of the performance obligation.
If the performance obligation in a franchise contract is satisfied at a point is satisfied.
Revenue from sales- based or usage-based royalties is recognized when those sales or usage occur.
CHAPTER 17 – MCP
1. Max, Jones and Waters shared profit and losses 20%, 40%, and 40% respectively and
their partnership capital balance is 10,000, 30,000, and 50,000 respectively.
45,000
2. On July 1, ML and PP formed a partnership, agreeing that to share profits and losses in
the ratio of 4:6 respectively
50,000
3. Paul, Jeremy and Juan are forming a partnership
90,000
4. Albert, Claude and Jaime form a partnership by contributing 25,000, 70,000, and 80,000
70,000
5. Max, Ike, and Tony are forming a partnership
240,000
6. Richardson, Peterson, and Wilkerson are forming a partnership
15,000
7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest
in capital and profits and Ken is to have a 40% interest in capital and profits.
10,000
8. WW and MM drafted a partnership agreement that lists the following assets contributed
at the partnership’s formation:
WW – 35,000, MM – 75,000
9. On March 1, 20x4, Evan and Helen decide to combine their business and form a
partnership.
50,070 and 32,195, respectively
10. Jones and Smith formed a partnership with each partner contributing the following
items:
Jones – 360,000, Smith – 260,000
11. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30,
20x4, just before the admission of DD, show the following balances:
CC’s adjusted capital before the admission of CC:
35,374
12. The amount of cash investment by DD:
17,687
13. On March 1, 20x4, CC and FF formed a partnership with each contributing the following
assets:
On March 1, 20x4, the capital account of FF would show balance of:
280,000
14. Assuming that the partners agreed to bring their respective capital …. How
much cash is to be invested by CC?
55,000
15. John, Jeff and Jane decided to engage in a real estate venture as a partnership.
Under the bonus method, what amounts …. At the formation of the partnership?
John – 60,000, Jeff – 60,000, Jane – 60,000
16. Under the revaluation (goodwill) approach …. At the formation of the partnership?
John – 90,000, Jeff – 90,000, Jane – 90,000
17. As of July 1, 20x4, FF and GG decided to form a partnership.
If the capital contribution of each partner is the net amount of his assets and liabilities
taken …. Accounts of FF and GG would be:
43,500 and 40,500, respectively
18. Assume that the partnership agreement provides for profit and loss sharing of 60% to
FF and 40% to GG …. Balance proportionate to the profit and loss ratio.
17,250
19. OO and PP are partners sharing in this proportion –
60:40. The cash invested by RR is:
59,375
20. The total capital of the partnership after the admission of RR is:
296,875
21. Cash settlement between OO and PP is:
OO will pay PP 17,537.50
22. CC admits DD for partnership interest in his business. The
balance of the capital of CC before the adjustment is:
211,200
23. The total assets of the partnership after the formation is:
393,720
24. On July 1 of the current year, JJ and GG form a partnership.
The value of the merchandise to be invested by GG is:
90,000
25. The cash invested by JJ is:
48,000
CHAPTER 17 – THEORIES
1. A partnership is a(n) accounting entity.
2. Partnerships need not follow GAAP.
3. The major categories in which partnership deviate from GAAP are:
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. A contra-capital account used by partnerships is called the drawings account.
5. When a partnership is being formed, equity dictates noncash asset contributed to the
partnership be recorded at their fair (or current) values instead of historical cost.
6. The fundamental objective underlying much of partnership accounting is that of
achieving equity among the partners.
7. A method of allocating profits and losses among partners that has the advantage of
preventing potential inequities among partners in the event of liquidation is capital
balances.
8. An alternative to the partnership form of the organization is the professional
corporation.
TRUE OR FALSE
9. A partnership is a taxable entity. FALSE
10. A partnership is a tax-reporting entity but not a tax-paying entity. TRUE
11. In a general partnership, only a majority of partners need to have unlimited liability
to partnership creditors. FALSE
12. When a partnership agreement has provisions that are contrary to laws pertaining to
partnerships, law is controlling. TRUE
13. Partnerships are separate legal entities, like corporations. FALSE
14. A partner's drawing account is merely a contra-capital account. TRUE
15. A partner's drawing account is substantively a loan account. FALSE
16. Under the partnership law, partnerships must follow GAAP. FALSE
17. Only individuals are allowed to be partners in a partnership. FALSE
18. Proprietorship and partnerships are similar in that they are both easily turned. TRUE
19. Proprietorship and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership
in the partnership. FALSE
20. Partnerships are not required to prepare financial statements in accordance with GAAP
unless they have publicly traded debt or are required to follow GAAP by a creditor.
TRUE
21. Most small partnerships maintain their financial information in accordance with GAAP.
FALSE
22. Tax authorities basically view partnerships and proprietorships as extensions of their
owners. TRUE
23. Partnerships are not required to pay any taxes. FALSE
24. The proprietary theory of equity is based on the notion that a business entity is
distinct from the owners. FALSE
25. The entity theory of equity is based on the notion that a business entity is distinct from
the owners TRUE
26. An individual partner's personal responsibility for partnership debts is an example of the
entity theory of equity. FALSE
27. Appraisal are not necessarily required when assigning vale to noncash assets
contributed to the partnership. TRUE
28. Assigning a noncash asset the contributor’s carrying vale could result in a
misallocation of gain or loss if the asset is sold. TRUE
29. An asset's carrying value should not be considered when establishing the initial capital
accounts of partners. FALSE
30. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the
partner’s capital account TRUE
MULTIPLE CHOICE QUESTIONS
31. The partnership form of business is an economic entity.
32. When a partnership is formed, equity dictates that assets contributed to the
partnership be recorded in the general ledger at their fair (or current) value
33. A unique feature of partnerships (compared with publicly owned corporations) is that
They do not have to follow GAAP
34. A distinct and major advantage of the professional corporation form of organizations in
comparison with the partnership form of organization is historical cost
35. A partnership is formed by two individuals who were previously sole
proprietors……… fair value of the property at the date of the investment
36. Which of the following is not a characteristic of a partnership? A partnership
requires written articles of partnership
37. Which of the following is not a reason for the popularity of partnerships as a legal
form of businesses? Partnerships can more easily generate significant
amounts of capital
45. The disadvantages of the partnership form of business organization compared
to corporations, include: unlimited liability for the partners
46. the advantages of the partnership form of business organization compared to
corporations, include: single taxation
47. A partner’s withdrawal of assets from a limited liability partnership that is considered a
permanent reduction in that partner’s equity is debited to the partner’s: Capital account
48. The drawing ledger accounts of limited liability partners are used to reduce the
partners’ capital account balances at the end of an accounting period
49. A partner’s drawing account in substance is a contra-capital account
50. Which of the following is NOT a characteristic of the proprietary theory that influences
accounting for partnership? A partnership is characterized by limited liability.
51. Which of the following statements are true when comparing corporations and
partnerships? Unlike shareholders, general partners may have liability
beyond their capital balances
52. Which of the following is NOT an advantage of a partnership over a corporation?
Unlimited liability
53. Under the entity theory, a partnership is unable to enter into contracts in its own
name.
CHAPTER 18 – MCP
1. PARTNER ALTA. Alta’s share of 20x4 partnership income is P31,000
2. PARTNERS A AND B. Any remainder is split equally, if the partnership had net income
of P88,000, how much should be allocated to Partner A: P44,500
3. BB AND GG. What amount of these earnings should be credited to each partner’s
capital account? BLUE – P43,000 GREEN – P37,000
4. PARTNERS A AND B. If the partnership had net income of P108,600. How much should
be allocated to partner A? P43,225
5. PARTNERS A AND B. If the partnership had net income of P52,000. How much should
be allocated to partner A? P14,000
6. PARTNERS ACKER, BECKER & CHECKER. How much should be allocated to Checker?
P4,000
7. PARTNERS A AND B. If the partnership had net income of P36,000. How much should
be allocated to partner A? P27,100
8. PARTNERS TUBA AND DRUM. How should the P50,000 of earnings be divided?
TUBA- P27,000 DRUM – P23,000
9. MACK AND RUBEN. The division of salaries and profits in total to Mack and Ruben would
be P120,000 & P80,000
10. ROBBIE AND RUBEN. The division of profits would be P30,000 & P20,000
11. JAMES. How much bonus does James receive? P7,500
12. CHERYL. How much bonus does Cheryl receive for this period? P6,000
13. JOHNSON AND PRITCHARD. How much of the gain will be assigned to Johnson?
P27,000
14. KAREN AND ANDREA. How much of the profit is allocated to Karen? P123,000
15. PETER AND RONALD. How much of the gain is allocated to Ronald? P192,500
16. JENNIFER AND ROBERT. What is the amount of change to Robert’s capital account
at the date the land is revalued? P28,000
17. Eric and Philip have been partners for several years. During that time… How much will
Philip’s capital account be adjusted at the date of change in the profit and loss ratios?
25,000 Increase
18. X, Y, and Z, a partnership formed… Partnership net profit on December 31,
20x4 before salaries, interests and partner’s share on the remainder was:
P207,750
19. A partnership begins… Assume that the net income is P50,000…
P107,400
20. A partnership begins… Assume that the net loss for the first year…
P102,600
21. Arthur Plack, a partner in the Brite partnership… What was the net income
of the Brite partnership for 20x4?
P150,000
22. Fox, Greg, and Howe are partners with average… By what amount should
Fox’s capital account change?
7,000 Increase
23. The DEF Partnership reported… How should partnership net income for 20x4 be allocated to
D, E, and F?
D- 66,200 E-34,100 F-29,700
24. Cleary, Wasser and Nolan formed a partnership… What was Wasser’s share of
income for 20x4?
63,000
25. Cleary, Wasser and Nolan formed a partnership… What was Nolan’s capital
balance at the end of 20x4?
246,000
26. Cleary, Wasser and Nolan formed a partnership… What was Cleary’s share of
income for 20x5?
75,540
27. Cleary, Wasser and Nolan formed a partnership… What was Wasser’s capital
balance at the end of 20x5?
264,540
28. A partnership began… What was Young’s share of loss for the first year?
11,700 loss
29. A partnership began… What was the balance in Eaton’s Capital account at the
end of the first year?
80,600
30. A partnership began… What was Thurman’s share of income or loss for the second year?
19,760 income
31. A partnership began… What was the balance in Young’s capital account at the end
of the second year?
133,380
32. The MM-NN Partnership was formed… NN’s initial capital balance in MM-NN is:
60,000
33. The MM-NN Partnership was formed… MM’s share of MM-NN’s net income is:
15,000
34. Partner A first contributed… The annual weighted average capital balance is:
26,667
35. BB and CC share profits and losses… What are the total amounts for the
allocation of interest, salary, and bonus, and how much over-allocation is present?
80,000 and 20,000
36. BB and CC share profits and losses… If the partnership experiences a net loss of 20,000
for the year, what will be the final amount of profit or loss closed to each partner’s capital account?
(10,000) to BB and (10,000) to CC
37. The JPB partnership… How should partnership net income for 20x4 be allocated to J, P, and
B?
J- 60,000 P- 60,000 B- 40,000
38. The APB partnership… Assuming a current year net income of P150,000,
what amount should be allocated to each partner?
A-24,000 P- 38,000 B-54,000
39. The APB partnership… Assuming a current year net income of P50,000
A-19,000 P-(3,000) B- 34,000
40. The capital account balances for Donald & Hanes partnership…
140,000
41. Maxwell is trying to decide…
210,000
42. Maxwell is a partner and has…
70,000
43. A partnership has the following accounting amounts… Partnership net income (loss) is:
18,000
44. Garcia and Henson formed a partnership… What is Henson’s 20x4 bonus?
15,000
45. DD and EE was organized and began… The share of partner DD in the net income
58,800
46. DD and EE was organized and began… The capital balance of each partner on March 1,
20x5 should be
DD-190,800; EE-277,200
47. DD and EE was organized and began… Assuming that the annual salary
are to be recognized as operating expenses…
66,000
48. DD and EE was organized and began… Assuming the same information in
no. 47, the capital balance of each partner on March 1, 20x5:
DD-216,000; EE-294,000
49. NN and OO created a partnership… The P250,000 should be allocated between
NN and OO as follows:
NN-219,000; OO- 31,000
50. Abe, Bert, and Carl are partners sharing profit… The new profit and loss
ratio of the partners for 20x5 is
Abe- 59.5%; Bert- 17.0%; Carl- 8.5%; Dave- 15%
51. Abe, Bert, and Carl are partners sharing profit… The share of partner Bert in the
20x5 net profits is:
2,490.50
CHAPTER 18 THEORIES
1. The ability of partners to withdraw resources from the partnership is controlled exclusively
by the laws of the state where the partnership resides. FALSE
2. The articles of partnership often control the size of withdrawals partners are allowed to
make. TRUE
3. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
TRUE
4. Partnerships are required to indicate the manner in which profits and losses are to
be allocated among partners. FALSE
5. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order. TRUE
6. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership. FALSE
7. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for… TRUE
8. The interest on capital balances component of partnership profit and loss allocation is
always based.. FALSE
9. The interest on capital balances component of partnership profit and loss allocation is
generally… TRUE
10. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time. FALSE
11. The salary portion of the partnership profit and loss allocation is not included in
the partnership income statement. TRUE
12. The salary portion of the partnership profit and loss allocation is used to
compensate partners for the time and effort expected in the business. TRUE
13. Partnerships are required to have bonus clauses in the articles of partnership. FALSE
14. Bonus to partners can be based on any criteria on which the partners agree. TRUE
15. Partnership bonus arrangements must consider net income as part of the bonus
calculation. FALSE
16. A residual interest is always a component of partnership is always a component of
partnership profit and loss allocation. TRUE
17. Partnership profit and loss residual percentages must be equal.
TRUE
18. Partnership profit and loss residual percentages must be the same for profits as they are for losses
TRUE
19. Partnership profit and loss residual percentages are used to allocate any remaining profit or loss to
partners after all other allocation components have been considered
TRUE
20. Partnership residual profit and loss percentages may be changed by agreement of the partners.
TRUE
21. Partnership residual profit and loss percentages do not have to be the last component applied in the
profit and loss allocation process
FALSE
22 When partnership profit and loss ratios are changed, the difference between market and book values
should be determined and allocated to partners based on the currently existing profit and loss ratios
TRUE
23 Partnerships must revalue assets up and/or down when the profit and loss ratios are adjusted.
FALSE
24. When an error is discovered in the financial records of a partnership, It should be corrected
immediately. Allocation of any change to capital accounts as a result of an error correction should be
based on the profit and loss ratios that existed when the error occurred.
FALSE
25. The value assigned to noncash assets invested by partners in a limited partnership is the cost of the
assets or the current for value of the assets at the time of investment, whichever is lower
FALSE
26. Partners are also employees if they are active in the business of the partnership.
FALSE
27. Theoretically, salary allowances paid to partners should not be reflected as salary in the general
ledger.
TRUE
28. Interest on partnership capital is mandatory in dividing profits and losses.
FALSE
29. Partnership drawings are
c. usually maintained in a separate draw account with any draws being debited directly to the
capital account
30. Drawing
d. are the same nature as withdrawals
31. Withdrawals from the partnership accounts are typically not used
c. to record interest earned on a partner’s capital balance
32. Which of the following is not a withdrawal that may be found in a partnership’s drawing account?
d. all of the above may be found in a drawing account
33. Which of the following statements is correct with regard to drawing accounts that may be used by a
partnership?
a. drawing accounts are closed to the partners’ capital accounts at the end of the accounting
period.
34. Which of the following would be least likely to be used as a means of allocating profits among
partners who are active in the management of the partnership?
d. Interest on average capital balances.
35. Which of the following best describes the use of interest in invested capital may be subject to
manipulation that distorts the measure of invested capital?
d. Use of beginning or ending measures of invested capital may be subject to manipulation
that distorts the measure od invested capital
36. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus
allocation, interest on capital, with any remainder to be allocated by presets ratio. If a partnership has
a loss to allocate, generally which of the following procedures would be applied?
c. The bonus criteria would not be used
37. If the partnership agreement provides a formula for the computation of a bonus to the partners, the
bonus would be computed
a. next to last. Because the final allocation is the distribution of the profit residual.
38 Which of the following statement is true concerning the treatment of salaries in partnership
accounting?
a. Partner salaries may be used to allocate profits and losses: they are not considered
expenses of the partnership
39. Partners active in a partnership business should have their share of partnership profits based on
the following
b. a combination of salaries and percentage of net income after salaries and any other allocation
basis
40. Which of the following could be used as a basis to allocate profits among partners who are active in
the management of the partnership?
1. Allocation of salaries
2 The number of years with the partnership
3. The amount of time each partner works
4. The average capital invested
e. 1,2, 3 and 4
41. In a partnership, interest on capital investment is occounted for as a(n)
b. allocation of net income
42. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year
of operation. the partnership incurs a P20.000 loss. The partners should share the losses
b. In a 2 to 1 ratio.
43. Which of the following interest component calculation bases is least susceptible to manipulation
when allocating profits and losses to partners
d. Ending capital account balance
44 A partnership agreement calls for location of profits and losses by salary allocations, a bonus
allocation, interest on capital with any remainder to be allocated by preset ratios. If a partnership
has
A loss to allocate, generally which of the following procedures would be applied?
c. The bonus criteria would not be used.
45. What is the underlying purpose of the interest on capital balances component of partnership
profits and losses?
a. Compensate partners who contribute economic resources of the partnership
46. What is the underlying purpose of the salary component of allocating partnership profits and losses?
b. Reward labor and expertise contributions
CHAPTER 19 page 1334
TRUE / FALSE
1. The dissolution of a partnership occurs only when the partnership is terminating operations and going
out of business. FALSE
2. One reason a change in the number of partners in a partnership through the addition or withdrawal
of a partner is important because the partners have unlimited liability. TRUE
3. A new partner in a partnership accepts unlimited liability for actions that occurred before that partner
joined the partnership. FALSE
4. The admission of a new partner into a partnership can occur without any new assets being invested
into the partnership. TRUE
5. If a new partner is going to acquire an ownership interest in a partnership directly from another
partner, the other partners do not need to approve the admission. FALSE
6. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the new
partner is also entitled to 40 Percent of the existing partner’s profit and loss allocation. FALSE
7. When a new partner is joining a partnership by making a payment to the partnership for an amount
more than book value…. FALSE
8. The revaluation of assets and liabilities at the date a new partner joins the partnership, by investing
assets directly into the partnership, does not eliminate the possibility that the partnership might need
to record bonuses or goodwill as part of the admission of the new partner. TRUE
9. The amount that assets are revalued when a new partner joins a partnership is always shared by
existing partners equally. FALSE
10. If a new partner’s capital account is created for an amount less than the value of net assets
contributed, an error has been made in the partnership’s accounting records. FALSE
11. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners. TRUE
12. The bonus recognized by existing partners when a new partner is admitted to a partnership is
commonly shared among the existing partners based on the existing partners’ relative profit and loss
residual ratios.TRUE
13. It is possible for a new partners’ capital account to be established at an amount greater than
the market value of the identifiable assets invested.TRUE
14. New partners are never recipients of bonuses when they join the partnership.FALSE
15. A bonus paid to a new partner results in a reduction to the capital accounts of the existing partners
in proportion to their profit and loss sharing ratios.TRUE
16. The goodwill method of admitting a new partner to a partnership results in greater total assets than
the bonus method of admitting anew partner.TRUE
17. When the goodwill meths is applied to recognize the admission of a new partner and the existing
partners are responsible or the goodwill, the new partners’ capital account will always be
established equal to the amount of the contribution to the partnership.TRUE
18. The existing partners will always recognize goodwill when a new partner is admitted to the
company and the goodwill method is applied.FALSE
19. When the goodwill meths is applied to recognize the admission of a new partner and the new
partner is responsible for the goodwill, the new partners’ capital account will be established at the
amount of the contribution. FALSE
20. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners capital accounts do not change as a result of the new partner’s admission.TRUE
21. A partner may withdraw from a partnership at any time without notice given to the
existing partners. FALSE
22. A withdrawing partner may have his/her partnership interest acquired by an outside investor agreed
to by the remaining partners, or the partnership.TRUE
23. If existing partners acquire a withdrawing partner’s equity, the existing partners must purchase
the withdrawing partner’s equity in proportion to their residual profit and loss ratios.FALSE
24. The revaluation of assets when a partner withdraws from the partnership may e a complete
revaluation or a partial revaluation, reflecting the change in value with regard to the drawing
partner’s ownership interest.TRUE
25. A partnership’s assets must be revalued when a partner withdraws.FALSE
26. When a partnership’s assets are are valued at the date a partner withdraws from the partnership,
the withdrawing partner’s equity must be acquired by the partnership. It cannot be acquired by an
outside investor of the existing partners personally. FALSE
27. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.TRUE
28. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can be
no bonus recorded.FALSE
29. A bonus can be recorded for a retiring partner only if the partnership acquires the equity of the
partner.TRUE
30. At the date of a partner withdraws from a partnership…FALSE
31. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated..TRUE
32. Partnerships may have both a revaluation of assets and liabilities as well as goodwill recognition
at the date a partner withdraws from a partnership. TRUE
MC THEORIES
33. Cob, Inc., a partner in TLC partnership, assigns its partnership...
Answer b. II only
34. A partner assigned his partnership interest to a third party...
Answer d. The assignee does not become a partner…
35. Transferable interest of a partner includes all of the following...
Answer d. The authority to transact any of the ….
36. Who may acquire the ownership interest of a partner who is with...
Answer d. All of the above
37. If existing partners acquire the equity of a withdrawing partner...
Answer d. existing partners are not allowed…
38. Which of the following will not result in the dissolution of a...
Answer e. neither 1,2,3 or 4
39. The dissolution of a partnership occurs...
Answer e. When there is any change in the…
40. Which of the following results in dissolution...
Answer d. withdrawal of a partner in a partnership
41. Changes in partnership ownership are presumed to be....
Answer d. all of the above are possible
42. Which of the following forms of new partner admission will not result....
Answer b. Purchase of an ownership directly from an existing partner
43. Which of the following must occur for a new partner...
Answer c. Existing partner must approve the admission …
44. Which of the following must be true when a new partner acquires...
Answer c. The new partner must be allocated some amount
45. When a new partner joins a partnership by investing...
Answer d. Any of the three or a combination…
46. Which of the following is a reason to not revalue partnership....
Answer c. The partnership has not c
47. A bonus is recognized by existing partners at the date a new....
Answer b. The new partner’s contribution less than his/her
percentage… Note: pls double check this one thanks
48. Which of the following is not a criterion for recognizing a bonus...
Answer a. only cash assets were contribiuted …
Note: pls double check this one thanks
49. Which method of recording the admission of a new partner....
Answer c. Either bonus method or goodwill method
Note: pls double check this one thanks
50. A bonus recognized by a new partner...
51. Which of the following is not a criterion for recognizing...
Answer a. Only cash assets …
52. Which of the following statements is false with regard...
Answer d. The three partners will have …
53. Which of the following statements presents a reason that goodwill...
Answer c. The total value of the new partners…
54. What portion of the partnership's assets must be revalued...
Answer c. Any or all…
55. The admission of a new partner under the bonus method...
56. When a new partner is admitted into a partnership and the new...
Answer b. II only
57. When a new partner is admitted into a partnership and the....
Answer b. II only
58. When a new partner is admitted into a partnership and the capital of the...
Answer a. I only
59. When a partner retires from a partnership and the retiring....
Answer c. Either I or II
60. When the old partners receive a bonus upon admission...
Answer b II only
61. When a new partner is admitted into a partnership...
Answer b. II only
62. Which of the following statements is true with regard to...
Answer b. A bonus may be paid to the retiring partner
63. What change occurs to continuing partners' capital...
Answer c. Continuing partners capital accounts do not change
64. What amount of goodwill can be recognized at the date a partner....
Answer d Either the withdrawing
65. What portion of the partnership's assets must be revalued...
Answer c. Any or all
66. Which of the following characterizes the bonus method...
Answer d. The market value concept
NOTE: Solman is until 68 while the qs in our book is until 66 skl
END
CHAPTER 20 MCP
1. Oliver, Patrick and Quincy LLP
Answer: B 44,000
2. The balance sheet given below is presented for the partnership of Janet, Anton and Millet
Answer D
3. The following condensed balance sheet is presented for the partnership of Andres, Barnes and
Crowley
Answer C Andres 200k, Barnes, 0, Crowley 220
4. Phil, Harry and Bill are partners
Answer A Phil 45k. Harry 28k, Bill 22k
5. Rick, Mary and Fran are partners
Answer C Rick 46k, Mary 24k, Fran 39k
6. Claire, Doris and Jeff
Question; What is Claire’s capital account balance after the transaction is completed?
Answer D 48,625
7. Whar is Doris’ capital account balance after the transaction is completed? ANS: 43,350
8-9. Larry, Marsha, and Natalie are partners in a company that is being liquidated.
8. What is the balance in Larry’s capital account after the transaction is completed? ANS: 109,650
9. What is the balance in Marsha’s Capital account after the transaction is completed? Ans: 62,600
10-11 The following condensed balance sheet is presented for the partnership of D, E and F who share
profits and loss in the ratio of 5:3:2, respectively.
10. If the other assets are sold for P280,000, how much should F receive… Ans: 50,000
11. If the other assets are sold for P80,000, and all partners are personally insolvent, how much should
E receive upon liquidation? Ans: C 10,000
12. A local partnership has assets of cash of P5,000 and a building worth P80,000…. if the building is
sold for 50,000, how much cash will Harry receive in the final settlement? Ans: 28,000
13. The year-end balance sheet and residual profit and loss sharing percentages for the Lang, Maas,
and Neal partnership on December 31, 2005 are as follows: Ans: Maas in the amount of 55,000
14&15 The balance sheet for the partnership of JJ CC and TT, whose shares of profits and losses are 40,
50, and 10 percent, is as follows:
14. If the inventory is sold for P300,000, how much should JJ receive upon liquidation of
the partnership? Ans: 136,000
15. If the inventory is sold for P180,000, how much should TT receive upon liquidation of the
partnership? Ans: 28,000
16. The Abrams, Bartel and Creighton partnership began the process of liquidation…. if the non-cash
assets were sold for 234,000, what amount of the loss would have been allocated to Bartle? Ans: 40,000
17 and 18. Tom, Dick and Harry are partners in an equipment leasing business…
17. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold
for P65,000? Ans: Tom-30,000 / Dick 4,000 / Harry - 11,000
18. What amount of cash will each partner receive as a liquidating distribution if the machinery is
sold for P21,100? Ans: Tom-1,100 / Dick 0 / Harry - 0
19. The Keaton, Lewis and Meador partnership had the following balance sheet… what amount of
cash would Keaton have received from the distribution of the partnership assets? Ans: 30,000
20. The Henry, Isaac and Jacobs partnership was about to enter liquidation … Before liquidating
any assets, the partners determined the amount of cash available for safe payments. How should the
cash be distributed? D. P15,000 to Henry and 10,000 to Jacobs
21. Giligan, Skipper, and Professor are partners with a profit and loss ratio of 4:3:3….. the liquidation
loss must have been: Ans: 480,000
22. The Abrams, Bartle, and Creighton partnership began the process of liquidation… For what
amount were the non-cash assets sold? Ans: 170,000
23 and 24- a local partnership was considering the possibility of liquidation since one of the
partners (Ding) as insolvent.
23. Ding’s creditors filed a P25,000 claim against the partnership’s assets. … what is the
minimum amount that Ding’s creditors would have received? Ans: 2,500
24. Ding’s creditors filed a P25,000 claim against the partnership’s assets. … what is the
minimum amount that Tillman’s creditors would have received? Ans: 67,260
25. Gonda, Herron and Morse is considering… what is the minimum that mOrse’s creditors
would receive if they have filed a claim for P50,000. Ans: 27,500
26. Shrek, Donkey, and Fiona are partners in SDF… Under the circumstances: Ans: C. Shek will receive
a distribution in liquidation of 6250
27. Taylor, Ullman & Victor partnership… the appropriate journal entry (explanation omitted) for
the partnership is: Ans: Trade accounts payable and Taylor, Capital 4,000.
28. White, sands and Luke has the following capital balances…who gets the money? Ans: A. 0
white; 57,143 Sands and 92,857 luke
29. During the liquidation of Gym, Hob & Ing Partnership… assuming the noncash asset may
be distributed safely to Hob is: Ans: B. 12,000
30. During the liquidation of the partnership of Karr, Rice, and Long….. the net debit to Karr’s account….
Anss: B. 100,000
31. X, Y, and Z have capital balances of P90,000, P60,000 and p30,000… Under the circumstances,
Z will…. Ans: personally have to contribute an additional 6,000.
Theories Chapter 20
Completion statements
1. The order of payment to creditors…a. partnership creditors other than partners b. partners’ loans—if
subordinated c. partners’ capital
statement of realization
2. A historical statement prepared in a partnership liquidation… statement of realization and liquidation
3. A schedule used in connection with the liquidation… schedule of safe payments
4. A procedure that was in which partnership assets…marshalling of assets
5. In the liquidation of a partnership, the subtraction…rule of setoff
6. If a partner absorbs the deficit balance…legal recourse against
7. The manner of distributing cash…bringing the capital balances into the profit and loss ratio
True or false
8. In a partnership liquidation, the accountant’s primary responsibility is to manage the company in
a manner that will ensure payment to the creditors other than partners… True
9. The accountants are not liable if the creditors are not paid at the end of a partnership liquidation…
False
10. All partners will get the same amount of cash distributed to them as part of a liquidation… False
11. The partners’ creditors and the partnership’s creditors one in the same because the partnership is
an extension of the partners… False
12. Keeping the partnership assets and liabilities separated from the personal assets and liabilities of
the individual partners is called the marshalling of assets… True
13. Partnership creditors can have claims against both the partnership’s assets and against the personal
personal assets of partners… True
14. Partner creditors can have claims against the partner’s assets but not against partnerships assets…
False
15. During a partnership liquidation, the accountants must fully pay all liabilities before cash can be
distributed to the partners… False
16. The partnership liquidation process generally begins with closing the partnership’s accounting
records and allocating any income or loss to partner’s capital accounts … True
17. During a partnership liquidation, gains and losses on the sale of noncash assets are assigned directly
to the capital accounts.… True
18. Allocations of gains and losses during partnership liquidation must consider the salaries and
bonuses of the partners as well as the residual profit and loss ratios… False
19. Partners may either receive distributions during partnership liquidation or they may have to wait
until the sale of all noncash assets is completed and creditors paid in full… True
20. A single payment made to partners at the end of the partnership liquidation is called a lump-sum
liquidation… True
21. A series of payments made to partners during partnership liquidation is called a
continuous liquidation.… False
22. In a lump-sum partnership liquidation, all of the assets are sold and the liabilities are paid before a
distribution is made to partners… TRue
23. The statement that details the business transaction of a partnership during liquidation is called a
CAsh Distribution Plan… False
24. The Statement of Realization and Liquidation prepared during partnership liquidation presents the same
information that would be recorded for partnership liquidation but its presented in tabular form…
True
25. On a Statement of Realization and Liquidation prepared as part of partnership liquidation the
difference between the market value of an asset and its carrying value is allocated to gain or loss on
sale of asset.… False
26. The allocation of gains and losses on a stament of realization and liquidation (prepared when a
partnership is liquidated) is typically based on the residual profit and loss ratios… True
27. Assuming there are positive partner capital account balances at the end of partnership
liquidation, the statement of realization and liquidation will display cash equal to the sum of the
partner’s capital accounts at the end of the liquidation process.
28. If a partner of liquidating limited partnership is unable to pay a capital account deficit, the deficit is
observed by the other partner’s in the income- sharing ratio of those partners.
29. After the realization of all noncash assets and the distribution of all available cash to the to the
creditors, Kapp &Lodi owed P 15,000 to creditors. If at this point Kapp had a capital account balance
of P18,000, Lodi had capital account deficit of P3,000.
30. Gains and losses from the realization of noncash assets by limited partnership in liquidation are
divided in the ratio to the partner’s capital account balances if there is no income-sharing plan in
the partnership contract.
31. A loan receivable from a partner is added to the partners’ capital account balance in the preparation of a
cash distribution program to be used by the liquidator of the limited liability partnership
32. If the partners’ capital account balances have been reduced to the income sharing ratio…
33. If the partners’ capital account balances have been reduced to the income-sharing ratio…
34. in the computation of the amount cash that may be paid to partners of liquidating
limited partnership…
35. The investor’s enterprise must use the equity method of accounting for an investment…
Multiple Choice Theories.
35. In a simple partnership liquidation, the last remaining cash distribution should be made according
to the ratio of
36. If a partner with a debit capital balance during liquidation is personally solvent, the
37. The first step in the liquidation process is to…
38. In partnership liquidation, how are partners salary allocation treated?
39. In partnership liquidation, how are partners salary allocations treated?
40. if cash payments to the partners of a limited partnership in liquidation are delayed until all noncash
assets have been realized, any cash remaining after all partnership creditors have been paid is
distributed.
41. In the liquidation of a limited partnership, a loan payable to a partner by the partnership is
42. Which item is not shown on the schedule of partnership liquidation?
43. The following is the priority sequence in which liquidation proceeds will be distributed for
partnership:
44. Which of the following statements is correct regarding a partner’s debit capital balance?
45. If a partnership has only non-cash assets, all liabilities have been properly disbursed and no
additional liquidation expense are expected, the maximum potential loss to the partnership in the
liquidation process is.
46. Which of the following procedures is acceptable when accounting for a deficit balance in a
partner’s capital account during partnership liquidation?
47. A partnership dissolution differs from liquidation in that…
48. A partnership in liquidation has converted all assets into cash and paid all liabilities, the order of
payment
49. If conditions produce a debit balance in a partner’s capital account when liquidation losses
are allocated
50. Which of the following statements are correct?
51. Offsetting a partners loan balance against his debit capital balance referred to as the
Chapter 21 MCP
1. The balance sheet for the partnership of JJ CC and TT, whose shares of profits and losses are 40,
50 and 10 percent.
2. The partnership of Peter, Paul, Mary share profits and losses in the ratio 4:4:2….
3. The following condensed balance sheet is presented for the partnership of Alpha, Baker and Charley.
The first sale of noncash assets having a book value of P90, 000 realized 50,000 and all cash available
after settlement…
4-6
The balance sheet for AA, BB and CC Partnership is as follows.
4. If the firm, as shown on the balance sheet, is dissolved and liquidated by selling assets in installments
and if the first sale of noncash assets having a book value…
5. If the facts are in questions 6 exceot that P3, 000 cash to be withheld, the resoective partners…
6.If each partner properly received some cash in the distribution after the second sale, if the cash to
be distributed amounts to P12, 000 from the third sale…
7. If Arch, Bole and Cusp Partnership is liquidated by the realization of other assets in installments, the
first realization…
8. If the facts are as in the previous question, except that P3,000 cash is to be withheld for
potential liquidation costs,
9. A partnership has the following capital balance; A ( 20% of profits and losses) = 100,000;
10. On December 1, 20x5, the partners Tim, William, and Levin, who share profits and losses in the ratio
of 4:4:2 decided to liquidate their partnership…
11-12. Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation,
half the inventory is sold for P60, 000.
11. Using a safe payment schedule, how much cash will be distributed to Dennis at the end of the
first month.
12. Assume instead that the remaining inventory was sold for P10, 000 in the second month. Whats
payments will be made to Dennis and Lilly at the end of the second month?
13. The following condensed balance sheet is presented for the partnership of Arche, Bows and /cross….
14. On January 1, 20x4, the partners of CC, DD and EE, who sharw profits and losses in the ratio of 5:3:2
15. The capital balances, prior to the liquidation of XYZ partnership…
16. After all noncash assets have been converted into cash in the liquidation of the AA and KK
Partnership, the ledger contains the following account balance…
17. Dancey, Reese, Newman and John were partners who shared profits and losses on a 4:2:2:2 basis,
respectively.
18. Harding, Jones and Sandy is in the process of liquidating and the partners have the following capital
balances; P20, 000, P22, 000 and P (10,000) respectively.
19. A, B and C capital balances of P80, 000, P80, 000 and P40,000, respectively. Profits are allocated 40%
to A, 40% to B and 20% to C.
20. The ABC partnership has the following capital accounts on its books at December 31, 20x4.
Assume that a partnership had assets with a book value of P240, 000 and a market value of P195,000.
21. How much would Able receive upon liquidation of the partnership assuming profits and losses are
allocated equally.
22. How would the first P100, 000 of available assets be distributed assuming profits and losse
are allocated equally?
23. If all outside creditors and loans to partners had been paid, how would the balance of the assets be
distributed assuming that Chapman.
24. Partners Dalton, Edwards and Finley have capital balances of P40, 000, P90,000 and
P30,000 respectively, immediately prior to liquidation…
25. A partnership is currently holding P400, 000 in assets and 234,000 in liabilities. The partnership is to
be liquidated, and 20,000 is the best estimation of the expenses that will be incurred..
26. CC, PP, MM and HH are partners who share profits and losses on a 4:3:2:1
basis… ANSWER: The first available P3,000 will go to MM
27. A partnership has gone through liquidation and now reports the following, loan from JJ..
ANSWER: FF should receive P10,600 and RR P5,400
28. Allen, Branden & Caylin are in the process of liquidating their partnership…
ANSWER: P5,000 to Branden only
29. The following account balances were available to Perry, Quincy and Renquist…
ANSWER: Any amount in excess of P108,000
30. A local partnership was in the process of liquidating and reported…(Justice, Capital, Zobart..)
ANSWER: P15,533
31. The balance sheet of the Partnership Duro, Kemp, and Ruth..
ANSWER: P205,000
32. Tree, Nee, and Dad who share profits… Total cash payment to partners…
ANSWER: P20,000
33. Tree, Nee, and Dad who share profits…The amount cash withheld for anticipated liquidation…
ANSWER: P17,600
34. The PQR partnership is being dissolved.
ANSWER: To Q P6,000
35. A cash distribution plan (payment priority program) for Matthew, Norell and Reams
Answer: Priority creditors 300,000 Matthew-108,000 Norell-58,000 Reams-84,000
Theory CH 21
TRUE OR
FALSE
1. An partnership installment liquidation occurs over a short time period.
2. A partnership installment, liquidation generally results in the partnership cash when…
3. During a partnership installment liquidation, the accountant should…
4. The accountant should pay creditors as quickly…
5. Partnership capital accounts with a deficit balance…
6. To eliminate a deficit in partner’s capital account…
7. The partner with the greatest residual profit…
8. The partner with the greatest capital account balance…
9. Partners who withdraw the least amount from the partnership…
10. The cash distribution plan indicates the order in which payment…
11. A cash distribution plan is a guarantee to partners…
12. A cash distribution plan is prepared before…
13. The loss absorption power computed…
14. The size of a partner’s loss absorption power…
15. The schedule of safe payments outlines…
16. The schedule of safe payments can be used in partnership liquidation…
17. The schedule of safe payments must be used for partnership liquidation…
MC THEORY CH 21
18. Under the rule of offset, what is the proper disposition…
ANSWER: The loan is written off as a partnership loss if the partner does not have the cash to
cover the debit balance
19. In partnership liquidations, what are safe payments?
ANSWER: The amounts of distributions that can be made to the partners with assurance that
such amounts will not have to be returned to the partnership
20. If all partners are included in the first installment…
ANSWER: cash will be distributed according to the residual profit and loss sharing ratio
21. Partner’s maximum loss absorbable is calculated by…
ANSWER: dividing the partner’s capital balance by his or her profit-and-loss-sharing percentage
22. A schedule prepared each time cash…
ANSWER: safe payment schedule
23. Which partner is considered the most vulnerable…
ANSWER: The partner with the lowest vulnerability ranking, who also has the lowest loss absorption
24. The rank order is for claims against a bankrupt partner of…
ANSWER: II first, III second and I third
25. The partnership of Clapton, Seidel and Thomas…
ANSWER: They may seek remuneration from any partner they choose
26. The partnership of Nurr, Cleamons and Kelly…
ANSWER: It ranks lower in priority than Cleamon’s personal creditors and the creditors of the
partnership
27. What accounting transactions are not recorded by an accountant during liquidation?
ANSWER: Remaining unpaid debts settled and the distribution of any remaining assets to the partners
based on their profit and loss ratio
28. Which of the following statements is false concerning the schedule of liquidation?
ANSWER: Frequent reporting by the accountants is rarely necessary
29. What is the preferred method of resolving partner’s deficit balance?
ANSWER: The partner with a deficit balance contributes personal assets only if those personal
assets exceed personal liabilities
30. Which of the following statements is true concerning the distribution of safe payments?
ANSWER: The distribution of safe payments assumes that any capital deficit balances will prove to
be a total loss to the partnership
31. A schedule prepared each time cash is to be distributed is called (n)?
ANSWER: Advance cash distribution schedule
32. An advance cash distribution plan is prepared?
ANSWER: To determine the order and amount of cash each partner will receive as it becomes
available for distribution
33. In a partnership liquidation, the final cash distribution to the partners should be made in accordance
with the:
ANSWER: Balances of the partners’ capital accounts
34. The first step in preparing an advance cash distribution plan is to
ANSWER: determine the net capital interest of each partner
35. Offsetting a partner’s loan balance against his debit capital balance is referred to as the:
ANSWER: right of offset
36. If a partner with a debit capital balance during liquidation is personally solvent, the
ANSWER: partner must have invest additional assets in the partnership
37. In partnership liquidation, the final cash distribution to the partners should be made in accordance
with the:
ANSWER: balances of the partners’ capital accounts
38. In an advance plan for installment distributions of cash to partner’s of liquidating partnership,
each partner’s loss absorption potential is computed by
ANSWER: dividing the total of each partner’s capital account less receivables from the partner
39. In accounting for partnership liquidation, cash payments to partners afterall creditor’s claims have
been satisfied , but before the final cash distribution , should be according to:
ANSWER: Safe payments computaions
40. Which of the following is not correct with regard to a creditor claims against partnership and
individual partners?
ANSWER: Partnership creditors can have claims against partnership assets and individual partner
assets
41. Which of the following is not possible claim against a partners personal asset?
ANSWER: Personal creditors of other partners
42. Which of the following statements is correct with regard to a partnership liquidation?
ANSWER: Partner capital contributions and undistributed partnership
43. Which of the following is not a part of the partnership liquidation process?
ANSWER: Recognition of market value adjustments
44. Which of the following describes partnership lump-sum liquidation?
ANSWER: The sale of all noncash assets and payment of liabilities before a single distributions
45. Which of the following describes partnership installment liquidation?
ANSWER: A series of interim distributions to partners while the side sale of noncash assets
46. Which of the following is not correct with regard to a partnership statement of realization and
liquidation?
ANSWER: Balance sheet and income statement accounts appear on the statement
CHAPTER 10
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
DJD Construction is constructing a building for Hotel Dian
On January 1, 20x6, Silver Construction Company signed a contract
DJ builders construction builds luxury houses in remote areas
DJ Builders Construction enters into a contract with a customer
Nair A.G. enters into a contract with a customer to build an apartment… transaction price
for this contract
Same… Transaction price assuming Nair is only able to estimate
Same… Transaction price assuming Nair has limited info
Mediocre Inc. has entered into a very profitable fixed price contract
Digger commenced contract X47 on July 1, 20x3
Augustus is involved in a number of contracts at September 30, 20x3
A construction company entered into a contract on January 1, 20x5 to build a factory
A construction contract has a fixed price contract for P100,000 to construct a building
Monroe Construction Company uses the percentage-of-completion (overtime) method
Adler Construction Co. uses the percentage-of-completion (overtime) method
AJD Company recognizes construction revenue and expenses
Gomez Inc. began work in 20x14 on contract #3814… the portion of total gp to be recognized
as income in 20x4
Gomez Inc. began work in 20x14 on contract #3814… the portion of total gp to be recognized
as income in 20x5
Tyro Construction Company has two projects, for which is reported
Kiner Inc. began work in 20x4 on a contract for 8,400,000… used the percentage-ofcompletion gp to be recognized in 20x4
Same… uses the cost recovery method (point-in-time), gp to be recognized in 20x5
Horner Construction Co. uses the overtime/percentage-of-completion method… amount of
gp to be recognized for year ended December 31, 2x15
Same… If the point-in-time recovery method (zero profit approach) of accounting was used
On October 31, 20x4, Mr. Cruz bought property D’Vision Heights
Hayes Construction Corporation contacted to construct a building
Ube Construction Company has consistently used the overtime/percentage-of-completion
Layton Construction company has consistently used the percentage-of-completion method
Remington Construction Company uses the percentage-of-completion method
The Naples Company uses the overtime/percentage-of-completion method
29. Lark Corp. has a contract to construct a P5,000,000 cruise ship at an estimated cost of
P4,000,000.. how much revenue should Lark Corp. recognize
30. Lark Corp. has a contract to construct a P5,000,000 cruise ship at an estimated cost of
P4,000,000… what amount will be reported related to the Construction in Process account?
31. Lark Corp. has a contract to construct a P5,000,000 cruise ship at an estimated cost of
P4,000,000… what amount will be reported for accounts receivable
32. For a construction firm using the cost recovery method, if costs exceed billings on some
contracts by P1,000,000
33. The Key Largo Company uses the overtime/percentage-of-completion method
34. Hiser Builders, Inc. is using the point-in-time/cost recovery method
35. Lake Construction Company uses the overtime/percentage-of-completion method
36. AJD Builders is building a multi-unit residential complex… total expected profit for the year 20x8
37. AJD Builders is building a multi-unit residential complex… Measure of progress
towards completion
38. AJD Builders is building a multi-unit residential complex… using an output method
(sales method)
39. AJD Builders is building a multi-unit residential complex… using an input method (cost basis)
40. Anton Builders constructs storage houses… Total expected profit for the year
41. Anton Builders constructs storage houses… The percentage of completion based on work
42. Anton Builders constructs storage houses… what amount should be shown in the statement
of profit
43. Anton Builders constructs storage houses… what amount should be shown in the statement
of financial position
44. Seasons Construction is constructing an office building under contract for Cannon Café… What
is the balance in the Accounts Receivable account
45. At December 31, 2x15, Seasons Construction estimates that it is 75% complete… Total
amount of Construction Expenses
46. At December 31, 2x15, Seasons Construction estimates that it is 75% complete… Total amount of
Construction Expenses… Difference between the Construction in Process and the Billings on
Construction in Process accounts
47. Seasons Construction completes the remaining 25% of the building
48. Cooper Construction Company had a contract starting April 20x4… Cooper would
recognize gross profit on the building at
49. Cooper Construction Company had a contract starting April 20x4… Cooper would
report Construction in Process in the amount of
50. During 20x4, Gates Corp. started a construction job with a total contract price
51. In 20x4, Fargo Corporation began construction work under a three-year contract… How
much cash was collected
52. In 20x4, Fargo Corporation began construction work under a three-year contract… what was
the initial estimated total income
52. What was the initial estimated total income before tax on this contract
Use the following information for questions 53 and 54:
Eilert Construction Company had a contract starting April 20x4, to construct building that is
expected to be completed in September 20x5, at an estimate P13,750,000. At the end of 20x4, the
costs to date were P6,325,000 and the estimated to complete had not changed. The progress
billings during 20x4 were P3,000,000 and the cash collected during 20x4 was P2,000,000.
Eilert uses the percentage-of-completion method
53. For the year ended December 31, 20x4, Eilert would recognize gross profit on the building
of
54. At December 31, 20x4, Eilert would report Construction in Process in the amount of
55. Belgium Co. is constructing a tunnel for P800 million. Construction began in 20x4 and is
estimated to be completed in 20x8. At December 31, 20x6, Belgium has incurred costs totaling
P356 million with P85 million of that incurred in 20x6, P143 million in 20x7, and the remainder
during 20x8. Belgium believes that it completed 30% of the tunnel during 20x6. although that
may change based on future activity. Belgium Co. uses PAS 11 for its accounting and regards
its cost numbers as very uncertain (cost recovery method/zeroprofit approach). What amount of
revenue should Belgium Co. recognize for the year ended December 31, 20x6?
56. Wynn, Inc. has a contract to construct a large hotel for P12,000,000. The contract was on
January 2, 20x4 and it was expected that the hotel would be complete on C. 31, 20x7. At the date
the contract was signed, Wynn, Inc. anticipated the cost of construction would total P11,000,000.
At the end of 20x5 the total cost estimated P11,870,000 and at the end of 20x6 the total cost
estimate rose to P12400 000. Due to certain circumstances, Wynn, Inc. believes there are
inherent hazards beyond the normal, recurring business risks. Wynn, Inc. expects to recover the
contract. Under these conditions, what amount of loss, if any, should Wynn recognize in each of
the following years?
57. Wynn Inc has a contract to construct….
Under these conditions, what amount of revenue should Wynn Inc, recognize in each of
the following years?
58. Gorman Construction Co. began…..
Which of the following should be shown on the income statement for 20x4 related to
Contract 1?
59. Gorman Construction Co. began…..
Which of the following should be shown on the balance sheet at December 31, 20x4
related to Contract 2?
60. Gorman Construction Co. began…..
Which of the following should be shown on the balance sheet at December 31, 20x4
related to Contract 3?
61. GR&R Enterprise entered into a construction agreement in 20x4 that called for a contract
price of 9, 600, 000. At the beginning…
Compute the amount of construction in progress (net) – contract assets or progress
billings (net)- contract liabilities for the year 20x5?
62. The Giant Construction Company started work in three job sites during the current year. Any
costs incurred are expected to be recoverable. . .
What would the amount of Construction in Progress account to be reported on the
year end balance sheet if the (1) overtime/percentage-of-completion method and (2) point in
time/ cost recovery method of construction accounting were used?
63. Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under
contract with Cactus Development Co. ….
What would be the journal entry made in 20x4 to record revenue?
64. Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under
contract with Cactus Development Co. ….
In its December 31, 20x4 balance sheet, ADH would report:
65. Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under
contract with Cactus Development Co. ….
What would be the journal entry to record revenue in 20x5?
66. As of December 31, 20x6, Cady Construction has one construction job for which the
construction in progress (CIP) account has a balance of 20 000 and the billings on construction
contract account has a balance of 14 000. Cady has another construction job for which the
construction progress account has a balance of 3 000 and the billings on construction contract
account has a balance of 5000. Indicate the amount of contract asset and or contract liability that
Cady would show in its December 31, 2016 balance sheet?
67. Sahara Desert Homes (SDH) reports under PFRS and constructed a new subdivision
during 20x4 and 20x5 under contract with Cactus . . .
What would be the journal entry made in 20x4 to record revenue?
68. In its December 31, 20x4 balance sheet SDH would report
69. What would be the journal entry SDH would use to record revenue in 20x5?
70. The company signed an 800 000 contract to build an environmentally friendly access trail
to Morayta, Manila. The project. . . . .
71. Chicane builders Inc employs the cost to cost . . . .
The estimated costs to complete the project at December 31, 20x5?
72. Chicane builders Inc employs the cost to cost . . . .
The actual costs incurred during the year 20x5
73. On october 1, 20x5delta signed a fixed term construction contract. Details are .. . . .
Compute the amount contract assets/liabilities using (outpu measure- proportional
cost approach?)
74. In 20x4, Kalye Construction Company was contracted to build the private.. .
In 20x4, Kalye Construction Company realized gross profit from the project amount of?
75. On september 30, 20x4 Jaja Inc was awarded to contract to build a 1000 room hotel . . .
In 20x4 assuming use of the percentage of completion method of accounting Jaja
Inc received cash a total fee of:
76. In 20x4, AJD construction company was contracted to build village company’s private
road network for 100 million. . . .
Payments made by Village company in 20x4 amounted to:
THEORIES CHAPTER 10
1. Companies must use the percentage-of-completion (overtime) method when estimates
or progresses toward completion are reasonably dependable.
FALSE
2. The most popular input measure used to determine the progress toward completion is the
cost basis.
TRUE
3. If the difference between the Construction in Process and the Billings on Construction
in Process account balances is a debit, the difference is reported as a current asset
TRUE
4. The Construction in Process account includes only construction costs under the percentage
of completion method (overtime).
FALSE
5. Under the cost recovery (point in time) method, companies recognize revenue and costs only
when the contract is completed.
FALSE
6. The principal advantage of the cost recovery (point-in-time) method is that reported
revenue reflects final results rather than estimates.
FALSE
7. Companies must recognize a loss on an unprofitable contract under the percentage-ofcompletion method (overfime) but not the cost recovery (point-in-time) method.
FALSE
8. A loss in the current period on a profitable contract must be recognized under both
the percentage of-completion (overtime and cost recovery (point-in-time) method.
FALSE
9. Under the completion-of-production basis, companies recognize revenue when agricultural
crops are harvested since the sales price is reasonably assured and no significant costs are
involved in product distribution.
TRUE
10. The provision for a loss on an unprofitable contract may be combined with the Construction
in Process account balance under percentage-of-completion (overtime) but not cost recovery
(point-in-time) Method
FALSE
11. Under the percentage-of-completion (overtime) method, amounts billed and the cash actually
received affect income recognition.
FALSE
12. Under the percentage-of-completion (overtime) method, the percent complete is often
estimated by comparing the cost incurred to date with the total estimated cost to complete.
TRUE
13. The percentage-of-completion (overtime) and cost recovery (point-in-time) methods
'calculate different amounts of total profit or loss for a particular contract.
FALSE
14. Use of the percentage-of-completion overtime) method is dependent on a firm's ability
to make dependable forecasts of future costs.
TRUE
15. Under the cost recovery (point-in-time) method, gross profit or loss is never recognized
until the contract is completed.
FALSE
16. Under the cost recovery (point-in-time) method used to account for long-term contracts under
PFRS, equal amounts of revenue and cost are recognized until all costs are recovered.
TRUE
17. Estimated losses on long-term contracts are recognized ratably over the contract
term regardless of the revenue recognition method used.
FALSE
18. The most popular input measure under percentage-of-completion (overtime) accounting is
the cost to-cost (point-in-time) method.
TRUE
19. Estimates of architects and engineers of percentage-of-completion (overtime) are
not acceptable under generally accepted accounting principles.
FALSE
20. At the conclusion of a construction contract, the balance in Construction in Progress will
be exactly equal to the amount in Progress Billings on Construction Contracts when using the
percentage-of completion (overtime) method.
TRUE
21. If analysis of construction contracts indicates that there will be an overall loss on the
contract, the loss should immediately be recognized in full under the cost recovery (pointin-time) method and me percentage-of-completion (overtime) method.
TRUE
22. As construction contract estimates change, retroactive adjustments are required if the
amount is material.
FALSE
23. Change orders are modifications of an original contract that effectively change
the provisions of mine contract, only at the option of the contractor.
FALSE
24. Firms have free choice as to whether they use the percentage-of-completion (overtime)
method of cost recovery (point-in-time) method to account for a long-term contract.
FALSE
25. Companies must use the percentage-of-completion (overtime) method when estimates
of program toward completion can be estimated reliably.
FALSE
26. The most popular input measure used to determine the progress toward completion is the
cost-to-cost basis.
TRUE
CHAPTER 10 THEORIES, 27-70
1. If the difference between the construction in process and the billings on construction in process
account balances is a debit, the difference is reported as a current asset.
2. The construction in process account includes only construction costs under the percentage-ofcompletion (overtime) method.
3. Under the cost-recovery (point-in-time) method, companies recognize revenue and costs
only when the contract is completed.
4. The cost-recovery (point-in-time) method recognizes revenue only to the extent of costs incurred
that are expected to be recoverable.
5. Companies must recognize a loss on an unprofitable contract under the percentage-ofcompletion (overtime) method but not the cost-recovery (point-in-time) method.
6. A loss in the current period on a profitable contract must be recognized under both the...
7. For contracts in progress, companies should disclose the aggregate amount of costs incurred
and...
8. The provision for a loss on an unprofitable contract may be combined with the construction in
process...
9. The most popular input measure under percentage-of-completion accounting is the...
10. Estimates of architects and engineers of percentage-of-completion (overtime) are not
acceptable...
11. At the conclusion of a construction contract, the balance in construction in progress will be
exactly equal to the amount in Progress billings on construction...
12. If analysis of construction contracts indicates that there will be an overall loss on the contract, the
loss should immediately...
13. As construction contract estimates change, retroactive adjustments are required if the amount is
material.
14. Change orders are modifications of an original contract that effectively change the provisions of
the....
Multiple choice THEORIES
1. Companies must use the percentage-of-completion (overtime)method when reliable estimates
are available...
2. The percentage-of-completion (overtime) method must be used when certain conditions exist...
3. When work to be done and costs to be incurred on a long-term contract can be estimated
reliably, which of the...
4. How should the balances of progress billings and construction in process be shown...
5. In accounting for long-term construction-type contract using the percentage-of-completion
(overtime) method, the gross profit recognized...
6. How should earned but unbilled revenues at the financial statement sate on a long-term
construction...
7. One of the more popular input measures used to determine the progress toward completion...
8. Which of the following are recognized each period under the cost-recovery (point-in-time)
method?
9. Under the cost-recovery (point-in-time) method of construction accounting...
10. Cost estimates on a long-term contract may indicate that a loss will result on completion...
11. Cost estimates at the end of the second year indicate a loss will result on completion of the...
12. When there is a significant increase in the estimated total contract costs but the increase does
not...
13. How should the balances of progress billings and construction in process be shown at reporting...
14. In accounting for a long-term construction-type contract using the percentage-of-completion...
15. How should earned but unbilled revenues at the balance sheet date on a long-term
construction...
16. One of the more popular input measures used to determine the progress toward completion...
17. Dilla Construction company's projects extend over several years and collection of receivables is...
18. Cost estimates at the end of the second year indicate a loss will result on completion of
the entire...
19. How should the balances of progress billings and construction in progress be shown at reporting
dates....\
20. If the percentage-of-completion (overtime) method is used, what is the basis for determining the
gross...
21. If the cost recovery method is used, what is the basis for determining the income to be
recognized...
22. Which of the following would be used in the calculation of the gross profit recognized in the...
23. Which of the following is not an element as being necessary in order to use percentage-ofcompletion...
24. Which of the following is not a difference between the percentage-of completion (overtime) and
cost recovery methods of accounting...
25. The theoretical support for using the percentage-of-completion (overtime) method...
26. If a company uses the cost recovery method of accounting for long-term construction
contracts,....
27. When the percentage-of-completion (overtime) method of accounting for long-term
construction...
28. When comparing the percentage-of-completion (overtime) and cost recovery methods of
accounting...
29. A company uses the percentage-of-completion (overtime) method to account for a four year ...
30. In accounting for a long-term construction contract for which there is a projected profit, the
balance in the...
CHAPTER 11 MC PROBS
1. Jennifer Talosig-Tan enterprises licenses customer-relationship software to jenny company in
addition to providing the software itself,...
2. AA Computers licenses customer-relationship software to ABS company. In addition to
providing the software itself...
3. An author, Anton D., Licenses the images and names of the characters of his series of
popular....when should revenue be recognized?
4. How many performance obligations exist in this contract for license?
5. Portia Glecilda Nacinopa Pharmaceuticals entered into a licensing agreement with PortGle Lab for
a new drug....
6. Rhea untalan mansibang associates sells two licenses to Yvette Tingin-Atienza Company
on......the software license is?
7. The license to use the name, rhea associates is:....
8. Rhea Untalan Mansibang… How much revenue will Rhea recognize in 20x6 under this
arrangement?
9. Amabella Caceres-Saker Engineering licensed software to oil-drilling...
10. Billy Biotech enters into a licensing agreement... Determine the transaction price of the
arrangement for Billy Biotech:
11. Billy Biotech enters into a licensing agreement... On December 20, 20x5, license revenue
amounted to...
12. Billy Biotech enters into a licensing agreement... On January 15, 20x6, license revenue amounted
to...
13. The ReSA Singing Group League... How much of the P1,000,000 initial license fee should the
RSGL recognize as revenue in the first year of the contract?
14. Assume that the RSGL anticipates that, in addition to receiving the P1,000,000...
15. ReSA FoodGroup operates several restaurants around the world... How many performance
obligations exist in this contract for franchise license?
16. ReSA FoodGroup operates several restaurants around the world... The license fee allocated to the
right to operate a restaurant in recognizing as revenue:
17. Darlene Tolentino Ysmael... How many performance obligations exist in the contract for
franchise?
18. Darlene Tolentino Ysmael... The initial franchise fee of P1,000,000 is recognized as
revenue:
19. Atianzar and Cabalde Computers... How many performance obligations exist in
this contract for franchise?
20. Atianzar and Cabalde Computers... The franchisee revenue should be recognized:
21. Atianzar and Cabalde Computers... The franchisee revenue on December 31, 20x7 should
be:
22. Atianzar and Cabalde Computers... The franchisee revenue on December 31, 20x8 should
be:
23. Fred Esquillo, Inc.
24. Liezl Sangalang Malabanan, Inc.
25. On January 1, 20x4 Ethelmea Dulva Dairy Treats, Inc.
26. Mean Dones and Jeremie Jane Roldan Inc.
27. KimDrei Group of companies... When KimDrei prepares its financial statements,
the franchise fee revenue to be reported is:
28. KimDrei Group of companies... When KimDrei prepares its financial statements,
the unearned franchise fee revenue to be reported is
29. Ronella Ocampo sells hairstyling...
30. Joey Muffler sells franchise arrangements... What amount would Joey calculate...
31. Joey Muffler sells franchise arrangements... What journal entry would Joey record...
32. Joey Muffler sells franchise arrangements... How much revenue would Joey recognize...
33. On April 1, 20x4 Joy Grigsby, Inc.
34. Anna Cielito Joaquin, Inc.
35. Carmita Nocom and Ellen Riofrio... The amount of revenue...
36. Carmita Nocom and Ellen Riofrio... The amount of unearned franchise fee...
37. Carmita Nocom and Ellen Riofrio... What entry should Carmita Nocom and Ellen
Riofrio...
38. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from franchise fee
on March 20, 20x5:
39. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from franchise fee
on June 15, 20x5:
40. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from continuing
franchise fee-services...
41. Gina Lopez... How many performance obligations...
42. Gina Lopez... The transaction price of this arrangement...
43. Gina Lopez... The amount of revenue reported each year:
44. A health club enters into a one-year contract...
45. The Rink offers annual P2,000 memberships... How many performance obligations...
46. The Rink offers annual P2,000 memberships... Calculate how much of the transaction
price should be allocated?
47. The Rink offers annual P2,000 memberships... How much of the contract price...
48. The Rink offers annual P2,000 memberships... The journal entry to recognize sale of a
new membership...
49. Assume that a customer enrolls in AAA’s Premier Membership... The journal entry on
August 1, 20x6:
50. Assume that a customer enrolls in AAA’s Premier Membership... The journal entry on
December 31, 20x6:
51. Assume that a customer enrolls in AAA’s Premier Membership... The current liability
section...
52. On June 1, DD Company shipped twenty five DVD to BB View Store... The amount
remitted by BB View Store is:
53. On June 1, DD Company shipped twenty five DVD to BB View Store... The consignment
profit is:
54. On June 1, DD Company shipped twenty five DVD to BB View Store... The cost of
inventory on consignment...
55. On August 5, 20x5, Famous Furniture... The amount cash received...
56. On August 5, 20x5, Famous Furniture... The total profit on units sold...
57. TS Trading consigned 100 beds... The number of units sold...
58. TS Trading consigned 100 beds... The amount remitted to TS co.
59. TS Trading consigned 100 beds... 9The consignment profit (loss) of TS Co.
60. On November 30, Northrup Company consigned 90 freezers to Watson Company for sale at
$1,600 each and paid $1,200 in transportation costs. A report of sales was received on December 30
from Watson reporting the sale of 20 freezers, together with a remittance of the $27,200 balance due.
The remittance was net of the agreed 15% commission. How much, and in what month, should
Northrup recognize as consignment sales revenue?
On October 1, 20x4, the NN Co mpany consigned one hundred wall clocks to P &GRetailers, Inc.
each wall clock had a cost of P150. Freight on the shipment was paid by NN Company forP200. On
December 1, 20x4, P&G submitted an account sales stating that it had sold sixty pieces and itwas
remitting the P12,480 balance due. The remittance was net of the following deductions from the
salesprice of the walls clocks sold:
Commision
Advertising
Delivery and installation
(20% of sales price)?
P500
P100
61. What was the total sales price of the walls clock sold by P&G Retailers, Inc.?
62.What was the cost of inventory on consignment?
The CC Manufacturing Company delivered ted DVD players to CLTV Company on consignment.
These DVD player cost P3000 each and are to be sold at P5000 each….
63. The number of units sold by TV Co. is:
64. The profit (loss) on consignment realized by CC Manufacturing company is:
65. The cost of inventory in the hands of CLTV Company is:
On May 1, 20x4, TV Inc. consigned 80 VCD players to ED’s TV…….
66. The total sales price of the VCD’s sold by ED’s TV was:
67. The inventory of VCDs will be reported on whose balance sheet and at what amount?
On May 15, 20x4, AA Sales Company received a shipment of merchandise with a selling price of 15,000
from PC Company. The consigned goods cost PC Company 10,000 and freight charges of 120 had
been paid to ship the goods to AA Sales Company…..
68. The cash remitted by AA sales company is:
69. The profit on consignment is:
70. The cost of unsold units in the hands of AA is:
On May 1, RR Products Company ships five of its appliances to SZ Company on consignment. The cost of
the appliances shipped is P155 per unit.
71. The total amount remitted to consignor as of June is:
72. The profit on consignment is:
73. The cost of inventory on consignment is:
Al Company consigned five calculators, with the cost of P800 each, to the OO Company which was to sell
these goods for the account and ink of the former for a commission of 15% of selling price….
74. The amount of cash remitted by OO Company is:
75. The consignment profit (loss) is:
76. The amount of inventory on consignment of AL Company is:
On October 5, 20x4, the PPG Trading Co. consigned 30 computer units, costing P8,000 each to
Pampanga, Inc. The units were to be sold on either cash or credit basis at a commission of 15%
net sales……
77. The amount due from BB, Inc is:
78. The consignment profit is:
79. The cost of inventory on consignment is:
80. NN Company consigns sign pens to retailers, debiting Accounts Receivable for the retail sales price
of the sign pens consigned and crediting Sales……
81. Berry farm produces organic tomatoes and strawberries…….
82. Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine….
83. The net income on regular sales is:
84. The net income on consignment sales is:
85. Seahawks, Inc.
No sales of consigned goods were made through December 31. Seahawks December 31
balance sheet should include consigned inventory at…..
MC Theories
6. Which of the following is not true about accounting for revenue from franchise
agreements? Ans:
7. All revenue for franchise companies is derived from
Ans: c. sale of initial franchise and continuing fees
8. Franchise fees should be recognized
Ans: d. when performance obligations are satisfied
9. Franchise revenue are recognized over time if
Ans: b. the franchisor is providing access……
10. types of franchising arrangements include all of the following
except Ans:
11. Continuing franchise fees should be recorded by the franchisor
ANs: as revenue when uncertainty related…..
12. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases
Ans:
13. Franchise revenues are recognized over time if
Ans: None of these
20. In consignment sales, the consignee
Ans: prepares an “account report”…..
21. Revenue is recognized by the consignor when the:
ANs: consignor receives an account sales from the consignee
22. Goods on consignment should be included in the inventory
of: ANs: the consignor but not the consignee
23. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the:
Ans: consignor when notification is received….
24. The role of the agent in a Principal – agent relationship is to
ANs: arrange for the principal….
25. The use of the net method of recognizing revenue by an agent
ANs: is the correct method….
26. Consignments are a specialized marketing method whereby the…
ANs: consignee takes possession of merchandise….
27. Consigned goods are recognized as revenues by the
Ans: consignor when it receives payment from consignee for goods sold
28. Which of the following is most true regarding consignment arrangements?
ANs: Revenue is recognized upon sale by the consignee to an end customer
29. Consignments are a specialized marketing method whereby the
Ans: Consignee takes possession of merchandise but title remains with manufacturer
30. Consigned goods are recognized as revenues by the
ANs: consignor when it receives payment from consignee for goods sold
Todd Sweeney is an artist who sells his work under consignment….
31. Sweeney most likely should recognize revenue when:
Ans: when the barbershop sells the painting
32. After Sweeney has transferred a painting to a barbershop, the painting:
Ans: should be counted in Sweeney’s inventory until the barbershop sells it
33. Which of the following is most true regarding consignment arrangements?
ANs: c. Revenue is recognized upon sale by the consignee to an end cust
. EXERCISE 7 – MODULE 17
True 1. Liquidation is a process by which the assets of the business are converted into cash,
the liabilities of the business are settled, and any remaining amount is distributed to the
owners.
True 2. No bonus is to be allocated if a partnership incurred a loss; however, salaries are
provided whether there is profit or loss.
False 3. When a new partner invests in a partnership, the new partner's capital account is
credited at an amount equal to the carrying value of his investment.
YOU ANSWERED
True 4. A partnership is created by agreement between the partners while a corporation is
created by the operation of law.
True 5. Partnership dissolution may result to liquidation.
False 6. In a partnership, a stipulation which excludes one or more partners from any share in
the profit or losses is legal.
False 7. Purchase of interest of one or more of the existing partners should be recorded in a
journal entry in the partnerships books.
True 8. A partnership in which all partners are individually liable is called a general
partnerships.
False 9. All withdrawals of the partners, whether temporary or permanent are debited to the
partners’ capital account, prior to the preparation of closing entries.
YOU ANSWERED
False 10.In case of dissolution, the transfer of ownership, whether to a new or existing
partner, does not require the approval of the remaining partners.
True 11. Liquidation is the termination of business operations.
CORRECT!
True 12. Under the cash priority program when all of the priorities are paid, any remaining
cash is distributed to the partners based on their respective profit or loss ratios.
True 13. A loan payable to a partner has a lower priority over the claims of outside creditors.
CORRECT!
True 14. Under the bonus method any increase or decrease in the capital credit of a partner
is deducted from or added to the capital credits of the other partners.
CORRECT!
True 15. Liquidation may either be voluntary or involuntary.
False 16. When financial statements are prepared during the liquidation process, all of the
assets of the partnership are restated to their fair market values, and liabilities to their carrying
amounts.
False 17. The legal right of offset allows a loan payable by a partner to the partnership to
be offset against his capital credit balance.
YOU ANSWERED
False 18. Liquidation is the conversion of assets into cash, and the payment of owners loans
and capital.
False 19.If the partnership is continued after dissolution, the old articles of partnerships may
still apply.
True 20.One of the reasons for incorporation of a partnership is limited liability of
shareholders.
CORRECT!
False 21. In a partnership, there may be dissolution because of the unlimited life of the
firm.
!
True 22. In case of partnership insolvency, the rule of marshalling of assets is applied
under this rule, only the excess of a partner's personal assets over his personal
liabilities will he used to settle partnership debt.
False 23. In the absence of stipulation, the share of each partners in the profits and
losses shall be equal, but the industrial partner shall not be liable for the losses.
True 24. On date of incorporation, normally the books of the partnership are closed
and new books are set up for the corporation.
CORRECT!
False 25. In installment liquidation, the carrying amount of any unsold non-cash asset is
considered as a loss, which is allocated to the partners’ capital balances equally.
True 26. A new partner may be admitted when he purchases part or all of the interest of one or more of
the existing partners.
False 27. As compared to corporations, the formation of a partnership requires more formality.
False 28.In lump-sum liquidation, the total gain or loss on the sale is allocated to the partners capital
balances equally.
False 29. A partnership is formed for a business undertaking that is, normally of continuing nature,
just like a joint venture.
EXERCISE 8
False 1. "Step 2" of the recognition principles of PFRS 15 is the allocation of the
transaction price to the performance obligations in the contract.
True 2. According to PFRS 15, a measure of progress based on the hours expended
on the contract is an application of the inputs method.
False 3. If the entity retains control over an asset created during the construction
period in a long-term construction contract, revenue is most likely not recognized using
the percentage of completion method.
False 4. If the performance obligation is a franchise contract is satisfied
overtime, revenue is recognized when the obligation is satisfied.
True 5. If the transaction price in a construction contracts includes a variable
consideration, for example a penalty provision or performance bonus, the entity
shall estimate the variable consideration taking into consideration any constraints to
the estimate.
False 6. The current PFRSs do not address the accounting for revenues from franchise
contracts.
True 7. In the construction of complex structures wherein the cost incurred and other
efforts expended on the contract do not correlate to the stage of completion of the
project, the most appropriate method for measuring progress on the contract are the
outputs method.
True 8. If the entity cannot demonstrate that a performance obligation is satisfied over
time, it is presumed that the performance obligation is satisfied at a point in time.
True 9. PFRS 15 requires that revenue from all long-term construction contracts
be recognized using the percentage of completion method.
False 10. Franchise is not a license.
False 11. The percentage of completion under a construction contract is always
computed based on the costs incurred to date as it bears to the total expected costs on
the contract.
False 12. According to PFRS 15 Revenue from Contracts with Customers, contracts
with customers are generally combined and accounted for as a single contract.
True 13. A franchise may be between two private entities or individuals.
True 14. Under the current PFRSs, initial franchise fees are recognized in full as
revenue when there is substantial performance by the franchisor indicated by the
commencement of operations of the new franchise business.
False 15. If the entity cannot demonstrate that a performance obligation is satisfied at a
point in time, it is presumed that the performance obligation is satisfied over time.
True 16. Revenue from sales-based royalties is recognized at the end of the year of sale.
False 17. Lease contracts are covered by PFRS 15.
False 18. The transaction price is the initial franchise fee.
False 19. The third step in the recognition of revenue under PFRS 15 is to identify the
contract with the customer.
False 20. If the performance obligation in a franchise contract is satisfied at a point in
time, revenue is recognized over the duration of the contract as the obligation is
satisfied.
⚫
⚫
⚫
⚫
⚫
⚫
⚫
⚫
⚫
⚫
⚫
⚫
Traditionally, infrastructure for public services, are constructed, operated and maintained by the
public sector. However, there may be service concession arrangements whereby a public sector
entity grants a private entity the right to conduct, operate and or maintain an infrastructure for
public services. Such arrangements are called “build-operate-transfer” (BOT).
Other terms for BOT arrangements are “service concession arrangement,” “rehabilitate-operatetransfer,” public-to private service concession” and “private-public partnership (PPP).
IFRIC 12 applies to BOT contracts whereby the grantor controls or regulates what services the
operation must provide using the assets, to whom, and at what price, and also controls any
significant residual interest in the assets at the end of the term of the arrangement.
IFRIS 12 applies to both (a) infrastructure that is yet to be constructed or acquired by the
operator and (b) existing infrastructure that the operator undertakes to operate and maintain.
The outsourcing of the operation of a governmental units internal services is not a service
concession arrangement within the scope of IFRIC 12 or SIC 29.
The infrastructure in a BOT contract is not recognized as an item of PPE by the operator.
The operator in a BOT contract acts as service provider. The operator shall recognize revenue
from the service concession arrangement using PFRS 15 for both construction or upgrade
services and operation services.
The common characteristics of all service concession arrangements is that the operator both
receives right and incurs an obligation to provide public services.
The operator recognizes a financial assets if it has a contractual right to receive cash or other
financial assets from the grantor.
The operator recognizes an intangible assets if the operation has a contractual right to charge
users of the public services.
An operator capitalizes borrowing costs in accordance with PAS 23 Borrowing Costs if the
consideration in a service concession arrangement is an intangible asset.
Financial assets and intangible assets received as consideration from a BOT contract are
subsequently accounted for under PFRS 9 and PAS 38, respectively.
Relevant provision of the PFRS for SMEs
Section 34 Specialized Activities
Service concession arrangements
A service concession arrangement is as arrangement whereby a government or other public sector body
(the grantor) contracts with a private operator to develop (or upgrade), operate and maintain the
grantor’s infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks,
prisons or hospitals.
In those arrangements, the grantor controls or regulates what services the operator must provide using
the assets, to whom, and at what price, and also controls any significant residual interest in the assets at
the end of the term of the arrangement.
Two principal categories of service concession arrangements
There are two principal categories of service concession arrangements:
A.
In one , the operator receives a financial asset - an unconditional contractual right receive a
specific or determinable amount of cash or another financial asset from the government in return
for constructing or upgrading a public sector asset, and then operating and maintaining the asset for a
specified period of time. This category includes guarantees by the government to pay for any shortfall
between amounts received from users of the public service and specified or determinable amounts.
B. In the other, the operator receives an intangible asset - a right to charge for use of a public sector
asset that it constructs or upgrades and then operates and maintain for a specified period of time. A right
to charge users is not an unconditional right to receive cash because the amounts are contingent on the
extent to which the public uses the service.
Sometimes, a single contract may contain both types: to the extent that the government has given an
unconditional guarantee of payment for the construction of the public sector asset, the operator has a
financial asset; to the extent that the operator has to rely on the public using the services in order to
obtain payment, the operator has an intangible asset.
Accounting - financial asset model
The operator shall recognize a financial asset to the extent that is has an unconditional contractual right
to receive cash or another financial asset from or at the direction grantor for the construction services.
The operation shall measure the financial asset at fair value. Thereafter, it shall follow Section 11 Basic
Financial Instruments and Section 12 Other Financial Instruments Issues in accounting for the
financial asset.
Accounting - intangible asset model
The operator shall recognize an intangible asset to the extent that it receives a right (a license) to charge
users of the public service. The operator shall initially measure the intangible asset at fair value.
Thereafter, if shall follow Section 18 in accounting for the intangible asset.
Operating revenue
The operator of a service concession arrangement shall recognize, measure and disclose revenue in
accordance with Section 23 Revenue for the services it performs.
DERIVATIVES
Derivatives are financial contracts or other contract with all the three of the following characteristics
(IAS 39).
(1) Whose value changes in response to change in a specific interest rate, security price, commodity
price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable
(sometimes called the “underlying”).
For example, a call option that gives the holder a right to purchase a share for a fixed price
increases in value when the price of that share increases. In the case, the share price is an underlying
that affects the value of the option.
(2) It requires no initial net investment or an initial net investment that is smaller than would be
required for other types of contracts.
For instances, a call option on a share can usually be purchased for an amount much smaller
than what will be required to purchase the share itself.
(3) It is settled at a future date.
For instance, a call option on a share is settled on the future date on which the holder may
exercise that call option to purchase the share for a fixed price.
Common examples of derivatives are forward contracts, swaps and options. In the statement of financial
position, derivatives are measured at fair values. As a general rule, changes in the fair value of a
derivatives are recognized in profit or loss. However, when the derivative is used to offset risk and
special hedge accounting conditions are met, some or all changes in fair value are recognized as a
separate component of equity.
HEDGING
Hedging is a risk management technique that involves using one or more derivatives or other
hedging instruments to offset changes in fair value or cash flows of hedged items. The general
provisions on hedging and hedge accounting are contained in PAS 39. A hedging relationship has two
components namely:
(1) Hedged item. A hedge item is an asset, liability, form commitment, highly probable forecast
transaction , or net investment in a foreign operation. To be designated as a hedged item, the
designated hedged item should expose the entity to risk of changes in fair value or future cash flows.
(2) Hedging instruments. A hedging instrument is a designated derivative or a designated
non-derivatives financial liability whose fair value or cash flows are expected to offset changes in fair
value or cash flows of a designated hedged item. Examples of hedging instruments are foreign exchange
forward contracts, interest rate swap and commodity future contracts.
There are three types of hedging relationships. These are:
(a) Fair value hedge. This is a hedge of the exposure to changes in fair value of a recognized asset or
liability or an unrecognized firm commitment that is attributable to a particular risk, and that could
affect profit or loss. Under fair value accounting, changes in the fair value of the hedging instrument and
of the hedged item are recognized in profit or loss at the same time. The result is that there will be no
(net) impact on profit or loss of the hedging instrument and the hedge item if the hedge is fully effective,
because in fair value will offset each other. If the hedge is not 100 percent effective (i.e., the changes in
fair value do not fully offset), such ineffectiveness is automatically reflected in profit or loss.
(b) Cash flow hedge. This is a hedge of the exposure to a variability in cash flow that is attributable to
particular risk associated with a recognized asset or liability or a highly probable forecast transactions
and could affect profit or loss. Under cash flow hedge accounting, changes in the fair value of the hedging
instruments attributable to the hedge risk are deferred (rather than being recognized immediately in
profit or loss). The accounting for the hedged item is not adjusted.
(c) Foreign current hedge. This is a hedge of the exposure to foreign currency exchange gains or losses on
an entity’s net investment in a foreign operation (which is the amount of the entity’s interest in the net
asset of that operation). Hedges of net investments of foreign operations are accounted for like cash flow
hedges.
Hedge Accounting
Hedge accounting recognized the offsetting effects on profit or loss of changes in the fair value of the
hedging instrument and the hedge item every accounting period. (However, under BSP Circular 476,
banks are required to book the market-to market valuation for securities at fair value through profit or
loss on a daily basis although they are permitted to do the booking every end of the month provided it
has an adequate mechanism in place to determine the daily fair values of the securities)
To qualify for hedge accounting, the hedging relationship should meet the following conditions:
(1) There is a formal designation and documentation of the hedging relationship and the entity’s risk
management objective and strategy for undertaking the hedge. Hedge accounting is permitted only
from the date such designation and documentation is in place.
(2) The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk.
(3) The effectiveness of the hedge can be measured reliably.
(4) The hedge is assessed on an going basis and determined actually to have been highly
effective throughout the financial reporting periods for which the hedge was designated.
(5) For cash flow hedges, a hedged forecast transaction must be highly probable and must present an
exposure to variations in cash flows that could ultimately affect profit or loss.
FOREIGN CURRENCY FORWARD CONTRACT
A foreign currency forward contract is an agreement to exchange currencies of different countries on a
specific future date at the specific rate(the forward rate).
The fair value of a foreign currency forward contract is determined by reference to changes in the
forward rate over the life of the contract. The changes in the forward rate may be discounted to the
present value.
Foreign value currency contracts are usually entered into for the following purposes:
1. A fair value hedge - this includes hedges against a change in the fair value of:
⚫ A recognized foreign currency denominated asset or liability.
⚫
An unrecognized foreign currency firm commitment.
2. A cash flow hedge - this includes hedges against the change in cash flow associated
with: ⚫ A forecast foreign currency transaction.
⚫
An unrecognized foreign currency firm commitment.
Fair Value Hedge of an Exposed Net Asset or Net Liability Position
A foreign currency exposed net asset position is the excess of assets denominated in foreign currency
over the liabilities denominated in the same foreign currency and translated at the current rate. A
foreign currency exposed net liability position is the excess of liabilities denominated in a foreign
currency over assets denominated in that foreign currency and translated at the current rate.
Companies enter into forward contracts to limit the amount of gains or loss from the delayed settlement of
foreign-currency- denominated accounts receivable and payables. A forward contracts to hedge an exposed
asset or liability position may be used by either importer to hedge accounts payable, i.e., a company enters
into a forward contract to purchase foreign currency or by exporters to hedge accounts receivable, i.e., a
company enters into a forward contract to sell foreign currency for future delivery.
When the exposed asset or liability position is completely hedged, no net forex gains or losses is to
be recognized. Forex gains and the offsetting losses are to be recognized in the computation of
comprehensive income and of the carrying value of the hedge items.
Normally, banks set the forward rate at an amount different from the spot rate on the contract date. The
difference between these rates represents the cost of avoiding the risk of exchange rate fluctuations.
Result of Hedging. Forward rate are ordinarily set so that a cost is incurred related to the hedge. Usually,
the rates for future contracts result in hedges that increase income.
In summary, a forward contract is recorded at the forward rate, while the underlying asset or liability is
recorded at the spot rate (and adjusted to the changes in rates and values at the financial statements date).
Over the life of the contract, the initial difference between the spot and the forward rate is the
cost of hedging the exchange risk, which is sometimes called premium or discount. Since the gain and
losses on the both the hedge and the underlying are recorded in current earnings, the net cost reported
in the income statement is the change in the relative value of the spot and forward rates.
If a company enters a forward contract for foreign currency units in excess of the foreign currency units
recognized in its exposed net assets or net liability position (a speculation in the currency), the difference
ends up either as a gain or loss. This is due to the difference in the change in the value of the derivative
and the change in the value of the underlying items hedged both being reported in the income
statement.
Fair Value Hedge of a Foreign Currency Denominated Commitment
A foreign currency commitment is a contract or agreement to purchase or sell goods to a foreign entity
in the future, to be settled in the foreign currency. The settlement will not be made until after delivery of
the goods: therefore, it is exposed to changes in currency exchange rates before the transaction date
(the date of the delivery of the goods). The accounting for the forward contract must begin when the
forward contract is designated as a hedge of a foreign currency commitment.
2017
Mar. 31 (1) Forward contract payable
Cash
To record settlement of forward contract.
425,000
425,000
(2)Cash (fc)
Loss on forward contract
Forward contract receivable
To record receipt of ¥1,000,000 from BPI
when the exchange rate is P.38.
380,000
30,000
410,000
(3) Firm commitment for machinery
Gain on firm commitment
To record the change in the value of the
underlying firm commitment, ¥1,000,000
x (P.41 - P.38).
30,000
30,000
(4) Machinery
Firm commitment for machinery
Cash (fc)
To record purchases of machinery
425,000
45,000
380,000
Cash Flow Hedge of a Foreign Currency Forecasted Transaction
It is important to differentiated accounting treatment of a hedge of a forecasted transaction as a cash
flow hedge versus that of an identifiable foreign currency commitment, a forecasted transaction is
anticipated but not guaranteed.
Under cash flow hedge the changes in fair value of the hedging instruments is deferred and recognized as
other comprehensive income. This is accumulated and reported as a separate line in the stockholders’
equity section of the statement of financial position.
Summary of Hedging Transactions
When transactions are denominated in one currency and measured in another, changes in currency
exchange rates can expose the transacting party to potential exchange gains or losses. In order to reduce
the uncertainty associated with exchange rate changes, forward contracts and other derivatives are often
used to hedge against this exposure.
The following table summarizes some of the details relating to forward contracts:
Hedge of a Forecasted
Hedge of an
Hedge of Denominated
Transaction
Identifiable
Asset or Liability
Firm Commitment
1. Type of hedge
Cash Flow Hedge
Fair value hedge or cash Fair value hedge or cash
flow hedge. Most often flow hedge. Most often
fair value.
fair value.
2. Basic purpose of
hedge.
3. Recognition over
time changes in the
value of the derivative
Hedge against changes
in the cash flows due to
exchange risk occurring
between the time of the
probable forecasted
transaction and the
resulting actual
transaction.
Changes in value are
recognized as a
component of other
comprehensive income.
Hedge against exchange
rate risk occurring
between the
commitment date and
the transaction date.
Hedge the exchange
rate risk between the
transaction date and
the payment /
settlement date.
Changes in value are
recognized currently as
a components of
income.
Changes in value are
recognized currently as
a components of
income.
OPTION CONTRACTS
An option is a financial derivative contracts that provides the holder the right to buy or sell an underlying
in the future, for a price set today. The price of the option is separate from the price of the underlying.
The following terms are usually associated on options contracts:







Premium - the option price. This is the sum of money that the option buyers pays the potion sellers
to obtain the “right” being sold in the option. This money is paid when the option contract is
initiated.
Time value of the option - This is the difference between the option market price and its intrinsic
value. Changes in the time value of the option are taken to current earnings.
Intrinsic value of the option - This is the difference between the current market price and the option
price of the hedge item. This is also the value of the option if it were exercised today.
Strike price - the price at which the holder has the option to buy or sell the item.
Option to buy “in the money” - This exists when the market price is more than the strike price.
Option to buy “out of the money” - This exists when the market price is less than the strike price.
Underlying - The asset, financial instrument or any other basis (e.g., interest rates)to which the
option is linked, and from where its value is derived. The underlying can be a stock, bond, interest
rate, foreign currency or commodity.
Two Basic Types of Options
An options can be either one of the following :
1. Call Option - an option granting the right to buy the underlying. Options of this type may simply be
called “calls”.
2. Put Option - an option granting the right to sell the underlying. Options of this type may simply be
called “put”.
FOREIGN CURRENCY OPTION
A foreign currency option gives the holder of the option the right but not the obligation to trade foreign
currency in the future. A put option is for the sale of foreign currency by the holder of the option; a call
option is for the purchase of foreign currency by the bank holder of the option. Foreign currency option
can be purchased directly from a bank.
SUMMARY
An option premiums has two parts “the intrinsic value and the time value”.
Intrinsic Value refers to the amount of value in the option if it were exercised today. Any increase in the
intrinsic value is treated as a gain and any decreased is treated as a gain and any decrease is treated as a
loss. Time value is the difference between whatever the intrinsic value is and what the premium is. An
increase in the time value is treated also as gain, while a decrease is treated also as a loss. The treatment
of the changes in the intrinsic value and the time value of the option are summarized below:
Increase in Intrinsic Value
Fair value Hedge
Gain on Hedge
Cash Flow Hedge
Other Comprehensive
Decrease in Intrinsic Value
Increase in Time Value
Decrease in Time Value
Activity
Loss on Hedge
Activity
Gain on Hedge
Activity
Loss on Hedge
Activity
Income
Other Comprehensive
Income
Gain on Hedge
Activity
Loss on Hedge
Activity
Hedging Disclosures
Hedge accounting is one of the more complex aspects of financial instruments accounting under IAS 39.
For each type of hedge described in IAS 39( i.e. fair value hedges, cash flow hedges, and hedges of net
investment in foreign operations), an entity engaged in hedging must disclose.
1. A description of each type of hedge;
2. A description of the financial instrument designated as hedging instruments and their fair values at the
reporting date; and
3. The nature of the risk being hedge.
In the cash of cash flow hedges, the reporting entity needs to disclose:
1. The periods when the cash flows are expected to occur and when they are expected to affect profit or
loss;
2. A description of any forecasted transaction for which hedge accounting had previously been used, but
which is no longer expected to occur;
3. The amount that was recognized in equity during the period;
4. The amount that was removed from equity and included in profit and loss for the period, showing the
amount included in each line item in the income statements; and
5. The amount that was removed from the equity during the period and included in the initial cost or
other carrying amount of a nonfinancial asset or nonfinancial liability whose acquisition or incurrence was
a hedged of a highly probable forecast transaction.
The reporting entity is to disclose separately:
1. For fair value hedges, gains, or losses
a) The hedging instrument; and
b) The hedge item attributable to the hedged risk.
2. The ineffectiveness recognized in profit in loss that arises from cash flows hedges;
3. The ineffectiveness recognized in profit in loss that arises from hedges of net investments in foreign
operations.
CHAPTER 7 – THEORIES
1. Companies manage their foreign currency exposure by a technique called hedging.
2. The three categories of foreign currency exposures that can be managed are existing
assets and liabilities, firm commitments and foreign transactions.
3. Hedging a noncancellable sales order is a hedge of a firm commitment anticipatory
transaction.
4. Hedging a budgeted export sales is a hedge of a forecasted transaction.
5. A specific foreign currency exposure being hedge is commonly called the hedging
item.
6. The financial instrument used to achieve the hedge is commonly called the hedging
instrument.
7. The two most commonly used hedging instrument to hedge a foreign currency
exposures are FX forwards and FX options.
8. FX forwards result in a two-sided hedge because both the downside risk and the
upside potential on the hedged item are counter balanced.
9. FX options result in a one-sided hedge because only the downside risk on the hedged
item is counter balanced.
10. Hedge accounting is a special accounting treatment that achieves both
counterbalancing and either concurrent recognition or concurrent deferral of mark-tomarket adjustments.
11. In an FX option, one part has the contractual right to buy or sell a specific quantity of
currency at an exchange rate during a specific period.
12. An option to buy is a call. And an option to sell is a put.
13. The party having the contractual right is the option holder.
14. The party having the obligation to honor the option contract is the option writer.
15. The price paid to acquire an option is called the premium.
16. An option exercising is said to be in the money.
17. Split accounting in the context of option refers to accounting for the time value
element separately from the intrinsic value element.
18. An FX forward is an agreement to buy or sell a foreign currency
Exchange rate, future date
19. In an FX forward, each party must
Fulfill, obligation
20. In an FX forward to buy a foreign currency, the buyer must
take
21. FX forwards are …… in nature
executory
22. Adjustments to FX forwards at intervening financial reporting dates
unrealized
23. The fair value of the obligations of each party in a forward exchange
The net position, setoff
24. The difference between the spot rate and the forward rate
Premium, discount, time value
25. Entering into an FX forward to buy a foreign currency at more than the spot rate
Premium, decrease
26. Accounting for premiums and discounts separately from the intrinsic value
Split accounting
27. For an FX forward to qualify as a hedge of a firm foreign-currency-denominated commitment
Designated, effective, firm
28. Entering into an FX forward for purposes other than hedging
speculating
29. Entering into an FX forward prior to the delivery
Firm commitment, forecasted transaction
30. The three types of risk associated with derivatives
Market, credit, liquidity
31. In a derivative, the party that is in a receivable position
Market, credit
32. In a derivative, the party that is in a payable position
Market, liquidity
33. In a derivative, the party that is either in a payable position or can go into
unlimited
34. Market risk can consist of both
“on-balance-sheet,” “off-balance-sheet
35. Derivative financial instruments are contracts that create rights and obligations that meet the
definitions of assets and liabilities.
36. All derivatives are valued in the balanced sheet at their fair value.
37. Gains and loses on derivatives cannot be deferred and reported as assets and liabilities.
38. The four types of hedging categories that exists are (1) undesignated hedges (hedges that do not
qualify as hedges in any of the following three categories), (2) fait value hedges, (3) cash flow hedges,
(4) net investment.
39. In a fair value hedge, the concern is that a loss will be incurred (1) on an existing asset or liability or
(2) on a firm commitment.
40. In a cash flow hedge, the concern is that an adverse cash flow result will occur on a forecasted
transaction.
41. Hedging a firm commitment is generally a fair value hedge.
42. Hedging a forecasted transaction is generally a cash flow hedge.
43. Hedging an investment in a foreign subsidiary is a net investment hedge.
44. FX gains and losses on fair value hedges are reported in earnings when they arise.
45. FX gains and losses on cash flow hedges are reported in other comprehensive income when they
arise and later reported in earnings.
46. In a cash flow hedge, amounts initially reported in Other Comprehensive Income are reclassified to
earnings when the transaction on the hedged item is reported in earnings.
47. All FX forwards are valued using the change in the forward exchange rate.
48. Split accounting encompasses both (1) the manner of valuing a derivative and (2) the manner of
reporting the change in derivative’s carrying value.
49. Split accounting comes into play in determining how to assess hedging effectiveness.
50. In assessing hedging effectiveness the change in derivative’s carrying value attributable to the
change in the derivative’s time value element may or may not be used.
51. Reporting in earnings currently is mandatory for that portion of a derivative’s FX gain that is
determined to be ineffective.
52. Companies can hedge firm commitments but not forecasted transactions. FALSE
CHAPTER 7 THEORIES 53-69
53.
Hedging and hedge accounting are synonymous terms.
FALSE
54.
Hedging a foreign currency payable is protecting against the loss of a forecasted
transaction.
FALSE
55.
Hedging a foreign currency receivable is protecting against the loss on a forecasted
transaction.
FALSE
56.
Hedging a domestic company's budgeted export sales is a hedge of a forecasted
transaction.
TRUE
57.
Not all anticipatory transactions are firm commitments.
TRUE
58.
An expected future sale that is under contract would be considered a forecasted
transaction.
FALSE
59.
An expected future sale that is not under contract would be considered a forecasted
transaction.
TRUE
60.
Hedging a domestic company's budgeted import purchases to the extent of orders
placed could be hedges of firm commitments.
TRUE
61.
Hedging a domestic company's budgeted export sales is always a hedge of a firm
commitment.
FALSE
62.
Hedging the potential loss of domestic sales because of an expected weakening of a
foreign currency would be a strategic hedge.
TRUE
63.
Hedging the potential loss of budgeted export sales because of an expected weakening
of a foreign currency would be a hedge of a forecasted transaction.
FALSE
70. Hedge accounting is not defined as accounting for the time value element separately from the
intrinsic value element of the hedging instrument.
TRUE
71. Hedge accounting is defined as accounting for the time value element in a manner consistent with
accounting for the intrinsic value element of the hedging instrument.
FALSE
72. Hedge accounting is defined as accounting for mark-to-market adjustments on the hedged item in
the same manner as accounting for mark-to-market adjustments on the hedging instrument.
FALSE
73. In an FX option written by an FX trader, the FX trader always has a contractual obligation to deliver
foreign currency to the option holder if the option holder exercises the option.
FALSE
74. In a foreign currency option, the option writer has potential loss exposure-not the option holder.
TRUE
75. An option to buy is referred to as a "call."
TRUE
76. An option to sell is referred to as a "put."
TRUE
77. Options have premiums but not discounts.
TRUE
78. Options that are "out of the money" have no intrinsic value.
TRUE
79 Options that are "in the money" have intrinsic value but not time value.
FALSE
80. An option that is "out of the money" has no time value.
FALSE
81. Split accounting is not a possibility for FX options.
FALSE
82. To "write" an option, an entity must be an FX trader. Thus, a domestic importer or exporter could
not write an option-such an entity can be only an option holder.
FALSE
83. In an FX forward, there is potential for either a gain or a loss.
TRUE
84. ln FX forwards, each party to the contract must deliver a currency to the other party at the
expiration date.
TRUE
85. in FX forwards, only one party to the contract must deliver a currency to the other party at the
expiration date.
FALSE
86. FX forwards can be tailored to the exposure as to both (a) the quantity of currency and (b) the
duration of the exposure.
TRUE
87. In an FX forward to sell a foreign currency, the seller must make delivery of the foreign currency to
FX dealer at the expiration date.
TRUE
88. In an FX forward to buy a foreign currency, the buyer must make delivery of the foreign currency to
the FX dealer at the expiration date.
FALSE
89. In practice, the obligations of each party in an FX forward are recorded on the books at the
inception of the contract.
FALSE
90. Whether or not the obligations of each party to an FX forward are to be recorded in the general
ledger at the inception of the contract.
FALSE
91. Just like the issuance of a sales order. FX forwards are executory in nature.
TRUE
92. In an FX forward entered into for hedging purposes, recording adjustments for the change in the
forward rate is accounting for only the intrinsic value element.
FALSE
93. The accounting for an importing transaction and the accounting for a related hedging transaction
using an FX forward are completely independent of each other.
TRUE
94. When a domestic importer desires to hedge a foreign currency payable using an FX forward, the
importer will contract to sell a specified number of foreign currency units
FALSE
95. When a domestic exporter desires to hedge a foreign currency receivable using an FX forward, the
exporter will contract to sell a specified number of foreign currency units.
TRUE
96. Reporting in the balance sheet the fair value of the net position of the obligations of each party to
an FX forward is mandatory under U.S. GAAP.
FALSE
97. In an FX forward, the process of accruing the premium or discount to earnings over the life of the
forward contract is called split accounting.
FALSE
98. In an FX forward, hedge accounting is accounting for the premiums and discounts separately from
the intrinsic value.
FALSE
99. Split accounting treatment achieves hedge accounting treatment
FALSE
100. Hedge accounting treatment achieves split accounting treatment.
FALSE
101. In an FX forward in which a foreign currency is being bought at less than the spot rate, a discount
exists.
TRUE
102. In an FX forward in which a foreign currency is being sold at less than the spot rate, a discount
exists.
TRUE
103. In an FX forward that hedges a foreign currency receivable, the accrual of a premium would result
in a debit being made to earnings.
FALSE
Chapter 7 – 104-120
104. In an FX forward that hedges a foreign currency receivable, the accrual of a discount would result
in a debit being made to earnings. TRUE
105. In an FX forward that hedges a foreign currency payable, the accrual of a discount would result in a
debit being made to earnings. TRUE
106. In an FX forward that hedges a foreign currency payable, the accrual of a premium would result in
a debit being made to earnings. TRUE
107. In an FX forward that involving buying a foreign currency, the buyer is said to be “long” in that
currency – not “short” in that currency. TRUE
108. In an FX forward that involving selling a foreign currency, the buyer is said to be “long” in that
currency – not “short” in that currency. FALSE
109. Under PAS 39/PFRS 9, any FX gain or loss on FX forward used to hedge an exposed asset or liability
position must be recognized currently in the earnings. TRUE
110. In a fair value hedge, any FX gain or loss on an FX forward used to hedge a firm commitment must
be deferred until the transaction date. FALSE
111. In a fair value hedge, any FX gain or loss on an FX forward used to hedge a firm commitment must
be deferred until the settlement date. FALSE
112. In a fair value hedge, any premium or discount during the commitment period on an FX forward
used to hedge a firm commitment must be deferred until the transaction date. FALSE
113. In a fair value hedge, any premium or discount during the commitment period on an FX forward
used to hedge a firm commitment must be deferred until the settlement date. FALSE
114. In an FX forward, the determination of whether a hedge has been effective is always an after-thefact determination. TRUE
115. In speculating using an FX forward, a doubling of the exposed position occurs instead of a
counterbalancing of the exposed position. FALSE
116. FX gains and losses resulting from speculating using an FX forward cannot be deferred. TRUE
117. Derivative financial instruments are contracts that creates rights but not obligations. FALSE
118. Derivative financial instruments are contracts that creates obligations but not rights. FALSE
119. Derivative financial instruments are contracts that creates both rights and obligations. TRUE
120. All derivatives are valued in the balance sheet at their fair values. TRUE
121. For certain hedges, FX gains and losses on derivatives can be deferred and reported as assets and
liabilities. FALSE
122. The four types of hedging categories that exist undesignated hedges, fair value hedges, cash value
hedges, and net investment hedges. FALSE
123. In a fair value hedge, the concern is always that a loss will be incurred on an existing asset or
existing liability. FALSE
124. In a fair value hedge, the concern is always that a loss will be incurred on a forecasted transaction.
FALSE
125. In a fair value hedge, the concern is always that a loss will be incurred (1) on an existing asset or
existing liability or (2) a firm commitment. TRUE
126. In a fair value hedge, the concern is always that a loss will be incurred (1) on an existing asset or
existing liability or (2) a forecasted transaction. FALSE
127. In a cash flow hedge, the concern is that an adverse cash flow result will occur on a forecasted
transaction. TRUE
128. In a cash flow hedge, the concern is that an adverse cash flow result will occur on a firm
commitment. FALSE
129. Hedging a firm commitment is a fair value hedge. TRUE
130. Hedging a firm commitment is a cash flow hedge. FALSE
131. Hedging a firm commitment is a cash value hedge. FALSE
132. Hedging existing inventory carried at FIFO cost is a fair value hedge. TRUE
133. Hedging a firm commitment is a fair value hedge. FALSE
134. Hedging a firm commitment is a cash flow hedge. TRUE
135. Hedging a firm commitment is a cash value hedge. FALSE
136. Hedging an investment in a foreign subsidiary is a fair value hedge. FALSE
137. FX gains and losses on fair value hedges are reported in earnings when they arise. FALSE
138. FX gains and losses on fair valuehedges are reported initially in Other Comprehensive Income
when they arise. FALSE
139. FX gains and losses on cash flowhedges are reported in earnings when they arise.FALSE
140. FX gains and losses on cash flowhedges are initially reported in Other Comprehensive Income
when they arise. TRUE
141. In a fair value hedge, amounts initially reported in Other Comprehensive Income are reclassified to
earnings when the transaction on the hedged item is reported in earnings.FALSE
142. In a cash flow hedge, amounts initially reported in Other Comprehensive Income are reclassified to
earnings when the transaction on the hedged item is reported in earnings.TRUE
143. In a cash flow hedge, amounts initially reported in Other Comprehensive Income are reclassified to
earnings when the transaction on the hedged item is consummated (such as the receipt of
inventory).FALSE
144. All FX forwards are valued using the change in the forward rate.TRUE
145. All FX forwards are valued using the change in the spot rate.FALSE
146. Split accounting encompasses both (1) the manner of valuing a derivative and (2) the manner of
reporting the change in a derivative’s carrying value.TRUE
147. Split accounting deals solely with the manner of valuing a derivative.FALSE
148. Split accounting deals solely with the manner of reporting the change in a derivative’s carrying
value. FALSE
149. In assessing hedge effectiveness, the change in a derivative’s carrying value attributable to the
change in the derivative’s time value element may or may not used.TRUE
150. In assessing hedge effectiveness, the change in a derivative’s carrying value attributable to the
change in the derivative’s time value element must be used.FALSE
151. Any portion of a derivative’s FX gain that is determined to be ineffective must be reported
currently in earnings.TRUE
152. Any portion of a derivative’s FX gain that is determined to be ineffective must be reported
currently in Other Comprehensive Income.FALSE
MULTIPLE CHOICE CHAPTER 7
153. Which of the following is not an existing asset or liability exposure that could be hedged?
Answer: E. NONE OF THE ABOVE
154. Which of the following is not a forecasted transaction that could be hedged to prevent a loss on the
transaction(S) (as opposed to the potential loss of forecasted transactions)?
Answer: B. AN EXPECTED DECREASE IN DOMESTIC EXPORT SALES IF THE DOLLAR STRENGTHENS
155. Which OF the following is not a forecasted transaction that could be hedged to prevent a loss on
the..
A. An expected decrease in domestic….
156. Hedging which of the following would be a strategic or competitive exposure.
E. None of the above
157. Hedging which of the following items would always be a hedge of a firmly committed transaction.
E. NONE OF THE ABOVE
158. Which of the following terms is a correct term?
B.HEDGE INSTRUMENT YES--- HEDGE ITEM NO
159. Which of the following results occur for fx towards and options
B. FORWARD EXCHANGE TWO SIDED HEDGE---- ONE SIDED HEDGE
160. Hedge accounting is a special accounting treatment that achieves..
D. COUNTERBALANCING AND EITHER CURRENT RECOGNITION
161. Concerning FX towards, which of the following statements is true?
C.THEY ARE CUSTOMIZABLE AS BOTH TO DURATION AND THE QUANTITY
162. Concerning FX towards, which of the following statements are false.
B.WHEN BUYING A FOREIGN…
163. Concerning FX towards, which of the following statement is false?
B. THEIR USE AUTOMATICALLY….
164. A domestic exporter has an FX payable that is due in 90 days. The exporter never speculates
B. ENTER INTO AN FX FORWARD TO SELL…
165. A domestic importer has an FX payable that is due in 90 days. The importer never speculates
A. ENTER INTO AN FX FORWARD TO PURCHASE A SPECIFIED
166. A domestic exporter has FX receivable that is due in 90 days. The exporter wishes a gain
E. BE UNABLE TO ALWAYS ACCOMPLISH THESE OBJECTIVES USING FX FORWARD.
167. A domestic importer has FX receivable that is due in 90 days. The importer wishes a gain
E. BE UNABLE TO ALWAYS ACCOMPLISH THESE OBJECTIVES USING FX FORWARD
168. Split accounting in context of FX forwards pertains to
A. ACCOUNTING FOR PREMIUMS AND DISCOUNT SEPARATELY FROM CHANGES IN INTRINSIC VALUE
169. A domestic company wishes to hedge an FX receivable arising from an exporting transaction
denominated in a foreign currency using an FX FORWARD.
A. A RECEIVABLE FROM THE FX TRADER THAT IS FIXED
170. A domestic company wishes to hedge an FX payable arising from an importing transaction
denominated in a foreign currency using an FX FORWARD.
D. A LIABILITY TO THE FX TRADER THAT IS A FIX AMOUNT
171. A domestic importer enters into an FX FORWARD TO hedge an FX payable on an importing
transaction…
E. NONE OF THE ABOVE
172. A domestic exporter enters into an FX FORWARD TO hedge an FX receivable on an importing
transaction…
C. ANY FX GAIN AND LOSSES CAN BE OFFSET AND NETTED IN EARNINGS
173. Which of the following statement is false concerning speculating in a foreign currency using an FX
forward?
B. FX GAIN AND LOSSES ARE MEASURED BY CHANGESIN THE SPOT RATE
174. Which of the following statement is false concerning speculating in a foreign currency…
C. PREMIUMS AND DISCOUNTS ARE NOT RECOGNIZED CURRENTLY IN EARNINGS
175. In a hedge of a firm purchase commitment using an FX forward, how should FX gain and losses
during the commitment period be reported?
A. RECOGNIZE CURRENTLY IN EARNINGS
176. In a hedge of a firm purchase commitment using an FX forward, how should FX gain and losses
occurring during the exposed liability position period be reported?
A. RECOGNIZE CURRENTLY IN EARNINGS
177. In a hedge of a firm purchase commitment using an FX forward, how should premium and discount
A. RECOGNIZE CURRENTLY IN EARNINGS
CHAPTER 7
172. A domestic exporter enters into an FX forward to hedge an FX receivable arising from an exporting transaction…..
ANS: c. Any FX gains and losses can be offset and netted in earnings.
173. Which of the following statements is false concerning speculating in a foreign currency using an FX forward?
ANS: b. FX gains and losses are measured by changes in the spot rate
174. Which of the following statements is false concerning speculating in a foreign currency using an FX forward?
ANS: c. Premiums and discounts are not recognized currently in earnings
175. In a hedge of a firm purchase commitment using an FX forward, how should fx gains and losses during the commitment
period be reported?
ANS: a. Recognize currently in earnings
176. In a hedge of a firm purchase commitment using an FX forward, how should fx gains and losses occurring during the
exposed liability position period be reported?
ANS: a. Recognize currently in earnings
177. In a hedge of a firm purchase commitment using an FX forward, how should premium and discount accruals occurring
during the commitment period be reported?
ANS: a. Recognize currently in earnings
178. For an FX forward to qualify for a hedge of a firm purchase commitment, which of the following conditions…….
ANS: c. The purchase commitment must be firm
179. For an FX forward to qualify for a hedge of a firm purchase commitment, which of the following conditions…….
ANS: a. The FX forward must coincide with the transaction date….
180. Which of the following is not unique “contractual element” …..
ANS: d. National balances or executory fixed amounts…
181. Which of the following is not a unique characteristic of forward-based derivative…
ANS: None of the above
182. Derivative financial instruments are…
ANS: both rights and obligations
183. Which of the following is not one of the four types of hedging categories that exist?
ANS: Cash value hedges
184. Which of the following is not one of the four types of hedging categories that exist?
ANS: Designated hedge
185. Hedging an existing FX receivable arising from an exporting transaction is a
ANS: Undesignated hedge
186. Hedging a firm commitment is a
ANS: fair value hedge
187. Hedging a forecasted transaction is a
ANS: Cash flow hedge
188. Hedging an investment in equity securities….
ANS: Fair value hedge
189. FX gains and losses on for value hedges are
a. Always reported currently in earnings
190. FX gains and losses on cash flow hedges are
c. Initially reported in other comprehensive income and later reclassified to earnings,
191. FX gains and losses on cash flow hedges are reported in eanings when
C. The transaction on the hedged item is initial reported in earnings.
192. FX forwards are valued using
a. The change in the forward rate.
193. The issue of split accounting encompasses .
c. Both a and b.
. 194. In assessing hedge effectiveness which of the following elements of a derivative must
always be included in the assessment?
b. Intrinsic Value Element :YES
Time Value: No
195. The ineffective portion of an FX gain or loss on a fair value hedge must always be reported
currently in:
b. Earnings: YES
OCI: NO
196. The ineffective portion of an FX gain or loss on a cash flow hedge must always be reported
currently in
b. Earnings: YES
OCI: NO
197. According to PFRS 9, which of the following is not an underlying?
d . The number of foreign currency units
198. The intrinsic value of a cash flow hedge has increased since the last balance sheet
Date. Which of the following accounting treatments is appropriate for this increase in value?".
C. Record the increase to Other Comprehensive Income.
199. The requirements for a derivative instrument include all but which of the following?
C. requires an initial net investment equal to that required for other types. . .
200. A decrease in the intrinsic value of a fair value hedge is accounted for as:
A. a decrease of other comprehensive income
201. Changes in the fair value of the effective portion of a hedging financial instrument are
recognized as part of current earnings of the period for which of the following:
Cash flow: YES
FV hedge: YES
202. According to PFRS 9, for which of the following is hedge accounting not allowed
c. trading securities
203. The exchange rate quoted for future delivery of foreign currency is the definition of
d. forward exchange rate
204. The forward exchange rate quoted for the remaining term of a forward contract is used to
account for the contract when the forward contract:
d. was acquired to speculate in foreign currency
205. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable
foreign currency commitment may be:
b. recognized currently in the determination of net income.
Chapter 7 MC theory
206. The underlying amount of a derivative instrument is... The price or rate that relates to the
asset or liability underlying the derivative.
207. Which of the following statements is true? Usually, a derivative instrument requires little or
no initial investment.
208. Derivative instruments include contracts to buy or sell... The specified, fixed price in the
contract us known as the forward rate.
209. in order for a fair value hedge to receive special accounting treatment, the... hedging
relationship is considered highly effective.
210. Which of the following statements regarding fair value hedges is true? The hedged item
may be a portfolio of similar assets.
211. Which of the following is true of the financial statement presentation of gains/losses...
Other comprehensive income, current earnings.
212. Exchange gains and losses on a forward exchange contract that covers the same time
period as the transaction... Income from continuing operations.
213. The time value of an option is the difference between the... Premium paid and its intrinsic
value.
214. The two distinguishing characteristics of a financial instrument are... On or more
underlying and one or more notional amounts.
215. In a hedge of a forecasted transaction, gains or losses... A component of other
comprehensive income.
216. Current disclosure requires users of hedging instruments... descriptions of various types of
hedges entered into.
217. Based on the relationship between the strike price and the current price... put option is outof-money when the strike price is less than the current price.
218. Which of the following is true of the intrinsic and time values associated with this option...
P2, P3.
219. Based on the preceding information, the call option: Is in the money.
220. An investor purchases a put option with a strike price of P100 for P3... Below P100
MULTIPLE CHOICE PROBLEMS/THEORIES CHAPTER 23 page
1415
Financial asset model
Page 1415. An operator enters into a contract to provide construction services…
1. Total revenue over the life of the contract …
2. Total cash inflows over the life of the contract…
3. Company B enters into an agreement under which it will build and operate a toll bridge.
INTANGIBLE ASSET MODEL
4 and 5. Using the same information in 1 and 2 ……
4. Total revenue over the life of the contract …
5. Total cash inflows over the life of the contract…
MC THEORIES CH23
6. Program of the Philippine Government guided by the principles of transparency,
accountability and sustained partnerships with private sector.
PUBLIC-PRIVATE PARTNERSHIP PROGRAM (SCA)
7. The program intends to provide the public with adequate, safe, efficient, reliable…
PUBLIC-PRIVATE PARTNERSHIP PROGRAM (SCA)
8. The arrangement is governed by a contract between the operator and the government (the
grantor) that sets out performance…
A “BUILD-OPERATE-TRANSFER” (BOT) ARRANGEMENT, A “REHABILITATE-OPERATETRANSFER” (ROT) OR “PUBLIC-TO-PRIVATE” SERVICE CONCESSION ARRANGEMENT.
9. The PFRIC 12 applies only if:
BOTH A AND B (The grantor controls or regulates… kag The grantor controls- through
ownership…)
10. Wala sa book
11. Wala sa book
12. This interpretation provides the according principles for recognizing and measuring the
obligations… I. treatment if the operator’s right over the infrastructure
I, II, AND III (kung may III, kay originally may ara – kung wala, I and II)
13. This interpretation provides the according principles for recognizing and measuring the
obligations…
I, II, AND III
14. Which of the following statement(s) is (are) false?
I ONLY
15. The operator of the BOT arrangement shall recognize and measure revenue in accordance
with:
PFRS 15
16. In construction or upgrade services, the operator shall account for revenue and costs
relating to construction or upgrade services in accordance with PFRS 15
OVER-TIME/STAGE OF COMPLETION METHOD
17. For providing the construction or upgrade services, the consideration received or
receivable…
A FINANCIAL ASSET OR AN INTANGIBLE ASSET
18. To the extent that it has an unconditional contractual right to receive cash or another asset
from, or at…
A FINANCIAL ASSET
19. To the extent that it receives a right (a license) to charge users of the public service. A right
to charge…
AN INTANGIBLE ASSET
20. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator based on:
SPECIFIED OR DETERMINABLE AMOUNTS OR THE SHORTFALL…
21. The operator shall account for revenue and costs relating to operation services in
accordance with:
PFRS 15
22. The terms of the contractual arrangement may require the operator:
A OR B (To maintain… kag To restore…)
23. In Accordance with PAS 23, borrowing cost attributable to the arrangement in the period in
which they are incurred shall be:
EXPENSE
24. In Accordance with PAS 23, borrowing cost attributable during the construction phase of
the arrangement shall be:
INTANGIBLE ASSET
25. It is an arrangement whereby a government or other public sector body contracts with a
private operator to develop or upgrade, operate and maintain…
26. According to PFRIC 12, service concession arrangement, the infrastructure asset shall be
recognized by the operator as:
27. It is a type of service concession arrangement whereby the operator receives a right to
charge for use of a public sector that it constructs or upgrades and then must operate and
maintain for a specified of time:
28. Under a financial asset model of service concession arrangement, the operator has as
unconditional right…
29. A feature of service concession arrangement is the public service nature of the obligation
undertaken by the operator.
30. In some cases, the grantor may provide other items to the service concession operator. If
such assets form part of the consideration….
MULTIPLE CHOICE PROBLEMS/THEORIES CHAPTER 23
MULTIPLE CHOICE PROBLEMS/THEORIES CHAPTER 23 page 1415
Financial asset model
Page 1415. An operator enters into a contract to provide construction services…
1. Total revenue over the life of the contract …
2. Total cash inflows over the life of the contract…
3. Company B enters into an agreement under which it will build and operate a toll
bridge.
INTANGIBLE ASSET MODEL
4 and 5. Using the same information in 1 and 2 ……
4. Total revenue over the life of the contract …
5. Total cash inflows over the life of the contract…
MC THEORIES CH23
6. Program of the Philippine Government guided by the principles of transparency,
accountability and sustained partnerships with private sector.
PUBLIC-PRIVATE PARTNERSHIP PROGRAM (SCA)
7. The program intends to provide the public with adequate, safe, efficient, reliable…
PUBLIC-PRIVATE PARTNERSHIP PROGRAM (SCA)
8. The arrangement is governed by a contract between the operator and the
government (the grantor) that sets out performance…
A “BUILD-OPERATE-TRANSFER” (BOT) ARRANGEMENT, A
“REHABILITATE-OPERATE-TRANSFER” (ROT) OR “PUBLIC-TO-PRIVATE” SERVICE
CONCESSION ARRANGEMENT.
9. The PFRIC 12 applies only if:
BOTH A AND B (The grantor controls or regulates… kag The grantor controlsthrough ownership…)
10. Wala sa book
11. Wala sa book
12. This interpretation provides the according principles for recognizing and
measuring the obligations… I. treatment if the operator’s right over the
infrastructure
I, II, AND III (kung may III, kay originally may ara – kung wala, I and II)
13. This interpretation provides the according principles for recognizing and
measuring the obligations…
I, II, AND III
14. Which of the following statement(s) is (are) false?
I ONLY
15. The operator of the BOT arrangement shall recognize and measure revenue in
accordance with:
PFRS 15
16. In construction or upgrade services, the operator shall account for revenue and
costs relating to construction or upgrade services in accordance with PFRS 15
OVER-TIME/STAGE OF COMPLETION METHOD
17. For providing the construction or upgrade services, the consideration received or
receivable…
A FINANCIAL ASSET OR AN INTANGIBLE ASSET
MULTIPLE CHOICE PROBLEMS/THEORIES CHAPTER 23
18. To the extent that it has an unconditional contractual right to receive cash or
another asset from, or at…
A FINANCIAL ASSET
19. To the extent that it receives a right (a license) to charge users of the public
service. A right to charge…
AN INTANGIBLE ASSET
20. The operator has an unconditional right to receive cash if the grantor
contractually guarantees to pay the operator based on:
SPECIFIED OR DETERMINABLE AMOUNTS OR THE SHORTFALL…
21. The operator shall account for revenue and costs relating to operation services in
accordance with:
PFRS 15
22. The terms of the contractual arrangement may require the operator:
A OR B (To maintain… kag To restore…)
23. In Accordance with PAS 23, borrowing cost attributable to the arrangement in
the period in which they are incurred shall be:
EXPENSE
24. In Accordance with PAS 23, borrowing cost attributable during the construction
phase of the arrangement shall be:
INTANGIBLE ASSET
25. It is an arrangement whereby a government or other public sector body
contracts with a private operator to develop or upgrade, operate and maintain…
26. According to PFRIC 12, service concession arrangement, the infrastructure asset
shall be recognized by the operator as:
27. It is a type of service concession arrangement whereby the operator receives a
right to charge for use of a public sector that it constructs or upgrades and then must
operate and maintain for a specified of time:
28. Under a financial asset model of service concession arrangement, the operator
has as unconditional right…
29. A feature of service concession arrangement is the public service nature of the
obligation undertaken by the operator.
30. In some cases, the grantor may provide other items to the service concession
operator. If such assets form part of the consideration….