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AFAR 1 Dayag Solution Manual
Accountancy (STI College)
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Advanced Accounting Solution Manual
Antonio J. Dayag
Chapter 1
Problem I
Requirement 1: Assuming that A and B agree that each partner is to receive a capital credit
equal to the agreed values of the net assets each partner invested:
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record investments:
Partnership books:
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … . 120,000
Inventory… … … … … … … … … … … … … … … … … … … … … … … … … … … … . 120,000
Equipment… ……………………… … … … … … … … … … … … … … … … … … .. 240,000
A, capital… ………………… … … … … … … … … … … … … … … … … ...
480,000
Initial investment.
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .. 120,000
Land… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .. 240,000
Building… ………………………… … … … … … … … … … … … … … … … … … … . 480,000
Mortgage payable… … … … … … … … … … … … … … … … … … … … .
240,000
B, capital… ……………… … … … … … … … … … … … … … … … … … ..
600,000
Initial investment.
Requirement 2: Assuming that Aand B agree that each partner is to receive an equal capital
interest.
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record investments:
Partnership books:
Bonus Approach:
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Inventory… … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Equipment… …………………………………………………………………. 240,000
A, capital… … … … … … … … … … … … … … … … … … … … … … … ..
480,000
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Land… … … … … … … … … … … … … … … … … … … … … … … … … … … … … . 240,000
Building… ……………………………………………………………………… 480,000
Mortgage payable… … … … … … … … … … … … … … … … … … …
240,000
B, capital.… … … … … … … … … … … … … … … … … … … … … .… …
600,000
B, capital… … … … … … … … … … … … … … … … … … … … … … … … … … … .. 60,000
A, capital… … … … … … … … … … … … … … … … … … … … … … … …
Total agreed capital (P480,000 + P600,000)… .P 1,080,000
Multiplied by: Capital interest (equal)… … … ...
1/2
Partner’s individual capital interest… … … … … .P 540,000
Less: A’s capital interest… … … … … … … … … ..… .480,000
Bonus to A… … .… … … … … … … … … … … … … … ..P 60,000
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60,000
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Revaluation (Goodwill) Approach:
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Inventory… … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Equipment… …………………………………………………………………. 240,000
A, capital… … … … … … … … … … … … … … … … … … … … … … … ..
480,000
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … 120,000
Land… … … … … … … … … … … … … … … … … … … … … … … … … … … … … . 240,000
Building… ……………………………………………………………………... .480,000
Mortgage payable… … … … … … … … … … … … … … … … … … …
240,000
B, capital.… … … … … … … … … … … … … … … … … … … … … .… … 600,000
Assets (or goodwill or intangible asset)… … … … … … … … … … … … … ... 120,000
A, capital… … … … … … … ..… … … … … … … … … … … … … … … ..
120,000
Total agreed capital (P600,000 / 1/2)… … … ..… .P1,200,000
Less: Total contributed capital (P480,000 +
P 600,000)… … … … … … … … … … … … ....… 1,080,000
Goodwill to A… … … … … ..… … … … … … … … … … .P 120,000
Problem II
Agreed Fair Values
Cash
Equipment
Total assets
Note payable assumed by partnership
Net assets invested
1. Bonus Method
Cash
Equipment
Note Payable
John, Capital
Jeff, Capital
Jane, Capital
Invested
by John
P100,000
100,000
--P100,000
Invested
by Jeff
--P 110,000
P 110,000
30,000
P 80,000
Invested
by Jane
----0
--P
0
2. Goodwill Method (Revaluation of Asset)
100,000
110,000
30,000
60,000
60,000
60,000
Cash
Equipment
Goodwill
Note Payable
John, Capital
Jeff, Capital
Jane, Capital
100,000
110,000
90,000
30,000
90,000
90,000
90,000
2. The bonus method is used when John and Jeff recognize that Jane is bringing something of
value to the firm other than a tangible asset, but they do not want to recognize an
intangible asset. To equalize the capital accounts, P40,000 is transferred from John's capital
account and P20,000 is transferred from Jeff's capital account.
The goodwill method is used when the partners recognize the intangible nature of the skills
Jane is bringing to the partnership. However, the capital accounts are equalized by
recognizing an intangible asset and a corresponding increase in the capital accounts of the
partners. Unless the intangible asset can be specifically identified, such as a patent being
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invested, it should not be recognized, because of a lack of justification for goodwill in a new
business.
Problem III
1. (a) Cash
Accounts Receivable
Office Supplies
Office Equipment
Accounts Payable
Tom, Capital
(b)
(c)
2.
13,000
8,000
2,000
30,000
2,000
51,000
Cash
Accounts Receivable
Office Supplies
Land
Accounts Payable
Mortgage Payable
Julie, Capital
12,000
6,000
800
30,000
Tom, Drawing
Cash
15,000
Julie, Drawing
Cash
12,000
Income Summary
Tom, Capital P50,000  (P51,000/P76,000)
Julie, Capital P50,000  (P25,000/P76,000)
50,000
Tom, Capital
Julie, Capital
Tom, Drawing
Julie, Drawing
15,000
12,000
5,000
18,800
25,000
15,000
12,000
33,553
16,447
15,000
12,000
TOM AND JULIE PARTNERSHIP
Statement of Changes in Partners' Capital
For the Year Ended December 31, 20x4
Capital balances, Jan. 1
Add: Additional investments
Net income allocation
Totals
Less: Withdrawals
Capital balances, Dec. 31
Tom
0
51,000
33,553
P 84,553
15,000
P 69,553
Julie
P0
25,000
16,447
P 41,447
12,000
P 29,447
P
Total
0
76,000
50,000
P126,000
27,000
P99,000
P
Problem IV
Book of H is to be retained by the new partnership .
The following procedures are to be followed:
Individual versus Sole Proprietor
Books of
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*Books of
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Individual
Sole Proprietor
Adjusting entries
N/A
Yes
Closing entries (real accounts)
N/A
No
Investments
Yes**
Balance Sheet
Yes
* Books of H; Partnership books
** Investments of individual; additional investments or withdrawals of sole proprietor.
1. Books of Sole Proprietor (H):
a. To record adjustments:
a. H, capital… … … … … … … … … … … … … … … … … … … … … … … … …
Allowance for doubtful accounts… … … … … … … … … … … .
Additional provision computed as follows:
Required allowance: 10% x P48,000 = P 4,800
Less: Previous balance… … … … … … …
3,000
Additional provision… … … … … … … … P 1,800
1,800
1,800
b. Interest receivable or accrued interest income… … … … … … … . 3,600
H, capital… … … … … … … … … … … … … … … … … … … … … … …
Interest income for nine months computed as follows:
P60,000 x 8% x 9/12 = P3,000.
3,600
c. H, capital… … … … … … … … … … … … … … … … … … … … … … … … … .. 6,000
Merchandise inventory… … … … … … … … … … … … … … … … ..
6,000
Decline in the value of merchandise.
P27,000 – P21,000 = P6,000.
d. H, capital… … … … … … … … … … … … … … … … … … … … … … … … … .
Accumulated depreciation… … … … … … … … … … … … … … .
Under depreciation.
e. Prepaid expenses… … … … … … … … … … … … … … … … … … … … … ...
H, capital… … … … … … … … … … … … … … … … … … … … … … …
Expenses paid in advance.
H, capital… … … … … … … … … … … … … … … … … … … … … … … … … …
Accrued expenses… … … … … … … … … … … … … … … … … … … .
Unrecorded expenses.
4,800
4,800
2,400
2,400
7,200
7,200
Note: All adjustment that reflects nominal accounts should be coursed through
the capital account, since all nominal accounts are already closed at th e time
of formation.
b. To close the books: nothing to close since the books of H will be retained.
c. To record investment:
Cash… … … … … … … … … … … … … … … … … … … … … … … … … … … … … . 116,100
I, capital… … … … … … … … … … … … … … … … … … … … … … … …
116,100
Initial investment computed as follows:
Unadjusted capital of H… … … … … … … … … … … … P 246,000
Add (deduct): adjustments:
a. Doubtful accounts...… … … … … … … … ...( 1,800)
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b. Interest income… … … … … … … … … … … ..
3,600
c. Decline in the value of merchandise… .( 6,000)
d. Under-depreciation… … … … … … … … … .( 4,800)
e. Prepaid expenses… … … … … … … … … … ..
2,400
Accrued expenses… … … … … … … … … ...( 7,200)
Adjusted capital balance of H… … … … … ..… … ...P 232,200
Divided by: Capital interest of H… … … … … … … …
2/3
Total agreed capital… … … … … … … … … … … .… … .P 348,300
Multiplied by: Capital interest of I… … … … … ..… …
1/3
Investment of I… … … … … … … … … … … … … … … … P 116,100
Note: The initial investment of H is already recorded since his books are already
retained. No further entry is required since there are no additional investments
or withdrawals made by H.
2. The balance sheet for both cases presented above is as follows:
HI Partnership
Balance Sheet
November 1, 20x4
Assets
Cash
Accounts receivables
Less: Allowance for doubtful accounts… … …...........
Notes receivable… … ...................................................
Interest receivable… … …………..................................
Merchandise Inventory................................................
Prepaid expenses… … … … ..........................................
Equipment (net)… … …….............................................
Less: Accumulated depreciation… … ………… ........
Total Assets....................................................................
P 236,100
P 48,000
4,800
P 72,000
10,800
Liabilities and Capital
Liabilities
Accrued expenses… … .. .......................................
Accounts payable...................................................
Notes payable… … ……...........................................
Total Liabilities................................................................
Capital...........................................................................
H, capital… ……………………..................................
I, capital… ………………...........................................
Total Capital..................................................................
Total Liabilities and Capital..........................................
43,200
60,000
3,600
21,000
2,400
61,200
P 427,500
P
7,200
12,000
60,000
P 79,200
P 232,200
116,100
P 348,300
P 427,500
Problem V
New set of books. The following procedures are to be followed:
Sole Proprietor versus Sole Proprietor
Books of
Sole Proprietor
Books of
Sole Proprietor
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Adjusting entries
Closing entries (real accounts)
Investments
Balance Sheet
(Baker)
Yes
Yes
(Carter)
Yes
Yes
Books
Yes**
Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors.
1. Books of Sole Proprietor
a. To record adjustments:
Books of J
a. J, capital… … … … … … … … … … 12,000
Merchandise Inventory… …
12,000
Worthless inventory.
b. J, capital… … … … … … … … … … 7,200
Allowance for doubtful
Accounts… … ……………..
7,200
Worthless accounts.
c. Rent receivable… … … … … … … 12,000
J, capital… ………………….
12,000
Income earned.
Books of K
a. Merchandise Inventory… … … … 6,000
K, capital… ……………………
6,000
Upward revaluation.
b. K, capital… … … .… … … … … … … . 3,000
Allowance for doubtful
accounts… … ……………….
3,000
Additional provision.
Required allowance:
5% x P180,000… … .. P9,000
Less: Previous
Balance… … … .. 6,000
Additional
Provision....… … … … P3,000
c. K, capital… … … … … … … … … … … . 9,600
Salaries payable… … ………….
9,600
Unpaid salaries.
d. Interest receivable… … … … … … … 1,200
K, capital… ………..................
1,200
Interest income from August
17 to October 1.
P60,000 x 16% x 45/360
e. J, capital… … … … … … … … … … 8,400
Office supplies… … ………….
8,400
Expired office supplies.
f. J, capital… … … … … … … … … … 6,000
Accumulated depreciation
- equipment… … …………
6,000
Under-depreciated.
g. K, capital… … … … … … … … … … … 12,000
Accumulated depreciationFurniture and fixtures… … …
12,000
Under-depreciated.
h. J, capital… … … … … … … … … … . 1,800
Interest payable… … … … … .
1,800
Interest expense from
July 1 to October 1.
P60,000 x 12% x 3/12
i. Patent… … … … … … … … … … … … . 48,000
K, capital… …………………..
48,000
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Unadjusted capital of J… … .……….P 372,000
Add(deduct): adjustments:
a. Worthless merchandise… … ..( 12,000)
b. Worthless accounts… … …… .( 7,200)
c. Rent income… …………….… . 12,000
e. Office supplies expense… … .( 8,400)
f. Additional depreciation… … ( 6,000)
h. Interest expense… … … …… … ( 1,800)
Adjusted capital of J… … …………… P348,600
Unrecorded patent.
Unadjusted capital of K..… ……… … ...P432,000
Add(deduct): adjustments:
a. Merchandise revaluation… … ..
6,000
b. Worthless accounts… … ……….( 3,000)
c. Salaries… … ……….…….………..( 9,600)
d. Interest income… …………… … .. 1,200
g. Additional depreciation… … … ( 12,000)
h. Patent… ……….……….………… . 48,000
Adjusted capital of K… .………………..P462,600
b. To close the books:
Books of J
Allowance for doubtful
accounts................................. 12,000
Accumulated depreciation –
equipment… … … … … … … … 60,000
Accounts payable… … … … … 159,600
Notes payable… … … … … … … 60,000
Interest payable… … … … … … . 1,800
J, capital… … .… … … … … … … .348,600
Cash… … ………………… …
90,000
Accounts receivable… … .
216,000
Merchandise inventory… .
180,000
Office supplies… … ……….
24,000
Equipment… ……………….
120,000
Rent receivable… … …… ...
12,000
Close the books of J.
Books of K
Allowance for doubtful
accounts................................. 9,000
Accumulated depreciation –
furniture and fixtures … … … . 36,000
Accounts payable… … … … … . 120,000
Salaries payable… … … … … … .
9,600
K, capital… … .… … … … … … … . 462,600
Cash… … ………………… … .
54,000
Accounts receivable… … ..
180,000
Notes receivable… … … … .
60,000
Interest receivable… … … ...
1,200
Merchandise inventory… ..
150,000
Furniture and fixtures.… … ..
144,000
Patent… ……….…………….
48,000
Close the books of K..
2. New Set of Books To record investments:
Cash……………………………………………………………….
Accounts receivable… … ……………………………………..
Merchandise inventory… … …………………………………..
Office supplies… ………………………………………………..
Equipment (net)… … …………………………………………...
Rent Receivable… … …………………………………………..
Allowance for doubtful accounts… … ……………… .
Accounts payable… ……………………………………..
Notes payable… … ……………………………………….
Interest payable… … ……………………………………..
J, capital……………………………………………………
Cash……………………………………………………………….
Accounts receivable… … ……………………………………..
Notes receivable… … ………………………………………….
Interest receivable… … ………………………………………..
Merchandise inventory… … …………………………………..
Furniture and fixtures (net)… ..… ……………………………..
Patent… ………..………………………………………………...
Allowance for doubtful accounts… … ……………… .
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90,000
216,000
180,000
24,000
60,000
12,000
12,000
39,600
60,000
1,800
468,600
54,000
180,000
60,000
1,200
150,000
108,000
48,000
9,000
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Accounts payable… ……………………………………..
Salaries payable… .……………………………………….
K, capital……………………………………………………
120,000
9,600
462,600
3.
H
P372,000
348,600
(P 23,400)
Unadjusted capital (refer to 1a)
Adjusted capital (refer to 1b)
Net adjustments (debit)/credit
I
P432,000
462,600
P 30,600
4. The balance sheet after formation is as follows:
J and K Partnership
Balance Sheet
October 1, 20x4
Assets
Cash...............................................................................
Accounts receivables .................................................
Less: Allowance for doubtful accounts… … … .........
Notes receivable… … ...................................................
Interest receivable… … …………..................................
Rent receivable… … ………….......................................
Merchandise Inventory................................................
Office supplies...............................................................
Equipment (net)… … …….............................................
Furniture and fixtures (net)… … …………….................
Patent… …………………...............................................
Total Assets....................................................................
P 144,000
P396,000
21,000
Liabilities and Capital
Liabilities
Salaries payable… … ………...................................
Accounts payable..................................................
Notes payable… … ……..........................................
Interest payable… … ………....................................
Total Liabilities...............................................................
Capital
J, capital… ……………………..................................
K, capital… ……………….........................................
Total Capital..................................................................
Total Liabilities and Capital..........................................
375,000
60,000
1,200
12,000
330,000
24,000
60,000
108,000
48,000
P1,162,200
P
9,600
159,600
60,000
1,800
P 231,000
P 468,600
462,600
P 931,200
P1,162,200
Problem VI
1. Total assets – P1,094,000, at fair value
2. Total liabilities - P540,000, at fair value
3. Total capital - P554,000 (P1,094,000 – P540,000)
Assets
Balance Sheet
January 1, 2009
Liabilities and Capital
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Cash
Account Receivable (net)
Merchandise Inventory
Building (net)
Furniture and Fixture (net)
Accounts Payable
Mortgage Payable
P 70,000
108,000
208,000
600,000
108,000
__________
P1,094,000
Total Assets
Liabilities
Accounts Payable
Mortgage Payable
Total Liabilities
Capital:
L, Capital
M, Capital
Total Capital
Total Liabilities and Capital
P 190,000
__350,000
P 540,000
P 260,000
___294,000
P 554,000
P 1,094,000
Multiple Choice Problems
1. c – P45,000
2. d – the prevailing selling price which is also the fair market value.
3. b - (P400,000 - P190,000) + [P270,000 - (P400,000 - P190,000)]/3 = P230,000
4.c
5.b - P60,000 + P80,000 + P100,000 = P240,000
6. c - P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000 - P30,000 = P5,000
7. a
Total Agreed Capital (P50,000/40%)… … … …………………...............
P125,000
Less: Total Contributed Capital (P65,000 + P50,000)… … ..................
115,000
Goodwill (revaluation of assets upward)… ………………..................
P 10,000
Assets, fair value (P20,000 + P60,000 + P15,000)… … … … … … … … … … P 95,000
Less: Liabilities assumed… … … … … … … … … … … … … … … … … … … ..… 30,000
Bill, capital..… … … … … … … … … … … … … … … … … … … … … … … … … … P 65,000
8.
b
The capital balances of William (WW) and Martha (MM) at the date of
partnership formation are determined as follows:
William
Martha
Cash
P20,000
P 30,000
Inventory
15,000
Building
40,000
Furniture and equipment
15,000
Total
P35,000
P 85,000
Less mortgage assumed
by partnership
(10,000)
Amounts credited to capital
P35,000
P 75,000
9.c
Unadjusted capital
Add (deduct) adjustments:
Allowance
Depreciation
Adjusted capital
Evan
59,625
( 555)
______
59,070
10. c: Jones – P80,000 + P400,000 – P120,00 = P360,000
Smith – P40,000 + P280,000 – P60,000 = P260,000
11. c – P35,374 – refer to No. 12
12. c – P17,687
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Helen
33,500
(
(
405)
900)
32,195
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Unadjusted capital of CC… … … … … … … … … … … … … … … … … … … … … … … … … .P 33,000
Add (deduct): adjustmentsAllowance for doubtful accounts (3% x P14,200)… … … … … … … … … … … … ...(
426)
Increase in merchandise inventory (P23,000 – P20,000)… … … … … … … … … … 3,000
Prepaid salary… … … … … … … … … … … … … … … … … … … … … … … … … … … … ....
600
Accrued rent expense… … … … … … … … … … … … … … … … … … … … … … … … … (
800)
Adjusted capital balance of CC… … … … … … … … … … … … … … … … … … … … … … P 35,374
Divided by: Capital interest of CC… … … … … … … … … … … … … … … … … … … … ....
2/3
Total capital of the partnership… … … … … … … … … … … … … … … … … … … … … … … P 53,061
Less: Adjusted capital balance of CC… … … … … … … … … … … … … … … … … … … .. 35,374
Capital balance of DD… … … … … … … … … … … … … … … … … … … … … … … … … … .. P 17,687
13. a
Total assets:
Cash
Machinery
Building
Less Liabilities (Mortgage payable)
Net assets (equal to FF’s capital account)
P 70,000
75,000
225,000
P 370,000
90,000
P 280,000
14. d
FF, capital (see no.13)
Divide by FF’s P & L share percentage
Total partnership capital
Required capital of CC (P400,000 x 30%)
Less: Assets already contributed:
Cash
Machinery and equipment
Furniture and fixtures
Cash to be invested by CC
P 280,000
70%
P 400,000
P 120,000
P 30,000
25,000
10,000
65,000
P 55,000
15. a
Agreed Fair Values
Cash
Equipment
Total assets
Note payable assumed by partnership
Net assets invested
Bonus Method
Cash
Equipment
Note Payable
John, Capital
Jeff, Capital
Jane, Capital
Invested
by John
100,000
100,000
--100,000
Invested
by Jeff
--110,000
110,000
30,000
80,000
Invested
by Jane
----0
--0
Goodwill Method
100,000
110,000
30,000
60,000
60,000
60,000
Cash
Equipment
Goodwill
Note Payable
John, Capital
Jeff, Capital
Jane, Capital
100,000
110,000
90,000
30,000
90,000
90,000
90,000
Note:
The bonus m ethod is used when John and Jeff recognize that Jane is bringing som ething of
value to the firm other than a tangible asset, but they do not want to recognize an intangible
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asset. To equalize the capital accounts, P40,000 is transferred from John's capital account and
P20,000 is transferred from Jeff's capital account.
The goodwill m ethod is used when the partners recognize the intangible nature of the skills Jane
is bringing to the partnership. However, the capital accounts are equalized by recognizing an
intangible asset and a corresponding increase in the capital accounts of the partners. Unless the
intangible asset can be specifically identified, such as a patent being invested, it should not be
recognized, because of a lack of justification for goodwill in a new business.
16. c – refer to No. 15 for computation.
17. a
FF, capital:
Unadjusted balance
Adjustments:
Accumulated depreciation
Allowance for doubtful account
Adjusted balance
GG, capital:
Unadjusted balance
Adjustments:
Accumulated depreciation
Allowance for doubtful account
Adjusted balance
18. c
P 57,000
( 1,500)
(12,000)
P 43,500
P 49,500
( 4,500)
( 4,500)
P 40,500
GG’s adjusted capital (see no. 17)
Divide by GG’s P & L share percentage
Total partnership capital
Multiply by FF’s P & L share percentage
FF’s capital credit
FF’s contributed capital (see no. 1)
Additional cash to be invested by FF
P 40,500
40%
P 101,250
60%
60,750
43,500
P 17,250
Total capital of the new partnership (see no. 20)
Multiply by RR’s interest
Cash to be invested by RR
P 296,875
20%
P 59,375
19. d
20. (a)
Unadjusted capital balances
Adjustments:
Allowance for bad debts
Inventories
Accrued expenses
Adjusted capital balances
OO
(60%)
P133,000
PP
(40%)
P108,000
Total
P241,000
( 2,700)
( 1,800)
( 4,500)
3,000
2,000
5,000
( 2,400) ( 1,600) ( 4,000)
P130,900 P106,600 P237,500
Total capital before the formation of the new partnership (see above)
Divide by the total percentage share of OO and PP (50% + 30%)
Total capital of the partnership after the admission of RR
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P 237,500
80%
P 296,875
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21. a
OO
PP
Agreed Capital
P148,437.50 (50% x P296,875)
89,062.50 (30% x P296,875)
Contributed Capital
P 130,900
106,600
Settlement
P 17,537.50
(17,537.50)
Therefore, OO will pay PP P17,537.50
22. c
Total partnership capital (P113,640/1/3)
Less DD’s capital
CC’s capital after adjustments
Adjustments made:
Allowance for doubtful account (2% x P96,000)
Merchandise inventory
Prepaid expenses
Accrued expenses
CC’s capital before adjustments
23. a
Assets invested by CC:
Cash:
Capital
Add Accounts payable
Total assets (excluding cash)
Less Noncash assets (96,000 + P144,000)
Accounts receivable (96,000 – P1,920)
Merchandise inventory
Prepaid expenses
Cash invested by DD
Total assets of the partnership
P 340,920
113,640
P 227,280
1,920
( 16,000)
( 5,200)
3,200
P 211,200
P211,200
49,600
260,800
240,000
P20,800
94,080
160,000
5,200
P 280,080
113,640
P 393,720
24. d
Total partnership capital (P180,000/60%)
P 300,000
GG’s Capital (P300,000 x 40%)
Less Cash investment
Merchandise to be invested by GG
P 120,000
30,000
P 90,000
25. a
Adjusted capital of JJ:
Total assets (at agreed valuations)
Less Accounts payable
Required capital of JJ
Cash to be invested by JJ
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P 180,000
48,000
P 132,000
180,000
P 48,000
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Quiz-I
1. P276,000 = (P480,000 – P228,000) + [P324,000 - (P480,000 – P228,000)]/3
2. Philip, P100,000; Ray, P100,000 and Sarah, P90,000 (P300,000 – P210,000)
3. P330,000
P330,000 = P50,000 + (P310,000 - P30,000)
4. c The capital balances of each partner are determined as follows:
Apple
Blue
Crown
Cash
P50,000
Property
P 80,000
Mortgage assumed
(35,000)
Equipment
P 55,000
Amount credited to
capital accounts
P50,000
P 45,000
P 55,000
5.
P15,000
(P190,000 – P160,000) x 1/2 = P15,000
P18,000 – the prevailing selling price which is also the fair market value.
6.
7.
8. P15,000
P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000
P50,000 - P35,000 = P15,000
9. P45,000
10. P225,000
11. P375,000 = P400,000 – P25,000
12. P50,000
13. P280,000
Cash .......................................................................................
Machinery and equipment ....................................................
Building ...................................................................................
Subtotal................................................................................
Less: Liability assumed by the partnership ..............................
Capital balances, 7/1/06 .......................................................
Pane
P 40,000
100,000
Sills
P 30,000
350,000
P380,000
(100,000)
P280,000
P140,000
P140,000
14. d
Adjusted capital of LL
Contributed capital of MM
Total capital
P 165,900
82,950
P 248,850
15. a
FF, capital:
Unadjusted balance
Adjustments:
Accumulated depreciation
Allowance for doubtful account
Adjusted balance
GG, capital:
Unadjusted balance
Adjustments:
Accumulated depreciation
P 57,000
( 1,500)
(12,000)
P 43,500
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P 49,500
( 4,500)
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Allowance for doubtful account
Adjusted balance
( 4,500)
P 40,500
THEORIES
Completion statements:
1.accounting
2.GAAP
3. a. cash basis instead of accrual basis
b. prior period adjustments
c. use of fair (or current) values instead of historical cost
d. recognition of goodwill in situations not involving business combinations
4.drawings
5.fair (or current) values
6.achievingequity among the partners
7.capital balances
8.professional corporation
True or False
9
False
10. True
11. False
12. True
13. False
14.
15.
16.
17.
18.
True
False
False
False
True
19.
20.
21.
22.
23.
False
True
False
True
False
24.
25.
26.
27.
28.
False
True
False
True
True
29.
30.
False
True
Note for the following numbers:
17. Individuals, partnerships, and corporations are allowed to be partners in a partnership.
19. All of the general partners are liable for all the partnership’s debts.
21. Most small partnerships maintain their financial information using the tax basis.
23., While the partnership does not pay income taxes, it is responsible for other taxes such as payroll taxes and franchise
taxes.
24. The proprietary theory is based on the notion that the business entity is an aggregation of the owners
26.This is an example of the proprietary theory of equity.
28.Any basis (i.e., carrying value, tax basis, or market value) can be used to value noncash assets contributed to a
partnership
MULTIPLE-CHOICE QUESTIONS
31.
32.
33.
34.
35.
a
B
a
e
d
36.
37.
38.
39.
40.
d
b
c
a
a
41.
42.
43.
44.
45.
c
c
a
d
b
46.
47.
48.
49.
50.
a
c
b
b
c
51.
52.
53.
d
b
b
Chapter 2
Problem I
1. Beginning Capital.
Income summary…………
X, drawing…….
Y, drawing…….
345,600
144,000
201,600
X, capital, January 1………..
X, capital, January 1………..
Total capitals
P 360,000
504,000
P 864,000
X’s share of net income: 360/864 of P345,600
P 144,000
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Y’s share of net income 504/864of P345,600
Total capitals
201,600
P 345,600
2. Ending Capital.
Income summary…………
X, drawing…….
Y, drawing…….
345,600
153,600
192,000
X, capital, December 31………..
X, capital, December 31………..
Total capitals
P 432,000
540,000
P 972,000
X’s share of net income: 432/972 of P345,600
Y’s share of net income 540/972 of P345,600
Total
P 153,600
192,000
P 345,600
3. Interest on Excess Average Capital Balance.
Income summary…………
Y, drawing…….
4,320
4,320
Int erest allowed based on average capit als.
Y’s interest on excess av erage capital:
6% of (P486,000 – P414,000)…………………..
X:
1/1/x4:
4/1/x4:
Capital
balance
P360,000
432,000
x
x
No. of Mos.
Unchanged
3
9
12
Av erage
Y:
1/1/x4:
3/1/x4:
11/1/x4:
Capital
balance
P504,000
468,000
540,000
x
X
x
No. of Mos.
Unchanged
2
8
2
12
Av erage
Total
P 4,320
P1,080,000
3,888,000
P4,968,000
P 414,000
P 1,008,000
3,744,000
1,080,000
P5,832,000
P 486,000
P 900,000
The net effect of the foregoing on capitals is:
X
Interest on excess
av erage capital……
Balance (1:2)………..
Total
P
P 113,760
P 113,760
Y
4,320
227,520
P 231,840
P
Total
4,320
341,280
P345,600
The allocation of net income may be summarized in a single entry as follows:
Income summary…………….
X, drawing…….
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345,600
113,760
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Y, drawing…….
231,840
Problem II
1. A bonus of 20% of net income before the bonus is deducted, the bonus would be computed
as follows:
Let B
B
B
B
=
=
=
=
Bonus
20% of Net income
20% of P504,000
P100,800
2. A bonus of 20% of net income after deduction of the bonus, the bonus would be computed
as follows:
Let B
B
B
B
1.20 B
B
=
=
=
=
=
=
Bonus
20% of Net income after Bonus
20% (P504,000 – B)
P100,800 - .20B
P100,800
P84,000
Problem III
1. Bonus is based on net income before bonus, salaries and interest
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
2.
B
P 72,000
9,600
86,400
P168,000
Total
P 100,800
120,000
24,000
259,200
P504,000
Bonus is based on net income after bonus but before salaries and interest
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
3.
A
P 100,800
48,000
14,400
172,800
P336,000
A
P 84,000
48,000
14,400
184,000
P330,400
B
P 72,000
9,600
92,000
P173,600
Total
P 84,000
120,000
24,000
276,000
P504,000
Bonus is based on net income after bonus and salaries but before interest:
Let B
B
B
B
B
B
1.20 B
B
=
=
=
=
=
=
=
=
Bonus; S = Salaries; and I = Interest.
20% of Net income after Bonus and Salaries before Interest
20% (P504,000 – B – S)
20% (P504,000 – B – P120,000)
20% (P384,000 – B)
P76,800 - .20B
P76,800
P64,000
Proof:
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Net income before bonus, salaries and interests……………
Less: Bonus………………
Salaries……………0
Net income after bonus, salaries before interests……………
Multiplied by: Bonus rate………….
Bonus…………
P504,000
64,000
120,000
P320,000
20%
P 64,000
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
4.
A
P 64,000
48,000
14,400
197,333
P323,733
B
P 72,000
9,600
98,667
P180,267
Total
P 64,000
120,000
24,000
296,000
P504,000
Bonus is based on net income after bonus, salaries and interest:
Let B
B
B
B
B
B
1.20 B
B
=
=
=
=
=
=
=
=
Bonus; S = Salaries; and I = Interest.
20% of Net income after Bonus, Salaries and Interest
20% (P504,000 – B – S - I)
20% (P504,000 – B – P120,000 – P24,000)
20% (P360,000 – B)
P72,000 - .20B
P72,000
P60,000
Proof:
Net income before bonus, salaries and interests……………
Less: Bonus………………
Salaries……………
Interest……………..
Net income after bonus, salaries before interests……………
Multiplied by: Bonus rate………….
Bonus…………
P504,000
60,000
120,000
24,000
P300,000
20%
P 60,000
The schedule showing the allocation of net income is presented as follows:
Bonus….
Salaries………
Interest………….
Balance (2;1)……….
Total
5.
A
P 60,000
48,000
14,400
200,000
P322,400
B
P 72,000
9,600
100,000
P181,600
Total
P 60,000
120,000
24,000
300,000
P504,000
Bonus is based on net income after salaries but before bonus and interest:
Let B
B
B
B
B
B
=
=
=
=
=
=
Bonus; S = Salaries; and I = Interest.
20% of Net income after Salaries before Bonus and Interest
20% (P504,000 – S)
20% (P504,000 – P120,000)
20% (P384,000)
P76,800
Refer to Note of No. 3.
6.
Bonus is based on net income after interest but before bonus and salaries:
Let B
B
B
= Bonus; S = Salaries; and I = Interest.
= 20% of Net income after Interest before Bonus and Salaries
= 20% (P504,000 – P24,000I
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B
B
= 20% (P480,000)
= P96,000
Refer to Note of No. 3.
7.
Bonus is based on net income before bonus but aft er income tax (tax rate is 35%):
Let B
B
B
= Bonus;
= 20% (P504,000 – T)
= P100,800 - .20T
Let T
T
T
= Income tax
= 35% (P504,000)
= P176,400
Substituting the equation for T in the equation for B:
Let B
B
B
= P100,800 - .20 (P176,400)
= P100,800 – P35,280
= P65,520
Proof:
Net income before bonus and income tax……………
Less: Bonus………………
Net income before bonus after income tax……..
Less: Income tax……………
Net income after bonus and income tax………
P504,000
65,520
P438,480
_176,400
P262,080
Bonus as computed above:
Net income before bonus and income tax……………
Less: Income tax (35% x P504,000)
Net income after income tax before bonus……..
Multiplied by: Bonus rate………
Net income after bonus and income tax………
P504,000
176,400
P327,600
____ 20%
P 65,520
8. Bonus is based on net income, that is, after bonus and income tax:
Let B
B
B
= Bonus; T = Income tax
= 20% (P504,000 – B - T)
= P100,800 - .20B - .20T
Let T
T
T
= Income tax
= 35% (P504,000)
= P176,400
Substituting the equation for T in the equation for B:
Let B
B
1.20B
1.20B
B
=
=
=
=
=
P100,800 - .20B - .20T
P100,800 - .2B - .20 (P176,400)
P100,800 – P35,280
P65,520
P54,600
Proof:
Net income before bonus and income tax……………
Less: Bonus………………
Net income before income tax……..
Less: Income tax (35% x P504,000)
Net income after bonus and income tax………
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P504,000
54,600
P449,400
176,400
P273,000
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Bonus as computed above:
Net income after bonus and income tax………
Multiplied by: Bonus rate………
Bonus……………
P273,000
____ 20%
P 54,600
Problem IV
B = Bonus to Rodgers
B = 0.20(Net I ncome - interest - salary - bonus)
B = 0.20(P168,000 - [0.08(P150,000)] - P60,000 – B)
B = 0.20(P96,000 - B)
B = P19,200 - 0.20B
1.20B = P19,200
B = P16,000
Problem V
Interest (8%)
Salary
James
P4,400 (below)
13,000
Remaining income (loss):
P30,000
(17,200)
(48,000)
P(35,000)
(7,040)
Totals
P10,360
Keller
P5,600
15,000
(10,560)
P10,040
Rivers
P7,200
20,000
(17,600)
P9,600
CALCULATION OF JAMES INTEREST ALLOCATION
Balance, January 1 – June 1 (P48,000 x 5 months)
Balance, June 1 – December 31 (60,000 x 7 months)
Total
Months
Average monthly capital balance
Interest rate
Interest allocation (above)
Totals
P17,200
48,000
(36,200)
P30,000
P240,000
420,000
P660,000
÷
12
P 55,000
x
8%
_P 4,400
STATEMENT OF PARTNERS’ CAPITAL
James
Keller
Beginning balances
P 48,000
P70,000
Additional contribution
12,000
0
Income (above)
10,060
10,040
Drawings (P1,000/month)
(12,000)
(12,000)
Ending capital balances
P58,360
P68,040
Problem VI
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Rivers
P90,000
0
9,600
(12,000)
P87,600
Totals
P208,000
12,000
30,000
(36,000)
P214,000
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1: Net income is P360,000
Salaries
Bonus on net income
Interest on average capital balances
Remainder is P 88,600 (positive)
Totals
P
P 80,000
21,600
9,800
___53,160
P 164,560
Q
P 100,000
43,200
16,800
__35,440
P195,440
Total
P180,000
64,800
26,600
___88,600
P 360,000
P
P 80,000
14,400
9,800
_(4,900)
P 99,300
Q
P 100,000
28,800
16,800
__(4,900)
P 140,700
Total
P 180,000
43,200
26,600
__(9,800)
P240,000
P
P 80,000
0
9,800
(123,300)
(P33,500)
Q
P 100,000
0
16,800
(123,300)
(P 6,500)
Total
P 180,000
0
26,600
(246,600)
(P 40,000)
2. Net income is P240,000
Salaries
Bonus on net income
Interest on average capital balances
Remainder is P 9,800 (negative)
Totals
3. Net loss is P40,000
Salaries
Bonus (no distribution)
Interest on average capital balances
Remainder is P 246,600 (negative)
Totals
Problem VII:
1 and 2.
Total to allocate:
As Bonus (Note A below )
As Salaries
As I nterest (Note B below )
Subtotal:
Residual Profit-sharing
Final Allocations:
Note A (Bonus):
Bonus = .20(Net I ncome
1.2Bonus = .20(P150,000)
1.2Bonus = 30,000
Bonus = P25,000
Total
P150,000
(25,000)
(72,000)
(10,720)
P 42,280
(42,280)
P
0
Carey
Drew
P25,000
36,000
6,560
P67,560
21,140
P88,700
P36,000
4,160
P40,160
21,140
P61,300
Fraction
of Year
1/12
I nterest
Rate
0.08
= Subtotal
P 667
6/12
0.08
3,520
3/12
0.08
1,520
Bonus)
Note B (I nterest):
Carey:
Capital
Amount
P100,000
(12,000)
88,000
(12,000)
76,000
(12,000)
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Drew :
P 64,000
2/12
1.0000
0.08
853
P6,560
Capital
Amount
P70,000
(12,000)
58,000
(12,000)
46,000
(12,000)
P34,000
Fraction
of Year
1/12
I nterest
Rate
0.08
= Subtotal
P 467
6/12
0.08
2,320
3/12
0.08
920
2/12
1.0000
0.08
453
P4,160
Problem VIII
Jones would have to receive a bonus of P12,000 to be indifferent to the two profit -sharing
options. Since Cable would receive the same bonus, the total bo nus would have to be P24,000.
Therefore,
P24,000 = 10% (Net income - Salaries - Bonuses)
P24,000 = 10% (Net income - [30,000 + 40,000] - 24,000)
P24,000 = 10% (Net income - 94,000)
P24,000 = 10% Net income - 9,400
P33,400 = 10% Net income
Net income P334,000
Problem IX
1. It should be noted that the order of priority is of no significance when it comes to allocation
of net income. Unless in cases, when there is a resulting residual loss, wherein the residual loss
should be allocated based on their agreement. In this case, there is no such agreement, so
the allocation would still be to satisfy completely all provisions of the profit and loss
agreement and use the profit and loss ratios to absorb any deficiency or additio nal loss cause
by such action.
Olsen
Katch
Total
Interest
P 2,000
P 2,400
P 4,400
Bonus
10,000
10,000
Salaries
48,000
36,000
84,000
Remainder (6:4)
__8,040
__5,360
_13,400
P58,040
P26,960
P85,000
Weighted Average Calculation:
Olsen:
1/1 to 4/1
4/1 to 10/1
10/1 to 12/31
Total
Average
Capital
Balance
20,000
25,000
30,000
Gross
# of Months
3
6
3
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Capital
60,000
150,000
90,000
300,000
25,000
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Katch:
Capital
Balance
40,000
30,000
20,000
30,000
1/1 to 3/1
3/1 to 9/1
9/1 to 11/1
11/1 to 12/31
Total
Average
2.
Gross
# of Months
2
6
2
2
Olsen
P48,000
Salaries
Bonus
Interest*
Remainder
Final Profit:
2,000
39,960
P89,960
Katch
P36,000
10,000
2,400
26,640
P75,040
*see part 'a' solution for weighted average capital calculation
Problem X
Weighted Av erage Capital Calculation:
1/1 to 6/1
6/1 to 10/1
10/1
to
12/31
1/1 to 3/1
3/1 to 9/1
9/1 to 11/1
11/1
to
12/1
12/1
to
12/31
1.
Salary
Bonus
I nterest
Matt
Cap Bal # months
35,000
5
45,000
4
50,000
3
Gross Cap
175,000
180,000
150,000
Total
Av erage
505,000
42,083
Jeff
Cap Bal # months
25,000
2
35,000
6
25,000
2
20,000
1
Gross Cap
50,000
210,000
50,000
20,000
28,000
Matt
P N/A
N/A
4,208
1
28,000
Total
Av erage
358,000
29,833
P
Jeff
N/A
N/A
2,983
P
Total
0
0
7,191
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Capital
80,000
180,000
40,000
60,000
360,000
30,000
Total
P 84,000
10,000
4,400
66,600
P165,000
lOMoARcPSD|28427881
Subtotal
Remainder
Total
P 4,208
29,404
P33,612
P 2,983
29,405
P32,388
P 7,191
58,809
P66,000
Salary
Bonus
I nterest
Subtotal
Remainder
Total
Matt
P
0
N/A
5,000
P 5,000
29,520
P34,520
Jeff
P 9,000
N/A
2,800
P11,800
19,680
P31,480
Total
P 9,000
0
7,800
P16,800
49,200
P66,000
Salary
Bonus
I nterest
Subtotal
Remainder
Total
Matt
P10,000
N/A
N/A
P10,000
23,992
P33,992
Jeff
P15,000
N/A
N/A
P15,000
17,008
P32,008
Total
P25,000
0
0
P25,000
41,000
P66,000
Salary
Bonus*
I nterest
Subtotal
Remainder
Total
Matt
P20,000
6,000
4,208
P30,208
(1,096)
P29,112
Jeff
P35,000
N/A
2,983
P37,983
(1,095)
P36,888
Total
P55,000
6,000
7,191
P68,191
(2,191)
P66,000
AA
14,400
12,960
( 1,200)
26,160
BB
12,000
17,280
( 900)
28,380
CC
13,600
24,840
( 900)
37,540
Total
40,000
55,080
( 3,000)
92,080
AA
96,000
BB
144,000
CC
216,000
Total
456,000
24,000
26,160
( 9,000)
137,160
28,380
( 9,000)
163,380
(36,000)
37,540
( 9,000)
208,540
(12,000)
92,080
(27,000)
509,080
AA
BB
CC
Interest-12% of Av e. Cap.
12,960
17,280
24,840
Balance/Remainder (4:3:3)
( 1,200)
( 900)
( 900)
Share in Net Income
11,760
16,380
23,940
*Net income before partners’ salaries and interests…………………P 92,080
Total
55,080
( 3,000)
52,080*
2.
3.
4.
Problem XI
1. Allocation/Distribution of Net Income
Salaries
Interest-12% of Av e. Cap.
Balance/Remainder (4:3:3)
Share in Net Income
2. Statement of Partners’ Capital
Capital, January 2, 2010
Additional Inv estments
(W ithdrawals)
Net Income
Personal W ithdrawals
Capital, December 31, 2010
3. Allocation/Distribution of Net Income
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lOMoARcPSD|28427881
Less: Operating expenses (including salaries)……………………….. 40,000
Net Income after partners’ salaries but before interests……………P 52,080
Incidentally, the entry to record the salaries would be:
Operating expenses (for salaries)…………………. 40,000
AA, capital………………………………………………………..
BB, capital………………………………………………………..
CC, capital………………………………………………………..
14,400
12,000
13,600
3. Statement of Partners’ Capital
AA
96,000
24,000
11,760
14,400
( 9,000)
137,160
Capital, January 2, 2010
Addit’l. Inv . (W ithdrawals)
Net Income
Sal. (refer to entry abov e)
Personal W ithdrawals
Capital. December 31, 2010
BB
144,000
16,380
12,000
( 9,000)
163,380
CC
216,000
( 36,000)
23,940
13,600
( 9,000)
208,540
Partners
Price
25%
P 5,000
20,000
5,000
2,692
11,417
10,200
P 54,309
Russell
40%
P 5,000
45,000
.............
2,692
6,750
16,319
P75,761
Problem XII
Components of Allocation
Profit/loss percentage ...............................
Gain on sale of equipment .......................
Salaries.......................................................
Bonus (Note A) ..........................................
Bonus (Note A) ..........................................
Interest on capital (Note B) .......................
Remaining profit (loss) ...............................
Profit (loss) allocation.................................
Durand
35%
P 5,000
40,000
.............
2,692
7,958
14,280
P 69,930
Cumulative
Total
...............
P 15,000
105,000
5,000
8,076
26,125
40,799
P200,000
Note A: Bonus to Price based on sales is 5%  (P1,100,000 – P1,000,000)
Bonus to all partners based on net income:
Bonus = 30%  [(net income – P150,000) – bonus]
Bonus = 30%  [(P185,000 – P150,000) – bonus]
130% Bonus = P10,500
Bonus = P8,076
The total bonus of P8,076 divided equally among the partners is P2,692 per partner.
Note B:
Calculation of weighted-av erage capital (capital is reduced by draws in excess of salaries):
Durand
Price
Russell
P75,000  5/12 =
85,000  4/12 =
80,000  3/12 =
P
31,250
28,333
20,000
P 79,583
10%
P
7,958
P125,000  1/12 =
120,000  2/12 =
115,000  3/12 =
110,000  6/12 =
P
P
P
10,417
20,000
28,750
55,000
114,167
10%
11,417
Problem XIII
1. Distribution of income for 20x4:
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P40,000 
70,000 
1/12 =
11/12 =
P
3,333
64,167
P 67,500
10%
P
6,750
lOMoARcPSD|28427881
Interest
Compensation
Subtotals
Allocation of remainder
Totals
Norr
P 12,000
__10,000
P 22,000
__14,640
P 36,640
Caylor
P 9,600
__14,000
P 23,600
__9,760
P 33,360
Total
P 21,600
__24,000
P 45,600
__24,400
P 70,000
2. Capital account balances at the end of 20x4:
Beginning capital balances
Share of income
W ithdrawals
Ending capital balances
Norr
P 100,000
36,640
_(12,000)
P 124,640
Caylor
P 80,000
33,360
_(12,000)
P 101,360
3. Distribution of income for 20x5:
Interest
Compensation
Subtotals
Allocation of remainder
Totals
Norr
P 14,957
__8,000
P 22,957
__13,872
P 9,085
Caylor
P 12,163
__12,000
P 24,163
__9,248
P 14,915
Total
P 27,120
__240,000
P 47,120
_(23,120)
P 24,000
4. Capital account balances at the end of 20x5:
Beginning capital balances
Share of income
W ithdrawals
Ending capital balances
Norr
P 124,640
9,085
_(12,000)
P 121,725
Caylor
P 101,360
14,915
_(12,000)
P 104,275
Problem XIV
1.
The interest factor was probably inserted to reward Page for contributing P50,000 more to the
partnership than Childers. The salary allowance giv es an additional P15,000 to Childers in recognition
of the full-time (rather than part -time) employment. The 40:60 split of the remaining income was
probably negotiated by the partners based on other factors such as business experience, reputation,
etc.
2.
The drawings show the assets remov ed by a partner during a period of time. A salary allowance is
added to each partner's capital for the year (usually in recognition of work done) and is a component
of net income allocation. The two numbers are often designed to be equal but agreement is not
necessary. For example, a salary allowance might be high to recognize work contributed by one
partner. The allowance increases the appropriate capital balance. The partner might, though, remov e
little or no money so that the partnership could maintain its liquidity.
3.
Page, Drawings ................................................................................................
Repair Expense .........................................................................................
(To reclassify payment made to repair personal residence.)
5,000
Page, Capital ....................................................................................................
Childers, Capital ...............................................................................................
Page, Drawings (adjusted) ...................................................................
Childers, Drawings ...................................................................................
(To close drawings accounts for 2008.)
13,000
11,000
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5,000
13,000
11,000
lOMoARcPSD|28427881
Rev enues ........................................................................................................90,000
Expenses (adjusted by first entry) ........................................................
Income Summary .....................................................................................
(To close rev enue and expense accounts for 2008.)
Income Summary .............................................................................................
Page, Capital ............................................................................................
Childers, Capital .......................................................................................
31,000
11,000
20,000
(To close net income to partners' capital–see allocation plan shown below.)
Allocation of Incom e
Page
Interest (10% of beginning balance)
P 8,000
Salary allowances
5,000
Remaining income (loss):
P31,000
(11,000)
(25,000)
P (5,000)
(2,000) (40%)
P11,000
4.
59,000
31,000
Childers
P 3,000
20,000
(3,000) (60%)
P20,000
Total capital (original balances of P110,000 plus 2008
net income less drawings) .....................................................................
P117,000
Inv estment by Smith ........................................................................................
43,000
Total capital after inv estment .....................................................................
P160,000
Ownership portion acquired by Smith .......................................................
20%
Smith, capital ................................................................................................P 32,000
Amount paid
................................................................................................ 43,000
Bonus paid by Smith—assigned to original partners ............................. P 11,000
Bonus to Page (40%) .......................................................................................
P4,400
Bonus to Childers (60%) ..................................................................................
P6,600
Cash
................................................................................................................
Smith, Capital (20% of total capital) ..................................................
Page, Capital ............................................................................................
Childers, Capital .......................................................................................
43,000
Multiple Choice Problems
1. c
Capital, Beg
Additional Investment
Withdrawal (800 x 12)
Net income (?)
Capital, Ending
32,000
4,400
6,600
45,000
50,000
(96,000)
31,000
P 30,000
2. b
Salaries
Bonus
Interest (20% x average capital)
Balance - equally
10M
A
2,000
8,000
8,000
8,500
44,500
*Bonus= 10% (NI - B)
B= .10 (8,800 - B)
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B
25,000
0
10,000
8,500
10M
45,000
8,000
18,000
1,700
8,800
lOMoARcPSD|28427881
B= 8,800 - .10B
1.10B= 8,800
B= 8,000
3.
b
The net income of P80,000 is allocated to Blue and Green in the following
manner:
Blue
Green
Net Income
P 80,000
Salary allowances
P 55,000
P45,000
(100,000)
Remainder
P (20,000)
Allocation of the negative
remainder in the
60:40 ratio
(12,000)
(8,000)
20,000
Allocation of net income
P 43,000
P37,000
P
-0-
4. a
Salaries
Bonus*
Interest: 10% x Av e. capital
1:3
Total
A
30,000
3,600
5,000
4,625
P 43,225
B
P 45,000
A
P 40,000
B
P 45,000
6,000
(32,000)
P 14,000
9,000
(16,000)
P 38,000
6,500
Total
P 75,000
3,600
11,500
18,500
P 108,600
*Bonus = 12% (NI – S – B)
B = .12 (108,600 – 75,000 – B)
B = .12 (33,600 – B)
B = 4,032 - .12B
1.12B = 4,032
B = 3,600
5. a
Salaries
Bonus (refer to Note)
Interest on av erage capital (15%)
Balance (2:1)
Total
Total
P 85,000
0
15,000
(48,000)
P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to
allocation of net income. When there is a resulting residual loss, wherein the residual
loss should be allocated based on their agreement. In this case, there is no such
agreement, so the allocation would still be to satisfy completely all provisions of the
profit and loss agreement and use the profit and loss ratios to absorb any deficiency
or additional loss caused by such action.
6. d
Salaries
Bonus*
3:4:3
Total
A
P 40,000
B
P 40,000
__3,000
P 43,000
4,000
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C
P 1,000
_3,000
P 4,000
Total
P 80,000
1,000
10,000
P 91,000
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*Bonus = 10% (NI – S – B)
B = .10 (91,000 – 80,000 – B)
B = .10 (11,000 – B)
B = 1,100 - .10B
1.10B = 1,100
B = 1,000
7. c
Salaries
Bonus (refer to Note)
Interest on av erage capital (10%)
Balance (1:2)
Total
A
P 41,600
B
P 38,400
2,000
(16,500)
P 27,100
3,500
Total
P 80,000
0
5,500
(49,500)
P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to
allocation of net income. When there is a resulting residual loss, wherein the residual
loss should be allocated based on their agreement. In this case, there is no such
agreement, so the allocation would still be to satisfy completely all provisions of the
profit and loss agreement and use the profit and loss ratios to absorb any deficiency
or additional loss caused by such action.
8. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual is 12 months.
9. c
Mack
P 90,000
_30,000
P120,000
Salaries
6:4
Total
10.
11.
12.
13.
14.
15.
16.
17.
18.
Ruben
P 60,000
__20,000
P 80,000
Total
P 150,000
50,000
P 200,000
c – Robbie, P50,000 x 90/150 = P30,000; Ruben, P50,000 x 60/150 = P20,000
c - B = .05(P180,000 - P150,000)
d - B = {[(P540,000 - P500,000)/P500,000] - .05} P120,000
d - (P60,000 - P50,000)(.60) + (P80,000 - P60,000)(.70)
c - (P300,000 - P200,000)(.75) + (P380,000 - P300,000)(.60)
c - (P300,000 - P100,000)(.35) + (P450,000 - P300,000)(.55)
d - (P120,000 - P50,000)(.40)
a - (P600,000 - P350,000)(.40 - .30)
b
XX
YY
ZZ
Salary
60,000
48,000
36,000
Interest: 10% x average capital
7,500
Balance: equally
5,000
5,000
5,000
X: P100,000 x 6 = P600,000
P160,000 x 6 = 960,000
P1,560,000 / 12 = P 130,000
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Total
144,000
48,750
15,000
207,750
lOMoARcPSD|28427881
Y (same with beginning since no additional
investments or withdrawals were made)
Z: P225,000 x 9 = P2,025,000
P155,000 x 3 =
465,000 P2,490,000/12
=
150,000
207,500
P 487,500 x 10% = P48,750
19. d - ASSIGNMENT OF INCOME
Interest—10% of
beginning capital ................................
Salary ...........................................................
Allocation of remaining income
(P6,000 div ided on a 3:3:4 basis) .............1,800
Totals ...............................................
ARTHUR
BAXTER
CARTWRIGHT
P 6,000
20,000
P 8,000
P10,000
20,000
1,800
P 7,800
2,400
P29,800
6,000
P12,400
ARTHUR
P60,000
7,800
(5,000)
P62,800
BAXTER
P80,000
29,800
(5,000)
P104,800
TOTAL
P24,000
P50,000
STATEMENT OF CAPITAL
Beginning capital ........................................
Net income (abov e) ...................................
Drawings (giv en) ..........................................
Ending capital ..............................................
CARTWRIGHT
P100,000
12,400
(5,000)
P107,400
TOTAL
P240,000
50,000
(15,000)
P275,000
20. a
ASSIGNMENT OF INCOME—YEAR ONE
WINSTON
Interest—10% of
beginning capital ................................
P11,000
Salary ...........................................................20,000
-0Allocation of remaining loss
(P80,000 div ided on a 5:2:3 basis)............(40,000) (16,000)
Totals ...............................................
P(9,000)
DURHAM
SALEM
TOTAL
P 8,000
10,000
P11,000
30,000
P30,000
(24,000)
P (8,000)
(80,000)
P (3,000)
P (20,000)
DURHAM
P80,000
(8,000)
(10,000)
P62,000
SALEM
P110,000
(3,000)
(10,000)
P 97,000
TOTAL
P300,000
(20,000)
(30,000)
P250,000
STATEMENT OF CAPITAL—YEAR ONE
Beginning capital ........................................
Net loss (abov e) ...........................................
Drawings (giv en) ..........................................
Ending capital ......................................
WINSTON
P110,000
(9,000)
(10,000)
P 91,000
ASSIGNMENT OF INCOME—YEAR TW O
WINSTON
Interest—10% of
beginning capital ................................
P 9,100
Salary ............................................................20,000
-0Allocation of remaining loss
(P15,000 div ided on a 5:2:3 basis) ........... (7,500) (3,000)
Totals ................................................
P21,600
DURHAM
SALEM
TOTAL
P 6,200
10,000
P 9,700
30,000
P25,000
(4,500)
P3,200
(15,000)
P15,200
P40,000
DURHAM
P62,000
3,200
(10,000)
P55,200
SALEM
P 97,000
15,200
(10,000)
P102,200
TOTAL
P250,000
40,000
(30,000)
P260,000
STATEMENT OF CAPITAL—YEAR TW O
Beginning capital (abov e) .......................
Net income (abov e) ...................................
Drawings (giv en) ..........................................
Ending capital ......................................
WINSTON
P 91,000
21,600
(10,000)
P102,600
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lOMoARcPSD|28427881
21. a
Capital, Beginning
Additional investment
Withdrawals
Net income
Net Decrease
25,000
(130,000)
45,000 / 30% = P 150,000
(60,000)
22. a
________
H
4,000
20,000
_________
Total
22,000
50,000
(105,000)
(33,000)
D
25,000
13,000
28,200
66,200
E
20,000
F
25,000
14,100
34,100
_4,700
29,700
Total
70,000
13,000
47,000
130,000
C
100,000
29,000
(12,000)
117,000
W
150,000
63,000
(12,000)
20,100
N
200,000
58,000
(12,000)
24,600
Total
450,000
150,000
(36,000)
564,000
C
10,000
19,000
29,000
W
15,000
10,000
38,000
63,000
N
20,000
38,000
58,000
Total
45,000
10,000
95,000
150,000
Capital, 1/1/x5
Net income
Withdrawals – personal
Capital, 12/31/x5
117,000
34,420
(12,000)
139,420
201,000
75,540
(12,000)
264,540
246,000
70,040
(12,000)
304,040
564,000
180,000
(36,000)
708,000
Net income – 20x5
10% interest a beginning capital
Salary
20% : 40% : 40%
117,000
34,420
(12,000)
139,420
201,000
75,540
(12,000)
264,540
246,000
70,040
(12,000)
304,040
564,000
180,000
(36,000)
708,000
I
Total
10% interest a Average capital
Salaries
Equally
F
12,000
30,000
(35,000)
7,000
G
6,000
23. d, P66,200; E, P34,100; F, P29,700
Salaries
Bonus on income (10% x P130,000)
Remainder (6:3:1)
24. a
Capital, 1/1/x4
Net Income – 20x4
Withdrawal – personal
Capital, 12/31/x4
Net income – 20x4
10% interest on beginning capital
Salary
20% : 40% : 40%
25. d - refer to No.24
26. b - refer to No.24
27. c - refer to No.24
28. b
Y
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E
lOMoARcPSD|28427881
Capital, 1/1/YearI
Net income (loss)
Withdrawals – personal
Capital, 12/31/ Year I
143,000
(11,700)
(13,000)
118,300
104,000
(10,400)
(13,000)
80,600
143,000
(3,900)
(13,000)
126,100
390,000
(26,000)
(39,000)
325,000
Year I Net loss
Salary
Interest – 10% x beginning capital
5:2:3
Total
26,000
14,300
(52,000)
(11,700)
10,400
(20,800)
(10,400)
13,000
14,300
(31,200)
(3,900)
3,900
3,900
(10,400)
(2,600)
Capital, 1/1/Year2
Net income (loss)
Withdrawals – personal
Capital, 12/31/ Year 2
118,300
28,080
(13,000)
133,380
80,600
76,700
(13,000)
144,300
126,100
19,760
(13,000)
132,860
325,000
52,000
(3,900)
338,000
8,060
(3,900)
76,700
13,000
12,610
(5,850)
19,750
3,900
32,500
(19,500)
52,000
Year 2 Net loss
Salary
Interest – 10% x beginning capital
5:2:3
26,000
11,830
(9,750)
28,080
29. d - refer to No.28
30. c - refer to No.28
31. a - refer to No.28
32. d
Because both partners have equal capital balances, NN's capital has to be increased to
equal that of MM's. Since MM's capital balance is P60,000 and NN's is P20,000, an addi tional
P40,000 has to be credited to NN's capital to make it equal MM's capital. This additional
amount credited to NN's capital is the goodwill that NN is bringing to the partnership.
33. a - MM's share of the net income of P25,000 is 60%, or P15,000.
34. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual - 12 months.
35. b
Interest: (P500,000 x 10%)
= P50,000
Salary: (P10,000 + P20,000) = P30,000
Bonus: Condition not met = P0
Total allocations = P80,000 and over-allocations =
P80,000 - P60,000 = P20,000
36. b
Bloom:
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Interest allocation: P20,000
Salary allocation:
P10,000
Carnes:
Interest allocation: P30,000
Salary allocation:
P20,000
There is a total of P80,000 for positive allocations. To bring them down to a P20,000 loss, a
residual adjustment of (P100,000) is needed which is allocated (P40,000) to Bloom and
(P60,000) to Carnes. After these amounts are assigned to the partners, each partner’s
capital account will be reduced by a net P10,000.
37. c
J
P 50,000
16,000
(6,000)
P 60,000
Salaries
Bonus*
Remainder (3:4:3)
Total
P
P 60,000
8,000
(8,000)
P 60,000
B
P 30,000
16,000
(6,000)
P 40,000
Total
P140,000
40,000
(20,000)
P160,000
* since problem is silent it should be based on net income before any deduct ions.
38. c
Salaries
Bonus (10% of av erage capital)
Remainder (4:4:2)
Total
A
P 30,000
5,000
_ 24,000
P 59,000
P
P 10,000
3,000
__24,000
P 37,000
B
P 40,000
2,000
_12,000
P 54,000
Total
P 80,000
10,000
60,000
P150,000
Salaries
Bonus (10% of av erage capital)
Remainder (4:4:2)
Total
A
P 30,000
5,000
(16,000)
P 19,000
P
P 10,000
3,000
(16,000)
(P3,000)
B
P 40,000
2,000
( 8,000)
P 34,000
Total
P 80,000
10,000
(40,000)
P 50,000
39. c
40. b
Total agreed capital = total contributed capital*
(P200,000 + P100,000 + P100,000)
Multiplied by: Capital interests of May
* No goodwill or asset adjust ment
41 d
P60,000, salary = P25,000, salary + [.20 (NI – B)]
P60,000 = P25,000 + P35,000, bonus
Therefore, bonus would be P35,000
B = .20 (NI – B)
P35,000 = . 20 (NI – P35,000)
P35,000 = .20NI – P7,000
P35,000 + P7,000 = .20NI
P42,000 = .20NI
NI = P210,000
42. c - P30,000 + P40,000 = P70,000, annual salary to allocate net income.
43. b
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P 400,000
_____35%
P 140,000
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[P70,000 – (P40,000 + P10,000 +P2,000)]
Salary to partners is an allocation of net income (they are not expenses)
Partner’s withdrawals are deduction to capital accounts.
44. c
Bonus = 20% (NI before deduction on salaries, interests and bonus)
B = 20% (NI after deduction of salaries, interests and bonus + salaries + interests + bonus)
B = 20% [P46,750 + (P1,000 x 12 months) + (.05 x P25,000) + B]
B = .20 [P60,000 + B]
B = P12,000 + .20B
1.20 B = P12,000
B = P15,000
45. a
Allocation/Distribution of Net Income
DD
EE
Salaries
18,000
24,000
Interest (10% of Ave. Cap.)
15,000
20,000
Balance/Remainder (60%:40%)
25,800
17,200
Share in Net Income
58,800
61,200
*P 500,000 – P100,000 (excluding salaries and int. – P100,000
Total
42,000
35,000
__43,000
120,000*
Statement of Partners’ Capital
DD
150,000
Capital, March 1, 2011
Additional Investments
Net Income
Personal Withdrawals
Capital, March 1, 2012
58,800
(18,000)
190,800
EE
180,000
60,000
61,200
(24,000)
277,200
Total
330,000
60,000
1240,000
( 42,000)
468,000
DD
P 15,000
51,000
P 66,000
EE
P20,000
34,000
P54,000
Total
P 35,000
85,000
P 120,000
DD
P 150,000
EE
P 180,000
60,000
54,000
24,000
( 24,000)
P 294,000
Allocation/Distribution of Net Income
Interest on Average Capital – 10%
Balance/Remainder – 60%:40%
Share in Net Income
Statement of Partners’ Capital
Capital balance, 2/28/20x4
Additional Investment
Share in Net Income
Salaries
Salary withdrawals
Capital balance, March 1, 20x5
66,000
18,000
( 18,000)
P 216,000
46. a – refer to No. 45
47. b – refer to No. 45
48. c – refer to No. 45
49. a
NN
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OO
Total
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Salary allowances
P180,000
P
P180,000
Balance/Remainder: Equally
15,000
15,000
30,000
Net Income for 20x5
P195,000
P 15,000
P 210,000
Adjustment of net income for 20x4 – 60% : 40%
24,000
16,000
40,000
Total
P219,000
P31,000
P250,000
Note: Any adjustments related to a particular year, the profit and loss ratio existing on that
year should be used as a basis for allocating the required adjustments.
50 – 53: No requirement
54. b
Abe
Bert
Carl
Dav e
Total
Old P & L
70%
20%
10%
100%
Interests Acquired
85%
15%
100%
New P & L
59.50%
17.00%
8.50%
15.00%
100%
55. b
Unadjusted net income, 20x5
Add (deduct): adjustments Accrued expense – 20x5
Accrued income – 20x5
Prepaid expense – 20x4
Deferred or unearned income – 20x4
Adjusted net income, 20x5
Multiplied by: P& L of Dav e
Share in net income – 20x5
P
15,000
(1,050)
875
(1,400)
__1,225
P 14,650
_____17%
P2,490.50
Quiz – II
1. P47,500 = [(P0,000 x 4) + (P40,000 x 6) + (P65,000 x 2)]/12
2. P6,400 = [(P60,000 x 2) + (P90,000 x 5) + (P70,000 x 4) + P110,000] (.08)
3. P3,703 - B = .08(P250,000 - P200,000 - B)
4. P39,150 = (P130,000 - P10,000 - P15,000 - P18,000) .45
5. Nick, P44,075; Joe, P48,435; Mike, P57,490
Nick
Joe
Mike
Total
Interest on capital
P200,000 x .09
P18,000
P350,000 x .09
P31,500
P180,000 x .09
P16,200
P65,700
Salary
25,000
15,000
35,000
75,000
Bonus .1(P150,000 - P100,000)
5,000
5,000
Residual
P4,300 x .25
1,075
P4,300 x .45
1,935
P4,500 x .30
______ _______
1,290
4,300
Totals
P44,075 P48,435 P57,490
P150,000
6.
7.
8.
9.
P185,000 = P35,000 + (P500,000 - P35,000 - P50,000 - P40,000) .4
P78,000 = (P250,000 x .08) + [P300,000 - (P200,000 + P250,000 + P400,000)(.08)] .25
P10,000 = (P60,000 - P50,000)(.40) + (P80,000 - P60,000)(.30)
P57,000 = (P300,000 - P200,000)(.25) + (P380,000 - P300,000)(.40)
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10.
11.
12.
13.
14.
15.
16.
17.
P197,500 = (P300,000 - P100,000)(.65) + (P450,000 - P300,000)(.45)
P42,000 = (P120,000 - P50,000)(.60)
P36,000 = (P200,000 - P120,000)(.45)
P105,000 = (P520,000 - P370,000)(.70)
P78,000 = (P650,000 - P520,000)(.60)
P13,000 increase = (P250,000 - P120,000)(.70 - .60)
P25,000 decrease = (P600,000 - P350,000)(.70 - .60)
P68,800
Garlic
Pepper
Salary
60,000
Interests – 10% on beginning
4,000
4,800
Equally
4,000
4,000
Total
8,000
68,800
Salt
24,000
3,200
4,000
Total
84,000
12,000
12,000
108,000
Rivers
7,200
20,000
(17,600)
9,600
Total
17,200
48,000
(35,200)
30,000
18. P310,000
Using bonus formula to solve for income:
Bonus = .20 (NI – Bonus – Salary)
35,000 = .20 NI – [.20 x P35,000] – [.20 x P100,000*]
62,000 = .2Income
P310,000 = income
*salaries 25,000 + 75,000
19. James, P58,360; Keller, P68,040; Rivers, P87,600
James
Interest – 8%
4,400
Salary
13,000
2:3:5
(7,040)
Total
10,360
Interest:
James: P48,000 x 5 = P240,000
P60,000 x 7 = 420,000 P660,000/12 =
Capital, beginning
Additional investments
Net income (loss)
Withdrawals – P1,000 per month
Capital, ending
Keller
5,600
15,000
(10,560)
10,040
P55,000 x 8% = P4,400
48,000
12,000
10,360
(12,000)
58,360
70,000
90,000
10,040
(12,000)
68,040
9,600
(12,000)
87,600
208,000
12,000
30,000
(36,000)
214,000
20. JJ, P27,000; KK, P24,000; LL, P39,000
JJ
Bonus (20%) ..................................
P18,000
Interest (15% of average capital) 15,000 30,000
Remaining loss ($18,000) .............
(6,000)
Income assignment .....................
P27,000
21. PP, P64,600; SS, P49,000; TT, P2,000
PP
Interest (10%)
6,600 (below)
Salary
18,000
SS
4,000
25,000
KK
-045,000
(6,000)
P24,000
P
TT
2,000
8,000
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LL
P
-090,000
(6,000)
P39,000
Totals
12,600
51,000
Total
P18,000
(18,000)
P90,000
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Remaining income (loss)
Totals
(16,000)
8,600
( 8,000) (16,000)
21,000
(6,000)
CALCULATION OF PURKERSON'S INTEREST ALLOCATION
Balance, January 1—April 1 (P60,000 × 3)
Balance, April 1—December 31 (P68,000 × 9)
Total .......................................................................................
Months ....................................................................................
Average monthly capital balance .......................................
Interest rate ............................................................................
Interest allocation (above) ....................................................
STATEMENT OF PARTNERS' CAPITAL
PP
SS
Beginning balances ......................
60,000
40,000
Additional contribution .................
8,000
-0Income (above) .........................
8,600
21,000
Drawings (P1,000 per month) .......
(12,000)
(12,000)
Ending capital balances................
64,600
49,000
(40,000)
23,600
P180,000
612,000
P792,000
 12
P 66,000
× 10%
P 6,600
TT
20,000
-0(6,000)
(12,000)
2,000
Totals
120,000
8,000
23,600
(36,000)
115,600
32,880
37,146
36,147
70,000
72,000
82,000
RR
6,000
-0(13,120)
(7,120)
Total
15,600
20,000
(65,600)
(30,000)
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4
LL
CC
RR
Beginning balances ...................
20,000
60,000
50,000
Income allocation .....................
(5,280)
(17,600)
(7,120)
Drawings ....................................
(10,000)
(10,000)
(10,000)
Ending balances ..................
4,720
32,400
32,880
Total
130,000
(30,000)
(30,000)
70,000
22. Ending capital balances:
20x4 ......................................
20x5 ......................................
20x6 … ………………………….
4,720
4,766
9,610
32,400
30,088
36,243
INCOME ALLOCATION—20x4
LL
CC
Interest (12% of beginning capital)
2,400
7,200
Salary
12,000
8,000
Remaining income/loss
(19,680)
(32,800)
Totals
(5,280)
(17,600)
INCOME ALLOCATION—20x5
LL
CC
Interest(12% of beginning capital above)
*566
3,888
Salary ........................................
12,000
8,000
Remaining income/loss:
(2,520)
(4,200)
Totals ....................
10,046
7,688
*Rounded
RR
3,946
-0(1,680)
2,266
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6
LL
CC
RR
Beginning balances (above)
4,720
32,400
32,880
Additional investment ................
-0-012,000
Income allocation .....................
10,046
7,688
2,266
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Total
8,400
20,000
(8,400)
20,000
Total
70,000
12,000
20,000
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Drawings ....................................
Ending balances ..................
(10,000)
4,766
(10,000)
30,088
(10,000)
37,146
INCOME ALLOCATION—20x6
LL
CC
Interest (12% of beginning capital
above)* ...............................
572
3,611
Salary ........................................
12,000
8,000
Remaining income .....................
2,272
4,544
Totals...............................
14,844
16,155
*Rounded
(30,000)
72,000
RR
Total
4,457
-04,544
9,001
8,640
20,000
11,360
40,000
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x6
LL
CC
RR
Beginning balances (above)
4,766
30,088
37,146
Income allocation
14,844
16,155
9,001
Drawings
(10,000)
(10,000)
(10,000)
Ending balances
9,610
36,243
36,147
23. Julio, P2,820 decrease; Fong, P120 increase
Short-term prepayments
Julio, Capital
Fong, Capital
Salaries Payable
The correction to partners' capital account s is
computed as follows:
Inventories understated by P12,000,
Dec. 31, 20x5
Inventories understated by P12,000,
Jan. 1, 20x6
Accrued salaries of P5,400 not recorded,
Dec. 31, 20x6
Short-term prepayments of P2,700
not recorded, Dec. 31, 20x6
Net corrections to partners' capital
accounts
THEORIES
True of False
1. False
2. True
3. True
4. False
5. True
6.
7.
8.
9.
10.
False
True
False
True
False
11.
12.
13.
14.
15.
True
True
False
True
False
2,700
2,820
120
5,400
Julio
Fong
P 6,000
P 6,000
(7,200)
(4,800)
(3,240)
(2,160)
1,620
1,080
P(2,820)
16.
17.
18.
19.
20.
Total
72,000
40,000
(30,000)
82,000
True
False
False
True
True
P
21.
22.
23.
24.
25.
120
False
True
False
True
False
26.
27.
28.
False
True
False
Note for the following numbers:
1.
While the partnership law may have indicated that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of partnership.
4.
If the partnership agreement is silent with regard to profit and loss al location, profits and losses are
shared equally.
6.
The interest component of partnership profit and loss allocation rewards partners for capital
contributions.
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8.
10.
13.
15.
17.
18.
21.
23.
The interest on capital balances component of partnership profit and loss allocation may be based
on the beginning, ending, simple average capital balance, or weighted average capital balance.
The salary component of the partnership profit and loss allocation would be expected to be
renegotiated periodically as the duties of the partners change.
Partnerships can offer bonuses to anyone. The choice is up to the partners. On the other hand,
there is no requirement to ever offer a bonus.
While many bonuses are based on a measure of income, it is not required. Bonus can be based on
other criteria such as market share, revenue, or average cost per unit.
Residual interests may be equal but they are not required to be equal.
While profit residual ratios and loss residual ratios are generally the same, they can differ.
Residual profit and loss percentages are the last component of the profit and loss allocation
process applied because they are designed to allocate any remaining amount to the partners.
There are several ways that the difference between market and book value of assets can be
addressed when the profit and loss ratios are changed. Revaluing the assets is one of the
possibilities along with maintaining a record of assets with market and book value differences as
well as directly adjusting capital accounts while leaving asset values unchanged.
Multiple Choice
29. c
30. d
31. c
32. d
33. a
34.
35.
36.
37.
38.
d
d
c
d
a
39.
40.
41.
42.
43.
b
e
c
b
d
44.
45.
46.
47.
c
a
b
C
Chapter 3
Problem I
1.
Ben, capital
Pet, capital (50% x P700,000)
350,000
350,000
2. The total capital of BIG Entertainment Galley remains at P1,480,000. The total amount paid by Pet to
Ben does not affect the partnership and Pet does not become a partner with the assignment of half
of Ben’s interest.
Problem II
1.
a.
D, capital…………………………………………………………… 24,000
F, capital………………………………………………….........
24,000
b.1.
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The capital balances of the partners after the admission of F would be as follows:
D
Capital before admission…P 72,000
x: Interest remained………..
¾
E
P 48,000
F (book value)
¾
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Total_
P120,000
________
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Capital after admission….. P54,000
P 36,000
P 30,000
P120,000
Therefore, the profit and loss ratio of the partners after the admission of F would be as follows:
D, capital (70% x ¾)……………………………………………… 52.50%
E, capital (30% x ¾)………………………………………………. 22.50%
F, capital (equivalent to interest acquired)…………………. 25.00%
Total………………………………………………………………….100.00%
b.2
b.2.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The positive excess of P6,000 represents a personal gain of D and E, computed as follows:
Amount paid (P21,600 + P14,400)…………………………………. P36,000
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………............................. 30,000
Excess (Gain of D and E – personal in nature)….……………….. P 6,000
The partnership does not record this gain because it was not benefited from it.
b.2.2
Assets (Goodwill)……………………………………………….. 24,000
D, capital (P24,000 x 70%).……………………………........
16,800
E, capital (P24,000 x 30%).…………………………….........
7,200
Or,
Amount paid (P21,600 + P14,400)…………….. P36,000 / ¼ P144,000 (100%)
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………... 30,000
120,000 (100%)
Excess……………………………………………….. P 6,000
Divided by (capitalized at): Interest acquired
¼
Revaluation of Asset Upward………………….. P24,000
P 24,000 (100%)
D, capital [(P72,000 + P16,800) x ¼]………………………… 22,200
E, capital [(P48,000 + P7,200) x ¼]…………………………… 13,800
F, capital…………………………………………………......
36,000
The capital balances of the partners after the admission of F would be as follows:
D
Capital before admission… P 72,000
Revaluation upward………. 16,0800
Capital balance after
E
P 48,000
7,200
F (amount paid)
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Total_
P120,000
24,000
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revaluation………………. P 88,800 P 55,200
x: Interest remained………..
¾
¾
Capital after admission….. P66,600 P 41,400
Capital interest %..............
P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)……
F (1/4)……………
P144,000
________
P 36,000
P144,000
25
22.50
25
It should be observed that the total capital balance after the admission increases equivalent to
the revaluation of assets amounting to P24,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid.
b.3
b.3.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
The negative excess of P3,600 represents a personal loss of D and E, computed as follows:
Amount paid ……………………….…………………………………. P 26,400
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………............................. 30,000
Excess (Loss of D and E – personal in nature)….………………… P( 3,600)
b.3.2
The entry to record the transaction in the books follows:
D, capital (P14,400 x 70%).…………………………………….. 10,080
E, capital (P14,400 x 30%).……………………………………... 4,320
Assets …………………………………………………….....
14,400
Or,
Amount paid ………………………….………….. P 26,400 / ¼ P 105,600 (100%)
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………... 30,000
120,000 (100%)
Excess……………………………………………….. P( 3,600)
Divided by: Interest acquired…………………..
¼
Revaluation of Asset Downward..…………….. P(14,400)
P(14,400) (100%)
D, capital [(P72,000 – P10,080) x ¼]………………………. 15,480
E, capital [(P48,000 – P4,320) x ¼]………………………….. 10,920
F, capital…………………………………………………..
26,400
The capital balances of the partners after the admission of F would be as follows:
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D
E
Capital before admission…P 72,000 P 48,000
Revaluation downward…… 10,080
4,320
Capital balance after
revaluation……………….. P 61,920 P 48,680
x: Interest remained…………
¾
¾
Capital after admission….. P46,440 P 32,760
Capital interest %..............
P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)……
F (1/4)……………
F (amount paid)
Total_
P120,000
14,400
P 105,600
________
P 26,400
P 105,600
25
22.50
25
Comparison between b.3.1 and b.3.2:
Schedule of Account Balances
Net Goodwill/Asset
Assets Revaluation
=
Book Value Approach
Balances before admission
P120,000
Admission
Balances after admission
of F
P 120,000
P
D
E
Capital__________
F___
P 72,000 P 48,000
( 18,000) (12,000) P 30,000
-0-
Revaluation Approach
Balances before admission P120,000
Revaluation
P 24,000
Admission
Balances after admission
of F
P120,000
P 24,000
Depreciation/impairment*
( 24,000)
Totals
P120,000
P -0-
P 54,000 P 36,000 P 30,000
P 72,000 P 48,000
16,800
7,200
( 22,200) (13,800) P 36,000
P 66,600 P 41,400 P 36,000
( 12,600) ( 5,400) ( 6,000)
P 54,000 P 36,000 P 30,000
*new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)
The two methods will yield the same results computed as follows;
Capital__________
D
E
F___
Balances after admission of F (BV approach)
P 54,000 P 36,000 P 30,000
Balances after admission of F (Revaluation approach)
54,000 36,000
30,000
Gain or (loss) through use of book value approach
P
-0- P -0- P
-0Problem III
a: No Bonus or No Revaluation.
The total agreed capital is equal to total agreed capital:
Total agreed capital (given)………………………………………….P 48,000
Less: Total agreed capital (P24,000 + P12,000 + P12,000)………. 48,000
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Difference…………………………………………………………………P
-0-
The entry to record the transaction in the books follows:
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital………………………………………………….
30,000
b: Bonus to New Partner.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill)
should be recognized as follows:
Total agreed capital (given)…………………………………………P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)…. 48,000
Difference………………………………………………………………..P -0The new partner’s contributed capital is less than the agreed capital, the difference is attributable to
bonus to new partner:
J’s contributed capital (given)……………………………………...P 12,000
J’s agreed capital: (P48,000 x 35%)…………………………………. 16,800
Difference (bonus to new partner)………………………………….P 4,800
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 12,000
G, capital (P4,800 x 60%)………………………………………. 2,880
H, capital (P4,800 x 40%)………………………………………. 1,920
J, capital ……………..………………………………….
16,800
c: Revaluation (Goodwill) to New Partner
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital: (P18,000 / 1/3)……………………………….P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000
Difference (revaluation/goodwill)………………………………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a)
is attributable to revaluation/goodwill to new partner:
J’s contributed capital (given)……………………………………...P 12,000
J’s agreed capital (given) ………..…………………………………. 18,000
Difference (revaluation/goodwill to new partner)………………P 6,000
The entry to record the transaction in the books follows:
Cash………………………………………………………………..12,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
18,000
d: Bonus to Old Partners.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill)
should be recognized as follows:
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Total agreed capital (should equal to TCC
since it is a bonus method)……………………………………P 60,000
Less: Total contributed capital
[(P24,000 + P12,000 + (P30,000 – P6,000)]……………….…. 60,000
Difference………………………………………………………………..P -0The new partner’s contributed capital is greater than his agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital (P30,000 – P6,000)………………………..P 24,000
J’s agreed capital: (P60,000 x 30%)………………………………... 18,000
Difference (bonus to old partners)..………………………………..P( 6,000)
The entry to record the transaction in the books follows:
Tangible asset…………………………………………………….30,000
Mortgage payable…………………………………….
6,000
J, capital ……………..………………………………….
18,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)……………………………..
2,400
e: Revaluation (Goodwill) to Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation should
be recognized as follows:
Total agreed capital (given) ………………………………………... P 76,800
Less: Total contributed capital (P24,000 + P12,000 +
P 8,400, revaluation + P28,800)…………………………. 73,200
Difference (revaluation/goodwill)………………..………………… P 3,600
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in (a) is
attributable to revaluation (goodwill) to old partners:
J’s contributed capital………………………………………………… P 28,800
J’s agreed capital: (P76,800 x 37.5%)….………………………….... 28,800
Difference …………………………..…………………………………… P
-0The entries to record the transaction in the books follows:
Equipment………………………………………………………… 8,400
G, capital (P8,400 x 60%)……………………………..
H, capital (P8,400 x 40%)………………………………
5,040
3,360
Cash………….…………………………………………………….28,800
Other assets………………………………………………………. 3,600
J, capital ……………..………………………………….
28,800
G, capital (P3,600 x 60%)……………………………..
2,160
H, capital (P3,600 x 40%)………………………………
1,440
f: Bonus and Revaluation (Goodwill) to New Partner.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
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Total agreed capital (given)…………………………………………P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000
Difference (revaluation/goodwill) …………………..……………..P 12,000
The new partner’s contributed capital is less than the agreed capital, the difference of P15,000 are
composed of revaluation of P12,000 in (a) above and the balance is bonus to new partner:
J’s contributed capital (given)……………………………………... P 12,000
J’s agreed capital: (P60,000 x 45%)…………………………………. 27,000
Difference (total bonus and revaluation)..………………………...P 15,000
Less: Revaluation / goodwill to new partner………………………. 12,000
Bonus to new partner…………………………………………………... P 3,000
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 12,000
Assets (goodwill)………………………………………………… 12,000
G, capital (P3,000 x 60%)………………………………………. 1,800
H, capital (P3,000 x 40%)………………………………………. 1,200
J, capital ……………..………………………………….
27,000
To record the admission of J.
g: Bonus and Revaluation to Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 72,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000
Difference (revaluation/goodwill)…………………....…………….P 18,000
The new partner’s contributed capital is greater than the agreed capital, the difference of P3,600 is
bonus to old partners since there is already a revaluation(goodwill) as indicated by (a) above.
J’s contributed capital (given).…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 20%)………………………………… 14,400
Difference (bonus to old partners)………………………………… P( 3,600)
Less: Revaluation / goodwill to old partners……………………… 18,000
Total bonus and revaluation to old partners.……………………. P 21,600
The P3,600 difference is considered as a bonus since there was a transfer of capital (as indicated by
the decrease in capital of the new partner) made by the new partner to the old partners.
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..…………………………………
14,400
G, capital (P21,600 x 60%)……………………………..
12,960
H, capital (P21,600 x 40%)……………………………..
8,640
h: Revaluation (Goodwill) to New and Old Partners.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
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Total agreed capital (given)…………………………………………P 72,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000)…. 54,000
Difference (revaluation/goodwill ) …………………..……………. P 18,000
The new partner’s contributed capital is less than the agreed capital, the difference of P18,000 in (a)
is attributable to revaluation (goodwill) to new partner and old partners:
J’s contributed capital (given)…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 30%)………………………………... 21,600
Difference (revaluation/goodwill to new partner)..…………….P 3,600
Less: Revaluation / goodwill computed in (a)..…………………. 18,000
Revaluation/goodwill to old partners……….……………………..P 14,400
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..………………………………….
21,600
G, capital (P14,400 x 60%)……………………………
8,640
H, capital (P14,400 x 40%)…………………………….
5,760
i: Bonus to Old Partners with Bonus Amount Given.
The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill)
should be recognized as follows:
Total agreed capital (should equal to TCC
since it is a bonus method)……………………………………P 60,000
Less: Total contributed capital
[(P24,000 + P12,000 + P24,000)……………...…………….…. 60,000
Difference………………………………………………………………..P -0The new partner’s contributed capital is greater than his agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital…………………….. …………………………P 24,000
J’s agreed capital (P24,000 – P6,000).……………………………... 18,000
Difference (bonus to old partners)..……………………………….. P( 6,000)
The entry to record the transaction in the books follows:
Cash………………………………………………………………..24,000
J, capital ……………..………………………………….
G, capital (P6,000 x 60%)……………………………..
H, capital (P6,000 x 40%)……………………………..
18,000
3,600
2,400
j: Bonus to New Partner with an Indication of Bonus.
There is an overstatement of asset amounting to P2,400 (P6,000 – P3,600) that is needed to be
recorded to comply with the provisions of GAAP recognizing overvaluation of net assets. Therefore,
the contributed capital of partner G and H are as follows:
G, capital: P24,000 – (P2,400 x 60%)………………………….P 22,560
H, capital: P12,000 – (P2,400 x 40%)…………………………. 11,040
Total contributed capital before the admission………….. P 33,600
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The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill)
should be recognized as follows:
Total agreed capital (should equal to TCC
since it is a bonus method)…………………………………… P 40,800
Less: Total contributed capital [P33,600 (a) + P7,200].………… 40,800
Difference………………………………………………………………..P -0The new partner’s contributed capital is less than the agreed capital, the difference is attributable to
bonus to new partner:
J’s contributed capital (given)……………………………………...P 7,200
J’s agreed capital: (P40,800 x 30%)…………………………………. 12,240
Difference (bonus to new partner)………………………………….P 5,040
The entries to record the transaction in the books follows:
G, capital (P2,400 x 60%)………………………………………. 1,440
H, capital (P2,400 x 40%)………………………………………. 960
Equipments………………………………………………
2,400
Cash……………………………………………………………….. 7,200
G, capital (P5,040 x 60%)………………………………………. 3,024
H, capital (P5,040 x 40%)………………………………………. 2,016
J, capital ……………..………………………………….
12,240
k: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill).
There is an understatement of asset amounting to P6,000 (P12,600 – P6,600) that is needed to be
recorded (also even in cases of overstatement) as long as the revaluation (goodwill) approach is
being used. Therefore, the contributed capital of partner G and H are as follows:
G, capital: P24,000 + (P6,000 x 60%)………………………….P 27,600
H, capital: P12,000 + (P6,000 x 40%)………………………….. 14,400
Total contributed capital before the admission…………..P 42,000
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital (P18,000 / ¼ )*…..……….…………………...P 72,000
Less: Total contributed capital [P42,000 (a) + P18,000]………..… 60,000
Difference (revaluation/goodwill ) …………………..…………….P 12,000
*The old partner’s total contributed capital of P42,000 should not be used as a basis becaus e it
will result to a negative revaluation. In cases of revaluation and there is no specification as to
upward or downward adjustments, the presumption should always be upward. The P18,000
was capitalized by ¼ to determine the value of the partnership as a whole.
The new partner’s contributed capital is equal to the agreed capital, the difference of P12,000 in (a)
is attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given)……………………………………...P 18,000
J’s agreed capital……………………………………………………… 18,000
Revaluation/goodwill to new partner……….……………………...P -0-
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The entries to record the transaction in the books follows:
Other assets…………………………………………………….... 6,000
G, capital (P6,000 x 60%)……………………………..
H, capital (P6,000 x 40%)……………………………..
3,600
2,400
Cash……………………………………………………………….. 18,000
Assets (goodwill)………………………………………………… 12,000
J, capital ……………..………………………………….
18,000
G, capital (P12,000 x 60%)……………………………
7,200
H, capital (P12,000 x 40%)…………………………….
4,800
l: Revaluation (Goodwill) to New Partner with Revaluation Amount Given.
The total contributed capital (TCC) is less than the total agree d capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital (TCC, P60,000 + P7,200, goodwill) ……….P 67,200
Less: Total contributed capital (P24,000 + P12,000 + P24,000)… 60,000
Difference (revaluation/goodwill ) …………………..……………..P 7,200
The new partner’s contributed capital is less than the agreed capital, the difference of P7,200 in (a)
is attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given)……………………………………...P 24,000
J’s agreed capital: (P24,000 + P7,200)……………………………… 31,200
Revaluation/goodwill to new partner……….……………………..P 7,200
The entry to record the transaction in the books follows:
Cash……………………………………………………………….. 24,000
Assets (goodwill)………………………………………………… 7,200
J, capital ……………..………………………………….
31,200
To record the admission of J.
m: Withdrawals Instead of Revaluation.
The total contributed capital (TCC) is greater than total agreed capital (TAC), so it should have been
a negative revaluation. Since there was an indication that capital balances should equal to the profit
and loss (old or new) ratio, then the difference should be considered as withdrawals (if it is a
positive revaluation it should have been additional investment and if the TCC = TAC, it should have
been settlement between partners) instead of negative revaluation.
Total agreed capital (given)………………………………………...P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P24,000).. 60,000
Difference (withdrawals)……………………………………………..P 12,000
The new partner’s contributed capital is less than the agreed capital, the difference is attributable to
bonus to new partner:
J’s contributed capital (given)……………………………………...P 24,000
J’s agreed capital: (P48,000 x 50%)…………………………………. 24,000
Difference……………………………..………………………………….P -0-
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The withdrawals of P12,000 should be attributable to the old partners computed as follows:
Total agreed capital (given)…………………………….
P 48,000
Less: J’s agreed capital (P48,000 x 50%)………………
24,000
Total agreed capital of the old partners………………
P 24,000
Less: G’s agreed capital (P24,000 x 60%)………………P 14,400
H’s agreed capital (P24,000 x 40%)……………… 9,600 24,000
G’s withdrawal: P24,000 – P14,400………………………
H’s withdrawal: P12,000 – P9,600………………………..
P 9,600
P 2,400
The entry to record the transaction in the books follows:
Cash (P24,000 – P12,000)………………………………………. 12,000
G, capital…………………………………………………………. 9,600
H, capital………………………………………………………….. 2,400
J, capital ……………..………………………………….
24,000
n: Bonus and Revaluation (Goodwill) When Not Specifically Stated.
n.1: Revaluation (Goodwill) or Bonus to New Partner.
n.1.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC,
since it is a bonus method)……………………………………P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference……………………………..…………………..…………….P -0The new partner’s contributed capital is less than the agreed capital, the difference is
attributable to bonus to new partner:
J’s contributed capital (given).……………………………………...P 18,000
J’s agreed capital: (P54,000 x 40%)………………………………… 21,600
Difference (bonus to new partner)..………………………………..P 3,600
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
G, capital (P3,600 x 60%)……………………………………… 1,260
H, capital (P3,600 x 40%)………………………………………. 1,440
J, capital ……………..………………………………….
21,600
n.1.2: Revaluation (Goodwill) Approach.
The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital:
(P24,000 + P12,000) / (100% - 40%)…………………………...P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to new partner:
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J’s contributed capital (given).…………………………………….P 18,000
J’s agreed capital: (P60,000 x 40%)……………………………….. 24,000
Difference (revaluation/goodwill to new partner)..…………...P 6,000
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
24,000
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 40%, while his profit and loss is 25%, so the
new profit and loss interest of the new partnership is computed as follows:
____G
Capital interest %..............
P & L %: G (60% x 75%)……
H (40% x 75%)……
J ……..……………
H _
J____
40
45
30
25
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)
- refer to Alternative 1 above:
G, capital (P24,000 – P2,160)………………………………P 21,840
H, capital (P12,000 – P1,440)……………………………… 10,560
J, capital…………………………………………………....... 21,600
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above:
G, capital……………………………………………………...P 24,000
H, capital……………………………………………………… 12,000
J, capital (P60,000 x 40%)………………………………….. 24,000
Total…………………………………………………………….P 60,000
Schedule of Account Balances
Net Goodwill/Asset
Assets Revaluation
=
G
Capital__________
H
J___
Bonus Approach
Balances after admission
of J
P 54,000
P
-0-
P 21,840 P 10,560 P 21,600
Revaluation Approach
Balances after admission
of J
P 54,000
Depreciation/impairment*
P 6,000
( 6,000)
P 24,000 P 12,000 P 24,000
( 2,700) ( 1,800) ( 1,500)
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Totals
P 54,000
P -0-
P 21,300 P 10,200 P 22,500
*new profit and loss ratio (G, 45%; H, 30%, and J, 25%)
The two methods will yield the same results computed as follows;
Capital__________
G
H
J__
Balances after admission of J (Bonus approach)
P 21,840 P10,560 P
21,600
Balances after admission of J (Revaluation approach)
21,300 10,200 22,500
Gain or (loss) through use of bonus approach
P 540 P 360 P( 900)
n.2: Revaluation (Goodwill) or Bonus to Old Partners.
n.2.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC,
since it is a bonus method)……………………………………P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference……………………………..…………………..…………….P -0The new partner’s contributed capital is greater than the agreed capital, the differen ce is
attributable to bonus to old partners:
J’s contributed capital (given).……………………………………...P 18,000
J’s agreed capital: (P54,000 x 30%)………………………………… 16,200
Difference (bonus to old partners)..…………………………………P 1,800
The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
J, capital ……………..………………………………….
16,200
G, capital (P1,800 x 60%)……………………………..
1,080
H, capital (P1,800 x 40%)………………………………
720
n.2.2: Revaluation (Goodwill) Approach.
The total contributed capital (TCC) is greater than the total agreed capital (TAC), so revaluation
(goodwill) should be recognized as follows:
Total agreed capital: P18,000 / 30%...............…………………...P 60,000
Less: Total contributed capital (P24,000 + P12,000 + P18,000).. 54,000
Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is equal to the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given).…………………………………….P 18,000
J’s agreed capital: (P60,000 x 30%)……………………………….. 18,000
Difference………………………………………………....……………P -0The entry to record the transaction in the books follows:
Cash………………………………………………………………..18,000
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Assets (goodwill)………………………………………………… 6,000
J, capital ……………..………………………………….
18,000
G, capital (P6,000 x 60%)……………………………..
3,600
H, capital (P6,000 x 40%)………………………………
2,400
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 30%, while his profit and loss is 40%, so the
new profit and loss interest of the new partnership is computed as follows:
____G
Capital interest %..............
P & L %: G (60% x 60%)……
H (40% x 60%)……
J ……..……………
H _
J____
30
36
24
40
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)
- refer to Alternative 1 above:
G, capital (P24,000 + P1,080)…..……………………………P 25,080
H, capital (P12,000 + P720)………………………………… 12,600
J, capital…………………………………………………....... 16,200
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above:
G, capital (P24,000 + P3,600)……………………………...P 27,600
H, capital (P12,000 + P2,400)………………………………. 14,400
J, capital (P60,000 x 30%)………………………………….. 18,000
Total…………………………………………………………….P 60,000
Schedule of Account Balances
Net
Assets
Goodwill/Asset
Revaluation
=
Bonus Approach
Balances after admission
of J
P 54,000
P
Revaluation Approach
Balances after admission
of J
P 54,000
Depreciation/impairment*
Totals
P 54,000
P 6,000
( 6,000)
P -0-
-0-
G
Capital__________
H
J___
P 25,080 P 12,720 P 16,200
P 27,600 P 14,400 P 18,000
( 2,160) ( 1,440) ( 2,400)
P 25,440 P 12,960 P 15,600
*new profit and loss ratio (G, 36%; H, 24%, and J, 40%)
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The two methods will yield the same results computed as follows;
Capital__________
G
H
J__
Balances after admission of J (Bonus approach)
P 25,080 P 12,720 P
16,200
Balances after admission of J (Revaluation approach)
25,440 12,960 15,600
Gain or (loss) through use of bonus approach
P( 360) P( 240) P 600
Problem IV
1. Phoenix, Capital
Dallas, Capital
22,500
22,500
2. Phoenix, Capital
Tucson, Capital
Dallas, Capital
18,000
10,000
3. Cash
60,000
28,000
Phoenix, Capital (P60,000 - P40,000) × .50
Tucson, Capital
Dallas, Capital
10,000
10,000
40,000
(P90,000 + P50,000) + P60,000 = P200,000; Therefore, no goodwill is to be recognized.
Dallas, capital = P200,000  0.20 = P40,000
4. Goodwill
Phoenix, Capital
Tucson, Capital
20,000
10,000
10,000
P40,000/0.20 = P200,000
Goodwill = P200,000 - (P90,000 + P50,000 + P40,000) = P$20,000
Cash
40,000
Dallas, Capital
40,000
Problem V
1. Book value of interest acquired = (P180,000 + P90,000)  1/3 = $90,000
Bonus Method
Cash
90,000
Moore, Capital
90,000
2. Book value of interest acquired = (P180,000 + P120,000)  0.45 = P135,000
Book value of interest is greater than assets invested.
Bonus Method
Cash
Brown, Capital (0.60  P15,000)
Coss, Capital (0.40  P15,000)
120,000
9,000
6,000
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Moore, Capital
135,000
The goodwill method is not applicable because the partners agreed to total capital interest of P300,000.
3. Book value of interest acquired (P180,000 + P120,000) 
1
= P100,000
3
Bonus method cannot be used because Moore will not accept less than P120,000 capital interest.
Goodwill Method
Total capital implied from contract [P120,000/(1/3)]
Minus current capital balance + Moore's investment (P180,000 + P120,000)
Goodwill
P360,000
300,000
P60,000
Goodwill
Brown, Capital (0.60  P60,000)
Coss, Capital (0.40  P60,000)
Cash
60,000
36,000
24,000
120,000
Moore, Capital
120,000
4. Book value of interest acquired (P180,000 + P40,000)  ¼ = P55,000
Book value of interest acquired is greater than assets invested.
Bonus Method
Cash
Brown, Capital (0.60  P15,000)
Coss, Capital (0.40  P15,000)
Moore, Capital
40,000
9,000
6,000
55,000
5. Book value of interest acquired (P180,000 + P35,000)  0.20 = P43,000
Book value of interest acquired is greater than the asset invested.
Goodwill Method
Total capital
Minus recorded value of net assets + Moore's investment (P180,000 + P35,000)
Goodwill
Cash
Goodwill
Moore, Capital
P225,000
215,000
P10,000
35,000
10,000
45,000
6. Book value of interest acquired (P180,000 + P150,000)  (1/3) = P110,000
Book value of interest acquired is less than asset invested.
Bonus Method
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Land
150,000
Brown, Capital (0.60  P40,000)
Coss, Capital (0.40  P40,000)
Moore, Capital
24,000
16,000
110,000
Goodwill Method
Net value of firm implied by contract [P150,000/(1/3)]
Minus current capital + Moore's investment (P180,000 + P150,000)
Goodwill
P450,000
330,000
P120,000
Goodwill
Brown, Capital (0.60  P120,000)
Coss, Capital (0.40  P120,000)
120,000
Land
150,000
72,000
48,000
Moore, Capital
150,000
7. Bonus Method
Brown, Capital (0.30  P92,000)
Coss, Capital (0.30  P88,000)
Moore, Capital
27,600
26,400
54,000
Problems- VI
1. (a) Goodwill method:
Cash… ……………………………………………………… 5,000
Goodwill…………………………………………………… 4,200
Mason, Capital… ………………………………………
2,520
Norris, Capital…………………………………………..
1,680
Oster, Capital… ………………………………………..
5,000
Computation of goodwill:
Total capital after adjustment for goodwill,
P5,000 / .25… … ……………………………………….. P20,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed old partners… …………………..P 4,200
Distribution of goodwill:
Mason: 3/5 of P4,200… … ……………………………P 2,250
Norris: 2/5 of P4,200… … ……………………………… 1,680
P 4,200
(b)Bonus method:
Cash… … …………………………………………………… 5,000
Mason, Capital… ………………………………………
630
Norris, Capital… ………………………………………..
420
Oster, Capital… ………………………………………..
3,950
Computation of bonus:
Amount invested by Oster… … …………………….. P 5,000
Oster’s interest, 25% of P 15,800… … …………..….. 3,950
Bonus allowed old partners… ……………………… P 1,050
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Distribution of bonus:
Mason: 3/5 of P1,050… … ……………… ……………. P 630
Norris: 2/5 of P1,050… … ……………………………… 420
P 1,050
(c) The bonus method will be preferred by Oster, who will gain P350. Norris will gain P140,
while Mason will lose P490.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST
Goodwill__
P4,200
When goodwill method is used… ..
When bonus method is used… … …
Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)… … … ………………. P4,200
P4,200
Gain (loss) through use of
bonus method… …………………….
Other
Assets
P15,800
P15,800
Mason
Capital
P8,520
P6,630
Norris
Capital
P6,480
P5,220
Oster
Capital
P5,500
P3,950
P15,800
1,400
P8,030
1,400
P6,620
1,400
P5,350
P 140
P350
(P 490)
COMPARISON WHEN GOODWILL IS NOT REALIZED
Goodwill__
When bonus method is used… … …
When goodwill method is used… .. P4,200
write-off of goodwill
(loss distributable equally)… … …… P4,200
Gain (loss) through use of
bonus method… …………………….
Other
Assets
P15,800
P15,800
Mason
Capital
P6,630
P8,520
Norris
Capital
P5,220
P6,480
P15,800
1,400
P7,120
1,400
P5,080
1,400
P3,600
(P 490)
P 140
P350
2. (a) Goodwill method:
Cash… … …………………………………………………… 5,000
Goodwill…………………………………………………… 2,200
Oster, Capital… ………………………………………..
7,200
Computation of goodw ill:
Total capital after adjustment for goodwill,
P10,800 / .60… ………………………………………….P18,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed to Oster… ……………………….. P 2,200
(b)Bonus method:
Cash… … …………………………………………………… 5,000
Mason, Capital… ………………………………………… 792
Norris, Capital… ………………………………………….. 528
Oster, Capital… ………………………………………..
6,320
Computation of bonus:
Oster’s interest, 40% of P 15,800… … …………..….. 6,320
Amount invested by Oster… … …………………….. P 5,000
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Oster
Capital
P3,950
P5,500 Deduct
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Bonus allowed to Oster… … ………………………… P 1,320
Charge to partners for bonus allowed to Oster:
Mason: 3/5 of P1,320… … ……………………………. P 792
Norris: 2/5 of P1,320… … ……………………………… 528
P 1,320
(c) The goodwill method will be preferred by Oster, who will gain P146.66. Norris’ loss is
P205.33, and Mason’s gain is P58.67.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST
Goodwill__
P2,200
When goodwill method is used… ..
When bonus method is used… … …
Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)… … … ………………. P2,200
P2,200
Gain (loss) through use of
bonus method… …………………….
Other
Assets
P15,800
P15,800
Mason
Capital
P6,000
P5,208
Norris
Capital
P4,800
P4,272
Oster
Capital
P7,200
P6,320
733.33
733.33
733.34
P15,800 P5,941.33 P5,005.33 P7,053.34
(P 58.67) P 205.33 (P146.66)
COMPARISON WHEN GOODWILL IS NOT REALIZED
Goodwill__
When bonus method is used… … …
When goodwill method is used… .. P2,200
write-off of goodwill
(loss distributable equally)… … …… P2,200
Other
Assets
P15,800
P15,800
P15,800
Gain (loss) through use of
bonus method… …………………….
Mason
Capital
P5,208
P6,000
Norris
Oster
Capital Capital
P4,272
P3,950
P4800
P7,200 Deduct
733.33
733.33
733.34
P5,266.67 P4,066.67 P6,466.66
(P58.67)
P205.33 (P146.66)
Problem VII
1. The total interest of the retiring partner K amounted to:
Capital interest………………………………………………….P 36,000
Add (deduct):
Share in net income…………………………………….. 7,200
Loan receivable………………………………………….( 6,000)
Total Interest of K before his retirement............................P 37,200
2.
a. Payment at Book Value (Settlement price is equal to the interest of retiring partner).
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Cash………………………….…………………………..
37,200
b. Payment at More than Book Value ((Settlement price is greater than the inte rest of retiring
partner).
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b.1. Bonus to Retiring Partner. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
L, capital (P4,800 x 5/7)……………………………………….. 3,429
M, capital (P4,800 x 2/7)………………………………………. 1,371
Cash………………………….…………………………..
42,000
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Retiring Partner……………………………………… P 4,800
The following items should be observed:
1. It should be observed that under bonus approach, undervaluation of net assets should not be
recorded for this will be in contradiction of current accounting standards.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit – P3,429, bonus)………………P56,571
M, capital (P18,000 + P4,800 profit – P1,371, bonus)……………….. 21,429
Assuming the same data, except that by mutual agreement the inventory is to be adjusted to their
fair value. Then, the undervalued asset should be recorded first before the settlement.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)…………………………….
L, capital (P4,800 x 50%)……………………………..
M, capital (P4,800 x 20%)……………………………
1,440
2,400
960
K, capital………………………………………………………….38,640
L, capital (P3,360 x 5/7)……………………………………….. 2,400
M, capital (P3,360 x 2/7)……………………………………… 960
Cash………………………….………………………….
42,000
Amount paid………………………..…………………………... P 42,000
Less: BV of K’s total interest (30%) - (P37,200 + P1,440).... 38,640
Bonus to Retiring Partner……………………………………… P 3,360
b.2: Partial Revaluation (Goodwill) to Retiring Partner.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)……………………………..
L, capital (P4,800 x 50%)……………………………..
M, capital (P4,800 x 20%)…………………………….
1,440
2,400
960
K, capital…………………………………………………………. 38,640
Assets (Goodwill)……………………………………………….. 3,360
Cash………………………….…………………………..
42,000
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Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P37,200 + P1,440........ 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360
The following items should be observed:
1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill) of P3,360 that has
been purchased should be recorded.
2. The situation at bar is the same situation in admission by investment Case 9, that recognition of
understatement of assets is in compliance with GAAP under the revaluation (goodwill) approach.
3. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P2,400, adjustment).………P62,400
M, capital (P18,000 + P4,800, profit + P960 adjustment)…….…… 23,760
A modified version of this partial revaluation (goodwill) approach happens assuming that when assets
and liabilities are revalued only to the extent of the excess payment to K, the entry to record the
transaction is as follows:
K, capital…………………………………………………………. 37,200
Assets ……………)………………………………………………. 4,800
Cash………………………….…………………………..
42,000
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%)……………………......... 37,200
Partial revaluation (goodwill) to Retiring Partner………… P 4,800
b.3: Total Revaluation (Goodwill) to Retiring Partner.
The entries to record the transaction in the books follows:
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)……………………………..
L, capital (P4,800 x 50%)……………………………..
M, capital (P4,800 x 20%)…………………………….
1,440
2,400
960
The excess is considered as revaluation (goodwill) to be recognized.
Assets (Goodwill)……………………………………………….. 11,200
K, capital (P11,200 x 30%)……………………………..
3,360
L, capital (P11,200 x 50%)……………………………..
5,600
M, capital (P11,200 x 20%)…………………………….
2,240
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 36,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K.............
30%
Total Revaluation (goodwill)…………………………………. P 11,200
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*The P3,360 represents K’s 30% interest in revaluation (goodwill) of P11,200. Notice that the P3,360 represents K’s interest in
the gain, which would be realized if the revaluation (goodwill) were sold. Therefore, K’s percentage is used to suggest the
total value of the revaluation (goodwill).
K, capital (P 38,640 + P3,360)…………………………………. 42,000
Cash………………………….…………………………..
42,000
The following items should be observed:
1. Whether part or all of the goodwill is recognized, opponents of this procedure contend that
transactions between partners should not be viewed as arm’s length; therefore, the measure of
revaluation (goodwill) may not be determined objectively. Also, inequitable results may be produced if
the remaining partners subsequently changed their profit and loss ratio.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P2,400, adjustment + P5,600).P68,000
M, capital (P18,000 + P4,400, profit + P960 adjustment + P2,240)….. 26,000
For purposes of comparison, let us assume that there is no undervalued inventory amounting to P4,800
in Case 2 above. Refer to the following schedule for comparison.
Schedule of Account Balances
Goodwill/Asset
Revaluation
Bonus Approach
Balances after retirement of K
P
-0-
Partial Revaluation (Goodwill) Approach
Balances after retirement of K*
P 4,800**
Depreciation/impairment***
( 4,800)
Totals
P -0-
L
Capital__________
M_____
P 56,571
P 21,429
P 60,000
( 3,429)
P 58,971
P 22,800
( 1,371)
P 21,429
*excl udi ng underva l ued i nventory of P2,400 a nd P960 for L a nd M, res pecti vel y.
** P42,000 – P37,200 = P4,800, pa rti a l reva l ua ti on
*** ol d profi t a nd l os s ra ti o (L, 5/7 a nd M, 2/7)
Total Revaluation (Goodwill) Approach
Balances after retirement of K*
P 16,000**
Depreciation/impairment***
( 16,000)
Totals
P -0-
P 68,000
( 11,429)
P 56,571
P 26,000
( 4,571)
P 21,429
*excl udi ng underva l ued i nventory of P2,400 a nd P960 for L a nd M, res pecti vel y.
** P42,000 – P37,200 = P4,800, pa rti a l reva l ua ti on / 30% = P16,000.
L, ca pi ta l : (P48,000 + P12,000) + (P16,000 x 50%) = P68,000
M, ca pi ta l : (P18,000 + P4,800) + (P16,000 x 20%) = P 26,000
*** ol d profi t a nd l os s ra ti o (L, 5/7 a nd M, 2/7)
The three methods will yield the same results computed as follows;
Total_______
L
M__
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Balances after retirement of K (Bonus approach)
P 56,571 P 21,249
Balances after retirement of K (Partial Revaluation approach)
P 56,571 P 21,249
Balances after retirement of K (Total Revaluation approach)
P 56,571 P 21,249
c: Payment at Less than Book Value ((Settlement price is less than the interest of retiring partner) .
c.1. Bonus to Remaining Partners. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Cash………………………….…………………………..
31,200
L, capital (P6,000 x 5/7)……………………………….
4,286
M, capital (P6,000 x 2/7)………………………………
1,714
Amount paid………………………..…………………………… P 31,200
Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Remaining Partners…………………………………. P 6,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P4,286, bonus)……………..P64,286
M, capital (P18,000 + P4,800 profit + P1,714, bonus)……………….. 24,514
c.2: Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner).
The entry to record the transaction in the books follows:
K, capital…………………………………………………………. 37,200
Specific Asset…..………………………………………
6,000
Cash………………………….…………………………..
31,200
Amount paid………………………..…………………………… P 31,200
Less: BV of K’s total interest (30%)………………………....... 37,200
Partial revaluation/write-down of specific assets……..… P 6,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit)………………………….………P60,000
M, capital (P18,000 + P4,800, profit)…………………………….…… 22,800
c.3: Total Revaluation/Write-down of Assets (Entire Entity).
The entries to record the transaction in the books follows:
K, capital (P20,000 x 30%)…………………………………...... 6,000
L, capital (P20,000 x 50%)………………………………………10,000
M, capital (P20,000 x 20%)……………………………………. 4,000
Assets…………………………………………………….
20,000
To record write-down of assets computed as follows:
Amount paid………………………..…………………………….P 31,200
Less: BV of K’s total interest (30%)………………………........ 37,200
Partial revaluation/write-down of asset……………………..P 6,000*
Divided by (capitalized at): Profit and loss % of K............
30%
Total Revaluation/Write-down of assets….………………….P 20,000
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*The P6,000 represents K’s 30% i nterest i n write -down of a s s ets of P20,000. Noti ce tha t the P6,000 repres ents K’s
i nteres t i n the l os s .
K, capital (P 37,200 - P6,000)………………………………. 31,200
Cash………………………….………………………...
31,200
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit – P10,000)…………………………...P50,000
M, capital (P18,000 + P4,800, profit - P4,000)……………………….….. 18,800
Assets (Goodwill)……………………………………………….. 11,200
K, capital (P11,200 x 30%)……………………………..
3,360
L, capital (P11,200 x 50%)……………………………..
5,600
M, capital (P11,200 x 20%)…………………………….
2,240
To record total revaluation (goodwill) computed as follows:
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K............. 30%
Total Revaluation ……………………………………………….. 11,200
Problem VIII
1.
Grey, Capital P200,000 + (P30,000 × 2/6)
Portney, Capital (P20,000 × 3/4)
Ross, Capital (P20,000 × 1/4)
Cash
2.
Goodwill (P20,000 ÷ 2/6)
Portney, Capital
Grey, Capital
Ross, Capital
Grey, Capital
Cash
210,000
15,000
5,000
230,000
60,000
30,000
20,000
10,000
230,000
230,000
Problem IX
1.
(a)
(b)
C, Capital
A, Capital
B, Capital
Cash
Goodwill
C, Capital
C, Capital
Cash
(c)
105,000
21,000
14,000
140,000
35,000
35,000
140,000
140,000
0.5X =P35,000
X =P70,000
Goodwill
A, Capital
B, Capital
70,000
21,000
14,000
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C, Capital
35,000
C, Capital
Cash
2.
140,000
140,000
The bonus method is more objectiv e. That is, the bonus method does not require the alloc ation of a
subjective v alue to goodwill. Since this is not an arm’s length transaction, there is no objective basis to
rev alue the firm as a whole.
Problem X
(1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of P80,000
(5/8 goodwill = P50,000), resulting in a total payment to Colter of P230,000. The entry would be:
Agler, Capital
50,000
Bates, Capital
30,000
Colter, Capital
150,000
Cash
230,000
(2) Under the partial goodwill approach, only the goodwill attri buted to the retiring partner is recorded.
Thus, the payment to Colter was P210,000 (P150,000 + P60,000).
Under the total Goodwill, since P66,000 was credited, total goodwill of P220,000 (P66,000/0.3) is
recorded. Colter is allocated P44,000 (P220,000 × 0.20). Thus, the payment to Colter was P194,000
(P150,000 + P44,000).
Problem XI
1. Partnership Books Retained
Entries in the Books of the New Corporation using the Partnership Books:
Inv entories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P36,600 – P31,200). .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,400
12,000
12,000
480
5,400
1,320
17,760
4,440
To adjust assets and liabilities to agreed amounts and t o divide net gain
of P22,200 bet ween partners in 4:1 ratio
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock (P10 par x 9,000 shares) . . . . . . . . . . . . . . . . . . . .
Paid-in capital in excess of par [(P11 – P10) x 9,000 shares] . . . .
75,348
23,652
90,000
9,000
To record distribution of common st ock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Tot al shares................................................ 9,000 shares
2. New Books Opened for the Corporation
Entries in the Books of the Partnership:
Inv entories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P36,600 – P31,200). .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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5,400
12,000
12,000
480
5,400
1,320
17,760
4,440
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To adjust assets and liabilities to agreed amounts and t o divide net gain
of P22,200 bet ween partners in 4:1 ratio
Receiv able from A&B Corporation (P76,800 + P22,200) . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receiv able . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inv entories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,000
42,000
1,320
1,200
36,600
14,400
33,720
36,000
84,000
12,000
To record t ransfer of assets and liabilities to A&B Corporation.
Common Stock of A & B Corporation (9,000 shares x P11) . . . . . . .
Receiv able from A & B Corporation . . . . . . . . . . . . . . . . . . . . . . .
To record receipt of 9,000 shares of P10 par com mon stock
valued at P11 a share in paym ent for net assets transferred to A
& B Corporation.
99,000
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . .
75,348
23,652
99,000
99,000
To record distribution of common st ock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Tot al shares................................................ 9,000 shares
In the Accounting Records of the Corporation:
Entries in the Books of the New Corporation:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receiv able . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inv entories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P84,000 - P36,600). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . .............
14,400
33,720
36,000
47,400
12,000
1,200
42,000
1,320
99,000
To record acquisition of assets and liabilities from A&B Partnership.
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par (9,000 x P10) . . . . . . . . . . . . . . . . . . . . .
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . .
To record issuance of 9,000 shares of com mon stock valued at
P11 a share in paym ent for net assets of A&B Partnership.
Problem XII
Cash
Trade Accounts Receivable
Inventories
Equipment
Allowance for Doubtful Accounts
Notes Payable
Trade Accounts Payable
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99,000
90,000
9,000
8,700
13,250
28,000
35,000
800
10,000
9,800
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Payable to Sade and Tipp
To record acquisition of net assets from Sade & Tipp LLP.
Payable to Sade and Tipp
Common Stock, P1 par
Paid-in Capital Excess of Par
To record issuance of 10,000 shares of common stock to
Sade and Tipp.
Problem XII
1. Cash
Inventory
Equipment
Snow, Capital
64,350
64,350
10,000
54,350
20,000
15,000
67,000
102,000
Cash
Land
50,000
120,000
Mortgage Payable
Waite, Capital
2. Snow, Capital
Waite, Capital
Income Summary
40,000
130,000
7,680
16,320
24,000
Snow
Waite
Net loss to be allocated
Interest on capital investment
P102,000  10%
P130,000  10%
Salaries to partners
P10,200
15,000
P13,000
20,000
Allocation 40:60
Net loss allocated to partners
(32,880)
P(7,680)
(49,320)
P(16,320)
3. Cash
Snow, Capital (P13,400  40%)
Waite, Capital (P13,400  60%)
Young, Capital
Total
P23,200
35,000
58,200
(82,200)
P(24,000)
70,000
5,360
8,040
83,400
Capital interest of Snow (P102,000 - P7,680)
Capital interest of Waite (P130,000 - P16,320)
Investment of Young
Total capital interest in new partnership
Percentage acquired by Young
Capital interest of Young
Investment by Young
Bonus to Young
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P94,320
113,680
70,000
278,000
30%
83,400
(70,000)
P13,400
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4. Income Summary
Snow, Capital (P150,000  20%)
Waite, Capital (P150,000  50%)
Young, Capital (P150,000  30%)
150,000
5. Snow, Capital*
Waite, Capital (P18,960  50/80)
Young, Capital (P18,960  30/80)
Cash
Note Payable
118,960
30,000
75,000
45,000
11,850
7,110
40,000
60,000
*P102,000 - P7,680 - P5,360 + P30,000 = P118,960
Problem XIV
Multiple Choice Problems
1. c
Note: A pa rtnership is not dissolved when a partner assigns his or her i nterest in the partnership to a third pa rty beca us e
s uch a n assignment does not in itself change the relations among partners. Such assignment only entitles the a s s i gnee to
recei ve the a ssigning interest partner’s i nterest i n future partnership profits a nd i n pa rtners hi p a s s ets i n the event of
l i quidation. The assignee does not become a partner, however, a nd does not obtain the ri ght to share in ma na gement of
the pa rtnership. If the assignee does not become a partner, the onl y cha nge requi red on the pa rtners hi p books i s for
tra ns fer of the capital interest of the assignor partner to the assignee. The assignment by A to D of hi s 50% i nteres t i n the
BIG Enterta i nment Compa ny i s recorded a re fol l ows :
A, Ca pi ta l (P168,000 x 1/4)................................................................. 42,000
D, Ca pi ta l ..............................................................................
42,000
The a mount of the capital tra nsfer i s equal to the recorded amount of A’s capital at the ti me of the ass i gnment, a nd i t i s
i ndependent of the consideration received by A for hi s 1/4 i nterest. If the recorded a mount of A’s i s P42,000, then the
a mount of the tra nsfer entry is P42,000, rega rdless of whether D pay A P42,000 or s ome a mount. Therefore, the ca pital of
the pa rtners hi p a fter the a s s i gnment of i nteres t rema i ns the s a me a t P480,000.
2. c
Amount paid… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .P 200,000
Less: Book value of interest acquired: (P100,000 + P200,000 + P300,000) x 25%.. 150,000
Excess – partial goodwill… … … … … … … … … … … … … … … … … … … … … … … … … P 50,000
Divided by: capitalization rate based on interest acquired… … … … … … … .......
25%
Goodwill or revaluation of asset upward… … … … … … … … … … … … … … … … … .P 200,000
Jethro: [P200,000 + (P200,000 x 30%)] x 75% = P195,000
3. b
Amount paid
Less: Book value of interest acquired:
(P140,000 x ¼)
Excess
Capitalized at: P&L of W
Goodwill/revaluation
P40,000
35,000
P 5,000
1/4
E: [P80,000 + (P20,000 x 60%)] x 3/4 = P69,000
G: [P40,000 + (P20,000 x 30%)] x 3/4 = P34,500
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P20,000
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D: [P20,000 + (P20,000 x 10%)] x 3/4 = P16,500
4. a
Amount paid………………………………………………………………………………P 60,000
Less: Book value of interest acquired: P120,000 x 40%…………………................ 48,000
Difference…………..……………………………………………………………………...P 12,000
Divided by: Capital Interest…………………………………………………………....... 40%
Goodwill…………………………………………………………………………………….P 30,000
LL: P50,000 + (P30,000 x ½) = P65,000 – (P60,000 x ½) = P35,000
QQ: P70,000 + (P30,000 x ½) = P85,000 – (P60,000 x ½) = P55,000
DD: Since there is an adjustment, the capital of the new partner will always be the same with the
amount paid, P60,000.
5. d - The amount that Richard will pay Ray depends on many factors and cannot be determined from
the information provided here.
6. b
Amount paid
Less: Book value of interest acquired
(P444,000 x 1/5)
Gain- personal (to N, S & J)
P132,000
88,800
P 43,200
7. c
Total agreed capital* (P74,000 + P130,000 + P96,000)/80% ............ P375,000
Less: Total contributed capital *...............…………………………..... 375,000
Difference .......................................………………..………………….. ..P
0
*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed capital.
The contributed capital or investment of the new partner will be computed based on total
agreed capital.
Total contributed capital… … … … … … … … … … … … … … … … .. . P375,000
Less: Total contributed capital of old partners............................ 300,000
Investment or contribution of new partner..................................P 75,000
or,
Total contributed capital… … … … … … … … … … … … … … … … .. . P375,000
Multiplied by: Capital interest of Jones (new partner)………...
20%
Investment or contribution of new partner..................................P 75,000
8. b
Total Agreed Capital
Multiplied by: Interest acquired by K
Agreed capital of K
Cash investment by K
Bonus to K
Therefore, E= P70,000 – (P10,000 x 70%) = P63,000
D= P60,000 – (P10,000 x 30%) = P57,000
J=
P50,000
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P180,000
1/3
P 60,000
50,000
P 10,000
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9. b - Total capital is P200,000 (P110,000 + P40,000 + P50,000) after the new investment. As
Kansas's portion is to be 30 percent, the capital balance would be P60,000 (P200,000 ×
30%). Since only P50,000 was paid, a bonus of P10,000 must be taken from the two
original partners based on their profit and loss ratio: Bolcar –P7,000 (70%) and Neary –
P3,000 (30%). The reduction drops Neary's capital balance from P40,000 to P37,000.
10. d
Total of old partners' capital
Investment by new partner
Total of new partnership capital
Capital amount credited to Johnson
(P95,000 x .20)
11. b
LL invests P40,000 and total capital specified as P150,000:
Investment in partnership
New partner's proportionate book value
[(P110,000 + P40,000) x 1/3]
Difference (investment < book value)
P 80,000
15,000
P 95,000
P 19,000
P 40,000
(50,000)
P (10,000)
Method: Bonus or goodwill to new partner
Specified total resulting capital
Total net assets not including goodwill
(P110,000 + P40,000)
Estimated goodwill
P 150,000
(150,000)
P
-0-
Therefore, bonus of P10,000 to new partner
Boris' capital = P54,000 = P60,000 - (P10,000 x 6/10)
12. a – “preferable accounting method” refers to bonus method
Total agreed capital = Total contributed capital (under the bonus method)
(P70,000 + P30,000 + P40,000).......................................................................... P 140,000
Multiplied by: interest acquired by new partner..............................................
20%
Capital of new partner Chapman...................................................................... P 28,000
Less: Investment by Chapman............................................................................. 40,000
Bonus to old partners to be allocated equally to old partners –
Adams and Bye......................................................................................... P 12,000
13. c - [P120,000 - (P170,000 + P260,000 + P120,000)(.25)]
14. c
Scott invests P36,000 for a 1/5 interest:
Investment in partnership
New partner's proportionate book value
[(P120,000 + P36,000) x .20]
Difference (investment > book value)
P 36,000
P
(31,200)
4,800
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Method: Goodwill to prior partners
1/5 estimated total resulting capital
Estimated total resulting capital
(P36,000 / .20)
P 36,000
P 180,000
Estimated total resulting capital
Total net assets not including goodwill
(P120,000 + P36,000)
Estimated goodwill/adjustment to prior partners
P 180,000
(156,000)
P 24,000
(Use the same procedure in Nos. 9 and 10)
15. b - Total capital is P270,000 (P120,000 + P90,000 + P60,000) after the new investment.
However, the implied value of the business based on the new investment is P300,000
(P60,000/20%). Thus, goodwill of P30,000 must be recognized with the offsetting allocation
to the original partners based on their profit and loss ratio: Bishop – P18,000 (60%) and
Cotton P12,000 (40%). The increase raises Cotton's capital from P90,000 to P102,000.
16. c
Total agreed capital* P120,000 /60% ............................................. P300,000
Multiplied by: Capital interest of Jones (new partner)………......
60%
Agreed capital of R............................................................................. P180,000
Note: The i nvestment of D is used as the basis to determine tota l a greed ca pi ta l , otherwi s e
us i ng the capital balance of D will lead to a “nega ti ve” goodwi l l or reva l ua ti on downwa rd.
17. c
Total agreed capital* (P250,000/20%)....................................... P 1,250,000
Less: Total contributed capital of R and S:
(P500,000 + P400,000 + P40,000) + P250,000................. 1,190,000
Goodwill or revaluation to old partners................................... P 60,000
Riley: P500,000 + (P40,000 x 60%) + (P60,000 x 60%) = P560,000
or,
Riley [P500,000 + (P40,000 x 60%)]
Smith [P400,000 + (P40,000 x 40%)]
Tyler
Total
Contributed
Agreed
Capital
Capital
P 524,000 P 560,000
416,000
P 940,000 P1,000,000
250,000
250,000 / 20%
P 1,190,000 P1,250,000 100%
Goodwill
P 36,000 60%
24,000 40%
P 60,000
-0P 60,000
18. c
Total agreed capital* ................................................................. P 260,000
Less: Total contributed capital of L, M, and N
(P120,000 + P70,000 – P30,000 + P60,000) + P40,000.... 260,000
Difference..................................................................................... P
0
Total agreed capital
P 260,000
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Multiplied by: Interest acquired
Capital credited to Ole
20%
P 52,000
or,
Contributed
Capital
Agreed
Capital
Old Partners: (P120,000+P70,00
- P30,000 + P60,000)
New Partner: Ole
P 220,000
__40,000 P 52,000 20%*
P 260,000 P 260,000
* P52,000 is derived from multiplying P260,000 by 20%.
Notes:
1. The partners agreed that assets should revalued using fair value.
2. Since problem is silent, bonus method is used.
P -0-
19. a - Admission by purchase. The implied value of the company is P900,000 (P270,000/30%).
Since the money is going to the partners rather than into the business, the capital total is
P490,000 before realigning the balances. Hence, goodwill of P410,000 must be
recognized based on the implied value (P900,000 – P490,000). This goodwill is assumed to
represent unrealized business gains and is attributed to the original partners according to
their profit and loss ratio. They will then each convey 30 percent ownership of the
P900,000 partnership to Darrow for a capital balance of P270,000.
Formal presentation:
Amount paid ………………………….………….. P 270,000 / 30%
Less: BV of interest acquired –
(P220,000 + P160,000 + P110,000) x 30%….... 147,000
Excess……………………………………………….. P123,000
Divided by: Interest acquired…………………..
20%
Goodwill or revaluation of Asset …………….. P410,000
P900,000 (100%)
The entry would be as follows;
Goodwill/Asset
Williams (40%)
Williams [P220,000 + (P410,000 x 40%)] x 30%
Jennings [P160,000 + (P410,000 x 40%)] x 30%
Bryan [P110,000 + (P410,000 x 20%)] x 30%
Darrow
490,000 (100%)
P410,000 (100%)
410,000
164,000
115,200
97,200
57,600
270,000
20. d - Admission by investment. Since the money goes into the business, total capital becomes
P740,000 (P490,000 + P250,000). Darrow is allotted 30 percent of this total or P222,000.
Because Darrow invested P250,000, the extra P28,000 is assumed to be a bonus to the
original partners. Jennings will be assigned 40 percent of this extra amoun t or P11,200. This
bonus increases Jennings’ capital from P160,000 to P171,200.
Formal presentation:
Total agreed capital* (same with total contributed capital)… ... P740,000
Less: Total contributed capital (P220,000 + P160,000 +
P110,000 + P250,000)..............…………………………....... 740,000
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Difference .......................................………………..………………… ..P
0
*since no goodwill or revaluation is allowed total agreed is the same with total contribut ed capital.
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in
(a) is attributable to revaluation (goodwill) to old partners:
Darrow’s contributed capital………………………………………… P250,000
Darrow’s agreed capital: (P740,000 x 30%)……………………....... 222,000
Bonus to old partners ........................………………………………… P 28,000
Jennings: [P160,000 + (P28,000 x 40%)] = P171,200
or, alternatively
Contributed Capital (CC)
220,000
Agreed Capital (AC)
W
J
160,000
171,200
B
110,000
_______
D
490,000
250,000
740,000
518,000
222,000 30%
740,000
Total
21.
22.
d
d
As specified no bonus or goodwill recognized.
5/6 estimated total resulting capital
Estimated total resulting capital (P150,000 / 5/6)
Required investment (P180,000 x 1/6)
11,200
40%
11,200
40%
5,600
20%
28,000
28,000
0
P 150,000
180,000
P 30,000
Direct purchase; reclassify CCs capital only (if silent – book value).
23. d
Total contributed capital*
(P140,000 + P40,000) / 4/5 ............................................. P225,000
Less: Total contributed capital of Allen and David................ 180,000
Investment by David......................................................................P 45,000
*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed
capital.
24. c
Total agreed capital (140,000 + 40,000) / 3/4.............................P240,000
Less: Total contributed capital
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 10,000
Note: since the problem indicates that there is goodwill/rev aluation of asset
downward, total agreed capital should be higher compared to total contributed
capital (to achieve this objectiv e the capital of old partners should be used as a basis)
Cash
Goodwill/assets
David, capital (1/4 x P240,000)
25. b
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50,000
10,000
60,000
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Total agreed capital (P40,000) / 1/5............................................P200,000
Less: Total contributed capital
(P140,000 + P40,000 + P40,000)......................................... 220,000
Revaluation of asset / inventory decreased……..…………....P( 20,000)
Note: since the problem indicates that there is rev aluation of asset downward, total
agreed capital should be lower compared to total contributed capital.
26. b – refer to No. 25 for computation
Allen: P140,000 – (P20,000 x 3/4) = P125,000
Daniel: P40,000 – (P20,000 x 1/4) = P35,000
27. d
Amount paid (P34,000 + P10,000)
P 44,000
Less: Book value of Allen and Daniel (1/5) x P180,000 )
36,000
Partial goodwill/revaluation adjustment
P 8,000
Capitalized at
1/5
Revaluation of land
P 40,000
28. a.
Allen: [P140,000 + (P40,000 x 3/4)] x 4/5 = P136,000
Daniel: [P40,000 + (P40,000 x 1/4)] x 4/5 = P40,000
29. b
Total agreed capital (given)........................................................P220,000
Less: Total contributed capital
(P140,000 + P40,000 + P40,000)......................................... 220,000
Difference..............................................………………..…………..P
0
Not e: Since t otal agreed and total contributed are the same, t herefore is no goodwill
or revaluat ion.
Total Agreed Capital
Multiplied by: Interest acquired by David
Agreed capital of David
Cash investment by David
Bonus to David
P220,000
1/5
P 44,000
40,000
P 4,000
Cash
Allen (P4,000 x 3/4)
Daniel (P4,000 x 1/4)
David
40,000
3,000
1,000
44,000
30. d – refer to No. 29
Allen = P140,000 – (P10,000 x 3/4) = P137,000
Daniel = P40,000 – (P10,000 x 1/4) = P39,000
31. a
Total agreed capital (P50,000) / 1/5............................................P250,000
Less: Total contributed capital
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 20,000
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Note: since the problem indicates that there is goodwill/rev aluation of asset
downward, total agreed capital should be higher compared to total contributed
capital (to achieve this objectiv e the capital of the new partners should be used as a
basis)
32. a - A P10,000 bonus is paid to Costello (P100,000 is paid rather than the P90,000 capital
balance). This bonus is deducted from the two remaining partners according to their
profit and loss ratio (2:3). A reduction of 60 percent (3/5) is assigned to Burns or a
decrease of P6,000 which drops that partner’s capital balance from P30,000 to P24,000.
33. a - (P121,000  P100,000) x 35/60 = P12,250]
34. c - (P39,000 + P7,200  P750 = P45,450)
35. b
Amount paid
Less: Book value of Williams
P70,000 + (P360,000 – P300,000) x 20%
Partial goodwill/revaluation adjustment
Capitalized at P&L of Dixon
Goodwill/revaluation
P 102,000
82,000
P 20,000
Brown: P65,000 + (P60,000 x 20%) + (P100,000 x 20%)
Lowe: P150,000 + (P60,000 x 60%) + (P100,000 x 60%)
20%
P100,000
P 97,000
P246,000
36. a
Amount paid
P 74,000
Less: Book value of Dixon (20%): (P210,000 – P160,000) 50,000
Partial goodwill/revaluation adjustment
P 24,000
Capitalized at P&L of Dixon
20%
Goodwill/revaluation
P120,000
37. b
Amount paid……………………………………………………………………………P 80,000
Less: Book value of Interest of Bolger
P60,000 + [(P170,000 + P210,000 + P100,000) – (P180,000 +
P200,000 + P75,000)] x 35%........................................................................ 68,750
Partial Goodwill (to retiring partner)……………………………………………….P 11,250
Incidentally, the entry for the retirement (payment to Bolger) would be:
Bolger, capital……………………………………………… 68,750
Goodwill……………………………………………………… 11,250
Cash………………………………………………..
80,000
Therefore, the capital of Grossman after the retirement of Bolger would be, P66,250 [P55,000 +
(45% x P25,000)].
38. c – no goodwill or revaluation therefore, bonus.
Tiffany
Ron (P10,000 x3/5)
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50,000
6,000
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Stella (P10,000 x 2/5)
Cash
4,000
60,000
39. a – refer to No. 38 (P80,000 – P6,000 = P74,000)
40. d
Amount paid
Less: Book value of Tiffany (1/6)
Partial goodwill/revaluation adjustment
Capitalized at
Goodwill/revaluation
)
P 56,000
50,000
P 6,000
1/6
P 36,000
41. c - Roberts receives an additional P60,000 above her capital balance.
Amount paid
P 160,000
Less: Book value of Robert (40%)
100,000
Partial goodwill/revaluation adjustment
P 60,000
Capitalized at
40%
Goodwill/revaluation
P 150,000
Goodwill/assets
Peter (20%)
Robert (40%)
Dana (40%)
150,000
30,000
60,000
60,000
Robert (P100,000 + P60,000)
Cash
160,000
160,000
Therefore: Peter: P80,000 + P30,000 = P110,000
42. d – refer to No. 41
Dana: P60,000 + P60,000 = P120,000
43. e – refer to No. 41
Total Assets before retirement (P80,000 + P100,000 + P60,000) P240,000
Add: Goodwill/revaluation of asset
150,000
Less: Cash paid
160,000
Total assets after retirement
P230,000
44. e – same with No. 43
45. c
Total Capital of L (wherein goodwill should be generated)
Total assets, fair value (P40,000 + P52,000 + P94,000 +
P320,000 + P64,000)
Less: Total liabilities ( P110,000 + P200,000)
Less; Total Capital of M
Total assets, fair value (P30,000 + P56,000 + P114,000
+
P280,000 + P44,000)
Less: Total liabilities ( P80,000 + P150,000)
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P 570,000
__310,000
P 260,000
P 524,000
230,000
294,000
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Goodwill
P 34,000
46. c
L, Capital and M, Capital are each $P94,000 if L's goodwill is recognized. Total capital is P588,000,
and total liabilities and capital amount to P1,128,000.
47. d
(1) Goodwill (revaluation) method:
Amount paid
P 36,000
Less: Book value of interest acquired (P100,000 x 30%)) 30,000
Partial goodwill/revaluation adjustment
P 6,000
Capitalized at
30%
Goodwill/revaluation
P 20,000
Therefore, the capital balances after the admission of OO:
Adams: [P60,000 + (P20,000 x 60%)] x 70%… … …………………P 72,000
Brown: [P40,000 + (P20,000 x 40%)] x 70%...… ………………….. 48,000
Call.............................................……………………………………. __36,000
Total capital after admission… ………………………………….. .P156,000
(2) If Book (or bonus) method is used, the capital balances would be:
Adams...............................................................……………………P 60,000
Brown..............................................................…………………….. 40,000
Call: (P60,000 + P40,000) x 30%… … ……………………………. ..__ 30,000
Total capital after admission… ………………………………….. .P130,000
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
Brown
P48,000
P40,000
5,600
P45,600
P 2,400
Call
P36,000
P30,000
6,000
P36,000
P
0
Alternative 2: If goodwill is not realized and written-off as a loss:
Adams
Brown
Goodwill Method is used… … …………….
P 72,000
P48,000
Less: Write-off of goodwill *……………….
8,400
5,600
P63,600
P42,400
BV/Bonus Method is used… … ……………
P60,000
P40,000
(Gain) loss – bonus method… ……………. P 3,600
P 2,400
Call
P36,000
6,000
P30,000
P30,000
P
0
Goodwill Method is used… … …………….
BV/Bonus Method is used… … ……………
Add: Goodwill *……...................................
(Gain) loss – BV/bonus method… ……….
Adams
P72,000
P60,000
8,400
P68,400
P 3,600
Adams: 70% x 6/10 = 42%
Brown: 70% x 4/10 = 28%
Call
30%
Note: The bonus method a dheres to the historical cost concept a nd i t is often used i n accounting practice. It is objective tha t i s
es tablishes total capital of the new partnership a t an amount based on actual consideration received from the new partner. The
bonus method i ndi rectl y a cknowl edges the exi s tence of goodwi l l by gi vi ng a bon us to ei ther ol d or new pa rtners .
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The goodwill method results in the recognition of an asset i mplied by a transaction ra ther than recogni zi ng a n a s s et a ctua l l y
purcha sed. Historically, goodwill has been recognized only when purchased so that a more objecti ve mea s ure of i ts va l ue i s
es tablished. Therefore, opponents of the goodwill method contend tha t goodwi l l i s not determi ned objecti vel y a nd other
fa ctors ma y ha ve i nfl uenced the a mount of i nves tment requi red from the new pa rtners .
Al though either method can be used in a chieving the required interest for the new partner, the two methods offer the s a me
ul ti ma te res ul ts onl y:
1. When the i ncoming partner’s percentage share of profit a nd l oss a nd percentage i nterest i n assets upon a dmi s s i on
a re equa l , a nd
2. When the former pa rtners conti nue to s ha re profi ts a nd l os s es between thems el ves i n the ori gi na l ra ti o.
If thes e condi ti ons a re not ful l y met, however, res ul ts wi l l be di fferent.
48. d – refer to No. 47 for Note.
(1) Goodwill method: Using the capital balance of new partner as a basis of computing total
agreed capital,:
Total agreed capital (P5,000/25%)… … … ……………………………. P20,000
Less: Total contributed capital (P6,000/P4,800+P5,000)… … … …… 15,800
Goodwill to old partners… ………………………………………………. P 4,200
Therefore, the capital balances after the admission of OO:
MM: [P6,000+(P4,200x3/5)]… … … …………………………………………. P 8,520
NN: [P4,800+(P4,200x2/5)]… … … …………………………………………..
6,480
OO… … …………………………………………………………………………. 5,000
Total agreed capital… ……………………………………………………… P20,000
(2) If bonus method is used, the capital balances would be:
Total agreed capital (P6,000+P4,800+P5,000)… … … ………………….......... P 15,800
Multiplied by: OO’s capital interest… …… ………………………………….....
25%
Agreed capital to be credited to OO… … …………………………………... P 3,950
Contributed/Invested capital of OO… … ………………………………..........
5,000
Bonus to MM and NN (old partner)… … …………………………………......... P 1,050
The bonus would be added to MM and NN:
MM: [P60,000+(1,050,000x3/5)]… … … … …………………………………. P 6.630
NN: [P4,800+(P1,050x2/5)]… … … …………………………………………..
5,220
OO… … …………………………………………………………………………
3,950
Total agreed capital… …………………………………………………….. P 15,800
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
Goodwill Method is used… … …………….
Bonus Method is used… … ………………...
Add: Goodwill (allocated equally)… … ..
(Gain) loss – bonus method… …………….
MM
P8,520
P6,630
1,400
P8,030
P 490
NN
P6,480
P5,220
1,400
P6,620
P (140)
OO
P5,000
P3,950
1,400
P5,350
P 350 (d)
Alternative 2: If goodwill is not realized and written-off as a loss:
MM
NN
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OO
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Goodwill Method is used… … …………….
Less: Write-off of goodwill
(allocated equally)… … …………….
Bonus Method is used… … ………………...
(Gain) loss – bonus method… …………….
P8,520
P6,480
P5,000
1,400
P7,120
P6,630
P 490
1,400
P5,080
P5,220
P (140)
1,400
P3,600
P3,950
P 350 (d)
49. a – refer to No. 47 for Note.
Goodwill method: Using the capital balance of new partner as a basis of computing total
agreed capital.
Total agreed capital (P500,000/25%)… … … ……………………………. P2,000,000
Less: Total contributed capital (P600,000/P480,000+P500,000)… … .. 1,580,000
Goodwill to old partners… ………………………………………………... P 420,000
Therefore, the capital balances after the admission of CC:
AA: [P600,000+(P420,000x3/5)]… … … … ………………………………… P 852,000 (d)
BB: [P480,000+(P420,000x2/5)]… … … … ………………………………….
648,000
CC… ……………………………………………………………………………
500,000
Total agreed capital… ……………………………………………………….. P 2,000,000
Bonus Method:
Total agreed capital (P600,000+P480,000+P500,000)… … … … ……... P 1,580,000
Multiply by: CC’s capital interest… ………………………………………
25%
Agreed capital to be credited to CC… ……………………………….. P 395,000
Contributed/Invested capital of CC… ………………………………….
500,000
Bonus to AA and BB (old partners)… … …………………………………. P 105,000
The bonus would be added to AA and BB:
AA: [P600,000+(1,050,000x3/5)]… … … … …………………………………. P 663,000
BB: [P480,000+(P105,000x2/5)]… … … … ……………………………………
522,000
CC… …………………………………………………………………………….
395,000
Total agreed capital… ……………………………………………………… P 1,580,000
For purposes of comparing bonus and goodwill, assume that goodwill is not realized and it
should be written-off as a loss:
AA
BB
CC
Goodwill Method is used… … …………….
P852,000
P648,000
P500,000
Add: Goodwill (allocated equally)… … ..
140,000
140,000
140,000
P712,000
P508,000
P360,000
Bonus Method is used… … ………………...
P663,000
P522,000
P395,000
(Gain) loss – bonus method… ……………. P 49,000
P (14,000)
P 35,000
50. b
Total
Capital, before adjustment………………… P309,000
Less: Net adjustment*……………………….. 35,400
Capital, after adjustment………………….. P273,600
Less: Portion covered by common stock,
par P10 (720 share to each partner)..
14,400
Portion to be covered by preferred stock,
Roy
Gil
P94,800 P214,200
11,800 23,600
P83,000
P190,600
7,200
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7,200
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par P100…………………………………..... P259,200
P75,800
Shares to be issued:
Preferred stock………………………. 2,592
758
Common stock……………………… 1,440
720
*FV, P40,000 + P68,000 + P180,600 – BV, P60,000 + 90,000 + P174,000.
51. d
52. b
53. c
P183,400
1,834
720
Fair value of the assets (P200,000 + P24,000)……………………………. P224,000
Less: Total liabilities……………………………………………………………. 40,000
Fair value of Net Assets……………………………………………………… P184,000
Less: Common stock at P1 par (10,000 shares x 2 x 1 par)…………… 20,000
Additional paid-in capital………………………………………………… P164,000
Unadjusted capital balances (P140,000 + P120,000)…………………… P260,000
Add (deduct): adjustments:
Allowances for doubtful accounts……………………………… (10000)
Revaluation of inventory (P160,000 - P140,000)………………... 20,000
Additional depreciation……………………………………………. (3,000)
Adjusted capital balances equivalent to the total shares issued……P267,000
Unadjusted assets (P10,500 + P15,900 + P42,000 + P60,000)……………. P128,400
Add (deduct): adjustments:
Allowances for doubtful accounts……………………………… ( 1,200)
Short-term prepayments...............................................................
800
Revaluation of inventory (P48,000 – P42,000)...………………...
6,000
Revaluation of equipment (P72,000 – P60,000)………………... 12,000
Adjusted asset balance............................................................................. P146,000
54. c
Adjusted asset balance............................................................................. P146,000
Less: Liabilities (P16,400 + P750).................................................................. 17,150
Adjusted net assets..................................................................................... P128,850
Less: Common stock, P5 par x 10,000 shares.....................……………... 50,000
Additional paid-in capital…………………………………………………… P 78,850
Quiz-III
1.
2.
3.
4.
5.
6.
7.
8.
9.
a
d
a
b
c
d
c
a
d
Problems
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1.
2.
P19,000
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5]
Difference (investment > book value)
P 17,000
P
(15,400)
1,600
Method: Bonus to prior/old partners
PP's capital credit = P77,000 x 1/5
= P15,400
3.
Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000
Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment. As
Claudius's portion is to be 20 percent, the new capital balance would be P90,000 (P450,000 ×
20%). Since P100,000 was paid, a bonus of P10,000 is being given to the two original partners
based on their profit and loss ratio: Messalina – P6,000 (60%) and Romulus – P4,000 (40%). The
increase raises Messalina's capital balance from P210,000 to P216,000 and Romulus's capital
balance from P140,000 to P144,000.
4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)
5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)
7. Abele, P300,000; Boule, P480,000; Dann, P420,000
8. Brown, P156,000; Green, P99,000; Red, P45,000
9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250
10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the price
paid by Mary Ann.
11. P180,000
12. Net assets of the partnership will increase by P190,000, including Professor’s interest.
13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000
16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000
17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750
18. P125,000
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(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000
19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits and
losses, this allocation indicates total goodwill of P50,000.
20% of Goodwill = P10,000
.20 G = P10,000
G = P10,000/.20
G = P50,000
Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of this
goodwill, an entry that raises this partner's capital balance from P130,000 to P145,000.
20.
21.
22.
23.
24.
25.
26.
a – [(P80,000  P60,000)  3 + P6,667]
Susan’s capital account balance cannot be determined from the information given
P445,000 = P80,000 + P110,000 + P55,000 + P200,000
P24,000 = (P250,000 - P210,000)(45/75)
P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
P172,500 = P150,000 + (P75,000 x .3)
P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)
27. Donald, P55,000; Todd, P60,000
Anne receives an additional P30,000 above her capital balance. Since she is assigned 40 pe rcent of
all profits and losses, this extra allocation indicates total goodwill of P75,000, which must be split
among all partners. 40% of Goodwill = P30,000
Amount paid
Less: Book value of Anne (40%)
Partial goodwill/revaluation adjustment
Capitalized at
Goodwill/revaluation
P 80,000
50,000
P 30,000
40%
P 75,000
Goodwill/assets
Donald (20%)
Anne (40%)
Todd (40%)
75,000
15,000
30,000
30,000
Anne (P50,000 + P30,000)
Cash
80,000
80,000
Donald: P40,000 + P15,000 = P55,000
Todd: PP30,000 + P30,000 = P60,000
28. Donald, P30,000; Todd, P10,000
The P30,000 bonus is deducted from the remaining partners according to their relative profit and
loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Anne
50,000
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Donald (P30,000 x 2/6)
Todd (P30,000 x 4/6)
Cash
10,000
20,000
80,000
Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000
29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)
30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%)
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
Goodwill to old partners
P2,000,000
1,580,000
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
P852,000
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
Agreed capital to be credited to ZZ
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
P 1,580,000
25%
P 395,000
500,000
P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
Goodwill Method is used
Bonus Method is used
Add: Goodwill (allocated equally)
(Gain) Loss – Bonus method
XX
P 852,000
P 663,000
140,000
P803,000
P 49,000
YY
P 648,000
P 522,000
140,000
P 662,000
P (140,000)
ZZ
P 500,000
P 395,000
140,000
P 535,000
P 35,000
YY
P 648,000
140,000
P 508,000
522,000
P (140,000)
ZZ
P 500,000
140,000
P 360,000
395,000
P 35,000
Alternative 2: If goodwill is not realized and written-off as a loss:
Goodwill Method is used
Less: Write -off of goodwill (equally)
Bonus Method is used
(Gain) Loss – Bonus method
XX
P 852,000
140,000
P 712,000
663,000
P 49,000
Note: The bonus method a dheres to the historical cost concept a nd i t is often used i n accounting practice. It is objective tha t i s
es tablishes total capital of the new partnership a t an amount based on actual consideration received from the new partner. The
bonus method i ndi rectl y a cknowl edges the exi s tence of goodwi l l by gi vi ng a bonus to ei ther ol d or new pa rtners .
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The goodwill method results in the recognition of an asset i mplied by a transaction ra ther than recogni zi ng a n a s s et a ctua l l y
purcha sed. Historically, goodwill has been recognized only when purchased so that a more objecti ve mea s ure of i ts va l ue i s
es tablished. Therefore, opponents of the goodwill method contend tha t goodwi l l i s not determi ned objecti vel y a nd other
fa ctors ma y ha ve i nfl uenced the a mount of i nves tment requi red from the new pa rtners .
Al though either method can be used in a chieving the required interest for the new partner, the two methods offer the s a me
ul ti ma te res ul ts onl y:
1. When the i ncoming partner’s percentage share of profit a nd l oss a nd percentage i nterest i n assets upon a dmi s s i on
a re equa l , a nd
2. When the former pa rtners conti nue to s ha re profi ts a nd l os s es between thems el ves i n the ori gi na l ra ti o.
If thes e condi ti ons a re not ful l y met, however, res ul ts wi l l be di fferent.
31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%)
Less: Total contributed capital (P600,000 + P480,000 + P500,000)
Goodwill to old partners
P2,000,000
1,580,000
P 420,000
Therefore, the capital balances after admission of ZZ:
XX: [P600,000 + (P420,000 x 3/5)]
YY: [P480,000 + (P420,000 x 2/5)]
ZZ:
Total agreed capital
P852,000
648,000
500,000
P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000)
Multiplied by; ZZ’s capital interest
Agreed capital to be credited to ZZ
Contributed / invested capital of ZZ
Bonus to XX and YY (old partners)
P 1,580,000
25%
P 395,000
500,000
P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)]
YY: [P480,000 + (P105,000 x 2/5)]
ZZ
Total agreed capital
P 663,000
522,000
395,000
P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
Goodwill Method is used
Bonus Method is used
Add: Goodwill* (45%: 30%:25%)
(Gain) Loss – Bonus method
XX
P 852,000
P 663,000
189,000
P852,000
P
0
YY
P 648,000
P 522,000
126,000
P 648,000
P
0
P
P
YY
P 648,000
ZZ
P 500,000
P
P
ZZ
500,000
395,000
105,000
500,000
0
*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%
Alternative 2: If goodwill is not realized and written-off as a loss:
Goodwill Method is used
XX
P 852,000
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Less: Write -off of goodwill*
Bonus Method is used
(Gain) Loss – Bonus method
189,000
P 633,000
663,000
P
0
126,000
P 522,000
522,000
P
0
105,000
P 395,000
395,000
P
0
32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid
Less: Book value of interest – Neal (40%))
Partial goodwill/revaluation adjustment
Capitalized at
Goodwill/revaluation
Capital balances before withdrawal
Allocate goodwill*
Withdrawal of Neal
P300,000
250,000
P 50,000
40%
P125,000
Neal
250,000
50,000
300,000
(300,000)
Write-off Impaired Goodwill (125,000  0.50)
_______
0
Capital balances using the bonus method**
Palmer
150,000
37,500
187,500
_______
187,500
(62,500)
125,000
125,000
Ruppe
100,000
37,500
137,500
_______
137,500
(62,500)
75,000
75,000
33. Prefer bonus method due to Palmer’s gain of P12,500
Capital balances before withdrawal
Allocation of goodwill*
Withdrawal of Neal
Write-off Impaired Goodwill
125,000  0.60
125,000  0.40
Neal
250,000
50,000
300,000
(300,000)
- 0-
________
- 0-
Capital balances using the bonus method**
(Gain) Loss – Bonus method
0
Palmer
150,000
37,500
187,500
_______
187,500
Ruppe
100,000
37,500
137,500
_______
137,500
(75,000)
_______
112,500
125,000
(50,000)
87,500
75,000
12,500
12,500
**The excess paid to Neal of P50,000 would have been divided equally between Palmer and
Ruppe as follows:
Capital balance before withdraw
Allocation of excess paid to Neal
Capital balance using bonus method
Palmer
150,000
(25,000)
125,000
34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
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Ruppe
100,000
(25,000)
75,000
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Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000
35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]…
19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
THEORIES
True or False
1.
2.
3.
4.
5.
False
True
False
True
False
6.
7.
8.
9.
10.
False
False
True
False
False
11.
12.
13.
14.
15,
True
True
True
False
True
16.
17.
18.
19.
20.
True
True
False
False
True
21.
22.
23.
24.
25.
False
True
False
True
False
26.
27.
28.
29.
30.
False
True
False
True
False
31.
32.
True
True
Note for the following numbers:
1. A dissolution occurs every time there is a change in relationship among the partners. This can occur when a new partner
enters the partnership or an existing partner leaves the partnership. A dissolution occurs when the partnership is going
out of business but the termination of business is not a requirement for a dissolution.
3. A new partner's liability for actions that occurred before joining the partnership is limited to the amount invested in the
partnership.
5.
Regardless how a new partner enters a partnership, the other partners have to approve the admission because they
must accept unlimited liability due to actions of the new partner taken on behalf of the partnership.
6. There is no necessary relationship between the percentage of equity acquired and the amount of profit or loss received.
These are separate contractual issues.
7. There are three methods that may be used when a new partner is paying an amount more than book value for the
investment: revaluation of existing assets, bonus method, and goodwill method. The partners do not have to choose
one method. It would not be inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
9. Existing partners share the difference between market value and book value equally if that is the manner in which profits
and losses are shared. If profits and losses are shared in some other manner, then the difference between market and
book values are shared in that manner.
10. While it is possible that an error has been made, it is more likely that the existing partners recognized an increase in
their capital accounts via a bonus. The difference between the amount credited to the new partner’s capital account
and the amount invested is shared by the existing partners.
14. New partners may receive a bonus if they bring value to the partnership in excess of the tangible assets invested. This
additional amount may be from such things as expertise, experience, or business contacts. The bonus al located to the
new partner is payment for these types of unidentifiable assets contributed to the partnership.
18. Goodwill may be recognized with regard to the existing partners but it may also be recognized with regard to the new
partner.
19. When goodwill is recognized with regard to the new partner, the new partner’s capital account will be greater than the
amount invested by the recognized goodwill.
21. The articles of partnership may include an agreement on the length of advanced notice a partner must give before
withdrawing from a partnership. Failure to provide the agreed notice may result in the withdrawing partner being
liable for damages suffered by the partnership.
23. If existing partners acquire a withdrawing partner’s equity, they can divide the purchase of that equity among
themselves in any manner they choose.
25. Partnership assets may be revalued but they may also remain at their carrying value.
26. The revaluation of the partnership’s assets is unrelated to the purchase of the withdrawing partners ownership interest
in the partnership.
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28. The revaluation of partnership assets at the time of a partner’s withdrawal has no impact on the recognition of a bonus
or goodwill.
30. While the partners can recognize either the withdrawing partner’s goodwill or the entire partnership’s goodwill, there is
no requirement to recognize any goodwill when a partner withdraws from a partnership.
Multiple Choice
33.
34
35.
36.
37.
b
d
d
d
d
38.
39.
40.
41.
42.
e
e
d
d
b
43.
44.
45.
46.
47.
c
c
d
c
b
47.
48.
50.
51.
52.
a
c
c
a
d
53.
54.
55.
56.
57.
c
c
c
b
b
58.
59.
60.
61.
62.
a
c
b
b
b
63.
64.
65.
66.
67.
68.
c
d
c
d
d
a
Chapter 4
Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Payment to partners - loan
Balances after payment of
partners’ loans
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
Capital
30%)
9,600
_____
12,000
(12,000)
______
2,400
3,600
13,200
6,000
54,000
2,400
38,400
2,400
(2,400)
13,200
______
54,000
______
38,400
_______
105,600
13,200
54,000
38,400
(105,600)
(13,200)
(54,000)
(38,400)
Cash
24,000
96,000
120,000
(12,000)
NonCash
Assets
84,000
(84,000)
108,000
(2,400)
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer
from Partner’s Loan Account (Right of Offset Exercised).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset deficit v ersus loans
Balances after offsetting
Payment to partners – loan
Balances after payment of
partners’ loans
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_____
12,000
(12,000)
______
2,400
(10,800)
(1,200)
(18,000)
30,000
(7,200)
28,800
2,400
(1,200)
1,200
(1,200)
(1,200)
1,200
30,000
_______
30,000
_______
28,800
_______
28,800
______
58,800
30,000
28,800
(58,800)
(30,000)
(28,800)
Cash
24,000
48,000
72,000
(12,000)
60,000
_______
60,000
(1,200)
NonCash
Assets
84,000
(84,000)
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R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
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3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer
from Partner’s Loan Account (Right of Offset Exerci sed and Additional Capital Investment is
Required and Made).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan v ersus deficit –
Balances after offsetting
partner’s loan
Additional inv estment by Q
Balances after additional
Inv estment
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
________
12,000
(12,000)
________
2,400
________
(14,400)
( 4,800)
_______
(24,000)
24,000
_______
(9,600)
26,400
_______
2,400
(2,400)
( 4,800)
2,400
24,000
_______
26,400
_______
(2,400)
2,400
24,000
_______
26,400
_______
50,400
24,000
26,400
(50,400)
(24,000)
(26,400)
Cash
24,000
36,000
60,000
(12,000)
NonCash
Assets
84,000
(84,000)
48,000
_______
48,000
__2,400
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring
Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is
Required but not Made (Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan v ersus deficit
Balances after offsetting
Additional loss due to
insolv ency of Q
Balances after additional ,
Loss
Payment to partners capital
Liabilities
12,000
Q, Loan
2,400
Q,
capital
(30%)
9,600
_______
12,000
(12,000)
________
2,400
_______
(12,600)
( 3,000)
_______
(21,000)
27,000
_______
(8,400)
27,600
_______
2,400
(2,400)
(3,000)
2,400
( 600)
27,000
______
27,000
27,600
______
27,600
( 429)
( 171)
54,000
26,571
27,429
(54,000)
(26,571)
(27,429)
Cash
24,000
42,000
66,000
(12,000)
54,000
_______
54,000
NonCash
Assets
84,000
(84,000)
_______
600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Req uiring
Transfer Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is
Required but not Made (Personally Insolvent).
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
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Balances before liquidation
Realization and distribution
of gain
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan v ersus deficit
Balances after offsetting
Additional inv estment by Q
Balances after additional
inv estment
Additional loss due to
insolv ency of Q
Balances after additional
Loss
Payment to partners capital
Cash
24,000
NonCash
Assets
84,000
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
Liabilities
12,000
Q, Loan
2,400
_______
12,000
(12,000)
_______
2,400
_______
(18,000)
( 8,400)
_______
(30,000)
18,000
_______
(12,000)
24,000
_______
2,400
(2,400)
( 8,400)
2,400
(6,000),
_ 3,600
18,000
______
18,000
______
24,000
_______
24,000
_______
39,600
(2,400)
18,000
24,000
______
2,400
(1,714)
( 686)
39,600
16,286
23,314
(39,600)
(16,286)
(23,314)
24,000
48,000
(12,000)
(84,000)
36,000
______
36,000
_3,600
6: Loss on Realization Creates a Deficit Balance i n Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Balances before liquidation
Payment of liquidation
expenses
Balances after payment of
liquidation expenses
Write-off goodwill and
prepaid expenses
Balances after write-offs
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
Liabilities
Offset loan v ersus deficit
Balances after offsetting
Additional inv estment by Q
and R
Balances after additional
Inv estment
Payment of liabilities
Balances after payment of
Liabilities
Payment to partners Capital
Cash
24,000
NonCash
Assets
84,000
Liabilities
12,000
(14,400)
______
________
9,600
84,000
_______
9,600
1,200
10,800
(10,800)
Q, Loan
2,400
Q,
capital
(30%)
9,600
R,
Capital
(50%)
48,000
S,
Capital
(20%)
36,000
________
(4,320)
(7,200)
(2,880)
12,000
2,400
5,280
40,800
33,120
(72,000)
12,000
_______
12,000
________
2,400
(21,600)
(16,320)
(36,000)
4,800
(14,400)
18,720
(12,000)
_______
12,000
(10,800)
________
2,400
________
( 3,240)
( 19,560)
_______
( 5,400)
( 600)
________
( 2,160)
16,560
_______
-0______
-0-
1,200
_______
1,200
2,400
(2,400)
(19,560)
2,400
(17,160)
( 600)
_______
( 600)
16,560
_______
16,560
17,760
_______
17,760
(1,200)
1,200
(1,200)
17,160
600
______
16,560
_______
16,560
16,560
(16,560)
(16,560)
7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring T ransfer
Partner’s Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
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Balances before liquidation
Increase in equipment
Decrease in furniture
Balances after rev aluation
Refund of prepaid
expenses
Balances after refunds
Receiv ed noncash assets
Balances after receipt
of noncash assets
Realization and distribution
of loss
Balances after realization
Payment of liabilities
Balances after payment of
liabilities
Offset loan v ersus deficit
Balances after offsetting
Payment to partners loan
Balances after payment
of loans
Payment to partnerscapitals
______
24,000
NonCash
Assets
84,000
1,200
(600)
84,600
_6,960
30,960
______
(8,400)
76,200
(10,200)
_______
12,000
_______
______
2,400
______
_(432)
9,348
_____
(720)
47,580
(7,200)
(288)
35,832
(3,000)
30,960
66,000
12,000
2,400
40,380
32,832
32,400
63,360
(12,000)
(66,000)
_______
12,000
(12,000)
______
2,400
_______
9,348
(
10,080)
( 732)
_______
( 16,800)
23,580
_______
( 8,064)
26,112
_______
23,580
______
23,580
26,112
______
26,112
______
_______
49,692
23,580
26,112
(49,692)
(23,580)
(26,112)
Cash
24,000
Liabilities
12,000
Q, Loan
2,400
_______
12,000
______
2,400
Q,
capital
(30%)
9,600
360
_(180)
9,780
51,360
_______
51,360
2,400
( 732)
1,668
(1,668)
(1,668)
(
R,
Capital
(50%)
48,000
600
(300)
48,300
S,
Capital
(20%)
36,000
240
(120)
36,120
732)
732
Problem II
DISCOUNT PARTNERSHIP
Schedule of Partnership Liquidation
January 14, 20x4
Explanation
Cash
Balances before realization
P25,000
Sales of noncash assets
Balances
Payment of liabilities
Balances
Allocation of Hardin's
balance
60,000
85,000
Other Liabilities
Assets
P120,000
P(40,000
(120,000)
0
Capital Balances
Dawson
Feeney
Hardin
P(31,000
P(9,000
P(65,000
______
(40,000
18,000
(13,000
24,000
(41,000
18,000
9,000
(40,000
45,000
__________
0
40,000
0
________
(13,000
________
(41,000
________
9,000
______
45,000
__________
0
______
0
3,857
(9,143
5,143
(35,857
(9,000
0
(45,000 __________
0
P
0
______
P
0
9,143
0
35,857
P
0
________
P
0
debit
Balances
Distribution of cash to partners
Balances
P
P
Problem III
1.
CDG Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on December 10, 20X6
Noncash
Downloaded by qwer ty (ryeupicy@ruru.be)
Carlos
Capital Balances
Dan
Gail
lOMoARcPSD|28427881
Cash
Preliquidation balances
Sale of assets and distribution
of P215,000 loss
Cash contributed by Gail to
extent of positive net worth
Assets
Liabilities
20%
40%
40%
25,000
475,000
(270,000)
(120,000)
(50,000)
(60,000)
260,000
285,000
(475,000)
-0-
(270,000)
43,000
(77,000)
86,000
36,000
86,000
26,000
25,000
310,000
-0-
(270,000)
(77,000)
36,000
(25,000)
1,000
Distribution of deficit of
insolv ent partner:
20/60(P1,000)
40/60(P1,000)
(1,000)
333
310,000
Contribution by Dan to
remedy deficit
Payment to creditors
Payment to partner
Post-liquidation balances
-0-
(270,000)
(76,667)
36,667
667
36,667
-0-
(36,667)
346,667
-0-
(270,000)
(76,667)
-0-
-0-
(270,000)
76,667
-0-
270,000
-0-
(76,667)
-0-
-0-
-0-
-0-
(76,667)
-0-
76,667
-0-
-0-
-0-
2.
CDG Partnership
Net W orth of Partners
December 10, 20X6
Carlos
Personal assets, excluding
partnership capital interests
Personal liabilities
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6
Contribution to partnership
Liquidating distribution from partnership
Net worth, December 10, 20X6
Dan
Gail
250,000
(230,000)
300,000
(240,000)
350,000
(325,000)
20,000
60,000
(36,667)
-023,333
25,000
(25,000)
-0-0-
76,667
96,667
This computation assumes that no other events occurred in the 10-day period that changed any
of the partners’ personal assets and personal liabilities. In practice, the accountant must be sure
that a computation of net worth is current and timely.
The table shows the effects of the transactions between the partnership and each partner. A
presumption of this table is that the personal creditors of Dan or Gail would not seek court action
to block the settlement transactions with the partnership. Upon winding up and liquidation, the
partnership does not have any priority to the partner’s personal assets. Thus, the per sonal
creditors may seek to block the transactions with the partnership in order to provide more
resources from which they can be paid. A partner who fails to remedy his or her deficit can be
sued by the other partners who had to make additional contribut ions or even by a partnership
creditor if the failed partner is liable to the partnership creditor. But those claims are not superior
to the other claims to the partner’s individual assets.
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When accountants provide professional services to partnerships a nd to its partners, the
accountant should expect, at some time, legal suits involving the partnership and/or individual
partners. A strong and thorough understanding of the legal and accounting foundations of
partnerships will be very important to that accountant.
Problem IV
Cash
Beginning balances
Liquidation expense
Sale of non-cash assets
Payment of liabilities
Contribution by Flowers
Allocation of Flower's
Distribution to partners
Ending balances
Noncash
Assets
Liabilities
P200,000
P165,000
P 25,000
(20,000)
160,000
(165,000)
10,000
(200,000)
(10,000)
0
Capital and Loan Balances
Merz
Dechter Flowers
P 40,000
(8,000)
(16,000)
P30,000
(8,000)
(16,000)
P(10,000)
(4,000)
(8,000)
(6,000)
(10,000)
0
(6,000)
0
0
10,000
12,000
0
0
(165,000)
0
0
Problem V
Beginning:
Payment of liabilities
Cramer/Bower pay in
from personal worth
to cover
deficit balances:
Payment of liabilities
Allocation of
deficit balances:
Able paid:
Cash
P20,000
(20,000)
P
0
Liabilities
P(30,000)
20,000
P(10,000)
Able
P(10,000)
Bower
P5,000
Cramer
P15,000
P(10,000)
P5,000
P15,000
12,000
P12,000
(10,000)
P 2,000
________
P(10,000)
10,000
P
0
________
P(10,000)
(2,000)
P3,000
(10,000)
P 5,000
P(10,000)
P3,000
P 5,000
______
P 2,000
(2,000)
P
0
________
P
0
8,000
P (2,000)
2,000
P
0
(3,000)
P
0
(5,000)
P
0
P
P
P
0
Problem VI
Answer:
Cash
70,000
Arthur, Capital
6,000
Baker, Capital
15,000
Casey, Capital
9,000
Other Assets
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.
Trade Accounts Payabl e
Cash
To record payment of liabilities.
65,000
Arthur, Capital
Loan Receivable from Arthur
20,000
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0
100,000
65,000
20,000
0
lOMoARcPSD|28427881
To offset Arthur's loan account against Arthur's capital
account.
Arthur, Capital
Loan Payabl e to Baker
Casey, Capital
Cash
To record payments to partners, computed as follows:
Arthur
P70,000
Capital account balances
Add: Loan payable to Baker
Less: Loan receivable from Arthur
Loss on realization of assets,
P30,000
Balances
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio
Cash paym ents
14,000
20,000
1,000
35,000
Baker
P80,000
30,000
Casey
P55,000
(6,000)
P44,000
(15,000)
P95,000
(9,000)
P46,000
(30,000)
P14,000
(75,000)
P20,000
(45,000)
P 1,000
(20,000)
Multiple Choice Problems
1. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000)
2. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000
3. c
4. a - Phil (P35,000 + P10,000); Harry P28,000; Bill (P27,000 - P5,000)
5. c - Rick P46,000; Mary (P39,000 - P15,000); Fran (P29,000 + P10,000)
6. d - P50,000 - (P15,000 - P9,500)(.25)
7. b - P45,000 - (P15,000 - P9,500)(.30)
8. a - P108,000 + [P10,000 - (P25,000 - P18,000)](.55)
9. c - P62,000 + [P10,000 - (P25,000 - P18,000)](.20)
10. b
11. c
12. d
13. c
Vulnerability ranks:
Lang equity (P70,000 - P40,000)/.25 = P120,000 = 1
Maas equity (P80,000 + P50,0000/.25 = P520,000 = 3
Neal equity (P150,000/.5)
= P300,000 = 2
Assumed loss absorption:
Equities
Loss to eliminate
Lang
Loss to eliminate
Neal
25%
Lang
30,000
P
(
30,000 )
0
P
25%
Maas
130,000
P
50%
Neal
150,000
P
Total
310,000
(
P
30,000 )
100,000
(
P
60,000 )
90,000
(
P
120,000 )
190,000
(
P
45,000 )
55,000
(
P
90,000 )
0
(
P
135,000 )
55,000
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14.
c
Profit ratio
Prior capital
Loss on sale
of inventory
15.
a
Prior capital
Loss on sale
of inventory
Allocate Charles'
capital deficit:
JJ = .40/.50
TT = .10/.50
JJ
CC
TT
Total
40%
50%
10%
100%
(160,000)
(45,000)
(55,000)
(260,000)
24,000
(136,000)
30,000
(15,000)
6,000
(49,000)
60,000
(200,000)
(160,000)
(45,000)
(55,000)
(260,000)
72,000
(88,000)
90,000
45,000
18,000
(37,000)
180,000
(80,000)
9,000
(28,000)
(80,000)
(45,000)
36,000
(52,000)
16. c – (P234,000 – P434,000) x 20% = P40,000
17. b
T
Capital before realization
40,000
Loss on sale (85,000 – 33,000)
(26,000)
14,000
Additional loss (5:2)
(4,000)
10,000
-0-
D
10,000
(15,600)
( 5,600)
5,600
H
15,000
(10,400)
4,600
( 1,600)
3,000
D
10,000
(19,170)
( 9,170)
9,170
H
15,000
(12,780)
2,220
(2,620)
( 400)
400
18. a
Capital before realization
Loss on sale (85,000 – 21,100)
Additional loss (5:2)
Additional loss
T
40,000
(31,950)
8,050
(6,550)
1,500
( 400)
1,100
19. b
Capital before realization
Liquidation expenses
Loss on sale (300 - 180)
Additional loss (2:4)
K
60,000
(2,000)
(24,000)
34,000
( 4,000)
30,000
L
40,000
( 4,000)
(48,000)
(12,000)
12,000
H
80,000
(61,000)
19,000
( 4,000)
I
110,000
(122,000)
(12,000)
12,000
M
80,000
( 4,000)
( 48,000)
28,000
( 8,000)
20,000
20. d
Capital before realization
Loss on sale (2:4:4)
Additional loss (2:4)
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J
140,000
(122,000)
18,000
( 8,000)
Total
330,000
(305,000)
25,000
lOMoARcPSD|28427881
15,000
10,000
21. d – [(P240,000 – P96,000) /30% = P480,000]
22. a
Capital before realization – C
Liquidation expenses (12,000 x 50%)
Share on loss on realization
Capital balance after realization
130,000
(6,000)
(132,000)
( 8,000)
Total loss on realization: P132,000/50%
Non-cash assets
Proceeds
(264,000)
434,000
170,000
23. b
Capital before realization
Loss on sale (4:2:2:2)
Possible insolvency loss (4:2:2)
Safe payments
Ding
60,000
(52,800)
7,200
( 4,700)
2,500
Laurel
67,000
( 26,400)
40,600
( 2,350)
38,250
Ezzard
17,000
(26,400)
( 9,400)
( 9,400)
0
Tillman
96,000
(26,400)
69,600
( 2,350)
67,250
Total
240,000
(132,000)
108,000
-0108,000
24. e – refer to No. 23
25. b
Capital before realization
Loss on sale (30:45:25); [200 – 150]
Gonda
60,000
(15,000)
45,000
Herron
70,000
( 22,500)
47,500
Morse
40,000
(12,500)
27,500
Total
170,000
(50,000)
120,000
S
40,000
________
40,000
(32,000)
8,000
(1,750)
6,250
_______
6,250
D
15,000
_______
15,000
( 19,200)
( 4,200)
( 1,050)
( 5,250)
5,250
F
5,000
5,000
10,000
(12,800)
( 2,800)
2,800
Total
60,000
5,000
65,000
(64,000)
1,000
0
1,000
5,250
6,250
26. c
Capital
Loan
Total interests
Loss on sale (5:3:2) - [90,000 – 26,000]
Possible insolvency (5:3)
Additional investment
27. b
28. a –
Since the partnership currently has total capital of P350,000, the P150,000 that is available
would indicate maximum potential losses of P200,000 that is hypothetically split among the
partners.
White
Sands
Luke
Total
Capital before realization
50,000
100,000
200,000
350,000
Loss on sale (30:20:50); [350 – 150]
(60,000)
( 40,000)
(100,000)
(200,000)
(10,000)
60,000
100,000
150,000
Possible insolvency (2:5)
10,000
(2,857)
(7,143)
0
Safe payments
57,143
92,857
150,000
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29. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below)
Revaluation entry:
Accum ulated depreciation
Gym , capital
Hob, capital
Ing, capital
3,000
1,000
1,000
1,000
Withdrawal of equipm ent:
Accum ulated depreciation (8,000 – 3,000)
Hob, capital
Equipm ent
5,000
13,000
18,000
30. b –
Accumulated depreciation
70,000
K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000
Machinery, at cost
150,000
Rice [P110,000 – (P150,000 – P70,000)] x 1/3
10,000
Long [P110,000 – (P150,000 – P70,000)] x 1/3
10,000
31. c
Capital before realization
Loss on sale (35%:35%:30%)
X
90,000
(42,000)
48,000
Y
60,000
(42,000)
18,000)
Z
30,000
(36,000)
( 6,000)
Total
180,000
*(120,000)
60,000
B
25,000
(45,000)
(20,000)
(20,000)
P
110,000
( 30,000)
80,000
( 5,714)
74,286
( 4,286)
70,000
L
100,000
(15,000)
85,000
( 2,857)
82,143
( 2,143)
80,000
S
65,000
(60,000)
5,000
(11,429)
( 6,429)
6,429
* balancing figure – t ot al reduct ion in capit al
Quiz - IV
1. Zero/nil
Capital before realization
Loss on sale (3:2:1:4))
Additional loss (2:1:4)
Additional loss (2:1)
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Zero/nil – refer to No. 1
Page, P70,000 and Larry, P80,000 – refer to No. 1
P39,525 = P42,000 - (P15,000 - P9,500)(.45)
P56,750 = P56,000 + [P10,000 - (P25,000 - P18,000)](.25)
P(1,000) = P20,000 - [P30,000 + (P50,000 - P90,000)](.30)
P(1,500) = P30,000 - [P30,000 + (P50,000 - P90,000)](.45)
P(2,500) = P15,000 - [P30,000 + (P50,000 - P90,000)](.25)
P340,000 = (P147,000 + P28,000)/.35
P1,040,000 = (P260,000 / .25)
Abrams and Creighton
A
Capital before realization
Liquidation expenses
Loss on sale (134 - 434)
80,000
(3,600)
(90,000)
(13,600)
B
90,000
(2,400)
(60,000)
27,600
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C
130,000
(6,000)
(300,000)
(176,000)
lOMoARcPSD|28427881
12. Tom, P30,000; Dick, P4,000 and harry, P11,000
T
Capital before realization
40,000
Loss on sale (85,000 – 65,000)
(10,000)
30,000
D
10,000
(6,000)
4,000
H
15,000
(4,000)
11,000
L
40,000
( 4,000)
(48,000)
(12,000)
12,000
M
80,000
( 4,000)
( 48,000)
28,000
______
28,000
13. P34,000
K
60,000
(2,000)
(24,000)
34,000
_____
34,000
Capital before realization
Liquidation expenses
Loss on sale (300 - 180)
Additional investment
14. P25,000
Cash, beginning
Payment of liquidation expenses
Payment of liabilities
Payment to partners
P90,000
( 5,000)
( 60,000)
P25,000
15. P15,000
B
25,000
(60,000)
(35,000)
(35,000)
15,000
Capital before realization
Loss on sale (4:2:1:3)
Additional loss (2:1:3)
P
110,000
( 30,000)
80,000
(11,667)
68,333
L
100,000
(15,000)
85,000
( 5,833)
79,167
S
65,000
(45,000)
20,000
(17,500)
2,500
16. P2,500 - refer to No. 15
17. Page, P68,3333 and Larry, P79,167 – refer to No.15
18. Bond: P225,000; Hamm: P115,000; Zell: P –0–
Bond’s capital balance .................................................
Less: Bond’s share of P140,000 loss in liquidation
(P140,000 × 50%) ............................................................
____
P300,000
(70,000)
___________________ P230,000
Less: Bond’s share of Zell’s capital deficiency of
P8,000 (5/8 of P8,000)............................................................
( 5,000)
P225,000
19. Alexa: P25,000; Bell: P75,000; Graham: P–0–
20. Jody, P5,200; Kane, P64,800; Lark, P10,000
Balance, May 1
Plant sold
Inv entory sold
Balances before
distribution
Offset loans
Pay creditors
Partner equity
Possible loss:
Plant assets
(
(
(
Assets
250,000
10,000
6,000)
254,000
26,000)
88,000) (
140,000
60,000 )
(
30%
Jody
32,000
3,000
1,800 )
(
33,200
10,000 )
Debts
88,000
88,000
45%
Kane
90,000
4,500
2,700 )
(
(
25%
Lark
40,000
2,500
1,500 )
(
41,000
16,000 )
91,800
88,000 )
23,200
(
18,000 )
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91,800
(
27,000 )
25,000
(
15,000 )
lOMoARcPSD|28427881
Distribution
80,000
5,200
64,800
10,000
(Cash Distribution: P54,000 + P54,000 + P60,000 - P88,000 = P80,000)
May 1 Inv entory Plant Creditors May 30
21. Oak, P0; Nebe, P0; and Pang, P11,000
NonCash
Cash
Assets
Jan 1 Balance
3,000
33,000
Sale of assets
17,000
( 15,000
Subtotal
20,000
18,000
First
Rank
Debt
9,000
)
9,000
30%
Oak
Equity
2,000
600
2,600
20%
Nebe
Equity
4,000
400
4,400
50%
Pang
Equity
21,000
1,000
22,000
Safe Payments Schedule
Oak
Equity
2,600
( 5,400
( 2,800
2,800
0
Partners’ pre-distribution balances
Possible losses on non-cash assets
Write off Oak 2/7 and 5/7
Cash distribution to partners
Nebe
Equity
4,400
) ( 3,600
)
800
(
800
0
Pang
Equity
22,000
) ( 9,000
13,000
) ( 2,000
11,000
)
)
Cash distribution plan on October 31:
First P9,000 goes to priority creditors, and then Pang receives P11,000.
22. Ide, P0; Hanly, P0; Jen, P92,000
Balance, Aug. 1
Ide’s personal
contribution
Ide
Capital
(
60,000
Cash
50,000
40,000
90,000
40,000
( 20,000
20,000
0
Write-off Ide
90,000
Hanly’s personal
contribution
)
)
(
(
2,000
92,000
(
92,000
(
92,000
0
Jen
Capital
106,000
4,000
7,500
3,500
106,000
12,500
93,500
1,500
1,500
0
)
Theories
Completion Statements
1. a. partnership creditors other than partners
2.
)(
)
Total
50,000
40,000
90,000
)
90,000
2,000
Write-off Hanly
Distribute cash
Hanly
Capital
4,000
b. partners’ loans—if subordinated
c. partners’ capital
statement of realization and liquidation
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2,000
)
(
(
93,500
1,500
92,000
92,000
0
92,000
)
92,000
) (
92,000 )
0
lOMoARcPSD|28427881
3.
4.
5.
6.
7.
schedule of safe payments
marshalling of assets
rule of setoff
legal recourse against
bringing the capital balances into the profit and loss ratio
True or False
8. True
9. False
10. False
11. False
12. True
13.
14.
15.
16.
17.
True
False
False
True
True
18.
19.
20.
21.
22.
False
True
True
False
True
23.
24.
25.
26.
27.
False
True
False
True
True
28.
29.
30.
31.
32.
True
False
False
False
False
33.
34.
35.
True
True
False
Note for the following numbers:
9.
The accountant is liable if he/she fails to meet the fiduciary responsibility of protecting the
creditors’ interest during the liquidation process.
10.
The amount of cash distributed to each partner is a function of the capital balances and the profit
and loss ratios. It is unlikely that partners will receive the same amount of cash.
11.
Partnership creditors have priority claims against partnership assets and partner creditors have
priority claims against partner assets.
14.
Partner creditors have claims first against partner assets. They can also have a claim against
partnership assets to the extent of the partner’s equity in the partnership.
15.
The accountant has a fiduciary responsibility to the partnership’s creditors to ensure that sufficient
assets exist to pay the creditors. It does not mean that creditors must be fully paid before any
partner distributions occur.
18.
Gains and losses realized during the liquidation process are generally allocated using the residual
profit and loss ratio. Other profit and loss allocation components are not considered because
these items are generally relevant to the partnership’s operatio n and the current issue is the
partnership’s liquidation.
21.
This is called an installment liquidation
23.
This document is called a Statement of Realization and Liquidation.
25.
The Statement of Realization and Liquidation does not include income stateme nt accounts. All
income statement amounts are allocated directly to partnership equity.
Multiple Choice Theories
36. A
41. b
37. A
42. d
38. C
43. b
39. D
44. d
40. C
45. b
46.
47.
48.
49.
50.
c
a
c
d
b
51.
52.
b
a
Chapter 5
Problem I
1.
A, B, C and D Partnership
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Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Cash
Balances before
Liquidation
January
- Realization
- Payment of
expenses
- Payment
of liabilities
Balances after Jan
February
- Realization
- Payment of
expenses
- Payment
of liabilities
Balances before
payment to
partners
Payment to
Partners (Sch. 1)
Balances after
February
March
- Realization
- Payment of
expenses
Balances before
payment to
partners
Payment to
Partners (Sch. 2)
Balances after
March
April
- Realization
- Payment of
expenses
Balances before
payment to
partners
Payment to
Partners (Note 1)
Balances after
April
May
- Realization
- Payment of
expenses
Balances before
Offsetting
Offset deficit v s.
Loan
Balances before
payment
Payment to
Partners (Note 2)
NonCash
Assets
Liabilities
181,800
72,000
84,000
A,
loan
6,000
D, loan
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
3,000
26,400
25,800
20,400
16,200
(7,200)
(3,600)
(3,600)
(3,600)
( 480)
( 240)
( 240)
( 240)
______
18,720
______
21,960
______
16,560
______
12,360
(3,360)
(1,680)
(1,680)
(1,680)
( 528)
( 264)
(90,000)
(1,200)
(66,000)
4,800
______
91,800
21,600
(30,000)
(66,000)
18,000
_____
6,000
_____
3,000
(1,320)
______
______
______
_______
( 264)
______
( 264)
______
61,800
6,000
3,000
14,832
20,016
14,616
10,416
( 5,280)
______
______
_____
______
(5,280)
______
_____
1,800
61,800
6,000
3,000
14,832
14,736
14,616
10,416
19,200
(24,000)
(1,920)
( 960)
( 960)
( 960)
( 1,440)
______
______
_____
( 576)
( 288)
( 288)
( 288)
19,560
31,500
6,000
3,000
12,336
13,488
13,368
9,168
(18,360)
______
(2,736)
(3,000)
(5,688)
(5,568)
(1,368)
1,200
37,800
3,264
12,336
7,800
7,800
7,800
6,000
(19,800)
(5,520)
(2, 760)
(2,760)
(2,760)
(4,800)
______
(1,920)
( 960)
( 960)
( 960)
2,000
15,000
3,264
4,896
4,080
4,080
4,080
(1,500)
______
( 720)
( 360)
( 360)
( 360)
500
18,000
2,554
4,896
3,720
3,720
3,720
2,400
(18,000)
(6,240)
(3,120)
(3,120)
(3,120)
(18,000)
_______
7,080
(18,000)
( 960)
_____
( 384)
( 192)
( 192)
( 192)
1,440
2,554
( 1,728)
408
408
408
______
(1,728)
1,728
_____
______
_____
2,040
816
408
408
408
(2,040)
(816)
(408)
(408)
(408)
2.
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lOMoARcPSD|28427881
A, B, C and D Partnership
Schedule of Safe Payments
Schedule 1 – February 28, 20x4
Computation of Distribution of Cash on February 28, 20x4
Balances before payment to partners:
Loans
Capital
Total Interest
Restricted interest for possible losses:
Unrealized non-cash assets
Cash withheld
P 61,800
1,800
P 63,600
Restricted for possible insolv ency of A (2:2:2)
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
6,000
14,832
20,832
20,016
20,016
14,616
14,616
3,000
10,416
13,416
(12,720)
7,296
(1,536)
5,760
( 420)
5,340
( 60)
5,280
(12,720)
1,896
(1,536)
360
( 420)
( 60)
60
(12,720)
696
(1,536)
( 840)
840
(25,440)
( 4,608)
4,608
Restricted for possible insolv ency of D (2:2)
Restricted for possible insolv ency of C
Payment to partner (s)
Applied to:
Loans
Capital
-05,280
5,280
Schedule 2 – March 31, 20x4
Computation of Distribution of Cash on March 31, 20x4
Balances before payment to partners:
Loans
Capital
Total Interest
Restricted interest for possible losses:
Unrealized non-cash assets
Cash withheld
P 37,800
1,200
P 39,000
Applied to:
Loans
Capital
A,
capital
(40%)
B,
capital
(20%)
C,
capital
(20%)
D,
capital
(20%)
6,000
12,336
18,336
13,488
13,488
13,488
13,488
3,000
9,168
12,168
(15,600)
2,736
( 7,800)
5,688
( 7,800)
5,568
( 7,800)
4,368
2,736
___-02,736
-05,688
5,688
-05,568
5,568
3,000
1,368
4,368
W,
capital
(20%)
Total
3.
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests
Balances before
liquidation:
Loans
Capital
T,
capital
(40%)
U,
capital
(20%)
V,
capital
(20%)
W,
capital
(20%)
6,000
26,400
25,800
20,400
3,000
16,200
T,
capital
(40%)
Payments
U,
capital
(20%)
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V,
capital
(20%)
lOMoARcPSD|28427881
Total Interests
Div ided by: P & L %
Loss Absorption
Abilities
Priority I
32,400
__40%
25,800
___20%
20,400
__20%
19,200
__20%
81,000 129,000
102,000
96,000
______ (27,000)
_______
_______
81,000 102,000
102,000
96,000
Priority II
______
( 6,000)
( 6,000)
_______
81,000
96,000
96,000
96,000
Priority III
______ (15,000)
(15,000)
(15,000) _______
81,000
81,000
81,000
81,000
____-0* also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.
5,400
5,400
1,200
1,200
3,000
9,600
3,000
4,200
2,400
3,000
3,000
9,000
16,800
4.
Total Interests
Divided by: P & L %
Loss Absorption
Abilities
Order of Cash Distribution
Vulnerability Rankings (1
Is most vulnerable)
T, capital
(40%)
P 32,400
____40%
U, capital
(20%)
P 25,800
____20%
V, capital
(20%)
P 20,400
____20%
W, capital
(20%)
P 19,200
____20%
P 81,000
(4)
P129,000
(1)
P 102,000
(2)
P 96,000
(3)
(1)
(4)
(3)
(2)
The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity
were reduced to zero with a partnership liquidation loss of P81,000. Partner U is least
vulnerable because his equity is sufficient to absorb his share of liquidation losses up to
P129,000. This interpretation helps explain why partner U received all the cash distributed to
partner on the first installment distribution (August 20x4).
Incidentally, the cash priority program developed will yield the same cash payment as the
process of computing safe payments each time cash is available. The cash distribution
under the cash priority program is as follows:
Order of Cash Distribution
1. First P70,000
2. Next P 4,500
3. Next P2,000
4. Next P7,500
5. Remainder
Creditors
100%
T
U
V
W
40%
100%
50%
33 1/3%
20%
50%
33 1/3%
20%
33 1/3%
20%
The first P84,000 available is, of course paid to the creditors. Cash may be held back from
distribution if it is anticipated that additional expenses will be incurred and unrecorded
liabilities will be discovered. The distribution of cash in excess of the reserve amount
proceeds as determined. Partner U will receive all of an additional ash up to P5,400.
Additional cash in excess of P5,400 and up to P7,800 is distributed 50:50 to partners U and V.
Any amount in excess of P7,800up to P16,800 is distributed 1: 1: 1 to partners U, V, and W,
respectively. After P16,800 (P5,400 + P2,400 + P9,000) has been distributed to the partners,
the capital accounts are in the desired profit and loss ratio of 4:2:2:2. Any further distributions
to the partners are made in accordance with the profit and loss ratio.
Even though both methods produce the same results, the cash payment priority program is
more informative to both personal and partnership creditors, and to the partners. Interested
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lOMoARcPSD|28427881
parties now know the order in which the individual partners will receive cash and the
amounts that each may receive at each period of the distribution process.
One requirement that must be satisfied in the development of the advance plan is that the
partners must share income in the same ratio that they share losses. If this were not the case
the potential amount of a new loss would need to be computed after every allocation to
the partners’ capital accounts. This occurs because the allocation of liquidation gain alters
the order of cash distribution computed in the priority program.
Problem II
ABC Partnership
Statement of Partnership Realization and Liquidation
For the period from January 1, 20x4, through March 31, 20x4
Capital Balances
Other
Accounts
AA
BB
Cash
Assets
Payable
50%
30%
Balances before Liquidation,
18,000
307,000
(53,000)
(88,000)
(110,000)
January 1,20x4
January transactions:
1. Collection of accounts
receiv able at a loss
of P15,000
51,000
(66,000)
7,500
4,500
2. Sale of inv entory at a loss
38,000
(52,000)
7,000
4,200
of P14,000
3. Liquidation expenses paid
(2,000)
1,000
600
4. Share of credit memorandum
3,000
(1,500)
(900)
5. Payments to creditors
(50,000)
50,000
55,000
189,000
-0(74,000)
(101,600)
Safe payments to partners
(Schedule 1)
(45,000)
__
26,600
10,000
189,000
-0(74,000)
(75,000)
February transactions:
6. Liquidation expenses paid
(4,000)
__
2,000
1,200
6,000
189,000
-0(72,000)
(73,800)
Safe payments to partners
(Schedule 2)
-0__
___ -0-06,000
189,000
-0(72,000)
(73,800)
March transactions:
8. Sale of M&Eq. at a loss of
146,000
(189,000)
21,500
12,900
P43,000
9. Liquidation expenses paid
(5,000)
2,500
1,500
147,000
-0-0(48,000)
(59,400)
10. Payments to partners
(147,000)
48,000
59,400
Balances
at
end
of
liquidation, March 31, 20x4
-0-
-0-
-0-
ABC Partnership
Schedules of Safe Payments to Partners
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-0-
-0-
CC
20%
(74,000)
3,000
2,800
400
(600)
(68,400)
18,400
(50,000)
800
(49,200)
-0(49,200)
8,600
1,000
(39,600)
39,600
-0-
lOMoARcPSD|28427881
Schedule 1: January 31, 20x4
Capital balances
Possible loss:
Other assets (P189,000) and possible
liquidation costs (P10,000)
Absorption of AA’s potential deficit balance
BB: (P25,500 x 3/5 = P15,300)
CC: (P25,500 x 2/5 = P10,200)
Safe payment, January 31, 20x4
AA
50%
(74,000)
BB
30%
(101,600)
CC
20%
(68,400)
99,500
25,500
(25,500)
59,700
(41,900)
39,800
(28,600)
15,300
Schedule 2: February 27, 20x4
Capital balances
Possible loss:
Other assets (P189,000) and possible
liquidation costs (P6,000)
Absorption of AA’s potential deficit balance:
BB: (P25,500 x 3/5 = P15,300)
CC: (P25,500 x 2/5 = P10,200)
Safe payment, February 27, 20x4
-0-
(26,600)
10,200
(18,400)
(72,000)
(73,800)
(49,200)
97,500
25,500
(25,500)
58,500
(15,300)
39,000
(10,200)
15,300
-0-
10,200
-0-
-0-
Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners.
This is due to the large book v alue of Other Assets still unrealized and the reserv ation of the $6,000 cash
on hand for possible future liquidation expenses.
Problem III: Cash Distribution Plan
PET Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power
PP
EE
Capital Accounts
TT
PP
Profit and loss
percentages
50%
Preliquidation
capital balances
Loss absorption
Power (Capital
balances /
Loss percent)
(110,000)
(150,000)
(120,000)
(110,000)
30,000
(120,000)
(120,000)
Decrease highest LAP
to next highest:
EE
(P30,000 x .30)
EE
30%
TT
20%
(55,000)
(45,000)
(24,000)
(55,000)
9,000
(36,000)
(24,000)
Decrease LAPs
to next highest:
EE
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lOMoARcPSD|28427881
(P10,000 x .30)
TT
(P10,000 x .20)
10,000
(110,000)
3,000
10,000
(110,000)
(110,000)
(55,000)
Summary of Cash Distribution
(If Offer of P100,000 is Accepted)
Accounts
PP
Payable
50%
P106,000
(17,000)
P17,000
(9,000)
(5,000)
Cash av ailable
First
Next
Next
Additional paid
in P&L ratio
(75,000)
P
-0-
______
P17,000
P37,500
P37,500
2,000
(22,000)
(33,000)
EE
30%
TT
20%
P 9,000
3,000
P 2,000
22,500
P34,500
15,000
P17,000
Problem IV
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Preliquidation balances
July:
Assets Realized
Paid liquidation costs
Paid creditors
Safe Payments (Sch. 1)
Cash
6,000
26,500
(1,000)
(17,000)
14,500
(6,500)
8,000
August:
Equipment withdrawn
(allocate P6,000 gain)
Paid liquidation costs
Safe Payments (Sch. 2)
September:
Assets Realized
Paid liquidation costs
Payments to partners
Postliquidation balances
Schedule 1: July 31, 20x4
Capital balances
Noncash
Assets
135,000
Accounts
Payable
(17,000)
(36,000)
99,000
99,000
4,750
500
75,000
(1,000)
76,500
(76,500)
-0-
Capital
EE
30%
(45,000)
TT
20%
(24,000)
2,850
300
1,900
200
17,000
-0-
(49,750)
(41,850)
6,500
(21,900)
-0-
(49,750)
(35,350)
(21,900)
(3,000)
(1,800)
8,800
300
(12,800)
4,000
200
(8.600)
8,600
-0-
(4,000)
(1,500)
6,500
(4,000)
2,500
PP
50%
(55,000)
95,000
-0-
750
(52,000)
95,000
-0-
(52,000)
450
(36,700)
4,000
(32,700)
-0-
-0-
-0-
-0-
10,000
500
(41,500)
41,500
-0-
6,000
300
(26,400)
26,400
-0-
(95.000)
PET Partnership
Schedules of Safe Payments to Partners
PP
50%
(49,750)
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EE
30%
(41,850)
(12,800)
TT
20%
(21,900)
lOMoARcPSD|28427881
Possible loss on noncash assets (P99,000)
Cash retained (P8,000)
49,500
4,000
3,750
(3,750)
Absorption of Pen's potential deficit
EE: P3,750 x .30/.50
TT: P3,750 x .20/.50
29,700
2,400
(9,750)
19,800
1,600
(500)
2,250
-0-
(7,500)
-0-
1,000
(6,500)
(52,000)
47,500
1,250
(3,250)
(36,700)
28,500
750
(7,450)
Absorption of TT’s potential deficit
EE P1,000 x .30/.30
Safe payment
Schedule 2: August 31, 20x4
Capital balances
Possible loss on noncash assets (P95,000)
Cash retained (P2,500)
Absorption of TTs’ potential deficit
PP: P6,700 x .50/.80
EE: P6,700 x .30/.80
1,500
1,000
(1,000)
-0-
(12,800)
19,000
500
6,700
(6,700)
4,188
938
(938)
Absorption of PPs potential deficit
EE: P938 x .30/.30
Safe payment
-0-
2,512
(4,938)
-0-
938
(4,000)
-0-
Problem V
DSV Partnership
Statement of Partnership Realization and Liquidation — Installment Liquidation
From July 1, 20x4, through September 30, 20x4
Capital Balances
Noncash
D
S
V
Cash
Assets
Liabilities
50%
30%
20%
Preliquidation balances, 6/30
50,000
670,000
(405,000)
(100,000)
(140,000)
(75,000)
July, 20x4: Sale of assets and
distribution of P120,000 loss
Liquidation expenses
Payment to creditors
Payments to partners (Sch. 1)
August, 20x4: Sale of assets &
distribution of P13,000 loss
Liquidation expenses
Payments to partners (Sch. 2)
September, 20x4: Sale of
assets
distribution of P70,000 loss
390,000
440,000
(2,500)
437,500
(405,000)
32,500
(22,500)
10,000
(510,000)
160,000
160,000
(405,000)
60,000
(40,000)
1,250
(38,750)
36,000
(104,000)
750
(103,250)
24,000
(51,000)
500
(50,500)
(38,750)
(103,250)
22,500
(80,750)
(50,500)
2,600
(47,900)
500
(47,400)
5,800
(41,600)
14,000
(27,600)
1,600
(26,000)
160,000
(405,000)
405,000
-0-
160,000
-0-
22,000
32,000
(2,500)
29,500
(19,500)
10,000
(35,000)
125,000
-0-
125,000
-0-
6,500
(32,250)
1,250
(31,000)
125,000
-0-
(31,000)
3,900
(76,850)
750
(76,100)
13,700
(62,400)
55,000
65,000
(125,000)
-0-
-0-
65,000
-0-
-0-
35,000
4,000
(4,000)
-0-
21,000
(41,400)
2,400
(39,000)
Allocate D's deficit to S and V
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(38,750)
(50,500)
lOMoARcPSD|28427881
Liquidation expenses
Payments to partners
Postliquidation balances
(2,500)
62,500
(62,500)
-0-
-0-
-0-
-0-
-0-
1,500
(37,500)
37,500
-0-
-0-0-0-
DSV Partnership
Schedule of Safe Payments to Partners
D
50%
Schedule 1, July 31, 20x4:
Capital balances, July 31,
Before cash distribution
Assume full loss of P160,000 on
remaining noncash assets and
P10,000 in possible future
liquidation expenses
Assume D's potential deficit
must be absorbed by S and V:
30/50 x P46,250
20/50 x P46,250
1,000
(25,000)
25,000
-0-
S
30%
V
20%
(38,750)
(103,250)
(50,500)
85,000
46,250
51,000
(52,250)
34,000
(16,500)
(46,250)
27,750
(24,500)
18,500
2,000
2,000
(2,000)
-0-
(22,500)
-0-
(31,000)
(76,100)
(47,400)
67,500
36,500
40,500
(35,600)
27,000
(20,400)
-0Assume V's potential deficit
must be absorbed by S completely
Safe payments to partners
on July 31, 20x4
Schedule 2, August 31, 20x4:
Capital balances, August 31,
before cash distribution
Assume full loss of P125,000 on
remaining noncash assets and
P10,000 in possible liquidation
Expenses
Assume D's potential deficit
must be absorbed by S and V:
30/50 x P36,500
20/50 x P36,500
Safe payments to partners
(36,500)
21,900
-0-
14,600
(5,800)
(13,700)
Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power
D
Profit and loss sharing ratio
Preliquidation capital balances
Loss absorption power (LAP)
capital accounts /
loss sharing percentage
Decrease highest LAP to next
highest LAP:
Decrease S by P91,667
S
Capital Accounts
V
D
50%
(100,000)
(200,000)
(466,667)
(375,000)
91,667
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S
30%
(140,000)
V
20%
(75,000)
lOMoARcPSD|28427881
(Cash distribution: P91,667 x .30)
(200,000)
Decrease LAP to next highest
lev el:
Decrease S by P175,000
Cash distribution: P175,000 x .30)
Decrease V by P175,000
Cash distribution: P175,000 x .20)
(375,000)
(100,000)
27,500
(112,500)
(75,000)
175,000
52,500
175,000
35,000
(200,000)
Decrease LAPs by distributing
cash in the P/L sharing ratio
1.
2.
3.
4.
5.
(375,000)
50%
(200,000)
(200,000)
30%
Summary of Cash Distribution Plan
(Estimated on June 30, 20x4)
Liquidation
Creditors
Expenses
100%
100%
First P405,000
Next P10,000
Next P27,500
Next P87,500
Any additional distributions
in the partners' profit
and loss ratio
(100,000)
(60,000)
20%
D
50%
S
V
100%
60%
40%
30%
20%
b. Confirmation of cash distribution plan
DSV Partnership
Capital Account Balances
June 30, 20x4, through September 30, 20x4
D
S
Profit and loss ratio
50%
30%
Preliquidation balances, June 30
(100,000)
(140,000)
July loss of P120,000 on disposal of assets
and P2,500 paid in liquidation costs
61,250
36,750
(38,750)
(103,250)
July 31 distribution of P22,500 of
av ailable cash to partners (Sch. 1)
First P22,500 of P27,500 layer:
100% to S
22,500
(38,750)
(80,750)
August loss of P13,000 on disposal of
assets and P2,500 paid in
liquidation costs
7,750
4,650
(31,000)
(76,100)
August 31 distribution of P19,500 of
av ailable cash to partners (Sch. 2)
Remaining P5,000 of P27,500 layer
of which P22,500 paid on July 31:
100% to S
5,000
Next $14,500 of P87,500 layer:
60% to S
8,700
40% to V
(31,000)
(62,400)
September loss of P70,000 on disposal of
assets and P2,500 paid in liquidation
Costs
36,250
21,750
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V
20%
(75,000)
24,500
(50,500)
(50,500)
3,100
(47,400)
5,800
(41,600)
14,500
(40,000)
lOMoARcPSD|28427881
5,250
(5,250)
-0-
Distribution of D's deficit
September 30 distribution of P62,500 of
av ailable cash to partners (Sch. 3)
Next P62,500 of P87,500 layer of which
P14,500 paid on August 31:
60% to S
40% to V
Postliquidation balances
(40,650)
3,150
(37,500)
(27,100)
2,100
(25,000)
37,500
-0-
-0-
25,000
-0-
Schedule 1, July 31, 20x4: Computation of P22,500 of cash av ailable to be distributed to partners on
July 31, 20x4:
Cash balance, July 1, 20x4
P 50,000
Cash from sale of noncash assets
390,000
Less: Payment of actual liquidation expenses
(2,500)
Less: Payments to creditors
(405,000)
Less: Amount held for possible
future liquidation expenses
(10,000)
Cash av ailable to partners, July 31, 20x4
P 22,500
Schedule 2, August 31, 20x4: Computation of P19,500 of cash av ailable to be distributed to partners
on August 31, 20x4:
Cash balance, August 1, 20x4
Cash from sale of noncash assets
Less: Payment of actual liquidation expenses
Less: Amount held for possible
future liquidation expenses
Cash av ailable to partners, August 31, 20x4
P10,000
22,000
(2,500)
(10,000)
P 19,500
Schedule 3, September 30, 20x4: Computation of P62,500 of cash av ailable to be distributed to
partners on September 30, 20x4:
Cash balance, September 1, 20x4
Cash receiv ed from sale of noncash assets
Less: Payment of actual liquidation expenses
Cash av ailable to partners, September 30, 20x4
P10,000
55,000
(2,500)
P62,500
Problem VII
Cash distribution program:
First
Next
Next
All over
P 50,000
34,000
48,000
P132,000
Creditors
100%
Ames
40%
Beard
Craig
100%
33 1/3%
20%
66 2/3%
40%
Working paper for cash distributions to partners during liquidation (not required):
Ames
Beard
Craig
Capital balances before liquidation
P60,000
P80,000 P92,000
Income-sharing ratio
4
4
2
Capital per unit of income sharing
P15,000
P40,000 P23,000
Reduce Beard's capital to next highest capital for Craig ______
(17,000) ______
Capital per unit of income sharing
P15,000
P23,000 P23,000
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Reduce Beard's and Craig's capital to Ames's capital
Capital per unit of income sharing
______
P15,000
(8,000)
(8,000)
P15,000 P15,000
Problem VIII
Cash
Quanto, Capital
Rollo, Capital
Simms, Capital
Assets
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.
60,000
5,000
3,000
2,000
70,000
Liabilities
Cash
To record payment to creditors.
30,000
Loan Payabl e to Quanto
Rollo, Capital
Simms, Capital
Cash
To record payment to partners, computed as follows:
9,500
10,500
5,000
30,000
Quanto
Capital (including Quanto's
loan of P10,000)
before liquidation
Loss on realization of assets
Balances
Maximum potential
additional
loss (P5,000 +
P50,000 = P55,000)
divided in 5:3:2 ratio
Cash paym ents
25,000
Rollo
Simms
P42,000
(5,000)
P37,000
P30,000
(3,000)
P27,000
P18,000
(2,000)
P16,000
(27,500)
P 9,500
(16,500)
P10,500
(11,000)
P 5,000
Multiple Choice Problems
1. c
Profit ratio
Prior capital
Loss on sale
of inventory
JJ
CC
TT
Total
40%
50%
10%
100%
(160,000)
(45,000)
(55,000)
(260,000)
24,000
(136,000)
30,000
(15,000)
6,000
(49,000)
60,000
(200,000)
2. a
Capital balances
Loss on sale of assets
(475,000 – 600,000) – 4:4:2
Peter
300,000
Paul
350,000
Mary
400,000
Total
1,050,000
( 50,000)
250,000
(50,000)
300,000
(25,000)
375,000
(125,000)
925,000
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Possible loss for unrealized assets
P1,000,000 – P600,000 = 400,000
3.
4.
160,000
(90,000
160,000
140,000
80,000
295,000
400,000
525,000
d
d
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(77,500 x .20 = 15,500)
Balances
Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000)
(C:70,000 x .20 = 14,000)
Balances
AA
37,000
40%
92,500
BB
65,000
40%
162,500
CC
48,000
20%
240,000
92,500
162,500
77,500
162,500
70,000
92,500
70,000
92,500
92,500
Cash of P20,000 after settlement of liabilities: CC receives first P15,500;
remaining P4,500 split 2/3 to BB and 1/3 to CC
5.
d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and
1/3 to CC.
6.
a If all partners received cash after the second sale, then the remaining 12,000 is
distributed in the loss ratio.
7.
b
Capital before realization
Loss on sale (2:2:1); [90 – 50]
Possible loss P90,000, unrealized NCA
Possible insolvency loss (2:1)
8.
B
65,000
( 16,000)
49,000
(36,000)
13,000
(10,000)
3,000
C
48,000
( 8,000)
40,000
(18,000)
22,000
( 5,000)
17,000
Total
150,000
(40,000)
110,000
90,000
20,000
0
A
37,000
(16,000)
21,000
B
65,000
( 16,000)
49,000
C
48,000
( 8,000)
40,000
Total
150,000
(40,000)
110,000
b
Capital before realization
Loss on sale (2:2:1); [90 – 50]
Possible loss P90,000, unrealized NCA
plus P3,000 = P93,000
Possible insolvency loss (2:1)
9.
A
37,000
(16,000)
21,000
(36,000)
(15,000)
15,000
a
Profit and loss ratio
Capital balances
Loss of P100,000
Remaining equities
(37,200)
(16,200)
16,200
AE
40%
(40,000)
40,000
-0-
(37,200)
11,800
(10,800)
1,000
BT
30%
(180,000)
30,000
(150,000)
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(18,600)
21,400
( 5,400)
16,000
KT
30%
(30,000)
30,000
-0-
93,000
17,000
0
17,000
lOMoARcPSD|28427881
AE will receive nothing; the entire P150,000 will be paid to BT.
10.
11.
12.
13.
c
d
d
c
14. a
Profit and loss ratio
Beginning capital
Actual loss on assets (5:3:2)
Possible loss – unrealized NCA
Safe payments
CC
5/10
80,000
(15,000)
65,000
( 50,000)
15,000
DD
3/10
90,000
(9,000)
81,000
(30,000)
51,000
X
Y
EE
2/10
70,000
(6,000)
64,000
(20,000)
44,000
Total
10/10
240,000
( 30,000)
210,000
( 20,000)
190,000
15. c
Capital before realization
Divided by:
Loss absorption abilities
130,000
50%
260,000
Z
130,000
30%
260,000
100,000
20%
500,000
16. a
The loan payable to AA has the same legal status as the partnership’s other
liabilities. After payment of the loan, then any available cash can be
distributed to the partners using the safe payments computations.
17. a
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce N to D:
(80,000 x .20 = 16,000)
D
72,000
40%
180,000
R
32,000
20%
160,000
N
52,000
20%
260,000
J
24,000
20%
120,000
80,000
____0
S
(10,000)
10,000
0
Total
32,000
0
32,000
18. d – Harding, P6,107; Jones, P12,275
Capital balances
Potential loss from Sandy deficit
Loss to reduce H and J:
(50:35)
Balances
H
20,000
(5,882)
14,118
J
22,000
(4,118)
17,882
(8,011)
6,107
(5,607)
12,275
(13,618)
13,382
Note:
1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may
not be recov ered for purposes of distribution of cash.
2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of
Harding and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program
Capital balances
H
20,000
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J
22,000
S
(10,000)
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Additional contribution
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000)
Balances
Cash available
Less: Priority I to Jones (P19,428 x 35/85)
Less: P& L (50:35)
P18,382
8,000
P10,382
(10,382)
0
20,000
50/85
34,000
0
22,000
35/85
53,429
34,000
19,428
34,000
10,000
P 8,000
P 6,107
P6,107
4,275
P 12,275
19. c
20. b
21. c
Capital before realization
Loan
Total interests
Loss on sale (240,000 – 195,000)
A
70,000
20,000
90,000
(15,000)
75,000
B
30,000
______
30,000
( 15,000)
15,000
C
50,000
______
50,000
(15,000)
35,000
Total
150,000
20,000
170,000
(45,000)
125,000
22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he
is the one entitled to the first priority.
INTERESTS
PAYMENTS______
A
B
C
A
B
C
Total
Balances before realization
Loans… ……………….. P 20,000
Capital… ……………...
70,000 P 30,000 P 50,000
Total interests… … …... P 90,000 P 30,000 P 50,000
Divided by: P&L ratio… ………
1/3
1/3
1/3
Loss absorption ability… …….. P270,000 P 90,000 P150,000
Priority I… ………………………. 120,000
_______ P40,000
P40,000
P150,000 P90,000 P150,000
Priority II… ………………………
60,000
0
60,000 20,000
0 P20,000
40,000
P 90,000 P90,000 P 90,000 P60,000 P
0 P20,000 P80,000
23. d
A
70,000
20,000
90,000
(15,000)
75,000
Payment of loans to partner
(20,000)
55,000
Asset received
______
Payment to partners after payment of loan 55,000
Capital before realization
Loan
Total interests
Loss on sale (240,000 – 195,000)
B
30,000
______
30,000
( 15,000)
15,000
______
15,000
______
15,000
C
50,000
______
50,000
(15,000)
35,000
_____
35,000
(30,000)
5,000
Total
150,000
20,000
170,000
(45,000)
125,000
(20,000)
105,000
(30,000)
75,000
Not e: The requirement is payment to partners aft er outside creditors and loans to partners had been paid, t herefore,
t he payment t o part ners is in s o far as capit al is concerned.
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24. a
Capital balances
Less: Machine, at fair value
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce E to D:
(45,000 x 1/3 = 15,000)
Balances
D
40,000
______
40,000
1/3
120,000
E
90,000
(35,000)
55,000
1/3
165,000
F
30,000
______
30,000
1/3
90,000
120,000
(45,000)
120,000
____0
90,000
25. c
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(170,000 x .10 = 17,000)
Balances
K
59,000
40%
147,500
M
39,000
30%
130,000
B
34,000
10%
340,000
J
34,000
20%
170,000
147,500
130,000
170,000
170,000
____0
170,000
26. c
Capital balances
Divided by: Profit and loss ratio
Loss absorption power
Loss to reduce CC to BB:
(15,000 x .20 = 3,000)
Balances
C
60,000
40%
150,000
P
27,000
30%
90,000
H
43,000
20%
215,000
M
20,000
10%
200,000
150,000
90,000
15,000
200,000
____0
200,000
27. c - the P16,000 available cash can be distributed but should be done under the assumption
that all deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000.
FF and RR, the two partners with positive capital balances, share profits in a 30:20 relationship
(the equivalent of a 60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being
allocated P1,600. The remaining capital balances (P10,600 and P5,400) are saf e capital
balances and those amounts can be immediately distributed.
or, alternatively:
Capital balances
Loan
Total interests
Potential insolvency loss (3:2)
W
(2,000)
______
(2,000)
2,000
J
(5,000)
3,000
(2,000)
2,000
F
13,000
_______
13,000
( 2,400)
10,600
R
7,000
__
7,000
(1,600)
5,400
28. b
Capital balances
Potential loss from A deficit (5:3)
Loss to reduce H and J:
(5:3)
A
(5,000)
5,000
B
18,000
(3,125)
14,875
C
6,000
(1,875)
4,125
(8,750)
6,125
(5,250)
(1,125)
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Total
19,000
0
19,000
(14,000)
5,000
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Possible insolvency loss
(1,125)
5,000
1,125
0
29. a – installment liquidation (refer for more problems in Chapter 5)
P
INTERESTS
Q
R
PAYMENTS
Q
R
P
Balances before realization
Totall interests………... P 70,000 P 50,000 P100,000
Div ided by: P&L ratio…………
20%
40%
40%
Loss absorption abilities……….. P350,000 P125,000 P250,000
Priority I…………………………. (100,000)
0 P20,000
P250,000 P125,000 P250,000
Priority II………………………… (125,000)
(125,000) 25,000
P125,000 P125,000 P125,000 P75,000
___
Total
P20,000
P 4,500
P50,000 75,000
P50,000 P95,000
Cash, beginning
Add (deduct):
Liquidation expenses paid
Payment of liabilities
Proceeds from sale of assets (?)
Payment to partner before payment to Renquist (pri ority I only)
P 90,000
( 8,000)
(170,000)
108,000
P 20,000
30. d – Justice P15,533
Capital balances
Potential loss from Douglass (40:35)
J
23,000
(7,467)
15,533
Z
22,000
(6,533)
15,467
D
(14,000)
14,000
0
Total
31,000
0
31,000
Note:
1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit
may not be recov ered for purposes of distribution of cash.
2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of
Justice and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)
J
Z
Capital balances
23,000
22,000
Additional contribution
0
0
Capital balances
23,000
22,000
Divided by: Profit and loss ratio
40/75
35/75
Loss absorption power
43,125
47,143
Loss to reduce Z to D:
(4,018 x 35/55 = 1,875)
4,018
Balances
43,125
43,125
Cash available
Less: Priority I to Douglass (P4,018 x 35/75)
Less: P& L (40:35)
P31,000
1,875
P29,125
(29,125)
P 1,875
P15,533
P15,533
13,592
P15,467
31. d
D
K
INTERESTS
R
D
PAYMENTS
K
R
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___
Total
D
(14,000)
14,000
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Balances before realization
Loans………………….. P
0 P 10,000 P(20,000)
Capital………………... 170,000 170,000 100,000
Total interests………... P170,000 P180,000 P 80,000
Div ided by: P&L ratio…………
50%
30%
20%
Loss absorption abilities……….. P340,000 P600,000 P400,000
Priority I………………………….
(200,000)
0
P340,000 P400,000 P400,000
Priority II…………………………
(60,000) (60,000)
P340,000 P340,000 P340,000
P60,000
P60,000
18,000
18,000 36,000
P – P 78,000 P18,000 P 96,000
Cash received by the partner Kemp
Add (deduct):
Liabilities paid
Expenses paid
Contingency
Cash, beginning
Proceeds from sale of other assets
P 60,000
250,000
5,000
10,000
(120,000)
P205,000
32. b
T
N
INTERESTS
D
PAYMENTS
N
D
T
Balances before realization
Loans………………….. P
0 P
0 P
0
Capital………………...
22,000 15,500
14,000
Total interests………... P 22,000 P15,500 P 14,000
Div ided by: P&L ratio…………
2/4
1/4
1/4
Loss absorption abilities……….. P 44,000 P62,000 P 56,000
Priority I………………………….
( 6,000)
0
P 44,000 P56,000 P56,000
Priority II…………………………
(12,000) (12,000) __
P 44,000 P44,000 P44,000 P
–
___
Total
P 1,500
P1,500
3,000
P 4,500
P 3,000 6,000
P 3,000 P 7,500
Cash received by Tree
Divided by: P & L ratio
Amount in excess of P7,500
Total cash payments – refer to program
Payment to partners
P
6,250
2/4
P 12,500
7,500
P 20,000
Cash, beginning
Add (deduct):
Proceeds from sale of certain assets
Liquidation expenses paid
Payment of liabilities
Payment to partners (refer to No. 30)
Cash withheld
P 12,000
33. d
32,000
( 1,000)
( 5,400)
( 20,000)
P 17,600
34. d
Priority
Creditors
First P300,000… … … . P300,000
Next P80,000 (7:3)…
Next P70,000 (3:4)…
Remainder*… … …..
Mattews
Norell
P56,000
30,000
22,000
P24,000
34,000
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Reams
P40,000
44,000
Total
P300,000
80,000
70,000
100,000
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P300,000
P108,000
P58,000
P84,000
P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
P
INTERESTS
Q
R
Balances before realization
Loans… ……………….. P 6,000
Capital… ……………... 24,000 P36,000
Total interests… … …... P30,000 P36,000
Divided by: P&L ratio… ………
3/10
3/10
Loss absorption abilities… ….. P100,000 P120,000
Priority I… ……………………….
P100,000 P120,000
Priority II… ………………………
(20,000)
P100,000 P100,000
P(10,000)
60,000
P50,000
4/10
P125,000
(5,000)
P120,000
(20,000)
P100,000
P
PAYMENTS______
Q
R
Total
P 2,000 P 2,000
P6,000
P – P6,000
8,000 14,000 (d)
P10,000 P16,000
35. d
Priority
Creditors
First P300,000… … … . P300,000
Next P80,000 (7:3)…
Next P70,000 (3:4)…
Remainder*… … …..
P300,000
Mattews
P56,000
30,000
22,000
P108,000
Norell
Reams
P24,000
34,000
P58,000
P40,000
44,000
P84,000
Total
P300,000
80,000
70,000
100,000
P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
Quiz - V
1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation pri nciples.
M
K
C
Total
Capital before realization
100,000
175,000
75,000
350,000
Loss on sale (50%:30%:20%)
(162,500)
(97,500)
(65,000)
*(325,000)
( 62,500)
77,500
10,000
**25,000
Additional loss (3:2)
62,500
(37,500)
(25,000)
______40,000
(15,000)
25,000
Additional loss
(15,000)
15,000
-025,000
* balancing figure – t ot al reduct ion in capit al
Payment to partners: P200,000 – P25,000 – P150,000 = P25,000**
2. Homer, P54,000; Marge, P84,000; Bart, P177,000.
3. P150,000
4. Stan, P0; Kenney, P10,000; Cartman, P0
5.
6.
7.
8.
P500,000 = (P147,000 + P28,000)/.35
P1,040,000 = (P260,000 / .25)
P675,000 = (P285,000 - P15,000)/.40
a
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9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000
10.
11. b
12. P33,000
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P 6,000
P24,000
20,000
44,000
10,000
Harold: P6,000 + P24,000 + (P10,000 x .30)
13. P2,500
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P 6,000
P24,000
20,000
44,000
10,000
Sheldon: (P10,000 x .25)
14. P24,500
First allocation (H) (P400,000 - P380,000) (.30)
Second allocation (H) (P380,000 - P300,000) (.30)
(F) (P380,000 - P300,000) (.25)
Third allocation, share based on profit and loss ratios
P 6,000
P24,000
20,000
44,000
10,000
Fred: P20,000 + (P10,000 x .45)
15. P147,000
Losses
Equities
Possible loss on
remaining assets
Contingencies
Subtotals
40%
Hara
135,000
200,000
10,000
Eliminate Jack’s
debit balance
30%
Ives
216,000
(
(
80,000 )
4,000 )
51,000
(
(
60,000 )
3,000 )
153,000
(
8,000 )
(
6,000 )
Safe payments
43,000
147,000
16. P495,000 = (P162,000 + P36,000) / .40
17. c
Capital before realization
Liquidation expenses
Divided by:
Loss absorption abilities
Selling Price
P
70,000
(1,600)
68,400
20%
342,000
Q
50,000
( 3,200)
46,800
40%
117,000
183,000
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R
100,000
( 3,200)
96,800
40%
242,000
30%
Jack
49,000
(
(
(
60,000 )
3,000 )
14,000 )
14,000
0
lOMoARcPSD|28427881
Book value
Loss
300,000
(117,000)
or,
Quincy capital before liquidation… … … … … … … … … … … … … … … … … … ..P 50,000
Less: Share in liquidation expenses (P8,000 x 40%)… … … … … … … … … … .…
3,200
Quincy capital before realization of non-cash assets… … … … … … … … … .P 46,800
Less: Cash received by Quincy (minimum)… … … … … … … … … … … … … … .
0
Share in the loss on realization… … … … … … … … … … … … … … … … … … … … P 46,800
Divided by: Profit and loss ratio… … … … … … … … … … … … … … … … … … … ..
40%
Loss on realization… … … … … … … … … … … … … … … … … … … … … … … … … ..P117,000
Less; Non-cash assets… … … … … … … … … … … … … … … … … … ...................... 300,000
Proceeds from sale… … … … … … … … … … … … … … … … … … … … … … … … … P183,000
18. P29,000
(P14,000 Warle capital + P10,000 Xin capital +
P6,000 Yates capital + P5,000 Loan from Xin P6,000 Loan to Warle)
19. P2,000
(P4,000 beginning balance + P3,000 cash collected + P4,000 for inventory
sold - P7,000 of accounts payable - P2,000 for expenses)
20. P2,000
Warle
8,000
2,000 )
400 )
5,600
Xin
15,000
3,000 )
600 )
11,400
Yates
6,000
5,000 )
1,000 )
0
Total
29,000
10,000 )
2,000 )
17,000
Equities,Jun 30
Inventory loss
Contingency fund
Subtotals
(
(
Possible losses on
remaining assets
Subtotals
(
3,000 )
2,600
(
4,500 )
6,900
(
(
3,000 )
400 )
(
4,500 )
2,400
7,500
0
2,000
400
0
(
400 )
2,000
0
2,000
Eliminate Yates’s
Deficit
Subtotals
Eliminate Warle’s
Deficit
Cash distribution
(
(
(
(
(
(
THEORIES
True or False
1. False
2. True
6.
7.
True
True
11.
12.
False
True
16.
17.
False
True
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7,500 )
7,500 )
(
(
(
15,000 )
2,000
lOMoARcPSD|28427881
3.
4.
5.
False
False
True
8.
9.
10.
False
True
True
13.
14.
15,
False
True
True
Note for the following numbers:
1.
An installment liquidation occurs over an extended period of time and partners generally receive
interim (installment) distributions.
3.
The accountant must ensure that the partnership will have sufficient cash to pay current and
prospective creditors before distributions are made to partners.
4.
It may not be prudent for the accountant to pay creditors as quickly as possible. However, funds
should be set aside so that creditors can be paid in a timely manner.
8.
The size of the capital account must be evaluated in conjunction with the residual profit and loss
ratio to determine which partner is least likely to have a deficit occur during the partnership
liquidation.
11.
The cash distribution plan indicates how a distribution will be allocated among the partners but it
does not guarantee that a distribution will be made.
13.
The loss absorption power indicates the amount of loss the partnership would have to occur before
that partner’s capital account balance is reduced to zero.
16.
The schedule of safe payments can be used for any partnership liquidation but it provides the same
distribution as the cash distribution plan under most circumstances.
Multiple Choice
18. b
19. b
20. a
21. a
22. d
23.
24.
25.
26.
27.
a
d
d
a
d
28.
29.
30.
31.
32.
b
e
a
a
c
33.
34.
35.
36.
37.
b
d
b
a
b
38.
39.
40.
41.
42.
c
d
b
a
b
43.
44.
45.
46.
d
b
c
d
Chapter 6
Problem I
1. Statement of Affairs - Formal
MINER COMPANY
Statement of Affairs
May 31, 2012
Book Value
P 50,000
1,200
119,000
13,200
Assets
Assets Pledged with Fully Secured Creditors:
Notes Receivable
P39,800
Accrued Interest Rec.
1,000
P 40,800
Notes Payable
Accrued Interest Pay.
40,000
800
Building
Note Payable
Accrued Interest Pay.
20,000
800
Realizable
Value
40,800
75,000
20,800
Assets Pledged with Partially Secured Creditors:
Equipment
4,200
Note Payable
10,000
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P 54,200
lOMoARcPSD|28427881
6,000
61,000
60,000
1,100
8,500
Free Assets
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Goodwill
Total Net Realizable Value
Liabilities having Priority – Wages
Taxes
Net Free Assets
6,000
50,000
30,000
400
0
140,600
6,000
2,400
Estimated Deficiency to Unsecured Creditors
53,600
P 185,800
P 320,000
Book
Value
P 6,000
2,400
60,000
1,600
10,000
170,000
10,000
110,000
( 50,000)
P 320,000
Equities
Liabilities Having Priority:
Accrued Wages
Taxes Payable
Fully Secured Creditors:
Notes Payable
Accrued Interest Payable
8,400
132,200
Unsecured
P 6,000
2,400
P 8,400
60,000
1,600
61,600
Partially Secured Creditors:
Note Payable
Equipment
10,000
4,200
P 5,800
Unsecured Creditors:
Accounts Payable
Notes Payable
170,000
10,000
Stockholders’ Equity
Common Stock
Retained Earnings (Deficit)
P 185,800
2. Deficiency Statement to determine estimated deficiency to unsecured creditors:
Estimated Losses:
Accounts Receivable
Notes Receivable
Inventory
Buildings
Equipment
Prepaid Insurance
Goodwill
Deficiency Account
May 31, 2012
Estimated Gains:
P 11,000
Common Stock
10,400
Retained Earnings
30,000
Estimated Deficiency to
44,000
Unsecured Creditors
9,000
700
8,500
P113,600
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P 110,000
(50,000)
53,600
P 113,600
lOMoARcPSD|28427881
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%
Problem II
1. Formal
Down Dog Corporation
Statement of Affairs
June 30, 2014
Book Value
P165,000
3,000
72,000
60,000
______
P300,000
Assets
Pledged with partially secured creditors
Equipment-net
Less: Note payable and accrued interest
Unsecured amount (See below)
Free Assets
Cash
Accounts receiv able-net
Inventories
Total net realizable v alue
Less: Priority liabilities – wages payable
Total av ailable for unsecured creditors
Estimated deficiency to unsecured creditors
Deficiency
Account
Realizable Value (Loss/Gain)
P87,000
(96,000)
(9,000)
3,000
48,000
72,000
123,000
(45,000)
78,000
30,000
P108,000
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(78,000)
P
0
(24,000)
12,000
______
(90,000)
lOMoARcPSD|28427881
Unsecured
Equities
Book Value
P 45,000
96,000
72,000
27,000
180,000
(120,000)
P300,000
Priority liabilities
W ages payable (assumed under
P4,650 per employee)
P 45,000
Partially secured creditors
Note payable and accrued interest
Less: Equipment pledged as security
P 96,000
(87,000)
Unsecured creditors
Accounts payable
Rent payable
Liabilities
P 9,000
72,000
27,000
Stockholders’ equity
Capital stock
Retained earnings (deficit)
180,000
(120,000)
P 60,000
P(30,000)
______
P108,000
Estimated Deficiency
2. Estimated payments per dollar for unsecured creditors
Cash available
Distribution to partially secured and unsecured priority creditors:
Note payable and interest
P87,000
Administrative expenses
24,000
Wages payable
45,000
Available to unsecured nonpriority creditors
P210,000
(156,000)
P 54,000
Note payable and interest (unsecured portion)
Accounts payable
Rent payable
Unsecured nonpriority claims
P 9,000
72,000
27,000
P108,000
(P54,000 / P108,000 = P0.50 per peso)
Expected recovery for each class of claims
Partially secured
Note payable and interest
Secured portion
Unsecured portion (P9,000 × 0.50)
P87,000
4,500
P91,500
Unsecured priority
Administrative expenses
Wages payable
P24,000
45,000
69,000
Unsecured nonpriority
Accounts payable (P72,000 × 0.50
Rent payable (P27,000 × 0.50)
Total payments
P36,000
13,500
Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000)
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49,500
P210,000
P1,275,000
lOMoARcPSD|28427881
Allocated to:
Fully secured creditors
Partially secured creditors
Unsecured creditors with priority
Remainder available to general unsecured creditors
Payment rate to general unsecured creditors
(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300, 000))
(316,000)
(300,000)
(100,000)
P559,000
44.2%
Realizable value of assets:
Assets pledged to fully secured creditors
Assets pledged to partially secured creditors
Free assets
Total realizable value
P635,000
300,000
340,000
P1,275,000
Amounts to be paid to:
Fully secured creditors
Partially secured creditors [P300,000 + (0.442 × P100,000)]
Unsecured creditors with priority
General unsecured creditors (0.442 × P1,165,000)
Total
P316,000
344,200
100,000
514,800*
P1,275,000
*Rounded P130
Problem IV
Free Assets:
Current Assets
P 35,000
Buildings and Equipment ..............................................................
Total
P145,000
Liabilities with Priority:
Administrative Expenses ................................................................
Salaries Payable (only P3,000 per employee) ................................
Income Taxes
8,000
Total
P 34,000
Free Assets After Payment of Liabilities with Priority
(P145,000 – P34,000) .....................................................................
110,000
P 20,000
6,000
P111,000
Unsecured Liabilities
Notes Payable (in excess of value of security) .............................
P 30,000
Accounts Payable ........................................................................85,000
Bonds Payable
70,000
Total
P185,000
Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %
Payment On Notes Payable:
Value of Security (land)
60% of Remaining P30,000
Total Collected by holders
...........................P 90,000
........................... 18,000
...........................P108,000
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lOMoARcPSD|28427881
Problem V
Free Assets:
Cash
..............................................................................
Receivables (30 percent collectible)......................................
Inventory ..............................................................................
Land (value in excess of secured note:
P120,000 – P110,000) .........................................................
Total ..............................................................................
P30,000
15,000
39,000
10,000
P94,000
Less: Liabilities with priority
Salary payable (below maximum)...................................
Free assets available ........................................................
(10,000)
P84,000
Unsecured Liabilities:
Accounts payable ..................................................................
Bonds payable (less secured interest in
building: P300,000 – P180,000)...........................................
Unsecured liabilities ..........................................................
P90,000
120,000
P210,000
Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%
Amounts to be paid for:
Salary payable (liability with priority to be paid
in full) ..............................................................................
Accounts payable (unsecured—will collect 40%
of debts of P90,000) ..........................................................
Note payable (fully secured by land—will collect
entire balance) ................................................................
Bonds payable (partially secured—will collect
P180,000 from building and 40 percent of the
remaining P120,000) ..........................................................
P10,000
P36,000
P110,000
P228,000
Problem VI
Class of Creditors
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities with priority
Unsecured liabilities without
priority
Total Creditor’s
Claims
183,600
54,600
30,810
182,500
Total
Amounts
Expected to
be
Recovered
183,600
51,720
30,810
116,800
Problem VII
1. Total estimated proceeds
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
Mortgage payable and interest (from
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% of Total
Claims
Expected to
be
Recovered
100.0
94.7
100.0
64.0
P910,000
P150,000
lOMoARcPSD|28427881
proceeds of land and building)
Total available to unsecured claimants.
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured claims
2.
3.
320,000
P 10,000
20,000
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims ofunsecured creditors
Dividend to Unsecured Creditors
P410,000 ÷ P640,000 = 64.1%
470,000
P440,000
30,000
P410,000
P380,000
260,000
P640,000
Unsecured portion of notes payable and
Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
P380,000
64.1%
P243,580
150,000
P393,580
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
Problem VIII
1.
WILBUR CORPORATION
STATEMENT OF AFFAIRS
DECEMBER 31, 20x4
Assets
Estimated
Current
Values
Book Value
P 40,000
50,000
110,000
(1) Assets pledged with fully secured
creditors:
Accounts receivable (net)
Less: 10% note payable and
interest
Land
Plant and equipment (net)
Less: Mortgages payable and
interest
20,000
(2) Assets pledged with partially
secured creditors:
Marketable securities
Less: 10% note payable and
interest
Estimated
Amount
Available to
Unsecured
Claims
Estimated
Gain
(Loss) on
Realization
P 40,000
38,500
P 1,500
P 65,000
100,000
P165,000
(157,500)
P 16,000
(20,800)
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P 15,000
(10,000)
7,500
(4,000)
lOMoARcPSD|28427881
35,000
4,000
35,000
55,000
6,000
140,000
48,000
Inventory
Less: Accounts payable
P 32,000
(60,000)
(3) Free assets:
Cash
Accounts receivable (net)
Inventory
Prepaid insurance
Plant and equipment (net)
Franchises
P 4,000
35,000
50,000
1,000
60,000
15,000
(3,000)
4,000
35,000
50,000
1,000
60,000
15,000
Estimated amount available
Less: Creditors with priority
Net available to unsecured creditors
Estimated deficiency
P 174,000
(43,000)
P 131,000
45,000
Total unsecured debt
P 176,000
P 543,000
(5,000)
(5,000)
(80,000)
(33,000)
(P 125,000)
2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%
Problem IX
Assets to be realized
Old Receivebles, net
Marketable Securities
Old Inventory
Depreciable Assets, net
Smith Company
Statement of Realization and Liquidation
Assets
Assets Realized
P 50,000
20,000
72,000
120,000
Assets Acquired
New Receivables
Supplementary Charges
Old Current Payables
Liabilities Liquidated
Old Current Payables
P 28,000
65,000
15,000
100,000
Assets Not Realized
100,000
Old Receivables, net
New Receivables, net
Depreciable Assets
22,000
35,000
96,000
Supplementary Items
Supplementary Credits
P 31,000
Net Loss
P 7,000
Liabilities
Liabilities to be Liquidated
P 31,000
Liabilities Not Liquidated
Old Current Payables
Old Receivbles
New Receivbles
Marketable Securities
Sales of Inventory
Old Current Payables
P 65,000
Liabilities Incurred
P 34,000
P433,000
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________
P 433,000
lOMoARcPSD|28427881
Problem X
Mallory Corporation
Statement of Realization and Liquidation
For the Three Months Ended July 31, 20x5
Assets
Cash
P 4,000
Assets
Beginning balances assigned 5/1/x5
Cash Receipts:
Collection of Accounts Receivable
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts pay.
Partial payment of bank loan
Ending balance
Assets
Beginning balances assigned
Cash Receipts:
Collection of Accounts
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts
Partial payment of bank loan
Ending balance
Fully
Secured
P240,000
Partially
Secured
P270,000
Non-Cash
P720,000
60,000
170,000
20,000
70,000
(70,000)
(200,000)
(340,000)
(100,000)
(60,000)
(170,000)
(70,000)
P24,000
P10,000
Liabilities
Unsecured
With
Without
Priority
Priority
P94,000
P0
(10,000)
(30,000)
(80,000)
(30,000)
(240,000)
________
P
0
Owner's
Equity
P120,000
(60,000)
(180,000)
(90,000) ________
P
0
P34,000
10,000
20,000
P30,000
________
P (30,000)
Multiple Choice Problems
1. d – since there is parent and subsidiary relationship, any intercompany accounts are
eliminated from consolidated point of view.
2. a - [P90,000 + P36,000 + P10,000 – P45,000 = P91,000 total estimated amount available; P91,000
– (P4,500 + P10,000) = P76,500 estimated amount available for unsecu red, non-priority
creditors; P76,500  P90,000 = 0.85]
3. c – it is a partially secured liability
4. d – [(P1,110,000 – P780,000) + P960,000] – P210,000 = P1,080,000
5. b – P25,000 + [.30 x (P75,000 – P25,000)] = P40,000
6. d – (P555,000 – P390,000) + P480,000 = P645,000 – P105,000 = P540,000
7. b – P30,000 + [.30 x (P90,000 – P30,000)] = P48,000
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lOMoARcPSD|28427881
8. c – [ P110,000 + (P150,000 – P110,000) x 40%] = P128,000
9. d
10. c – P60,000 + [(P120,000 + P6,000) – (P30,000 + P35,000) = P121,000
11. b - P20,000 + P80,000 + [P170,000 – (P150,000 + P7,000)] = P113,000 – (P10,000 + P10,000)
= P93,000
12. c – P93,000/P121,000 = 77% rounded.
13. a
Net Free Assets:
(P700,000 – P300,000) + P70,000 + P230,000 = P700,000 – P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 – P300,000) + P600,000 = P700,000
14. c - Pension P10,000 + Salaries P35,000 (= P10,600 + P10,950 + P10,950 + P2,500) + Taxes P80,000
+ Liq. expenses P40,000 = P165,000.
15. c
Statement of Realization and Liquidation
Assets to be Realized…………. P 1,375,000 Assets Realized…………………..P 1,200,000
Assets Acquired………………..
750,000 Assets Not Realized…………… 1,375,000
Liabilities Liquidated………….
1,875,000 Liabilities to be Liquidated…. 2,250,000
Liabilities Not Liquidated…….
1,700,000 Liabilities Assumed………….. 1,625,000
Supplementary charges/
Supplementary credits……… 2,800,000
debits………………………
3,125,000
P 8,825,000
P 9,250,000
Net Gain……………………….. P 425,000
16. No requirement
17. c
Total Liabilities (refer to Liabilities not liquidated–No. 14)… … … … … … … … P1,700,000
+: Stockholders’ Equity (P1,500,000 – P500,000)… … … … … … … … … … … … … 1,000,000
Total LSHE = Total Assets… … … … … … … … … … … … … … … … … … … … … … … P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14)… … … .… … … … … … 1,375,000
Cash balance, ending… … … … … … … … … … … … … … … … … … … … … … … … P1,325,000
18. P440,000
Total Free Assets:
Fully secured:
Land and building: P650,000 – (P300,000 + P20,000) = P 330,000
Free assets:
Cash
10,000
Equipment
100,000
Or,
Total estimated proceeds
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P440,000
P910,000
lOMoARcPSD|28427881
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
Mortgage payable and interest (from
proceeds of land and building)
Total available to unsecured claimants/total free
19. P410,000
Total available to unsecured claimants/total free
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured
claims/net free assets
P150,000
320,000
470,000
P440,000
P440,000
P 10,000
20,000
30,000
P410,000
20. P640,000 = P260,000 + [(P50,000 + P100,000) – (P500,000 + 30,000), or
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims of unsecured creditors
P380,000
260,000
P640,000
21. 64.1%
Dividend to unsecured creditors
P410,000 ÷ P640,000 = 64.1%
22. P320,000 = P300,000 + P20,000
23. P393,580
Unsecured portion of notes payable and
interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
x
P380,000
64.1%
P243,580
150,000
P393,580
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
24. P30,000
25. P166,666 = P260,000 x 64.1
26. P910,247 = P320,000 + P393,580 + P30,000 + P166,666 (discrepancy of P247 due to rounding off)
27. P230,000
Net free assets (No. 19)
P410,000
Less: Unsecured creditors without priority (No. 20)
640,000
P230,000
28. P340,000 = P910,000 – P1,250,000
29. P340,000, same with No. 28, since there are no unrecorded expenses liabilities)
30. P60,675 – you may the same procedure in Nos. 18 to 29 to solve this problem, the following is
the formal presentation of statement of affairs
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lOMoARcPSD|28427881
Book
Value
98,500
5,800
41,000
43,000
1,850
21,200
15,000
_______
226,350
Book
Value
600
70,000
375
10,000
50,000
3,775
40,625
10,000
185,375
40,975
226,350
31.
32.
33.
34.
35.
36.
Estimated
Net
Realizable
Value
Assets
Assets pledged with fully secured
creditors:
Land and Bldg
92,800
Inv estment in Calandir
15,000
Total
107,800
Assets pledged with partially
secured creditors:
Inv entory
20,000
Equipment
8,000
Free Assets:
Cash
1,850
Accounts Rec
17,000
Note Rec
15,000
Estimated Amount Av ail for unsecured creditors
with and without priority
Less unsecured creditors with priority
Estimated amounts for unsecured creditors
without priority (Net Free Assets):
Net Realizable Amount Av ail
Deficiency
_______
169,650
Liabilities
and Owners Equity
Fully Secured Creditors:
Accrued Mtg Interest
Mortgage Payable
Accrued N/P Interest
Note Payable
Total
Partially Secured
Creditors:
Accounts Payable
Unsecured Creditors with
Priority:
Accrued Payroll
Unsecured creditors without
Priority:
Accounts Payable
Other Accrued Liabilities
Totals
Owner Equity
Estimated
Secured
Amount
Estimated Amt
Av ail for
Unsecured
Creditors
Estimated
Gain or
(Loss)on
Liquidation
22,200
4,625
(5,700)
9,200
(21,000)
(35,000)
1,850
17,000
15,000
0
(4,200)
0
60,675
(3,775)
56,900
15,725
72,625
_______
(56,700)
Estimated Unsecured Amount
W ith
W ithout
Priority
Priority
600
70,000
375
10,000
80,975
28,000
22,000
3,775
_______
108,975
3,775
P56,900 – refer to No. 30 for computation
P72,625 – refer to No. for computation
Dividend - P56,900/P72,625 = P.78 – refer to No. 30 for further computation
P80,975 – refer to No. 30 for computation
P45,160 = P28,000 + (P22,000 x 78%)
P3,775
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40,625
10,000
72,625
lOMoARcPSD|28427881
37. P39,487.50 = 78% x (P40,625 + P10,000)
38. P169,397.50
No. 34… … … … … ..P 80.975
No. 35… … … … … .. 45,160
No. 36… … … … … ..
3,775
No. 37… … … … … .. 39,487.50
P169,397.50 (discrepancy around P250 plus due to rounding-off)
39.
40.
41.
42.
P15,725 – refer to No. 30 or P56,700, estimated net loss – P40,975, owners’ equity
P56,700 – refer to No. 30 or P169,650 – P226,350
P56,700 (same with No. 40 since there are no unrecorded expenses liabilities)
P22,475
Liabilities
Unsecured
Assets
Fully
Partial
With Without Owners'
Cash Noncash Secured Secured
Priority
Priority
Equity
6/1/x5 Balances:
1,850
224,500
80,975
50,000
3,775
50,625
40,975
Cash
Receipts:
Securities Sale
16,000
N/R Collected
15,000
Equipment
7,000
Sale
Inventory Sale
22,000
Cash Disbursements:
Bank Loan
(10,375)
Part Pyt-A/P
(29,000)
6/30 Balance
22,475
43.
44.
45.
46.
47.
48.
(5,800)
(15,000)
(43,000)
10,200
0
(36,000)
(41,000)
(19,000)
---------119,700
(10,375)
--------70,600
(50,000)
0
------3,775
21,000
71,625
---------(3,825)
P119,700 – refer to No. 42
P70,600 – refer to No. 42
None – refer to No. 42
P3,775 – refer to No. 42
P71,625 – refer to No. 42
(P3,825) deficit – refer to No. 42
49. P150,900
Book
Value
57,000
174,000
6,000
900
90,000
Estimated
Net
Realizable
Value
Assets
Assets pledged with fully secured creditors:
Accounts receiv able (net)
45,000
Land, plant and equipment (net)
150,000
Total
195,000
Free assets:
Notes receiv able
6,000
Accrued interest receiv able
900
Inv entories (90,000 x 60%)
54,000
Estimated amount av ailable for
unsecured creditors with and
without priority
Estimated
Amount
Av ailable for
Unsecured
Creditor
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Estimated
Gain or
(Loss) on
Liquidation
12,600
77,400
(12,000)
(24,000)
6,000
900
54,000
0
0
(36,000)
150,900
lOMoARcPSD|28427881
Less unsecured creditors with priority
Estimated amounts for unsecured
creditors without priority:
Net realizable amount av ailable
Deficiency
327,900
Totals
(26,900)
124,000
26,000
255,900
150,000
Estimated
Secured
Amount
Book
Value
3,600
69,000
2,400
30,000
24,900
0
Liabilities and Owners' Equity
Fully secured creditors:
Accrued interest
Note payable
Accrued interest
Note payable
Total
Unsecured creditors with priority:
W ages payable
Administration fees – accountant’s
fee
Unsecured creditors without priority:
Accrued interest
Cash ov erdraft
Notes payable
Accounts payable
Totals
Owners' equity--see Note A
Estimated Unsecured
Amount
W ith Priority
W ithout
Priority
3,600
69,000
2,400
30,000
105,000
0
18,000
6,000
126,000
-------279,900
105,000
48,000
327,900
Note A: Includes the effect of the P2,000 professional fee.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
(72,000)
24,900
2,000
-------26,900
0
18,000
6,000
126,000
150,000
P124,000 – refer to No. 49
P150,000–
82.67% = P124,000/P150,000
P105,000
None
P26,900
P124,005 = P150,000 x 82.67%
P255,900 = P72,000 + P26,900 + P124,005 (discrepancy of P5)
P26,000 = (P72,000 + P2,000 unrecorded ) – P48,000 or P150,000 – P124,000
P72,000 – refer to No. 49
P74,000 = P72,000, loss of realization of assets + P2,000 unrecorded expenses
Quiz - VI
1. P96,000
Claims of partially secured creditors ................................................ P 120,000
Current value of assets pledged with these creditors .................
(80,000)
Deficiency that is unsecured............................................................... P 40,000
Claims of other unsecured creditors .................................................
360,000
Total unsecured creditors claims ..................................................... P 400,000
Amount available to unsecured creditors:
Excess left over after paying fully secured creditors
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lOMoARcPSD|28427881
(P195,000 – P150,000)..........................................................................
Current value of free assets (net of P45,000 to
creditors with priority) .........................................................................
Amount available to unsecured creditors ....................................
Settlement to unsecured claims per dollar (P160,000/P400,000)..................
Total distribution to partially secured creditors:
Current value of assets pledged ................................................................
Deficiency of P40,000 × P.40 .......................................................................
P 45,000
115,000
P160,000
P
.40
P 80,000
16,000
P 96,000
2. P144,000 = P360,000 x 40%
3. P56,000
Claims of partially secured creditors ................................................
Current value of assets pledged with these creditors .................
Deficiency that is unsecured...............................................................
Claims of other unsecured creditors .................................................
Total unsecured creditors claims .....................................................
Amount available to unsecured creditors:
Excess left over after paying fully secured creditors
(P300,000 – P250,000)..........................................................................
Current value of free assets (net of P60,000 to
creditors with priority) .........................................................................
Amount available to unsecured creditors ....................................
Settlement to unsecured claims per peso (P36, 000/P240,000).....................
Total distribution to partially secured creditors:
Current value of assets pledged ................................................................
Deficiency of P40,000 × P.15 .......................................................................
P 90,000
(50,000)
P 40,000
200,000
P 240,000
P 50,000
(14,000)
P 36,000
P
.15
P 50,000
6,000
P 56,000
4. P30,000 = P200,000 x 15%
5. P35,000 = P20,000 + (P70,000 – P20,000) x 30%
6. P96,000 = Free assets P220,000 - priority claims P100,000 = P120,000
P120,000/P300,000 unsecured = payment of 40% on unsecured peso
40% x P240,000 A/P = P96,000
7. P474,000 = Land and building sold for P450,000 leaves P60,000 unsecured still owing. 40% x
P60,000 = P24,000
8. P295,000 = P200,000 + P95,000
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lOMoARcPSD|28427881
9. P42,950 - (P10,950 + P2,000 + P20,000 + P10,000)
10. P76,050 - Excess of salaries, P1,050 + notes pay in excess of security P25,000 + accounts pay
P50,000
11. P163,800
Free assets:
Other assets
P104,000
Excess from assets pledged with secured
(P150,800 – P91,000)
59,800
P163,800
12. P109,200
Total free assets
P163,800
Less: Liabilities with priority
54,600
P109,200
13. P364,000
Unsecured creditors:
Excess of partially secured liabilities over
Pledged assets (P169,000 – P65,000)
P104,000
Unsecured creditors
260,000
P364,000
14. P96,200
Payment of partially secured debt:
Value of pledged assets
P 65,000
30%* of remaining P104,000
31,200
P 96,200
*P109,200/P364,000 = 30%
15. P78,000
Cash
Excess of pledged with secured liabilities
(P117,000 – P104,000)
16. P52,000
Free assets after of liabilities with priority:
Total free assets
Less: Liabilities with priority
17. P260,000
Unsecured creditors:
Excess of partially secured liabilities over
pledged assets (P195,000 – P169,000)
Accounts payable
P 65,000
13,000
P 78,000
P 78,000
26,000
P 52,000
P
26,000
234,000
P 260,000
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18. P174,200
Payment on bond:
Value of pledged assets
20%* of remaining P26,000
P 169,000
5,200
P 174,200
Free after priority: P52,000/P260,000 = 20%
19. P247,000
Free assets
Excess from assets pledged with fully secured
(P260,000 – P195,000)
Amount available
Unsecured liabilities with priority
Net free assets / available for unsecured
P390,000
65,000
P455,000
( 208,000)
P247,000
20. P32,000
Cash
Mortgage payable, paid in full
(
Note payable to bank, secured portion
(
Priority claims (P16,000 of administrative costs +
P2,000 of customer deposits + P4,000 property tax)
Available for unsecured nonpriority claims
(
120,000
60,000 )
60,000
30,000 )
30,000
22,000 )
8,000
Unsecured, nonpriority claims:
Unsecured portion of note payable to bank
Accounts payable
Total unsecured, nonpriority claims
10,000
30,000
40,000
P8,000 cash/P40,000 claims = P.20 on the dollar
Amount paid to bank:
P30,000 for secured portion + (P10,000 x .20) for unsecured
portion =
32,000
21. P15,400
Mortgage note receivable
Less: Portion secured by equipment
Unsecured portion
(
Estimated recovery on secured portion
Estimated recovery on unsecured portion
(P28,000 x P.30) =
Recovery on mortgage note receivable
35,000
7,000
28,000
)
7,000
8,400
15,400
22.
Mortgage note receivable
Less: Portion secured by marketable securities
Unsecured portion
Estimated recovery on secured portion
Estimated recovery on unsecured portion
(20,000 x P.25) =
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(
80,000
60,000
20,000
60,000
5,000
)
lOMoARcPSD|28427881
Recovery on mortgage note receivable
23. P30,000
Book value of assets
Net realizable of assets
65,000
P700,000
370,000
P330,000
Less stockholders' equity
(P700,000 – P400,000)
Deficiency
300,000
P 30,000
24. P.75 Dividend = P370,000 – P250,000 – P30,000 / P400,000 – P250,000 – P30,000
25. P8,500 = P7,000 + [(P9,000 – P7,000) x .75]
26. P410,000
Total estimated proceeds
P910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
P150,000
Mortgage payable and interest (from
proceeds of land and building)
320,000
470,000
Total available to unsecured claimants.
P440,000
Less distributions to unsecured claims
with priority:
Wages payable
P 10,000
Taxes payable
20,000
30,000
Amount available for unsecured creditors
P410,000
27. 64.10%
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000)
Accounts payable
Total claims of unsecured creditors
P380,000
260,000
P640,000
Dividend to unsecured creditors:
P410,000 ÷ P640,000 = 64.1%
28. Unsecured portion of notes payable and
Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
THEORIES
1. debtor
2. P5,000
3. inability to pay debts as they mature
4. a. administrative costs
b. certain postfiling “gap” claims in involuntary filings
c. wages, salaries, and commissions
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P380,000
x 64.1%
P243,580
150,000
P393,580
lOMoARcPSD|28427881
5.
6.
7.
8.
d. employee benefit plans
e. deposits by individuals
f. taxes
infrequent
two-thirds, more than one-half
fraudulent, preferential
realization and liquidation
9.
10.
11.
12.
13.
False
False
False
True
False
44.
45.
46.
47.
48.
a
c
c
a
b
14.
15.
16.
17.
18.
49.
50.
51.
52.
53.
False
True
True
True
True
c
d
a
d
b
19.
20.
21.
22.
23.
54.
55.
56.
57.
58.
False
False
c
a
a
d
c
d
b
a
24.
25.
26.
27.
28.
c
a
d
c
e
59.
60.
a
c
29.
30.
31.
32.
33.
b
b
b
a
c
34.
35.
36.
37.
38.
b
d
b
c
a
39.
40.
41.
42.
43.
b
c
b
a
c
Chapter 7
Problem I
1. Entries in 20x4:
Cash…………………………………………………………………….………..
3,500
Mortgage Notes Receivable ………………………………………………..
20,500
Real Estate …………………………………………………………….
Gain on Sale of Real Estate ………………………………………..
Cash ………………………………………………………………………………
500
Mortgage Notes Receivable ……………………………………….
500
Entry in 20x5:
Real Estate ………………………………………………………………………. 16,500
Loss on Repossession of Real Estate ………………………………………..
Mortgage Notes Receivable ………………………………………
9,000
15,000
3,500
20,000
2. Entries in 20x4
Cash ………………………………………………………………………………
3, 500
Mortgage Notes Receivable ………………………………………………..
20,500
Real Estate ……………………………………………………………..
Deferred Gross Profit on Installment Sales ………………............
Cash ……………………………………………………………………………….
500
Mortgage Notes Receivable …………………………………..…..
500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ………………………………...
2,500
Realized Gross Profit on Installment Sales ………………………...
Gross Profit Percentages
15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
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2,500
9,000
15,000
lOMoARcPSD|28427881
Or P2,500
Entry in 20x5
Real Estate………………………………………………………………………... 16,500
Deferred Gross Profit on Installment Sales ………………………………….. 12,500
Mortgage Notes Receivable ………………………………………..
20,000
Gain in Repossession of Real Estate ………………………………..
9,000
Problem II
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of inves tment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.
20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales
20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem III
1.
a. Installment Contracts Receivable 19X8………………………………… 250,000
Installment Sales ……………………………………………………
250,000
b. Cash ………………………………………………………………………….. 120,000
Installment Contracts Receivable 19X8 ………………………
120,000
c. Cost of Installment Sales ………………………………………………….. 200,000
Merchandise Inventory …………………………………………..
200,000
d. Merchandise Repossessions ……………………………………………… 14,500
Deferred Gross Profit on Installment Sales 19X8 ……………..
Loss on Repossession ……………………………………………...
Installment Contracts Receivable, 19X8 …………….
Gross Profit Percentages: 50,000/250,000, or 20%
Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise..
Less: Unrecovered cost:
Unpaid balance…………………………P 20,000
Less: Deferred Gross Profit
20% x P20,000…………………… 4,000
Loss on repossession…………………….
4,000
1,500
P 14,500
16,000
P 1,500
e. Expenses ……………………………………………………………………… 16,000
Cash ………………………………………………………………….
2. Adjustment to Recognize Gross Profit on Installments Sales:
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16,000
20,000
lOMoARcPSD|28427881
a.
To set-up Cost of Installment Sales:
No entry (since perpetual inventory method is used)
b.
To set-up Deferred Gross Profit on Installment Sales:
Installment Sales ……………………………………………………… 250,000
Cost of Installment Sales ………………………………….
200,000
Deferred Gross Profit on Installment Sales -20x4.. ………
c.
Adjustment to Recognize Gross Profit on Installment Sales:
Deferred Gross Profit on Installment Sales – 20x4…………..……. 24,000
Realized Gross Profit on Installment Sales – 20x4 ……….
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
d.
50,000
24,000
Closing of nominal accounts.
Realized Gross Profit on Installment Sales – 20x4………………… 24,000
Expenses ……………………………………………………….
16,000
Loss on Repossessions ……………………………………….
1,500
Income Summary …………………………………………….
6,500
To close the accounts for 20x4.
Problem IV
1.
Ja nua ry to December 31
20x4
20x5
(1) To record regular sales:
Accounts recei va bl e
Sa l es
600,000
1,080,000
600,00
(2) To record i ns ta l l ment s a l e:
Ca s h
Ins ta l l ment a ccounts recei va bl e
Ins ta l l ment Sa l es
60,000
300,000
1,080,000
144,000
336,000
360,000
480,000
(3) To record cos t of s a l es :
Peri odi c Method: No entry
Perpetua l Method:
Regul a r Sa l es :
Cos t of Sa l es
Mercha ndi s e i nventory
Ins ta l l ment Sa l es :
Cos t of i ns ta l l ment s a l es
Mercha ndi s e i nventory
(4) To record col l ecti ons :
Regul a r Sa l es :
Ca s h
Accounts recei va bl e
480,000
864,000
480,000
252,000
864,000
312,000
252,000
144,000
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312,000
360,000
144,000
360,000
lOMoARcPSD|28427881
Ins ta l l ment Sa l es :
Ca s h
Ins ta l l ment Accounts recei va bl e –
20x2
Ins ta l l ment Accounts recei va bl e –
20x3
Interes t i ncome
(5) to record pa yment of opera ti ng expens es :
Opera ti ng expens es
Ca s h
108,000
204,000
72,000
72,000
36,000
60,000
72,000
90,000
102,000
90,000
102,000
2.
Adjus ti ng entri es (end of the yea r):
(6) To recogni ze a ccrued i nteres t recei va bl e
Interes t recei va bl e
1,440
Interes t i ncome
2,880
1,440
2,880
(7) To s et-up Cos t of Sa l es :
Peri odi c Method:
Cos t of i ns ta l l ment s a l es
480,000
Mercha ndi s e i nventory
864,000
480,000
864,000
Perpetua l Method: No entry
(7) To s et-up Cos t of Ins ta l l ment Sa l es :
Peri odi c Method:
Cos t of i ns ta l l ment s a l es
252,000
Shi pment s on i ns ta l l ment s a l es
312,000
252,000
312,000
Perpetua l Method: No entry
(8) To s et-up Deferred Gros s Profi t
Ins ta l l ment s a l es
Cos t of i ns ta l l ment s a l es
360,000
480,000
252,000
Deferred gros s profi t – 20x4
Deferred gros s profi t – 20x5
Gros s profi t ra te – 20x4: P 108,000 / P360,000 = 30%.
Gros s profi t ra te – 20x5: P168,000 / P480,000 = 35%.
312,000
108,000
168,000
(9) To record rea l i zed gros s profi t on i ns ta l l ment
s a l es :
Deferred gros s profi t – 20x4
25,200
25,200
Deferred gros s profi t – 20x5
Rea l i zed gros s profi t
20x4: Rea l i zed gros s profi t on i ns ta l l ment s a l es :
Col l ecti ons a ppl yi ng a s to pri nci pa l ..……………………………P 72,000
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21,000
25,200
46,200
lOMoARcPSD|28427881
Mul ti pl i ed by: Gros s profi t ra te …………………………………….
30%
Rea l i zed gros s profi t…………………………………………………P 21,600
20x5: Rea l i zed gros s profi t on i ns ta l l ment s a l es ;
20x4
20x5
Col l ecti ons – pri nci pa l ……………
P 72,000
P 60,000
Mul ti pl i es by: Gros s profi t %..........
____30%
____35%
Rea l i zed gros s profi t………………
P 21,600
P 21,000
P 42,600
Cl os i ng entri es :
(10) To cl os e rea l i zed gros s profi t a ccount:
Rea l i zed gros s profi t
21,600
42,600
Income s umma ry
21,600
42,600
(11) To cl os e other nomi na l a ccounts
Sa l es
Interes t i ncome
600,000
1,080,000
37,440
74,880
Cos t of s a l es
480,000
864,000
Opera ti ng expens es
90,000
102,000
Income s umma ry
67,440
188,880
(12) To cl os e res ul ts of opera ti ons :
Income s umma ry
89,040
231,480
Reta i ned ea rni ngs
89,040
231,480
Problem V
1.
Type of Sa l e
Regul a r Sa l es :
Ca s h s a l es
Credi t s a l es
Tota l regul a r s a l es
Ins ta l l ment Sa l es
Tota l Sa l es
Amount
Ra ti o to Tota l Sa l es
P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000
675/1,800
1,125/1,800
Al l oca ted Cos t
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of sale is the same.
Normally, the selling prices of the merchandise are not the same for each type of sales.
2.
Type of Sa l e
Ca s h s a l es
Credi t s a l es
Ins ta l l ment Sa l es
Tota l Sa l es
Amount
P 225,000
450,000
1,125,000
P 1,500,000
Amount ba s ed on
Ca s h Sa l es (100%)
P 225,000
375,000*
900,000**
P 1,250,000
Ra ti o to Tota l
Sa l es
225/1,500
375/1,500
900/1,500
Amount
P 225,000
450,000
Gros s profi t ra te
30%
36%
Cos t ra ti o
70%
64%
Al l oca ted Cos t
P 175,500
292,500
__ 702,000
P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
Type of Sa l e
Ca s h s a l es
Credi t s a l es
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Al l oca ted Cos t*
P 157,500
288,000
lOMoARcPSD|28427881
Ins ta l l ment Sa l es
Tota l Sa l es
1,125,000
P 1,800,000
40%
60%
_ _675,000
P 1,170,000
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repos s es s ed mercha ndi s e ……………………………………......
Deferred gros s profi t – 20x4………………………………............
Los s on repos s es s i on………………………………………………...
Ins ta l l ment a ccounts recei va bl e – 20x4…………………….
68,400
48,000
3,600
120,000
To record repossessed merchandise.
Repossessed merchandise……………………………………......
Cash, etc (or various credits)……………………................
12,000
12,000
To record reconditioning costs
The loss on repossession is computed as follows:
Estimated selling price after reconditioning costs..............
Less: Reconditioning costs………………………………………
Costs to sell and dispose………………………………….
Normal profit (20% x 108,000)…………………………….
Market value before reconditioning costs …………………..
Less: Unrecovered cost
Installment accounts receivable – 20x4,
unpaid balance……………………………………...
Less: Deferred gross profit – 20x4 (P120,000 x 40%).....
Loss on repossession…………………………….
P 108,000
P 12,000
6,000
__21,600
P120,000
__48,000
__39,600
P 68,400
__72,000
P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Tra de-i n Mercha ndi s e …………………………………...............
Over-a l l owa nce on tra de-i n mercha ndi s e ………………….
Ca s h…………………………………………………………………..
Ins ta l l ment a ccounts recei va bl e – 20x4……………............
Ins ta l l ment s a l es ……………………………………….......
840,000
360,000
2,400,000
3,360,000
6,960,000
To record installment sales with trade-in.
Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales, the
entry would be as follows:
Tra de-i n Mercha ndi s e …………………………………...............
Ca s h…………………………………………………………………..
Ins ta l l ment a ccounts recei va bl e – 20x4……………............
Ins ta l l ment s a l es (net of over-a l l owa nce)……..............
840,000
2,400,000
3,360,000
6,600,000
To record installment sales with trade-in.
The over-allowance is computed as follows:
Tra de-i n a l l owa nce …………………………………..................
Les s : Ma rket va l ue before recondi ti oni ng cos ts :
Es ti ma ted res a l e pri ce a fter recondi ti oni ng cos ts .
Les s : Recondi ti oni ng cos ts ………………………………..
Cos ts to s el l (5% x P1,680,000)……………………
Norma l profi t (20% x P1,680,000)…………….......
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P1,200,000
P1,680,000
420,000
84,000
__336,000
__840,000
lOMoARcPSD|28427881
Over-a l l owa nce……………………………………………………
P 360,000
The gross profit rate on installment sales is computed as follows:
Ins ta l l ment s a l es ……………………………………………………………......
Les s : Over-a l l owa nce…………………………………………………………
Adjus ted Ins ta l l ment Sa l es ……………………………………………………
Les s : Cos t of i ns ta l l ment s a l es ……………………………………………….
Gros s profi t……………………………………………………………………….
Gros s profi t ra te (P2,680,000/P6,600,000)………………………………..
P6,960,000
___360,000
P6,600,000
__3,920,000
P2,680,000
40.60%
Further, the entry to record the reconditioning costs is as follows:
Tra de-i n Mercha ndi s e …………………………………...............
Ca s h, etc (or va ri ous credi ts )……………………..............
420,000
420,000
To record reconditioning costs.
Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is computed
as follows:
Tra de-i n mercha ndi s e (ma rket va l ue before recondi ti oni ng cos ts ) ………
Down pa yment……………………………………………………………………
Ins ta l l ment col l ecti on (Ma rch 31 – December 31: P80,000 x 10 months )
Tota l col l ecti ons …………………………………………………………………..
Mul ti pl i ed by: Gros s profi t ra te i n 20x4………………………………………..
Rea l i zed gros s profi t on i ns ta l l ment s a l es of new mercha ndi s e …………
P 840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash ……………………………………………………………………… 20,000
Mortgage Notes Receivable …………………………………………. 55,000
Real Estate ……………………………………………………….
60,000
Deferred Gross Profit on Installment Sales ………………….
15,000
Nov. 30 Cash ……………………………………………………………………….
1,150
Mortgage Notes Receivable …………………………………
Interest Income ………………………………………………….
Interest Received: P55,00 at 12% for 1 month, or P550
600
550
Dec. 31 Cash ………………………………………………………………………… 1,144
Mortgage Notes Receivable …………………………………..
600
Interest Income ……………………………………………………
544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales …………………………….. 4,240
Realized Gross Profit on Installment Sales ……………………
4,240
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of
the contract:
Dec. 31 Cash ……………………………………………………………………… 20,000.00
Mortgage Notes Receivable ………………………………………… 55,000.00
Real Estate ………………………………………………………
60,000.00
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Deferred Gross Profit on Installment Sales ………………..
Nov. 30 Cash ………………………………………………………………………
600
Mortgage Notes Receivable ………………………………..
Interest Income …………………………………………………
15,000.00
50.00
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or
P50, is reduction in principal)
Dec. 31 Cash ……………………………………………………………………….
600.00
Mortgage Notes Receivable …………………………………
Interest Received ………………………………………………
50.50
549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in
principal.
31 Deferred Gross Profit on Installment Sales ………………………… 4,020.10
Realized Gross Profit on Installment Sales …………………
4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or
P4,020.10
Problem IX
1. 6/30x4: Cash……………………………………………………………………………. 25,000
Notes Receivable …………………………………………………………… 125,000
Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300
Depreciation Expense (1/2[2% of P90,000]) ……………………………
900
Land ……………………………………………………………………
10,000
Building ………………………………………………………………..
90,000
Deferred Gross Profit on Sale of Property ………………………
57,200
Deferred Gross Profit on Sale of Property ………………………………… 9,553
Realized Gross Profit on Sale of Property ………………………...
Amount realized: (P25,000/150,000) x 57,200
2. 6/30x5: Cash …………………………………………………………………………… 30,000
Notes Receivable ……………………………………………………..
Deferred Gross Profit on Sale of Property ………………………………. 11,440
Realized Gross Profit on Sale of Property …………………………
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash …………………………………………………………………………. 50,000
Notes Receivable ……………………………………………………
6/30/x7 Cash ………………………………………………………………………….. 15,000
Notes Receivable ……………………………………………………
Deferred Gross Profit on Sale of Property ……………………………….
30,000
11,440
50,000
Deferred Gross Profit on Sale of Property ……………………………… 19,067
Realized Gross Profit on Sale of Property …………………………
Amount Realized: (P50,000/P150,000) X 57,200
15,000
5,720
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9,553
19,067
lOMoARcPSD|28427881
Realized Gross Profit on Sale of Property …………………………
Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable …………………………………………. 200,000
Installment Sales ………………………………………………………
5,720
200,000
Cost of Installment Sales …………………………………………………….. 120,000
Merchandise Inventory ………………………………………………
120,000
Cost of Sales: 60% of P200,000
Installment Sales ……………………………………………………………….. 200,000
Cost of Installment Sales ……………………………………………
Deferred Gross Profit on Installment Sales ………………………
120,000
Cash ………………………………………………………………………………. 124,000
Installment on Contracts Receivable – 20x4……………………...
Installment on Contracts Receivable – 20x5……………………...
Installment on Contracts Receivable – 20x6……………………...
60,000
30,000
34,000
60,000
Deferred Gross Profit on Installment Sales -20x4 …………………………… 13,800
Deferred Gross Profit on Installment Sales -20x5 …………………………... 14,280
Deferred Gross Profit on Installment Sales -20x6 …………………………... 24,000
Realized Gross Profit on Installment Sales ……………………….…………..
52,080
Realized Gross Profit
20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 …………………………………………………………………………………. 27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 ………………………………………………………………………….. 30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts
receivable 20x4 ………………………………………………………………………….. 32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………....................
P27,500
Installment Accounts Receivable 20x6 ………………………….. P 55,000
20x5 ………………………….. 12,000
20x4 …………………………..
3,000
Accounts receivable ………………………………………………………………………….
17,000
Inventory ………………………………………………………………………………………....
60,000
Other Assets ……………………………………………………………………………………...
40,000
Total Assets ……………………………………………………………………………………… P 214,500
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70,000
lOMoARcPSD|28427881
Liabilities
Accounts payable ………………………………………………………………
P 40,000
Deferred Gross Profit
20x6 …………………………… P 15,125
20x5 ……………………………
3,600
20x4 ……………………………
960
19,685
Total Liabilities
Stockholders’ Equity
Capital Stock …………………………………………………………………….. P 100,000
Retained Earnings ……………………………………………….. P 68,400
Balance, Jan. 1, 20x6 ……………………………………….
13,585
Balance, Dec. 31, 20x6 …………………………………………………….
54,185
Total Stockholder’ s Equity ………………………………………………………
Total Liabilities and Stockholder’ s Equity …………………………………….
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Sales ………………………………………………………............
Cost of goods sold:
Merchandise Inv entory, Jan. 1 ………………P 52,000
Purchases …………………………..................
350,000
Merchandise Av ailable for sale .................
402,000
Less: Merchandise Inv . Dec. 31 …………
60,000
Gross Profit ………………………………………………………..
Less: Deferred Gross Profit on 19X34 …………………………
Realized Gross Profit on current year’ s sales ……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ……………….
Total Realized Gross Profit …………………………………….
Operating Expenses …………………………………………...
Net Loss …………………………………………………………..
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
P88,000
15,125
P78,875
110,000
P15,000
P15,000
P
59,685
P154,815
P 214,500
Total
P445,000
342,000
P103,000
15,125
P87,875
50,040
P137,915
151,500
P 13,585
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred Gross profit on installment sales, 20x6
Installment contracts receiv able, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% …………………………………………………………P 15,125
Realized Gross Profit:
20x6
20x5
20x4
Collections on Installment Contracts Receiv able ………... P265,000
P138,000
P27,000
Installment sales gross profit percentage …………………..
27.5%
30%
32%
Realized Gross Profit …………………………………………….. P 72,875
P 41,400
P 8,640
Ins ta l l ment Sa l es …………………………………………………… 320,000
Cos t of Ins ta l l ment Sa l es …………………………………………. 232,000
Deferred Gros s profi t -20x6………………………………………………
88,000
Deferred Gros s Profi t, 20x6 ……………………………...............
Deferred Gros s Profi t, 20x5 ……………………………...............
72,875
41,400
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Deferred Gros s Profi t, 20x4 ……………………………...............
8,640
Rea lized Gross Profit on Installment s a l es ……………122,915
Income Summa ry …………………………………………………
170,000
Shi pment on Installment of Sales ………………………………
232,000
Mercha ndi s e Inventory, Ja n. 1, 20x6 ……………….
Purcha s es ………………………………………………
52,000
350,000
Mercha ndi s e Inventory, Dec. 31, 20x6 ……………………..
Income Summa ry ……………………………………
60,000
60,000
Sa l es ……………………………………………………………….
125,000
Income Summa ry …………………………………….
Rea l i zed Gros s Profi t on Ins ta l l ment Sa l es ………..………...
Income Summa ry …………………………………….
Income Summa ry ………………………………………………
Opera ti ng Expens es ………………………………...
Reta i ned Ea rni ngs ……………………………………………..
Income Summa ry …………………………………...
125,000
122,915
122,915
151,500
151,500
13,585
13,585
Problem XII
1. Calculation of gross profit percentage on instal lment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 …………………………………………………………………………………… 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 ………………………………………………………………. 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 ………………………………………………………………. 45%
2.
Deferred Gross Profit, 20x6………………………………
Deferred Gross profit, 20x5………………………………
Deferred Gross Profit, 20x4………………………………
Loss on Repossessions…………………………..
Cancellation of deferred gross profit,
balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
1,900
4,000
3,600
9,500
GG SALES CORPORATION
Income Statement
For Year Ended December 31, 20x6
Sales ………………………………………………………............
Cost of goods sold:
Merchandise Inv entory, Jan. 1 …………… P 30,000
Purchases …………………………..................
445,000
Repossessed Merchandise ………………..
10,000
Merchandise Av ailable for sale .................
495,000
Less: Merchandise Inv . Dec. 31 …………
35,000
Installment
Sales
P500,000
Regular
Sales
P192,000
P692,000
310,000
150,000
460,000
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Total
lOMoARcPSD|28427881
Gross Profit ………………………………………………………..
Less: Deferred Gross Profit on 20x6 sales (see schedule)
Realized Gross Profit on current year’ s sales ……………….
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ……………….
P190,000
32,300
P157,700
P42,000
P103,000
32,300
P199,700
P42,000
100,650
P300,350
3,500
P296,850
300,000
P 3,150
Deduct loss on repossession ………………………………….
Total Realized Gross Profit …………………………………….
Operating Expenses ……………………………………………
Net Loss …………………………………………………………..
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred gross profit on Installment sales – before defaults, 19X8:
Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% ……………………………………………………….
P 32,300
Realized Gross Profit:
20x6
20x5
20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
Installment sales gross profit percentage ………..
38%
40%
45%
Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………...
P 25,000
Installment Accounts Receivable 20x6 …………………P 80,000
20x5 ………………… 20,000
20x4 ………………… 5,000
Accounts receivable …………………………………………………………………..
40,000
Inventory ………………………………………………………………………………….
35,000
Other Assets ………………………………………………………………………………
52,000
Total Assets ……………………………………………………………………………….P 257,000
Liabilities
Accounts payable …………………………………………………….
P 75,000
Deferred Gross Profit 20x6 ………………………………. P 30,400
20x5 ……………………………….
8,000
20x4 ……………………………….
2,250
40,650
Total Liabilities
Stockholders’ Equity
Capital Stock ………………………………………………………….
P100,000
Retained Earnings ………………………………………. P 44,500
Balance, Jan. 1, 20x6 ………………………………
3,150
Balance, Dec. 31, 20x6 ……………………………
41,350
Total Stockholder’ s Equity ………………………………………….
Total Liabilities and Stockholder’ s Equity ………………………..
4. Installment Sales ………………………………………………………………..500,000
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105,000
P
115,650
141,350
P 257,000
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Cost of Installment Sales ………………………………………………..
Deferred Gross Profit, 20x6 ……………………………………………..
310,000
190,000
Deferred Gross Profit, 20x6 ……………………………………………………
157,500
Deferred Gross Profit, 20x5 ……………………………………………………
84,000
Deferred Gross Profit, 20x4 ……………………………………………………
16,650
Realized Gross Profit on Installment Sales … …………………………
258,350
Income Summary ……………………………………………………………… 185,000
Shipment on Installment Sales ………………………………………………
310,000
Merchandise Inv, January 1, 20x6 …………………………………….
30,000
Purchases ………………………………………………………………….
455,000
Repossessed Merchandise ……………………………………………..
10,000
Merchandise Inv, December 31, 20x6……..……………………………….
Income Summary ………………………………………………………..
35,000
35,000
Sales ……………………………………………………………………………....
192,000
Income Summary …………………………………………………………
192,000
Realized Gross Profit on Installment Sales …………………………………..258,350
Income Summary ………………………………………………………..
258,350
Income Summary ……………………………………………………………… 3,500
Loss on Repossession …………………………………………………….
Income Summary ……………………………………………………………… 300,000
Operating Expenses ……………………………………………………..
3,500
300,000
Retained Earnings ……………………………………………………………… 3,150
Income Summary ………………………………………………………….
3,150
Problem XIII
1.
Deferred gross profit – 20x4……….……………………………………. 8,407.00
Deferred gross profit – 20x5……….……………………………………. 93,438.80
Deferred gross profit – 20x6……….……………………………………. 71,006.70
Realized Gross Profit on Installment Sales (20x4 – 20x6)…..
172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%
20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34%
20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37%
Calculation of collections in 20x6:
20x4: Beginning balance
P 24,020
20x5: P344,460 (beginning balance) – P67,440 (ending balance) –
P2,200 (write-offs on default)
274,820
20x6: P602,000 (sales) – P410,090 (ending balance)
191,910
Calculation of realized gross profit:
20x4: 35% x P24,020
20x5: 34% x P274,820
20x6; 37% x P191,910
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P
8,407.00
93,438.80
71,006.70
lOMoARcPSD|28427881
Total
P172,852.50
2. Deferred gross profit 20x5………………………………………………………
748.00
Inventory of Repossessed Merchandise……………………………….
748.00
To reduce by 20x5 deferred gross profit related to defaulted contract and
requiring cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections
to date); inventory now reported at P2,200 (balance of installm ent
contract), less P748 or P1,452.
Loss on repossession……………………………………………………………..
381.00
Inventory of repossessed merchandise………………………………..
381.00
To reduce inventory to “ m arket” as follows: to realize a gross profit of 37%
on a resale estim ated at P1,700, the repossessed m erchandise should be
reported at a value of 63% of P1,700, or P1,071; the inventory then requires a
further write-down of P381 (P1,452 – P1,071)
Repossessed merchandise could be recorded at its resale value less the usual gross profit
margin on sales. Recording the merchandise at P1,452 will result in the realization of less than
the normal profit margin on the resale of the goods in the subsequent period. if expenses of
the resale exceed P248 (P1,700 – P1,452), the later period would actually have to absorb a
loss as a result of such valuation. Recording the goods at resale value reduced by the
company’ s usual profit margin on sales is recommended, for such practice will charge the
next period with no more than the utility of the goods carried forward.
Problem XIV – HH Instruments
1.
Installment Contracts Receivable ……………………………………. 1,600.00
Merchandise Inventory (Piano) ………………………………
Deferred Gross Profit on Installment Sales …………………
1,000.00
600.00
Cash ………………………………………………………..........................
160.00
Installment Contracts Receivable ……………………………
2.
Cash …………………………………………………………........................
160.00
Interest Income ……………………………………………………
Installment Contracts Receivable …………………………….
Cash ……………………………………………………………...................... 160.00
Interest Income …………………………………………………….
Installment Contracts Receivable ………………………………
3.
4.
160.00
14.40
145.60
11.47
148.53
Deferred Gross Profit on Installment of Sal es ………………………….. 225.45
Realized Gross Profit on Installment of Sales …………………
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
225.45
Merchandise Inventory (piano) …………………………………………... 560.00
Deferred Gross Profit on Installment of Sales ……………………........... 374.55
Loss on Repossessions ………………………………………………………. 64.36
Installment Contracts Receivable ………………………………
998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
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Problem XV – Big Bear
20x4:
Installment receivables
Inventory
Deferred gross profit
250,000
150,000
100,000
Cash
80,000
Installment receivables
80,000
20x5:
Cash
120,000
Installment receivables
120,000
Deferred gross profit
Realized gross profit
50,000
50,000
20x6:
Cash
50,000
Installment receivables
Installment receivables
Inventory
Deferred gross profit
50,000
300,000
210,000
90,000
Cash
135,000
Installment receivables
135,000
Deferred gross profit
Realized gross profit
40,500
40,500
Gross profit deferred at sale = 30% x P300,000 = P90,000.
Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XVI – Tappan Industrial
(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PVn = R(PVAFn/i) Table IV
PVn = P187,500 x 4.3553 n = 6, i = 10%
PVn = P816,619 (rounded)
Gross profit on sale:
Sales
Cost of sales
Gross profit
Interest revenue--4 months: P816,619 x 10% x 4/12 =
Total income for 20x5 = P179,119 + P27,221 =
(2) No reasonable assurance – assume the use of installment sales method
Installment sale: Gross profit (P179,119/P816,619) =
Gross profit earned in 20x5 (P0 x 22%)
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P816,619
637,500
P179,119
_ 27,221
P206,340
22% rounded
P
0
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Interest revenue
Total income for 20x5
27,221
P 27,221
Multiple Choice Problems
1. b –
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000 P390,000
2. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
20x5 sales: P50,000 x 25%
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
Realized Gross Profit on Sales in 20x5
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
Realized Gross Profit in 20x5 for 20x4 sales
Divided by: Col lections in 20x5 for 20x4 sales
Gross Profit % for 20x4 sales
2,200
12,500
10,575
P 25,275
P
P 10,500
5,000
5,500
P 25,000
22%
3. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128 39,375
Realized Gross Profit on Instal lment SalesP 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25
Less: Collections in 20x3
Collections in 20x4
Unrecovered Cost, 12/31/20x4
P384,000
140,000
240,000
P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item
sold is recovered through cash receipts. All cash receipts, both interest and principal
portions, are applied first to the cost of the items sold. Then, all subsequent receipts are
reported as revenue. Because all costs have been recovered, the recognized revenue after
the cost recovery represents income (interest and realized gross profit). This method is used
only when the circumstances surrounding a sale are so uncertain that earlier recognition is
impossible.
4. a
P0.
5. c
6. e, 20x6 – 0; 20x7 - 0
Unrecovered cos ts ,1/1/20x4
Les s : Col l ecti ons
1/1//20x4
Add: Sa l es on a ccount
Tota l
Les s : 1/1/20x5
Col l ecti ons i n 20x4
Unrecovered cos ts ,1/1/20x5
110,000
0
15,000
15,000
10,500
__4,500
105,500
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1/1//20x5
Add: Sa l es on a ccount
Tota l
Les s : 1/1/20x6
Col l ecti ons i n 20x5
Unrecovered cos ts ,1/1/20x6
1/1//20x6
Add: Sa l es on a ccount
Tota l
Les s : 1/1/20x7
Col l ecti ons i n 20x6
Unrecovered cos ts ,1/1/20x7
1/1//20x7
Add: Sa l es on a ccount
Tota l
Les s : 1/1/20x8
Col l ecti ons i n 20x7
Unrecovered cos ts ,1/1/20x8
10,500
30,000
40,500
25,500
15,000
90,500
25,500
60,000
85,500
40,500
45,000
45,500
40,500
24,000
64,500
70,000
____-045,500
7. b
20x4: P150,000 – (P568,620 x 10%) = P93,138.
20x5: (P568,620 – P93,138) x 10% = P47,548.
8. a – refer to No. 3 for discussion.
Cost, January 1, 20x4
Less: Collections including interest – 20x4
Unrecovered Cost, December 31, 20x4
P 60,000
32,170
P 27,830
9. c
(P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3%
(P3,600,000  .20) + [(3,600,000  .80)  4/12)] = P1,680,000
P1,680,000  33 1/3% = P560,000.
10. b
[(P3,600,000  .20) + (P3,600,000  .80 x 8/12] – P2,400,000 = P240,000.
11. b – refer to No. 3 discussion.
Cost, January 1, 20x4…………………………………………………………….P 500,000
Less: Collections including interest – 20x4……………………….P241,269
Collections including interest – 20x5……………………… 241,269
482,538
Unrecovered Cost, December 31, 20x5……………………………………….P 17,462
12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
13. c
P300,000 + P50,000 = P350,000
P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 – P100,000) x 30% = P60,000.
14. c
P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 – (P288,000 ×.4) = P364,800.
15. d – [P225,000 + (P120,000/40%)]
16. b
(P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000.
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17. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30%
20x5 Sales: P440,000/ 40%
18. c
Sale: Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
Deferred gross profit
Realized gross profit
Balance Sheet:
Installment receivables (4,500,000 – 500,000)
Deferred gross profit (900,000 – 100,000)
Installment receivables (net)
P 400,000
1,100,000
P 1,500,000
4,500,000
3,600,000
900,000
500,000
500,000
100,000
100,000
P 4,000,000
800,000
P 3,200,000
19. b
12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000]
2,000,000
Installment receivables
2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)]
400,000
Realized gross profit
400,000
Balance sheet:
Deferred gross profit: P800,000
400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
22. a Gross profit % = (P900,000
P450,000)/P900,000 = 50%
20x4: 50% x P300,000 = P150,000
23. c
20x4 sales: Gross profit % = (P900,000
P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000
P900,000)/P1,500,000 = 40%
40% x P400,000 received in 2010 = P160,000
Total: P150,000 + P160,000 = P310,000
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24. c
20x4 Sales:
20x5 Sales:
Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 – P150,000 (x4 collections)
- P150,000 (x5 collections) =
Net installment receivable for 20x4 sales
=
Installment receivables = P1,500,000 – P500,000 (x5 collections)=
Deferred gross profit = P600,000 – P200,000 (x5 collections) =
Net installment receivable for 20x5
=
Total
25. a - Costs not yet recovered.
26. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit – 20x5
P 300,000
150,000
P 150,000
P1,000,000
400,000
P 600,000
=
P 750,000
P 30,000
(20,000)
P 10,000
15,000
P 5,000
27. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
( 20,000)
( 10,000)
0
The entire P20,000 payment received in 20x6 is recognized as gross profit.
28. d
Sale:
Installment receivables
Inventory
Deferred gross profit
Payment: Cash
55,000
30,000
25,000
20,000
Installment receivables
Balance Sheet:
Installment receivables P55,000 – 20,000
Deferred gross profit
Installment receivables (net)
29. a
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20,000
P 35,000
( 25,000)
P 10,000
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Sale:
2008:
Installment receivables
Inventory
Deferred gross profit
55,000
30,000
25,000
Cash
20,000
20,000
15,000
15,000
Installment receivables
Cash
2009:
Installment receivables
Deferred gross profit
Realized gross profit
5,000
5,000
Balance Sheet:
Installment receivables
Deferred gross profit
Installment receivables (net)
P 20,000
( 20,000)
P
0
30. c
Note: Since the collectibility of the note is reasonably assured, the accrual bas is should be applied. Therefore,
full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553)
P816,619
Cost of sales
637,500
Gross profit (realized)
P179,119
31. c
Total Income for 20x4:
Gross profit (realized) – No. 51
Interest revenue—4 months: P816,619 x 10% x 4/12..
Total income for 20x4
P179,119
_ 27,221
P206,340
32. b
Total Income for 20x5:
Gross profit (realized) – already recognized in 20x4
Interest revenue – 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
Total Income for 20x5
P
0
P 54,441
23,693
78,134
P 78,134
*Schedule of Discount Amortization/Interest Income computation:
Year
1
2
(1)
Face
Amount
of Note1
P1,125,000
937,500
(2)
Unamortized
Discount
P308,3813
226,7194
(3)
Net
Amount
(1) – (2)
P 816,6192
710,781
1
(4)
Discount
Amortization
10%  (3)
81,6625
71,078
P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous balance.
The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3
P1,125,000 – P816,619
4
(2) – (4)
5
Discount amortization give rise to recognition of interest revenue/income.
2
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33. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method should be
applied. Also, if the there is high degree of uncertainty as to collectibility, the cost recovery method may be
used.
Installment sale: Gross profit (P179,119/P816,619)
22% (rounded)
Gross profit earned in 20x4 (P0* x 22%)
* no collections in 20x4.
P
0
34. a
Total Income for 20x4:
Gross profit earned in 20x4 (P0* x 22%)
Interest revenue (refer to No. 52
Total income for 20x4.
35. d
Collections in 20x5 (August 31, 20x5)
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
Collection as to principal
x: Gross Profit % (refer to No. 54)
Gross profit realized in 20x5
Add: Interest revenue/income for 20x5 (refer to No. 53)
Total Income for 20x5
P
0
27,221
P 27,221
P 187,500
81,662
P 105,838
22%
P 23,284
78,134
P 101,418
36. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
37. a
(P800,000 x .25) – P90,000 = P110,000,
38. d
P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
39. a
(P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
40. d
(P1,200,000  .30) – P120,000 = P240,000.
41. a
P1,050,000  .30 = P315,000
P900,000 – [(P1,200,000 + P1,050,000)  .30] = P225,000.
42. b
P24,000 – P7,200 = P16,800
P16,800 – P13,500 = P3,300 loss.
43. d
44. d
[P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.
P8,400 – P5,880 = P2,520
(P3,000 – P300) – P2,520 = P180 gain.
45. d
20x4: P24,000 – P0 = P24,000 collections x 39%P
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42%
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40%
Realized gross profit on installment sales in 20x6
46. b
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9,360
96,600
62,000
P167,960
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Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
20x5 Sales
P 4,500
P10,000
50%
5,800
P (1,300)
P 5,000
60% 3,000
P 500
20x6 Sales
P 3,500
Net
P( 800)
47. a
(1) Gain or Loss on repossession:
Estimated selling price
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance – 20x3
Less: DGP – x3 (P2,200 x34%)
Loss on repossession
P 1,700
629
P 1,071
P 2,200
748
(2) Realized gross profit on installment sales:
20x2 Sales: (P24,020 – P 0) x 35%
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34%
20x4 Sales: (P602,000 – P410,090) x 37%
Realized gross profit on installment sales
1,452
P( 381)
P
8,407.0
93,438.8
71,006.7
P 172,852.5
48. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
20x4 Sales: (P410,090 x 37%)
22,929.6
151,733.3
P174,662.9
49. d*
Resale Value
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500
Market Value of Repossessed Merchandise
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000)
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000
Loss on repossession
P 8,500
3,145
P 5,355
P 11,000
___3,740
Entry made:
Inventory of RM*
IAR-20x5
__7,260
P( 1,905)
11,000
11,000
Correct Entry (Should be):
Inventory of RM (at MV)
DGP-20x5
Loss on repossession
IAR-20x5
5,355
3,740
1,905
11,000
Correcting Entry:
DGP-20x5
3,740
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Loss on repossession
Inventory of RM
1,905
5,645**
50. c
Installment Sales
Less: Over-allowance:
Trade-in allowance
Less: MV of Trade-in Merchandise:
Estimated Resale Price
Less: Normal profit (25% x P1,400,000)
Reconditioning costs
Adjusted Installment Sales
Less: Cost of I/S
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections –Trade-in merchandise (at MV)
RGP on I/S in 20x4
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000 900,000
600,000
P 3,000,000
2,500,000
P 500,000
16 2/3%
P 900,000
P 150,000
51. c
Trade-in allowance
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs
Less: Reconditioning costs
Normal profit (15% x P36,000)
Over-allowance
P43,200
P36,000
1,800
5,400 28,800
Installment sales
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of Installment Sales
Gross profit
Gross profit rate: P21,600/P108,000
Realized gross profit:
Down payment
Trade-in (at market value)
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos.
Total collections in 2008
x: Gross profit rate
Realized gross profit
P 14,400
P122,400
14,400
P108,000
86,400
P 21,600
20%
P 7,200
28,800
21,600
P 57,600
20%
P 11,520
52. d
( Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is
recognized in the year of sale, because collection of the receivable is reasonably assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales
P4,584,000
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Cost of Sales
Gross Profit
Interest Revenue (Schedule I)
Income before Income Taxes
3,825,000
759,000
328,320
P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales)
Payment made on January 1, 20x3
Balance outstanding at 12/31/x3
Interest rate
Interest Revenue
P4,584,000
936,000
3,648,000
9%
P 328,320
Quiz - VII
1. P920,000
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000 P920,000
2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000
3.
P1,600– assume the use of installment sales method. It should be noted that if the collectability is highly
uncertain or extremely uncertain, the use of cost recovery method is preferable.
4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all costs have been recovered.
20x5
P45,000 x 63% = P28,350
Cost of sale
P28,350 - P24,000 = P4,350
No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 =
P14,650
Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400
Cost of sale
P40,000 - P35,400 =
4,600
Gross profit recognized
P19,250
Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
P 2,000
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
17,000
Relating to 20x7 sales:
P85,000 x 60% = P51,000
Cost of sale
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P53,000 - P51,000 = ..........
7.
2,000
Gross profit
recognized
Recognized in 20x7
P21,000
P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4
x: Gross profit rate (66 2/3 / 166 2/3)
Deferred Gross Profit, end of 20x4
P 320,000
_____40%
P 128,000
10. P25,168, determined as follows:
Gross profit percentages:
20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%
To deferred gross profit:
20x3: P160,000 x P136,000 =
20x4: P184,000 x P158,240 =
P24,000
25,760
P49,760
Gross profit realized:
0.15 x P40,000 =
0.15 x P89,600 =
0.14 x P36,800 =
Balance
of
P49,760 - P24,592 = P25,168
P 6,000
13,440
5,152
P24,592
Gross
Profit
Deferred:
11. P 0 – all profit recognized in 20x5
12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450
16. P50 gain
Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable…………………….. 750
Gain on repossession……………………………………
50
17. 0
Unrecovered cos ts ,1/1/20x4
Les s : Col l ecti ons
Unrecovered cos ts ,1/1/20x5
Les s : Col l ecti ons
Profi t – 20x5
Profi t – 20x5
100
70
30
40
10
30
18. P10 – refer to No. 17
19. P30 –refer to No. 17
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20. Zero
Unrecovered cos ts – 20x4
Les s : Col l ecti ons – 20x4
Unrecovered cos ts , 12/31/20x4
Addi ti ona l cos ts – 20x5
Tota l cos ts
Les s : Col l ecti ons – 20x5
Unrecovered cos ts , 12/31/20x5
Addi ti ona l cos ts – 20x6
Tota l cos ts
Les s : Col l ecti ons – 20x6
Unrecovered cos ts , 12/31/20x6
Addi ti ona l cos ts – 20x7
Tota l cos ts
Les s : Col l ecti ons – 20x7
Profi t – 20x7
120,000
______0
120,000
_20,000
140,000
80,000
60,000
20,000
80,000
40,000
40,000
10,000
50,000
100,000
50,000
21. P50,000 profit – refer to No. 20
22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)
24. P43,700
Unrecovered cos ts – Cos t of i ns ta l l ment s a l es for 20x5 i ns ta l l ment s a l es
Les s : Col l ecti ons i n 20x5 for 20x5 i ns ta l l ment s a l es
Unrecovered cos ts , 12/31/20x5
Les s : Col l ecti ons i n 20x6 for 20x5 i ns ta l l ment s a l es (ba l a nci ng fi gure)
Rea l i zed GP on I/S i n 20x6 for 20x5 s a l es
56,050
_22,800
33,250
_43,700
*10,450
Rea l i zed GP on I/S i n 20x6
Les s : Rea l i zed GP on I/S i n 20x6 for 20x5 I/S s i nce cos t of P31,000 (No. 23) i s
a l rea dy recovered i n 20x5 equi va l ent to col l ecti on
Rea l i zed GP on I/S i n 20x6 for 20x5 i ns ta l l ment s a l es
16,050
*
__5,600
*10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized
Unrecovered cos ts – Cos t of i ns ta l l ment s a l es for 20x4 (No. 23)
Les s : Col l ecti ons i n 20x4 for 20x4 i ns ta l l ment s a l es
Unrecovered cos ts , 12/31/20x4
31,000
_22,800
8,200
26. P41,000
Unrecovered cos ts – Cos t of i ns ta l l ment s a l es for 20x4 i ns ta l l ment s a l es
Les s : Col l ecti ons i n 20x4 for 20x4 i ns ta l l ment s a l es
Unrecovered cos ts , 12/31/20x4
Les s : Col l ecti ons i n 20x5 for 20x4 i ns ta l l ment s a l es
Rea l i zed GP on I/S i n 20x5 for 20x4 i ns ta l l ment s a l es
Rea l i zed GP on I/S i n 20x5 for 20x5 i ns ta l l ment s a l es :
Unrecovered cos ts – Cos t of i ns ta l l ment s a l es for 20x5 i ns ta l l ment
Sa l es
Les s : Col l ecti ons i n 20x5 for 20x5 i ns ta l l ment s a l es
Unrecovered cos ts , 12/31/20x4
Rea l i zed GP on I/S i n 20x5
Downloaded by qwer ty (ryeupicy@ruru.be)
31,000
_25,600
5,400
46,400
41,000
56,050
22,800
33,250
____-041,000
lOMoARcPSD|28427881
27. P 45,000
Installment
Deferred
Fair value
receivable
gross
profit
= P75,000
Repossessed inventory P 75,000
Deferred gross profit
P 80,000
Loss on repossession (plug)
P 45,000
Installment receivable
28. Zero
P450,000 cost
=
=
P80,000
(P200,000
x
P
P200,000
40%)
200,000
P300,000 collections = P150,000 unrecovered costs
29. P300,000
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so
P150,000 of gross profit recognized in 20x5, leaving P300,000 recognized in
20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000
of cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so
P0 of gross profit recognized in 20x6.
Total: P300,000 + P0 = P300,000
30. d
20x4 Sales:
20x5 Sales:
Total
Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) =
Net installment receivable for 20x4 sales
=
P 300,000
P
300,000
0
Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000
Deferred gross profit = P600,000 – P0 (all x5 collections to
cost recovery) =
P 600,000
Net installment receivable for 20x5
=
P 400,000
=
P 400,000
31. 24%.
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lOMoARcPSD|28427881
Determined from the repossession entry:
Deferred gross profit
P2,400
———— = 24%
P10,000
Installment accounts receivable
32. 35%
Installment sales
Cost of sales
Gross profit
P120,000
78,000
P 42,000
Gross profit
P42,000
————- = 35% gross profit rate
P120,000
Installment sales
33.
a. 20x4 Deferred gross profit balance
Gross profit rate
Beginning accounts receivable
Beginning accounts receivable
Ending accounts receivable
Cash collected
P 12,000
÷ 25%
P 48,000
P 48,000
(20,000)
P 28,000
b. 20x5 Deferred gross profit balance
Gross profit rate
Beginning accounts receivable*
Beginning accounts receivable*
Ending accounts receivable*
Cash collected
P 26,400
÷ 24%
P110,000
P110,000
(50,000)
P 60,000
c. 20x6 Installment sales—20x6
Accounts receivable—20x6
Cash collected
P120,000
(90,000)
P 30,000
34. P31,900
Total realized gross profit in 20x6
From 20x4
P28,000 × 25% =
20x5
P60,000 × 24% =
20x6
P30,000 × 35% =
P 7,000
14,400
10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.
35. 20x4 (2010), P33,750; 20x5 (2011), P95,250
Gross profit realized in 20x4 (2010):
Installment sales =
[(P300,000 P165,000)/P300,000] x P75,000 =
Gross profit realized in 20x5 (2011):
From 20x4 sales =
[(P300,000 P165,000)/P300,000] x P105,000 =
From 20x5 sales =
[(P450,000
P270,000)/P450,000] x P120,000 =
P33,750
P47,250
48,000
P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250
20x4
Downloaded by qwer ty (ryeupicy@ruru.be)
20x5
lOMoARcPSD|28427881
Sales
Cost of sales
Gross profit
Gross profit realized on installment sales
Total gross profit
37. 20x4 (2010), P148,750; 20x5 (2011), P275,250
.
Installment accounts receivable
Less: Deferred gross profit
Net of deferred gross profit
Theories
1.
False
2.
True
3.
False
4.
True
5.
True
30.
31.
32.
33.
34.
60.
61.
62.
63.
64.
c
b
b
b
c
C
B
b
c
d
7.
8.
9.
10.
6.
True
False
True
False
True
12.
13.
14.
15.
35.
b
40.
36.
37.
38.
39.
d
41.
42.
43.
44. d
65.
b
b
d
66.
67.
68.
69.
d
e
c
11.
True
False
False
True
True
a
e
b
b
16.
17.
18.
19.
20.
45.
46.
47.
48.
49.
(2010)
P450,000
335,000
P115,000
33,750
P148,750
(2011
P450,000
270,000
P180,000
95,250
P275,250
20x4
(2010)
P225,000
101,250
P123,750
20x5
(2011
P450,000
186,000
P264,000
True
True
False
False
True
21.
b
c
c
50.
c
d
22.
23.
24.
25.
True
True
True
True
True
d
51. c
52. b
53. a
54. b
d
c
Downloaded by qwer ty (ryeupicy@ruru.be)
26.
27.
28.
29.
True
True
False
True
55.
56.
57.
58.
59.
d
b
d
c
c
lOMoARcPSD|28427881
Chapter 8
Problem I
1. Input Measure - Percentage of Completion Method (Cost to Cost Method)
2008:
Contract price
P 1,800,000
Actual costs to date
P 450,000
Estimated costs to complete
1,200,000
Total estimated project costs
1,650,000
Estimated total gross profit
150,000
Percentage of completion:
P450,000 / P,1650,000
27.27%
Gross profit recognized
P 40,905
2009:
Contract price
P 1,800,000
Costs incurred:
2008
2009
P 450,00
1,100,000
Total cost
Total gross profit
Recognized in 2008
Recognized in 2009
1,550,000
250,000
40,905
P 209,095
2. Input Measure - Cost Recovery Method
2008: (all costs not yet recovered)
2009:
Contract price
Costs incurred:
P -01,800,00
2008
2009
P 450,000
1,100,000
Total cost
Total gross profit
1,550,000
P 250,000
Problem II
1. Input Measure - Percentage of Completion Method (Cost to cost Method)
Years
Gross Profit (or Loss) Supporting computations
recognized
2008
P 2 million
(P108 – 90) x (P30/P90) = P6 million
2009
( P18 million)
Total loss is (P108 –120) = (P12 million)
To date, P6 million was recorded:
therefore, (P12 million) – P6 million =
(P18 million) in 2009
2010
P 10 million
Total loss is P 108 – 110) = (P2 million)
To date, (P 12 million was recorded:
therefore, ( P2 million) – (P12 million)
= P10 million in 2010
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lOMoARcPSD|28427881
2. Input Measure - Cost Recovery Method
Years
Gross Profit (or Loss)
2008
P -0-
2009
2010
(P 12 million)
P 10 million
Supporting computations
( P108 – 90) = P18 anticipated gross
profit, so no need to recognized a
gross loss
Total loss is ( P108 – 120) = (12 million)
Total loss is (P108- 110) – ( P2 million)
To date, ( P12 million was recorded:
therefore, ( P2 million) – ( P12 million)
= P10 million in 2010
Problem III
1. Journal Entries
a. Input Measure – Percentage of completion – (cost-to-cost method)
The following analysis is to determine the percentage of completion:
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date (1)…..…
Add: Estimated costs to complete…..
Total estimated costs (3)……..…………
Estimated gross profit……………………
Percentage of completion (1) / (3)
20x3
20x4
20x5
P528,000
_______P528,000
P 126,048
_______P126,048
_358,752
P484,800
P 43,200
26%
P528,000
__12,000
P540,000
*P244,032
_126,048
*P370,080
_121,920
P492,000
P 48,000
**74%
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
100%
* including the P7,200 additional costs in 20x4.
* * it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials
held for the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080
/ P492,000 = 74%.
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Rev enue (P528,000 x 26%)
Costs/Expenses (P484,800 x 26%)
Gross Profit (P43,200 x 26%)
To date
P 137,280
126,048
P 11,232
Recognized in
prior years
-
Recognized in
current year
P 137,280
126,048
P 11,232
20x4
Rev enue (P540,000 x 74%)
Costs/Expenses (P492,000 x 74%)
Gross Profit (P48,000 x 74%)
To date
P 399,600
_364,080
P 35,520
Recognized in
prior years
P 137,280
_126,048
P 11,232
Recognized in
current year
P 262,320
238,032
P 24,288
20x5
Rev enue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
To date
P 540,000
_492,000
P 48,000
Recognized in
prior years
P 399,600
_364,080
P 35,520
Recognized in
current year
P 140,400
_127,920
P 12,480
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Downloaded by qwer ty (ryeupicy@ruru.be)
20x4
20x5
lOMoARcPSD|28427881
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date (1)…..…….
Add: Estimated costs to complete………
Total estimated costs (3)……..…………….
Estimated gross profit………………………
Percentage of completion (1) / (3)……...
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year -% of completion
Gross profit in current year –cost recov ery method
P528,000
_______P528,000
P126,048
_______P126,048
_358,752
P484,800
P 43,200
____26%
P 11,232
_______P 11,232
P
0
P528,000
__12,000
P540,000
P240,032
_126,048
P370,080
_121,920
P492,000
P 48,000
____74%
P 35,520
___11,232
P 24,288
P
0
P528,000
12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__35,520
P 12,480
P 48,000
Following are the entries for the years 20x3 to 20x5:
Percentage of Completion Method
20x3
1. To record costs incurred:
Construction In Progress*………......
Materials Inv entory…………………..
Cash, payables, etc……………..
126,048
232,032
6,000
126,048
2. To record progress billings:
Accounts receiv able………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receiv able……………
120,000
4. To recognize Rev enue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Rev enue from Construction......
20x4
127,920
6,000
121,920
244,032
240,000
144,000
156,000
240,000
228,000
120,000
126,048
11,232
20x5
156,000
192,000
228,000
238,032
24,288
137,280
192,000
127,920
12,480
262,320
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternativ ely be used.
** If “Contract account” is used then no entry is required for No. 5.
140,400
540,000
540,000
b. Input Measure – Cost Recovery Method
The following table shows the data needed for further analysis:
20x3
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date……....…
Add: Estimated costs to complete…..
P528,000
_______P528,000
P126,048
_______P126,048
____ _?
Downloaded by qwer ty (ryeupicy@ruru.be)
20x4
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
20x5
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______-
lOMoARcPSD|28427881
Total estimated costs ….……..…………
P
?
P
?
P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Rev enue*
Costs/Expenses
Gross Profit
* equiv alent to costs incurred
To date
P 126,048
126,048
P
0
Recognized in
prior years
-
Recognized in
current year
P 126,048
126,048
P
0
20x4
Rev enue*
Costs/Expenses
Gross Profit
* equiv alent to costs incurred
To date
P 364,080
_364,080
P
0
Recognized in
prior years
P 126,048
126,048
P
0
Recognized in
current year
P 238,032
238,032
P
0
To date
Recognized in
prior years
Recognized in
current year
20x5
Rev enue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
P 540,000
P 364,080
P 175,200
_492,000
364,080
127,920
0
P 48,000
P 48,000
P
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date ……...…….
Add: Estimated costs to complete………
Total estimated costs …….…..…………….
Estimated gross profit……………………….
Percentage of completion………………..
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year………………...
P528,000
_______P528,000
P 126,048
_______P 126,048
____ _?
P
?
P
0
_ -___
P
0
_______P
0
20x4
20x5
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
P
0
_ -___
P
0
_______P
0
P528,000
12,000
P540,000
P 121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__
0
P 48,000
Following are the entries for the years 20x3 to 20x5:
20x3
1. To record costs incurred:
Construction In Progress*………......
Materials Inv entory…………………..
Cash, payables, etc……………..
126,048
20x4
238,032
6,000
126,048
2. To record progress billings:
Accounts receiv able………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receiv able……………
120,000
20x5
127,920
6,000
121,920
244,032
240,000
144,000
156,000
240,000
228,000
120,000
Downloaded by qwer ty (ryeupicy@ruru.be)
156,000
192,000
228,000
192,000
lOMoARcPSD|28427881
4. To recognize Rev enue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Rev enue from Construction......
126,480
238,032
127,920
48,000
126,480
238,032
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternativ ely be used.
** If “Contract account” is used then no entry is required for No. 5.
175,920
540,000
540,000
2. Due from/Due to Customers
a. Input Measure - Percentage of Completion Method
Current Asset:
Accounts receiv able……………………….
Other receiv ables:
Construction In Progress…………………
Less: Progress billings…………………….
Gross amount due from customers…...
Raw materials Inv entory……………………
20x3
P 24,000
20x4
P 36,000
20x5
P
-
P399,600
_384,000
P 15,600
P 6,000
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
P144,000
_137,280
P 6,720
Construction In Progress
Progress Billings
20x3 CI 126,048
Pr
11,232
144,000 20x3
end of x3 137,280
20x4 CI 238,032
Pr
11,232
144,000 end of x3
240,000 20x4
end of x4 399,600
20x5 CI 127,920
Pr
12,480
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
b. Input Measure – Cost Recovery Method
Current Asset:
Accounts receiv able……………………….
Raw materials Inv entory……………………
20x3
P 24,000
20x4
P 36,000
P 6,000
Downloaded by qwer ty (ryeupicy@ruru.be)
20x5
P
-
lOMoARcPSD|28427881
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
P 137,280
_144,000
P 6,720
P384,000
_364,080
P 19,920
Construction In Progress
Progress Billings
20x3 CI 126,048
Pr
0
144,000 20x3
end of x3 126,048
20x4 CI 238,032
Pr
0
144,000 end of x3
240,000 20x4
end of x4 364,080
20x5 CI 127,920
Pr
48,000
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
3. Gross Profit
a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed
computation)
Rev enue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 137,280
_126,048
P 11,232
20x4
P 262,320
_238,032
P 24,288
20x5
P 140,400
_127,920
P 12,480
b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
Rev enue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 126,048
_126,048
P
0
20x4
P 238,032
_238,032
P
0
20x5
P 175,920
_127,920
P 48,000
Problem IV
1. Anticipated/Gross Loss
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Contract price
Actual cost to date
Estimated costs to complete
Total estimated project costs
Estimated loss, recognized in 2008
P2,500,000
P1,500,000
1,200,000
Downloaded by qwer ty (ryeupicy@ruru.be)
2,700,000
P (200,000)
lOMoARcPSD|28427881
2009:
Contract price
Costs incurred:
P 2,500,000
In 2008
In 2008
P1,500,000
1,300,000
Total cost
Total loss
Recognized in 2008
Recognized in 2009
2,800,000
P (300,000)
(200,000)
P (100,000)
Loss in 20x4
Loss in 20x5
a. Input
Measure –
Cost
Recovery
Method
P( 200,000)
P (100,000)
2. Journal Entries
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Construction in progress
Various credits
1,500,000
1,500,000
Accounts receivable
Billings on construction contract
1,200,000
Cash
Accounts receivable
1,000,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts*
2009:
Construction in progress
Various credits
1,588,889
Accounts receivable
Billings on construction contract
1,300,000
Cash
Accounts receivable
1,500,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts**
1,211,111
Billings on construction contract
Construction in progress
2,500,000
*P2,500,000
** P2,500,000
1,200,000
1,000,000
200,000
1,388,889
1,300,000
1,300,000
1,300,000
1,500,000
100,000
1,111,111
2,500,000
(P1,500,000/P2,700,000)
1,388,889
Problem V
Item to compute
Answer
Downloaded by qwer ty (ryeupicy@ruru.be)
lOMoARcPSD|28427881
Total revenue recognized during 2009 (w):
CIP contains cost + gross profit = revenue, so w = P50
Gross profit recognized during 2009 (x): P50 – P35 = P15
Billings on construction (y) : P14 + P 46 = P60
Net billings in excess of construction in progress (z): Billings of P60 – CIP of
P50
Calculate the percentage of PAC that was completed during 2009:
50/150 = 33.33%
Problem VI
Item to compute
Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R)
Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22
gross pofit)
At 12/31/2009, the estimated remaining costs to complete Cincy One
(44/{44 + x})(300 – {44 + x}) = 22; x = 156
The percentage of Cincy One that wa completed during 2009 100 x (44/
{44 + 156})
Problem VII
1.
Progress billings on construction contract
Less accounts receivable
Cash collected in 20x4
P50 million
P 15 million
P60million
P10 million
333.33%
Answer
P65 million
P44 million
P156 million
22%
P562,000
150,500
P411,500
2.
Gross profit from construction contract + Construction in progress = Revenue for 20x4
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12%
Percentage completed in 20x4
P301,000/.12 = P2,508,333
Estimated income on construction contract
Problem VIII
1. Percentage of Completion Method (Cost-to-cost Approach)
20x4
Contract price ...................
P250,000
Current year costs ...............
110,000
Costs to date ....................
110,000
Estimated cost to complete .......
100,000
Estimated total cost .............
210,000
Estimated total gross profit .....
40,000
Percent complete .................
52%
Revenue to date ..................
P130,000
20x4:
Revenue
Costs (110/210 x 210)
Gross profit
To Date
at Dec. 31
P130,000
110,000
P 20,000
20x5:
Revenue
Costs (230/245 x 245)
P235,000
230,000
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20x5
P250,000
120,000
230,000
20,000
245,000
5,000
94%
P230,000
20x6
P250,000
15,000
245,000
0
240,000
5,000
100%
P250,000
Previous
Years
Current
Year
P130,000
110,000
P 20,000
P130,000
110,000
P105,000
120,000
lOMoARcPSD|28427881
20x6:
Gross profit (loss)
P
5,000
P 20,000
P(15,000)
Revenue
Costs
Gross profit
P250,000
245,000
P 5,000
P235,000
230,000
P 5,000
P 15,000
15,000
P
0
20x4
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
P130,000
20,000
20x5
20x6
P100,000
P15,000
(15,000)
0
130,000
235,000
0
125,000
5,000
250,000
(15,000)
0
0
2. Cost Recovery Method
20x4
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
P110,000
20x5
20x6
P120,000
0
0
P20,000
5,000
110,000
230,000
0
125,000
(15,000)
250,000
(20,000)
0
0
Problem IX
1. Percentage of Completion Method (Cost-to-cost Approach)
Contract price
Current year costs
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
Percent complete
2005
P250,000
150,000
150,000
90,000
240,000
10,000
63%
2006
P250,000
100,000
250,000
20,000
270,000
(20,000)
93%
2007
P250,000
15,000
265,000
0
265,000
(15,000)
100%
Revenue to date
P157,500
P232,500
P250,000
2005:
Revenue ............
Costs (150/240 x 240)
Gross profit ............
2006:
Revenue ............
Costs ............
Gross profit (loss) ............
To Date
at Dec. 31
P157,500
150,000
P 7,500
Previous
Years
P232,500
252,500
P(20,000)
P157,500
150,000
P 7,500
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Current
Year
P157,500
150,000
P 7,500
P 75,000
102,500
P(27,500)
lOMoARcPSD|28427881
2007:
Revenue ............
Costs ............
Gross profit (loss) ............
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
Balance in accounts receivable
at Dec. 31 (after closing entries)
P250,000
265,000
P(15,000)
P232,500
252,500
$(20,000)
20x4
20x5
P150,000
7,500
157,500
P102,500
(27,500)
P 17,500
12,500
P 5,000
20x6
P12,500
5,000
230,000*
110,000
47,500
230,000
0
10,000
10,000
0
0
0
0
*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss
2. Cost Recovery Method
20x4
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
P150,000
0
20x5
20x6
P 80,000*
P20,000**
(20,000)
5,000
150,000
***230,000
0
110,000
40,000
230,000
0
0
0
Balance in accounts receivable
at Dec. 31 (after closing entries)
10,000
10,000
0
*P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5
** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5
***P150,000 + P100,000 – P20,000
Multiple Choice Problems
1. a
Costs incurred each year
(2.5 M + 2.0 M + 1 M* + .5 M)
P 6M
Add: Cost incurred in prior years
0
Costs incurred to date
P 6M
Add: Estimated cost to complete
Total estimated costs
P 18 M
Percentage of completion
6 M / 18M
Administrative cost as long as reimbursable is included in the construction costs.
Marketing costs are considered as expenses.
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Depreciation of idle equipment is charged to expenses.
2. b
P7,200,000
——————————— x (P15,000,000 – P12,000,000) = P1,800,000.
P7,200,000 + $4,800,000
3. c
P1,170,000
—————- x (P3,300,000 – P1,950,000) = P810,000
P1,950,000
(P3,300,000 – P2,010,000) – P810,000 = P480,000.
4. d
Under the percentage of completion method, the Construction-I n-Progress
account is used for cost incurred during the year and any realized gross profit (loss).
The follow ing T-account is prepared:
5. b
6.
c
7.
a
CI in 2004
RGP in 20x4 (?)
End of 20x4
CI in 20x5
RGP in 20x5 (?)
Construction-In-Progress
210,000
34,000
244,000
384,000
100,000
End of 20x5
728,000
P1,200,000
————— x (P7,200,000 – P4,800,000) = P600,000.
P4,800,000
P7,200,000 – P4,875,000 =P2,325,000.
20x4
Contract Price
8.
a
P4,800,000
x: Percentage-of-completion
_______75%
Recognized Rev enue to date
P3,600,000
Less: Costs incurred to date
P3,400,000
Gross Profit to date
P 200,000
Less: GP in prior year
_______-0-
Gross profit in current year
P 200,000
P3,600,000
————— x (P8,400,000 – P6,000,000) = P1,440,000.
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P6,000,000
9.
P8,400,000 – P5,600,000 = P2,800,000.
b
Items 10 and 11
No number requirement identified, if percentage-of-completion then the answer would (a)
a
[P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000
(P5,500,000 – P3,350,000) – P1,350,000 = P800,000.
10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000.
11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross
profit should be realized.
12. c
P600,000
—————————— x (P1,500,000 – P1,000,000) = P300,000
P600,000 + P400,000
(P1,500,000 – P1,050,000) – P300,000 = P150,000.
13. a
Contract Price
P6,000,000
Less: Total Estimated Costs
Costs I ncurred-1/10/x4 to 12/31/x5
P3,600,000
Add: Estimated costs to complete
1,200,000
4,800,000
Less: Costs incurred to date
P1,200,000
Multiplied by: % of completion
___3.6/4.8
Gross Profit to date
P 900,000
Less: GP in prior year (giv en)
___600,000
Gross profit in current year
14. b
P 300,000
20x4: Cost to date – P7,500,000 x 20%
20x5: Cost to date – P8,000,000 x 60%
Cost incurred during 20x5
P1,500,000
4,800,000
P3,300,000
15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000.
16. b
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
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50,000
P260,000
P 50,000
-0P 50,000
150,000
P200,000
P60,000)
lOMoARcPSD|28427881
Multiplied by: percentage of completion………..
Construction In Progress account
Less: Progress billings
Construction In Progress account (net) or Due from customers
__50/200
15,000
65,000
30,000
35,000
17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery
method must be used).
18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000.
19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.
20. d
21. d
Recognized gross profit (loss) to date… … … … ..
Less: Recognized gross profit in prior years… … .
Recognized gross profit each year… … … … … ..
P( 100,000)
____20,000
P (120,000)
22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000.
23. c
Contract price… … ……………… … … … … … … … .
Cost incurred each year… … … … … … … … … … ..
Add: Cost incurred in prior year… … … … … … … .
Costs incurred to date… … … … … … … … … … … ..
Add: Estimated costs to complete… … … … … …
Total estimated costs… ………… … … … … … … … .
Estimated gross profit (loss)… … … … .… … … … … .
Multiplied by: percentage of completion… …… ..
Recognized gross profit (loss) to date… … … … ..
Less: Recognized gross profit in prior years… … .
Recognized gross profit each year… … … … … ..
Prior year
P7,000,000
Current year
P7,000,000
P600,000
24. c
P7,440,000  .30 = P2,232,000.
25. d
(P7,200,000  .75) – (P7,100,000  .30) = P3,270,000.
26. b
(P7,440,000  .75) – (P620,000  8) = P620,000 debit.
27. c
P7,440,000  .25 = P1,860,000
P7,500,000 – (P7,200,000  .75) = P2,100,000.
28. b
(P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000.
29. c
P3,795,000 + P345,000 = P4,140,000.
30. d
P3,500,000 –P1,350,000 – P1,525,000 = P625,000.
31. b
P240,000 – P100,000 = P140,000.
32. d
P300,000 – P60,000 = P240,000
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P5,000,000
2,800,000
P7,800,000
(P 800,000)
_____100%
(P 800,000)
___600,000
(P1,400,000)
lOMoARcPSD|28427881
P240,000
————————— x (P2,400,000 – Total estimated cost) = P60,000
Total estimated cost
Total estimated cost = P1,920,000
P2,400,000 – P1,920,000 =P480,000.
33. c
(P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.
34. a
(P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.
P6,325,000 + P575,000 = P6,900.000.
35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zero profit approach) of construction accounting, revenue is recognized up to the extent of costs
incurred as long as it is probable will be recoverable.
36. b - 20x5: P12,000,000 > P11,870,000, No loss;
20x6: P12,000,000 – P12,400,000 = P400,000 loss.
37. a - Revenue recognized to the extent of costs incurred
38. c
P3,200,000 – P2,150,000 = P1,050,000.
39. c
P1,500,000 – P820,000 = P680,000.
40. a
Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 –
P150,000, loss) – P1,900,000, billings = P200,000 is classified as due from customers.
Under the US FASB, the excess of P200,00 is considered as an inventory account.
41. c
Costs of construction
Construction in progress
Rev enue for long-term contracts
1,200,000
800,000
2,000,000
Percentage
complete
=
P1,200,000
/
(P1,200,000
+P600,000)
=
2/3
Revenue
recognized
=
2/3
P3,000,000
=
P2,000,000
Cost
recognized
=
P1,200,000
Gross profit recognized = P2,000,000
P1,200,000 = P800,000
42. a
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due from customers)
P1,200,000
800,000
P2,000,000
1,500,000
P 500,000
43. b
Costs of construction
Construction in progress
Rev enue for long-term contracts
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600,000
400,000
1,000,000
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Total revenue P3,000,000
revenue previously recognized P2,000,000 = Revenue to
recognize
this
year
P1,000,000.
Cost
recognized
=
P600,000
Gross profit recognized = P1,000,000
P600,000 = P400,000
44. d
Costs of construction
Rev enue for long-term contracts
1,200,000
1,2000,000
Under cost recovery method, revenue should be recognized up to the extent of costs
incurred.
45. b
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due to customers)
P1,200,000
0
P1,200,000
1,500,000
P( 300,000)
46. d
Costs of construction
Construction in progress
Rev enue for long-term contracts
600,000
1,200,000
1,800,000
Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000,
so record remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5.
47. a
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x4
P 9,600,000
P 4,920,000
4,920,000
P 9,840,000
P(240,000)
100%
P (240,000)
_________
P (240,000)
20x5
P10,080,000
P 8,640,000
2,160,000
P 10,800,000
P (720,000)
100%
P (720,000)
(240,000)
P (480,000)
% of Completion / Cost Recovery Method:
Construction in Progress
CI
CI
4,920,000
4,680,000
3,720,000
Progress Billings
240,000 loss
480,000 loss
7,920,000
5,280,000
5,280,000
3,420,000
8,700,000
due to customers
P780,000
Note: If there is an anticipated loss, the Construction-in-Progress for both methods will
exactly be the same in the year the loss was incurred.
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48. d
Percentage of Completion:
Contract price… … … … … … … … … … ..
Cost incurred each year… … … … … … .
Add: Cost incurred in prior year… … …
Costs incurred to date… … … … … … …
Add: Estimated costs to compute… … .
Total estimated costs… … … … … … … .
Estimated gross profit… … … … … … …
Multiply by: percentage of completion.
Recognized gross profit to date… … …
Less: Recognized gross profit in prior years
Recognized gross profit each year… .
Project 6
P500,000
P375,000
_________
P375,000
________
P375,000
P125,000
100%
P125,000
_________
P125,000
Project 7
P700,000
P100,000
________
P100,000
400,000
P500,000
P200,000
20%
P 40,000
_________
P 40,000
Project 8
P250,000
P100,000
________
P100,000
100,000
P200,000
P 50,000
50%
P 25,000
_________
P 25,000
Cost Recovery Method of Construction Accounting:
Recognized Revenue… … … ..… … … ..
Less: Costs of long-term construction
contract… … … … … … … … … … … ..
Recognized gross profit each year… .
Project 6
P500,000*
Project 7
P100,000
Project 8
P100,000
375,000
P125,000
100,000
P
0
100,000
P
0
* Since the contract is com pleted then the full am ount of P500,000 contract price should be
recognized as revenue.
Percentage of Completion
Construction
Cost
Construction in Progress
Pr. 6 - Cl.
Pr.
Pr. 7 – Cl.
Pr.
Pr. 8. Cl
Pr.
12/31
375,000
125,000
100,000
40,000
100,000
100,000
765,000
265,000
500,000 Pr. 6
Recovery
Method
Construction in Progress
Pr. 6 - Cl.
Pr.
Pr. 7 – CI
Pr. 8 – CI
12/31
375,000
125,000
100,000
100,000
700,000
200,000
500,000 Pr. 6
500,000
(d)
500,000
(d)
49. a
Input Measures: Efforts-Expended Method - using timbers laid
Year 2
Timers laid Each Year
300
Add: Timbers laid in Prior Years
150
Timbers laid to date
450
Add: Additional support timbers to be laid
520
Total Estimated Timbers
970
Percentage-of-Completion
45/97
x: CONTRACT PRICE
P 800,000
Recognized Revenue to Date
P 371,134
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
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Year 3
500
450
950
-0950
100%
P 800,000
P 800,000
371,134
P 428,866
of
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Output Measures – Number of trail feet
Trail feet Each Year
Add: Trail fees in Prior Years
Trail feet to date
Add: Additional trail feet to be constructed
Total Estimated Trail feet
Percentage-of-Completion
x: CONTRACT PRICE
Recognized Revenue to Date
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
Year 2
7,500
3,000
10,500
8,200
18,700
105/187
P 800,000
P 449,198
Year 3
8,000
10,500
18,500
___-018,500
100%
P 800,000
P 800,000
449,198
P 350,802
50. b
Contract price… … … … … … … … … … ..
Cost incurred each year… … … … … … .
Add: Cost incurred in prior year… … …
Costs incurred to date… … … … … … …
Add: Estimated costs to complete
Total estimated costs… … … … … … … .
Estimated gross profit… … … … … … …
Multiply by: percentage of completion.
Recognized gross profit to date… … …
Less: Recognized gross profit in prior years
Recognized gross profit each year… .
2006
P5,000,000
P 900,000
P 100,000
-0P 100,000
2007
P5,000,000
900,000
P2,550,000
1,700,000
P4,250,000
P 750,000
60%
P 450,000
100,000
P 350,000
2008
P5,000,000
P2,050,000
2,550,000
P4,600,000
-0P4,600,000
P 400,000
100%
P 400,000
450,000
P( 50,000)
51. d – refer to No. 50
52. c
Contract Price… … … … … … … … … … … … … … … … … …
P60,000,000
Less: Total Estimated Costs
Cost Incurred to Date… … … … … … … … … … … … P26,000,000
Add: Estimated Costs to Complete… … … … … … 25,000,000
51,000,000
Estimated Gross Profit… … … … … … … … … … … … … … .
P 9,000,000
Multiplied by: % of completion… … … … … … … … … … .
30%
Recognized gross profit to date… … … … … … … … … ..
P 2,700,000
Less: RGP in prior years… … … … … … … … … … … … … …
_________0
Recognized gross profit in current year… … … … … …
P 2,700,000
Construction-in-progress Account:
Costs incurred to date… … … … … … … … … … … … … ..
GP in the current year… … … … … … … … … … … … … …
Less: Progress billings… … … … … … … … … … … … … … ..
Due from customer (net)… … … … … … … … … … … … .
P 26,000,000
2,700,000
P 28,700,000
5,000,000
P 23,700,000
53. c
Contract Price
Multiplied by: Gross Profit Rate
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P100,000,000
_________25%
lOMoARcPSD|28427881
Estimated Gross Profit of the entire contract
Multiplied by: Percentage of Completion for first year
Gross Profit realized for current year
P 25,000,000
_________50%
P 12,500,000
54. c
Contract Price
x: Mobilization Fee
Collection in 20x4
Note: Billings for 20x4 will be collected in January 20x5.
P120,000,000
10%
P 12,000,000
55. a
Mobilization Fee: 5% x P10M
Collection on Billings:
Contract price
x: Progress billings, net of 10% and 8% (50% - 10% - 8%)
Progress billings
x: Collections net of contract retention of 10%
Collections in 20x4
P 5.0 M
P 100 M
32%
P 32 M
90%
28.8 M
P 33.8 M
56. b – cost recovery method is used.
At the end of 20x4 the contractor must recognized only to the extent of recoverable
contract costs incurred (i.e., P5,000 contract revenue and P5,000 construction
costs/expenses).
Quiz- VIII
1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000
P1,000,000 – P900,000 = P100,000.
2. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
4,500,000
1,350,000
_2,700,000
4,050,000
450,000
1,350/4,050
150,000
____-0150,000
3. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
3,000,000
2,250,000
750,000
4. P80,000
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300,000
20x6
3,000,000
1,800,000
_600,000
2,400,000
600,000
1,800/2,400
450,000
_300,000
150,000
lOMoARcPSD|28427881
20x5
1,600,000
240,000
_960,000
1,200,000
400,000
240/1,200
80,000
______0
80,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
5. P20,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
1,400,000
400,000
_____-0400,000
_400,000
800,000
600,000
400/800
300,000
______0
300,000
20x6
1,400,000
400,000
400,000
800,000
200,000
1,000,000
400,000
800/1,000
320,000
300.000
20,000
6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit
7.P240,000 Profit
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
4,000,000
960,000
_______0
960,000
3,200,000
800,000
960/3,200
240,000
_______0
240,000
8. P102,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
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20x5
850,000
238,000
_______0
238,000
357,000
595,000
lOMoARcPSD|28427881
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
255,000
238/595
102,000
_______0
102,000
9. P990,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date*
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
3,000,000
450,000
20x6
3,000,000
990,000
450,000
1,440,000
2,250,000
750,000
____20%
150,000
______0
150,000
2,400,000
600,000
_____60%
360,000
150.000
210,000
* total estimated costs x % of completion
10. P50,000
20x5
1,500,000
465,000
_______0
465,000
1,085,000
1,550,000
( 50,000)
100%
( 50,000)
_______0
( 50,000)
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
11. P625,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
20x5
3,500,000
1,350,000
-01,350,000
1,350,000
2,700,000
800,000
-
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20x6
3,500,000
1,525,000
1,350,000
2,875,000
_______0
2,875,000
625,000
___100%
lOMoARcPSD|28427881
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
-0-0-
625,000
_______0
625,000
12. P550
Costs Incurred……………………………………………………………………….
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account……………………
400
P2,750
P 400
___-0P 400
_1,600
P2,000
P 750
400/2,000
150
550
13. P1,200,000
The term “completed” should be “cost recovery”
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
700,000
P2,000,000
P 700,000
______-0P 700,000
__800,000
P1,500,000
P 500,000
________0
_______0
700,000
20x5
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
14. P32,000 = P47,000 – P15,000
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600,000
P2,000,000
P 600,000
_700,000
P1,300,000)
__800,000
P(2,100,000)
P (100,000)
________0
_(100,000)
1,200,000
lOMoARcPSD|28427881
15. P782,000
20x5
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
238,000
P850,000
P238,000
______-0P238,000
_357,000
P595,000
P255,000
_238/595
102,000
340,000
20x6
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
Less: Progress billings (P260,000 + P210,000)
Construction In Progress account (net) – Due from
customers
319,600
P850,000
P319,600
_238,000
P557,600
_139,400
P697,000
P153,000
_557.6/697
_122,400
782,000
470,000
312,000
16. P312,000
17. same with no.16 – P312,000
18. (P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000.
19.P3,795,000 + P345,000 = P4,140,000.
20. P2,750,000
P1,650,000
————— × P5,000,000 = P2,750,000
P3,000,000
21.
22.
Accounts Receivable.......................................................................
Billings on Construction in Process ......................................
1,650,000
Construction Expenses .....................................................................
1,650,000
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1,650,000
lOMoARcPSD|28427881
Construction in Process ...................................................................
Revenue from Long-Term Contracts ...................................
23. P875,000
Revenue
Costs
Total gross profit
Recognized in 20x5
Recognized in 20x6
Or
Total revenue
Recognized in 20x5
Recognized in 20x6
Costs in 20x6
Gross profit in 20x6
24.
25.
26.
20x5
20x6
20x7
P5,000,000
3,025,000
1,975,000
(1,100,000)
P 875,000
P5,000,000
(2,750,000)
2,250,000
(1,375,000)
P 875,000
Percentage-of-Completion
Gross Profit
P750,000a
P210,000b
P440,000c
20x5
20x6
20x7
Completed-Contract
Gross Profit
—
—
P1,400,000d
aP1,500,000
————— × P2,000,000 =
P4,000,000
P750,000
bP2,640,000
————— × P1,600,000 =
P4,400,000
P960,000
Less 20x5 gross profit
20x6 gross profit
(750,000)
P210,000
cTotal
revenue
Total costs
Total gross profit
Recognized to date
20x7 gross profit
d Total
revenue
Total costs
Total gross profit
1,100,000
P6,000,000
4,600,000
1,400,000
(960,000)
P 440,000
P6,000,000
4,600,000
P1,400,000
27. P312,500
Revenue
= [P250,000/(P250,000 + P750,000)]
P1,250,000
= P312,500
Gross profit = P312,500 P250,000 = P62,500
Construction in progress = P250,000 + P62,500 = P312,500
28. P125,000
(2)
Current Assets
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2,750,000
lOMoARcPSD|28427881
Inventories
Construction in progress*
P1,000,000
Less: Partial billings**
(875,000)
Costs and recognized profit not
P 125,000
yet billed
* Revenue to date = (P250,000 +
P600,000)/(P250,000 + P600,000 +
P212,500) 1,250,000 = P1,000,000
Construction in progress = P250,000 +
P600,000 + P150,000 = P1,000,000
** Partial billings = P375,000 + P500,000 =
P875,000
29. P60,00
Revenue to date
Revenue from previous periods
Revenue for 20x7
Costs incurred in 20x7
Gross profit for 20x7
P1,250,000
_1,000,000
P 250,000
_ 190,000
P 60,000
THEORIES
1.
2.
3.
4.
5.
36.
False
True
True
False
False
6.
7.
8.
9.
10,
False
False
False
True
False
11.
12.
13.
14.
15,
False
True
False
True
False
16.
17.
18.
19.
20.
True
False
True
False
True
21.
22.
23.
24.
25.
True
False
False
False
False
26.
27.
28.
29.
30.
True
True
False
False
True
31.
32.
33.
34.
35.
37.
38.
39.
40.
False
True
True
False
False
41.
b
46.
a
51.
c
56.
d
61.
d
66.
c
42.
43.
44.
45.
c
47.
48.
49.
50.
d
52.
53.
54.
55.
b
c
b
57.
58.
59.
60.
b
62.
63.
64.
65.
b
a
c
d
67.
68.
69.
70.
b
b
c
b
c
c
a
a
c
c
c
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a
d
C
False
False
True
False
True
lOMoARcPSD|28427881
Chapter 8
Problem I
1. Input Measure - Percentage of Completion Method (Cost to Cost Method)
2008:
Contract price
P 1,800,000
Actual costs to date
P 450,000
Estimated costs to complete
1,200,000
Total estimated project costs
1,650,000
Estimated total gross profit
150,000
Percentage of completion:
P450,000 / P,1650,000
27.27%
Gross profit recognized
P 40,905
2009:
Contract price
P 1,800,000
Costs incurred:
2008
2009
P 450,00
1,100,000
Total cost
Total gross profit
Recognized in 2008
Recognized in 2009
1,550,000
250,000
40,905
P 209,095
2. Input Measure - Cost Recovery Method
2008: (all costs not yet recovered)
2009:
Contract price
Costs incurred:
P -01,800,00
2008
2009
P 450,000
1,100,000
Total cost
Total gross profit
1,550,000
P 250,000
Problem II
1. Input Measure - Percentage of Completion Method (Cost to cost Method)
Years
Gross Profit (or Loss) Supporting computations
recognized
2008
P 2 million
(P108 – 90) x (P30/P90) = P6 million
2009
( P18 million)
Total loss is (P108 –120) = (P12 million)
To date, P6 million was recorded:
therefore, (P12 million) – P6 million =
(P18 million) in 2009
2010
P 10 million
Total loss is P 108 – 110) = (P2 million)
To date, (P 12 million was recorded:
therefore, ( P2 million) – (P12 million)
= P10 million in 2010
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lOMoARcPSD|28427881
2. Input Measure - Cost Recovery Method
Years
Gross Profit (or Loss)
2008
P -0-
2009
2010
(P 12 million)
P 10 million
Supporting computations
( P108 – 90) = P18 anticipated gross
profit, so no need to recognized a
gross loss
Total loss is ( P108 – 120) = (12 million)
Total loss is (P108- 110) – ( P2 million)
To date, ( P12 million was recorded:
therefore, ( P2 million) – ( P12 million)
= P10 million in 2010
Problem III
1. Journal Entries
a. Input Measure – Percentage of completion – (cost-to-cost method)
The following analysis is to determine the percentage of completion:
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date (1)…..…
Add: Estimated costs to complete…..
Total estimated costs (3)……..…………
Estimated gross profit……………………
Percentage of completion (1) / (3)
20x3
20x4
20x5
P528,000
_______P528,000
P 126,048
_______P126,048
_358,752
P484,800
P 43,200
26%
P528,000
__12,000
P540,000
*P244,032
_126,048
*P370,080
_121,920
P492,000
P 48,000
**74%
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
100%
* including the P7,200 additional costs in 20x4.
* * it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials
held for the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080
/ P492,000 = 74%.
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Rev enue (P528,000 x 26%)
Costs/Expenses (P484,800 x 26%)
Gross Profit (P43,200 x 26%)
To date
P 137,280
126,048
P 11,232
Recognized in
prior years
-
Recognized in
current year
P 137,280
126,048
P 11,232
20x4
Rev enue (P540,000 x 74%)
Costs/Expenses (P492,000 x 74%)
Gross Profit (P48,000 x 74%)
To date
P 399,600
_364,080
P 35,520
Recognized in
prior years
P 137,280
_126,048
P 11,232
Recognized in
current year
P 262,320
238,032
P 24,288
20x5
Rev enue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
To date
P 540,000
_492,000
P 48,000
Recognized in
prior years
P 399,600
_364,080
P 35,520
Recognized in
current year
P 140,400
_127,920
P 12,480
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
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20x4
20x5
lOMoARcPSD|28427881
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date (1)…..…….
Add: Estimated costs to complete………
Total estimated costs (3)……..…………….
Estimated gross profit………………………
Percentage of completion (1) / (3)……...
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year -% of completion
Gross profit in current year –cost recov ery method
P528,000
_______P528,000
P126,048
_______P126,048
_358,752
P484,800
P 43,200
____26%
P 11,232
_______P 11,232
P
0
P528,000
__12,000
P540,000
P240,032
_126,048
P370,080
_121,920
P492,000
P 48,000
____74%
P 35,520
___11,232
P 24,288
P
0
P528,000
12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__35,520
P 12,480
P 48,000
Following are the entries for the years 20x3 to 20x5:
Percentage of Completion Method
20x3
1. To record costs incurred:
Construction In Progress*………......
Materials Inv entory…………………..
Cash, payables, etc……………..
126,048
232,032
6,000
126,048
2. To record progress billings:
Accounts receiv able………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receiv able……………
120,000
4. To recognize Rev enue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Rev enue from Construction......
20x4
127,920
6,000
121,920
244,032
240,000
144,000
156,000
240,000
228,000
120,000
126,048
11,232
20x5
156,000
192,000
228,000
238,032
24,288
137,280
192,000
127,920
12,480
262,320
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternativ ely be used.
** If “Contract account” is used then no entry is required for No. 5.
140,400
540,000
540,000
b. Input Measure – Cost Recovery Method
The following table shows the data needed for further analysis:
20x3
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date……....…
Add: Estimated costs to complete…..
P528,000
_______P528,000
P126,048
_______P126,048
____ _?
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20x4
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
20x5
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______-
lOMoARcPSD|28427881
Total estimated costs ….……..…………
P
?
P
?
P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
20x3
Rev enue*
Costs/Expenses
Gross Profit
* equiv alent to costs incurred
To date
P 126,048
126,048
P
0
Recognized in
prior years
-
Recognized in
current year
P 126,048
126,048
P
0
20x4
Rev enue*
Costs/Expenses
Gross Profit
* equiv alent to costs incurred
To date
P 364,080
_364,080
P
0
Recognized in
prior years
P 126,048
126,048
P
0
Recognized in
current year
P 238,032
238,032
P
0
To date
Recognized in
prior years
Recognized in
current year
20x5
Rev enue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
P 540,000
P 364,080
P 175,200
_492,000
364,080
127,920
0
P 48,000
P 48,000
P
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date ……...…….
Add: Estimated costs to complete………
Total estimated costs …….…..…………….
Estimated gross profit……………………….
Percentage of completion………………..
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year………………...
P528,000
_______P528,000
P 126,048
_______P 126,048
____ _?
P
?
P
0
_ -___
P
0
_______P
0
20x4
20x5
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
P
0
_ -___
P
0
_______P
0
P528,000
12,000
P540,000
P 121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__
0
P 48,000
Following are the entries for the years 20x3 to 20x5:
20x3
1. To record costs incurred:
Construction In Progress*………......
Materials Inv entory…………………..
Cash, payables, etc……………..
126,048
20x4
238,032
6,000
126,048
2. To record progress billings:
Accounts receiv able………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receiv able……………
120,000
20x5
127,920
6,000
121,920
244,032
240,000
144,000
156,000
240,000
228,000
120,000
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156,000
192,000
228,000
192,000
lOMoARcPSD|28427881
4. To recognize Rev enue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Rev enue from Construction......
126,480
238,032
127,920
48,000
126,480
238,032
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternativ ely be used.
** If “Contract account” is used then no entry is required for No. 5.
175,920
540,000
540,000
2. Due from/Due to Customers
a. Input Measure - Percentage of Completion Method
Current Asset:
Accounts receiv able……………………….
Other receiv ables:
Construction In Progress…………………
Less: Progress billings…………………….
Gross amount due from customers…...
Raw materials Inv entory……………………
20x3
P 24,000
20x4
P 36,000
20x5
P
-
P399,600
_384,000
P 15,600
P 6,000
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
P144,000
_137,280
P 6,720
Construction In Progress
Progress Billings
20x3 CI 126,048
Pr
11,232
144,000 20x3
end of x3 137,280
20x4 CI 238,032
Pr
11,232
144,000 end of x3
240,000 20x4
end of x4 399,600
20x5 CI 127,920
Pr
12,480
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
b. Input Measure – Cost Recovery Method
Current Asset:
Accounts receiv able……………………….
Raw materials Inv entory……………………
20x3
P 24,000
20x4
P 36,000
P 6,000
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20x5
P
-
lOMoARcPSD|28427881
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Gross amount due to customers…………
P 137,280
_144,000
P 6,720
P384,000
_364,080
P 19,920
Construction In Progress
Progress Billings
20x3 CI 126,048
Pr
0
144,000 20x3
end of x3 126,048
20x4 CI 238,032
Pr
0
144,000 end of x3
240,000 20x4
end of x4 364,080
20x5 CI 127,920
Pr
48,000
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
3. Gross Profit
a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed
computation)
Rev enue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 137,280
_126,048
P 11,232
20x4
P 262,320
_238,032
P 24,288
20x5
P 140,400
_127,920
P 12,480
b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
Rev enue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 126,048
_126,048
P
0
20x4
P 238,032
_238,032
P
0
20x5
P 175,920
_127,920
P 48,000
Problem IV
1. Anticipated/Gross Loss
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Contract price
Actual cost to date
Estimated costs to complete
Total estimated project costs
Estimated loss, recognized in 2008
P2,500,000
P1,500,000
1,200,000
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2,700,000
P (200,000)
lOMoARcPSD|28427881
2009:
Contract price
Costs incurred:
P 2,500,000
In 2008
In 2008
P1,500,000
1,300,000
Total cost
Total loss
Recognized in 2008
Recognized in 2009
2,800,000
P (300,000)
(200,000)
P (100,000)
Loss in 20x4
Loss in 20x5
a. Input
Measure –
Cost
Recovery
Method
P( 200,000)
P (100,000)
2. Journal Entries
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Construction in progress
Various credits
1,500,000
1,500,000
Accounts receivable
Billings on construction contract
1,200,000
Cash
Accounts receivable
1,000,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts*
2009:
Construction in progress
Various credits
1,588,889
Accounts receivable
Billings on construction contract
1,300,000
Cash
Accounts receivable
1,500,000
Cost of construction
Construction in progress (loss)
Revenue from long-term contracts**
1,211,111
Billings on construction contract
Construction in progress
2,500,000
*P2,500,000
** P2,500,000
1,200,000
1,000,000
200,000
1,388,889
1,300,000
1,300,000
1,300,000
1,500,000
100,000
1,111,111
2,500,000
(P1,500,000/P2,700,000)
1,388,889
Problem V
Item to compute
Answer
Downloaded by qwer ty (ryeupicy@ruru.be)
lOMoARcPSD|28427881
Total revenue recognized during 2009 (w):
CIP contains cost + gross profit = revenue, so w = P50
Gross profit recognized during 2009 (x): P50 – P35 = P15
Billings on construction (y) : P14 + P 46 = P60
Net billings in excess of construction in progress (z): Billings of P60 – CIP of
P50
Calculate the percentage of PAC that was completed during 2009:
50/150 = 33.33%
Problem VI
Item to compute
Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R)
Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22
gross pofit)
At 12/31/2009, the estimated remaining costs to complete Cincy One
(44/{44 + x})(300 – {44 + x}) = 22; x = 156
The percentage of Cincy One that wa completed during 2009 100 x (44/
{44 + 156})
Problem VII
1.
Progress billings on construction contract
Less accounts receivable
Cash collected in 20x4
P50 million
P 15 million
P60million
P10 million
333.33%
Answer
P65 million
P44 million
P156 million
22%
P562,000
150,500
P411,500
2.
Gross profit from construction contract + Construction in progress = Revenue for 20x4
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12%
Percentage completed in 20x4
P301,000/.12 = P2,508,333
Estimated income on construction contract
Problem VIII
1. Percentage of Completion Method (Cost-to-cost Approach)
20x4
Contract price ...................
P250,000
Current year costs ...............
110,000
Costs to date ....................
110,000
Estimated cost to complete .......
100,000
Estimated total cost .............
210,000
Estimated total gross profit .....
40,000
Percent complete .................
52%
Revenue to date ..................
P130,000
20x4:
Revenue
Costs (110/210 x 210)
Gross profit
To Date
at Dec. 31
P130,000
110,000
P 20,000
20x5:
Revenue
Costs (230/245 x 245)
P235,000
230,000
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20x5
P250,000
120,000
230,000
20,000
245,000
5,000
94%
P230,000
20x6
P250,000
15,000
245,000
0
240,000
5,000
100%
P250,000
Previous
Years
Current
Year
P130,000
110,000
P 20,000
P130,000
110,000
P105,000
120,000
lOMoARcPSD|28427881
20x6:
Gross profit (loss)
P
5,000
P 20,000
P(15,000)
Revenue
Costs
Gross profit
P250,000
245,000
P 5,000
P235,000
230,000
P 5,000
P 15,000
15,000
P
0
20x4
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
P130,000
20,000
20x5
20x6
P100,000
P15,000
(15,000)
0
130,000
235,000
0
125,000
5,000
250,000
(15,000)
0
0
2. Cost Recovery Method
20x4
1.
2.
3.
4.
5.
Revenue recognized during
the year
Gross profit recognized during
the year
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
Net (3-4) or (4-3) – due from (due to)
P110,000
20x5
20x6
P120,000
0
0
P20,000
5,000
110,000
230,000
0
125,000
(15,000)
250,000
(20,000)
0
0
Problem IX
1. Percentage of Completion Method (Cost-to-cost Approach)
Contract price
Current year costs
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
Percent complete
2005
P250,000
150,000
150,000
90,000
240,000
10,000
63%
2006
P250,000
100,000
250,000
20,000
270,000
(20,000)
93%
2007
P250,000
15,000
265,000
0
265,000
(15,000)
100%
Revenue to date
P157,500
P232,500
P250,000
2005:
Revenue ............
Costs (150/240 x 240)
Gross profit ............
2006:
Revenue ............
Costs ............
Gross profit (loss) ............
To Date
at Dec. 31
P157,500
150,000
P 7,500
Previous
Years
P232,500
252,500
P(20,000)
P157,500
150,000
P 7,500
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Current
Year
P157,500
150,000
P 7,500
P 75,000
102,500
P(27,500)
lOMoARcPSD|28427881
2007:
Revenue ............
Costs ............
Gross profit (loss) ............
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
Balance in accounts receivable
at Dec. 31 (after closing entries)
P250,000
265,000
P(15,000)
P232,500
252,500
$(20,000)
20x4
20x5
P150,000
7,500
157,500
P102,500
(27,500)
P 17,500
12,500
P 5,000
20x6
P12,500
5,000
230,000*
110,000
47,500
230,000
0
10,000
10,000
0
0
0
0
*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss
2. Cost Recovery Method
20x4
1. Construction costs (expense)
recognized during the year
2. Gross profit recognized during
the year
3. Balance in the construction in
progress account at Dec. 31
(after closing entries)
4. Balance in the progress
billings account at Dec. 31 .
5. NNet (3-4) or (4-3) – due from (due to)
P150,000
0
20x5
20x6
P 80,000*
P20,000**
(20,000)
5,000
150,000
***230,000
0
110,000
40,000
230,000
0
0
0
Balance in accounts receivable
at Dec. 31 (after closing entries)
10,000
10,000
0
*P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5
** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5
***P150,000 + P100,000 – P20,000
Multiple Choice Problems
1. a
Costs incurred each year
(2.5 M + 2.0 M + 1 M* + .5 M)
P 6M
Add: Cost incurred in prior years
0
Costs incurred to date
P 6M
Add: Estimated cost to complete
Total estimated costs
P 18 M
Percentage of completion
6 M / 18M
Administrative cost as long as reimbursable is included in the construction costs.
Marketing costs are considered as expenses.
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lOMoARcPSD|28427881
Depreciation of idle equipment is charged to expenses.
2. b
P7,200,000
——————————— x (P15,000,000 – P12,000,000) = P1,800,000.
P7,200,000 + $4,800,000
3. c
P1,170,000
—————- x (P3,300,000 – P1,950,000) = P810,000
P1,950,000
(P3,300,000 – P2,010,000) – P810,000 = P480,000.
4. d
Under the percentage of completion method, the Construction-I n-Progress
account is used for cost incurred during the year and any realized gross profit (loss).
The follow ing T-account is prepared:
5. b
6.
c
7.
a
CI in 2004
RGP in 20x4 (?)
End of 20x4
CI in 20x5
RGP in 20x5 (?)
Construction-In-Progress
210,000
34,000
244,000
384,000
100,000
End of 20x5
728,000
P1,200,000
————— x (P7,200,000 – P4,800,000) = P600,000.
P4,800,000
P7,200,000 – P4,875,000 =P2,325,000.
20x4
Contract Price
8.
a
P4,800,000
x: Percentage-of-completion
_______75%
Recognized Rev enue to date
P3,600,000
Less: Costs incurred to date
P3,400,000
Gross Profit to date
P 200,000
Less: GP in prior year
_______-0-
Gross profit in current year
P 200,000
P3,600,000
————— x (P8,400,000 – P6,000,000) = P1,440,000.
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lOMoARcPSD|28427881
P6,000,000
9.
P8,400,000 – P5,600,000 = P2,800,000.
b
Items 10 and 11
No number requirement identified, if percentage-of-completion then the answer would (a)
a
[P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000
(P5,500,000 – P3,350,000) – P1,350,000 = P800,000.
10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000.
11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross
profit should be realized.
12. c
P600,000
—————————— x (P1,500,000 – P1,000,000) = P300,000
P600,000 + P400,000
(P1,500,000 – P1,050,000) – P300,000 = P150,000.
13. a
Contract Price
P6,000,000
Less: Total Estimated Costs
Costs I ncurred-1/10/x4 to 12/31/x5
P3,600,000
Add: Estimated costs to complete
1,200,000
4,800,000
Less: Costs incurred to date
P1,200,000
Multiplied by: % of completion
___3.6/4.8
Gross Profit to date
P 900,000
Less: GP in prior year (giv en)
___600,000
Gross profit in current year
14. b
P 300,000
20x4: Cost to date – P7,500,000 x 20%
20x5: Cost to date – P8,000,000 x 60%
Cost incurred during 20x5
P1,500,000
4,800,000
P3,300,000
15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000.
16. b
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
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50,000
P260,000
P 50,000
-0P 50,000
150,000
P200,000
P60,000)
lOMoARcPSD|28427881
Multiplied by: percentage of completion………..
Construction In Progress account
Less: Progress billings
Construction In Progress account (net) or Due from customers
__50/200
15,000
65,000
30,000
35,000
17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery
method must be used).
18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000.
19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.
20. d
21. d
Recognized gross profit (loss) to date… … … … ..
Less: Recognized gross profit in prior years… … .
Recognized gross profit each year… … … … … ..
P( 100,000)
____20,000
P (120,000)
22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000.
23. c
Contract price… … ……………… … … … … … … … .
Cost incurred each year… … … … … … … … … … ..
Add: Cost incurred in prior year… … … … … … … .
Costs incurred to date… … … … … … … … … … … ..
Add: Estimated costs to complete… … … … … …
Total estimated costs… ………… … … … … … … … .
Estimated gross profit (loss)… … … … .… … … … … .
Multiplied by: percentage of completion… …… ..
Recognized gross profit (loss) to date… … … … ..
Less: Recognized gross profit in prior years… … .
Recognized gross profit each year… … … … … ..
Prior year
P7,000,000
Current year
P7,000,000
P600,000
24. c
P7,440,000  .30 = P2,232,000.
25. d
(P7,200,000  .75) – (P7,100,000  .30) = P3,270,000.
26. b
(P7,440,000  .75) – (P620,000  8) = P620,000 debit.
27. c
P7,440,000  .25 = P1,860,000
P7,500,000 – (P7,200,000  .75) = P2,100,000.
28. b
(P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000.
29. c
P3,795,000 + P345,000 = P4,140,000.
30. d
P3,500,000 –P1,350,000 – P1,525,000 = P625,000.
31. b
P240,000 – P100,000 = P140,000.
32. d
P300,000 – P60,000 = P240,000
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P5,000,000
2,800,000
P7,800,000
(P 800,000)
_____100%
(P 800,000)
___600,000
(P1,400,000)
lOMoARcPSD|28427881
P240,000
————————— x (P2,400,000 – Total estimated cost) = P60,000
Total estimated cost
Total estimated cost = P1,920,000
P2,400,000 – P1,920,000 =P480,000.
33. c
(P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.
34. a
(P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.
P6,325,000 + P575,000 = P6,900.000.
35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zero profit approach) of construction accounting, revenue is recognized up to the extent of costs
incurred as long as it is probable will be recoverable.
36. b - 20x5: P12,000,000 > P11,870,000, No loss;
20x6: P12,000,000 – P12,400,000 = P400,000 loss.
37. a - Revenue recognized to the extent of costs incurred
38. c
P3,200,000 – P2,150,000 = P1,050,000.
39. c
P1,500,000 – P820,000 = P680,000.
40. a
Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 –
P150,000, loss) – P1,900,000, billings = P200,000 is classified as due from customers.
Under the US FASB, the excess of P200,00 is considered as an inventory account.
41. c
Costs of construction
Construction in progress
Rev enue for long-term contracts
1,200,000
800,000
2,000,000
Percentage
complete
=
P1,200,000
/
(P1,200,000
+P600,000)
=
2/3
Revenue
recognized
=
2/3
P3,000,000
=
P2,000,000
Cost
recognized
=
P1,200,000
Gross profit recognized = P2,000,000
P1,200,000 = P800,000
42. a
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due from customers)
P1,200,000
800,000
P2,000,000
1,500,000
P 500,000
43. b
Costs of construction
Construction in progress
Rev enue for long-term contracts
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600,000
400,000
1,000,000
lOMoARcPSD|28427881
Total revenue P3,000,000
revenue previously recognized P2,000,000 = Revenue to
recognize
this
year
P1,000,000.
Cost
recognized
=
P600,000
Gross profit recognized = P1,000,000
P600,000 = P400,000
44. d
Costs of construction
Rev enue for long-term contracts
1,200,000
1,2000,000
Under cost recovery method, revenue should be recognized up to the extent of costs
incurred.
45. b
Costs of construction
Profit
Construction In Progress
Less: Progress billings
Excess (Due to customers)
P1,200,000
0
P1,200,000
1,500,000
P( 300,000)
46. d
Costs of construction
Construction in progress
Rev enue for long-term contracts
600,000
1,200,000
1,800,000
Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000,
so record remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5.
47. a
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x4
P 9,600,000
P 4,920,000
4,920,000
P 9,840,000
P(240,000)
100%
P (240,000)
_________
P (240,000)
20x5
P10,080,000
P 8,640,000
2,160,000
P 10,800,000
P (720,000)
100%
P (720,000)
(240,000)
P (480,000)
% of Completion / Cost Recovery Method:
Construction in Progress
CI
CI
4,920,000
4,680,000
3,720,000
Progress Billings
240,000 loss
480,000 loss
7,920,000
5,280,000
5,280,000
3,420,000
8,700,000
due to customers
P780,000
Note: If there is an anticipated loss, the Construction-in-Progress for both methods will
exactly be the same in the year the loss was incurred.
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48. d
Percentage of Completion:
Contract price… … … … … … … … … … ..
Cost incurred each year… … … … … … .
Add: Cost incurred in prior year… … …
Costs incurred to date… … … … … … …
Add: Estimated costs to compute… … .
Total estimated costs… … … … … … … .
Estimated gross profit… … … … … … …
Multiply by: percentage of completion.
Recognized gross profit to date… … …
Less: Recognized gross profit in prior years
Recognized gross profit each year… .
Project 6
P500,000
P375,000
_________
P375,000
________
P375,000
P125,000
100%
P125,000
_________
P125,000
Project 7
P700,000
P100,000
________
P100,000
400,000
P500,000
P200,000
20%
P 40,000
_________
P 40,000
Project 8
P250,000
P100,000
________
P100,000
100,000
P200,000
P 50,000
50%
P 25,000
_________
P 25,000
Cost Recovery Method of Construction Accounting:
Recognized Revenue… … … ..… … … ..
Less: Costs of long-term construction
contract… … … … … … … … … … … ..
Recognized gross profit each year… .
Project 6
P500,000*
Project 7
P100,000
Project 8
P100,000
375,000
P125,000
100,000
P
0
100,000
P
0
* Since the contract is com pleted then the full am ount of P500,000 contract price should be
recognized as revenue.
Percentage of Completion
Construction
Cost
Construction in Progress
Pr. 6 - Cl.
Pr.
Pr. 7 – Cl.
Pr.
Pr. 8. Cl
Pr.
12/31
375,000
125,000
100,000
40,000
100,000
100,000
765,000
265,000
500,000 Pr. 6
Recovery
Method
Construction in Progress
Pr. 6 - Cl.
Pr.
Pr. 7 – CI
Pr. 8 – CI
12/31
375,000
125,000
100,000
100,000
700,000
200,000
500,000 Pr. 6
500,000
(d)
500,000
(d)
49. a
Input Measures: Efforts-Expended Method - using timbers laid
Year 2
Timers laid Each Year
300
Add: Timbers laid in Prior Years
150
Timbers laid to date
450
Add: Additional support timbers to be laid
520
Total Estimated Timbers
970
Percentage-of-Completion
45/97
x: CONTRACT PRICE
P 800,000
Recognized Revenue to Date
P 371,134
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
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Year 3
500
450
950
-0950
100%
P 800,000
P 800,000
371,134
P 428,866
of
lOMoARcPSD|28427881
Output Measures – Number of trail feet
Trail feet Each Year
Add: Trail fees in Prior Years
Trail feet to date
Add: Additional trail feet to be constructed
Total Estimated Trail feet
Percentage-of-Completion
x: CONTRACT PRICE
Recognized Revenue to Date
Recognized Revenue in Prior Years
Recognized Revenue in Current Yr.
Year 2
7,500
3,000
10,500
8,200
18,700
105/187
P 800,000
P 449,198
Year 3
8,000
10,500
18,500
___-018,500
100%
P 800,000
P 800,000
449,198
P 350,802
50. b
Contract price… … … … … … … … … … ..
Cost incurred each year… … … … … … .
Add: Cost incurred in prior year… … …
Costs incurred to date… … … … … … …
Add: Estimated costs to complete
Total estimated costs… … … … … … … .
Estimated gross profit… … … … … … …
Multiply by: percentage of completion.
Recognized gross profit to date… … …
Less: Recognized gross profit in prior years
Recognized gross profit each year… .
2006
P5,000,000
P 900,000
P 100,000
-0P 100,000
2007
P5,000,000
900,000
P2,550,000
1,700,000
P4,250,000
P 750,000
60%
P 450,000
100,000
P 350,000
2008
P5,000,000
P2,050,000
2,550,000
P4,600,000
-0P4,600,000
P 400,000
100%
P 400,000
450,000
P( 50,000)
51. d – refer to No. 50
52. c
Contract Price… … … … … … … … … … … … … … … … … …
P60,000,000
Less: Total Estimated Costs
Cost Incurred to Date… … … … … … … … … … … … P26,000,000
Add: Estimated Costs to Complete… … … … … … 25,000,000
51,000,000
Estimated Gross Profit… … … … … … … … … … … … … … .
P 9,000,000
Multiplied by: % of completion… … … … … … … … … … .
30%
Recognized gross profit to date… … … … … … … … … ..
P 2,700,000
Less: RGP in prior years… … … … … … … … … … … … … …
_________0
Recognized gross profit in current year… … … … … …
P 2,700,000
Construction-in-progress Account:
Costs incurred to date… … … … … … … … … … … … … ..
GP in the current year… … … … … … … … … … … … … …
Less: Progress billings… … … … … … … … … … … … … … ..
Due from customer (net)… … … … … … … … … … … … .
P 26,000,000
2,700,000
P 28,700,000
5,000,000
P 23,700,000
53. c
Contract Price
Multiplied by: Gross Profit Rate
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P100,000,000
_________25%
lOMoARcPSD|28427881
Estimated Gross Profit of the entire contract
Multiplied by: Percentage of Completion for first year
Gross Profit realized for current year
P 25,000,000
_________50%
P 12,500,000
54. c
Contract Price
x: Mobilization Fee
Collection in 20x4
Note: Billings for 20x4 will be collected in January 20x5.
P120,000,000
10%
P 12,000,000
55. a
Mobilization Fee: 5% x P10M
Collection on Billings:
Contract price
x: Progress billings, net of 10% and 8% (50% - 10% - 8%)
Progress billings
x: Collections net of contract retention of 10%
Collections in 20x4
P 5.0 M
P 100 M
32%
P 32 M
90%
28.8 M
P 33.8 M
56. b – cost recovery method is used.
At the end of 20x4 the contractor must recognized only to the extent of recoverable
contract costs incurred (i.e., P5,000 contract revenue and P5,000 construction
costs/expenses).
Quiz- VIII
1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000
P1,000,000 – P900,000 = P100,000.
2. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiply by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
4,500,000
1,350,000
_2,700,000
4,050,000
450,000
1,350/4,050
150,000
____-0150,000
3. P150,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
3,000,000
2,250,000
750,000
4. P80,000
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300,000
20x6
3,000,000
1,800,000
_600,000
2,400,000
600,000
1,800/2,400
450,000
_300,000
150,000
lOMoARcPSD|28427881
20x5
1,600,000
240,000
_960,000
1,200,000
400,000
240/1,200
80,000
______0
80,000
Contract price
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
5. P20,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
1,400,000
400,000
_____-0400,000
_400,000
800,000
600,000
400/800
300,000
______0
300,000
20x6
1,400,000
400,000
400,000
800,000
200,000
1,000,000
400,000
800/1,000
320,000
300.000
20,000
6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit
7.P240,000 Profit
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
4,000,000
960,000
_______0
960,000
3,200,000
800,000
960/3,200
240,000
_______0
240,000
8. P102,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
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20x5
850,000
238,000
_______0
238,000
357,000
595,000
lOMoARcPSD|28427881
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
255,000
238/595
102,000
_______0
102,000
9. P990,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date*
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
20x5
3,000,000
450,000
20x6
3,000,000
990,000
450,000
1,440,000
2,250,000
750,000
____20%
150,000
______0
150,000
2,400,000
600,000
_____60%
360,000
150.000
210,000
* total estimated costs x % of completion
10. P50,000
20x5
1,500,000
465,000
_______0
465,000
1,085,000
1,550,000
( 50,000)
100%
( 50,000)
_______0
( 50,000)
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
11. P625,000
Contract price
Costs incurred each year
Add: Cost incurred in prior years
Costs incurred to date
Add: Estimated cost to complete
Total estimated costs
Estimated Gross Profit (loss)
Multiplied by: % of completion
20x5
3,500,000
1,350,000
-01,350,000
1,350,000
2,700,000
800,000
-
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20x6
3,500,000
1,525,000
1,350,000
2,875,000
_______0
2,875,000
625,000
___100%
lOMoARcPSD|28427881
Recognized Gross Profit (Loss) to date
Less: Gross Profit (Loss) in prior year
Recognized Gross Profit (Loss) in current year
-0-0-
625,000
_______0
625,000
12. P550
Costs Incurred……………………………………………………………………….
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account……………………
400
P2,750
P 400
___-0P 400
_1,600
P2,000
P 750
400/2,000
150
550
13. P1,200,000
The term “completed” should be “cost recovery”
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
700,000
P2,000,000
P 700,000
______-0P 700,000
__800,000
P1,500,000
P 500,000
________0
_______0
700,000
20x5
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
14. P32,000 = P47,000 – P15,000
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600,000
P2,000,000
P 600,000
_700,000
P1,300,000)
__800,000
P(2,100,000)
P (100,000)
________0
_(100,000)
1,200,000
lOMoARcPSD|28427881
15. P782,000
20x5
Costs Incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
238,000
P850,000
P238,000
______-0P238,000
_357,000
P595,000
P255,000
_238/595
102,000
340,000
20x6
Costs incurred
Contract price……………………………………….
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date……………………………..
Add: Estimated costs to complete………………
Total estimated costs……………………………….
Estimated gross profit (loss)………….…………….
Multiplied by: percentage of completion………..
Construction In Progress account – inv entory account
Less: Progress billings (P260,000 + P210,000)
Construction In Progress account (net) – Due from
customers
319,600
P850,000
P319,600
_238,000
P557,600
_139,400
P697,000
P153,000
_557.6/697
_122,400
782,000
470,000
312,000
16. P312,000
17. same with no.16 – P312,000
18. (P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000.
19.P3,795,000 + P345,000 = P4,140,000.
20. P2,750,000
P1,650,000
————— × P5,000,000 = P2,750,000
P3,000,000
21.
22.
Accounts Receivable.......................................................................
Billings on Construction in Process ......................................
1,650,000
Construction Expenses .....................................................................
1,650,000
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1,650,000
lOMoARcPSD|28427881
Construction in Process ...................................................................
Revenue from Long-Term Contracts ...................................
23. P875,000
Revenue
Costs
Total gross profit
Recognized in 20x5
Recognized in 20x6
Or
Total revenue
Recognized in 20x5
Recognized in 20x6
Costs in 20x6
Gross profit in 20x6
24.
25.
26.
20x5
20x6
20x7
P5,000,000
3,025,000
1,975,000
(1,100,000)
P 875,000
P5,000,000
(2,750,000)
2,250,000
(1,375,000)
P 875,000
Percentage-of-Completion
Gross Profit
P750,000a
P210,000b
P440,000c
20x5
20x6
20x7
Completed-Contract
Gross Profit
—
—
P1,400,000d
aP1,500,000
————— × P2,000,000 =
P4,000,000
P750,000
bP2,640,000
————— × P1,600,000 =
P4,400,000
P960,000
Less 20x5 gross profit
20x6 gross profit
(750,000)
P210,000
cTotal
revenue
Total costs
Total gross profit
Recognized to date
20x7 gross profit
d Total
revenue
Total costs
Total gross profit
1,100,000
P6,000,000
4,600,000
1,400,000
(960,000)
P 440,000
P6,000,000
4,600,000
P1,400,000
27. P312,500
Revenue
= [P250,000/(P250,000 + P750,000)]
P1,250,000
= P312,500
Gross profit = P312,500 P250,000 = P62,500
Construction in progress = P250,000 + P62,500 = P312,500
28. P125,000
(2)
Current Assets
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2,750,000
lOMoARcPSD|28427881
Inventories
Construction in progress*
P1,000,000
Less: Partial billings**
(875,000)
Costs and recognized profit not
P 125,000
yet billed
* Revenue to date = (P250,000 +
P600,000)/(P250,000 + P600,000 +
P212,500) 1,250,000 = P1,000,000
Construction in progress = P250,000 +
P600,000 + P150,000 = P1,000,000
** Partial billings = P375,000 + P500,000 =
P875,000
29. P60,00
Revenue to date
Revenue from previous periods
Revenue for 20x7
Costs incurred in 20x7
Gross profit for 20x7
P1,250,000
_1,000,000
P 250,000
_ 190,000
P 60,000
THEORIES
1.
2.
3.
4.
5.
36.
False
True
True
False
False
6.
7.
8.
9.
10,
False
False
False
True
False
11.
12.
13.
14.
15,
False
True
False
True
False
16.
17.
18.
19.
20.
True
False
True
False
True
21.
22.
23.
24.
25.
True
False
False
False
False
26.
27.
28.
29.
30.
True
True
False
False
True
31.
32.
33.
34.
35.
37.
38.
39.
40.
False
True
True
False
False
41.
b
46.
a
51.
c
56.
d
61.
d
66.
c
42.
43.
44.
45.
c
47.
48.
49.
50.
d
52.
53.
54.
55.
b
c
b
57.
58.
59.
60.
b
62.
63.
64.
65.
b
a
c
d
67.
68.
69.
70.
b
b
c
b
c
c
a
a
c
c
c
False
False
True
False
True
a
d
C
Chapter 10
Problem I
1. The journal entries shown below would be made on the consignor’s and consignee’s books
(assume the use of perpetual inventory):
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lOMoARcPSD|28427881
Transactions
Shipment of goods on
consignment.
2. Payment of
expenses by
consignor.
3. Payment of
expenses
by consignee.
Adv ances by
Consignor
Sale of merchandise
6. Notification of sale
to consignor and
payment of cash due.
Commission:
10% x P48,000 =
P4,800
Entries on Consignor’s Books
(Herbalife Supplier)
Inv entory on
Consigment……
60,000
Finished Goods
Inv entory*....
Inv entory on
Consignment…..
Cash……..
Inv entory on
Consignment……
Consignee
Payable………
Cash………
Adv ances from
Consignee…..
Entries on Consignee’s Books
(Conrado Enterprises)
No entry
(memorandum
entry only)
60,000
No entry
600
600
Consignor
Receiv able
2,400
2,400
Cash…………….
2,400
3,360
3,360
No entry.
Commission
expense
Adv ances from
Consignee……
Cash…….
Consignee
Payable
Consignment
Sales
Rev enue..
Adv ances to
Consignor
Cash
Cash
Consignor
payable
Cost of goods
sold**
Inv entory on
Consignment
3,360
3,360
48,000
48,000
Consignor
Payable..
Commission
Rev enue……..
Consignor
Receiv able
…..
Cash………
Adv ances
from
4,800
3,360
37,440
2,400
48,000
4,800
2,400
37,440
48,000
Consignee……
7. To record cost of
goods sold and
related costs.
** (P60,000 + P600 +
P2,400) x ½ =
P31,500
2,400
3,360
31,500
31,500
*if periodic method is used, the credit should be “consignment shipments” account treated as
reduction in the Costs of goods available for sale to arrive at Cost of Goods Sold Available for
Regular Sale.
2. The remittance amounting to P37,440 can be determined by preparing the Account Sales as
follows:
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lOMoARcPSD|28427881
Sold for the Account of:
Jingka Juice
Sales (60 sachets of herbal goods)
Charges:
Finishing costs… … … … … … … … ..
Commission (P48,000 x 10%)… … … … … … ..
Due to Consignor… … … … … … … … … … … .
Less: Advances… … … … … … .
Balance… … … … … … … … … …
Remittance Enclosed… … … … … …
Balance Due… … … … …
Items on Hand (50 sachets of herbal goods): P60,000 x
50%
Problem II
1. The account sales:
Sold for the Account of:
AA Company
Sales (8 sets @ P24,000)… … … … … …
Charges:
Freight-in… … … … …
Advertising expense… … … …
Deliveries and installation expenses
Repairs expense – on units sold..
Commissions, 25% of sales
Due to Consignor… … … … … … … … … … … .
Less: Advances… … … … … … .
Balance… … … … … … … … … …
Remittance Enclosed… … … … … …
Balance Due… … … … …
Items on Hand… … … …
Items Returned (defective)… .… … .
P48,000
P 2,400
4,800
P30,000
P 192,000
P 6,000
2,400
9,600
4,800
48,000
2. The inventory on consignment amounted to P189,000 computed as:
Charge Analysis
Sales
Inventory
(8 sets)
(15 sets)
Charges by consignor:
Cost of consigned goods
(@P12,000/set)
P 96,000
P180,000
Freight-out (P9,000/25 sets = P360 per set)
3,600*
5,400
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set)
2,400*
3,600
Advertising expense… … … … ..
2,400
0
Delivery and installation
9,600
0
Repairs expense… … … … …
4,800
0
Commissions [25% of sales (8 sets x
P24,000 per set]
48,000
0
Total
P166,800
P189,000
* Freight on sets returned is charged against sales of the period.
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7200
P40,800
3,360
P37,440
37,440
P
0
70,800
P121,200
0
P121,200
30,000
P 91,200
15 sets
2 sets
Total
(25 sets)
P 300,000
9,000
6,000
2,400
9,600
4,800
___48,000
P379,800
lOMoARcPSD|28427881
** Normally, the term “freight-out” is synonymous to “delivery expense” which is classified as
selling expenses if we are dealing with a third party. But, for consignment accounting
where the transfer of merchandise if from consignor to consignee, the usage of the term
“freight-out” does not construed to be a selling expense but still an inventoriable cost
(which is part of freight-in).
The consignment net income amounted to P25,200 computed as:
Consignment Sales (8 sets x P24,000 per set)
Less: Costs and expenses:
Charges by Consignor:
Cost of consigned goods @P12,000/set)
Freight-out (P9,000/25 sets = P360 per set)
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set)
Advertising expense… … … … ..
Delivery and installation
Repairs expense… … … … …
Commissions [25% of sales (8 sets x P24,000 per set]
Net Income
P 192,000
P 96,000
3,600*
P 2,400*
2,400
9,600
4,800
48,000
99,600
67,200
P 25,200
Problem III
Summit Electronics Company
Inventory on Consignment (800 @ P570)
Finished Goods Inventory
456,000
456,000
Consignment Expense (P368,000 x 30%)
Accounts Receivable--Consignee Sales
Sales Revenue—Consignment (P920 x 400)
110,400
257,600
Cost of Consigned Goods Sold (P570 x 400)
Inventory on Consignment
228,000
Cash [(P920 x 70%) x 380]
Accounts Receivable--Consignee Sales
244,720
368,000
228,000
244,720
Farley Hardware
No entry upon receipt of consigned merchandise.
Cash (P920 x 400)
Consignor Payable
Commission Revenue
368,000
Consignor Payable
Cash
244,720
257,600
110,400
244,720
Multiple Choice Problem
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1. c – P1,200
Commission = 25% x Sales price
P400 = 25% x Sales price
Sales price = P400 ÷ 25% = P1,600
Number of units sold = Selling price
= __P1,600__
Price per tape P200 per tape
= 8 tapes
Sales … …………………………………………………………….. P1,600
Less Commission of consignee… … …………………………...
400
Amount remitted by Beta View Store… … …………………...P1,200
2. a – P 370
Total
Charges
(25)
Charges Related to
Consignment
Inventory on
Sales
Consignment
(8)
(15)
Consignor’s charges:
Cost
Freight-out
Consignee’s charge - Commission
Total
P2,500
75
P800
30
P1,500
45
__400__
P2,975
__400__
1,230
_______
_P1,545_
Sales price
Consignment profit
_1,600_
_P370_
3. a – P1,545 (refer to No. 2 for computation)
4. b
Sales (P2,250 / 15%)
Divided by: Selling price per unit
P15,000
P 1,000
Number of units sold
15 units
Sales
P15,000
5. c
Less Charges:
Commission
P 2,250
Advertising
Delivery expense
1,500
___750
Due to Consignor
Less: Advances
__4,500
P10,500
Value of note – sight draft: (100 beds x P600 per bed) x 60%
Multiplied by: Proportional number of beds sold
Amount remitted
P36,000
15/100
__5,400
P 5,100
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6. d – P1,500
Sales
Less Charges:
P15,000
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds)
9,000
Consignee’s charges:
Commission
P2,250
Advertising
Delivery expense
1,500
___750
Consignment net income
__4,500
P1,500
7. a – no items were sold in November;
Sales (unknown)
Less Charges:
P
Commission
Remittance
x
15% x
P 27,200
x – 15%x = P27,200
85%x = P27,200
x = P32,000
8. c – P16,800
Sales (unknown)
x
Less Charges:
Advertising
P500
Delivery and installation charges
Commission (unknown)
100
20%x
_______
Remittance
P 12,840
x – (P500 + P100 + 20%x) = P 12,840
x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800
9. b- P6,080
Cost (P150 per unit x 40 units)
Freight on shipment (P200 x 40/100)
Cost of inventory on consignment
P6,000
80
P6,080
10. c - 6
Sales (unknown)
Less Charges:
x
Commission (unknown)
Advertising
Delivery and installation
Cartage on consigned goods
20%x
P1,000
600
500
Remittance
P21,900
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lOMoARcPSD|28427881
x – (20%x + P1,000 + P600 + P500) = P21,900
x – 20%x = P21,900 + P2,100
80%x = P24,000
x = P30,000
Number of units sold = _P30,000_
=6
P5,000 per set
11. b – P2,300
Charges Related to
Consignor’s charges:
Cost
Freight-out
Consignee’s charges:
Commission (20% x P30,000)
Advertising
Delivery and installation
Cartage
Total
Total
Charges
(10)
Consignment
Sales
(6)
Inventory on
Consignment
(3)
P30,000
P18,000
P9,000
2,500
1,750
750
6,000
1,000
600
6,000
1,000
600
__500__
P40,600
__350__
27,700
Sales price
Profit on Consignment
__150__
_P9,900_
_30,000_
__P2,300__
12. d – None of the above (P9,900) – refer to No. 11 for computation.
13. No answer available - P17,625
Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.
14. a
(P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.
AA Sales - Nos. 15 to 17:
15. a
Gross collection (P15,000 x 70% x 80%)
Less: Cash discount taken by customer (P8,400 x 2%)
P 8,400
__168
Net collection
Less Charges:
P 8,232
Expenses
Commission (P8,400 x 15%)
Due to Consignor
Less: Advances
Amount remitted
P 800
_1,260
__2,060
P 6,172
_6,000
P 172
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16. b
Charges Related to
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Expenses
Commission (15% x P10,500)
Cash discount (P10,500 x 80% x 2%)
Total
Total
Charges
(100%)
Consignment
Sales
(70%)
Inventory on
Consignment
(30%)
P10,000
P 7,000
P 3,000
120
84
36
800
1,575
800
1,575
168
P12,663
168
P 9,627
Sales price (70% x P15,000)
Profit on Consignment
_P3,036_
_10,500_
P 873
17. b – refer to No. 16 for computation
RR Products Company – Nos. 19 to 21
19. c
Collection made pertaining to:
May sale
Down payment (3 x P50)
Monthly payment thereafter (3 x P10)
June sale
P 150
30
Down payment (1 x P50)
P 180
Total
___50
P 230
Less: Commission (P230 x 20%)
Amount remitted
___46
P 184
20. d – P140
Charges Related to
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Total
Charges
(5)
Consignment
Sales
(4)
Inventory on
Consignment
(1
P 775
P 620
P 155
50
40
10
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Commission
Total
200
P1,025
P
Sales price (4 units x P250/unit)
Profit on Consignment
200
860
____
P165
_ 1,000
P 140
21. b – refer to No. 20 for computation
22. b
Collection made:
Cash sale (P1,500 x 2)
Credit sale (P1,800 x 25%)
P 3,000
___450
Total
Less: Charges
Freight
P3,450
P 320
Commission [(P3,000 + P1,800) x 15%]
Amount remitted
__720
__1,040
P 2,410
23. a
Charges Related to
Consignor’s charges:
Cost
Freight
Consignee’s charges:
Freight
Commission
Total
Sales price
Total
Charges
(5)
Consignment
Sales
(3)
Inventory on
Consignment
(2)
P4,000
P 2,400
P 1,600
200
120
80
320
720
192
720
128
______
P5,240
P 3,432
4,800
P1,808
Profit on Consignment
P 1,368
24. b – P1,808 – refer to No. 23 for computation
25. d – 244,600
Sales on credit (14,000 per unit x 12 units) + (13,000 x 10)
Less: Sales allowance granted
P298,000
P 2,000
Bad debts
Commission [2% x (P298,000 – P2,000)]
7,000
_44,400
Amount still due from BB, Inc
__53,400
P 244,600
26. d – P67,280
Total
Charges
(30)
Charges Related to
Consignment
Inventory on
Sales
Consignment
(22)
(8)
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Consignor’s charges:
Cost
Freight-out
Consignee’s charges:
Sales allowance
Bad debts
Commission
[15% x (P298,000 – P2,000)]
Total
Sales price [P14,000 per unit x 12 units)
+ (P13,000 per unit x 10 units)]
Consignment profit
P240,000
P176,000
P64,000
1,800
1,320
480
2,000
7,000
2,000
7,000
44,400
44,400
P295,200
P230,720
_P64,480_
298,000
P 67,280
27. d – refer to No. 26 for computation
28. b – 395
Sales (unknown)
Less Charges:
x
Commission (unknown)
( )
__x__ P10
P100
__P45__
Delivery expense
Remittance
x-
________
P35,505
[( _x__ ) P10 + P45 ] = P35,505
100
x – _P10x_ = P35,550
P100
P100x – P10x = P3,555,000
P90x = P3,555,000
x = P39,500
Number of ballpens sold = _P39,500_
= P395
P100 per unit
29. b
Sales
Cost of sales
Gross profit
Operating expenses:
Regular Sales
P120,000
Consignment
Sales
P30,000
Total
P150,000
84,000
P 36,000
19,500*
P10,500
103,500
P 46,500
P 1,500
1,950
P 1,500
1,950
Commission (P30,000 x 5%)
Freight-in (P260 x P19,500*/P26,000)
Others
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Regular (P15,150 x P19,500/P26,000)
Consignment
(P15,150 x P30,000/P150,000)
12,120
Total
_______
P 12,120
3,030
P 4,725
3,030
_P16,845_
Net profit
P 23,880
P 5,775
P29,655
*P26,000 – P6,500 = P19,500
30. d – P5,775 (refer to No. 29 for computation)
31. a – (P18,000 + P900) = P18,900
Chapter 11
Problem III
1.
• Contributions of cash by the operators
Cash
360,000
KK Company
Cerise Company
180,000
180,000
Contribution by joint operators.
• Use of cash and loan to buy machinery & equipment and raw materials
Machinery and equipment
96,000
Cash
Loans payable – machinery and equipment
60,000
36,000
Contribution by joint operators.
Materials
Accounts payable
78,000
78,000
Acquisition of materials.
• Labor incurrence
Payroll
Cash
86,400
84,000
Accrued payroll
2,400
Annual labor.
• Loans from the bank
Cash
Bank loans payable
72,000
72,000
Amount borrowed.
• Repayment of loan – machinery and equipment and other factory expenses
Loan payable – machinery and equipment
12,000
Cash
Partial payment of loan.
Accounts payable
50,400
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12,000
lOMoARcPSD|28427881
Cash
50,400
Payment of trade creditors.
Factory overhead control – heat, light and power
156,000
Cash
156,000
Payment of manufacturing expenses such as heat, light
and power.
• Depreciation of machinery and equipment
Factory overhead control – depreciation
Accumulated depreciation
9,600
9,600
Depreciation of equipment.
• Transfer of materials, labor and overhead to Work -in-Process
Work-in-process
Payroll
309,600
86,400
57,600
156,000
Materials
Factory overhead control – heat, light and power
Factory overhead control – depreciation
9,600
Allocation of costs to work-in-process
• Transfer of Work-in-Process to Finished Goods Inventory.
Finished goods
Work-in-process
216,000
216,000
Allocation to finished goods
• Transfer of Finished Goods Inventory to Joint Operators throughout the year
KK Company
96,000
DD Company
96,000
Finished goods
192,000
Delivery of output to joint operators.
2.
Cash
Contribution – Drei
Contribution – Cerise
Bank loan
Balance, 12/31/x4
Work-in-Process
Labor
180,000
180,000
60,000
60,000
84,000
12,000
50,400
156,000
Machinery and equipment
Labor
Machinery and equipment
Accounts payable
Factory overhead control
57,600
86,400
216,000
to Finished Goods
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lOMoARcPSD|28427881
Materials
57,600
Factory Overhead – heat, etc. 156,000
Factory Overhead – depreciation 9,600
Balance, 12/31/x4
93,600
3.
a. Total assets, P282,000
b. KK’s investment, P84,000
c. DD’s investment, P84,000
December 31, 20x4
Assets
Current Assets
Cash
Finished goods inventory
Work-in-Process inventory
Materials inventory
Total current assets
Non-current Assets
Equipment
Less: Accumulated depreciation
Total Assets
Liabilities and Net Assets
Current Liabilities
Accrued payroll
Accounts payable
Non-current Liabilities
Bank loan payable
Loan payable – machinery and equipment
Total Liabilities
Net Assets
Total Liabilities and Net Assets
Joint Operator’s Equity
KK Company: Contributions – January 1, 20x4
Cost of inventory distributed
DD Company: Contributions – January 1, 20x4
Cost of inventory distributed
Total Joint Operator’s Equity
P 57,600
24,000
93,600
20,400
P 195,600
P 96,000
9,600
P
2,400
27,600
P 60,000
24,000
P 180,000
( 96,000)
P 180,000
( 96,000)
86,400
P282,000
P 30,000
__84,000
P 114,000
168,000
P282,000
P 84,000
P 84,000
P168,000
Problem VI
The joint operator, Entity K account for their interests in the joint operation as follows:
January 1, 20x4 (P12,000,000 / 5 = P2,400,000)
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Property, plant and equipment (interest in an aircraft)
Cash
2,400,000
2,400,000
To recognize the purchase of an ownership-interest in a
jointly controlled aircraft.
In 20x4
Cash
Profit or loss (rental income)
To recognize income earned in renting to others the use of
the aircraft in 20x4.
12,000
12,000
Profit or loss (aircraft operating expenses)
Cash
180,000
180,000
To recognize the costs of running an aircraft in 20x4.
Profit or loss (depreciation expense)
Accumulated depreciation (interest in an aircraft
120,000
120,000
To recognize depreciation of an ownership-interest in a
jointly controlled aircraft in 20x4: P12,000,000/20 years =
P600,000/5 operators = P120,000
share for each joint operator.
Problem VII
1. The following are the summaries of the above transactions for a joint operation in the form of
a partnership:
Ev ent
a.
b.
c.
d.
e.
f. *
NI**
Cash***
Settlement
Totals
Inv estment in
Joint Operation
Dr.
Cr.
P 12,000
120,000
6,000
180,000
P588,000
AA
Dr.
BB
Cr.
P12,000
120,000
Dr.
CC
Cr.
Dr.
Cr.
P 6,000
120,000
P204,000
3,600
P60,000
P312,000
3,600
________
P318,000
_297,000
P597,000
6,000
___3,000
P597,000
________
P597,000
___3,000
P210,600
________
P210,600
________
P252,000
__112,200
P364,200
________
P315,600
________
P315,600
______
P 60,000
_147,000
P195,000
P72,000
3,600
6,000
_______
P81,600
_______
P81,600
_______
P597,000
________
P597,000
_153,600
P364,200
________
P364,200
________
P315,600
_120,600
P315,600
_______
P81,600
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10,800
_______
P 16,800
31,800
P48,600
_33,000
P81,600
lOMoARcPSD|28427881
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000.
**NI – Net Income Allocation
AA
Allowance for cleaning-up operations
Commission:
Aljon: 40% of P204,000
Elerie: 40% of P312,000
Mac: 40% of P72,000
Balance (75%: 25%)
Total
BB
CC
P 3,000
Total
P 3,000
P81,600
30,600
10,200
28,800
_______
81,600
124,800
28,800
40,800
P112,200
P135,000
P31,800
P279,000
P124,800
**Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.
2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as
follows:
AA, capital
153,600
BB, capital
120,600
CC, capital
33,000
Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint
operations.
Problem VIII
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Cost of investment
Consideration transferred
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%)
Retained earnings (P1,080,000 x 30%)
Allocated excess (excess of cost over book value)
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%)
Increase in land (P960,000 x 30%)
Increase in building (P600,000 x 30%)
Decrease in equipment (P840,000 x 30%)
Increase in bonds payable (P120,000 x 30%)
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P2,016,000
P 1,080,000
324,000
P
72,000
288,000
180,000
( 252,000)
( 360,000)
1,404,000
612,000
P
252,000
lOMoARcPSD|28427881
Positive excess: Goodwill (excess of cost over fair value)
P 360,000
The over/under valuation of assets and liabilities are summarized as follows:
Anton Co.
Anton Co.
Book value
Fair value
Inventories (sold in 20x4)
P1,200,000
P1,440,000
Land
1,080,000
2,040,000
Buildings – net ( 10 year remaining life)
1,800,000
2,400,000
Equipment – net ( 7 year remaining life)
1,440,000
600,000
Bonds payable (due January 1, 20x9)
( 1,200,000)
(1,320,000)
Net
P4,320,000
P5,160,000
(Over) Under
Valuation
P 240,000
960,000
600,000
( 840,000)
( 120,000)
P 840,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be amortized
Inventories (sold in 20x4)
Land
Buildings – net ( 10 year remaining life)
Equipment – net ( 7 year remaining life)
Bonds payable (due January 1, 20x9)
Net
Over/
Under
P 240,000
960,000
600,000
( 840,000)
( 120,000)
P 840,000
30%
thereof
P 72,000
288,000
180,000
( 252,000)
( 36,000)
P 252,000
Life
1
10
7
5
Current
Year(20x4)
P 72,000
18,000
(36,000)
( 7,200)
P 46,800
The following are entries recorded by the parent in 20x4 in relation to its investment in joint
venture:
January 1, 20x4:
(1) Investment in DD Company
Cash
Acquired 30% joint control in DD Company.
January 1, 20x4 – December 31, 20x4:
(2) Cash
Investment in DD Company (P720,000 x 30%)
Record dividends from DD Company.
December 31, 20x4:
(3) Investment in DD Company
Investment income (P1,440,000 x 30%)
Record share in net income of DD Company.
December 31, 20x4:
(4) Investment income
Investment in DD Company… ………………….
Record amortization of allocated excess of inventory,
equipment, buildings and bonds payable.
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2,016,000
2,016,000
216,000
216,000
432,000
432,000
46,800
46,800
lOMoARcPSD|28427881
Thus, the investment balance and investment income in the books of TT Company is as follows:
Investment in Joint Venture (DD Company)
Cost, 1/1/x4
2,016,000 216,000
NI of Anton
46,800
(1,440,000 x 30%)
432,000
Balance, 12/31/x4
2,185,200
Investment Income
Amortization
46,800
432,000
385,200
Dividends – Son (720,000x 80%)
Amortization
NI of Son
(P1,440,000 x 30%)
Balance, 12/31/x4
To check the balance of Investment in Joint Venture (DD Company):
DD Company’s Stockholders’ Equity, 12/31/20x4:
Common stock
Retained earnings
Retained earnings,1/1/20x4
Net income – 20x4
Dividends – 20x4
Book value of stockholders’ equity of DD Company,12/31/20x4
Multiplied by: Interest in Joint Venture
Book value of Interest in Joint Venture
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization)
Goodwill
Investment in Joint Venture (DD Company) – equity method
P3,600,000
P 1,080,000
1,440,000
( 720,000)
1,800,000
P5,400,000
30%
P1,620,000
205,200
360,000
P2,185,200
Multiple Choice Problems
30. a
Books of X
Inv. in JO
4,000 6,500
2,500
Books of Y
Inv. in JO
2,500
4,000
6,500
X, capital
2,500
Journal entry for settlement should be:
Z, capital… …………………….. 6,500
X, capital… …………………
2,500
Y, capital… …………………
4,000
Y. capital
4,000
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Books of Z
Inv. in JO
2,500
4,000
Z, capital
6,500
6,500
31.
Total credits - Investment in Joint Operations… … ……………………………P 25,810
Total debits - Investment in Joint Operations… … ……………………………. 19,750
Net income or total gain (credit balance)… … … ……………………………. P 6,060
32. d
Jose, capital
8,500 investment
1,212 share in net income (P6,060 x 2/10)
9,712
33. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40
per share)
34. b
20,000 shares at P40/share
Expenses
Joint operation loss
Jose, capital
P800,000 P 198,000 (4,500 x P44) – Sales
3,000
125,000 (5,000 x P25)
4,700
13,600* (13,600 x P1) - Cash dividend
168,000 (6,000 x P28) - Sales
266,000 (7,600 x P35)
P807,700 P 770,600
P 37,100
*
9/30 Shares issued (6,000 + 10,000 + 4,000)
10/20 Sold
11/ 1 Stock dividend (20,000 – 4,500) x 20%
11/15 Sold
Balance of shares outstanding before cash dividend
20,000
(4,500)
3,100
(5,000)
13,600
Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares)
35. c
Share in net loss
P37,100 x (10,000/20,000)
Investment in Joint Operations
P400,000 Investment (10,000 shares x P40)
P18,550
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P381,450
36. b
Unrealized loss due to decline in the value of shares at the time of investment
(P62 – P40) x 4,000 shares
Share in joint operation (P37,100 x 4/20)
Reduction of loss by cash dividend (P13,600 x 4/20)
P68,000
__7,420
P98,140
37. a
before net income or loss
Investment in Joint Operations
15,000
25,000 ending inventory
10,000 net income
38. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%)
39. a
Purchases
Contr/Invest
Expenses
Joint Operations
20,000
77,000 Sales (?)
20,000
800
1,800
42,600
Anson, Capital
Unsold merchandise 600 20,000
18,600 Prof it(50%)
600
38,600
38,000 to Alas
77,000
34,400 (P16,000 + P18,400)
2,800 (P600 + P2,200)
Unsold merchandise
37,200 Net profit
40. c – refer to No. 39 computation.
41. a
Purchases
Freight-in
Freight-out
Inv estment in Joint Operations
10,000 7,200 sales
240 5,120 unsold
260
(P10,000 + P240) x 1/2
10,500 12,320
1,820
Santo, capital
10,000 Contribution/Invest
910 Share in NI
10,910
42. a – refer to No. 41 for computation
43. c
Investment in Joint Operations
6,500
3,500 Sales
3,000
before sale
Net loss
N, capital
1,100 14,500
13,400
O, capital
1,100
6,500
5,400
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Distribution of Loss:
M
300
(1,100)
P ( 900)
Salary
Balance, equally
P
N
P
(1,100)
P(1,100)
O
P
(1,100)
P(1,100)
Total
300
(3,300)
P(3,000)
P
44. a – refer to No. 43 for computation
45. b
Revenues
Total cash receipts (P78,920 + P65,245)
Less: Cash investments (P30,000 + P20,000)
Cash sales
Add: Proceeds from sale of remaining assets
Total Revenue
Less: Expenses (P62,275 + P70,695)
Net income
P144,345
50,000
P 94,345
60,000
P154,345
132,970
P 21,375
46. c
Receipts
Benin, capital
78,920
30,000 Contribution
62,275 Disbursement
12,825 Share in NI (3/5)
78,920 105,100
26,180
Receipts
Sucat, capital
65,425 20,000 Contribution
70,695 Disbursement
8,550 Share in NI (2/5)
65,425 99,245
33,820
47. d
N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should
receive net cash of P2,000:
O, capital
3,000
Cash
2,000
P, capital
5,000
O’s books: it shows P5,000 receivable from P, and P2, 000 payable to N; thus, O should
receive net cash of P3,000:
N, capital
2,000
Cash
3,000
P, capital
5,000
P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P
should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively:
N, capital
2,000
O, capital
3,000
Cash
5,000
50. b – refer to No. 25 for further discussion.
The Income from Investment in Basket Co. on December 31 is as follows:
Share in net income (P90,000 x 40%]
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P 36,000
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Amortization of allocated excess
Income from Investment on December 31
( 16,400)
P 19,600
51. d
The joint arrangement is a joint venture because it needs unanimous consent to all parties
involved. The parties recognize their rights to the net assets of Harrison Company as
investments and account for them using the equity method.
The Investment in Goldman Co. as of December 31, 2015 is as follows:
Acquisition cost, January 1, 2013
Add (deduct):
Share in net income [(P140,000 x 3 years) x 40%]
Share in dividends [(P50,000 x 3 years) x 40%]
Amortization of allocated excess
Investment balance on December 31
Cost of investment
Less: Book value of interest acquired (40% x P1,200,000)
Allocated excessP 120,000
Less: Over/undervaluation of assets and liabilities
Goodwill
P 600,000
168,000
(60,000)
(
0)
P 708,000
P 600,000
480,000
0
P 120,000
There is no indication as to impairment of goodwill.
52. d
To determine whether a contractual arrangement gives parties control of an arrangement
collectively, it is necessary first to identify the relevant activities of that arrangement. That is,
what are the activities that significantly affect the returns of the arrangement?
When identifying the relevant activities, consideration should be given to the purpose and
design of the arrangement. In particular, consideration should be given to the risks to which
the joint arrangement was designed to be exposed, the risks the joint arrangement was
designed to pass on to the parties involved with the joint arrangement, and whether the
parties are exposed to some or all of those risks.
In many cases, directing the strategic operating and financial policies of the arrangement
will be the activity that most significantly affects returns. Often, the arrangement requires the
parties to agree on both of these policies. However, in some cases, unanimous consent may
be required to direct the operating policies, but not the financial policies (or vice versa). In
such cases, since the activities are directed by different parties, the parties would need to
assess which of those two activities (operating or financing) most significantly affects returns,
and whether there is joint control over that activity. This would be the case whenever there is
more than one activity that significantly affects returns of the arrangements, and those
activities are directed by different parties.
Based on the ownership structure, even though Wallace can block any decision, Wallace
does not control the arrangement, because Wallace needs Zimmerman to agree —
therefore joint control between Wallace and Zimmerman (since their votes and only their
votes, together meet the requirement). Because they are the only combination of parties
that collectively control the arrangement, it is clear that Wallace and Zimmerman must
unanimously agree.
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The appropriate method for the joint venture is the equity method.
Investment in Gold Co. on December 31, 2015 is as follows:
Share in net income (P140,000 x 40%)
Amortization of allocated excess
Income from Investment on December 31, 2015
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The Income from
P 56,000
(
0)
P 56,000