1.1 Partnership Formation
Problem 1 (ReSA)
On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over
business assets and assume liabilities, and capitals are to be based on net assets
transferred after the following adjustments:
a) XX and YY’s inventory is to be valid at P31,000 and P22,000, respectively.
b) Accounts receivable of P2,000 in XX’s book and P1,000 in YY’s books are
uncollectible.
c) Accrued salaries of P4,000 for XX and P5,000 for YY are still to be recognized in
the books.
d) Unused office supplies of XX amounted to P5,000, while that of YY amounted to
P1,500.
e) Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in
the books of XX and YY, respectively.
f) XX is to invest or withdrew cash necessary to have a 40% interest in the firm.
Balance sheets for XX and YY on July 1 before adjustments are given below:
XX
Cash
Accounts Receivable
Inventory
Office Supplies
Equipment
Accumulated Depreciation - Equipment
Total Assets
Accounts Payable
Capitals
Total Liabilities and Capital
Php
Php
Php
Php
YY
31,000 Php
26,000
32,000
20,000
(9,000)
100,000 Php
50,000
20,000
24,000
5,000
24,000
(3,000)
120,000
28,000.00 Php
72,000
100,000 Php
20,000.00
100,000
120,000
Determine:
1. The net adjustments – capital in the books of XX and YY:
a. XX, P7,000 net debit; YY, P2,000 net credit
b. XX, P5,000 net debit; YY, P7,000 net credit
c. XX, P7,000 net credit; YY, P2,000 net debit
d. XX, P5,000 net credit; YY, P7,000 net debit
2. The adjusted capital of XX and YY in their respective books.
a. XX – P65,000; YY – P102,000
c. XX – P77,000; YY – P98,000
b. XX – P63,000; YY – P107,000
d. XX – P77,000; YY – P93,000
3. The additional investment (withdrawal) made by XX:
a. P(15,000.00)
c. P3,000.00
b. P( 6,666.50)
d. P8,377.50
4. The total assets of the partnership after formation:
a. P235,333.50
c. P220,333.50
b. P230,000.00
d. P212,000.00
5. The total liabilities of the partnership after formation:
a. P57,000.00
c. P54,000.00
b. P48,000.00
d. P51,000.00
6. The total capital of the partnership after formation:
a. P180,000.00
c. P163,333.50
b. P178,333.50
d. P155,000.00
7. The capital balances of XX and YY in the combined balance sheet:
a. XX, P81,250; YY, P72,000
c. XX, P100,000; YY, P75,000
b. XX, P81,250; YY, P75,000
d. XX, P 62,000; YY, P93,000
Solution
XX Capital
1. D
YY Capital
a
(1,000.00)
a
(2,000.00)
b
(2,000.00)
b
(1,000.00)
c
(4,000.00)
c
(5,000.00)
d
5,000.00
d
(3,500.00)
e
7,000.00
e
4,500.00
Net Credit
5,000.00
Net Debit
(7,000.00)
2. D
XX Capital- Unadjusted
72,000.00
YY Capital- Unadjusted
Net adjustment
5,000.00
Net adjustment
(7,000.00)
Adjusted Capital
77,000.00
Adjusted Capital
93,000.00
3. A
XX
YY
CC
77,000.00
93,000.00
150,000.00
AC
62,000.00
93,000.00
155,000.00
Addtl Investment
(Withdrawal)
(15,000.00)
(15,000.00)
100,000.00
4. D
5. A
6. D
From the accounting equation Asset = Liability + Capital
Total Asset
212,000.00
7. D
Liability
28,000.00
20,000.00
4,000.00
5,000.00
57,000.00
XX (155,000x40%)
YY (155,000x60%)
Capital
77,000.00
93,000.00
(15,000.00)
155,000.00
62,000
93,000
Problem 2 (ReSA)
On December 1, 2019, AA and BB formed a partnership with contributing the following
assets at fair market values:
Cash ………………………………………
Machinery and equipment …..
Land ………………………………………
Building …………………………………
Office Furniture …………………….
AA
BB
P 9,000
13,500
13,500
P 18,000
90,000
27,000
-
The land and building are subject to a mortgage loan of P54,000 that the partnership
will assume. The partnership agreement provides that AA and BB share profits and
losses, 40% and 60%, respectively and partners agreed to bring their capital balances in
proportion to the profit and loss ratio and using the capital balance of BB as the basis.
The additional cash investment made by AA should be:
a. P18,000.00
b. P85,500.00
c. P134,000.00
d. P166,250.00
Solutions:
AA
BB
Cash
9,000.00
18,000.00
Machinery & Eqmpt
13,500.00
Land
90,000.00
Building
27,000.00
Office Furniture
13,500.00
Mortgage Loan
(54,000.00)
Capital
36,000.00
CC
81,000.00
Addtl
Investment
(Withdrawal)
AC
AA 40%
36,000.00
54,000.00
BB 60%
81,000.00
81,000.00
117,000.00
135,000.00
18,000.00
18,000.00
Problem 3 (ReSA)
CC and DD are joining their separate business to form a partnership. Cash and non-cash
assets are to be contributed for a total capital of P150,000. The non-cash assets to be
contributed and liabilities to be assumed are:
CC
Book Value
Fair Value
Book Value
P11,250.00
11,250.00
P11,250.00
16,875.00
P30,000.00
18,750.00
15,000.00
33,750.00
5,637.50
5,625.00
3,750.00
DD
Fair
Value
Accounts Receivable …
Inventories ………………..
P33,750.00
Equipment …………………
35,625.00
Accounts Payable ….....
3,750.00
The partner’s capital accounts are to be equal after all contributions of assets and
assumptions of liabilities.
Determine:
1. The total assets of the partnership.
a. P159,375.00
c. P140,625.00
b. P150,000.00
d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375
b. CC – P37,500; DD – P5,625
c. CC – P80,625; DD – P78,750
d. CC – P63,750; DD – P5,625
Solution
1. A
Asset
159,375.00
2. A
Liability
5,625.00
3,750.00
9,375.00
Capital
150,000.00
150,000.00
CC
DD
Cash
37,500.00
9,375.00
Accounts Receivable
11,250.00
0.00
Inventories
16,875.00
33,750.00
Equipment
15,000.00
35,625.00
Total Assets
80,625.00
78,750.00
Accounts Payable
5,625.00
3,750.00
Capital
75,000.00
75,000.00
Total Liabilities and Capital
80,625.00
78,750.00
Problem 4 (ReSA)
On December 1, 2018, EE and FF formed a partnership agreeing to share for profits and
losses in the ration of 2:3 respectively. EE invested a parcel of land that cost him
25,000. FF invested 30,000 cash. The land was sold for 50,000 on the same date, three
hours after formation of the partnership. How much should be the capital balance of EE
right after formation?
a. 25,000
b. 30,000
c. 60,000
d. 50,000
Solution: The contribution of noncash assets to a partnership should be recorded based
on their fair value. In this case, the fair value of the land would be measured by its sales
price on the date of sale, P50,000
Problem 5 (ReSA)
On March 1, 2018, Coco and Martin formed a partnership with each contributing the
following assets:
Cash
Machinery and Equipment
Building
Furniture and Fixtures
Coco
300,000
250,000
100,000
Martin
700,000
750,000
2,250,000
-
The building is subject to mortgage loan of 800,000 which is to be assumed by the
partnership agreement provides that Coco and Martin share profits and losses 30% and
70% respectively. On March 1, 2018 the balance in Martin’s capital account should be:
a. 3,700,000
b. 3,140,000
c. 3,050,000
d. 2,900,000
Solution:
Cash
Machinery and Equipment
700,000.00
750,000.00
Building
2,250,000.00
Total assets invested
3,700,000.00
Mortgage assumed
(800,000.00)
Capital Balance of Martin
2,900,000.00
Problem 6 (PRTC)
Baser and Michelle have just formed a partnership. Baser contributed cash of P920,000
and office equipment that costs P422,000. The equipment had been used in his sole
proprietorship and had been 70% depreciated. The current value of the equipment is
P295,000. Baser also contributed a note payable of P87,000 to be assumed by the
partnership. The partners agreed on a profit and loss ratio of 50% each. Baser is to have
a 70% interest in the partnership. Michelle contributed only a merchandise inventory
from her sole proprietorship carried at P550,000 on a first-in- first-out basis. The current
fair value of the merchandise is P525,000.
To consummate the formation of the partnership Baser should make additional
investment or (withdrawal) of:
A. P224,000
B. P(30,000)
C. P97,000
D. P(80,000)
Solution:
Michelle’s total contribution
Interest Ratio
Total Capital
Baser’s Ratio
Required capital of Baser
Total contribution of Baser
(920,000+295,000-87,000)
P 525,000
30%
P 1,750,000
70%
P 1,225,000
(1,128,000)
97,000
Problem 7 (PRTC)
In 2018, Norma and Celso agreed to form a new partnership under the following general
agreements:
Partners’ contributions will be on a %:4 ratio; (2) Profit and loss, 5:5, and (3) Capital
credits 57:43 ratio, respectively to Norma and Celso. Their respective contributions will
come from old proprietorships they owned.
Norma contributed the following items and amounts:
Cash
P 748,800
512,000
Equipment (at book value per her proprietorship records)
Celso contributed the following items at their carrying amounts in the proprietorship
records:
Accounts receivable
Inventory
Furniture and fixtures
96,000
268,800
514,560
220,800
Intangibles
All the non-cash contributions are not properly valued. The two partners have agreed
that (a) P7,680 of the accounts receivable are uncollectible; (b) the inventories are
overstated by P19,200; (c) the furniture and fixtures are understated by P11,520; and
the intangibles include a patent with a carrying value of P13,440, which must now be
derecognized upon a court order. The rest of the intangible items are fairly valued.
1. How much is the total depreciable fixed asset recorded by the partnership?
a. P1,060,080
c. P1,116,480
b. P403,200
d. P1,041,480
2. What is the capital balance of Celso after the formation of the partnership?
a. 1,036,541
b. 1,339, 225
c. 1,325,808
d. 1,071,360
Solution:
1. D
Celso’s Contribution @ BV
Net decrease to FV
Celso’s Contribution @ FV
Contribution Ratio
FV of Norma’s Contribution
Cash of Norma
FV equipment investment
FV of Furniture and Fixture
Total Fixed Assets
P 1,100,160
(28,800)
P 1,071,360
5/4
P 1,339,200
(748,800)
590,400
526,080
P 1,116,480
2. A
Partner
CC
CNA
Difference
N
P 1,374,019
P 1,339,200
P 34,819
C
1,036,541
1,071,360
(34,819)
P 2,410,560
P 2,410,560
-0-
Total
Problem 8 (PRTC)
A, B and C formed the ABC Partnership on July 1, 2018, with the following assets,
measured at book values in their respective records, contributed by each partner:
Cash
A
B
C
P 200,000
P 150,000
P 150,000
38,500
68,900
Accounts receivable
Inventory
135,000
118,000
67,000
Plant, Property and Equipment (PPE)
950,000
460,000
380,000
A part of A’s contribution, P25,000, comes from his personal borrowings. Also, the PPE
of A and B are mortgaged with the bank for P160,000 and P16,500, respectively. The
partnership is to assume responsibility for these PPE mortgages. The fair value of the
accounts receivable contributed by C is P43,000 and her PPE at this date has a fair value
P365,000. All the other assets contributed are fairly valued. The partners have agreed to
share profits and losses on a 5:3:2 ratio, to A, B and C, respectively.
How much is the contribution of each partner? Calculate their contribution ratio.
Solution:
Cash
A
B
C
Total
200,000
150,000
150,000
500,000
38,500
43,000
81,500
Accounts Receivable
Inventory
135,000
118,000
67,000
320,000
PPE
950,000
460,000
365,000
1,775,000
Total Assets
1,285,000
766,500
625,000
2,676,500
Liabilities
-160,000
-16,500
Net Asset
1,125,000
750,000
Net Assets
Contribution
Ratio
A
1,125,000
45%
B
750,000
30%
C
625,000
25%
Total
2,500,000
100%
-176,500
625,000
2,500,000
What is the capital balance for each partner at July 1, instead, if the interest ratio is
agreed at 4:3:3 to A, B and C, respectively?
Answer:
A
1,000,000
(2,500,000 x 40%)
B
750,000
(2,500,000 x 30%)
C
750,000
(2,500,000 x 30%)
Total
2,500,000
Problem 9 (PRTC)
Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnership’s formation:
Contributed by
Cash
Roberts
Smith
20,000
30,000
Inventory
15,000
Building
40,000
Furniture & Equipment
15,000
The building is subject to a mortgage of P 10,000, which the partnership has assumed.
The partnership agreement also specifies that profits and losses are to be distributed
evenly.
1. What amounts should be recorded as capital for Roberts and Smith at the
formation of the partnership?
Roberts
Smith
A.
35,000
85,000
B.
35,000
75,000
C.
55,000
55,000
D.
60,000
60,000
Solution:
Roberts: 20,000 + 15,000 = P35, 000
Smith: 30,000 + 15,000 + 40,000 – 10,000 = P75,000
Problem 10 (PRTC)
The Grey and Redd Partnership was formed on January 2, 2010. Under the partnership
agreement, each partner has an equal initial capital balance. Partnership net income or
loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally
contributed assets costing P30,000 with a fair value of P60,000 on January 2, 2010, and
Redd contributed P20,000 cash. Drawings by the partners during 2010 totaled P3, 000
by Grey an P9,000 by Redd. The partnership net income in 2010 was P25,000
1. Under the goodwill method, what is Redd’s initial capital balance in the partnership?
A. 20,000
C. 40,000
B. 25,000
D. 60,000
Solution:
Contributed Capital
Agreed Capital
Increase (Decrease)
Grey
60,000
60,000
Redd
20,000
60,000
40,000
Total
80,000
120,000
40,000
Problem 11 (CRC-ACE)
On May 1, 2018, the business assets and liabilities of Nathan and Janice were as follows:
Nathan
Cash
Janice
8,000.00
62,000.00
Receivables
200,000.00
600,000.00
Inventories
120,000.00
650,000.00
200,000.00
Land, Building and Equipment
Other Assets
Accounts Payable
2,000.00
535,000.00
3,000.00
(180,000.00)
(250,000.00)
Nathan and Janice agreed to from a partnership by contributing their net assets, subject
to the following adjustments:



Receivables of P20,000 in Nathan’s books and P40,000 in Janice’s books are
uncollectible.
Inventories of P6,000 and P7,000 in the respective books of Nathan and Janice
are worthless
Other assets in both books are written off
Upon the partnerships formation:
1. The respective capital of partners Nathan and Janice would be_____________;
2. The total assets of the partnership would be_____________________.
Solution:
Nathan
Janice
Receivables
8,000.00
200,000.00
62,000.00
600,000.00
Inventories
120,000.00
200,000.00
Land Building and Equipment
650,000.00
535,000.00
3,000.00
Cash
Other Assets
Accounts Payable
2,000.00
(180,000.00)
800,000.00
(20,000.00)
1,150,000.00
Uncollectible
Inventories
(6,000.00)
(7,000.00)
Written off
(2,000.00)
Total Capital
772,000.00
(3,000.00)
1,100,000.00
(250,000.00)
(40,000.00)
Problem 12 (CRC-ACE)
James admits Dani as a partner in business. Accounts in the ledger of James on June 1,
2018, just before the admission of Dani, show the following balances:
Cash
P26,000
Accounts Receivable
120,000
Merchandise Inventory 180,000
Accounts Payable
James, Capital
P264,000
62,000
It is agreed that for purposes of establishing James’s interest, the following adjustments
should be made:

An allowance for doubtful accounts of 2% of accounts receivable is to be
established


The merchandise inventory is to be valued at P202,000.
Prepaid expenses of P6,500 and accrued expenses of P4,000 are to be
established
Dani is to invest sufficient funds in order to receive a 1/3 interest in the partnership.
1. How much is the adjusted capital of James?
2. How much cash should Dani invest?
3. How much is the total assets of the partnership.
Solution:
Cash
26,000.00
A/R
120,000.00
Merchandise Inventory
180,000.00
A/P
(264,000.00)
62,000.00
2% Allow. For doubtful acc.
(2,400.00)
Merch. Inventory
22,000.00
Prepaid Exp.
6,500.00
Accrued Exp.
(4,000.00)
James adjusted cap. 2/3
84,100.00
42,050.00
Dani 1/3
126,150.00
James Capital
84,100.00
Dani Capital
42,050.00
Accounts Payable
264,000.00
Accrued Expense
4,000.00
Total Assets
394,150.00
Problem 13 (CRC-ACE)
The balance sheet as of July 31, 2018, for the business owned by Ethan, shows the
following assets and liabilities:
Cash
P100,000
Accounts Receivable 268,000
Merchandise
440,000
Fixtures
Accounts Payable
P328,000
57,600
It is estimated that 5% of the receivable will prove uncollectible. The cash balance
includes 1,000 share certificates of PNB at its cost, P8,000; the stock last sold on the
market at P70.00 per share. Merchandise includes obsolete items costing P36,000 that
will probably realize only P8,000. Depreciation has never been recorded; the fixtures are
2 years old, have an estimated life of 10 years, and would cost P480,000 if purchased
new currently. Sundry prepaid items amount to P10,000. ava is to be admitted as a
partner upon investing P400,000 cash and P200,000 merchandise.
1. What will be that total capital after the formation of the partnership?
Solution:
Cash
100,000.00
A/R
268,000.00
Merchandise
440,000.00
Fixtures
328,000.00
Accts. Payable
(57,600.00)
1,078,400.00
Unadjusted Cap.
Uncollectible
(13,000.00)
Share
62,000.00
Obsolete Merchandise
(28,000.00)
Prepaid Items
10,000.00
Depreciation
56,000.00
Investment
600,000.00
Adjusted Capital
1,765,400.00
Problem 14 (CRC-ACE)
Harold and Cherry are partners sharing profits 60:40. A balance sheet prepared for the
partnership on April 1, 2018 shows the following:
Cash
48,000.00
Accounts Payable
89,000
Accounts Receivable
92,000.00
Harold, capital
133,000
Inventory
165,000.00
Cherry, capital
108,000
Equipment
70,000.00
Accumulated Depreciation
(45,000.00)
Total Assets
330,000.00
330,000.00
On this date, the partners afree to admit lucas as a partner. The terms of the agreement
is that assets and liabilities are to be restated as follows:




An allowance for possible uncollectible of P4,500 is to be established.
Inventories are to be restated at their present replacement values of P170,000
Equipment are to be restated at a value of P35,000
Accrued expenses of P4,000 are to be recognized.
Harold, Cherry, and Lucas will divide profits in the ratio of 5:3:2. Capital balances for the
new partners are to be in this ratio with Harold and Cherry making cash settlement
outside of the partnership for the required capital adjustment between themselves and
Lucas investing cash in the partnership for his interest.
Questions:
1. How much cash Lucas should contribute?
Solution:
H
136,900
C
110,600
L
61,875
309,375
17,787.5
(17,787.5)
0
154,687.5
92,812.5
61,875
309,375
Problem 15 (CRC-ACE)
Ferdinand and Daniel establish a partnership to operate a used-furniture business under
the name of F and D Furniture. Ferdinand contributes furniture that cost P60,000 and
has a fair value of P90,000. Daniel contributes P30,000 cash and delivery equipment
that cost P40,000 and has a fair value of P30,000. the partners agree to share profits
and losses 60% to Ferdinand and 40% to Daniel.
1. Calculate the peso amount of inequity that will result if the initial noncash
contributions of the partners are recorded at cost rather than fair market value.
Solution:
Should be
Recovered
U&D
Oshi
F
90,000
60,000
30,000
(12,000)
18,000
D
60,000
70,000
10,000
(8,000)
18,000
T
150,000
130,000
20,000
(20,000)
-0-
1.2 Partnership Operations
Problem 1 (ReSA)
Left and Right are partners. Their capital accounts during 2019 were as follows:
Left, Capital
8/23
P 3,000
Right, Capital
1/1
P15,000
4/3
4,000
10/31
3,000
3/5
P4,500
1/1
7/6
10/7
P 25,000
3,500
2,500
Partnership net income is P25,000 for the year. The partnership agreement provides for
the division of net income as follows:



Each partner is credited 10 percent interest on his or her average capital
(rounded to the nearest month)
Because of prior work experience of, Left is entitled to an annual salary of P6,000
and Right is credited with P4,000
Any remainder income or loss is to be allocated based on the beginning capital
How much of the partnership net income for 2019 should be assigned to Left and Right?
a. Left, P11,833.33; Right, P13,166.50
b. Left, P9,375; Right, P15,625
c. Left, P13,194; Right, P11,806
d. Left, P12,500; Right, P12,500
Solution:
Left
Right
Total
Interest
1,750.00
2,362.50
4,112.50
Salaries
6,000.00
4,000.00
10,000.00
Balance
4,083.00
6,804.00
10,887.50
11,833.00
13,166.50
25,000.00
Left
Right
15,000 x 3
45,000.00
25,000 x 2
50,000.00
19,000 x 5
95,000.00
20,500 x 4
82,000.00
16,000 x 2
32,000.00
24,000 x 3
72,000.00
19,000 x 2
38,000.00
26,500 x 3
79,500.00
210,000.00
Divide:
Average
Capital
283,500.00
12
17,500.00
12
Average
Capital
23,625.00
Problem 2 (ReSA)
Hunt, Rob, Turman and Kelly own a publishing company that they operate as a
partnership. The partnership agreement includes the following:



Hunt receives a salary of P10,000 and a bonus of 3% of income after all bonuses.
Rob receives a salary of P5,000 and a bonus of 2% of income after all bonuses.
All partners are to receive 10% interest on their average capital balances.
The average capital balances are Hunt, P25,000; Rob, P22,500; Turman, P10,000 and
Kelly, P23,500. Any remaining profit and losses are to be allocated among the partners.
a.
b.
c.
d.
Hunt, P20,725; Rob, P14,975; Turman, P7,725; Kelly, P9,075
Hunt, P14,000; Rob, P8,250; Turman, P1,000; Kelly, P2,350
Hunt, P19,850; Rob, P14,600; Turman, P8,350; Kelly, P9,700
Cannot be determined.
Solution:
Hunt
Rob
Turman
Kelly
Salary
10,000.00
5,000.00
10% Interest
2,500.00
2,250.00
Bonus
Balance :
Equally
1,500.00
1,000.00
6,725.00
6,725.00
6,725.00
6,725.00
26,900.00
20,725.00
14,975.00
7,725.00
9,075.00
52,500.00
1,000.00
-
Total
-
15,000.00
2,350.00
8,100.00
-
2,500.00
Problem 3 (ReSA)
PP and QQ are partners operating a chain of retail stores. The partnership agreement
provides for the following:
PP
QQ
Salaries …………………………………………………
Interest on capital balances …………………
Bonus ……………………………………………………
P5,000
P2,500
10%
10%
20% of net income
before interest but
after bonus & salaries
Remainder …………………………………………….
30%
70%
The income summary account for year 2019 shows a credit balance of P25,000 before
any deductions. Average capital balances for PP and QQ are P25,000 and P37,500,
respectively. The share of PP and QQ in the P25,500 net income would be:
a. PP, P12,031.25; QQ, P13,468.75
b. PP, P13,275.75; QQ, P12,229.25
c. PP, P11,750; QQ, P13,750
d. PP, P13,125; QQ, P12,375
Solution:
PP
QQ
Total
Salaries
5,000.00
2,500.00
7,500.00
10% Interest
2,500.00
3,750.00
6,250.00
Bonus
Balance 30%,
70%
3,000.00
-
3,000.00
2,625.00
6,125.00
8,750.00
13,125.00
12,375.00
25,500.00
Problem 4 (ReSA)
XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss
in the ratio of 90% and 10%, respectively. XX contributed capital of P6,250. YY
contributed no capital but has a specialized expertise and manages the firm full time.
There were no withdrawals during the year. The partnership agreement provides for the
following:




Capital accounts are to be credited annually with interest at 5% of the beginning
capital
YY is to be paid a salary of P250 a month
YY is to receive a bonus of 20% of net income calculated before deducting his
salary and interest on both capital accounts
Bonus, interest, and YY’s salary are to be considered as partnership expenses
The partnership’s income statement for 2019 follows:
Revenues ……………………………………………………………………………
P24,112.50
Less: Expenses (including salary, interest, and bonus)……
12,425.00
Net Income …………………………………………………………………………
11,687.50
1. What is YY’s 2019 bonus?
a. P2,922.00
c. P3,750.00
b. P3,000.00
d. P3,934.50
2. How much is the total share of YY on the 2019 partnership net income?
a. P7,084.50
c. P7,918.75
b. P7,162.50
d. P8,097.00
Solution:
1. C
Net Income after salaries interest and
bonus
11,687.50
Salaries
3,000.00
Interest
312.50
Net income after bonus
15,000.00
Divide
80%
Net income before salaries, interest and bonus
18,750.00
20%
Bonus
3,750.00
2. C
XX
5% Interest
YY
312.50
Total
-
312.50
Salaries
-
3,000.00
3,000.00
Bonus
-
3,750.00
3,750.00
10,518.25
1,168.75
11,687.00
10,830.75
7,918.75
18,749.50
Balance 9:1
Share in Net
Income
Problem 5 (ReSA)
The Trading Company, a partnership, was formed on January 1, 2019, with four
partners, DD, EE, FF, and GG. Capital contributions were as follows: DD, P25,000; EE,
P12,500; FF, P12,500; GG, P10,000. The partnership agreement provides that partners
shall receive 5% interest in the amounts of their capital contributions. In addition, DD is
to receive a salary of P2,500 and EE a salary of P1,500. The agreement further provides
that FF shall receive a minimum of P1,250 per annum from the partnership and GG a
minimum of P3,000 per annum, both including amounts allowed as interest on capital
and their respective shares of profits. The balance of the profits is to be shared in the
following proportions: DD, 30%; EE, 30%; FF, 20%; and GG, 20%. Calculate the
amount that must be earned by the partnership during 2019, before any charges for
interest on capital or partners’ salaries, in order that DD may receive an aggregate of
P6,250 including interest, salaries and share of profits.
a. P 8,333.33
b. P 15,000.00
c. P15,333.33
d. P16,166.67
Solution:
DD
EE
FF
GG
Total
Salaries
2,500.00
1,500.00
0.00
0.00
4,000.00
Interest
1,250.00
625.00
625.00
500.00
3,000.00
Balance 3:3:2:2
2,500.00
2,500.00
1,666.00
1,667.00
8,333.00
6,250.00
4,625.00
2,291.00
2,167.00
15,333.00
833.00
833.00
3,000.00
16,166.00
Problem 6 (CRC-ACE)
David and Ruby organized the DR Partnership on January 1, 2018. the following entries
were made in their capital accounts during 2018:
Debit
Credit
David, capital:
January 1
180,000.00
April 1
50,000.00
October 1
10,000.00
Ruby, capital
January 1
March 1
60,000.00
10,000.00
September
20,000.00
November 1
10,000.00
Required:
If the partnership net income, computed before salaries, interest and bonus is P56,000
for 2018, indicate its division between the partners under each of the following
independent profit-sharing agreements:
a. Interest at 4% is allowed on average capital investments, and the balance is
divided equally.
b. A salary of P24,000 is to be credited to Ruby, 4% interest is allowed on each
partner on their ending capital balance, and the balance in the ratio of beginning
capital balances.
c. Salaries allowed to David and Ruby in the amounts of P34,000 and P38,000.
respectively, and remaining profits ad losses are divided in the ratio of average
capital balances.
d. A bonus of 10% of partnership net income is credited to David, a salary of
P16,000 is allowed to Ruby, and remaining profits and losses are shared equally.
(The bonus is regarded as an expense for purposes of calculating the bonus
amount).
DAVID
RUBY
43,101
180,000
*12/12
180,000
43,101
60,000
*12/12
60,000
43,191
(50,000)
*9/12
(37,500)
43,160
(10,000)
*10/12
8,333
43,374
(10,000)
*3/12
(2,500)
43,344
20,000
*4/12
6,667
140,000
43,405
10,000
1,666
80,000
*2/12
AVE.
CAP
120,000
60,000
A.
DAVID
RUBY
TOTAL
C.
DAVID
RUBY
TOTAL
INTEREST
5,600
2,400
8,000
SALARIES
34,000
38,000
72,000
BALANCE
24,000
24,000
48,000
BALANCE
(11,200)
(4,800)
(16,000)
29,600
26,400
56,000
22,800
33,200
56,000
DAVID
RUBY
TOTAL
16,000
16,000
D.
B.
DAVID
SALARIES
RUBY
TOTAL
SALARY
24,000
24,000
BONUS
5,091
BALANCE
17,455
17,455
34,909
22,546
33,455
56,000
INTEREST
4,800
3,200
8,000
BALANCE
18,000
6,000
24,000
5,091
56,000
Problem 7 (CRC-ACE)
X,Y and Z, doctors, agree to form a partnership and to share profits in the ratio 5:3:2.
they also agreed that Z is to be allowed a salary of P140,000 and that Y is to be
guaranteed P105,000 higher as his share of the profits. During the first year of
operations, income from fees are P900,000, while expenses total P480,000.
How much of the profits should be credited to X?, to Y? to Z?
Solution:
X
Y
SALARY
BALANCE
PROFIT
Z
TOTAL
140,000
140,000
140,000
84,000
56,000
280,000
140,000
84,000
196,000
420,000
(15,000)
21,000
(6,000)
125,000
105,000
190,000
420,000
Problem 8 (CRC-ACE)
Partners L and M share profits 3:1 after annual salary allowances of P400,000 and
P60,000, respectively; however, if profits are not adequate to meet the salary
allowances, the entire profit is to be divided in the salary ratio. Profits of P90,000 were
reported for the year 2018. in 2019 it is ascertained that in calculating net income for
the year ended December 31, 2018, depreciation was overstated by P36,000 and ending
inventory was understated by P80,000.
What adjustments should be made on the capital of L and M?
Adjusting entry needed to correct the partner’s capital balances.
Solution:
L
M
TOTAL
40,000
60,000
100,000
25,500
8,500
34,000
SHOULD BE
65,500
68,500
134,000
MADE
(36,000)
(54,000)
(90,000)
ADJUSTMENTS
29,500
14,500
44,000
ENTRIES:
MDSE
8,000
AD
36,000
L
29,500
M
14,500
Problem 9 (CRC-ACE)
NEGOSYO TO Company a partnership was formed on January 1, 2018, with four
partners, C, P, A and S. Capital contributions were as follows: C- P1,000,000; PP500,000; A- P500,000; and S- P400,000. the partnership agreement provides that
each partner shall receive 5%interest on the amount of his capital contribution. In
addition, C is to receive a salary of P100,000 and P a salary of P60,000 which are to be
charged as expenses of the business. The agreement provides that A shall receive a
minimum of P50,000 per annum from the partnership and S a minimum of P120,000 per
annum, both including amounts allowed as interest on capital and their respective
shares of profits. The balance of the profits to be shared in the following proportions: C30%; P- 30% A- 20% and S-20%.
Calculate the amount that must be earned by the partnership during 2018, before any
charge for interest on capital or partners ‘ salaries, in order that C may receive an
aggregate of P250,000, including interest, salary and share of profits.
Solution:
C
P
A
S
TOTAL
INTEREST
50,000
25,000
25,000
20,000
120,000
SALARIES
100,000
60,000
BALANCE
100,000
100,000
66,667
66,666
333,333
250,000
185,000
91,667
86,666
613,333
33,334
33,334
160,000
250,000
185,000
91,667
120,000
646,667
50,000
25,000
25,000
20,000
120,000
Problem 10 (CRC-ACE)
The following account balances appear in the ledger for the firm of X and Y at the end of
2018 before the profit for the year has been transferred to the partner’s accounts:
X, drawing
72,000.00
Y, drawing
125,000.00
X, loan
175,000.00
X, capital
500,000.00
Y, capital
500,000.00
Profit and loss
302,250.00
The following information is to be considered in closing the profit and loss account and
the drawing accounts:
 The cost of installing equipment at the beginning of 2018, P27,000, was charged
to expense. The installation relates to equipment with a 10-year life.
 The loan to the firm was made by X on March 1, 2018. No entry has been made
for interest on the loan, which is 6% and is to be paid to X at the time the loan is
prepaid.
The partnership agreement permits X and Y to withdraw weekly sums of P1,500 and
P2,250, respectively, these amounts to be regarded as salaries. Actual withdrawals by
partners differed from allowed amounts and are summarized in the drawing accounts.
Y, the managing partner, is entitled to special bonus of 25% of the net profit after
deduction of all special allowances to partners (including the bonus), and any remaining
profit is to be distributed equally.
1. How much should be the Dec. 31 ending capital balance of each partner?
Solution:
SALARIES
X
Y
TOTAL
PROFIT AND LOSS
302,500
78,000
117,000
195,000
INSTALLATION
24,610
24,610
ACCUP. DEP.
27,000
2,700
INTEREST
326,800
8,750
ADJUSTED PROFIT
318,050
B
BALANCE
49,220
49,220
98,440
198,830
125,000
318,050
DRAWING
127,220
72,000
55,220
65,830
500,000
500,000
555,220
565,830
CAPITAL
Problem 11 (PRTC)
Linda and Mario created a partnership to own and operate a health-food store. The
partnership agreement provided that Linda receives an annual salary of P10,000 and
Mario a salary of P5,000 to recognize their relative time spent in operating the store.
Remaining profits and losses were divided 60:40 to Linda and Mario, respectively.
Income of P13,000 for 2017, the first year of operations, was allocated P8,800 to Linda
and P4,200 to Mario. On January 1, 2018, the partnership agreement was changed to
reflect the fact that Mario could no longer devote any time to the store’s operations. The
new agreement allows Linda a salary of P18,000, and the remaining profits and losses
are divided equally. In 2018, an error was discovered such that 2017 reported income
was understated by P4,000. The partnership income of P25,000 for 2018 included this
P4,000 related to 2017.
1. In the reported new income of P25,000 for the year 2018, Linda would have
A. P21,900
B. P17,100
B. P0
D. P12,500
Solution:
2018 income to allocate (25,000-4000=21,000)
Salary
Remainder to divide
income
2017
understatement
Linda
18,000
Mario
Total
18,000
1,500
1,500
3,000
2,400
1,600
4,000
21,900
3,100
Problem 12 (PRTC)
Derha, a senior partner in a law firm, has a 30% participation in the firm’s profit and
losses. During 2018, Derha withdrew P130,000 against her capital but contributed
property with a fair value of P25,000. Derha’s capital increased by P15,000 during 2018.
2. The net income of the partnership for 2018 is
A. P150,000
C. P.350,000
B. P400,000
D. P550,000
Solution:
Increase in Capital
P 15,000
Contributed Property
(25,000)
Withdrawal
130,000
Share in Net Income
120,000
Ratio
30%
Net Income of Partnership
400,000
Problem 13 (PRTC)
Elmo, Fred and Greg invest P40,000, P30,000 and P25,000 respectively, in a partnership
on June 30, 2017. They agree to divide net income or loss as follows:
A. Interest at 10% on beginning capital account balances
B. Salaries of P10,000, P8,000 and P6,000, respectively to Elmo, Fred and Greg,
respectively.
C. Remaining net income or loss is divided equally
D. A minimum of P18,000 of income is guaranteed to Greg regardless of the result of
operations.
3. If the net income for the year ended June 30, 2018 before interest and salaries
allowances to partners was P44,000, the amount of the net income credited to Elmo is:
A. P21,875
B. P20,000
C. P18,334
D. P14,500
Solution:
Interest
Salaries
Unallocated
Unadjusted
share
Guarantee
Greg
Net Income
to
Elmo
4,000
10,000
3,500
Fred
3,000
8,000
3,500
Greg
2,500
6,000
3,500
Total
9,500
24,000
10,500
17,500
14,500
12,000
44,000
(3,000)
(3,000)
6,000
-
14,500
11,500
18,000
44,000
Problem 14 (PRTC)
X, Y and Z are partners with average capital balances during 2018 of P120,000, P60,000
and P40,000, respectively. Partners receive 10% interest on their average capital
balances. After deducting salaries of P30,000 to X and P20,000 to Y, the residual profit
or loss is divided equally. In 2018 the partnership sustained a P33,000 loss before
interest and salaries to partners.
4. By what amount should X’s capital account change?
A. P7,000 increase
C. P11,000 decrease
B. P35,000 decrease
D. P42,000 increase
Solution:
Interest
Salaries
Unallocated
Total
X
12,000
30,000
(35,000)
7,000
Y
6,000
20,000
(35,000)
(9,000)
Z
4,000
(35,000)
(31,000)
Total
22,000
50,000
(105,000)
(33,000)
Problem 15 (PRTC)
Partners Joyce and Marie share profits 3:1 after annual salary allowances of P4,000 and
P6,000 respectively; however, if profits are not adequate to meet the salary allowances,
the entire profit is to be divided in the salary ratio. Profits of P9,000 were reported for
the year 2017. in 2018, it is ascertained that in calculating net income for the year
ended December 31, 2017, depreciation was overstated by P3,600 and the ending
inventory was understated by P800.
5. The amount of the net adjustments in the books of Joyce and Marie are:
Joyce
Marie
A
P(3,699)
P(1,813)
B
P2,950
P1,450
C
P8,188
P8,563
D
P2,300
P3,475
Solution:
2017 Net Income = 9,000
4:6 Ratio
Joyce
Marie
Total
3,600
5,400
9,000
2017 corrected Net Income = 9,000 + 3,600 + 800 = 13,400
Salaries
4,000
6,000
10,000
Unallocated (3:1)
2,550
850
3,400
Total
6,550
6,850
13,400
Ratio
(3600.00)
(5400.00)
Distribution
2,950
1,450
1.3 Partnership Dissolution
Problem 1 (ReSA)
A partnership had the following condensed balance sheet:
Assets
Liabilities and Capital
Cash
2,500.00
Liabilities
7,500.00
Noncash Assets
32,500.00
XX Capital (80%)
20,000.00
XX Loan
2,500.00
YY Capital (20%)
10,000.00
Total
37,500.00
37,500.00
The percentages in parentheses after the partner's capital balances represent their
respective interests in profits and losses. The partners agree admit ZZ as a member of
the firm.
1. ZZ purchases a ¼ interest in the firm. One fourth of each partner's capital is to
be transferred to the new partner. ZZ pays the partners which is divided between
them in proportion to the equities given up. The capital balances of XX, YY, and
ZZ after should be:
a.
b.
XX
YY
15,000 7,500
12,500 12,500
ZZ
9,375
12,500
XX
YY
ZZ
c. 15,000 7,500 7,500
d. 10,000 10,000 10,000
Solution:
XX
(20,000 x 3/4)
15,000.00
YY
(10,000 x 3/4)
7,500.00
ZZ
(30,000 x 1/4)
7,500.00
30,000.00
Problem 2 (ReSA)
WW desires to purchase a one-fourth capital and profit and loss interest in the
partnership of EE, GG, DD. The three partners agree to sell WW a one fourth of their
respective capital and profit and loss interest in exchange for a total payment of 40,000.
The capital accounts and the respective percentage interest in profits and losses
immediately before the sale to WW are:
EE, capital (60%)
80,000.00
GG, capital (30%)
40,000.00
DD, capital (10%)
20,000.00
Total
140,000.00
All other assets and liabilities are fairly valued and with no adjustments is to be recorded
prior to the acquisition by WW immediately after WW’s acquisition, what would be the
capital balances of EE, GG and DD respectively?
a. 60,000; 30,000; 15,000
b. 69,000; 34,500; 16,500
c. 77,000; 38,500; 19,500
d. 92,000; 46,000; 22,000
Solution:
EE
(80,000 x 3/4)
60,000.00
GG
(40,000 x 3/4)
30,000.00
DD
(20,000 x 3/4)
15,000.00
105,000.00
Problem 3 (ReSA)
The following condensed balance sheet is presented for the partnership of AA and BB
who share profit and losses in the ratio of 6:4 respectively:
Cash
33,750.00
Other Asset
468,750.00
BB, loan
22,500.00
525,000.00
Accounts Payable
90,000.00
AA, capital
261,000.00
BB, capital
174,000.00
525,000.00
The assets and liabilities are fairly valued on the balance sheet. AA and BB decide to
admit CC as a new partner with 20% interest. No bonus or goodwill is to be recorded.
What amount should CC contribute or invest in cash and other assets?
a. 82,500
b. 87,000
c. 105,000
d. 108,750
Solution:
AA, capital
261,000.00
BB, capital
174,000.00
Total
435,000.00
Divide:
80%
Total Agreed Capital
543,750.00
CC's interest
20%
108,750.00
Problem 4 (ReSA)
XX and YY are partners who have capital balances of 300,000 and 240,000 sharing
profits in the ratio of 3:2. ZZ is admitted as a partner upon investing 250,000 for a 25%
interest in the firm, profits are to be allocated equally. Given the choice between
goodwill and bonus method, ZZ will:
a.
b.
c.
d.
Prefer bonus method due to ZZ’s gain of 17,500
Prefer bonus method due to ZZ’s gain of 70,000
Prefer goodwill method due to ZZ’s gain of 70,000
Be indifferent for the goodwill and bonus methods are the same
Solution:
Bonus Method:
CC
AC
Bonus
XX
300,000.00
331,500.00
31,500.00
3/5
YY
240,000.00
261,000.00
21,000.00
2/5
540,000.00
592,500.00
52,500.00
250,000.00
197,500.00
(52,500.00)
790,000.00
790,000.00
ZZ
-
Goodwill Method:
CC
AC
Goodwill
XX
300,000.00
426,000.00
126,000.00
YY
240,000.00
324,000.00
84,000.00
540,000.00
750,000.00
210,000.00
250,000.00
250,000.00
790,000.00
1,000,000.00
ZZ
210,000.00
For purposes of comparing bonus and goodwill, goodwill is assumed not realized and it
should be written off outright as a loss, therefore:
XX
YY
ZZ
Capital balance if Goodwill method is
used
426,000.00
324,000.00
250,000.00
Less: write off of Goodwill (equally)
(70,000.00)
(70,000.00)
(70,000.00)
Capital balance after write off of goodwill
356,000.00
254,000.00
180,000.00
Capital balance of Bonus method is used
331,500.00
261,000.00
197,500.00
Gain (loss) if Bonus method is used
24,500.00
(7,000.00)
17,500.00
Problem 5 (ReSA)
DD, EE and FF are partners sharing profits and losses of 50%, 30% and 20%
respectively. The December 31, 2019 balance sheet of the partnership before any profit
allocation was summarized as follows:
ASSETS
LIABILITES AND CAPITAL
Cash
60,000.00
Accounts Payable
4,000.00
Inventories
40,000.00
FF, loan
3,000.00
Furn. & Fixt (net)
50,000.00
DD, capital
70,000.00
Patent
15,000.00
EE, capital
60,000.00
Total Assets
165,000.00
FF, capital
30,000.00
FF, drawings
(2,000.00)
Total Liabilities and Capital
165,000.00
The partnership net income for the year amounted to 30,000. On January 1, 2020, FF
has decided to retire from the partnership and by mutual agreement among partners;
the following have been arrived at:
a. Inventories amounting to 5,000 is considered obsolete and must be written off
b. Furniture and fixtures should be adjusted to their current value of 65,000
c. Patents are considered worthless and must be written off immediately before the
retirement of FF
It was agreed that the partners will pay FF for his interest in the partnership inclusive of
loan balance
1. The interest of FF immediately before his retirement amounted to:
a. 37,000
c. 35,000
b. 36,000
d. 24,000
2. FF retires by receiving 36,000 cash payment at book value, the capital balances
of DD and EE after the retirement of FF:
a. DD, 82,500; EE, 67,500
c. DD, 67,500; EE, 58,500
b. DD, 85,000; EE, 69,000
d. DD, 57,500’ EE, 52,500
3. FF retires by receiving 38,000 cash (payment at more than book value), using
bonus method, the capital balances of DD and EE after the retirement of FF:
a. DD, 81,250; EE, 66,750
c. DD, 81,875; EE, 67,125
b. DD, 83,750; EE, 68,250
d. DD, 82,500; EE, 67,500
4. FF retires by receiving 38,000 cash (payment at more than book value), using
total implied goodwill method, the capital balances of DD and EE after the
retirement of FF:
a. DD, 87,500; EE, 70,500
c. DD, 81,875; EE, 67,125
b. DD, 83,750; EE, 68,250
d. DD, 82,500; EE, 67,500
Solution:
1. B
2. A
DD
EE
FF
Unadjusted Capital
70,000.00
60,000.00
30,000.00
Share in Net Income
15,000.00
9,000.00
6,000.00
Total
85,000.00
69,000.00
36,000.00
Inventories written off
(2,500.00)
(1,500.00)
(1,000.00)
Furniture and Fixtures
7,500.00
4,500.00
3,000.00
Patent
(7,500.00)
(4,500.00)
(3,000.00)
Adjusted Capital
82,500.00
67,500.00
35,000.00
3. A
Bonus Method (38,000-36,000) 2,000
DD
EE
Capital
82,500.00
67,500.00
(2,000 x 5/8)
(1,250.00)
(2,000 x 3/8)
Capital Balances
(750.00)
81,250.00
66,750.00
4. A
DD
Capital
82,500.00
(10,000 x 50%)
5,000.00
EE
67,500.00
(10,000 x 30%)
Capital Balances
3,000.00
87,500.00
70,500.00
Problem 6 (PRTC)
The capital accounts of the Sarah and Opel partnership on January 1, 2018 were:
Sarah, Capital (75% profit percentage)
P 140,000
Opel, Capital (25% profit percentge)
60,000
Total Capital
P 200,000
On October 1, Tina was admitted for a 40% interest in the partnership when she
purchased 40% of each existing partner’s capital for P100,000, paid directly to Sarah
and Opel. The partnership’s net income for the year is P82,500 and 2/3 of it was earned
in the last quarter of the year.
1. What are the capital balances of Sarah, Opel and Tina after Tina’s admission to the
partnership?
A. P105,000; P45,000; P100,000
B. P135,875; P55,313; P127,500
C. P96,375; P40,125; P91,000
D. P112,500; P50,000; P87,500
Solution:
Beginning
Balance
Net
Income
(27,500)
Adjusted
Net
Income
Purchase Interest
Ending Balance
Sarah
Opel
Tina
140,000
60,000
200,000
20,625
6,875
27,500
160,625
66,875
227,500
(64,250)
(26,750)
91,000
96,375
40,125
91,000
2. How much will Sarah receive from the above transaction?
A. P71,000
C. P86,250
B. P92,500
D. P118,750
Total
227,500
Solution:
Sarah
64,250
6,750
71,000
Opel
26,750
2,250
29,000
Total
91,000
9,000
100,000
3. Assume Tina is admitted by investing the P100,000 into the partnership for a 40%
interest, how much is the ending capital balance of Opel after admission and the bonus
(given)/received to/from Tina?
A. P68,750; (P6,250)
B. P79,063; (P13,125)
C. P89,063; P5,313
D. P59,125;(P7,750)
Solution:
Interest Ratio
40%
Partner
TAC
CAN
Sarah
137,375
160,625
Difference
(23,250)
Opel
59,125
66,875
(7,750)
Tina
131,000
100,000
31,000
Total
3,275,000
327,500
0
Problem 7 (PRTC)
The balance sheet at December 31, 2018, for the Beth, Daisy and Maya partnership is
summarized as follows:
Daisy is retiring from the partnership. The partners agreed that the partnership assets,
Assets
P 1,000,000
Loan to Daisy
Total
125,000
P 1,125,000
Liabilities
P 250,000
Beth Capital (50%)
375,000
Daisy Capital (40%)
375,000
Maya Capital (10%)
125,000
Total
P 1,1125,000
excluding Daisy’s loan, should be adjusted to their fair market value of P1,250,000 and
that Daisy should receive P380,000 for her capital balance net of the P125,000 loan.
How much is the capital balance of Beth and Maya immediately after Daisy’s retirement.
A. P475,000; P145,000
B. P500,000; P150,000
C. P481,250; P146,250
D. P385,416; P127,084
Solution:
Beth
Daisy
Maya
Total
Beg. Balance
375,000
375,000
125,000
875,000
Adjusment
125,000
100,000
25,000
250,000
Adjusted interest
Total Cash paid to
Daisy
500,000
475,000
150,000
1,125,000
Bonus
-25,000
30,000
-5,000
0
End. Balance
475,000
0
145,000
620,000
-505,000
-505,000
Problem 8 (PRTC)
On January 2, 2018, Lexy and Ace dissolve their partnership and transfer all assets and
liabilities to a newly formed corporation. At the date of incorporation, the fair value of
the net assets was P22,500 more than the carrying amount on the partnership’s books.
Of which P12,500 was assigned to tangible assets and P10,000 was assigned to patent.
Lexy and Ace were each issued 5,000 shares of the corporations P12.50 par common
stock.
5. Immediately following incorporation, additional paid-in capital in excess of par should
be credited for
A. P160,000
C. P25,000
B. P47,500
D. P137,500
Solution:
FV of Net Assets
(150,000+22,500)
172,500
PV of shares issued
(10,000x12.5)
(125,000)
APIC
47,500
Problem 9 (PRTC)
On June 30, 2017, the balance sheet for the partnership of D, E and F, together with
their respective profit and loss ratios, is summarized as follows:
Assets, at cost
P 375,000
D, Loan
P 18,750
D, Capital (20%)
87,500
E, Capital (20%)
81,250
F, Capital (60%)
187,500
Total
P 375,000
D has decided to retire from the partnership, and by mutual agreement the assets are to
be adjusted to their fair value of P450,000 at June 30, 2018. It is agreed that the
partnership will pay D P127,500 cash for his partnership interest exclusive of his loan,
which is to be repaid in full.
1. After D’s retirement, what are the capital account balances of partners E and F,
respectively?
A. P81,250 and P187,500
B. P90,000 and P213,750
C. P121,250 and P307,500
D. P96,250 and P232,500
Solution:
D
E
F
Total
Beg. Balance
87,500
81,250
187,500
356,250
Adjustment
15,000
15,000
45,000
75,000
Adjusted Balance
102,500
96,250
232,500
431,250
(6,250)
(18,750)
90,000
213,750
Cash Paid
(127,500)
Bonus
25,000
(127,500)
303,750
Problem 10 (PRTC)
Partners Boba and Tess, who share profits and losses equally, have decided to
incorporate the partnership at December 31, 2018. The partnership net assets after the
following adjustments will be contributed in exchange for share of stocks from the
corporation.
I. Provision of allowance for doubtful accounts, P6,250.
II. Adjustment of overstated equipment by P2,500
III. Adjustment of understated inventory by P13,750 and
IV. Recognition of additional depreciation of P5,000.
The corporation’s ordinary share is to have a par value of P250 each and the partners
are to be issued corresponding shares equivalent to 80% of their adjusted capital
balances.
The partnership balance sheet at December 31, 2018 follows:
Cash
P 112,500
Liabilities
P 107,500
Accounts Receivable
62,500
Accounts Payable
5,000
Inventory
87,500
Boba, Capital
106,250
Equipment
50,000
Tess, Capital
93,750
Total
P 312,500
Total
P 312,500
1. Determine the total credit to APIC upon incorporation of partnership
A. P61,875
C. P40,000
B. P144,375
D. P140,000
Solution:
BV of Net Asset (106,250 + 93, 750)
200,000
Net Adjustment
-
FV
200,000
PV of Shares (200,000 x 80%)
(160,000)
Total credit of APIC for the excess of credits
40,000
2. The number of ordinary shares issued to Partner Tess is
A. 210
C. 238
B. 300
D. 217
Solution:
Tess' FV contribution
93,750
80%
PV of share issued to Tess
75,000
Number of shares received by Tess
/250
300
Problem 11 (CRC-ACE)
Capital balances and profit sharing percentages for the partnership of Aaron, Nimrod,
and Elijah on January 1,2018 are as follows:
Aaron (36%)
P140,000
Nimrod (24%)
100,000
Elijah (40%)
160,000
On January 2,2018 the partners agree to admit Ruth in the partnership for a 25%
interest in capital and earnings for her investment in the partnership of P120,000.
Partnership are not to be revalued.
a. The capital balance of Aaron, Nimrod, Elijah and Ruth, immediately after the
admission of Ruth would be:
b. What will be new profit and loss ratio for Aaron, Nimrod, Elijah, and Ruth, if old
partners will share profits using the old ratio?
Solution:
A
140,000
(36,000)
TAC
B
136,400
27%
N
100,000
(2,400)
97,600
18%
E
160,000
(4,000)
156,000
30%
R
120,000
(10,000)
130,000
25%
T
520,000
0
520,000
100%
Problem 12 (CRC-ACE)
The balance sheet of Dylan and Samuel Partnership at December 31, 218, appears
below:
Assets:
Cash
P35,000
Accounts Receivable (net)
25,000
Inventories
40,000
PPE (net)
110,000
P15,000
Liabilities:
Accounts Payable
45,000
Notes Payable
75,000
Accrued Liabilities
225,000
Mortgage Payable
Dylan, Capital
60,000
Samuel. Capital
90,000
P360,000
P360,000
Determine the capital balances of partners immediately after the admission of
Sebastian under the ff. independent situations:
a. Sebastian acquired 25% interest in the partnership capital directly from Dylan
and Samuel for P50,000. Sebastian paid P18,750 directly from Dylan and
P31,250 directly to Samuel. Total Assets of the partnership after the
admission of Sebastian were P360,000. How much must be the capital
balance of Dylan immediately after the admission of Sebastian.
b. Assume the same facts as in a except that total assets of the partnership
were P410,000 after the admission of Sebastian. At January 1,2019,
inventories had a fair value of P85,000, while PPE (net) had a fair value of
P265,000. Both Dylan and Samuel decided to revalue the partnership’s assets
before the admission of Sebastian. Determine the capital balance of Samuel
immediately after the admission of Sebastian
c. Sebastian acquired a 25% interest in capital by investing P50,000 of cash into
the partnership. Total capital of the Dylan-Samuel-Sebastian Partnership on
January 1,2019, amounted to P200,000. Determine the capital balance of
Sebastian immediately after his admission
d. Sebastian acquired 25% interest in capital by investing P80,000 of cash into
the partnership. Total capital of the Dylan-Samuel-Sebastian Partnership after
Sebastian’s admission amounted to P320,000. The fair value of the
inventories was P85,000 and the fair value of the PPE (net) was P305,000 on
January 1,2019. Determine the capital balance of Dylan, Samuel and
Sebastian immediately after Sebastian’s admission.
Solution:
B
D
60,000
15,000
3,750
S
90,000
22,500
8,750
S
50,000
200,000
A.
D
S
CAPITAL SOLD
13,750
23,750
TOTAL
37,500
GAIN/BONUS
5,000
7,500
12,500
SELLING PRICE
18,750
31,250
50,000
D
D
60,000+3,750= 46,250
B.
SEB
TOTAL
SEB.CAP
50,000
60,000
90,000
0
150,000
REVAL. TAC
TCB
VAL.
200,000
20,000
30,000
0
50,000
150,000
80,000
120,000
0
200,000
400,000
18,750
31,250
50,000
200,000
61,250
C.
TCC
D
60,000
60,000
S
90,000
90,000
S
50,000
50,000
200,000
200,000
BONUS METHOD
D.
D
60,000
36,000
96,000
S
90,000
54,000
144,000
S
80,000
230,000
80,000
90,000
320,000
Problem 13 (CRC-ACE)
1. A, B and C have capital balances of P112,000, P130,000 and P58,000,
respectively and share profits in the ratio 3:2:1. D invest cash in the partnership
for a ¼ interest.
a. D receives a ¼ interest in the assets of the partnership, which includes credit
for 25,000 of goodwill that is recognized upon admission. How much cash D
invest?
b. D receives a ¼ interest in the assets of the partnership and B is credited with
P15,000 of the bonus from D, how much cash D invest?
Solution:
A.
TCC
A
112,000
B
130,000
C
58,000
D
75,000
25,000
100,000
375,000
25,000
400,000
A
112,000
22,500
B
130,000
15,000
C
58,000
D
160,000
7,500
45,000
115,000
460,000
0
460,000
300,000
B.
Problem 14 (CRC-ACE)
L, M and M are partners sharing profits in the ratio of 3:2:1, respectively. Capital
accounts are P500,000. P300,000 and P200,000 on December 31,2018, when N decides
to withdraw. It is agreed to pay P300,000 for N’s interest. Profits after the withdrawal of
N are to be shared equally.
Questions:
a. Using the bonus approach, how much are the capital balances of L and M
after N’s withdrawal?
b. Using the goodwill approach, how much are the capital balances of L and M
after N’s withdrawal?
Solution:
A.
L
M
CAP
440,000
260,000
N CAP.
200,000
L
60,000
M
40,000
CASH
300,000
B.
VALUATION
L
M
600,000
800,000
500,000
ASSET
600,000
CL
300,000
M
200,000
N
100,000
Problem 15 (CRC-ACE)
O, P and Q share profits in the ratio of 5:3:2, Q is permitted to withdraw from the firm
on December 31, 2018. Profits after withdrawal of Q are to be shared 3:2. The
partnership balance sheet on this date is as follows:
Receivable from Q
Goodwill
Other Assets
P10,000
80,000
190,000
Liabilities
Payable to P
O, capital
P, capital
Q, capital
P80,000
30,000
70,000
60,000
40,000
280,000
280,000
a. Assuming that Q is paid P44,000 in full settlement of the capital interest and
P10,000 claim balance, using the bonus method of recording the withdrawal
of Q, how much are the capital balances of O and P after Q’s withdrawal?
b. Using the data in question A, using the goodwill method of recording the
withdrawal of Q, how much are the capital balances of O and P after Q’s
withdrawal?
Solution:
A.
PAID
CAP.
BONUS
44,000
-30,000
14,000
14,000*5/8 8,750-70,000= 61,250
5,250-60,000= 54,750
Q CAP
O CAP
P CAP
B.
40,000
8,750
5,250
R'BLE OF Q
CASH
44,000
-30,000
14,000
/2
70,000
O
P
10,000
10,000
SHARE OF Q IN VALUATION
1.4 Partnership Liquidation
Problem 1 (ReSA)
On December 31, 2019, the accounting record of MM, NN, OO Partnership (a general
partnership) included the following ledger account balances:
(Dr.) Cr.
MM, drawing
(15,000.00)
OO, drawing
(5,625.00)
NN, loan
18,750.00
MM, capital
76,875.00
NN, capital
62,812.50
OO, capital
67,500.00
Total assets of the partnership amounted to P299,062.50 including P32,812.50 cash and
partnership liabilities totalled, P93,750. The partnership was liquidated on December 31,
2019 and OO received P52,031.25 cash pursuant to the liquidation. MM, NN and OO
shared net income and losses in a 5:3:2 ratio, respectively.
1. The loss on realization
a. 9,843.75
c. 49,218.75
b. 15,468.75
d. 77,343.50
2. The amount realized from sale of non-cash assets?
a. 160,781.25
c. 217,031.25
b. 188,906.25
d. 266,250.00
3. The cash balance after payment of liabilities?
a. 156,093.75
c. 221,718.75
b. 193,593.75
c. 249,843.75
Solution:
1. C
2. C
3. A
Cash
2)
Cash Proceeds
Book Value of Asset
Other Asset
266,250.00
217,031.25
266,250.00
(93,750.00)
(266,250.00)
(49,218.75)
32,812.50
249,843.75
217,031.25
-
Liabilities
93,750.00
MM
NN
OO
61,875.00
81,562.50
61,875.00
9,843.75
93,750.00
(93,750.00)
52,031.25
3)
156,093.75
-
Problem 2 (ReSA)
Fleming, Durano and Mart are partners in a wholesale business. On January 1, 2019 the
total capital was P30,00 and drawings presented as follows:
Capitals
Fleming
Drawings
6,250.00
3,750.00
Durano
5,000.00
2,500.00
Mart
18,750.00
1,250.00
Partners agree that profit and loss ratio are shared equally. Because of the failure of
some debtors to pay their outstanding accounts, the partnership loses heavily and is
compelled to liquidate. After exhausting the partnership assets, including those arising
from an operating profit of P4,500 in 2019, they still owe P5,250 to creditors on
December 31, 2019. Fleming has no personal but the others are well off.
1. The partnership liquidation loss:
a. None
c. 27,750
b. 10,000
d. 32,250
2. The amount to be received by Mart as a result of the liquidation:
a. 818.75
c. 7,125
b. 4,875
d. 9,750
Solution:
Asset
Liabilities
5,250.00
Profit
Liquidation
Loss
Capital
22,500.00
4,500.00
32,250.00
Fleming
5,250.00
27,000.00
Durano
Mart
Capital
6,250.00
5,000.00
18,750.00
Drawings
(3,750.00)
(2,500.00)
(1,250.00)
2,500.00
2,500.00
17,500.00
1,500.00
1,500.00
1,500.00
(10,750.00)
(10,750.00)
(10,750.00)
(6,750.00)
(6,750.00)
8,250.00
Profit
Loss on Realization
6,750.00
-
(3,375.00)
(3,375.00)
(10,125.00)
4,875.00
Problem 3 (ReSA)
Following is the balance sheet of DD, EE and FF partnership (a general partnership) on
June 4, 2019 immediately prior to its liquidation:
Assets
Liabilities and Capital
Cash
6,000.00
Liabilities
20,000.00
Other Asset
94,000.00
EE, loan
4,000.00
DD, capital
27,000.00
EE, capital
39,000.00
FF, capital
10,000.00
Total
100,000.00
100,000.00
The partners shared net income and losses as follows: DD, 40%; EE, 40% and FF, 20%.
On June 4, 2019, the other cash were realized at P30,700 and P20,500 had to be paid to
liquidate the liabilities because of an unrecorded trade accounts payable of P500. DD
and EE were solvent, but FF’s personal liabilities exceeded personal assets by P5,000.
How much would each partner receive?
a.
b.
c.
d.
DD, 1,680; EE, 17,680; FF, 0
DD, 1,480; EE, 17,480; FF, 0
DD, 100; EE, 12,100; FF, 0
DD, 100; EE, 16,100; FF, 0
Solution:
40%
40%
20%
DD
EE
FF
Total
27,000.00
43,000.00
10,000.00
80,000.00
(25,520.00)
(25,520.00)
(12,760.00)
63,800.00
1,480.00
17,480.00
(2,760.00)
16,200.00
(1,380.00)
(1,380.00)
2,760.00
100.00
16,100.00
-
Cash Beg.
6,000.00
Proceeds
30,700.00
Payment of Liabilities
(20,500.00)
Payment to Partners
16,200.00
Problem 4 (ReSA)
When Ray and Conniff, general partners of the Ray Conniff partnership who shared net
income and losses in a 4:6 ratio were incapacitated in an accident, a liquidator was
appointed to raise up the partnership. The partnership’s balance sheet showed the
following:
Assets
Liabilities and Capital
Cash
17,500.00
Liabilities
10,000.00
Other Asset
50,000.00
Ray, capital
35,500.00
Goodwill
5,000.00
Conniff, capital
27,000.00
72,500.00
Total
72,500.00
Liquidation expenses paid P2,500 for advertising, rent, travel, etc. and in the process of
liquidating the partnership an overlooked bill for landscaping of P1,000 is discovered and
in addition, partners agree to keep a P1,500 contingent fun. Determine the amount of
cash that should be paid to each partner:
a. Ray, 11,500; Conniff, 0
b. Ray, 2,500; Conniff, 0
c. Ray, 7500; Conniff, 0
d. Ray, 5,000; Conniff, 0
Solution:
40%
60%
Ray
Conniff
Total
35,500.00
27,000.00
62,500.00
(24,000.00)
(36,000.00)
60,000.00
11,500.00
(9,000.00)
2,500.00
(9,000.00)
9,000.00
2,500.00
Cash beg
-
2,500.00
17,500.00
Liquidation Expenses
(2,500.00)
Payment of Liability
(10,000.00)
Unrecorded
(1,000.00)
Cash Withheld
(1,500.00)
Payment to Partners
2,500.00
Problem 5 (ReSA)
The partnership of JJ, KK, LL and MM is preparing to liquidate. Profit and loss sharing
ratios are shown is the summarized balance sheet at December 31, 2019 as follows:
Assets
Liabilities and Capital
Cash
100,000.00
Other Liabilities
50,000.00
Inventories
Loan to KK
Other Assets
100,000.00
10,000.00
255,000.00
JJ, loan
JJ, capital (40%)
KK, capital (20%)
50,000.00
100,000.00
160,000.00
LL, capital (20%)
50,000.00
MM, capital (20%)
55,000.00
Total
465,000.00
Total
465,000.00
During January 2020, the inventories are sold for P42,500, the others liabilities are paid
and P25,000 is set-aside for contingencies
Compute the total cash payment to partners:
Payment to
Partners
a.
97,500.00
b.
102,500.00
c.
72,500.00
d.
67,500.00
Solution:
Cash beg.
100,000.00
Proceeds
42,500.00
Payment of Liability
(50,000.00)
Cash Withheld
(25,000.00)
Payment to Partners
67,500.00
Problem 6 (PRTC)
Partners Edong, Sally and Zarah decided to liquidate their partnership on November 30,
2017. Their capital balances and profit and loss are as follows:
Capitals
P&L ratio
Edong
P 600,000
40%
Sally
784,000
40%
Zarah
240,000
20%
The net income from January 1, 2017 to November 30, 2017 is P656,000. On November
30, 2017, the cash balance is P520,000, and that of liabilities is P1,160,000.
Edong is to receive P706,560 in the settlement of his interest.
1. Calculate: (1) The loss on realization, and (2) the amount to be realized from the sale
of non-cash assets?
A. (1) P 389,600 (2) P2,530,400
B. (1) P 248,000 (2) P5,100,000
C. (1) P 620,000 (2) P3,860,000
D. (1) P 522,000 (2) P3,860,000
Solution:
Edong
Sally
Zarah
Total
Beg. Balance
600,000
784,000
240,000
1,624,000
Net Income
262,400
262,400
131,200
656,000
Adjusted Balance
862,400
1,046,400
371,200
2,280,000
Cumulative Loss
(155,840)
(155,840)
(77,920)
(389,600)
Cash Payment
706,560
890,560
293,280
1,890,400
Book Value of NCA
(1,160,000
520,000)
+
2,280,000
2,920,000
Loss on Realization
(389,600)
Proceeds
2,530,400
Problem 7 (PRTC)
The partnership of Mikee and Rosa is in the process of liquidation. On January 1, 2017,
the ledger shows account balances as follows:
Cash
P 8,000
Accounts Payable
P 12,000
Accounts Receivable
20,000
Mikee, Capital
32,000
Lumber Inventory
32,000
Rosa, Capital
16,000
On January 10, 2017, the lumber inventory is sold for P20,000, and during January,
accounts receivable of P16,800 is collected. No further collections on the receivables are
expected and the partners have incurred P3,200 of liquidation expenses. Profits are
shared 60% for Mikee and 40% for Rosa.
2. How much cash will partner Mikee and Rosa receive upon liquidation?
A. P22,800; P9,920
B. P37,600; P18,400
C. P20,960; P8,640
D. P20,500; P20,500
Solution:
Mikee
Rosa
Total
Beg. Balance
32,000
16,000
48,000
Cumulative Loss
(11,040)
(7,360)
(18,400)
Cash Payments
20,960
8,640
29,600
Problem 8 (PRTC)
The partnership ABC is currently liquidating and on February 15, 2017, their balances in
capital and their profit and loss ratios are shown below:
Apple, Capital (P&L 40%)
P 22,000
Bryan, Capital (P&L 20%)
14,000
Cecile, Capital (P&L 40%)
-12,000
Assume non-cash assets have been all disposed and Cecile has promised to pay his
deficiency in a week’s time.
3. Calculate the amount to be received by one of the partners if cash is paid immediately
on February 15, 2017.
A. Apple, P22,000
B. Bryan, P12,000
C. Bryan, P10,000
D. Apple, P12,000
Solution:
Apple
Bryan
Cecile
Balance
22,000
14,000
12,000
APL
-8,000
-4,000
-12,000
Free Interest
14,000
10,000
0
Problem 9 (PRTC)
The balance sheet for Chester, Joana and John partnership, who share profits and losses
in the ratio of 50%, 25% and 25%, respectively, shows the following balances just
before liquidation.
Cash
P 24,000
Other Assets
119,000
Liabilities
40,000
Chester, Capital
44,000
Joana, Capital
31,000
John, Capital
28,000
On the first month of liquidation, certain assets are sold for P64,000. Liquidation
expense of P2,000 are paid, and additional liquidation expenses are anticipated.
Liabilities are paid amounting to P10,800 and sufficient cash is retained to insure the
payment to creditors before making payments to partners. On the first payment to the
partners, Chester receives P12,500
4. Determine the amount of cash withheld for anticipated liquidation expenses.
A. P35,200
B. P29,200
C. P33,200
D. P6,000
Solution:
Beg.
Balance
Loss
Cash
Payment
Chester
Joana
John
Total
44,000
31,000
28,000
103,000
(31,500)
(15,750)
(15,750)
(63,000)
12,500
15,250
12,250
40,000
24,000 + 64,000 - 40,000 - 2,000 40,000
6,000
Problem 10 (PRTC)
A condensed balance sheet with profit sharing percentages for the E, F and G
partnership on January 1, 2017, shows the following:
Cash
Other Assets
Total
P 100,000
500,000
P 600,000
Liabilities
P 80,000
E, Capital (40%)
100,000
F, Capital (40%)
250,000
G, Capital (20%)
170,000
Total
P 600,000
On January 2, 2017, the partners decided to liquidate the business, and during January
they sell assets with a book value of P300,000 for P170,000.
5. How much cash will the partners receive if all available cash, except for a P10,000
contingency fund, is distributed immediately after the sale
A. All partners will receive P60,000
B. Partners F and G will both receive P90,000
C. Partner F will receive P96,667 and Partner G will receive P93,333
D. Partner F will receive P190,000
Solution:
E
F
G
Beg. Balance
100,000
250,000
170,000
Cumulative Loss
(136,000)
(136,000)
(68,000)
Balance
-36,000
114,000
102,000
Absorption
36,000
(24,000)
(12,000)
Cash
0
90,000
90,000
Problem 11 (CRC-ACE)
A, B, and C are partners sharing profits in the ratio of 5:3:2, respectively. A balance
sheet prepared just prior to partnership liquidation shows the following:
A
B
C
Capital Balances
P 122,000
P 72,000
P47,000
Loan Balances
P 43,000
P 48,000
P 6,000
Assets are sold and cash is distributed to partners in monthly instalments during the
course of liquidation as follows:
January
P 20,000
February
50,000
March
80,000
April (final distribution)
20,000
Required:
a. Prepare a program to show how cash is to be distributed during the entire course
of liquidation.
b. Using the program developed above, prepare a schedule summarizing the
payments to be made to partners at the end of each month.
Solution:
A.
CCP/ACDP
A
B
C
TOTAL EQUITY
165,000
120,000
153,000
1
0.2
0.3
330,000
400,000
265,000
/ P&L
P1
CASH
DISTRIBUTION
A
-70,000
-65,000
-65,000
32,500
265,000
265,000
265,000
A
B
C
B
C
21,000
21,000
19,500
52,000
ANY CASH IN EXCESS OF 73,000
IS ALLOCATED AT P/L
B.
T
TOTAL
JANUARY
20,000
20,000
P1
FEBRUARY
P1
P2
20,000
50,000
-1,000
49,000
30,625
18,375
50,000
30,625
19,375
1,000
MARCH
80,000
P2
-3,000
77,000
1,875
1,125
38,500
23,100
15,400
80,000
40,375
24,225
15,400
20,000
10,000
6,000
4,000
P/L
APRIL
Problem 12 (CRC-ACE)
Elizabeth, Diana, Anthony, and Scarlett were partners who decided to liquidate the
affairs of the partnership. Prior to dissolution, the condensed balance sheet together
with the profit and loss sharing ratio was derived as follows:
Cash
Other Assets
P
100,000
1,800,000
P
1,900,000
TOTAL
Liabilities
Diana, Loan
Scarlett, Loan
Elizabeth,Capital (30%)
Diana, Capital (30%)
Anthony, Capital (20%)
Scarlett, Capital (20%)
P
750,000
60,000
50,000
420,000
315,000
205,000
100,000
P
1,900,000
The other assets were sold for P 1,200,000. Payments were made to creditors and final
distributions of cash were made to partners.
a. The partner who got paid the most was:
b. The cash received by Scarlett will be applied:
Solution:
E
D
A
S
TOTAL
420,000
180,000
375,000
180,000
205,000
120,000
150,000
120,000
1,150,000
240,000
195,000
85,000
30,000
550,000
-600,000
A. E
B.
LOAN
Problem 13 (CRC-ACE)
D, E, and F are partners sharing profits in the ratio of 40:35:25, respectively. On
December 31, 2018, they agree to liquidate. A balance sheet prepared on this date
follows:
DEF Partnership
Balance Sheet
As of December 31, 2018
Cash
P 2,000
Liabilities
Other Assets
46,000
E, Loan
F, Loan
D, Capital
E, Capital
F, Capital
P 48,000
The results of liquidation are summarized below:
Realizations
Book
Value
Cash
Realized
Expenses
of
Realization
P
6,000
5,000
2,500
14,450
12,550
7,500
P 48,000
Cash Withheld
at end of month
for estimated
future expenses
Liability
Paid
January
P 12,000
P 10,500
P 500
P 2,000
P 4,000
February
7,000
6,000
750
1,250
2,000
March
15,000
10,000
600
500
April
12,000
4,000
400
All cash available, except the amount withheld for future expenses, is distributed
at the end of each month.
Required: Determine the share of each partner every month of distribution.
Solution:
JAN.
FEB.
MARCH
APRIL
BEGINNING
2,000
4,000
1,250
500
PROCEEDS
10,500
6,000
10,000
4,000
-600
-400
EXPENSE
-500
-750
LIABILITIES
-6,000
-2,000
CASH WITHELD
-2,000
-1,250
-500
CAFD
4,000
6,000
10,150
4,100
JANUARY
D
TOTAL EQUITY
CAFD
FEBRUARY
MARCH
E
F
TOTAL
14,450
17,550
10,000
42,000
-15,200
-13,200
-9,500
-38,000
-750
4,250
500
4,000
750
-440
-312.5
0
3,812.50
187.5
14,450
13,737.50
9,812.50
38,000
(12,800)
(11,200)
(8,000)
(32,000)
1,650
2,540
1,813
6,000
4,060
3,553
2,540
10,150
4,000
APRIL
1,640
1,435
1,025
4,100
Problem 14 (CRC-ACE)
The balance sheet of J, K, and L Partnership shows the following information as of
December 31, 2018:
Cash
Other
Assets
P
2,000
Liabilities
28,000
J, Loan
2,500
J, Capital
12,500
K, Capital
7,000
L, Capital
3,000
P 30,000
P
5,000
P 30,000
Profit and loss ratio is 3:2:1, respectively, for J, K, and L. Other assets were
realized as follows:
Date
January, 2018
Cash Received
P
Book Value
8,000
P
9,000
February, 2018
3,500
7,700
March, 2018
12,500
11,300
Cash is distributed as assets are realized.
a. How much is the total loss to J?
b. How much is the total cash received by K?
c. How much cash does L receive in January?
Solution:
TOTAL EQUITY
JANUARY
A
2,000
B
5,667
C
-0-
J
K
L
TOTAL
15,000
7,000
3,000
25,000
(2,000)
(1,333)
(667)
4,000
13,000
5,667
2,333
21,000
15,000
7,000
3,000
25,000
(10,000)
(6,667)
(3,333)
20,000
5,000
333
(333)
5,000
(200)
(133)
333
4,800
200
-
5,000
Problem 15 (CRC-ACE)
Balance sheet data for the firm of W, X, and Y as of January 1, 2018, follow:
Assets
P
1,225,000
P
1,225,000
Liabilities
P 675,000
W, Capital
200,000
X, Capital
200,000
Y, Capital
200,000
P
1,225,000
Partners share profits equally after allowance of a salary to Y, the managing partner, of
P7,500 monthly. As a result of operation losses sustained at the beginning of 2018, W
advanced P 150,000 to the firm on April 1; it was agreed that he would be allowed
interest at 6%. With continued losses, the members decided to liquidate. Y agreed to
take over partnership equipment in part of settlement of his interest, the transfer being
made at an agreed value of P 40,000. On November1, P 200,000 cash was available for
distribution to partners after the sale of remaining assets and payment of partnership
obligations to outsiders. Y had withdrawn his salary for January and February but had
not received his salary for the period of March 1 to November 1; no other cash
payments had been made to partners. Available cash was distributed on November 1
and the firm was declared dissolved.
How much cash should W received in the distribution of P 200,000 cash
available?
Solution:
W
X
Y
TOTAL
200,000
200,000
200,000
600,000
(1,750)
(1,750)
(5,250)
(40,000)
(40,000)
60,000
60,000
150,000
5,250
(1,750)
353,500
198,250
218,250
770,000
(190,000)
(190,000)
(190,000)
(570,000)
163,500
8,250
28,250
200,000
2.0 Corporate Liquidation
Problem 1 (ReSA)
The following data were taken from the statement of affairs for Liquo Company:
Asset pledged for fully secured liabilities
(fair value, P75,000)
90,000.00
Asset pledged for partially secured liabilities
(fair value, P52,000)
74,000.00
Free Assets (fair value, P40,000)
70,000.00
Unsecured Liabilities with priority
7,000.00
Fully secured liabilities
30,000.00
Partially secured liabilities
60,000.00
Unsecured liabilities without priority
112,000.00
1. Total estimated deficiency to unsecured creditors amounted to:
a. 27,000
c. 35,000
b. 34,000
d. 42,000
2. The expected recovery per peso of unsecured claims amounted to:
a. 0.35
c. 0.70
b. 0.65
d. 0.71
Solution:
Free assets on assets pledged to fully secured assets (75,000-30,000)
45,000
Free assets on assets pledged to fully secured assets (75,000-30,000)
40,000
Total Free assets
85,000
Less: Unsecured creditors w/ priority
(7,000)
Net free assets
78,000
Unsecured Creditors:
Partially secured creditors (60,000-52,000)
Unsecured creditors without priority
8,000
112,000
Estimated deficiency to unsecured creditors
42,000
Expected recovery per peso of unsecured creditors
Net free assets / Total unsecured creditors
78,000/120,000
120,000
0.65
Problem 2 (ReSA)
Zero Na Corp. has been undergoing liquidation since January 1. As of March 31, its
condensed statement of realization and liquidation is presented below:
Assets:
Assets to be realized
95,000
Assets acquired
5,000
Assets realized
30,000
Assets not realized
42,000
Liabilities
Liabilities liquidated
35,000
Liabilities not liquidated
31,850
Liabilties to be liquidated
65,000
Liabilities assumed
1,500
Revenue and Expenses:
Sales on account
5,000
Purchases
1,500
Payment of expenses of trustee
7,500
Sales for cash
25,000
Interest on marketable securities
150
The net gain (loss) for the three-month period ending March 31 is:
a. 7,200
b. (7,200)
c. 49,500
d. (17,500)
Solution:
Statement of Realization and Liquidation
95,000
30,000
5,000
42,000
35,000
65,000
31,850
1,500
1,500
5,000
7,500
25,000
150
175,850
7,200
168,650
Problem 3 (ReSA)
Orville Company recently petitioned for bankruptcy and is now in the process of
preparing a statement of affairs. The carrying values and estimated fair values of the
assets or Orville Company are as follows:
Carrying Value
Fair Value
Cash
20,000
20,000
Accounts Receivable
45,000
30,000
Inventory
60,000
35,000
Land
75,000
70,000
Building (net)
180,000
100,000
Equipment (net)
170,000
80,000
Total
550,000
335,000
Debts of Orville are as follows:
Accounts payable
60,000.00
Wages payable (all have priority)
10,000.00
Taxes payable
10,000.00
Notes payable (secured by receivable and inventory)
120,000.00
Interest on Notes Payable
Bonds Payable (secured by land and building)
Interest on Bonds payable
Total
6,000.00
150,000.00
7,000.00
363,000.00
1. What is the total amounts of unsecured claims
a. 93,000
c. 121,000
b. 113,000
d. 126,000
2. What is the estimated amount will be available for general unsecured creditors
upon liquidation?
a. 28,000
c. 113,000
b. 93,000
d. 121,000
3. What is the estimated dividend percentage?
a. 23%
c. 77%
b. 93%
d. 68%
Solution:
1. 60,000 + [(120,000+)] – (30,000) + (35,000) = 121,000
2. 20,000+80,000+[170,000-(150,000+7,0000]=113,000–(10,000+10,000)=
93,000
3. 93,000/121,000= 77%
Problem 4 (ReSA)
Kareindeer Corporation filed a voluntary petition for bankruptcy on January 2016. On
March 31, 2016, the trustee provided the following information about the corporation’s
financial affairs:
Assets
Est. Realizable
Value
Book Value
Cash
40,000
40,000
Accounts receivable- net
200,000
150,000
Inventories
300,000
140,000
Plant assets - net
500,000
560,000
Total Assets
1,040,000
Liabilities
Liabilities for priority claims
160,000
Accounts payable - unsecured
Notes payable, secured by accounts
receivable
Mortgage payable, secured by all plant
assets
300,000
Total Liabilities
200,000
440,000
1,100,000
1. The amount expected to be available for unsecured claims without priority (net
free assets):
a. 300,000
c. 140,000
b. 580,000
d. 310,000
2. The expected recovery per peso of unsecured creditors:
a. .215
c. .415
b. .223
d. .400
3. The estimated payment to creditors:
a. 730,000
b. 45,000
c. 770,000
d. 890,000
Solution:
1.
Cash
40,000
Inventories
140,000
Plant Assets (560,000-440,000)
120,000
Liabilities w/ priority claims
(160,000)
Net Free Assets
140,000
2.
Expected recovery per peso of unsecured creditors
Net free assets / Total unsecured creditors
140,000/350,000
0.40
3.
Secured Liability
440,000
Liability w/ priority
160,000
Liability w/out priority (300,000x40%)
120,000
Partially secured [150,000+(50,000x40%)]
170,000
Est. payment to creditors
890,000
Problem 5 (ReSA)
The unsecured creditors of Insolve Corporation filed a petition in July 1, 2016 to force
Insolve Corporation into bankruptcy. The court order for relief was granted on July 10 at
which time an interim trustees was appointed to supervise liquidation of the estate. A
listing of assets and liabilities of Insolve Corporation as of July 10, 2016, along with
estimated realizable value is as follows:
Assets
Book Value
Est. Realizable Value
Cash
61,400
61,400
Accounts Receivable
250,000
Allownce for D/A
(20,000)
15% of the accounts receivable is
estimated to be uncollectible
Inventories
420,000
Estimated selling price , P340,000
which will require additional cost of
P50,000
Prepaid Expenses
40,000
?
Investments
180,000
110,000
Land
210,000
Buildings (net)
260,000
An offer of P500,000 has been
received for land and buildings
Machinery and Equipment
220,000
53,900
Goodwill
200,000
?
Total Assets
1,821,400
Liabilities & Equity
Accounts Payable
670,000
Wages payable
3,400
Notes payable
160,000
Accrued Interest notes
Mortgage payable, secured
by land and building
5,000
400,000
Capital Stock
800,000
Addtl Paid in Capital
80,000
Deficit
(297,000)
Total Liab.& Equity
1,821,400
Additional information:
a. Patents completely written off the books in past years but with a realizable value
of P10,000
b. The books do not show the following accruals (unrecorded expenses/additional
liabilities):
Taxes
16,400
Interest on Mortgage
10,000
c. The investment have been pledged as security for holder of the notes payable
d. The trustee fees and other costs of liquidating the estate are estimated to be
P60,000
Determine:
1. The total free assets should be:
a. 1,831,400
b. 1,821,400
c. 717,800
d. 638,000
2. The net free assets should be:
a. 717,800
b. 698,000
c. 638,000
d. 628,000
3. The estimated deficiency to unsecured creditors should be:
a. 87,000
c. 27,000
b. 47,800
d. 7,200
Solution:
1.
Assets pledged to fully secured creditors:
Land and Buildings
Less:
500,000
Mortgage Payable
400,000
Interest Payable
10,000
410,000
90,000
Free Assets:
Cash
61,400
Accounts Rec. (250,000x85%)
212,500
Inventories (340,000-50,000)
290,000
Prepaid Expenses
-
Machinery & Equipment
53,900
Goodwill
Additional Assets/unrecorded assets:
Patent
10,000
Total Free Assets
717,800
2.
Total Free Assets
717,800
Unsecured creditors w/ priority
3,400
Taxes payable
16,400
Administrative expenses
60,000
Net Free Assets
79,800
638,000
3
Secured Creditors:
Investments
Less: Notes Payable
Interest payable
110,000
160,000
5,000
165,000
55,000
Unsecured Creditors w/out priority:
Accounts payable
Total Unsecured creditor w/out priority
Net Free Assets
670,000
725,000
(638,000)
87,000
PROBLEM 6(PRTC)
The following data were taken from the statement of affairs of MIRIAM CORPORATION:
Assets pledged for fully secured liabilities
(current fair value, P93,750)
P112,500
Assets pledged for partially secured liabilities
(current fair value P65,000)
92,500
Free assets (current fair value, P50,000)
87,500
Unsecured liabilities with priority
18,750
Fully secured liabilities
37,500
Partially secured liabilities
75,000
Unsecured liabilities without priority
140,000
1. The amount that will be paid to creditors with priority is:
A. P8,750
C. P9,375
B. P7,500
D. P7,750
2. The amount to be paid fully secured creditors is:
A. P37,500
C. P25,000
B. P40,000
D. P43,750
3. The amount to be paid to partially secured creditors is:
A. P65,875
C. P70,250
B. P71,500
D. P71,250
3. The amount to be paid to unsecured creditors is:
A. P97,750
C. P90,000
B. P88,500
D. P91,000
Solution:
Cash available (93,750+65,50,000)
208,750
Prioritized Claims
Fully secured
37,500
Partially secured liabilities (secured)
65,000
W/ Priority
8,750
Net Cash
(111,250)
97,500
Unsecured Amount
Partially secured liabilities (unsecured)
10,000
W/out Priority
140,000
150,000
52,500
ERR = 97,500/150,000
65%
Partially secured
75,000
Secured Portion
65,000
100%
65,000
Unsecured Portion
10,000
65%
6,500
71,500
Unsecured w/out priority
140,000
65%
91,000
PROBLEM 7 (PRTC)
The Statement of Affairs for CANDY CORPORATION shows that approximately P0.78 on
the peso probably will be paid to unsecured creditors without priority. The corporation
owes TOY COMPANY P28,750 on a promissory note, plus accrued interest of P1,175..
Inventories with a current fair value of P24,000 collateralize the note payable. Compute
the amount that the TOY COMPANY would receive from CANDY CORPORATION assuming
that the actual payments to unsecured creditors without priority consist of 78% of total
claims. Round all amounts to the nearest peso.
A. P24,000
C. P42,483.75
B. P28,612.50
D. P65,250
Solution:
Partially secured (28,750 + 1,175)
29,925
Secured Portion
24,000
100%
24,000
Unsecured Portion
5,925
78%
4,621.50
28,621.50
PROBLEM 8 (PRTC)
The statement of affairs of ADAMSON CORPORATION shows the following:
Estimated gains on realization of assets
P1,600,000
Estimated losses on realization of assets
2,805,000
Contingent assets
1,250,000
Contingent liabilities
375,000
Capital stock
2,500,000
Deficit
11,125,000
The pro-rata payment on the peso, to stockholders, is:
A. P0.78
C. P0.76
B. P0.43
D. P0.75
Solution:
Est. gross loss (2,805,000 + 375,000)
Gain Contingent asset (1,600,000+1,250,000)
3,180,000
(2,850,000)
Est. loss (net)
(330,000)
BV of SHE (2,500,000 - 1,125,000)
1,375,000
Est. amt. recoverable by stockholders
1,045,000
/
1,375,000
Pro rata payment
76%
PROBLEM 9 (PRTC)
When NATIONAL COMPANY filed for liquidation with Securities and Exchange
Commission, it prepared following balance sheet.
Current assets, net realizable value, P137,500
P100,000
Land and buildings, fair value, P225,000
250,000
Goodwill, fair value, PO
50,000
Total assets
P400,000
Accounts payable
P200,000
Mortgage payable, secured by land and building
250,000
Common stock
125,000
Retained earnings, deficit
(175,000)
Total equities
P320,000
1. How much would the holders of the mortgage payable likely to get?
A. 75,000
C. 240,000
B. 450,000
D. 301,250
2. What is the estimated deficiency to unsecured amounts?
A. 87,500
C. 240,000
B. 112,500
D. 175,000
Solution:
Cash available (137,500+225,000)
362,500
Prioritized Claim - MNP (Secured)
(225,000)
Net Cash
137,500
Unsecured Amount
MNP (unsecured)
25,000
A/P
200,000
Estimated deficiency
ERR = 137,500/225,000
225,000
(87,500)
61.11%
MNP (Total BV)
250,000
Unsecured Portion
225,000
100%
225,000
Unsecured Portion Balance
25,000
61.11%
15,278
240,278
PROBLEM 10 (PRTC)
BENILDE ENTERPRISES. has been forced into bankruptcy and liquidated. Unsecured
claims will be paid at the rate of P0.70 on the peso. LETRAN ENTERPRISES holds a noninterest bearing note receivable from BENILDE in the amount of P75,000 collateralized
by machinery with a liquidation value of P12,500. The total amount to be realized by
LETRAN on this note receivable is:
A. P56,250
C. P31,250
B. P37,500
D. P12,500
Solution:
Partially Secured Claims
75,000
Secured Portion
12,500
100%
12,500
Unsecured Portion
62,500
70.00%
43,750
56,250
PROBLEM 11 (CRC-ACE)
The following information is available on June 1, 2018 to Samsung Company, which is
having difficulty in paying its liabilities as they come due:
Carrying amount
cash
8,960
accounts receivable, net, fair value equal to carrying amount
103,040
inventories, current fair value, P40,320 pledged on P47,040 of
87,360
notes payable
machinery and equipment, net, current fair value of P150,976
239,680
pledged on mortgage note payable
office supplies, current fair value of P5,600
4,480
wages payable
12,992
taxes payable
accounts payable
2,688
134,400
notes payable, P47,040 of which is secured by inventories
89,600
mortgage note payable
112,896
common stock, P5 par
224,000
retained earnings, deficit
133,056
Additional information:
(1) estimated liability to the trustee is P58,240
(2) a delivery van previously given to the supervisor was returned to the company, fair
market value, P56,000
REQUIRED:
a) compute the estimated recoverable amounts to the different types of creditors in the
event of liquidation.
b) prepare statement of deficiency to unsecured creditors
ANSWER:
Asset @ FV
Cash
A/R
Inventory
PPE
Supplies
Delivery van
Secured
Unsecured
40,320
112,896
6,720
Total Free asset
Total free asset
unsecured liabilities w/ priority
wages payable
12,992
taxes payable
2,688
trustee
58,240
net free asset
w/o priority
Accounts payable
Notes payable
Partially secured liab.
Estimated deficiency
Free Asset
8,960
103,040
38,080
5,600
56,000
211,680
211,860
73,920
137,760
134,400
42,560
6,720
183680
45,920
PROBLEM 12 (CRC-ACE)
SMDC Corp. a closely-held corporation was undergoing liquidation. The total cash value
of SMDC’s bankruptcy estate after the sale of all assets and payment of administrative
expenses is P100,000.
SMDC has the following creditors:





BDO bank is owed P75,000 on a mortgage loan secured by SMDC’s real property.
The property was valued at and sold, in bankruptcy, for P70,000.
The BIR has a P12,000 recorded judgement for unpaid corporate income tax.
National Office Supplies has an unsecured claim of P3,000 that was timely filed.
ACE Electric Company has an unsecured claim of P10,000 that was timely filed.
REH Publications has a claim of P16,000, which is secured by SMD’s inventory
that was valued and sold, in bankruptcy, for P2,000. The claim was timely filed.
REQUIRED:
a) Calculate the total amount recoverable by partially-secured creditors.
ANSWER:
Partially secured liability
72,000
9,500
81,500
PROBLEM 13 (CRC-ACE)
A Company that was to be liquidated had the following liabilities:
Income Taxes
10,000
Notes Payable secured by land
100,000
Accounts Payable
251,050
Salaries Payable
12,950
Administrative expenses or liquidation
20,000
The Company had the following assets:
Book Value
Fair Value
Current assets
100,000
95,000
Land
50,000
75,000
Building
150,000
200,000
Determine the following:
1. Total free assets
Current Asset FV
95,000
Building FV
200,000
Total assets
295,000
2. Total liabilities with priority
Income taxes
10,000
Salaries payable
12,950
Admin. Expense
20,000
42,950
3. Net free assets
Total Assets
295,000
Fully secured liability
0
Unsecured liability w/ priority
42,950
Net free asset
252,050
PROBLEM 14 (CRC-ACE)
The following data were taken from the statement of realization and liquidation of
CRASHED CO.
Assets to be realized
1,375,000
Assets acquired
750,000
Supplementary credits
2,800,000
Assets realized
1,200,000
Liabilities to be liquidated
2,250,000
Liabilities assumed
1,625,000
Supplementary charges
3,125,000
Assets not realized
1,375,000
Liabilities liquidated
1,875,000
Liabilities not liquidated
1,700,000
The ending balance of capital stock and retained earnings are P1,500,000 and P238,000,
respectively. A net loss of P738,000 was reported for the period.
1. What is the net gain/(loss) for the three-month period?
a. (325,000)
c. 425,000
b. 250,000
d. 750,000
Solution:
Supplementary credits
2,800,000
Liabilities to be liquidated
2,250,000
Assets realized
1,200,000
Liabilities assumed
1,625,000
Assets not realized
1,375,000
9,250,000
Less:
Assets to be realized
1,375,000
Supplementary charges
3,125,000
Liabilities liquidated
1,875,000
Assets aquired
750,000
Liabilities not liquidated
1,700,000
8,825,000
425,000
PROBLEM 15 (CRC-ACE)
The following data were taken from the statement of realization and liquidation of
Bagsak Corporation for the three month period ended December 31, 2018:
Assets to be realized
55,000
Assets acquired
60,000
Assets realized
70,000
Assets not realized
25,000
Liabilities to be liquidated
90,000
Liabilities assumed
30,000
Liabilities liquidated
60,000
Liabilities not liquidated
75,000
Supplementary credits
85,000
Supplementary charges
78,000
What is the net income (loss) for the period?
ANSWER:
Assets to be realized
55,000
Assets aquired
60,000
Liabilities not liquidated
75,000
Liabilities liquidated
60,000
Suplementary charges
78,000
Assets realized
70,000
Assets not ealized
25,000
Liabilities assumed
30,000
Suplemerntary credits
85,000
Net loss
328,000
300,000
28,000
3.0 Joint Arrangements
Problem 1 (ReSA)
The joint operation accounts in the books of the operators, X, Y and Z, show the
balances below, upon termination of the joint arrangement and distribution of profits:
Accounts With
X Dr. (Cr.)
Y Dr. (Cr.)
Z Dr. (Cr.)
X
-
2,500
2,500
Y
4,000
-
4,500
Z
(6,500)
(6,500)
-
Final settlement of joint operations will require payments as follows:
a.
b.
c.
d.
X pays 2,500 to Z and Y pays 4,000 to Z
Z pays 2,500 to X and 4,000 to Y
Y pays 6,500 to X and Z pays 2,500 to Y
None of these
Solution:
Joint Operation - Y
Joint Operations - X
4,000
6,500
2,500
2,500
6,500
4,000
Joint Operation - Z
2,500
4,000
6,500
Problem 2 (ReSA)
Soriente, Santos and Salazar formed a joint operations, Soriente has been designated as
manager of the arrangements for which he is to receive a bonus of 15% of the profit
after deduction of the bonus as an expense. The net profit, after bonus has been agreed
to be divided as follows: Soriente, 25%; Santos 40% and Salazar 35%
After 5 months, the joint arrangement is terminated as of May 31, 2012. On this date,
the trial balance kept by Soriente contains the following balances:
Debit
Credit
Investment in Joint
Arrangement
9,000
Santos
500
Salazar
2,000
The joint operations has still some undisposed merchandise, which Soriente agreed to
purchase at its costs of P2,500. The bonus of Soriente has not yet taken up.
1. The net profit of the joint arrangement, after bonuss of Soriente is:
a. 1,500
b. 9,000
c. 10,000
d. 11,500
2. The share of Santos in the joint arrangement is:
a. 3,500
b. 3,600
c. 4,000
d. 4,600
Solution:
1.
Joint Operations
9,000
2,500
11,500
(1,500)
10,000
2.
Soriente
Santos
Salazar
Total
Bonus
Net Profit after
Bonus
1,500
-
-
1,500
2,500
4,000
3,500
10,000
Share in Profit
4,000
4,000
3,500
11,500
Problem 3 (ReSA)
Ace Company purchase 40% of Basket Company on January 1 for P500,000 that carry
voting rights at a general meeting of shareholders of Basket Company. Ace Company
and Blake Company immediately agreed to share control (wherein unanimous consentis
needed to all the parties involved) over Basket Company. Basket report assets on that
date of P1,400,000 with liabilities of P500,000. One building with a seven-year life is
undervalued on Basket’s books by P140,000. Also Basket’s book value for its trademark
(10 year life) is undervalued by P210,000. During the year, Basket reports net income of
P90,000, while paying dividends of P30,000.
1. What is the Investment in Basket Company balance (equity method) in Ace’s
financial records as of December 31?
a. 504,000
b. 507,600
c. 513,900
d. 516,000
2. The income form Investment in Basket Company in Ace’s financial records as of
December 31?
a. 36,000
b. 19,600
c. 12,000
d. 7,600
Solution:
1.
Investment
500,000
Net Income
(90,000x40%)
36,000
(30,000x40%)
Dividends
12,000
16,400
536,000
Invesment Balance
Amortization*
28,400
507,600
*Amortizaton
Building (140,000x40%)
56,000
Useful life
7
Trademark (210,000x40%)
8,000
84,000
Useful life
10
8,400
16,400
2.
Income from Investment
36,000
Amortization
Expense
16,400
19,600
Income
Problem 4 (ReSA)
K and L form a joint arrangement for the sale of certain merchandise. The joint
operators agree to the following: K shall be allowed a commission of 10% on his net
purchases, the joint operators shall be allowed commissions of 25% on their respective
sales, and K and L shall divide the profit or loss 60% and 40% respectively. Joint
arrangements transactions follow:
Dec. 1: K make cash purchase of P57,000
Dec 3: L pays joint arrangement expenses of P9,000
Dec 5: Sales are as follows: K, P48,000; L, P36,000. The operators keep their own cash
receipts
Dec 7: K returns unsold merchandise and receives P15,000 cash
Dec 15: The operators make cash settlement.
1. In the distribution of the balance in net profit of the joint arrangement, the
shares of K and L:
a. K, 4,260; L, 3,230
c. K, 4,820; L, 3,430
b. K, 4,680; L, 3,120
d. K, 4,840; L, 4,230
2. In the final cash settlement, L would pay K the amount of:
a. 14,100
b. 14,880
c. 15,100
d. 15,890
Solution:
1.
Commission Exp (42,000x10%)
Commission Exp (48,000x25%)
Commission Exp (36,000x25%)
Investment in Joint Operations
57,000 48,000
9,000 36,000
4,200 15,000
12,000
9,000
91,200
99,000
7,800
K(7,800*60%)
4,680
L(7,800*40%)
3,120
2.
K
57,000
48,000
4,200
15,000
12,000
4,680
14,880
Sales
Sales
Merchandise Returned
Income
Problem 5 (ReSA)
Panner Inc. owns 30% of Watkins and applies the equity method. During the current
year, Panner buys inventory costing P54,000 and then sells its Watkins for P90,000. At
the end of the year, Watkins still holds only P20,000 of merchandise. What amount of
unrealized gross profit must Panner defer in reporting this investment using the equity
method?
a. 2,400
b. 4,800
c. 8,000
d. 10,800
Solution:
Gross Profit Mark-up: 36,000/90,000 = 40%
Inventory Remaining at year end
20,000
x: Markup
40%
Unrealized profit in ending inventory
8,000
x: Ownership
Intercompany Unrealized profit in ending
inventory
30%
2,400
PROBLEM 6 (PRTC)
On January 1, 2018, HHH, III, and JJJ (all are corporations) establish a joint undertaking
to manufacture a product they agree to share equally. Each will contribute P200,000 into
the operation; HHH and III are to contribute cash while JJJ is to contribute equipment
with a cost of P185,000. The equipment has a remaining life of 10 years when
contributed.
1. Determine the amount JJJ will show the Equipment in JO account in its balance sheet
at January 1, 2018.
A. P61,667
C. P66,667
B. P50,000
D. P65,000
Solution:
FV/SP
BV
200,000
185,000
COS
15,000 * 1/3
5,000 - Deferred Gain
JJJ's Share in FV
(200,000 x 1/3)
66,667
Unamortized deffered gain
(2000,000 - 185,000) x 1/3
Equipment in JJJ's books, 12/31/18
(5,000)
61,667
2. Determine the net amount JJJ will show the Equipment in JO account in its balance
sheet at December 31, 2018.
A. P45,000
C. P60,000
B. P55,500
D. P58,500
Solution:
JJJ's Share in Current carrying value
(200,000 * 90%) x 1/3
60,000
Unamortized deffered gain
(5,000 * 90%)
(4,500)
Equipment in JJJ's books, 12/31/18
55,500
3. Determine the net amount HHH (or III) will show the Equipment in JO account in its
balance sheet at December 31, 2018.
A. P45,000
C. P60,000
B. P55,500
D. P58,500
Solution:
200,000 x 90% x 1/3 =
60,000
PROBLEM 7 (PRTC)
HHH and III are venturers in a joint arrangement sharing control and profits equally.
They contributed P625,000 each to establish Joint Venture JJ) early in 2018. The Joint
Venture paid cash dividends of P45,000 and reported a net income of P180,000 during
the year. On the other hand, HHH paid cash dividends of P22,500 and reported a net
income of P90,000 during the year. Its Retained Earnings at the beginning of the year is
P125,000.
1. At what amounts will HHH report in its December 31, 2018 balance sheet the
Investment in Joint Venture and Retained Earnings accounts, respectively?
A. P629,500 and P251,000
C. P692,500 and P282,500
B. P625,900 and P250,100
D. P652,900 and P201,500
Solution:
Investment in JV:
Retained Earnings:
Initial Investment
625,000
Beginning
125,000
Share in Profit (180,000/2)
90,000
Income
180,000
Dividend Received (45,000/2)
(22,500)
Dividends Declared
(22,500)
692,500
RE, Ending
282,500
PROBLEM 8 (PRTC)
TRINA and BELLA in a joint venture, contributed P30,000 each in order to purchase
merchandise which were sold in lots at a closing-out sale. They agreed to divide their
profits equally and each shall record her purchases, sales, and expenses in her own
books. After almost all merchandise had been sold, they wind up their venture.
The following are the venture transactions:
TRINA
BELLA
Purchases of merchandise
P30,000
P30,000
3,000
3,900
Expenses paid from Jt Venture
Cash
Jt venture credit balances
(24,000) (21,000)
Undisposed merchandise upon termination of JV 900
1,400
All transactions for the joint venture are in cash. The venturers are to take over the
unsold merchandise at cost.
1. Calculate the net profit of the joint venture undertaking
A. P 47,300
C. P 24,900
B. P 54,900
D. P 30,000
2. Determine the amount of cash BELLA would receive/ (pay) from/ to TRINA upon final
cash settlement by the venturers.
A. P(1,250)
C. P(2,150)
B. P 2,150
D. P 1,250
Solution:
Joint Venture - Trina
Purchase 30,000
Joint Venture - Trina
57,ooo Sales
Expenses 3,000
Purchase 30,000
54,9oo Sales
Expenses 3,900
33,000
57,000
33,900
54,900
24,000
Sales (57,000+54,900)
COS: Purchases
End. Inventory (900 + 1,400)
Gross Profit
OPEX
Net Income
Cash Settlement
24,000
111,900
60,000
(2,300)
57,700
54,200
(6,900)
47,300
Trina
Bella
Cash Due
Share in NI (42,300/2)
23,650
23,650
Investments
30,000
30,000
(900)
(1400)
52,750
52,250
Unsold Merchandise
Cash on hand (57,000 - 3,000)
(54000)
(54,900 - 3,900)
(51000)
Cash paid/received
(1,250)
1,250
PROBLEM 9 (PRTC)
JRU CORPORATION, a joint venturer with a 50% equity in Joint Venture ABC
INCORPORATED, prepared the following draft of its combined financial statements at
December 31, 2018 before the year-end adjustments under the equity method.
Revenues
P10,800,000
Expenses
9,280,000
Profit
1,520,000
Ordinary shares
3,000,000
Retained earnings
920,000
Liabilities
840,000
Totals
P6,280,000
Current assets
P1,830,000
Plant assets
3,900,000
Accumulated Deprn
(700,000)
Investment in JV
1,250,000
Totals
P6,280,000
Joint venture ABC reported a net profit of P115,000 for the year ended December 31,
2018.
1. Determine the total assets that will be shown in the balance sheet of JRU
CORPORATION at December 31, 2018.
A. P5,030,000
C. P6,280,000
B. P6,337,500
D. P5,280,000
Solution:
Current Assets
1,830,000
Plant Assets, net
3,200,000
Inv. In JV [1,250,000 + (115,000*50%)
Total Assets
1307500
6,337,500
2. Determine the total stockholders' equity that will be shown in the balance sheet of
JRU at December 31, 2018.
A. P4,190,000
C. P5,497,500
B. P5,440,000
D. P4,440,000
Solution:
Share Capital
3,000,000
RE, 1/1
920,000
Profit Share from own operations
152,000
Profit share from JV
57,500
Shareholder's Equity
2,497,500
5,497,500
PROBLEM 10 (PRTC)



1.
On January 1, 2018 SME JV acquired a 35% equity of Z CORPORATION for
P37,000, SME JV shares in the joint control over the strategic financial and
operating decisions of Z CORPORATION. Transactions costs of 5% of the
purchase price of the shares were incurred by SME JV.
On December 31, 2018 Z CORPORATION declared and paid a dividend of
P24,000. Z CORPORATION recognized a profit of P18,000 for that year.
Published price quotations do not exist for the shares of Z CORPORATION. Using
appropriate valuation techniques SME IV determined the fair value of its
investment in Z CORPORATION at December 31, 2018 as P49,000. Costs to sell
are estimated at 9% of the fair value of the investments. SME A does not prepare
consolidated financial statements because it does not have any subsidiary.
What is the profit (loss) of SME JV to be presented in the income statement for Z
CORPORATION using the fair value method?
A. PP20,400
B. P18,550
C. P15,990
D. P14,140
Solution:
2.
Transaction cost (exp. 37,000 x 5%)
(1850)
Dividend income (24,000 x 35%)
8,400
Gain on FVR (49,000 - 37,000)
12,000
Net gain
18,550
What is the profit (loss) of SME IV to be presented in the income statement for Z
CORPORATION using the cost model?
A. P(8,575)
B. P 8,400
C. P 5,250
D. P (1,750)
Solution:
Dividend income (24,000 x 35%)
8,400
3. What is the investment balance of SME JV at the end of the year in Z CORPORATION
using the fair value model?
A. P 52,325
C. P49,000
B. P 57,575
D. P 47,075
4. What is the investment balance of SME JV at the end of the year in Z CORPORATION
using the equity model?
A. P38,850
C. P 34,125
B. P42,525
D. P 36,750
Solution:
Investment Cost
Transaction Cost
Dividend Income
Share of Profit (18,000 x 35%)
37,000
1,850
-8,400
6,300
Carrying Value, 12/31
36,750
PROBLEM 11 (CRC-ACE)
Barnes and Carter join in a venture for a sale of football souvenirs at the Rose Bowl
Games Partners agree to the following: 1) Barnes must be allowed a commission o 10%
on net purchases, 2) members shall be allowed a commission of 25% on the respective
sales, 3) any remaining profit shall be shared equally, Venture transactions follows:
Dec-20
Barnes make cash purchase, P9,500
Jan-01
Carter pays venture expenses, P1,500
Jan-01
Sales are follows: Barnes, P8,000; Carter, P6,000
(members kept their own cash receipts)
Jan-06
Barnes returns unsold merchandise and receives cash of
P2,500 on the return
Jan-06
The partners makes cash settlement
REQUIRED: Separate books for the venture are not kept. What entries would
be made on the books of Barnes and Carter?
ANSWER:
Barnes
Carter
Joint venture
9,500
Cash
Joint venture
9,500
1,500
Carter
Sales
Joint venture
Carter
1,500
Joint venture
Joint venture
1,500
8,000
Joint venture
Barnes
2,500
5,500
1,500
6,000
Barnes
14,000
2,500
9,500
Cash
Cash
6,000
Joint venture
Cash
Barnes
Joint venture
8,000
9,500
14,000
2,500
Joint venture
Joint venture
2,500
5,500
Inc.
3,350
Inc.
2,150
Carter
2,150
Barnes
3,350
PROBLEM 12 (CRC-ACE)
On January 1, 2018 entities A and B (the venturers) form a Joint venture (entity X).
upon incorporation of entity X, entities A and B each take up 50 per cent of the share
capital of entity X. In return or their interests in entity X entities A and B each contribute
P1000,000 and a carrying amount of P80,000. Entity B’s contribution is P100,000 cash.
The machine contributed by entity A has an estimated useful life of 10 years with no
residual value.
Entity X’s profit for the year ended December 31, 2018 is P300,000 (after deducting
depreciation expense of P10,000 on the machine contributed by entity A). Entity A
accounts for his investment using the equity method.
What is the cost of investment of entity A on December 31, 2018
ANSWER:
Investment of Machine, January 1, 2018
Carrying amount
80,000
Realized gain (P100,000-P80,000)50%
10,000
90,000
Proit shares (50%xP30,000)
15,000
Realized gain on machine (P10,000/10yrs)
1,000
Investment account balance, December 31, 2018
106,000
PROBLEM 13 (CRC-ACE)
On March 1, 2018 entities A and B each acquired 30% of the ordinary shares that carry
voting rights at a general meeting of shareholders of entity Z for P300,000. Entities A
and B immediately agreed to share control over entity Z.
On December 31, 2018 entity Z declared a dividend of P100,000 for the year 2018.
Entity Z reported a profit of P60,000 for the year ended December 31, 2018. At
December 31, 2018 the recoverable amount of each venturer’s investment in entity Z is
P292,000 (fair value of P295,000 less cost to sell of P3,000). Entities A and B uses the
equity method to account for its investment in entity Z. However, there is no published
price quotation for entity Z.
On December 31, 2018, entities A and B must each report its investment in entity Z at:
ANSWER:
Cost of investment
300,000
Profit share (10/12xPP60,000)x30%
15,000
Dividend income (30%xP100,000)
(30,000)
Investment in entity Z, December 31, 2018
285,000
PROBLEM 14 (CRC-ACE)
On January 1, 2018 entities M and N each acquired 30% of the ordinary shares that
carry voting rights at a general meeting of shareholders of entity Z for P300,000.
Contingent consideration probable to the paid by entity M is measured reliably at
P50,000. Entities M and N immediately greed to share control over entity Z.
For the year ended December 31, 2018 entity Z recognized a profit of P400,000. On
December 30, 2018 entity Z declared and paid a dividend of P150,000 for the year
2018. At December 31, 2018 the fair value of each venturers’ investment in entity Z is
P425,000. However, there is no published price quotation for entity Z.
On December 31, 2018 entity M sells goods for P60,000 to entity Z. at December 31,
2018 this goods were in the inventories of equity Z. entity M sells goods at a 50 per cent
mark-up on cost. entities M and N account for its investment in entity Z using the equity
method.
At December 31,2 108 entity M would report its investment in entity Z at?
ANSWER:
Cost of investment, Jan. 1, 2018(P300,000+P50,000)
350,000
Profit share (30%xP400,000)
120,000
Unrealized profit (50/150 x P60,000) 30%
(6,000)
Dividend income(30%xP150,000)
(45,000)
Investment in entity Z, Dec. 31, 2018
419,000
PROBLEM 15 (CRC-ACE)
On January 1, 2018 entities A and B each acquired 30% of ordinary shares that carry
voting rights at a general meeting of shareholders of entity M for P100,000. The
purchase price is equal to the fair value of 30% of entity M’s identifiable assts less 30%
of its identifiable liabilities.
Entities A and B immediately agreed to share control over entity M.
For the year ended December 31, 2018 entity M recognized a loss of P600,000. Entities
A and B have no constructive or legal obligation with respect of their jointly controlled
entity’s loss and have made no payments on its behalf.
Entity M recognized profit for the year ended December 31, 2018 of P800,000. There is
no published price quotation for entity M. investments are accounted for using the equity
method.
At December 31, 2018 how much investment in entity M should be reported by each
venture?
ANSWER:
Cost of investment
100,000
Loss share
(100,000)
Investment in entity M, Dec. 31, 2018
0
4.1 Revenue from Contracts with Customers
Problem 1 (ReSA)
Hold Industries received a P2,000 prepayment from the Ramirez Company for the sale
of new office furniture. Holt will bill Ramirez an additional P3,000 upon delivery of the
furniture to Ramirez. Upon receipt of the P2,000 prepayment, how much should Holt
recognize for a contract asset, a contract liability and accounts receivable?
a.
b.
c.
d.
Contract asset: 0; contract liability, P2,000; accounts receivable, 0
Contract asset: 0; contract liability, 0; accounts receivable, 0
Contract asset: P2,000; contract liability, 0; accounts receivable, 0
Contract asset: 0; contract liability, 0; accounts receivable, 2,000
Answer: (A) – Holt has a contract liability, deferred revenue of P2,000. It never has a
contract asset because it hasn’t satisfied a performance obligation for which payment
depends on something other than passage of time. It does not have an accounts
receivable for the P3,000 until it delivers the furniture to Ramirez.
Problem 2 (ReSA)
On January 15, 2015, Bella Vista Company entered into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of March 1.
The equipment was not delivered until March 31. The contract required full payment of
P75,000 30 days after delivery. This contract should be:
a. Recorded on January 15, 2015
b. Recorded on March 1, 2015
c. Recorded on March 31, 2015
d. Recorded on April 30, 2015
Problem 3 (ReSA)
Pampanga Communications contracted to set up a call center for the City of San
Fernando. Under the terms of the contract, Pampanga Communications will design and
set up a call center with the following costs:
Computers, servers, telephone equipment
10,000
Computers, servers, telephone equipment
275,000
Software
85,000
Installation and testing equipment
15,000
Selling commission
25,000
Annual service contract
50,000
In addition, Pampanga Communications will maintain and service the equipment and
software to ensure smooth operations of the call center for an annual fee of P90,000.
Ownership of equipment installed remains with the City of San Fernando. The contract
costs that should be capitalized is
a. 460,000
b. 410,000
c. 360,000
d. 370,000
Solution:
Computers, servers, telephone equipment
10,000
Computers, servers, telephone equipment
275,000
Software
85,000
Installation and testing equipment
15,000
Selling commission
25,000
410,000
Problem 4 (ReSA)
On October 1, 2016, Acme Fuel Co. sold 100,000 gallons of healing oil to Karn Co. at P3
per gallon. Fifty thousand gallons were delivered on December 15, 2016 and the
remaining 50,000 gallons were delivered on January 15, 2017. Payment terms were
50% due on October 1, 2016, 25% due on first delivery, and the remaining 25% due on
second delivery. What amount of revenue should Acme recognize form this sale during
2017?
a. 75,000
b. 150,000
c. 225,000
d. 300,000
Solution:
50,000 gallons x P3 = 150,000
Problem 5 (ReSA)
On June 1, 2015, Johnson & Sons sold equipment to James Landscaping Services. In
exchange for a zero-interest bearing note with a face value of P55,000 with payment
due in 12 months. The fair value of the equipment on the date of sale was P50,000. The
amount of revenue to be recognized on this transaction in 2015 is
a. 55,000
b. 5,000
Solution:
(55,000-50,000) x 7/12 = 2,917
c. 50,000
d. 50,000 sales revenue and 2,917
interest revenue
PROBLEM 6 (PRTC)
1. Which of the following is typically true for a bill-and-hold arrangement?
A. Revenue is recognized when goods are manufactured.
B. Revenue is recognized when the arrangement is made.
C. Revenue is recognized when the delivery of goods is made.
D. Revenue is recognized at the point in time at which payment from the
customer is received.
Answer: Bill-and-hold arrangements normally do not quality for revenue recognition
until delivery is made to the customer. Prior to that point, control of goods usually is not
viewed as having passed to the customer.
PROBLEM 7 (PRTC)
1. On June 1st, Joseph & Company received a P500 deposit for 80 cases of wine. On
June 10th the customer identified specific vintages that are included in Joseph's
inventory, and asked that Joseph not ship the wine until June 20 so the customer could
ready space to store the wine so, Joseph set those wines aside for the customer, boxed
and ready for shipment to the customer. On June 20th the wine was shipped and
delivered to the customer. Joseph likely would recognize revenue on:
A. June 20th
C. June 1st
B. June 10th
D. Upon consumption of the wine by the customer
Answer: Bill-and-hold arrangements normally do not qualify for revenue recognition
until delivery is made to the customer. Prior to that point, control of goods is not viewed
as having passed to the customer. However, sellers can recognize revenue prior to
delivery if it is concluded that the customer controls the product (the customer
specifically identified the goods), there is good reason for the bill-and-hold arrangement
(the customer needed time to make space for the wine), and the product is specifically
identified as belonging to the customer and is ready for shipment (Joseph has a good
faith deposit, the customer selected the goods, the goods were prepared for shipment
and set aside from regular goods for sale).
PROBLEM 8 (PRTC)
1. Horowitz Paint Shop sold P3,000 of paint to a local construction company for cash on
June 25, 20x6. Because of a flood in the area, the customer requested that Horowitz not
ship the items from its warehouse until July 3, 20x6, so Horowitz set aside the paint on
June 25, packaged and ready to ship on July 3.For the second quarter ending on June
30, how Horowitz recognize for the sale to the local construction company?
A. No contract exists
C. P1,500
B. Zero
D. P3,000
Answer: P3,000. In a bill-and-hold arrangement, the key issue normally is that the
customer does not have physical possession of the asset until the seller has delivered it.
However, since the customer requested that Horowitz hold the goods, has been paid for
the goods, and the goods are separated from Horowitz's inventory and ready for
shipment, Horowitz likely would be viewed as shifting control to the customer in June.
PROBLEM 9 (PRTC)
Ralf Laurentii’s Perfume, Inc., sold 3,210 boxes of white musk soap during January of
20x6 at the price of P90 per box. The company offers a full refund for any product
returned within 30 days from the date of purchase. Based on historical experience, Ralf
Laurentii’s Perfume expects that 3% of sales will be returned.
1. How many performance obligations are there in each sale of a box of soap
A. No contract exist
C. 2
B. 1
D. 3
Answer: Number of performance obligations in the contract: 1. A right of return is not a
performance obligation. Instead, the right of return represents a potential failure to
satisfy the original performance obligation to deliver goods to the customer. Because the
total amount of cash received from the customer depends on the amount of returns, a
right of return is a type of variable consideration.
PROBLEM 10 (PRTC)
Taster Choice sell natural supplements to customers with an unconditional right of return
if they are not satisfied. The right of returns extends 60 days. On February 10, 20x4, a
customer purchases P3,000 of products (cost P1,500). Assuming that based on prior
experience, estimated returns are 20%.
1. The journal entry to record the sale and cost of goods sold includes a
A. debit to Cash and a credit to Sales Revenue of P3,000.
B. credit to Refund Liability of P600 and a credit to Sales Revenue of
P2,400.
C. debit to Cost of Goods Sold and credit to Inventory for P1,500.
D. credit to Estimated Inventory Returns of P300
Answer: P3,000 x 2 = P600; P3,000-P600 = P2,400.
2. The journal entry to record the return of P200 of merchandise includes a
A. credit to Refund Liability for P200.
B. credit to Returned Inventory for P100.
C. credit to Estimated Inventory Returns for P100.
D. debit to Estimated Inventory Returns for P100.
Answer: P1,500/ P3,000 = 5: P200 x .5 = P100.
PROBLEM 11 (CRC-ACE)
Assume that a customer enrolls in AAA's Premier Membership, which provides 12
months 01 roadside assistance for P120. On August I. 20x6, a customer purchases a
contract that runs from that date through July 31, 20x7. Given that roadside assistance
requests occur equally throughout t h e c o n t r a c t p e r i o d , AA A u s e s " p r o p o r t i o n o f
ti m e " a s i t s m e a su r e o f p r o g r e s s t o w a r d completion. The amount of sales
revenue on August 1?
a. Zero
b. P10
c. P120
d. P1,140
Answer:
August 1
Cash 120
Deferred revenue 120
PROBLEM 12 (CRC-ACE)
Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms,
Inc. for P3 million, which w a s r e c e i v e d i n c a s h a t c o n t r a c t i n c e p t i o n .
U n d e r t h e a g r e e m e n t . D e l u x e R o o m s i s o b l i g a t e d t o cl ea n an d p r epa r e
o v er 5 .000 h ot el s r o om s m an ag e d b y Lu x H ot el on a d ai l y ba si s f ro m
Au gu s t 1, 20x6 to July 31. 20x7.
When should Lux Hotels recognize revenue?
a. No transaction
b. No revenue
c. Point in time
d. Over time
Answer:
This service contract qualifies for revenue recognition over time, because the
customer consumes the benefit of the seller's work as it is performed.
PROBLEM 13 (CRC-ACE)
On February 1 st H&B Bank originated a loan for P50,000 at an interest rate of
7.2%. On March 15th. an interest payment of P300 was received. Which of the
following best describes when interest revenue should be recognized?
a. At a point in time feb 1 st
c. At a point in time (march 31 s t )
b. At a point in time march 15th d. Over time
ANSWER
This announcement qualities for revenue recognition over time because the
customer consumes the benefit of
the setters service as the seller provides it
PROBLEM 14 (CRC-ACE)
On January 1, the Cost Driver Company, a consulting firm, entered into a
three-month contract with Coco Seafood Restaurant to analyze its cost
structure in order to find a way to reduce operating costs and increase profits.
Cost Driver promises to share fi ndings with the restaurant every two weeks
and to provide the restaurant with a final analytical report at the end of the
contract. This service is customized to Coco. and Cost Driver would need to start
from scratch it provided a similar service to anothe r client. Coco promises to
pay P5.000 per month. If Coco chooses to terminate the contract, it is entitled to
receive a report detailing analyses to that stage. When should revenue be
recognized?
a. No transaction
b. No revenue
c. Point in time
d. Over time
Answer:
The team of the contract and on the related facts and circumstances Indicate
that Coco has the ability to direct the use or, and receive the benefit born. the
consulting services as they are performed. The restaurant has on unconditional
obli gati on to pay throughout the contract as evidenced by the nonrefundable
progress payments, and the right to a report regardless of contract
terminated Al so the report has no alternate use to Cost Driver. Therefore,
the Cost Driver Company's performance obl igation is to provide the
restaurant with services continuously during the three Months of the contract,
and Cost Driver should recognize revenue over the life of the contract.
PROBLEM 15 (CRC-ACE)
Squeaky Shine provides car washing services in Sampaloc , Manila. A threemonth pass for automatic car wash sells for P60. which entitles the customer
for an unlimited number of car washes during the contract period. Squeaky
Shine estimates that pass holders wash their cars equally throughout the
three-month period. On December 1st. customers purchased P1,260 of the
three-month passes. with purchases of the possess occurring evenly
throughout December. The amount of soles revenue on December 1:
a. Zero
b. P60
Answer:
December 1 entry
Cash 1,260
Deferred revenue 1,260
c. 210
d. P1,260
4.2 Long Term Construction Contracts
Problem 1 (ReSA)
DJ Builders Construction enters into a contract with a customer to build a warehouse for
P850,000 on March 30, 2015 with a performance bonus of P50,000 if the building is
completed by July 31, 2015. The bonus is reduced by P10,000 each week that
completion is delayed. DJ Builders commonly includes these completion bonuses in its
contracts and based on prior experience, estimates the following completion outcome:
Completed by
Probability
July 31, 2015
65%
August 7, 2015
25%
August 14, 2015
5%
August 21, 2015
5%
The transaction price for this transaction is:
a. 895,000
b. 850,000
c. 585,000
d. 552,500
Solution:
900,000x65%
890,000x25%
585,000
222,500
880,000x5%
44,000
870,000x5%
43,500
895,000
Problem 2 (ReSA)
Jarflloydee Construction Company enters into a contract with a customer to build a 50
kilometers road for P100 million with a performance bonus of P60 million that will be
paid based on the timing of completion. The amount of the performance bonus
decreases by 10% per week for every week beyond the agreed upon completion date.
The contract requirements are similar to contracts that Jarflloydee has performed
previously and management believes that such experience is predictive for this contract.
Management estimates that there is a 60% probability that the contract will be
completed by the agree upon completion date, a 30% probability that it will be
completed one week late and only 10% probability that it will be completed two weeks
late. Determine the probability-weighted amount for the management to determine
transaction price?
a. 96 million
b. 111 million
c. 142.2 million
d. 157 million
Solution:
160m x 60%
96 million
154m x 30%
46.2 million
148m x 10%
14.8 million
157 million
Problem 3 (ReSA)
AJD Company recognizes construction revenue and expenses using the percentage of
completion method. During 2014, a single long term project was begun which continued
through 2005. Information on the project were as follows:
2014
2015
Accounts Receivable from
construction contract
Construction expenses
200,000
210,000
600,000
384,000
Construction in progress
Partial billings on contract
244,000
200,000
728,000
840,000
The profit recognize form the long-term construction contract should amount to:
a.
b.
c.
d.
2014, P44,000; 2015, P456,000
2014, P44,000; 2015, P200,000
2014, P34,000; 2015, P256,000
2014, P34,000; 2015, P100,000
Solution:
Construction in Progress
CI in 2014
210,000
RGP in 2014
34,000
CI in 2015
RGP in 2015
384,000
100,000
End of 2015
728,000
244,000
Problem 4 (ReSA)
Chicane Builders, Inc. employs the cost to cost method in determining the percentage of
completion for revenue recognition. The company’s record show the following
information on a recently completed project for a contract price of P5,000,0000
2014
2015
2016
Cost incurred to date
900,000
2,550,000
?
Gross Profit (loss)
100,000
350,000
(50,000)
1. The estimated cost to complete project at December 31, 2015:
a. 850,000
c. 2,300,000
b. 1,700,000
d. 2,550,000
2. The actual cost incurred during the year 2016
a. 2,550,000
c. 2,200,000
b. 2,300,000
d. 2,050,000
Solution:
Contract Price
2014
2015
2016
5,000,000
5,000,000
5,000,000
Cost incurred each year
2,050,000
Add: Cost incurred in prior year
900,000
2,550,000
900,000
2,550,000
4,600,000
Add: Estimated cost to complete
3,600,000
1,700,000
Total Estimated Cost
4,500,000
4,250,000
4,600,000
Estimated Gross Profit
Cost incurred to date
-
500,000
750,000
400,000
Multiply by: percentage of completion
20%
60%
100%
Recognized gross profit to date
Less: Recognized gross profit in prior
years
100,000
450,000
400,000
0
(100,000)
(450,000)
Recognized gross profit each year
100,000
350,000
(50,000)
Problem 5 (ReSA)
Seasons Construction is constructing an office building under contract for Cannon Café.
The contract calls for progress billing and payments of P620,000 each quarter. The total
contract price is P7,440,000 and Seasons estimates total costs of P7,100,000. Seasons
estimates that the building will take 3 years to complete and commences construction
on January 2, 2014.
At December 31, 2014, Seasons estimates that it is 30% complete with the
construction, based on cost incurred. What is the total amount of Revenue from Long
term contracts recognized for 2014 and what is the balance of accounts receivable
account assuming Cannon Café has not yet made its last quarterly payment?
Revenue
Accounts
Receivable
a.
2,480,000
2,480,000
b.
2,130,000
620,000
c.
2,232,000
620,000
d.
620,000
2,480,000
Solution:
Revenue: P7,440,000x30 = 2,232,000 A/R = 620,000
PROBLEM 6 (PRTC)
STRONG CONSTRUCTIONS uses the percentage of completion method in recogr. 9
income. In 2016, STRONG was engaged by SM on a fixed-price-contract to build a 3storey shopping mall.
On January 1, 2018, a fire damaged the accounting records of STRONG
CONSTRUCTIONS The president of the company has contracted you to reconstruct the
contract information
The following data were taken from the salvaged files:
31-Dec
2016
2017
Architect's estimated total cost of completion
P7,500,000
P8,000,000
Costs incurred
3,000,000
Percentage of completion
60%
Income recognized to date
500,000
1,200,000
Compute for the percentage completed in 2016 on the SM shopping mall.
A. 40%
C. 20%
B. 25%
D. 30%
Solution:
Contract Price
Total Cost
2017
10,000,000
(8,000,000)
2016
10,000,000
(7,500,000)
Gross Profit
2,000,000
2,500,000
GP x % of Completion = RGP
GP = RGP/% of Completion
= 1,200,000/60%
= 2,000,000
GP x % of Completion = RGP
% of Completion = RGP/GP
= 500,000/2500,000
= 20%
PROBLEM 7 (PRTC)
On January 2, 2018, QUICKBUILD ERECTORS entered into contract to construct two
projects. The following data relate to the construction activities.
Proiect A
Project B
Contract price
P945,000
P675,000
Cost incurred during 2016
540,000
630,000
Estimated costs to complete
270,000
157,500
Billings to customer
337,500
607,500
1. What amount of gross profit should QUICKBUILD ERECTORS report in its 2018 income
statement under the following methods?
Percentage of
Zero Profit
Completion Method
Method
A.
P (0)
P (90,000)
B.
P (112,500)
P (22,500)
C.
P ( 22,500)
P (0)
D.
P ( 22,500)
P(112,500)
Solution:
Project A
Project B
Contract Price
945,000
675,000
Actual Cost
540,000
630,000
Estimated Cost to Complete
270,000
157,500
Estimated Total Cost
810,000
787,500
GP/GL
135,000
787,500
%
66.67%
100%
% of Completion
Zero Profit
90,000 + (112,500) =
0
+ (112,500) =
(22,500)
(112,500)
PROBLEM 8 (PRTC)
BEST - EVER CONSTRUCTION, INC recognizes construction revenue and costs using the
percentage of completion method. During 2017, a single long-term project was begun
which continued through 2018. Information on the project follows:
2017
2018
Accounts receivable
P350,000
P1,050,000
Incurred costs during year
367,500
672,000
Construction in progress
427,000
Billings on contract
350,000
The construction accounts are at amounts to-date.
1,274,000
1,470,000
1. What is the gross profit recognized from this long-term contract?
2017
2018
A.
P 77,000
P 798,000
B.
77,000
350,000
C.
59,500
448,000
D.
59,500
175,000
Solution:
2017 (427,000 - 367,500)
59,500
2018 (1,274,000 - 427,000 - 672,000)
175,000
PROBLEM 9 (PRTC)
The SKYVIEW CORPORATION started work on three contracts during 2018. Data relating
to the three jobs are:
Contract 1
Contract 2
Contract 3
Contract
Contract
Contract
Contract
Contract
Price
P400,000
Price
P300,000
Price
-
Price
P400,000
Price
P320,000
560,000
80,000
320,000
80,000
40,000
200,000
80,000
80,000
-
-
1. Calculate the amount of Construction in Progress to be reported in the year-end
balance sheet under percentage of completion.
A. P132,000
C. P460,000
B. P212,000
D. P628,000
Solution:
Contract 2
Contact 3
Contract Price
560,000
200,000
Actual Cost
80,000
80,000
Est. Cost to Complete
320,000
80,000
Est. Total Cost
400,000
160,000
Gross Profit
160,000
40,000
20%
50%
%
C2 (560,000 x 20%)
112,500
C3 (200,000 x 50%)
100,000
Total
212,500
PROBLEM 10 (PRTC)
RAINBOW, INC., a construction company, has a P8,000,000 contract that was started in
2016. The following information is provided for the construction activities.
Construction
Actual cost
Est cost to complete
Years
incurred to-date
at year-end
2016
P1,024,000
P4,096,000
2017
3,993,600
2,246,400
2018
6,473,600
0
1. Calculate the amount of gross profit to be reported for 2017 under percentage of
completion method:
A. P1,126,400
C. P576,000
B. P 550,400
D. P480,000
Solution:
2017 (8,000,000 x 64%) - 3,993,600
1,126,400
2016 (8,000,000 x 20%) - 1,024,000
-576,000
Profit recognized in 2017
550,400
PROBLEM 11 (CRC-ACE)
The following information pertain to the building contract of DMCI Construction
Company, wherein the fixed contract price is P80 million.
2016
2017
2018
Estimated costs
20.1 million
30.15 million
16.75 million
Progress billings
10 million
25 million
45 million
Cash collection
8 million
23 million
49 million
Assume that all costs are incurred, all billings to customers are made, and all collections
from customers are received within 30 days of billing, as planned. Under the
percentage-of-completion method revenue recognition is used, how much is the income
from construction for the year 2018?
ANSWER:
Total Contract Price
Total Estimated costs
80,000,000
2,016
20,100,000
2,017
30,150,000
2,018
16,750,000
67,000,000
Estimated gross profit
13,000,000
2018 gross profit:
16750000/67000000 x 13000000 =
3,250,000
PROBLEM 12 (CRC-ACE)
Philip Construction Company started a project with a contract price of P80 million. The
cost incurred to date is P12 million and the estimated cost to complete is still P48
million. Under the cost to cost basis, how much is the income from construction?
ANSWER:
Contract Price
80,000,000
Total estimated cost
Cost
incurred
Estimated cost to complete
12,000,000
48,000,000
60,000,000
Estimated gross profit
20,000,000
Percentage of completion (12,000,000/60,000,000)
x
Income from construction
20%
4,000,000
PROBLEM 13 (CRC-ACE)
Cameron Company entered into a contract to build a small bridge for Agdao. The
contract price for the bridge was P7,500,000 and Cameron estimated a total cost of
P6,900,000 in 2018. The company incurred P2,300,000 of costs during real costs. The
estimated total cost o project skyrocketed to P7,800,000. Construction cost incurred in
2019 totaled P4,000,000. The project was completed in 2019 at a final cost of
P7,800,000. No progress billings were made under the contract and no cash was
collected by the end of 2019.
The amount of gross profit (loss) that must be recognized in 2019 must be:
ANSWER:
Contract Price (fixed)
Total estimated cost
Anticipated loss to date
Add: Gross profit recognized in 2018:
Contract
Price
Total estimated cost
Estimated gross profit
Percentage
of
completion (2.3/6.9)
7,500,000
7,800,000
(300,000)
7,500,000
6,900,000
600,000
x
1/3
Total loss recognized in 2019
(200,000)
(500,000)
PROBLEM 14 (CRC-ACE)
Clarence Construction has consistently used the percentage-of-completion method. On
January 10, 2018, Clarence began work on P3,000,000 construction contract. At the
inception date, the estimated cost o construction was P2,250,000. The following data
relate to the progress of the contract:
Income recognized at December 31, 2018
300,000
Cost incurred January 10, 2018 through Dec. 31, 2019
1,800,000
Estimated cost to complete, December 31, 2019
600,000
In its income statement for the year ended Dec. 31, 2019, what amount or gross profit
should Clarence report?
ANSWER:
Gross profit to date:
Contract price
3,000,000
Total estimated costs (1,800,000 + 600,000)
(2,400,000)
Estimated gross profit
Percentage of completion (1.8/2.4)
600,000
x
75%
450,000
Less: Gross profit in prior year, 2018
(300,000)
Gross profit this year, 2019
150,000
PROBLEM 15 (CRC-ACE)
Jason Construction, Inc. has consistently used the percentage-of-completion method of
recognizing income. During 2019 Jason started work on a P3,000,000 fixed-price
construction contract. The accounting records disclosed the following data or the year
ended Dec. 31, 2019:
Cost incurred
930,000
Estimated cost to complete
2,170,000
Progress billings
1,100,000
Collections
700,000
How much loss should Jason have recognized in 2019?
ANSWER:
Contract price (fixed)
3,000,000
Total estimated costs:
Cost incurred to date
Add: Estimated cost to complete
Gross profit (loss) recognized
930,000
2,170,000
( 3,100,000)
( 100,000)
4.3 Franchise Operations
Problem 1 (ReSA)
Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as
a franchisee of Frozen Delight. Of this amount P25,000 is collected immediately. The
remainder is collected in four equal annual instalment of P12,500 each. These
instalments have a present value of P41,402. As part of total franchise fee, Frozen
Delight also provides training (with a fair value of P2,000) to help franchisees get the
store ready to open. The franchise agreement is signed of April 1, 2015, training is
completed, and the store opens on July 1, 2015.
1. The amount of revenue from training and franchise on April 1, 2015 to:
a. Zero
c. 66,402
b. 64,402
d. 75,000
2. The amount of revenue from training and franchise on July 1, 2015 to:
a. Zero
c. 66,402
b. 64,402
d. 75,000
Solution:
1.
April 1, 2015
Cash
25,000
Notes Receivable (75k-25k)
50,000
Unearned Interest Income
8,598
Unearned Service Revenue (training)
2,000
Unearned Service Revenue (franchise)
(25,000+41,402-2,000)
64,402
2.
July 1, 2015
Unearned Service Revenue (training)
2,000
Unearned Service Revenue (franchise)
64,402
Franchise Revenue
Service Revenue (training)
64,402
2,000
Problem 2 (ReSA)
Wynne Inc. charges an initial franchise fee of P1,840,000 with P400,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10% is P1,091,744. The franchisee has the option to
purchase P240,000 of equipment for P192,000. Wynne has substantially provided all
initial services required and collectability of the payments is reasonably assured. The
amount of revenue from franchise fees:
a. 400,000
b. 1,443,744
c. 1,491,744
d. 1,840,000
Solution:
(400,000+1,091,744-(240,000-192,000) = 1,443,744
Problem 3 (ReSA)
Pasta Inn charges an initial franchise fee of P1,600,000 for a franchise, with P320,000
paid when the agreement is signed and the balance in four equal annual payments. The
present value of the annual payments, discounted at 10% is P1,014,000. The franchisee
has the right to purchase P60,000 of kitchen equipment and supplies for P50,000. An
additional part of the initial fee is for advertising to be provided by Pasta Inn during the
next five years. The value of advertising is P1,000 a month. Collectability of the
payments is reasonably assured and Pasta Inn has performed all the initial services
required by the contract. How much revenue from franchise fee to be recognized when
the agreement is signed?
a. Zero
b. 1,264,000
c. 1,590,000
d. 1,600,000
Solution:
Total Franchise Fee
1,600,000
Less: Unearned Interest Income
Amount due
1,280,000
Less: Present value of payments
1,014,000
(266,000)
Bargain purchase option (60,000-50,000)
(10,000)
Advertising (1,000x60 months)
(60,000)
Revenue from Franchise Fee
1,264,000
Problem 4 (ReSA)
Pacific Crossburgers Inc. charges an initial franchise fee of P70,000. Upon the signing of
the agreement (which covers 3 years), a payment of P28,000 is due. Thereafter, three
annual payments of P14,000 is required. The credit rating of the franchisee is such that
it would have to pay interest at 10% to borrow money. The franchise agreement signed
on May 1, 2015 and the franchise commences operation on July 1, 2015.
1. The amount of franchise revenue on May 1, 2015 assuming no future services are
required by the franchisor once the franchise starts operations:
a. Zero
c. 62,816
b. 28,000
d. 70,000
2. In relation to No. 2, the amount of franchise revenue on July 1, 2015:
a. Zero
c. 62,816
b. 28,000
d. 70,000
Solution:
1. May 1, 2015
Cash
28,000
Notes Receivable
42,000
Discount on notes receivable
7,184
Unearned Franchise Revenue
62,416
2.
July 1, 2015
Unearned Franchise Revenue
62,816
Franchise Revenue
62,816
Cash Payment
28,000
Present Value (14,000x2.48685)
34,816
Franchise Revenue
62,816
Problem 5 (ReSA)
TopChop sells hairstyling franchises. TopChop receives a P50,000 from a new franchisee
for providing initial training, equipment and furnishings that have a stand-alone selling
price of P50,000. TopChop also receives P30,000 per year for use of the TopChop name
and for ongoing consulting services (starting on the date of the franchise is purchased).
Carlos became a TopChop franchisee on July 1, 2016 and on August 1, 2016, had
completed training and was open for business. How much revenue in 2016 will TopChop
recognize for its arrangement with Carlos?
a. Zero
b. 10,000
c. 65,000
d. 70,000
Solution:
Yearly Fee (30,000x6/12)
15,000
Cash received
50,000
65,000
PROBLEM 6 (PRTC)
On January 1, 2018, MAXX SERVICES, INC. signed an agreement authorizing LALLA
COMPANY to operate as a franchisee over a 20-year period for an initial franchise fee of
P137,500 received when the agreement was signed. LALLA commenced operations on
August 1, 2018, at which date all of the initial services required of MAXX SERVICES had
been performed. The agreement also provides that LALLA must pay annually to MAXX a
continuing franchise fee equal to 5% of the revenue from the franchise. LALLA
COMPANY's franchise revenue for 2018 was P1,100,000.
For the year ended December 31, 2018, how much should MAXX SERVICES record as
revenue fror franchise fees with respect to the LALLA account?
A. P192,500
B. P137,500
C. P123,750
D. P 60,500
Solution:
FR-IFF
137,500
FR-CFF
55,000
Total FR
192,500
PROBLEM 7 (PRTC)
HARRYNAWA PRODUCTIONS has created a franchise based on the hit movie LORD OF
PRA NINGS. Many jumped on the LOPN bandwagon, and several franchise agreements
have been signed. At December 31, 2018 the following franchisees have open accounts
with HARRYNAWA:
YELLOW
GREEN
BLACK
BEIGE
125,000
125,000
125,000
125,000
Paid in:
Cash
Notes (face 750k), unpaid
437,500
250,000
568,750
343,750
Franchise services completed
25%
10%
94%
100%
Probability of collection
Likely
Unlikely
Likely
Likely
Continuing franchise fee
1% of NI
1% of NI
1% of NI
1% of NI
Period of refund
1/31/2019
2/28/2019
12/31/2018
12/31/2001
1. Initial franchise fees earned from these four accounts aggregated at Dec. 31, 2018.
A. P 750,000
C. P1,162,500
B. P 1,200,000
D. P1,750,000
Solution:
No revenue shall be recognized for entities Yellow and Green since:
a. There is no substantial performance of initial services having completed 25% and
10% for Yellow and Green, respectively.
b. Period of refund has not yet expired for both entities, thus amount paid is still
refundable.
Harrynawa Productions can recognize revenue for Black and Beige using ACCRUAL
Method since it is LIKELY that the balance will be collected. Recognition is computed as
follows:
DP
Notes
Total
Black
125,000
750,000
875,000
Beige
125,000
750,000
875,000
Total revenue for initial revenue
1,750,000
PROBLEM 8 (PRTC)
On January 2, 2018, JELLYFISH, INC. entered into a franchise agreement with KOOKIE
COMPANY to sell their products. The agreement provides for an initial franchise fee of
P3,515,625 payable as follows: P984,375 cash to be paid upon signing of the contract
and the balance in five equal annual payments every December 31, starting December
31, 2018. JELLYFISH signs a 15% interestbearing-note for the balance. The agreement
further provides that the franchisee must pay a continuing franchise fee equal to 3% of
its monthly gross sales. On October 31 the KOOKIE COMPANY completed the initial
services required in the contract at a cost of P1,125,000 and incurred indirect costs of
P225,000. The franchise commenced business operations on November 30, 2018. The
gross sales reported to the franchisor are November sales, P115,312 and December
sales, P133,594. The first installment payment was made on due date. Assume
collection of the note is not reasonably assured.
1. In its income statement for the year ended December 31, 2018, how much is the net
income recognized by KOOKIE COMPANY?
A. P1,216,069
C. P1,059,258
B. P 801,070
D. P 1,175,780
Solution:
DP 984,375
3,515,625
=
Note 2,531,250/5= 50,625
FR-IFF (984,375 + 2,531,250)
3,515,625
Franchise Cost
-1,125,000
DGP - Franchises
2,390,625
GRP (2,390,625/3,515,625)
RGP (984,375 + 506,250) x 68%
FR-IFF (248,906 x 3%)
68%
1,013,625
7,467
Interest Revenue (2,531,250 x 15%)
379,688
Expenses
-225,000
Net Income
1,175,780
PROBLEM 9 (PRTC)
On January 2, 2018, EXTREME COMPANY signed an agreement to operate as a
franchisee of BASIC PRODUCTS, INC., for an initial franchise fee of P2,500,000 for 10
years. Of this amount, 40% was paid when the agreement was signed and the balance
payable in four semi-annual payments beginning on June 30, 2018. EXTREME signed a
non-interest-bearing note for the balance. EXTREME's rating indicates that it can borrow
money at 24% on a loan of this type. Assume that substantial services amounting to
P617,500 had already been rendered by BASIC PRODUCTS, INC.
1. If the collection of the note is not reasonably assured, the realized gross profit to
be reported by BASIC for the year ended December 31, 2018 is:
A. P1,057,076
B. P855,225
C. P880,856
D. P1,070,646
Solution:
DP 1,000,000
2,500,000
=
Note 1,500,000/4= 375,000
Down payment
1,000,000
PV (375,000 x 3.04)
1,140,000
FR-IFF
2,140,000
Franchise Cost
-617,500
DGP - Franchises
1,522,500
GPR (1,522,500/2,140,000)
RGP (1,000,000 + 238,200 + 266,784) x 71.14%) x 68%
71.14%
1,070,646
PROBLEM 10 (PRTC)
On January 2, 2018 NAIKEE COMPANY signed an agreement to operate as a franchisee
of CONVERSE PRODUCTS, INC., for an initial franchise fee of P12,500,000 for 10 years.
Of this amount, P2,500,00 was paid when the agreement was signed and the balance
payable in four annual payments beginning on December 30, 2018. NAIKEE signed a
non-interest bearing note for the balance
NAIKEE's rating indicates that it can borrow money at 24% the loan of this type. Present
value of an annuity of 1 for 4 periods at 24% is 2.40.
Assume that substantial services amounting to P1,275,00 had already been rendered by
CONVERSE PRODUCIS. Indirect franchise cost paid amounted to P340,000.
1. Calculate the realized gross profit for 2018 assuming (1) collection of note is
reasonably assured or (2) collection of the note is not reasonably assured
A. (1) P 6,885,000; (2) P4,050,000
B. (1) P 7,225,000; (2) P3,026,000
C. (1) P11,225,000; (2) P4,250,000
D. (1) P 4,725,000; (2) P2,883,600
Solution:
DP 1,600,000
2,500,000
=
Note 6,400,000/4= 1,600,000
FR-IFF DP
1,600,000
NR @ PV (1,600,000 x 2.4)
3,840,000
Total
Franchise Cost
5,440,000
-816,000
Gross Profit
GPR (4,624,000/25,440,000)
4,624,000
85.00%
RGP (1,600,000 + (1,600,000 - 921,600) x 71.14%) x 85%
1,936,640
Discount
= PV xDR
= 3,840,000 x 24%
= 921600
PROBLEM 11 (CRC-ACE)
On January 1, 2018, Starbucks Company signed an agreement to operate as a
franchisee of perfect Pizza, Inc. for an initial franchise fee of P1,600,000 for a period of
(10) years. Of this amount P600,000 was paid when the agreement was signed and the
balance payable in five annual payments of P200,000 beginning December 31, 2018.
Starbucks signed a non interest bearing note for the balance. Starbucks rating indicates
that it can borrow money at 20% for a loan of this type. In return for the initial fee, the
franchisor agrees to make a market studies, find a location, train the employees, and
perform other related services. The following transactions describe the relationship with
perfect pizza, a franchisee:
2018
Jan. 1:
Entered into a franchise agreement.
April 1:
completed a market study at a cost of P59,436 indirect cost
of
services (general expenses), P5,000.
May 15:
found suitable location. Service cost P280,000.
Nov. 15:
completed training program for employees, cost P20,000.
Dec. 20
franchise outlet opened and business operations started.
Dec. 30:
received the first annual payment.
Required: prepare all entries on the books of the franchisor for 2018, assuming
the collection of the note is reasonably assured.
ANSWER:
Down payment
600,000
Notes receivable
598,000
Total franchise fee
1,198,000
(pv2.99x200,0000)
JOURNAL ENTRIES
Jan. 1
Cash
600,000
N/r
1,000,000
Unearned franchise fee
1,198,000
Discount
402,000
Apr-01
Deferred franchise cost
59,436
Expense
5,000
Cash
64,436
May-15
Deferred franchise cost
280,000
Cash
280,000
Nov. 15
Deferred franchise cost
20,000
Cash
20,000
Dec. 20 NO ENTRY
Dec. 31
Collection:
cash
200,000
N/r
200,000
Disc. On N/r
119,600
Int.
income.
119,600
PROBLEM 12 (CRC-ACE)
On September 1, 2018, Goldilocks Company entered into franchise agreements with
three franchisees. The agreement required an initial fee payment of P70,000 plus four
(4) P30,000 payments due every 4 months, the first payment due December 31, 2018.
The interest rate is 12%. The initial deposit is refundable until substantial performance
has been completed. The following describes each agreement.
Service performed
by Franchiser at
Total cost incurred
Franchise
Probability
Full
collection
Dec. 31, 2018
to Dec. 31, 2018
A
Likely
Substantially
70,000
B
Doubtful
25%
20,000
C
Doubtful
Substantially
100,000
For each franchisee, identify the revenue recognition method that you would recommend
considering the circumstances. Prepare the journal entries on the books of Goldilocks
Company to account the franchise. Assume P100,000 was received from each franchisee
during the year.
ANSWER:
A.
Deferred franchise cost
70,000
Cash
70,000
B.
Deferred franchise cost
20,000
Cash
20,000
C.
Deferred franchise cost
100,000
Cash
100,000
Collection:
Cash
30,000
N/R
30,000
Interest:
Discount
4,356(4% x 108,900)
Interest income
Cash
70,000
Collection
30,000
Interest
(4,356)
4,356
25,644
x 44.1%
42,179
PROBLEM 13 (CRC-ACE)
On January 2, 2018, REH signed an agreement to operate as a franchisee to
SAMGYUPSALAMAT Corp. for an initial franchise fee of P937,500 for 10 years. Of this
amount P187,500 was paid when the agreement was signed, and the balance was
payable in three annual payments beginning on December 31, 2018. REH signed a noninterest bearing not for the balance. REH’s rating indicates that h can borrow money at
18% for a loan of this type. Assume that substantial services amounting to P292,000
had already been rendered by SAGYUMPSALAMAT and that indirect franchise cost of
P25,500 was also incurred. PV is 2.17.
If the collection of the note is not reasonably assured, the net income for the year ended
December 31, 2018 is
ANSWER:
Down payment
187,500
Notes Receivable
542,500
Total Franchise Fee
730,000
Installment
Cash
187,500
Collection
250,000
Interest
(97,650)
-18% x 542,500
399,850
60%
Realized Gross Profit
203,910
Operating Exp
(35,500)
Net Income
276,060
PROBLEM 14 (CRC-ACE)
Each of Potter Pie Co’s. 21 new franchisees contracted to pay an initial franchise fee of
P30,000. By December 31, 2017, each franchise had paid a non-refundable P10,000 fee
and signed a note to pay P10,000 principal plus the market rate of interest on December
31,2018 and 2019. Experience indicates that one franchise will default on the additional
payments. Services for the initial fee will be performed in 2017. What amount of net
unearned franchise fees would Potter report at Dec. 31,2019?
ANSWER:
Down payment
(21 x 30,000)
630,000.00
Less: Default
(2 additional payments)
20,000.00
Unearned Franchise Fee
December 31, 2016
610,000.00
PROBLEM 15 (CRC-ACE)
At the beginning o the year, Zita Eat Haus got the franchise of Max, known steak house
of upscale patronage. The franchise agreement required a P500,000 franchise fee
payable P100,000 upon signing of the franchise and the balance in four annual
installments starting the end of the current year. At present value using 12% as
discount rate, the four installments would approximate P303,735. The fees once paid are
not refundable. The franchise may be canceled subject to the provisions of the
agreement. Should there be unpaid franchise fee attributed to the balance of main fee
(P500,000), the same would become due and demandable upon cancellation. Further,
the franchiser is entitled to a 5% fee on gross sales payable monthly within the first ten
days of the following month. The credit investigation bureau rated Zita as AAA credit
rating. The balance of the franchise fee was guaranteed by a commercial bank. The first
year of operations yielded gross sales of P9 million. Max’s earned franchise fees from
Zita for the first year of operation, amounted:
ANSWER:
Franchise
fees
during the year:
Initial
earned:
Franchise
earned
fee
Continuing Franchise fee
Down payment
100,000
Installments
303,735
(5% x 9 million)
450,000
853,735
4.4 Consignment Sales
Problem 1 (ReSA)
On June 1, DD Company shipped twenty five DVD to BB View Store on consignment. The
DVD is to be sold at an advertise price of P200 per item. The cost of each DVD to the
consignor is P100. The consignor paid P75 to ship the merchandise. Commission is to be
25% of sales price. During the month, two DVD were retuned.
On June 30, BB View Store remitted the amount due to consignor after deducting
commission of P400.
1. The amount remitted by BB View Store is:
a. 1,100
c. 1,200
b. 1,600
d. 2,000
2. The consignment profit is:
a. 370
b. 415
c. 720
d. 800
3. The cost of the inventory on consignment amounted to:
a. 1,400
c. 1,545
b. 1,550
d. 1,500
Solution:
1.
Sales price (400/25%)
1,600
Commission 25%
(400)
1,200
2.
Consignment Sales
1,600
Consignor's charges:
*Cost (8 units x P100)
800
Freight out (75/25units x 10)
30
Commission
400
(1,230)
Consignment Profit
370
1,600
* # of Units Sold
P200 per tape
8 tapes
3.
Cost (15 units x P100)
Freigh out (75/25unitsx15)
1,500
45
1,545
Problem 2 (ReSA)
On August 5, 2015, Famous Furniture shipped 20 dining sets on consignment to
Furniture Outlet Inc. The cost of each dining was P350. The cost of shipping the dining
sets amounted to P1,800 and was paid for by Famous Furniture. On December 30, 2014,
the consignee reported the sale of 15 dining sets at P850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
P300 and installation and set up costs of P390. The amount of cash received by Famous
Furniture is
a. 12,750
b. 11,985
c. 11,295
d. 11,685
Solution:
(15x P850) – (12,750x 6%) – 300- 390 = P11,295
Problem 3 (ReSA)
On August 5, 2015, Famous Furniture shipped 20 dining sets on consignment to
Furniture Outlet Inc. The cost of each dining was P350. The cost of shipping the dining
sets amounted to P1,800 and was paid for by Famous Furniture. On December 30, 2014,
the consignee reported the sale of 15 dining sets at P850 each. The consignee remitted
payment for the amount due after deducting a 6% commission, advertising expense of
P300 and installation and set up costs of P390. The total profit on units sold for the
consignor is
a. 11,295
b. 4,695
c. 6,045
d. 9,945
Solution:
P11,295 – (15 x P350) = P6,045
Problem 4 (ReSA)
TS Trading consigned 100 beds costing P600 each to PP Company. The advertised selling
price is P1,000 each bed. The consignment agreement provides that the consignee is to
be allowed a commission of 15% on the selling price. Furthermore, PP Company has to
draw sight draft for 60% of the cost of the beds; the advanced is to be recovered
periodically by monthly deductions (in proportion to units sold) from the remittance
which accompany the account sales. All expenses of consignee are to be deducted
monthly as incurred.
At the end of the first month, the consignee rendered an account sales showing among
others the following charges: Commission, P2,250; Advertising, P1,500; and Delivery
expense, P750.
1. The number of units sold by PP Co. is:
a. 10
b. 15
c. 20
d. 25
2. The amount remitted to TS Co. for the month is:
a. 1,500
c. 5,100
b. 4,500
d. 5,500
3. The consignment profit (loss) of TS Co. is?
a. 1,500
c. 3,412.50
b. 2,137.50
d. None of the above
Solution:
1.
Sales (2,250/15%)
15,000
Divided by: Selling price per unit
1,000
No. of units sold
15 units
2.
Sales
15,000
Less: Charges
Commission
2,250
Advertising
1,500
Delivery expense
750
Due to consignor
(4,500)
10,500
Less: Advances
Value of note (100 beds xP600) x 60%
36,000
Multiplied by: Proportional number of beds sold
15/100
Amount remitted
(5,400)
5,100
3.
Sales
15,000
Less: Charges
Cost of beds (600 per bed x 15 beds)
(9,000)
Commission
2,250
Advertising
1,500
Delivery expense
750
(4,500)
Consignment net income
1,500
Problem 5 (ReSA)
On October 1, 2014, the NN Company consigned one hundred wall clocks to P&G
Retailer Inc. Each wall clock had a cost of P150. Freight on the shipment was paid by NN
Company for P200. On December 1, 2014, P&G submitted on account sales stating that
it had sold sixty pieces and it was remitting the P12,480 balance due. The remittance
was net of the following deductions from the sales price of the wall clocks sold:
Commission (20% of sales price)
?
Advertising
500
Delivery and installation charges
100
1. What was the total sales price of the wall clocks sold by P&G Retailers Inc.?
a. 13,440
c. 16,800
b. 15,000
d. 17,000
2. What was the cost of the inventory on consignment?
a. 6,000
c. 6,280
b. 6,080
d. 6,320
Solution:
1.
Sales (unknown)
x
Less Charges:
Advertising
Delivery and installation
charges
500
Commission (unknown)
20%
100
Remittance
12,840
x- (P500 + P100 + 20%x) = 12,480
x - 20%x = 12,480 + 600
80%x = 13, 440
x = 16,800
2.
Cost (P150 per unit x 40 units)
Freight on shipment
(P200x40/100)
6,000
Cost of inventory on consignment
6,080
80
PROBLEM 6 (PRTC)
Passionate Enterprises consigned 15 dozens of fine men's suits with a cost of P800 a suit
to Fashion Treats Company. Passionate incurred freight cost of P35 per dozen. As
required by the agreement, Fashion Treats reported sales of 8 dozens at P1,200 a suit
and reimbursable expenses of P2,500. Fashion Treats remitted the proceeds to
Passionate, net of the agreed 15% commissions on sale.
1. How much cash was remitted by Fashion Treats to Passionate Enterprises?
A. P139,800
C. P 95,420
B. P142,500
D. P142,800
Solution:
Sales (8x12x1,200)
Reimbursable exp.
2,500
Commissions (115,200x15%)
17,280
Amount remitted
115,200
(19,780)
95,420
2. How much was the consignment profit to Passionate Enterprises?
A. P 55,590
C. P 18,430
B. P 58,590
D. P 18,340
Solution:
Orig Cost
Cap. Cost
15x12x800
15x35
144,000
525
Sales (8x12x1,200)
COS (144,000x525)8/15
115,200
-77,080
Gross Profit
38,120
Reimburses exp
Commisions
2500
17280
-19780
Net Income
18,340
PROBLEM 7 (PRTC)
Jessie Corporation consigned 400 dresses to Anne Fashions at a suggested retail price of
P500 each. Jessie paid freight charges of P2,000 on the shipment on consignment. Anne
paid delivery charges of P2,100 for units sold, subject to subsequent settlement. Jessie
and Anne agreed that any sales in excess of the suggested retail price will accrue to the
latter. Anne submitted an account sales on the sale of 215 dresses, 40% of which was
sold at P580 each and the rest at P640 each, All these sales were paid in cash. Jessie's
cost is P375 each dress, before any deferred costs on consignment are taken into
account.
1. How much should Anne remit to Bryan for the aforementioned sales to customers?
A. P105,400
C. P107,500
B. P130,340
D. P132,440
Solution:
Sales (215x500)
107,500
Delivery Exp.
-2,100
Remittance by Anne
105,400
2. How much is the commission earned by Anne from sales of the consigned goods?
A. P 13, 236
C. P 24,940
B. P 49,800
D. P 82,560
Solution:
215 Dresses
40%
86 @ 580
49,880
60%
129 @ 640
82,560
Cash Proceeds
132,440
Sug. Retail price
(107,500)
24,940
PROBLEM 8 (PRTC)
Aircon, Inc, consigned 10 one-horse power air conditioner units to Argy Trading and paid
P2,000 freight out. Gross margin is 12.5% of sales. The consignee is allowed a
commission of 5% on sales. Argy Trading submitted an account sales on December 31,
2017 as follows:
Sales
P 72,000
P 10,000
Less: Advances to consignor
800
Selling expenses
Delivery and
1,200
Installation cost
3,600
Commission
Net remittance
15,600
P56,400
1. How much is the net profit or loss of Aircon, Inc. in the consignment?
A. P1,400 profit
C. P2,200 profit
B. P8,800 loss
D. P720 loss
Solution:
Orig Cost (72,000 x 87.5%)
63,000
Cap. Cost
2,000
Total Cost
65,000
Sales
72,000
COS
(65,000)
GP
7,000
OPEX (800 +1200+3600)
(5600)
Net Income
1,400
PROBLEM 9 (PRTC)
On August 31, 2015, CTC Company consigned to Lovely Company ten ladies handbags
which cost CTC P300 each. CTC paid freight charge of P150 on the shipment.
On September 30, 2015, Lovely Company submitted an account sales reporting that it
sold for cash seven handbags for which it remitted P3,165 representing the net proceeds
after deductions as follows:
20% of selling price
Commission
Advertising placed upon receipt of shipment
P120
Delivery of units sold
1. The consignee sold the seven handbags for a total of
A. P3,956.25
C. P4,200.00
B. P4,087.50
D. P4,387.50
75
Solution:
Remittance
3,165
Charges: Advertising
120
Delivery
75
Total proceeds from sales, net of 20% commission
195
3,360
/80%
Total sales price of the 7 handbags
4,200
2. The inventory of unsold handbags at September 30, 2015 was valued at
A. P900
C. P891
B. P949
D. P1,120
Solution:
Cost (3xP300)
900
Freight (3/10 x P150)
45
Advertising (3/10 x P120)
36
Inventory of unsold handbags
981
PROBLEM 10 (PRTC)
The CCN Interior Designers and Manufacturers Corporation consigned 10 sala set to a
furniture dealer. Manufacturing cost is P4,000 per set. Consignment profits are not
recorded separately by the company. At the end of one month, the dealer reported the
sale or 4 sets at P7,000 each and remitted the net sales proceeds after deducting the
following: 20% commission on sets sold and P1,600 freight paid upon receipt of the 10
sets.
1. The entry on the books of CCN Interiors to record the shipment assuming
consignment profits are calculated separately includes:
A. a debit to Consignment Out of P70,000
B. a debit to Consignment In of P40,000
C. a credit to Merchandise Shipment on Consignment of P40,000
D. a credit to Merchandise Inventory of P70,000
2. Cash remitted to the consignor was
A. P20,000
C. P21,600
B. P20,800
D. P22,400
Solution:
Sales (4 x P7,000)
Charges: Commission (20% x P28,000)
Freight
Remittance
28,000
5,600
1,600
7,200
P20,800
3. The balance of the consignor's inventory relative to consigned goods is
A. P19,200
C. P24,640
B. P24,000
D. P24,960
Solution:
Cost (6 x P4,000)
24,000
Freight (6/10 x P1,600)
960
Balance of Merchandise on Consignment account
24,960
4. Net profit on consignment sales was
A. P4,160
C. P5,120
B. P4,800
D. P5,760
Solution:
Sales (4 x P7,000)
Cost (4 x P4,000)
Less: Commission
Freight (4/10 x P1,600)
Net profit on consignment
28,000
16,000
5,600
640
6,240
5,760
PROBLEM 11 (CRC-ACE)
On November 30, Northup Company consigned 90% freezers to Watson Company for
sale at P1,600 each and paid P1,200 in transportation costs. A report of sales was
received on December 30 from Watson reporting the Sale of 20 freezers, together
with a remittance of the P27,200 balance due. The remittance was net of the agreed
15% commission. How much, and in what month, should Northup recognize as
consignment sales revenue?
November
a. P0
b. P0
c. P144,000
d. P142,800
December
32,000
27,200
0
0
ANSWER
A sole takes place when there Is a transfer of ownership of goods. A consignment does
not transfer ownership of the goods to another person who is to sell the goods but the
owner retains title to such goods until the consignee makes a bona fide sole.
Since the soles of twenty (20) freezers were mode in December by the consignee
(Watson). therefore, the soles revenue equivalent to the number of freezers sold (i.e..
20 freezers x P1,600 = P32.000) by the consignee should be recognized by the
consignor.
PROBLEM 12 (CRC-ACE)
On August . I 2016, JBD. Inc. consigned to Mags store 10 ladies handbags costing
P3,000 each, paying freight charge of P3,000. At the end of the month, Mags Store
reported sales of 6 handbags at P6,000 each and expenses incurred of 2,500, and
remitted the net proceeds due to JBD after deducting a 20% commission.
How much net income did JBD realize in August on the consignment?
a. 7,500 net income
b. 6,500 net income
c. 6,700 net loss
d. 6,500 net loss
ANSWER
Consignment Soles: P6,000 x 6……………………………………. P36,000
Less: Applicable costs and expenses related to consignment soles:
Consigner:
Cost of goods sold: P3.000 x 6 ................ P16,000
Freight: P3,030 x 6/10 …………………..……….. P 1,800
Consignee:
Expenses ……………………………………………. P2,500
Commission …………………………………………..... P 7,200
P29,500
Net Income ………………………………………………………………………… P6,500
PROBLEM 13 (CRC-ACE)
On November 1, 2016, the Western Appliance Center ships five (5) of its appliances
to the ABC Store on consignment. Each unit is to be sold 'at-P25,000 payable
P5,000 in the month of purchase and PI,000 per month thereafter. The consignee is
to be entitled to, 20% of all amounts collected on consignment sales. ABC Store
sells three (3) appliances in November and one (1) on December. Regular monthly
collections are made by the consignee, and appropriate cash remittances are
made to the consignor at the end of each month. The cost of the appliances
shipped by the consignor was P15,500 per unit. The consignor paid shipping costs
to the consignee totaling P5,000.
The cost of inventory on consignment on December 31, 2016?
a.
b.
c.
d.
15,500
16,500
19,600
24,500
ANSWER
The inventory on consignment amounted to P16,500 computed as follows:
Charges Analysis
Sales
Inventory
4 sets
1 set
Charges by consignor
Cost
of
consigned
(@ P15,500/set)
P62,000
P15,500
Shipping cost
4,000
1,000
Charges by consignee:
Commissions
(20% of sales (25,030 x 4)] P20,000
Total
P86,000
0
P16,500
Total
5 units
goods
P77,500
5,000
20,000
P102,500
PROBLEM 14 (CRC-ACE)
On June 1 Bruce Company shipped 25 television sets to Lee Inc on consignment.
The sets are to be sold at an advertised price of P20,000. The cost of each set to
the consignor was 10,000. The cost of shipment paid by the consignor was P7,500.
The consignor agreed to absorb the consignee’s expenditure for freight and also to
allow consignee P1,000 for delivery and installation of each set. Commission is to
be 25% of the sales price. On June 30, Lee submitted the following summary of
consignment sales:
Sets received
25
Sets sold
8
Sets returned to consignor (defective)
2
Sets on hand
10
15
June 3-30 Sales, 8 sets at P20,000
Charges:
Freight – In
P 5,000
Deliveries and initiation expenses
P 8,000
Commissions 25% of sales
P 40,000
53,000
107,000
Remittances enclosed
Balances owned collections fr. customers not yet made
Compute the inventory value of the units unsold in the hands of
the consignee.
a. 150,000
b. 153,000
c. 154,500
d. 157,500
25,000
82,000
ANSWER
Charges Analysis
Sales
Inventory
Total
8 sets
15 sets
25 sets
(@ P10,000/set)
80,000
150,000
230,000
Freight Out
3,000
4,500
7,500
Charges by consignor
Cost of consigned goods
Charges Analysis
Sales
Inventory
Total
8 sets
15 sets
25 sets
(@ P10,000/set)
80,000
150,000
230,000
Freight Out
3,000
4,500
7,500
2,000
8,000
3,000
5,000
0
8,000
(25% of sales (20,000 x 8)]
40,000
0
40,000
Total
133,000
157,500
290,500
Charges by consignor
Cost of consigned goods
Charges by consignee:
Freight In (200 per set)
2,000
Delivery & Installation
Commissions
PROBLEM 15 (CRC-ACE)
In 2015, CCA Wholesales transferred goods to a retailer on consignment. The goods cost
P90,000 and normally are sold at a 30% markup. In 2014, merchandise costing P24,000
was sold by the consignee at the normal markup, and the balance of the merchandise
was returned to CCA Wholesalers. The consignee withheld a 10% commission from
payment
Prepare journal entries to record the transfer of merchandise to the consignee, the sale
of goods by the consignee and the remittance of the amount due the consignor.
ANSWER
Inventory on Consignment
90,000
Merchandise Inventory
90,000
To record transfer of merchandise to consignee
Consignee Receivable (P24,000 x 130%)
31,2000
Consignment Sales Revenue
31,200
To record consignment sales
Cost of Consignment Goods Sold
24,000
Inventory on Consignment
24,000
To record cost of goods sold
66,000
M er ch an di s e In v en t o ry
66,000
Inventory on Consignment
To record return of consigned goods
Commission Expense (P31.200 x 10%)
Cash
3,120
28,080
Consignee Reed able
31,200