Advance Accounting Book 1

Partnership – Basic Considerations and Formation

1

CHAPTER 1 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 1-1: a

1-2: b 1-2: c

Jose's capital should be credited for the market value of the computer contributed by him. (40,000 + 80,000)  2/3 = 180,000 x 1/3 = 60,000 .

1-3: a

Cash Land Mortgage payable

P100,000 300,000 ( 50,000)

Net ass assets (J ul io, capital )

P350,000 P350,000

Total Capital (P300,000/60%) Perla's interest

P500,000 ______40%

Perla's capital Less: Non-cash asset contributed at market value Land P 70,000 Building 90,000 Mortgage Payable ( 40,000)

P200,000

Cash Cash contr contr i bution

P 80,000 80,000

1-4: b

1-5: d

_120,000

- Zero, because under the bonus method, a transfer of capital is only required.

1-6: b

Reyes

Santos

P200,000 – –

Cash Inventory Building Equipment Mortgage payable

________

P300,000 150,000 400,000 150,000 ( 100,000)

Net asse assett (capi tal )

P350,000

P750,000

AA

BB

CC

P55,000 P55,000

1-7: c

Cash Property at Market Value Mortgage payable Equipment at Market Value

P 50,000

_______

P 80,000 ( 35,000) _______

Capi tal

P 50,000

P 45,000

2

Chapter 1

1-8: a PP

RR

SS

Cash Computer at Market Value

P 50,000 __25,000

P 80,000 _______

P 25,000 __60,000

Capital

P 75,000

P 80,000

P 85,000

1-9: c Maria

Nora

Cash Merchandise inventory Computer equipment Liability Furniture and Fixtures

P 30,000

200,000

P 90,000 160,000 ( 60,000) ________

Total contribution

P230,000

P190,000

Total agreed capital (P230,000/40%) Nora's interest

P575,000 ______60%

Nora's agreed capital Less: investment

P345,000 190,000

Cash to be i nvested nvested

P155,000

1-10: d Roy

Sam

Tim

Cash Office Equipment Note payable

P140,000 – ________

– P220,000 _( 60,000)

– – ______

Net asset invested

P140,000

P160,000

P

Agr eed capital s, equal equal ly (P300,000/3) (P300,000/3) =

P100,000 P100,000

1-11: a Lara

Mitra

Cash Computer equipment Note payable

P130,000 – ________

P200,000 50,000 _( 10,000)

Net asset invested

P130,000

P240,000

Goodwil l (P240,000 - P130,000) P130,000) =

P110,000 P110,000

1-12: a Perez

Reyes

Cash Office Equipment Merchandise Furniture Notes payable

P 50,000 30,000 – _______

P 70,000 – 110,000 100,000 ( 50,000)

Net asset asset in vested vested

P 80,000

P230,000

–


3

Bonus M ethod:

Total capital (net asset invested)

P310,000

Goodwil Goodwil l M ethod:

Net assets invested Add: Goodwill (P230,000-P80,000)

P310,000 _150,000

Net capital

P460,000

1-13: b

Required capital of each partner (P300,000/2) Contributed capital of Ruiz: Total assets P105,000 Less Liabilities __15,000

P150,000

Cash Cash to be contr i buted by Rui z

P 60,000 60,000

__90,000

1-14: d

Total assets: Cash Machinery Building Less: Liabilities (Mortgage payable)

P 70,000 75,000 _225,000

P370,000 __90,000

Net assets (equal to Ferrer's Ferrer's capital account) Divide by Ferrer's P & L share percentage

P280,000 ____70%

Total partnership capital

P400,000

Required capital of Cruz (P400,000 X 30%) Less Assets already contributed: Cash P 30,000 Machinery and equipment 25,000 Furniture and fixtures __10,000

P120,000

Cash to be i nvested nvested by Cr uz

P 55,000

__65,000

1-15: d

Adjusted assets of C Borja Cash P 2,500 Accounts Receivable (P10,000-P500) 9,500 Merchandise inventory (P15,000-P3,000) 12,000 Fixtures __20,000 Asset contributed by D. Arce: Cash P 20,000 Merchandise __10,000

__30,000

Total ass assets of th e partn ershi ershi p

P 74,000 74,000

P 44,000

4

Chapter 1

1-16: a

Cash to be invested by Mendez: Adjusted capital of Lopez (2/3) Unadjusted capital Adjustments: Prepaid expenses Accrued expenses Allowance for bad debts (5% X P100,000)

P158,400 17,500 ( 5,000) _( 5,000)

Adjusted capital

P165,900

Total partnership capital (P165,900/2/3) Multiply by Mendez's interest

P248,850 ⅓

Mendez's capital Less Merchandise contributed

P 82,950 __50,000

Cash to be i nvested by M endez

P 32,950

Total Capital: Adjusted capital of Lopez Contributed capital of Mendez

P165,900 __82,950

Total capital

P248,850

1-17: d

Moran, capital (40%) Cash Furniture and Fixtures Divide by Moran's P & L share percentage

P 15,000 _100,000

Total partnership capital Multiply by Nakar's P & L share percentage Required capital of credit of Nakar: Contributed capital of Nakar: Merchandise inventory Land Building Total assets Less Liabilities Required cash investment by Nakar

P115,000 ______40% P287,500 ______60% P172,500

P 45,000 15,000 __65,000 P125,000 __30,000

P 95,000 P 77,500

1-18: c

Garcia's adjusted capital (see schedule 1) Divide by Garcia's P & L share percentage

P40,500 ______40%

Total partnership capital Flores' P & L share percentage

P101,250 ______60%

Flores' capital credit Flores' contributed capital (see schedule 2)

P 60,750 __43,500

Addi ti onal cash to be i nvested by F lor es

P 17,250


5

Schedul e 1:

Garcia, capital: Unadjusted balance Adjustments: Accumulated depreciation Allowance for doubtful account

P 49,500 ( 4,500) ( 4,500)

Adjusted balance

P 40,500

Schedul e 2:

Flores capital: Unadjusted balance Adjustments: Accumulated depreciation Allowance for doubtful accounts

P 57,000 ( 1,500) ( 12,000)

Adjusted balance

P 43,500

1-19: d

Ortiz

Ponce

Total

( 60%) ( 40%) P133,000 P108,000 P241,000

Unadjusted capital balances Adjustments: Allowance for bad debts Inventories Accrued expenses

( 2,700) 3,000 _( 2,400)

Adjusted capital balances

P130,900

( 1,800) 2,000 ( 1,600) P106,000

( 4,500) 5,000 ( 4,000) P237,500

Total capital before the formation of the new partnership (see above) P237,500 Divide by the total percentage share of Ortiz and Ponce (50% + 30%) ______80% Total capital of the partnership before the admission of Roxas Multiply by Roxas' interest

P296,875 ______20%

Cash to be i nvested by Roxas

P 59,375

1-20: d

Merchandise to be invested by Gomez: Total partnership capital (P180,000/60%)

P300,000

Gomez's capital (P300,000 X 40%) Less Cash investment

P120,000 __30,000

M erchandi se to be i nvested by Gomez

P 90,000

Cash to be invested by Jocson: Adjusted capital of Jocson: Total assets (at agreed valuations) Less Accounts payable Required capital of Jocson Cash to be i nvested by Jocson

P180,000 __48,000

P132,000 _180,000 P 48,000

6

Chapter 1

1-21: b

Unadjusted Ell, capital (P75,000 – P5,000) Allowance for doubtful accounts Accounts payable

P 70,000 ( 1,000) ( 4,000)

Adju sted El l, capital

P 65,000

1-22: c

Total partnership capital (P113,640/1/3) Less David's capital

P340,920 _113,640

Cortez's capital after adjustments Adjustments made: Allowance for doubtful account (2% X P96,000) Merchandise inventory Prepaid expenses Accrued expenses

P227,280

Cort ez' s capi tal bef ore adjustments

P211,200

1,920 ( 16,000) ( 5,200) ___3,200

1-23: a

Total assets at fair value Liabilities

P4,625,000 (1,125,000)

Capit al balance of F lor

P3,500,000

Total capital of the partnership (P3,500,000 ÷ 70%) Eden agreed profit & loss ratio Eden agreed capital Eden contributed capital at fair value

P5,000,000 30% 1,500,000 812,000

Al located cash to be i nvested by Eden

P 688,000

1-24: c

1-25: c

__Rey __Sam_ __Tim __Total_ Contributed capital (assets-liabilities)P471,000 P291,000 P195,000 P957,000 Agreed capital (profit and loss ratio) 382,800 382,800 191,400 957,000 Capital tr ansf er (B onus)

P 88,200 P(91,800) P

3,600

-

1-26: d

Total agreed capital (P90,000 ÷ 40%) Contributed capital of Candy (P126,000+P36,000-P12,000) Total agreed capital (P90,000 ÷ 40%) Candy, agreed capital interest Agreed capital of Candy Contributed capital of Candy

P225,000 150,000 225,000 60% 135,000 150,000

Wit hdr awal

P 15,000


7

1-27: a

Total agreed capital (210,000 ÷ 70%) Nora’s interest Agreed capital of Nora Cash invested

P300,000 30% P 90,000 42,000

Cash to be i nvested by Nor a

P 48,000

Contributed capital of May (P194,000 - P56,000) Agreed capital of May (P300,000 x 70%)

P138,000 210,000

1-28: a

Cash to be i nvested by M ay

P 72,000

1-29: c

Contributed capital Agreed capital

_Alex_ _ P100,000 92,000

_Carlos_ P84,000 92,000

Capital i nvested

P( 8,000)

P 8,000

__Total__ P184,000 184,000 -

8

Chapter 1

SOLUTIONS TO PROBLEMS Problem 1 – 1 1.

a. Books of Pedro Castr o wil l be r etain ed by the par tnershi p

To adjust the assets and liabilities of Pedro Castro.

1. Pedro Castro, Capital ............................................................. Merchandise Inventory......................................................

600

2. Pedro Castro, Capital ............................................................. Allowance for Bad Debts ..................................................

200

3. Accrued Interest Receivable .................................................. Pedro Castro, Capital.........................................................

35

Computation: P1,000 x 6% x 3/12 = P2,000 x 6% x 2/12 =

600

200

35

P15 _20

Total ......................... ...... P35 4. Pedro Castro, Capital ............................................................. Accrued Interest Payable ................................................... (P4,000 x 5% x 6/12 = P100)

100

5. Pedro Castro, Capital ............................................................. Accumulated Depreciation – Furniture and Fixtures ........

800

6. Office Supplies ...................................................................... Pedro Castro, Capital.........................................................

400

100

800

400

To record the investment of Jose Bunag.

Cash .. ........................................................................................... 15,067.50 Jose Bunag, Capital ............................................................... Computation: Pedro Castro, Capital P600 P31,400 (1) 200 35 (3) (2) 100 400 (6) (4) (5) ___800

P1,700

P31,835 P30,135

Jose Bunag, Capital : 1/2 x P30,135 = P15,067.50

15,067.50


b.

9

A n ew set of books will be used

Books of Pedro Castro

To adjust the assets and liabilities.

See Requirement (a). To close the books.

Notes Payable ............................................................................... Accounts Payable ......................................................................... Accrued Interest Payable.............................................................. Allowance for Bad Debts ............................................................. Accumulated Depreciation – Furniture and Fixtures ................... Pedro Castro, Capital ................................................................... Cash ....................................................................................... Notes Receivable ................................................................... Accounts Receivable ............................................................. Accrued Interest Receivable .................................................. Merchandise Inventory .......................................................... Office Supplies ...................................................................... Furniture and Fixtures............................................................

4,000 10,000 100 1,200 1,400 30,135 6,000 3,000 24,000 35 7,400 400 6,000

New Partnership Books

To record the investment of Pedro Castro.

Cash ........................................................................................... Notes Receivable.......................................................................... Accounts Receivable .................................................................... Accrued Interest Receivable......................................................... Merchandise Inventory................................................................. Office Supplies ............................................................................. Furniture and Fixtures .................................................................. Notes Payable ........................................................................ Accounts Payable................................................................... Accrued Interest Payable ....................................................... Allowance for Bad Debts....................................................... Accumulated Depreciation – Furniture and Fixtures............. Pedro Castro, Capital .............................................................

6,000 3,000 24,000 35 7,400 400 6,000 4,000 10,000 100 1,200 1,400 30,135

To record the investment of Jose Bunag.

Cash .. ........................................................................................... 15,067.50 Jose Bunag, Capital ...............................................................

15,067.50

10

Chapter 1

2.

Castro and Bunag Partnership Balance Sheet October 1, 2008

A s s e t s

Cash ..... ...... ... ........................................................................................... Notes receivable .......................................................................................... Accounts receivable .................................................................................... P 24,000 Less Allowance for bad debts...................................................................... ___1,200 Accrued interest receivable ......................................................................... Merchandise inventory ................................................................................ Office supplies ........................................................................................... Furniture and fixtures .................................................................................. 6,000 Less Accumulated depreciation................................................................... ___1,400 Total Assets ........................................................................................

P21,067.50 3,000.00 22,800.00 35.00 7,400.00 400.00 __4,600.00 P59,302.50

Liabilities and Capital

Notes payable ........................................................................................... Accounts payable ........................................................................................ Accrued interest payable ............................................................................. Pedro Castro, Capital................................................................................... Jose Bunag, Capital .....................................................................................

P 4,000.00 10,000.00 100.00 30,135.00 _15,067.50

Total Liabilities and Capital ...............................................................

P59,302.50

Problem 1 – 2

Contributed Capitals:

Jose:

Capital before adjustment ...................................................... P 85,000 Notes Payable ........................................................................ 62,000 Undervaluation of inventory .................................................. 13,000 Underdepreciation.................................................................. ( 25,000) Pedro: Cash ....................................................................................... Pablo: Cash ....................................................................................... 11,000 Marketable securities ............................................................. _57,500 Total contributed capital .............................................................................. Agreed Capitals: Bonus M ethod:

Jose (P231,500 x 50%) ................................................................. P115,750 Pedro (P231,500 x 25%) .............................................................. 57,875 Pablo (P231,500 x 25%)............................................................... __57,875 Total . ........................................................................................... P231,500

P 135,000 28,000 ___68,500 P 231,500


11

. To have a goodwill, the only possible base is the capital of Pablo. T he Goodwil l M ethod computation is: Contributed Capital

Jose Pedro Pablo

P135,000 28,000 __68,500

Total

P231,500

Total agreed capital (P68,500



Agreed Capital

P137,000 (50%) 68,500 (25%) __68,500 (25%)

Goodwill

2,000 40,500 _____ –

274,000

42,500

25%) = 274,000

Jose, Pedro and Pablo Partnership Balance Sheet June 30, 2008

Bonus Method

Assets: Cash Accounts receivable (net) Marketable securities Inventory Equipment (net) Goodwill

Goodwill Method

P 49,000 48,000 57,500 85,000 45,000 ______ –

P 49,000 48,000 57,500 85,000 45,000 __42,500

P284,500

P327,000

Accounts payable Jose, capital (50%) Pedro, capital (25%) Pablo, capital (25%)

P 53,000 115,750 57,875 __57,875

P 53,000 137,000 68,500 __68,500

Total

P284,500

P327,000

Total Liabilities and Capital:

Problem 1 – 3 1.

Books of Pepe Basco To adjust the assets.

a.

Pepe Basco, Capital...................................................................... Estimated Uncollectible Account ..........................................

3,200

b. Pepe Basco, Capital ...................................................................... Accumulated Depreciation – Furniture and Fixtures.............

500

3,200

500

12

Chapter 1

To close the books.

Estimated Uncollectible Account ....................................................... Accumulated Depreciation – Furniture and Fixtures .......................... Accounts Payable................................................................................ Pepe Basco, Capital ............................................................................ Cash .. ........................................................................................... Accounts Receivable .................................................................... Merchandise Inventory................................................................. Furniture and Fixtures .................................................................. 2.

4,800 1,500 3,600 31,500 400 16,000 20,000 5,000

Books of the Partnership To record the investment of Pepe Basco.

Cash .... ... ........................................................................................... Accounts Receivable .......................................................................... Merchandise Inventory ....................................................................... Furniture and Fixtures......................................................................... Estimated Uncollectible account .................................................. Accumulated Depreciation – Furniture and Fixtures ................... Accounts Payable ......................................................................... Pepe Basco, Capital......................................................................

400 16,000 20,000 5,000 4,800 1,500 3,600 31,500

To record the investment of Carlo Torre.

Cash .... ... ........................................................................................... Carlo Torre, Capital ..................................................................... Computation: Pepe Basco, capital (Base) ........................................................... Divide by Pepe Basco's P & L ratio .............................................

47,250 47,250

P31,500 ___40%

Total agreed capital ...................................................................... P78,750 Multiply by Carlo Torre's P & L ratio .......................................... ___60% Cash to be invested by Carlo Torre ..............................................

P47,250

Problem 1 – 4 a.

Roces' books wil l be used by the partn er shi p

Books of Sales

1. Adjusting Entries (a) Sales, Capital ......................................................................... Accumulated Depreciation – Fixtures ...............................

3,200

(b) Goodwill ................................................................................ Sales, Capital .....................................................................

32,000

3,200

32,000


2.

13

Closing Entry

Allowance for Bad Debts ............................................................. Accumulated Depreciation – Delivery Equipment ...................... Accumulated Depreciation – Fixtures .......................................... Accounts Payable ......................................................................... Notes Payable ............................................................................... Accrued Taxes .............................................................................. Sales, Capital ................................................................................ Cash ....................................................................................... Accounts Inventory................................................................ Merchandise Inventory .......................................................... Prepaid Insurance................................................................... Delivery Equipment............................................................... Fixtures .................................................................................. Goodwill ................................................................................

12,800 8,000 91,200 64,000 40,000 8,000 224,000 4,800 72,000 192,000 3,200 48,000 96,000 32,000

Books of Roces (Books of the Partnership)

1.

2.

Adjusting Entries

(a) Roces, Capital .............................................................................. Allowance for Bad Debts.......................................................

1,600

(b) Accumulated Depreciation – Fixtures .......................................... Roces, Capital ........................................................................

16,000

(c) Merchandise Inventory................................................................. Roces, Capital ........................................................................

8,000

(d) Goodwill....................................................................................... Roces, Capital ........................................................................

40,000

1,600

16,000

8,000

40,000

To record the investment of Sales.

Cash .... ... ........................................................................................... Accounts Receivable .......................................................................... Merchandise Inventory ....................................................................... Prepaid Insurance................................................................................ Delivery Equipment ............................................................................ Fixtures ... ........................................................................................... Goodwill . ........................................................................................... Allowance for Bad Debts ............................................................. Accumulated Depreciation – Delivery Equipment ...................... Accumulated Depreciation – Fixtures .......................................... Accounts Payable ......................................................................... Notes Payable ............................................................................... Accrued Taxes .............................................................................. Sales, Capital ................................................................................

4,800 72,000 192,000 3,200 48,000 96,000 32,000 12,800 8,000 91,200 64,000 40,000 8,000 224,000

14

b.

Chapter 1 Sales' books wil l be used by the partn ershi p

Books of Roces

1. Adjusting Entries See Requirement (a). 2. Closing Entry Allowance for Bad Debts ............................................................. Accumulated Depreciation – Delivery Equipment ...................... Accumulated Depreciation – Fixtures .......................................... Accounts Payable ......................................................................... Accrued Taxes .............................................................................. Roces, Capital .............................................................................. Cash ....................................................................................... Accounts Receivable ............................................................. Merchandise Inventory .......................................................... Prepaid Insurance................................................................... Delivery Equipment............................................................... Fixtures .................................................................................. Goodwill ................................................................................

1,600 12,800 64,000 104,000 6,400 224,000 14,400 57,600 132,800 4,800 19,200 144,000 40,000

Books of Sales (Books of the Partnership)

1.

Adjusting Entries

See Requirement (a). 2.

To record the investment of Roces.

Cash .... ... ........................................................................................... Accounts Receivable .......................................................................... Merchandise Inventory ....................................................................... Prepaid Insurance................................................................................ Delivery Equipment ............................................................................ Fixtures ... ........................................................................................... Goodwill . ........................................................................................... Allowance for Bad Debts ............................................................. Accumulated Depreciation – Delivery Equipment ...................... Accumulated Depreciation – Fixtures .......................................... Accounts Payable ......................................................................... Accrued Taxes .............................................................................. Roces, Capital ..............................................................................

14,400 57,600 132,800 4,800 19,200 144,000 40,000 1,600 12,800 64,000 104,000 6,400 224,000


c.

15

A n ew set of books wil l be opened by the partn er shi p

Books of Roces

1. Adjusting Entries See Requirement (a). 2. Closing Entry

See Requirement (b). Books of Sales

1. Adjusting Entries See Requirement (a). 2. Closing Entry See Requirement (a). New Partnership Books To record the investment of Roces and Sales.

Cash .... ... ........................................................................................... Accounts Receivable .......................................................................... Merchandise Inventory ....................................................................... Prepaid Insurance................................................................................ Delivery Equipment (net) ................................................................... Fixtures (net)....................................................................................... Goodwill ........................................................................................... Allowance for Bad Debts ............................................................. Accounts Payable ......................................................................... Notes Payable ............................................................................... Accrued Taxes .............................................................................. Roces, Capital .............................................................................. Sales, Capital ................................................................................

19,200 129,600 324,800 8,000 46,400 84,800 72,000 14,400 168,000 40,000 14,000 224,000 224,000

16

Chapter 1

Problem 1 – 5

1.

To close Magno's books.

Allowance for Bad Debts.................................................................... Accounts Payable................................................................................ Notes Payable ..................................................................................... Accrued Interest Payable .................................................................... R. Magno, Capital ............................................................................... Cash .. ........................................................................................... Accounts Receivable .................................................................... Merchandise Inventory................................................................. Equipment .................................................................................... Other Assets ................................................................................. 2.

5,000 13,000 12,000 3,000 9,000

To adjust the books of Lagman.

Goodwill . ........................................................................................... Allowance for Bad Debts ............................................................. J. Lagman, Capital........................................................................ 3.

1,000 6,000 10,000 300 24,700

8,000 210 7,790

To record the investment of Magno.

Cash .... ... ........................................................................................... Accounts Receivable .......................................................................... Merchandise Inventory ....................................................................... Equipment........................................................................................... Other Assets........................................................................................ Allowance for Bad Debts ............................................................. Accounts Payable ......................................................................... Notes Payable ............................................................................... Accrued Interest Payable.............................................................. R. Magno, Capital ........................................................................

5,000 13,000 12,000 3,000 9,000 1,000 6,000 10,000 300 24,700

To adjust the investments of the partners.

Cash .... ... ........................................................................................... R. Magno, Capital ........................................................................ (P35,000 – P24,700 = P10,300)

10,300

J. Lagman, Capital .............................................................................. Cash .. ........................................................................................... Accounts Payable to J. Lagman ................................................... (P63,000 + P7,790 = P70,790 – P35,000 = P35,790)

35,790

10,300

23,300 12,490


4.

17

Lagman and Magno Balance Sheet December 31, 2008

A s s e t s

Cash .... ... ........................................................................................... Accounts receivable ............................................................................ Less Allowance for bad debts ............................................................. Merchandise inventory ....................................................................... Equipment........................................................................................... Other assets ......................................................................................... Goodwill ...........................................................................................

P – P34,000 1,210

Total Assets ..................................................................................

32,790 21,000 8,000 46,000 ___8,000 P115,790


Accounts payable ................................................................................ Notes payable...................................................................................... Accrued interest payable..................................................................... Accounts payable to J. Lagman .......................................................... J. Lagman, capital ............................................................................... R. Magno, capital................................................................................

P 18,000 15,000 300 12,490 35,000 __35,000

Total Liabilities and Capital .........................................................

P115,790

Problem 1 – 6 1.

Books of Toledo

Toledo, Capital ............................................................................. Allowance for Bad Debts (15% x P32,000) ..........................

4,800 4,800

Books of Ureta

Ureta, Capital ............................................................................... Allowance for Bad Debts (10% x P24,000) ..........................

2,400

Cash (90% x P12,000).................................................................. Loss from Sale of Office Equipment............................................ Office Equipment...................................................................

10,800 1,200

Toledo, Capital (1/4 x P1,200) ..................................................... Ureta, Capital ............................................................................... Loss from Sale of Office Equipment .....................................

300 900

2,400

12,000

1,200

18

2.

3.

Chapter 1

New Partnership Books

Cash .. ........................................................................................... Accounts Receivable .................................................................... Merchandise ................................................................................. Office Equipment ......................................................................... Allowance for Bad Debts....................................................... Accounts Payable................................................................... Notes Payable ........................................................................ Toledo, Capital ...................................................................... To record the investment of Toledo.

3,200 32,000 40,000 10,000

Cash .. ........................................................................................... Accounts Receivable .................................................................... Merchandise ................................................................................. Toledo, Capital ............................................................................. Allowable for Bad Debts ....................................................... Accounts Payable................................................................... Ureta, Capital ......................................................................... To record the investment of Ureta.

22,800 24,000 36,000 300

Cash .... ... ........................................................................................... Ureta, Capital ............................................................................... To record Ureta's cash contribution.

3,400

4,800 10,000 2,000 68,400

2,400 16,000 64,700

Computation: Toledo, capital (P68,400 – P300) ................................................. P 68,100 Divide by Toledo's profit share percentage .................................. ____50%

Total agreed capital of the partnership ......................................... P136,200 Multiply by Ureta's profit share percentage ................................. ____50% Agreed capital of Ureta ................................................................ P 68,100 Ureta, capital ................................................................................ __64,700 Cash contribution of Ureta ........................................................... P 3,400 or Toledo, capital (P68,400 – P300) ................................................. P 68,100 Less Ureta, capital ........................................................................ __64,700 Cash contribution of Ureta ........................................................... P 3,400

3,400


4.

19

Toledo and Ureta Partnership Balance Sheet July 1, 2008

A s s e t s

Cash .... ... ........................................................................................... Accounts receivable ............................................................................ P56,000 Less Allowance for bad debts ............................................................. __7,200 Merchandise........................................................................................ Office equipment ................................................................................ Total Assets ..................................................................................

P 29,400 48,800 76,000 __10,000 P164,200


Accounts payable ................................................................................ Notes payable...................................................................................... Toledo, capital .................................................................................... Ureta, capital .......................................................................................

P 26,000 2,000 68,100 __68,100

Total Liabilities and Capital .........................................................

P164,200

20

Chapter 2

CHAPTER 2 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 2-1: d

Jordan

Pippen

Total

Annual salary Balance, equally

P120,000 ( 10,000)

P80,000 P200,000 ( 10,000) ( 20,000)

Tot al

P110,000

P 70,000

P180,000

JJ

KK

LL

Total

Bonus (.20 X P90,000) Interest JJ (.15 X P100,000) KK (.15 X P200,000) LL (.15 X P300,000) Balance, equally

P18,000

–

–

P 18,000

P15,000

– P 30,000

– ) – ) P45,000) ( 6,000)

90,000 ( 18,000)

Total prof it shar e

P27,000

P 24,000

P39,000

P 90,000

Allan

Michael

Total

2-2: a

( 6,000)

( 6,000)

2-3: a 2-4: a

Interest Allan - .10 X (P40,000 + 60,000 /2) Michael - .10 X (P60,000 + 70,000/2) Balance, equally

P 5,000 _14,000

Tot al

) P 6,500) P 11,500 _14,000 __28,000

P 19,000

P20,500

P 28,000

Greg

Henry

Total

2-5: a

Fred

Interest (.10 of average capital) Salaries Balance, equally

P12,000 30,000 ( 35,000)

P 6,000 ( 35,000)

Total

P 7,000

( P29,000)

2-6: b

Average Capital Date

Capital Balance

January 1 July 1 August 1

140,000 180,000 165,000

Months Unchanged

Peso Months

6 1 5

P 840,000 180,000 __825,000

12

P1,845,000

Average capital - P1,845,000/12

=

P153,750

I nterest

=

P 15,375

(P153,750 X 10%)

P 4,000 20,000 ( 35,000)

P 22,000 50,000 (105,000)

(P11,000) (P 33,000)

Partnership Operations

21

2-7: c

Date

January 1 April 1 June 1 September 1

Capital Balance

Months Unchanged

P16,000 17,600 19,200 15,200

Average Capital (P201,600/12) =

Peso Months

3 2 3 4

P 48,000 35,200 57,600 __60,800

12

P201,600

P16,800

2-8: a

Net profit before bonus Net profit after bonus (P24,000/120%)

P 24,000 __20,000

Bonus to RJ Balance (P24,000-P4,000)X3/5

4,000 __12,000

Total profi t share

P 16,000

2-9: a

LT

AM

Total

Interest Salaries Balance, 3:2

P3,200 15,000 (11,580)

P 3,600 7,500 ( 7,720)

P 6,800 22,500 ( 19,300)

Tot al

P 6,620

P 3,380

P 10,000

2-10: b

Net income after salary, interest and bonus Add back: Salary (P10,000 X 12) Interest (P250,000 X .05)

P467,500 P120,000 __12,500

_132,500

Net income after bonus (80%) Net income before bonus (P600,000/80%)

P600,000 _750,000

Paul ' s bonus

P150,000

2-11: b

CC

Salary Balance Additional profit to DD

P14,000 ( 1,500)

Tot al

P12,500

Net income Fees Earned Expenses

P90,000 _48,000

Net Income

P42,000

DD

EE

Total

P 8,400 __2,100

P 14,000 5,600 ( 600)

P 14,000 28,000 ______ –

P10,500

P 19,000

P 42,000

22

Chapter 2

2-12: c

LL

MM

NN

Total

Interest Annual Salary Additional profit to give LL, P20,000 Additional profit to give MM, P14,000

P 2,000 8,500 9,500 _____ –

P 1,250 – 5,700 __7,050

P 750 – 3,800 _____ –

P 4,000 8,500 19,000* __7,050

Total *(P9,500/50%) = P19,000

P20,000

P14,000

P 4,550

P 38,550

2-13: a

RR

SS

TT

Total

Excess (Deficiency) RR (P80,000 - P95,000) SS (P50,000 - P40,000) Balance 4:3:1

P15,000 – _47,500

– (P10,000) _35,625

– ) – ) _11,875

P 5,000 __95,000

Tot al

P62,500

P25,625

P11,875

P100,000

BB

CC

Total

Net Income

(200,000 - 100,000) =

2-14: b

P100,000 AA P 10,000 30,000

AA - 100,000 X 10% 150,000 X 20% Remainder, 210,000 BB (60,000 X .05) CC (60,000 X .05) Balance, equally

__68,000

Tot al

P108,000

) )

P 40,000

_68,000

) P 3,000 _68,000

6,000 _204,000

P71,000

P71,000

P250,000

P 3,000

2-15: a

AJ Bonus to CJ Net profit before bonus P44,000 Net profit after bonus (P44,000/110%)P40,000 – – Interest to BJ – Salaries P 10,000 Balance, 4:4:2 __6,800

BJ

CJ

Total

P1,000 – _6,800

P4,000 – 12,000 __3,400

P4,000 1,000 22,000 _17,000

Tot al

P7,800

P19,400

P44,000

P 16,800

2-16: c

Total profit share of Pedro Less: Salary to Pedro Interest

P200,000 P 50,000 __20,000

Share in the balance (40%) Net profit after salary and interest (130,000/40%) Add: Total Salaries Total Interest Total Partnership I ncome

__70,000 P130,000 P325,000

P150,000 __70,000

_220,000 P545,000


23

2-17: c

Net income before extraordinary gain and bonus (69,600-12,000) Net income after bonus (57,600/120%)

P 57,600 _48,000

Bonus to RR

P 9,600

Distribution of Net Income: JJ

RR

Total

Bonus Balance, equally

– P 24,000

P 9,600 24,000

P 9,600 48,000

Net profit before extraordinary gain Extraordinary gain

P 24,000 __4,800

P 33,600 __7,200

P 57,600 _12,000

Tot al

P 28,800

P 40,800

P 69,600

Mel

Jay

Total

Interest Annual Salary Remainder 60:40

P 20,000 36,000 __60,000

P 12,000 – _40,000

P 32,000 36,000 _100,000

Tot al

P116,000

P 52,000

P168,000

DV

JE

FR

Total

P 15,000 ( 36,875)

P 3,750 ( 22,125)

(P 7,500) ( 14,750)

P 11,250 ( 73,750)

(P 21,875)

(P 18,375)

2-18: a

2-19: a

Interest on excess (Deficiency) Remainder 5:3:2 Total

(P 22,250) (P 62,500)

2-20: c

Correction of 1998 profit: Net income per books Understatement of depreciation Overstatement of inventory, December 31

P 19,500 ( 2,100) ( 11,400)

Adjusted net income

P 6,000 Pete

Distribution of net income per book: Equally Distribution of adjusted net income Equally Requi r ed Decr ease

Rico

Total

P 9,750

P 9,750

P 19,500

( 3,000)

( 3,000)

( 6,000)

P 6,750

P 6,750

P 13,500

Tiger

Woods

Total

2-21: a

Salaries Interest Bonus (P360,000-P54,000)X.25 Remainder, 30:70

P 64,000 24,000 76,500 __19,650

P100,000 P164,000 30,000 54,000 76,500 – __45,850 __65,500

Tot al

P184,150

P175,850

P360,000

24

Chapter 2

2-22: a

Holly

Field

Total

Salaries Commission Interest Bonus, schedule 1 Remainder, 60:40

P 20,000 – 32,000 30,000 __35,640

– P 25,000 33,600 – _23,760

P 20,000 25,000 65,600 30,000 __59,400

Tot al

P117,640

P 82,360

P200,000

Schedule 1 Net income before salary, commission, interest and bonus Less: salaries

P200,000 __20,000

Net income before bonus Net income after bonus (P180,000/120%)

P180,000 _150,000

Bonus

P 30,000

2-23: a

Mike

Tyson

Total

Capital balance, beginning Additional investment Capital withdrawal Capital balance before profit and loss distribution

P600,000 100,000 -200,000 P500,000

P400,000 P1,000,000 200,000 300,000 ( 100,000) _-300,000 P500,000 P1,000,000

Net income: Salary Balance, 3:2

P200,000 __60,000

P300,000 P 500,000 __40,000 __100,000

Total

P260,000

P340,000 P 600,000

Total Drawings

P760,000 ( 200,000)

P840,000 P1,600,000 ( 300,000) ( 500,000)

Capi tal balan ce, end

P560,000

P540,000 P1,100,000

Average Capital - King: Date

Capital Balance

Months Unchanged

Peso Months

January 1 April 1

P40,000 55,000

3 9

P120,000 _495,000

12

P615,000

Average capital – P615,000/12 = P51,250 Average Capital - Queen: Date

Capital Balance

January 1 April 1

P100,000 130,000

Average capital - P1,350,000 / 12 =P112,500

Months Unchanged

Peso Months

7 5

P700,000 __650,000

12

P1,350,000


25

2-24: d

Distribution of Net Income - Schedule 1 King

Queen

Total

Interest Bonus, Schedule 2 Salaries Residual, 50:50

P 5,125 12,725 25,000 ( 2,050)

P11,250 – 30,000 _(2,050)

P16,375 12,725 55,000 _(4,100)

Total

P40,800

P39,200

P80,000

Schedule 2

Net income before allocation Less: Interest

P80,000 _16,375

Net income before bonus Net income after bonus (P63,625/125%)

P63,625 _50,900

Bonus

P12,725

Capital Balance December 31: King

Queen

Total

Capital balance, January 1 Additional investment Capital balance before profit and loss distribution Net income (Schedule 2) Drawings (P400 X 52)

P40,000 _15,000

P100,000 __30,000

P140,000 __45,000

P55,000 40,800 ( 20,800)

P130,000 39,000 ( 20,800)

P185,000 80,000 ( 41,600)

Capi tal balan ce, December 31

P75,000

P148,400

P223,400

2-25: d

Total receipts (P1,500,000 + P1,625,000) Expenses

P3,125,000 ( 1,080,000)

Net income

P2,045,000

Distribution to Partners Red – P1,500,000/P3,125,000 X P2,045,000 = Blue – P1,625,000/P3,125,000 X P2,045,000 =

P 981,600 (1)

_1,063,400 P2,045,000

Capital balance of Blue Dec. 31 Capital Balance, Jan. 1 Additional investment Capital balance before profit and loss distribution Profit share Drawings Capital balance, Dec. 31

P 374,000 ___22,000 P 396,000 1,063,400 ( 750,000) P 709,400 (2)

26

Chapter 2

2-26: a

Ray

Sam

P150,000 _______

P180,000 __60,000

P330,000 __60,000

150,000

240,000

390,000

15,000 51,000

20,000 34,000

35,000 85,000

66,000

54,000

120,000

Total Salaries

216,000 _18,000

294,000 _24,000

510,000 _42,000

Total Drawings

234,000 (18,000)

318,000 (24,000)

552,000 (42,000)

Capital balances, March 1 Additional investment, Nov. 1 Capital balances before salaries, profit and Drawings Profit share: Interest Balance, 60:40 Total

Capi tal balan ces, F eb. 28

Total

P216,000

P294,000

P510,000

Susan

Tanny

Total

P150,000 8,000 _______

P30,000

158,000

24,000

2-27: a

Capital balances, 1/1 Additional investment, 4/1 Capital withdrawals, 7/1 Balances before profit distribution Profit distribution: Interest Bonus (20% x P30,000) Balance, equally Total Total Drawings Capi tal balan ces, 12/31

23,400

P180,000 8,000 (6,000) _(6,000) 182,000

(1,725)

4,050 6,000 (1,725)

27,450 6,000 (3,450)

21,675

_8,325

30,000

179,675 (12,000)

32,325 (12,000)

212,000 (24,000)

P167,675

P20,325

P188,000


27

2-28: a

Sin

Capital balances, beg. 1st year Loss distribution, 1st year: Salaries Interest Balance, 5:3:2 Total Total Drawings Capital balances, beg. 2nd year Profit distribution, 2nd year: Salaries Interest Balance, 5:3:2 Total Total Drawings Capital balances, end of 2nd year

P110,000 20,000 11,000 (40,000)

Tan

P80,000

Uy

P110,000

Total

P300,000

8,000 (16,000)

10,000 11,000 (24,000)

30,000 30,000 (80,000)

( 9,000)

( 8,000)

( 3,000)

(20,000)

101,000 (10,000)

72,000 (10,000)

107,000 (10,000)

280,000 (30,000)

91,000

62,000

97,000

250,000

20,000 9,100 ( 7,500)

6,200 ( 4,500)

10,000 9,700 ( 3,000)

30,000 25,000 (15,000)

21,600

_1,700

16,700

40,000

112,600 _(10,000)

63,700 (10,000)

P102,600

P53,700

113,700 _(10,000) P103,700

290,000 _(30,000) P260,000

2-29: c

Jay

Capital balances, 1/1/06 Additional investment, 2006 Capital withdrawal, 2006

Kay

P30,000

P30,000

_(5,000)

Capital balances Profit distribution, 2006: Interest Salary Balance, equally Capital balances, 1/1/07 Additional investment, 2007 Capital withdrawal, 2002

36,000 5,000 ______

Capital balances Profit distribution, 2007: Interest Salary Balance, equally Capital balances, 1/1/08 Additional investment, 2008 Capital withdrawal, 2008

Loi

Total

_(4,000)

P30,000 5,000 ______

P90,000 5,000 _(9,000)

25,000

26,000

35,000

86,000

3,000 7,000 _1,000

3,000

3,000

_1,000

_1,000

9,000 7,000 __3,000

30,000

39,000

_(3,000)

_(8,000)

105,000 5,000 (11,000)

41,000

27,000

31,000

99,000

3,600 7,000 _1,500

3,000

3,900

_1,500

_1,500

10,500 7,000 __4,500

53,100

31,500

______

_(4,000)

36,400 6,000 _(2,000)

121,000 6,000 _(6,000)

Capital balances Profit distribution, 2008: Interest Salary Balance, equally

53,100

27,500

40,400

121,000

5,310 7,000 __3,300

3,150

3,640

__3,300

__3,300

12,100 7,000 ___9,900

Capital balances, 12/31/08 per books Understatement of depreciation

P68,710 (2,000)

P33,950 (2,000)

P47,340 (2,000)

P150,000 (6,000)

Adj usted capit al balances, 12/31/08

P66,710

P31,950

P45,340

P144,000

28

Chapter 2

2-30: a

Ken

Capital balances, 1/1/07 Additional investment, 2007 Capital withdrawal, 2007

P100,000

Capital balances, 1/1/08 Capital withdrawal, 2008

Mon

Total

P100,000 40,000 _______

P100,000 _______

P300,000 40,000 ( 20,000)

140,000

100,000

320,000

20,000

20,000

60,000 20,000

60,000 60,000

100,000 ( 20,000)

160,000 ( 40,000)

180,000 _______

440,000 ( 60,000)

80,000

120,000

180,000

380,000 60,000 __60,000 P500,000

( 20,000)

Balances Profit distribution, 2007 (Schedule 1) Salary Balance, beg. Capital ratio

Len

80,000

Balances Profit distribution, 2008: Salary Balance, beg. capital ratio

__13,636

__21,818

60,000 __24,546

Capi tal balan ces, 12/31/08

P 93,636

P141,818

P264,546

Schedule 1 – Computation of net profit: Total capital, 2008 (P647,500 – P147,500) Total capital, 2007 (P300,000 + P40,000 – P80,000)

P500,000 _260,000

Total profit for 2 years

P240,000

Net profit per year (P240,000 / 2)

P120,000

2-31: d

Capital balance, 1/1/08 Additional investment Withdrawals Cap. bal. before P/L dist. NP: Salary (16,500 x 12) Interest on EC (15%) Balance 25:30:45 Total Capi tal balan ce 12/31/08

_ Nardo_ P280,000 96,000 376,000 42,000 ( 19,875 ) 22,125 P398,125

__Orly P300,000 60,000 ( 90,000 ) 270,000 198,000 45,000 ( 23,850 ) 219,150 P 489,150

__Pedro_ P170,000 ( 72,000 ) 98,000 25,500 ( 35,775 ) ( 10,275 ) P 87,72

2-32: d

Sam capital, beginning Additional investment (Land) Drawings Capital balance before net profit (loss) Capital balance, end Profit share (40%)

P120,000 60,000 ( 80,000 ) 100,000 150,000 50,000

Net pr ofi t (P50,000 ÷ 40%)

P125,000

_Total_ P750,000 156,000 (162,000) 744,000 198,000 112,500 (79,500 ) 231,000 P975,000


29

2-33: a

__ Joe__ Capital balance, 1/2/07 P 80,000 Net loss- 2007: Annual salary 96,000 10% interest on beg. capital 8,000 Bal. beg. cap. ratio: 8:4 ( 108,000) Total ( 4,000) Capital balance 76,000 Drawings ( 4,000) Capital balance, 12/31/07 72,000 Net profit- 2008: Annual salary 96,000 10% interest on BC 7,200 Bonus to Joe – NPBB – P 22000 NPAB (22000/110%)20000 2,000 Balance equally ( 67,300) Total 37,900 Total 109,900 Drawings ( 4,000) Capi tal balan ce, 12/31/08

105,900

__Tom__ P 40,000

__Total__ P120,000

48,000 4,000 ( 54,000) ( 2,000) 38,000 ( 4,000) 34,000

144,000 12,000 ( 162,000) ( 6,000) 114,000 ( 8,000) 106,000

48,000 3,400

144,000 10,600

( 67,300) ( 15,900) 18,100 ( 4,000)

2,000 ( 134,600) 22,000 128,000 ( 8,000)

14,100

120,000

2-34: a

Decrease in capital Drawings Contribution Profit share

P 60,000 ( 130,000) 25,000 45,000

Net i ncome (45,000 ÷ 30)

P150,000

30

Chapter 2

SOLUTIONS TO PROBLEMS Problem 2 – 1

1.

Castro Diaz

: :

(P26,000/P42,500) x (P16,500/P42,500) x

P23,800 P23,800

= =

P14,560 __9,240 P23,800

2.

Castro Diaz

: :

(P31,250/P50,000) x (P18,750/P50,000) x

P23,800 P23,800

= =

P14,875 __8,925 P23,800

Computation of Average Capitals: Castro: Date

Capital Balances

1/1 ..................................... 4/10 ................................... 5/1 ..................................... 8/1 .....................................

Average capital = P375,000



P26,000 29,000 36,000 32,000

12 months =

Diaz:

Date 1/1 ..................................... 6/1 ..................................... 9/1 .....................................

Capital Balances P16,500 21,500 19,500

Average capital = P225,000 – 12 months = Castro

3.

Months Unchanged

Peso Months

3 1 3 5

P 78,000 29,000 108,000 _160,000

12

P375,000

P31,250 Months Unchanged 5 3 4

Peso Months P 82,500 64,500 __78,000

12

P225,000

P18,750 Diaz

Total

Interest ........................................................ Salaries........................................................ Balance, equally..........................................

P 7,500 36,000 ( 24,100)

P4,500 24,000 (24,100)

P12,000 60,000 ( 48,200)

Total ............................................................

P19,400

P 4,400

P23,800

Castro

Diaz

Total

Bonus (a) .................................................... Interest (b)................................................... Balance, 3:2 ................................................

P 4,760 1,100 _10,764

P – – _7,176

P 4,760 1,100 _17,940

Total ............................................................

P16,624

P7,176

P23,800

4.


31

Computations: a. Net profit before bonus................................................. Net profit after bonus (P23,800  125%) .....................

P23,800 _19,040

Bonus............................................................................

P 4,760

b.

5.

Castro Diaz

Average capital of Castro [(P26,000 + P32,000)  2] ........................... Average of Diaz [ (P16,500 + P18,500)  2]....... ..................................

P29,000 _18,000

Castro's excess ..................................................... .................................. Multiply by .......................................................... ..................................

P11,000 ___10%

Interest ................................................................. ..................................

P 1,100

: :

(P3,000/P5,000) x P23,800 (P2,000/P5,000) x P23,800

= =

P14,280 __9,520 P23,800

Problem 2 – 2

a.

Average Capital : : Date Robin

Balances

Jan. 1 Feb. 28 Apr. 30 Sept. 30

P135,000 95,000 175,000 195,000

Ave. Capital (P1,920,000 Hood:



Balances

Jan. 1 Mar. 31 June 30 Aug. 31 Oct. 31

P140,000 200,000 150,000 220,000 200,000



2 2 5 3

P270,000 190,000 875,000 __585,000

12

P1,920,000

Months Unchanged

P420,000 600,000 300,000 440,000 __400,000

12

P2,160,000

12) = P180,000

P160,000  P340,000 x P510,000 = P180,000  P340,000 x P510,000 =

Peso Months

3 3 2 2 2

: Profi t Di stri bution Robin : Hood :

Peso Months

12) = P160,000

Date

Ave. Capital (P2,160,000

Months Unchanged

P240,000 _270,000 P510,000

32

Chapter 2

Robin

Hood

Total

Interest on ave. capital ......................................... Salaries................................................................. Bonus (P510,000 – 30,600 – 160,000) x 25%) .... Balance, equally...................................................

P 14,400 60,000 78,850 _119,775

P 16,200 100,000 – _119,775

P 30,600 160,000 79,850 _239,550

Totals ...................................................................

P274,025

P235,975

P510,000

Robin

Hood

Totals

249,000

P 6,000 249,000

P 12,000 498,000

255,000

255,000

510,000

Robin

Hood

Total

P 80,000 62,000 _124,000

P120,000

P200,000 62,000 _248,000

b.

c.

Interest: Robin (P195,000 – P135,000) 10%............. Hood (P200,000 – P140,000) 10% ............. Balance, equally................................................... Totals ................................................................... d.

Salaries................................................................. Bonus (see computations below) ......................... Balance, equally...................................................

P 6,000

_124,000

Totals ................................................................... P266,000 P244,000 Bonus Computations: Net income before salaries and bonus......... ..................... ....................... Less Salaries................................................ ..................... .......................

P510,000 P510,000 200,000

Net income before bonus ............................ ..................... ....................... Net income after bonus (P310,000  125%) ..................... .......................

310,000 _248,000

Bonus .......................................................... ..................... .......................

P 62,000

Problem 2 – 3 a.

De Villa

De Vera

Total

P 30,000

– P 20,000 31,200 9,818 __44,182

P 30,000 20,000 64,000 19,636 __88,364

Total ..................................................................... P116,800 P105,200 Bonus Computations: Income before salary, commissions, interest & bonus ...... ....................... Salary and commission (P30,000 + P20,000) ................... ....................... Interest......................................................... ..................... .......................

P222,000 P222,000 ( 50,000) ( 64,000)

Income before bonus ................................... ..................... ....................... Income after bonus (P108,000  110%) ..... ..................... .......................

108,000 _98,182

Bonus .......................................................... ..................... .......................

P 9,818

Salaries................................................................. Commission (2% x P1,000,000) .......................... Interest of 8% on average capital......................... Bonus (see computations below) ......................... Balance, equally...................................................

b.

Income Summary ................................................. De Villa, capital .......................................... De Vera, capital...........................................

32,800 9,818 __44,182

P 222,000 116,800 105,200


33

Problem 2 – 4

East

North

West

Total

Salaries................................................ Bonus (see computation below).......... Interest (see computation below) ........ Balance, 3:3:4 .....................................

P15,000 3,760 2,800 __3,180

P20,000

P18,000

4,000 __3,180

4,800 __4,240

P53,000 3,760 11,600 _10,600

Total ....................................................

P24,740

P27,180

P27,040

P78,960

Bonus computations: Net income before bonus ........... .................... ..................... ..................... Net income after bonus (P78,960  105%) ..... ..................... .....................

P78,960 _75,200

a.

Bonus ......................................... .................... ..................... ..................... Interest computations: East (10% x P28,000)................. .................... ..................... ..................... North (10% x P40,000) .............. .................... ..................... ..................... West (10% x P48,000) ............... .................... ..................... .....................

P 3,760 P 2,800 4,000 __4,800

Total ........................................... .................... ..................... .....................

P11,600

East

North

West

Total

Interest (see computations below) ...... Salaries................................................ Bonus (see computations below) ........ Balance, equally..................................

P 3,133 24,000

P 5,200 25,000

( 6,056)

P 3,633 21,000 4,280 ( 6,055)

( 6,055)

P11,966 70,000 4,280 ( 18,166)

Total ....................................................

P 21,077

P 22,858

P 24,145

P 68,080

b.

Interest computations: Average capitals: East: Date

1/1 5/1 9/1

Balances

P30,000 36,000 28,000

Average capital (P376,000



Date

Balances

1/1 3/1 7/1 9/1

P40,000 31,000 36,000 40,000



Pesos Months

4 4 4

P120,000 144,000 _112,000

12

P376,000

12) ..........................................

North:

Average capital (P436,000

Months Unchanged

Months Unchanged

P 31,333 Pesos Months

2 4 2 4

P80,000 124,000 72,000 _160,000

12

P436,000

12) ...........................................

P 36,333

34

Chapter 2

West: Date

Balances

Months Unchanged

1/1 4/1 6/1 8/1

P50,000 57,000 60,000 48,000

3 2 2 5

P150,000 114,000 120,000 _240,000

12

P624,000

Ave. capital (P624,000

Pesos Months

12).................................. ................. ................... ..

P 52,000

Interest Computations Computations: East (10% x P31,333) ............ ................................. ................ ............................... .............. North (10% x P36,333) ......... ......................... ....... ................................... ...................... ..... West (10% x P52,000)........... ................................. ................ ............................... ..............

P 3,133 3,133 3,633 __5,200

Total ... .................................. ................ .................. ................................. ................ ............................... ..............

P 11,966

Bonus Computations Computations: Net income ............................ ................... . ................................... ............................ ........... Less Salary ............................ ................ ............ ................................. ................ ............................... ..............

P 68,000 _21,000

Net income before bonus....... ......................... ....... ................................... ...................... ..... Net income after bonus (P47,080  110%) ........................... ................ ...........

47,080 _42,800

Bonus to North ...................... ................ ...... ................................. ................ ............................... .............. * To Total

P 4,280



East

West

Total

Bonus (see comp. below) .................... .................. .. Salaries ................................... .................. ......................... ........ Interest on beginning capital............... Remainder, 8:7:5................................. ................. ................

8,990 – P21,000 P 18,000 3,000 4,000 5,000 _13,180 _11,532.50 __8,237.50

P 8,990 39,000 12,000 _32,950

Total ........ ................................... .................. ......................... ........

P37,180 P33,532.50 P22,227.50

P92,940

Bonus Computations Computations: Net income before salaries & bonus bonus ............... .............. ....... ..................... ......... ............ Less Salaries (P21,000 + P18,000) ................. ..................... ................ ..... ..................... .................. ...

P92,940 _39,000

Net income before bonus ........... .................... ..... ............... ................... .. ................... .. ..................... ............... ...... Net income after bonus (P53,940 (P53,940  120%) ..... ..................... ................ ..... ..................... .................. ...

P53,940 _44,950

Bonus to West ............................ ................. ........... .................... ................. ... ..................... ................ ..... ..................... .................. ...

P 8,990

c.

North

P

Problem 2 – 5 a.

Schedule of Income Distribution: Maria

Clara

Rita

Total

Salaries.... ................................... .................. ......................... ........ Interest (see computation on p. 30) ..... Balance, equally.................................. .................. ................

P12,000 7,200 __3,133

P10,000 9,600 __3,133

P 8,000 13,800 __3,134

P30,000 30,600 __9,410

Total ........ ................................... .................. ......................... ........

P22,333

P22,733

P24,934

P70,000


35

Interest on Average Capital: Maria: P80,000 x 8% x 6 months.. .................... ................. ... P100,000 x 5% x 6 months .................... ................. ... Clara: P120,000 x 8% .................. ................ .. .................... ................. ... Rita: P180,000 x 8% x 9 Mos. ... .................... ................. ... P150,000 x 8% x 3 Mos. ... .................... ................. ...

P 3,200 __4,000

9,600 P10,800 __3,000

Total ................................... .................. ......................... ........ .................... ................. ... b.

P 7,200

_13,800 P30,600

Statement of Partners Capital : Maria

Clara

Rita

Total

Balances, Jan. 1................................... 1................... ................ Additional Investment ........................ ................ ........ Capital Withdrawal ............................. .................. ........... Net Income........................................ Income....................... ................... .. Drawings ................................... .................. ......................... ........

P 80,000 20,000 – 22,333 ( 10,000)

P120,000 – – 22,733 ( 10,000)

P180,000 – ( 30,000) 24,934 ( 10,000)

P380,000 20,000 ( 30,000) 70,000 ( 30,000)

Balance, Dec. 31 ................................. ................. ................

P112,333

P132,733

P164,934

P410,000

Benny

Celia

Total

Problem 2 – 6

1.

Allocation of net loss for 2008:

Alvin

2.

Salary to Alvin .................................. ................. ................... .. Interests on average capital: Alvin (P120,000 x 10%) ............ Benny (P200,000 x 10%) ........... Celia (P220,000 x 10%) ............. Balance, 30:30:40 ............................... ................. ..............

P 20,000

(29,400)

Total ........ ................................... .................. ......................... ........

P20,000

12,000 20,000 _(29,400)

22,000 _(39,200)

54,000 _(98,000)

P 2,600

P( 9,400)

P(17,200)

P(24,000)

Alvin

Benny

Capitals, January 1, 2008 .................... .................. .. Additional investments ....................... .................. ..... Capital withdrawals ............................ ................. ...........

P120,000

P180,000 60,000 ________

Balances .. ................................... .................. ......................... ........ Net loss (see above) ............................ ................. ...........

120,000 __2,600

Balances .. ................................... .................. ......................... ........ Drawings. ................................... .................. ......................... ........

122,600 _(16,000)

Statement of Partnership Capital Year Ended December 31, 2008

Capitals, December 31, 2008 ..............

_______

P106,600

Celia

Total

P220,000 40,000 _(20,000)

P520,000 100,000 _(20,000)

240,000 __(9,400)

240,000 _(17,200)

600,000 _(24,000)

230,600 _______

222,800 _______

576,000 _(16,000)

P230,600

P222,800

P560,000

36

3.

Chapter 2

Correcting entry:

Celia capital ................................... .................. ...................... ..... 2,400 Alvin capital ............................... ................. .............. 2,200 Benny capital ............................. .................. ........... 200 To correct capital accounts for error in loss allocation computed as follows: Alvin

Benny

Correct loss allocation ........................ ................ ........ Actual loss allocation.......................... .................. ........

P2,600 __(400)

P(9,400) __9,600

P(17,200) __14,800

Adjustment.................................. ................. ......................... ........

P2,200

P

P ( 2,400)

200

Celia

Problem 2 – 7

Dino

Nelson

Oscar

Total

Capital balances, 1/2/06.......................... ..... Additional investment, 2006 ....................... .................. .....

P45,000 _15,000

P45,000 _15,000

P45,000 __6,000

P135,000 __36,000

Balances..................... .................................. ................. ................. Net income (Loss) - 2006, equally equally .............. Withdrawals, 2006.................................. ................. ...................... .....

60,000 (1,800) (17,000)

60,000 ( 1,800) ( 7,000)

51,000 ( 1,800) ( 3,200)

171,000 ( 5,400) ( 27,200)

Capital balances, 12/31/06........................... Additional investment, 2007 ....................... .................. .....

41,200 41 ,200 _____ –

51,200 _____ –

46,000 __6,000

138,400 ___6,000

Balances..................... .................................. ................. ................. Net income - 2007, 40: 30: 30 30 ..................... ................ ..... Withdrawals, 2007.................................. ................. ...................... .....

41,200 10,800 (17,000)

51,200 8,100 ( 7,000)

52,000 8,100 ( 3,200)

144,400 27,000 ( 27,200)

Capital Balances, 12/31/07 .......................... .................. ........ 35,000 Additional investment, 2008 ....................... .................. ..... ______ –

52,300 ______ –

56,900 ___6,000

144,200 ___6,000

Balances..................... .................................. ................. ................. Net income, 2008 (schedule (schedule 1) .................... .................. .. Withdrawals, 2008.................................. ................. ...................... .....

35,000 56,365 (19,000)

52,300 42,272 ( 9,000)

62,900 20,363 ( 3,200)

150,200 120,000 ( 31,200)

Capital balances, 12/31/08...........................

P72,365

P86,572

P80,063

P239,000

Dino

Nelson

Oscar

Total

Annual salaries....................... ............. P48,000 Bonus (see computations below) ........ – Interest .................................. ................. ............................... .............. 3,600 Balance, equally.................................. .................. ................ _* 4,765

P24,000 10,909 3,600 __4,763

P12,000 – 3,600 __4,763

P84,000 10,909 10,800 __14,291

Totals ................................. ................ .................................. .................

P43,272

P20,363

P120,000

Bonus computations: computations: Net income before bonus ........... ................ ..... ........... ..................... ...... ............... ................... . .................... .. Net income after bonus (P120,000 (P120,000  110%) ..................... .................. ... ..................... ................ .....

P120,000 _109,091

Bonus to Nelson ......................... ................. ........ ................ ..................... .................. ... ..................... ................ .....

P 10,909

Schedule 1:

* To Total

P56,365


37 Problem 2 – 8 Red, White & Blue Partnership Statement of Partners' Capital For Year Ended December 31, 2008

Balances, beginning of year Add: 20% of fees billed to personal clients Green's share of fees (Exhibit A) Remaining net income (Exhibit A) Subtotals Less: Withdrawals Uncollectible accounts identified with clients of each partner Excess rent charged to Blue Total deductions Balances, end of year

Red

White

Blue

40,200 8,800

20,200 4,800

40,600 4,400

Green

Total

P101,000 18,000 3,200 _57,000

_22,800

_22,800

_11,400

3,200 ______

_71,800

_47,800

_56,400

__3,200

179,200

10,400

8,800

11,600

5,000

35,800

2,400

900

3,300 1,800

1,800 P12,800

P 9,700

P13,400

P 5,000

P 40,900

P59,000

P38,100

P43,000

P (1,800)

P138,300

Red, White & Blue Partnership Exhibit A – Computation and Division of Net income For Year Ended December 31, 2008

Total revenue from fees Expenses, excluding depreciation and doubtful accounts expense Less: Excess rent charged to N ($300 x 6)

P120,000 P38,700 __1,800

Subtotal Add: Depreciation, computed as follows: $26,000 x 0.10 $10,000 x 0.10 x 1/2

36,900 2,600 ____500

Total expenses, excluding doubtful accounts expense Add: Doubtful accounts expense ($3,000 x 0.60) Total expenses

P40,000 __1,800 41,800

Net income for year ended Dec. 31, Year 1 Division of net income: Fees billed to personal clients: Red P44,000 x 20% White P24,000 x 2% Blue, P22,000 x 20% Green's share of fees: Gross fees from new clients after April 1, Year 1 Less: Allocated expenses ($40,000 x $24,000/ $120,000) Net income from new clients Green's share (P16,000 x 20%) Total divided pursuant to special agreement

________ P 78,200

P 8,800 48,000 4,400

P18,000

24,000 __8,000 P16,000 P 3,200 __21,200

Balance, divided in income-sharing ratio as follows: To Red, 40% To White, 40% To Blue, 20%

P 57,000 P22,800 22,800 _11,400

Total

P57,000

38

Chapter 2

Problem 2 – 9 Allan, Eman and Gino Partnership Statement of Profit Distribution Year Ended December 31, 2008

Allan

Eman

Gino

Total

Interest Commission (P16,120 – P5,000) x 10% Balance, equally

P 4,000 – __5,926

P 750 1,112 _5,925

P 250 1,112 _5,925

P 5,000 2,224 _17,776

Total Adjustments (50% of P25,000 to Allan)

P 9,926 __2,574

P7,787 (1,287)

P7,287 (1,287)

P25,000 _____ –

Total

P12,500

P6,500

P6,000

P25,000

Sonny

Letty

Total

Problem 2 – 10

Gary, Sonny, and Letty Partnership Statement of Partners' Capital Accounts Year Ended December 31, 2008

Gary

Capital balances, 1/1/08 Additional investments

P210,000 ___9,100

P180,000 _______

P 90,000 _______

P480,000 __9,100

Total Profit distribution: Salaries Interest Bonus to Gary and Sonny (Schedule 1) Balance, equally

_219,100

_180,000

_90,000

489,100

10,640 10,800

13,680 25,920 – __(9,720)

11,520 21,600 – _(9,720)

_(9,720)

35,840 58,320 – (29,160)

__29,880

_23,400

_11,720

_65,000

Total Drawings

248,980 _(21,000)

203,400 (18,000)

101,720 __(9,000)

554,100 _(48,000)

Capital balances, 12/31/08

P227,980

P 92,720

P506,100

Total

P185,400

Schedule 1: Computation of the bonus.

Net profit before interest, salaries and bonus Less: Salaries Interest Net profit (loss) before bonus Therefore no bonus is to be given to Gary and Sonny.

P 65,000 P35,840 _58,320

__94,160 P(29,160)


39

Problem 2 – 11

a. Entries to record the formation of the partnership and the events that occurred during 2008: Cash Inventory Land Equipment Mortgage payable Installment note payable Kobe, capital (P600,000 + P800,000 + P1,000,000 – P200,000) Lebron, capital (P500,000 + P1,300,000 - P500,000) (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Inventory Cash Accounts payable

1,100,000 800,000 1,300,000 1,000,000 500,000 200,000 2,200,000 1,300,000 300,000 240,000 60,000

Mortgage payable Interest expense Cash

50,000 20,000

Installment note payable Interest expense Cash

35,000 20,000

Accounts receivable Cash Sales

70,000

55,000 210,000 1,340,000 1,550,000

Selling and general expenses Cash Accrued expenses payable

340,000

Depreciation expense Accumulated depreciation

60,000

Kobe, drawing Lebron, drawing Cash Sales

278,000 62,000

60,000 104,000 104,000 208,000 1,550,000

Income summary (9)

Cost of goods sold Inventory P900,000 = P800,000 beginning inventory + 300,000 purchases - 200,000 ending inventory

1,550,000 900,000 900,000

40

Chapter 2

Income summary Cost of good sold Selling and general expenses Depreciation expense Interest expense

1,340,000 900,000 340,000 60,000 40,000

Income summary Kobe, capital Lebron, capital

210,000

Kobe, capital Lebron, capital Kobe, drawing Lebron, drawing

104,000 104,000

105,000 105,000

104,000 104,000

Schedule to allocate partnership net income for 2008:

Profit percentage Beginning capital balance Net income (P1,550,000 revenue - P 1,340,000 expenses) Interest on beginning capital balances (3%) Salaries Residual deficit Total b.

Kobe 60% P2,200,000

Lebron 40% P1,300,000

Total 100% P3,500,000

210,000 66,000

39,000

120,000

120,000

(81,000) P105,000

(54,000) P105,000

(105,000) P105,000 (240,000) P(135,000) (135,000) -0-

Kobe-Lebron Partnership Income Statement For the Year Ended December 31, 2008

Sales Less: Cost of goods sold: Inventory, January 1 Purchases Goods available for sale Less: Inventory, December 31 Gross profit Less: Selling and general expenses Depreciation expenses Operating income Nonoperating expense- interest Net income

P1,550,000 P800,000 300,000 P1,100,000 (200,000) 340,000 60,000

(900,000) P650,000 400,000 P250,000 (40,000) P210,000


c.

41

Kobe-Lebron Partnership Balance Sheet At December 31, 2008

Assets Cash Accounts receivable Inventory Land Equipment (net) Total assets

P1,589,000 210,000 200,000 1,300,000 940,000 P4,239,000 Liabilities and Capital

Liabilities: Accounts payable Accrued expenses payable Installment note payable Mortgage payable Total liabilities Capital: Kobe, capital Lebron, capital Total capital Total liabilities and capital

P60,000 62,000 165,000 450,000 P737,000 P2,201,000 1,301,000 3,502,000 P4239,000

42

Chapter 3

CHAPTER 3 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 3-1: c

Implied capital of the partnership (P90,000/20%) Actual value of the partnership

P450,000 ( 420,000)

Goodwill

P 30,000 AQUINO

LOCSIN

DAVID

HIZON

Capital balances before Goodwill Goodwill to old partners

P252,000 __18,000

P126,000 ___9,000

P42,000 __3,000

– _____ –

Total Purchase by Hizon (20%)

P270,000 ( 54,000)

P135,000 ( 27,000)

P45,000 ( 9,000)

– _90,000

Capi tal balan ces after admi ssi on

P216,000

P108,000

P36,000

P 90,000

AQUINO

LOCSIN

DAVID

HIZON

Capital balances before admission Purchase by Hizon (20%)

P252,000 ( 50,400)

P126,000 ( 25,200)

P42,000 ( 8,400)

– _84,000

Capi tal balan ces after admi ssi on

P201,600

P100,800

P33,600

P 84,000

AQUINO

LOCSIN

DAVID

TOTAL

Capital transferred Excess divided using profit and loss ratio

P 50,400 __3,600

P 25,200 __1,800

P 8,400 ___600

P 84,000 __6,000

Cash distr i buti on

P 54,000

P 27,000

P 9,000

P 90,000

3-2: b

3-3: d

3-4: b

Selling price Interest sold (444,000X1/5)

P132,000 ( 88,800)

Combin e gain

P 43,200

3-5: b

Implied value of the partnership (P40,000/1/4) Actual value

P160,000 ( 140,000)

Goodwill

P 20,000 BERNAL

CUEVAS

DIAZ

Cash balances Goodwill, Profit and Loss ratio

P 80,000 __12,000

P40,000 __6,000

P 20,000 __2,000

Total Capital Transfer (1/4)

P 92,000 ( 23,000)

P46,000 ( 11,500)

P 22,000 ( 5,500)

Capit al balances after admissi on

P 69,000

P34,500

P 16,500

Partnership Dissolution – Changes in Ownership

43

3-6: b

BANZON

CORTEZ

TOTAL

Capital Transfer (20%) Excess, Profit and Loss ratio

P 16,000 __6,000

P 4,000 __4,000

P20,000 _10,000


P 22,000

P 8,000

P30,000

PEREZ

CADIZ

TOTAL

Capital balances beginning Net profit, 1:2 Drawings

P 24,000 5,430 ( 5,050)

P 48,000 10,860 ( 8,000)

P 72,000 16,290 ( 13,050)

Capital balances before admission Capital transfer (squeeze)

P 24,380 ( 5,570)

P 50,860 ( 13,240)

P 75,240 (18,810) (1/4)

Capital balances after admission 1:2

P 18,810

P 37,620

P 56,430

Capital transfer Excess, 1:2

P 5,570 __3,730

P 13,240 __7,460

P18,810 _11,190

Cash

P 9,300

P 20,700

P30,000

3-7: d

3-8: a

Total agreed capital (P150,000/5/6) Diana's Interest

P180,000 1/6

Cash distri bution

P 30,000

Total agreed capital (P36,000/1/5) Total contributed capital (80,000+40,000+36,000)

P180,000 ( 156,000)

Un r ecognized Goodwil l

P 24,000

3-9: a

Contributed Capital

Agreed Capital

Increase (Dec.)

Old partners New partner

P110,000 __40,000

P100,000 __50,000

(P 10,000) _10,000

Total

P150,000

P150,000

3-10: b

P

–

Ben, capital balance before admission Bonus share to new partner (10,000X60%)

P 60,000 ( 6,000)

Ben, capital aft er admission

P 54,000

Total agreed capital (P40,000+20,000+17,000) Pete's interest

P 77,000 1/5

Pete' s agreed capit al balance

P 15,400

3-11: c

44

Chapter 3

Contributed Capital

Agreed Capital

Increase (Dec.)

Old partner New partner

P 65,000 25,000 (1/3)

P60,000 30,000

(P 5,000) _5,000

Total

P

90,000

P90,000

FRED

RAUL

3-12: b

Capital balances before admission Investment by Lory Bonus to Lory

P


P

– LORY

(

35,000 – 3,500)

P30,000 – ( 1,500)

– 25,000 __5,000

P

31,500

P28,500

P 30,000

3-13: c

Total agreed capital (90,000+60,000+70,000) Augusts' interest Agreed capital Contributed capital

P220,000 _____1/4 P 55,000 __70,000

Bonus to June & July

P 15,000 JUNE

JULY

Capital balances before admission Bonus from August, equally

P90,000 __7,500

P 60,000 __7,500


P97,500

P 67,500

3-14: a

Total agreed capital (52,000 + 88,000)/80%) Total capital of Mira & Nina after admission

P175,000 ( 140,000)

Cash paid by El ma

P 35,000

Total agreed capital (P41,600/2/3) Total contributed capital (P23,000+18,600+16,000)

P 62,400 ( 57,600)

Goodwill to new partner, Ang

P 4,800

3-15: a

LIM

ONG

ANG

Capital balances before admission Investment by Ang Goodwill to August

P23,000 – _____ –

P 18,600 – ______ –

– 16,000 __4,800


P23,000

P 18,600

P20,800


45

3-16: a

Capital balances before admission Admission by Dong: By Purchase (1/2) By Investment Capital balances before Goodwill and Bonus Goodwill to Old Partners (sch. 1) Bonus to Old Partners (sch. 1) Capital balances after admi ssi on

ANG

BENG

CHING

DONG

TOTAL

P600,000

P 400,000

P 300,000

–

P1,300,000

300,000 _300,000

– ___300,000

( 300,000) _______ –

– _______ –

– _______ –

P300,000 150,000 __37,500

P 400,000 150,000 __37,500

P 300,000 100,000 __25,000

P600,000 – ( 100,000)

P1,600,000 400,000 ________ –

P487,500

P 587,500

P 425,000

P500,000

P2,000,000

Schedule 1: Old Partners New Partner

Total

CC AC P 1,000,000 P1,500,000 600,000 (25%) __500,000

Inc. (Dec.) P500,000 ( 100,000) Bonus

P

P400,000 GW

1,600,000 P2,000,000

3-17: b

MONA

Capital balances before admission of Alma Admission of Alma: Investment Goodwill to old partner, 70:30 (sch. 1) Capital balances before admission of Lorna Admission of Lorna: Goodwill Written off, 5:3:2 Investment Goodwill to old partners, 5:3:2 (sch. 2) Capital balances after admi ssi on

P150,000

P

–

LIZA

ALMA

LORNA

TOTAL

50,000

–

–

P 200,000

–

80,000

–

80,000

______ –

___40,000

–

P 320,000

__28,000

___12,000

_______ –

P178,000

P

62,000

P 80,000

(P 20,000) –

(P

12,000) –

(

P8,000) –

– 75,000

( P40,000) 75,000

__10,000

____6,000

____4,000

______ –

___20,000

P168,000

P

P

P 75,000

P 375,000

Schedule 1: Total agreed capital (80,000/25%) Total capital contributed (200,000+80,000)

Goodwill to old partners, 70:30 Schedule 2: Total agreed capital (75,000/20%) Total contributed capital (280,000+75,000)

Goodwill to old partners, 5:3:2

56,000

76,000

P 320,000 ( 280,000) P

40,000

P 375,000 ( 355,000) P

20,000

46

Chapter 3

3-18: c

RED

WHITE

BLUE

TOTAL

Unadjusted capital balances Overvaluation of Marketable Securities Allowance for Bad Debts

P175,000 ( 12,500) ( 12,500)

P100,000 ( 7,500) ( 7,500)

P 45,000 P320,000 ( 5,000) ( 25,000) ( 5,000) ( 25,000)

Adjusted capital balances before admission

P150,000

P 85,000

P 35,000

P270,000

Total agreed capital (270,000/2/3) Green's interest

P405,000 1/3

I nvestment

P135,000

WW

TOTAL

3-19: b

XX

YY

ZZ

P360,000

P225,000

P135,000

( 60,000)

( 37,500)

( 22,500)

_120,000

Balances Equalization of capital

P300,000 ( 100,000)

P187,500 __12,500

P112,500 __87,500

P120,000 P720,000 – ______ – ______

Balances Net profit, equally Drawings (2 months) Capital balances before WWs Investment

P200,000 3,150 _( 1,500)

P200,000 3,150 _( 2,000)

P200,000 3,150 _( 1,500)

P120,000 P720,000 3,150 12,600 _( 2,000) _( 7,000)

P201,650

P201,150

P201,650

P121,150

Capital balances before admission Capital transfer to WW (1/6)

– P720,000

Total agreed capital (201,650+201,150+201,650)/2/3 WW's interest

P906,675 1/3

Agreed capital of WW Contributed capital (see above)

P302,225 _121,150

Cash to be i nvested

P181,075

______ –

P725,600

3-20: a

A

B

C

Capital balances Understatement of assets, P12,000

P 20,750 __3,000

P 19,250 __3,000

P 45,000 __6,000

Balances before settlement to A

P 23,750

P 22,250

P 51,000

Settlement to A A's interest (23,750+5,000)

P 30,250 _28,750

Partial Goodwill to A

P 1,500

Therefore: 1. U nder part ial Goodwil l method the capital bal ances of B i s P 22,250 2. U nder B onus method th e capital balances of B woul d be:

B, capital balances before settlement to A Bonus to A (1,500X25/75)

P 22,250 _( 500)

B, capital after retir ement of A

P 21,750


47

3-21: a

Perez

Reyes

Suarez

Capital balances Net income, P140,000 Undervaluation of inventory, P20,000

P 100,000 70,000 ___10,000

P 150,000 P 200,000 42,000 28,000 ____6,000 ____4,000

Capital balances before settlement to Perez Settlement to Perez Bonus to Perez

P 180,000 P 198,000 P 232,000 – – ( 195,000) ___15,000 _( 9,000) _( 6,000)

Capit al balances after r eti r ement

P

– P 189,000 P 226,000

3-22: c

ELY

FLOR

GLOR

Capital balances Settlement to Ely Total Goodwill (P40,000/50%)P80,000

P 320,000 P 192,000 P 128,000 – – ( 360,000) __40,000 ___24,000 ___16,000

Capital balances after retir ement of El y

P

– P 216,000 P 144,000

3-23: c

Capital balance 3/1/07 Net loss-2007: Salary (10 months) Interest (10 months) Bal. beg. cap. ratio: 48:24 Total Capital balance Drawings Capital balance, 12/31/07 Net profit- 2008: Salary Interest Balance, equally Total Capital balance Drawings Capital balance 12/31/08

_Alma_ 480,000

_Total_ 720,000

480,000 40,000 ( 544,000) ( 24,000) 456,000 ( 24,000) 432,000

240,000 20,000 ( 272,000) ( 12,000) 228,000 ( 24,000) 204,000

720,000 60,000 ( 816,000) ( 36,000) 684,000 ( 48,000) 636,000

576,000 43,200 ( 397,800) 221,400 653,400 ( 24,000) 629,400

288,000 20,400 ( 397,800) ( 89,400) 114,600 ( 24,000) 90,600

864,000 63,600 ( 795,600) 132,000 768,000 ( 48,000) 720,000

Total contributed capital (720,000 + 400,000) Cora’s interest Cora’s agreed capital Cora’s contributed capital Bonus to Cora, from Alma and Betty 4:2 Therefore entr y (c) i s corr ect.

_Betty_ 240,000

1,120,000 40% 448,000 400,000 48,000

48

Chapter 3

3-24: a

Capital balance, beg. 2007 2007 net profit (90,000 – 59,000): Interest Compensation Balance, 4:6 Total Balance Withdrawal Repairs (charge to Pete) Capital balance, 12/31/07

_ Pete_ P80,000 8,000 5,000 ( 2,000) 11,000 91,000 ( 8,000) ( 5,000) 78,000

1/1/08: Admission of Sammy Total agreed capital (P117,000 +43,000) Sammy’s interest Sammy’s agreed capital Sammy’s contributed capital Bonus to Pete & Carlos, 4:6 Therefore entr y (a) i s corr ect.

_Carlos_ P30,000

3,000 20,000 ( 3,000) 20,000 50,000 ( 11,000) 39,000

_Total_ P110,000

11,000 25,000 ( 5,000) 31,000 141,000 (19,000) ( 5,000) 117,000

P160,000 20% 32,000 43,000 11,000


49

SOLUTIONS TO PROBLEMS Problem 3 – 1 (a)

1. Goodwill Method : Total agreed capital (P75,000  25%) ..................................... P300,000 Total contributed capital .......................................................... _275,000 Goodwill to old partners, P/L ratio .......................................... P 25,000 Entry Goodwill ............................................................................ Cash ................................................................................... Red, capital ................................................................... White, capital ................................................................ Blue, capital .................................................................. Green, capital ................................................................

25,000 75,000 5,000 10,000 10,000 75,000

2. Bonus Method: Contributed capital of Green ......................... ........................... P 75,000 Agreed capital of Green (P275,000 x 25%) ............................... _68,750 Bonus to old partners, P/L ratio ................................................ P 6,250 Entry: Cash ................................................................................... Green, capital ................................................................ Red, capital ................................................................... White, capital ................................................................ Blue, capital .................................................................. (b)

75,000 68,750 1,250 2,500 2,500

1. Implicit Goodwill Method : Total Implied Capital (P75,000  25) ...................................... P300,000 Total existing capital................................................................ _200,000 Implied Goodwill to old partners ............................................. P100,000 Entries: Goodwill ............................................................................ Red, capital ................................................................... White, capital ................................................................ Blue, capital ..................................................................

100,000 20,000 40,000 40,000

Red, capital (25% x P80,000)............................................ White, capital (25% x p120,000)....................................... Blue, capital (25% x P100,000)......................................... Green, capital ................................................................

20,000 30,000 25,000

2. Red, capital (25% x P10,000)....................................................... White, capital (25% x P80,000) ................................................... Blue, capital (25% x P60,000) ..................................................... Green, capital .........................................................................

15,000 20,000 15,000

75,000

50,000

50

Chapter 3

Problem 3 – 2 a.

(1) Bonus Method: Contributed capital of Tomas ......................................................... .................. Agreed capital of Tomas (P640,000 x 20%) ................................... ..................

P140,000 _128,000

Bonus to old partners, P/L ratio ...................................................... ..................

P 12,000

BRUNO

MARIO

TOMAS

TOTAL

Balances before admission .................... Admission of Tomas ..............................

P200,000 ___9,000

P300,000 ___3,000

– _128,000

P500,000 _140,000

Balances after admission .......................

P209,000

P303,000

P128,000

P640,000

(2) Goodwill Method : Total agreed capital (P140,000  20%) . .................. ..................... Total contributed capital ........................ .................. .....................

P700,000 _640,000

Goodwill to old partners, P/L ratio ........ .................. .....................

P 60,000

BRUNO

MARIO

TOMAS

TOTAL

Balances before admission .................... Admission of Tomas ..............................

P200,000 __45,000

P300,000 __15,000

P – _140,000

P500,000 _200,000

Balances after admission .......................

P245,000

P315,000

P140,000

P700,000

BRUNO

MARIO

TOMAS

TOTAL

(3) Goodwill with subsequent write-off . Balances from A-2 ................................. Goodwill written off, 6:2:2 ....................

P245,000 ( 36,000)

P315,000 ( 12,000)

P140,000 ( 12,000)

P700,000 ( 60,000)

Balances .................................................

P209,000

P303,000

P128,000

P640,000

BRUNO

MARIO

TOMAS

TOTAL

b.

Balances from A-2 ................................. Goodwill written off, 4:4:2 ....................

P245,000 ( 24,000)

P315,000 ( 24,000)

P140,000 ( 12,000)

P700,000 ( 60,000)

Balances .................................................

P221,000

P291,000

P128,000

P640,000

Problem 3 – 3 a.

Total capital after admission (P76,000 + P104,000) ..................................... .................. Total capital before admission (P60,000 + P80,000) .................................... .................. Goodwill recorded ........................................................................................ .................. Total capital of the partnership (P180,000  75%) ....................................... .................. Less: Total capital of old partners plus Goodwill (P140,000 + 40,000) ....... ..................

b.

P180,000 _140,000 P 40,000 P240,000 _180,000

Cash payment by Barry ................................................................................. ..................

P 60,000

Total capital after admission (P52,000 + P68,000) ....................................... .................. Total capital before admission ...................................................................... ..................

P120,000 _140,000

Bonus to Barry .............................................................................................. ..................

P 20,000

Agreed capital of Barry (P120,000  75%) x 25% ....................................... .................. Less: Bonus .............................................................................................. ..................

P 40,000 __20,000

Cash payment by Barry ................................................................................. ..................

P 20,000


51

Problem 3 – 4 a.

Total agreed capital (P60,000  20%) .................................................. P300,000 Total contributed capital (P100,000 + P40,000 + P60,000) ................. _200,000 Goodwill to old partners, P/L ratio ....................................................... P100,000 Entry: Cash .. .... ...................................................................................... Goodwill ...................................................................................... Gene, capital .......................................................................... Nancy, capital ........................................................................ Ellen, capital ..........................................................................

b.

Cash ..... .. .... ...................................................................................... Ellen, capital.................................................................................

60,000 100,000 80,000 20,000 60,000 60,000 60,000

No Goodwill, no bonus because the total agreed capital is equal to the total contributed capital. c.

d.

Gene, capital ...................................................................................... Nancy, capital ..................................................................................... Ellen, capital.................................................................................

20,000

Cash .... ... .... ...................................................................................... Ellen, capital.................................................................................

32,000

8,000 28,000

32,000

Since the total agreed capital (P172,000) is equal to the total contributed capital (P172,000), then no Goodwill or bonus is to be recorded. e.

Total agreed capital (P140,000  80%) ................................................ P175,000 Total contributed capital (P140,000 + P32,000) ................................... _172,000 Goodwill to new partner ....................................................................... P Entry: Cash .. .... ...................................................................................... Goodwill ...................................................................................... Ellen, capital ..........................................................................

3,000

32,000 3,000 35,000

Problem 3 – 5 a.

b.

Cash ..... .. .... ...................................................................................... Cherry capital ...............................................................................

40,000 40,000

Total agreed capital (P120,000 + P50,000) ................ .......................... P170,000 Cherry's interest .................................................................................... ____25% Cherry's agreed capital .............................................................................. 42,500 Contributed capital................................................................................ __50,000 Bonus to old partners, 70:30 ................................................................. P

7,500

52

Chapter 3

Entry: Cash .. .... ...................................................................................... Cherry, capital ....................................................................... Helen, capital ......................................................................... Cathy, capital ......................................................................... c.

50,000 42,500 5,250 2,250

Total agreed capital (P120,000 + P25,000) ................ .......................... P145,000 Cherry's interest .................................................................................... ____25% Agreed capital of Cherry .......................................................................... 36,250 Contributed capital................................................................................ __25,000 Bonus to new partner ............................................................................ P 11,250 Entry: Cash .. .... ...................................................................................... Helen, capital................................................................................ Cathy, capital................................................................................ Cherry, capital .......................................................................

d.

25,000 7,875 3,375 36,250

Total agreed capital (P50,000  25%) .................................................. P200,000 Total contributed capital (P120,000 + 50,000) ....................................... 170,000 Goodwill to old partners, 70:30 ............................................................ P 30,000 Entry: Cash ...................................................................................... Goodwill ...................................................................................... Cherry, capital ....................................................................... Helen, capital ......................................................................... Cathy, capital .........................................................................

e.

50,000 30,000 50,000 21,000 9,000

Total agreed capital (P120,000  75%) ................................................ P160,000 Total contributed capital (P120,000 + P25,000) ................................... _145,000 Goodwill to new partner ....................................................................... P 15,000 Entry: Cash ...................................................................................... Goodwill ...................................................................................... Cherry, capital .......................................................................

25,000 15,000 40,000

Problem 3 – 6 a.

b.

Total agreed capital (P600,000  3/4) ................................................................. Santos interest ......................................................................................................

P800,000 _____1/4

Contribution of Santos .........................................................................................

P200,000

Total agreed capital (P630,000  3/4) ................................................................. Santos' interest .....................................................................................................

P840,000 _____1/4

Contribution of Santos .........................................................................................

P210,000

Partnership Dissolution – Changes in Ownership c.

d.

e.

53

Total agreed capital (P624,000  3/4) ....................................................................... .................... Less: Contributed capital of old partners ................................................................... ....................

P832,000 _600,000

Contributed capital of Santos .................................................................................... ....................

P232,000

Total agreed capital (P600,000  3/4) ....................................................................... .................... Less: Goodwill ........................................................................................................ ....................

P800,000 __10,000

Contributed capital .................................................................................................... .................... Contributed capital of old partners ............................................................................ ....................

790,000 _600,000


P190,000

Total agreed capital (Contributed) ............................................................................. .................... Less: Contributed capital of old partners ................................................................... ....................

P820,000 _600,000


P220,000

Problem 3 – 7 a.

b.

c.

Tony, capital ........................................................................................................ Noel, capital ......................................................................................................

40,000

Cash ........................................................................................................ Noel, capital ...................................................................................................... (P180,000  2/3) x 1/3 = P90,000.

90,000

Cash....... ..... .... ........................................................................................................ Goodwill ..... .... ........................................................................................................ Noel, capital ......................................................................................................

56,000 4,000

40,000

90,000

60,000

Total agreed capital (P180,000  3/4) ....................................................................... ..... P240,000 Total contribu ted capital (P180,000 + P56,000) ........................................................ ..... _236,000

d.

Goodwill to new partner ............................................................................................ ..... P

4,000

Subas, capital……………………………………………………………… ..... .. Tony, capital………………………………………………………………… Inventory……………………………………………………………….............

14,400 9,600

Cash....... ..... .... ........................................................................................................ 52,000 Noel, capital ...................................................................................................... Total agreed capital (P52,000  1/4) ......................................................................... ..... P208,000 Total capital before inven tory write-down (180,000 + 52,000) ................................. ..... (232,000) e.

Write-down to o ld partners cap ital ............................................................................ ..... ( 24,000) Land……………………………………………………………………………………….. 92,000 Subas, capital…………………………………………………………………… Tony, capital……………………………………………………………………. Subas, capital (P155,200 x 1/4) ................................................................................. 38,800 Tony, capital (P116,800 x 1/4) .................................................................................. 29,200 Noel, capital ...................................................................................................... Total resulting capital (P68,000  1/4) ...................................................................... ..... P272,000 Total capita l of old partner (net assets) ...................................................................... ..... _180,000 Increase in value of land ............................................................................................ ..... P 92,000 Capital of old partner after revaluation of land: Subas (P100,000 + P55,200) ............................................................................. ..... P155,200 Tony (P80,000 + P36,800) ................................................................................ ....... 116,800

24,000

52,000

55,200 36,800

68,000

54

f.

Chapter 3

Cash .... ... .... ...................................................................................... Subas, capital ...................................................................................... Tony, capital ...................................................................................... Noel, capital .................................................................................

40,000 2,400 1,600 44,000

Agreed capital of Noel (P220,000 x 1/5) ............................................... P 44,000 Contributed capital of Noel .................................................................... _40,000 Bonus to Noel ........................................................................................ P 4,000 g.

Cash .... ... .... ...................................................................................... Goodwill . .... ...................................................................................... Noel, capital ................................................................................. Subas, capital (P60,000 x 3/5)...................................................... Tony, capital (P60,000 x 2/5) .......................................................

P60,000 60,000 P 60,000 36,000 24,000

Total agreed capital (P60,000  1/5) .................................................... P300,000 Total contributed capital (P180,000 + P60,000) ................................... _240,000 Goodwill to old partner, 3:2.................................................................. P 60,000 Problem 3 – 8 a.

b.

c.

Conny, capital ..................................................................................... Andy, capital (P8,000 x 3/4) ............................................................... Benny, capital (P8,000 x 1/4) ............................................................. Cash .. .... ......................................................................................

40,000 6,000 2,000

Goodwill . .... ...................................................................................... Conny, capital ..................................................................................... Cash .. .... ......................................................................................

10,000 40,000

Goodwill (P5,000  1/5) ..................................................................... Conny, capital ..................................................................................... Andy, capital (P25,000 x 3/5) ...................................................... Benny, capital (P25,000 x 1/5) ..................................................... Cash ......................................................................................

25,000 40,000

48,000

50,000

15,000 5,000 45,000

Problem 3 – 9 a.

b.

Spade, capital ...................................................................................... Jack, capital ..................................................................................

120,000

Goodwill (P30,000  50%) ................................................................. Ace, capital................................................................................... Jack, capital .................................................................................. Spade, capital ...............................................................................

60,000

Spade, capital (P120,000 + P30,000).................................................. Jack, capital ..................................................................................

150,000

120,000

12,000 18,000 30,000

150,000


55

Problem 3-9 (Continued)

c.

d.

e.

f.

g.

Spade, capital ...................................................................................... Cash .. .... ......................................................................................

180,000

Ace, capital (P60,000 x 2/5) ............................................................... Jack, capital (P60,000 x 3/5)............................................................... Spade, capital ...............................................................................

24,000 36,000

Land .... ... .... ...................................................................................... Ace, capital (20%) ........................................................................ Jack, capital (30%) ....................................................................... Spade, capital (50%) ....................................................................

20,000

Spade, capital ...................................................................................... Ace, capital (P50,000 x .40) ............................................................... Jack, capital (P50,000 x .60) ............................................................... Cash .. .... ...................................................................................... Land.. .... ......................................................................................

130,000 20,000 30,000

Goodwill . .... ...................................................................................... Spade, capital ...................................................................................... Cash .. .... ......................................................................................

30,000 120,000

Goodwill (P30,000  50%) ................................................................. Spade, capital ...................................................................................... Ace, capital (P60,000 x 20%)....................................................... Jack, capital (P60,000 x 30%) ...................................................... Cash .. .... ......................................................................................

60,000 120,000

Land .... ... .... ...................................................................................... Ace, capital (20%) ........................................................................ Jack, capital (30%) ....................................................................... Spade, capital (50%) ....................................................................

P40,000

180,000

60,000

4,000 6,000 10,000

60,000 120,000

150,000

12,000 18,000 150,000

Spade, capital (P120,000 x P20,000) .................................................. 140,000 Ace, capital (P10,000 x 40%) ............................................................. 4,000 Jack, capital (P10,000 x 60%) ............................................................ 6,000 Land.. .... ...................................................................................... Note payable.................................................................................

8,000 12,000 20,000

100,000 50,000

56

Chapter 3

Problem 3 – 10

Case 1: Bonus of P10,000 to Eddy: Eddy, capital................................................................................. Charly, capital (P10,000 x 3/5) .................................................... Danny, capital (P10,000 x 2/5)..................................................... Cash ......................................................................................

70,000 6,000 4,000

Case 2: Partial Goodwill to Eddy: Goodwill ...................................................................................... Eddy, capital................................................................................. Cash ......................................................................................

4,000 70,000

Case 3: Bonus of P5,000 to remaining partner : Eddy, capital................................................................................. Charly, capital (P5,000 x 3/5) ................................................ Danny, capital (P5,000 x 2/5) ................................................ Cash ...................................................................................... Case 4: Total Implied Goodwill of P24,000: Goodwill ...................................................................................... Eddy, capital................................................................................. Charly, capital (P24,000 x 3/6) .............................................. Danny, capital (P24,000 x 2/6) .............................................. Cash ...................................................................................... Case 5: Other assets disbursed : Eddy, capital................................................................................. Other assets .................................................................................. Charly, capital (P60,000 x 3/6) .............................................. Danny, capital (P60,000 x 2/6) .............................................. Cash ...................................................................................... Case 6: Danny purchases Eddy's capital interest : Eddy, capital................................................................................. Danny, capital ........................................................................

80,000

74,000

70,000 3,000 2,000 65,000

24,000 70,000 12,000 8,000 74,000

70,000 20,000 30,000 20,000 40,000

70,000 70,000


57

Problem 3 – 11 a. 1/1/06

Building ............................................................... Equipment............................................................ Cash .................................................................... Santos capital .............................................. To record initial investment .

52,000 16,000 12,000

12/31/06 Reyes capital ........................................................ Santos capital .............................................. Income summary ......................................... To record distribution of loss as follows :

22,000

1/1/07

40,000

12,000 10,000

Interest ................................................................. Additional profit .................................................. Balance to Reyes..................................................

Santos P 8,000 4,000 ______

Reyes P –

(22,000)

Total P 8,000 4,000 (22,000)

Total ....................................................................

P12,000

P(22,000)

(P10,000)

Cash .................................................................... Santos capital (15%) ............................................ Reyes capital (85%) ............................................. Cruz capital .................................................

15,000 300 1,700 17,000

(new investment by Cruz brings total capital to P85,000 after 2006 loss [80,000 – 10,000 + 15,000]. Cruz's 20% interest is P17,000 [85,000 x 20%] with the extra P2,000 coming from the two original partners [allocated between them according to their profit and loss ratio].)

12/31/07 Santos capital ....................................................... Reyes capital ........................................................ Cruz capital .......................................................... Santos drawings .......................................... Reyes drawings ........................................... Cruz drawings .............................................

10,340 5,000 5,000 10,340 5,000 5,000

To close drawings accounts for the year based on distributing 20%. Of each partner's beginning capital balances [after adjustment for Cruz's investment] or P5,000 whichever is greater. Santos's capital Is P51,700 [40,000 + 12,000 – 300].)

12/31/07 Income summary ................................................. Santos capital .............................................. Reyes capital ............................................... Cruz capital ................................................. To allocate P44,000 income figure as computed below : Santos Interest (20% of P51,700) .................................... P10,340 15% of P44,000 income....................................... 6,600 Balance, 60:40 ..................................................... ______ Total ....................................................................

P16,940

44,000 16,940 16,236 10,824 Reyes

Cruz

P16,236

P10,824

P16,236

P10,824

58

Chapter 3

Capital balances as of December 31, 2008

1/1/08

Initial investment, 2007 ....................................... 2007 profit ........................................................... Cruz investment ................................................... 2007 drawings...................................................... 2007 profit ...........................................................

Santos P40,000 12,000 (300) (10,340) _16,940

Reyes P40,000 (22,000) (1,700) (5,000) _16,236

P17,000 (5,000) _10,824

Capital, 12/31/07 .................................................

P58,300

P27,536

P22,824

Cruz capital .......................................................... Diaz capital ................................................. To transfer capital purchase from Cruz to Diaz

Cruz

22,824 22,824

12/31/08 Santos capital ....................................................... 11,660 Reyes capital ........................................................ 5,507 Diaz capital .......................................................... 5,000 Santos drawings .......................................... 11,660 Reyes drawings ........................................... 5,507 Diaz drawings ............................................. 5,000 To close drawings accounts based on 20% of beginning capital Balances (above) or P5,0000 (whichever is greater). 12/31/08 Income summary ................................................. Santos capital .............................................. Reyes capital ............................................... Diaz capital ................................................. To distribute profit for 2008 computed as follows :

1/1/09

b. 1/1/06

61,000 20,810 24,114 16,076 Reyes

Diaz

Interest (20% of P58,300) .................................... 15% of P61,000 profit.......................................... Balance, P40,190, 60:40 ......................................

Santos P11,660 9,150 ______

P24,114

P16,076

Total ....................................................................

P20,810

P24,114

P16,076

Diaz capital .......................................................... 33,900 Santos capital (15%) ............................................ 509 Reyes capital (85%) ............................................. 2,881 Cash............................................................. 37,290 Diaz capital is [33,900 (P22,824 – P5,000 + P16,076)]. Extra 10% is deducted from the two remaining partners' capital accounts. Building ............................................................... Equipment............................................................ Cash .................................................................... Goodwill .............................................................. Santos capital .............................................. Reyes capital ............................................... To record initial investments. Reyes is credited with goodwill of Santos investment .

52,000 16,000 12,000 80,000 80,000 80,000 P80,000 to match


59

12/31/06 Reyes capital .............................................................. 30,000 Santos capital .............................................. 20,000 Income summary ......................................... 10,000 Interest of P16,000 is credited to Santos (P80,000 x 20%) along with a base of P4,000. The remaining profit is now a P30,000 loss which is attributed entirely to Reyes. 1/1/07

Cash .................................................................... 15,000 Goodwill .............................................................. 22,500 Cruz capital ................................................. 37,500 Cash and goodwill contributed by Cruz are recorded . Goodwill is Computed algebraically as follows: P15,000 + goodwill = P15,000 + goodwill = P15,000 + goodwill = .80 goodwill = goodwill =

20% (current capital + P15,000 + goodwill) 20% (P150,000 + P15,000 + goodwill) P33,000 + .20 goodwill P18,000 P22,500

12/31/07 Santos capital ....................................................... 20,000 Reyes capital ........................................................ 10,000 Cruz capital .......................................................... 7,500 Santos drawings .......................................... Reyes drawings ........................................... Cruz drawings ............................................. To close drawings accounts based on 20% of beginning capital Balances: Santos, p100,000; Reyes, P50,000; and Cruz, P37,500. 12/31/07 Income summary ................................................. Santos capital .............................................. Reyes capital ............................................... Cruz capital ................................................. To allocate P44,000 profit as follows:

20,000 10,000 7,500

44,000 26,600 10,400 6,960

Interest (20% of P100,000) .................................. 15% of P44,000 profit.......................................... Balance of P17,400, 60:40 ...................................

Santos P20,000 6,600 ______

Reyes

Cruz

P10,440

P 6,960

Total ....................................................................

P26,600

P10,440

P 6,960

Santos P80,000 20,000

Reyes P80,000 (30,000)

Cruz

Capital balances as of December 31, 2004: Initial investment, 2006 ....................................... 2006 profit allocation........................................... Additional investment.......................................... 2007 drawings...................................................... (20,000) 2007profit allocation............................................ __26,600 Capitals, 12/31/07 ................................................ P106,600

(10,000) _10,440

P37,500 (7,500) __6,960

P50,440

P36,960

60

Chapter 3 1/1/08

Goodwill ...................................................................... 26,588 Santos capital ..................................................... 3,988 Reyes capital ...................................................... 13,560 Cruz capital ........................................................ 9,040 To record goodwill implied of Cruz's interest . In effect, the profit Sharing ratio is 15% to Santos, 51% to Reyes (60% of 85% remaining after Santos's income), and 34% to Cruz (40% of the 85% remaining after Santos' income). Diaz is paying P46,000, P9,040 in excess of Cruz's capital (P36,960). The additional payment for this 34% income Interest indicates total goodwill of P26,588 (P9,040/34%).

1/1/08

Cruz capital .................................................................. Diaz capital ........................................................ To transfer of capital purchase.

46,000

12/31/08 Santos capital ............................................................... Reyes capital ................................................................ Diaz capital .................................................................. Santos drawings ................................................. Reyes drawings .................................................. Diaz drawings .................................................... To close drawings accounts based on 20% of beginning capitals .

22,118 12,800 9,200

12/31/08 Income summary ......................................................... Santos capital ..................................................... Reyes capital ...................................................... Diaz capital ........................................................ To allocate profit for 2008 as follows:

61,000

46,000

22,118 12,800 9,200

31,268 12,800 9,200 Reyes

Diaz

Interest (20% of P110,588) .......................................... 15% of P61,000 ........................................................... Balance of P29,732, 60:40 ...........................................

Santos P22,118 9,150 ______

P17,839

P11,893

Totals ...........................................................................

P31,268

P17,839

P11,893

Santos P106,600 3,988

Reyes P50,440 13,560

Diaz

Capital balances as of December 31, 2008: 12/31/07 balances ........................................................ Goodwill ...................................................................... Capital purchased ........................................................ Drawings...................................................................... Profit allocation ........................................................... 12/31/08 balances ........................................................ 1/1/09

1/1/09

(22,118) __31,268

(12,800) _17,839

P46,000 (9,200) _11,893

P119,738

P69,039

P48,693

Goodwill ...................................................................... 14,321 Santos capital ..................................................... 2,148 Reyes capital ...................................................... 7,304 Diaz capital ........................................................ 4,869 To record implied goodwill . Diaz will be paid P53,562 (110% of the capital balance for his interest. This amount is P4,869 in excess of the capital account. Since Diaz is only entitled to a 34% share of profits and losses, the additional P4,869 must indicate that the partnership as a whole is undervalued by P14,321 (P4,869/34%) which is treated as goodwill. Diaz capital .................................................................. 53,562 Cash.................................................................... 53,562 To record settlement to Diaz.


61

Problem 3 – 12 Partnership Books Continued as Books of Corporation Ent r ies in the Books of th e Corporati on

(1) Inventories ..... .................................................................... ................. Land ...... ........ .................................................................... ................. Building. ........ .................................................................... ................. Accumulated depreciation – bldg. ...................................... ................. Accumulated depreciation – equipment .............................. ................. Equipment .................................................................. ................. Jack capital ................................................................ ................. Jill capital................................................................... ................. Jun capital.................................................................. ................. To adjust assets and liabilities of the partnership to their current fair values.

26,000 40,000 20,000 20,000 30,000

(2) Cash ...... ........ .................................................................... ................. Jack capital .... .................................................................... ................. Jill capital................................................................... ................. Jun capital.................................................................. ................. To adjust capital accounts of the partners to 4:3:3 ratio.

4,000 18,000

(3) Jack capital .... .................................................................... ................. Jill capital ...... .................................................................... ................. Jun capital...... .................................................................... ................. Capital stock............................................................... ................. To record issuance of stock to the partners.

100,000 75,000 75,000

20,000 58,000 34,800 23,200

20,200 1,800

250,000

New Books Opened for the New Corporation Ent r ies in the Books of th e Partn er shi p

(1) Inventories ..... .................................................................... ................. Land ...... ........ .................................................................... ................. Building. ........ .................................................................... ................. Accumulated depreciation – bldg. ...................................... ................. Accumulated depreciation – equipment .............................. ................. Equipment .................................................................. ................. Jack capital ................................................................ ................. Jill capital................................................................... ................. Jun capital.................................................................. ................. To adjust assets and liabilities of the partnership.

26,000 40,000 20,000 20,000 30,000

(2) Cash ...... ........ .................................................................... ................. Jack capital .... .................................................................... ................. Jill capital................................................................... ................. Jun capital.................................................................. ................. To adjust capital accounts of the partners.

4,000 18,000

20,000 58,000 34,800 23,200

20,200 1,800

62

Chapter 3

(3) Stock of JJJ Corporation .................................................... ................. Accounts payable ................................................................ ................. Loans payable – Jill ............................................................ ................. Cash in bank ............................................................... ................. Accounts payable ....................................................... ................. Inventories .................................................................. ................. Land....... .................................................................... ................. Building . .................................................................... ................. Equipment .................................................................. ................. To record transfer of assets and liabilities to The corporation and the receipt of capital stock

250,000 30,000 40,000

(4) Jack capital .... .................................................................... ................. Jill capital ...... .................................................................... ................. Jun capital...... .................................................................... ................. Stock of JJJ Corporation ............................................ ................. To record issuance of stock to the partners.

100,000 75,000 75,000

44,000 26,000 60,000 60,000 70,000 60,000

250,000

Ent r ies in the Books of th e Corporati on

(1) To record the acquisition of assets and liabilities from the partnership: Cash in bank .. .................................................................... ................. Accounts receivable ............................................................ ................. Inventories ..... .................................................................... ................. Land ...... ........ .................................................................... ................. Building (net) . .................................................................... ................. Equipment (net)................................................................... ................. Accounts payable ....................................................... ................. Loans payable ............................................................ ................. Capital stock............................................................... .................

44,000 26,000 60,000 60,000 70,000 60,000 30,000 40,000 250,000

Problem 3 – 13

a. 1/1/06

12/31/06

Building 1,040,000 Equipment 320,000 Cash 240,000 Lim, capital 800,000 Sy, capital 800,000 (To record initial investment. Assets recorded at market value with two equal capital balances. Sy, capital 440,000 Lim, capital 240,000 Income summary 200,000 (The allocation plan specifies that Lim will receive 20% in interest [or 160,000 based on P800,000 capital balance] plus P80,000 more [since that amount is


63

greater than 15% of the profits from the period]. The remaining P440,000 loss is assigned to Sy.) 1/1/07

Cash 300,000 Lim, capital (15%) 6,000 Sy, capital (85%) 34,000 Tan, capital 340,000 (New investment by Tan brings total capital to P1,700,000 after 2006 loss [P1,600,000 – P200,000 + P300,000]. Tan’s 20% interest is P340,000 [P1,700,000 x 20%] with the extra P40,000 coming from the two original partners [allocated between them according to their profit and loss ratio].)

12/31/07

Lim, capital 206,800 Sy, capital 100,000 Tan, capital 100,000 Lim, drawings 206,800 Sy, drawings 100,000 Tan, drawings 100,000 (To close out drawings accounts for the year based on distributing 20% of each partner’s beginning capital balances [after adjustment for Tan’s investment] or P100,000 whichever is greater. Lim’s cap ital is P1,034,000 [P800,000 + P240,000 – P6,000])

12/31/07

Income summary 880,000 Lim, capital Sy, capital Tan, capital (To allocate P880,000 income figure for 2007 as determined below.)

Interest (20% of P1,034,000 beginning capital balance) 15% of P880,000 income 60:40 split of remaining P541,200 income Total

338,800 324,720 216,480

Lim

Sy

Tan

P206,800 132,000 P338,800

324,720 P524,720

216,480 P216,480

Capital balances as of December 31, 2007: Initial 2006 investment 2006 profit allocation Tan’s investment 2007 drawings 2007 profit allocation 12/31/07 balances 1/1/08

Lim P800,000 240,000 (6,000) (206,800) 338,800 P1,166,000

Sy P800,000 440,000 (34,000) (100,000) 324,720 P550,720

Tan

P340,000 (100,000) 216,480 P456,480

Tan, capital 456,480 Ang, capital (To reclassify balance to reflect acquisition of Tan’s interest.)

456,480

64

Chapter 3

12/31/08

Lim, capital 233,200 Sy, capital 110,140 Ang, capital 100,000 Lim, drawings 233,200 Sy, drawings 110,140 Ang, drawings 100,000 (To close out drawings accounts for the year based on 20% of beginning capital balances [above] or P100,000 [whichever is greater].)

12/31/08

Income summary 1,220,000 Lim, capital 416,200 Sy, capital 482,280 Ang, capital 321,520 (To allocate profit for 2008 determined as follows) Lim Sy Ang Interest (20% of P1,166,000 beg. capital) P233,200 15% of P1,220,000 income 183,000 60:40 split of remaining P803,800 482,280 321,520 Totals P416,200 P482,280 P321,520

b.

1/1/09

Ang, capital 678,000 Lim, capital (15%) 10,180 Sy, capital 85%) 57,620 Cash 745,800 (Ang’s capital is P678,000 [P456,480 – P100,000 + P321,520]. Extra 10% payment is deducted from the two remaining partners’ capital accounts.)

1/1/06

Building 1,040,000 Equipment 320,000 Cash 240,000 Goodwill 1,600,000 Lim, capital 1,600,000 Sy, capital 1,600,000 (To record initial capital investments. Sy is credited with goodwill of P1,600,000 to match Lim’s investment.)

12/31/06

Sy, capital 600,000 Lim, capital 400,000 Income summary 200,000 (Interest of P320,000 is credited to Lim [P1,600,000 x 20%] along with a base of P80,000. The remaining amount is now a P600,000 loss that is attributed entirely to Sy.)

1/1/07

Cash 300,000 Goodwill 450,000 Tan, capital 750,000 (Cash and goodwill being contributed by Tan are recorded. Goodwill must be calculated algebraically.)


65

P300,000 + Goodwill = 20% (Current capital + P300,000 + Goodwill) P300,000 + Goodwill = 20% (P3,000,000 + P300,000 + Goodwill) P300,000 + Goodwill = P660,000 + .2 Goodwill .8 Goodwill = P360,000 Goodwill = P450,000 12/31/07

Lim, capital 400,000 Sy, capital 200,000 Tan, capital 150,000 Lim, drawings 400,000 Sy, drawings 200,000 Tan, drawings 150,000 (To close out drawings accounts for the year based on 20% of beginning capital balances: Lim- P2,000,000, Sy- P100,000, and Tan- P750,000.)

12/31/07

Income summary Lim, capital Sy, capital Tan, capital (To allocate P880,000 income figure as follows) Lim

Interest (20% of P2,000,000) beginning capital balance) 15% of P880,000 income 60:40 split of remaining P348,000 Totals

P400,000 132,000 P532,000

880,000 532,000 208,800 139,200

Sy

Tan

P208,800 P208,800

P139,200 P139,200

Sy P1,600,000 (600,000)

Tan

Capital balances as of December 31, 2007: Initial 2006 investment 2006 profit allocation Additional investment 2007 drawings 2007 profit allocation 12/31/07 balances 1/1/08

Lim P1,600,000 400,000

(400,000) 532,000 P2,132,000

(200,000) 208,800 P1,008,800

P750,000 (150,000) 139,200 P739,200

Goodwill 531,760 Lim, capital (15%) Sy, capital (51%) Tan, capital (34%) (To record goodwill indicated by purchase of Tan’s interest.)

79,760 271,200 180,800

In effect, profits are shared 15% to Lim, 51% to Sy – (60% of the 85% remaining after Lim’s income), and 34% to Tan (50% of the 85% remaining after Lim’s income). Ang is paying P920,000, an amount P180,800 in excess of Tan’s capital (P739,200). The additio nal payment for this 34% income interest indicates total goodwill of P531,760 (P180,800/34%). Since Tan is entitled to 34% of the profits but only holds 19% of the total capital, an implied value for the

66

Chapter 3

company as a whole cannot be determined directly from the payment of P920,000. Thus, goodwill can only be computed based on the excess payment. 1/1/08

Tan, capital Ang, capital (To reclassify capital balance to new partner.)

920,000 920,000

12/31/08

Lim, capital 442,360 Sy, capital 256,000 Ang, capital 184,000 Lim, drawings 442,360 Sy, drawings 256,000 Ang, drawings 184,000 (To close out drawings accounts for the year based on 20% of beginning capital balances [after adjustment for goodwill].)

12/31/08

Income summary Lim, capital Sy, capital Ang, capital

1,220,000 625,360 356,780 237,860

To allocate profit for 2008 as follows: Lim Interest (20% of P2,211,760 beginning capital balance) P442,360 15% of P1,220,000 income 183,000 60:40 split of remaining P594,640 Totals P625,360

Sy

Ang

356,780 P356,780

237,860 P237,860

Sy P1,008,00 271,200 ( 256,000) 356,780 P1,380,780

Ang P739,200 180,800 (184,000) 237,860 P973,860

Capital balances as of December 31, 2008: 12/31/07 balances Adjustment for goodwill Drawings Profit allocation 12/31/08 balances

Lim P2,132,000 79,760 (442,360) 625,360 P2,394,760

Ang will be paid P1,071,240 (110% of the capital balance) for her interest. This amount is P97,380 in excess of the capital account. Since Ang is only entitled to a 34% share of profits and losses, the additional P97,380 must indicate that the partnership as a whole is undervalued by P286,420 (P97,380/34%). Only in that circumstance would the extra payment to Ang be justified: 1/1/09

Goodwill Lim, capital (15%) Sy, capital (51%) Ang, capital (34%) (To recognize implied goodwill.)

286,420 42,960 146,080 97,380


1/1/09

Ang, capital Cash (To record final distribution to Ang.

67

1,071,240 1,071,240

68

Chapter 4


PAR

BOOGIE

BIRDIE

Capital balances before realization Loss on liquidation, P40,000

P 20,000 ( 20,000)

P 16,000 ( 12,000)

P 10,000 ( 8,000)

Cash distri bution

P

–

P 4,000

P 2,000

PING

PANG

PONG

Capital balances before liquidation Gain of P10,000 (150,000-140,000)

P 50,000 __6,000

P 50,000 __2,000

P 10,000 __2,000


P 56,000

P 52,000

P 12,000

PING

PANG

PONG

4-2: c

4-3: b

Capital balances before liquidation Loss of P40,000 (P140,000-P100,000)

P 50,000 ( 24,000)

P 50,000 ( 8,000)

P 10,000 ( 8,000)


P 26,000

P 42,000

P 2,000

PING

PANG

PONG

4-4: a

Capital balances before liquidation Loss of P70,000 (P140,000-P70,000)

P 50,000 ( 42,000)

P 50,000 ( 14,000)

P 10,000 ( 14,000)

Balances Absorption of Pong's deficiency, 6:2

P8,000 ( 3,000)

P 36,000 ( 1,000)

( 4,000) __4,000


P 5,000

P 35,000

–

4-5: b

COLT

MARK

CLOCK

Capital balances before liquidation (net of loans)P290,000 P200,000 Loss of P130,000, 4:3:3 ( 52,000) ( 39,000)

P220,000 ( 39,000)


P238,000

P161,000

P181,000

JONAS

CARLOS

TOMAS

Capital balances before liquidation Loss of P60,000, 40:50:10

P160,000 ( 24,000)

P 45,000 ( 20,000)

P 55,000 ( 6,000)


P136,000

P 25,000

P 49,000

4-6: c

Partnership Liquidation

69

4-7: a

ARIEL

BERT

CESAR

Capital balances before liquidation Loss of P100,000, 4:3:3

P40,000 ( 40,000)

P180,000 ( 30,000)

P 30,000 ( 30,000)

Cash distribution

P

–

P150,000

P

NORY

OSCAR

–

4-8: b

Capital balances before realization Additional investment by Nory for the unpaid liabilities (33,000-18,000) Loss on realization (schedule 1)

P23,000

P 13,500

15,000 ( 30,900)

– ( 20,600)

Payment by Oscar to Nor y

P 7,100

( P7,100)

Schedule 1 Total capital before liquidation Unpaid liabilities

P 36,500 15,000

Total loss on realization

P 51,500

4-9: d

BLACK

WHITE

GREEN

Capital balances before liquidation (net) Loss on realization (schedule 1) P27,500

P99,000 ( 13,750)

P 91,500 ( 27,500)

P138,000 _( 5,500)

Bal ances, cash distri buti on

P85,250

P 64,000

P132,500

Schedule 1: Capital balances of white (net) Cash received by White

P 91,500 _83,250

White's share of total loss (30%)

P 8,250

Total loss on realization (P8,250/39%)

P 27,500

4-10: c

ANA

EVA

NORA

P27,000 ( 25,320)

P 43,000 ( 25,320)

P 10,000 ( 12,660)

Balances Unrecorded liabilities, P500

P 1,680 ( 200)

P 17,680 ( 200)

( 2,660) ( 100)

Balances Elimination of Nora's deficiency

P 1,480 ( 1,380)

P 17,480 ( 1,380)

( 2,760) __2,760

Payment to partn er s

P

100

P 16,100

P

ARIES

LEO

TAURUS

Capital balances before liquidation (net) Loss on realization (schedule 1) P45,000

P33,500 ( 22,500)

P 49,000 ( 13,500)

P 36,500 ( 9,000)


P11,000

P 35,500

P 27,500

Capital balances before liquidation (net) Loss on realization, P63,600

–

4-11: d

70

Chapter 4

Schedule 1:

Taurus capital (net) Payment to Taurus

P36,500 ( 27,500)

Share of total loss (20%)

P 9,000

Total loss on realization (9,000/20%)

P45,000

4-12: c

TOTAL

MONA

NORA

OLGA

P32,700 ( 9,800)

P15,000 ( 4,200)

P13,500 ( 2,800)

P 4,200 ( 2,800)

P22,900 ( 17,500)

P10,800 ( 7,500)

P10,700 ( 5,000)

P 1,400 ( 5,000)

Balances Additional investment by Olga

P 5,400 _1,500

P 3,300 _____ –

P 5,700 _____ –

( 3,600) _1,500

Balances Elimination of Olga's deficiency

P 6,900 ______

P 3,300 ( 1,260)

P 5,700 ( 840)

( 2,100) _2,100


P 6,900

P 2,040

P 4,860

P

RITA

SARA

TITA

Capital balances, June 11 Net loss from operation (squeeze) Capital balances, August 30 before liquidation (48,500-25,600) Loss on realization (47,500-30,000)

–

4-13: b

Capital balances before liquidation Operating loss, P21,000 Drawings Loans Loss on realization, P12,000

P49,000 ( 3,500) ( 10,000) – ( 2,000)

P18,000 ( 7,000) ( 15,000) 8,000 ( 4,000)

P10,000 ( 10,500) ( 20,000) 25,000 ( 6,000)

Balances Absorption of Tita's deficiency

P33,500 __1,500

P – _____ –

( 1,500) _1,500

Payment to Nor a

P32,000

P

–

P

–

4-14: a

CLARO

PEDRO

ANDRO

P45,000

P27,000

P50,000

( 24,000)

( 24,000)

( 12,000)

P21,000

P 3,000

P38,000

TOTAL

MONA

Capital balances before liquidation (inclusive loans) Loss on realization, (squeeze)

P47,500 ( 38,500)

P28,500 ( 23,100)

P19,000 ( 15,400)

Capit al balances - cash distri buti on

P 9,000

P 5,400

P 3,600

Capital balances before liquidation Loss on realization Accounts Receivable (P50,000 X 40%) Investment (P30,000 - P20,000) Equipment (P60,000-P30,000) Total

P20,000 10,000 _30,000 P60,000


4-15: c

LISA


71

Cash after realization Less Liabilities (P36,000-P7,500)

P 37,500 ( 28,500)

Total capital after realization

P 9,000

4-16: a

FF capital before distribution of net loss Add: share of net loss (P10,000 X 40%) FF capital before liquidation Cash settlement to FF

P100,000 _( 4,000) 96,000 ( 80,000)

FF share of total loss on realization (40%)

P 16,000

Total loss on realization (P16,000/40%)

P 40,000

Total capital before liquidation (P260,000-P10,000) Add: Liabilities

P250,000 _100,000

Total assets Cash before liquidation

P350,000 ( 50,000)

Non-cash assets Loss on realization

P300,000 ( 40,000)

Cash to be r eal ized

P260,000

4-17: d

TOTAL

CC

DD

EE

Capital balances before realization (net) Loss on realization (squeeze) Capital balances after realization (liabilities-unpaid)

P100,000 ( 125,000)

P 15,000 ( 62,500)

P22,500 ( 37,500)

P62,500 ( 25,000)

(P 25,000)

( 47,500)

( 15,000)

P37,500

Elimination of CC's deficiency

_______ –

__47,500

( 28,500)

( 19,000)

Balances Investment by DD

(P 25,000) __43,500

– ______ –

(P43,500) _43,500

P18,500 – _____

Payment to EE

P 18,500

P

–

P18,500

–

4-18: d

Total capital before liquidation Liabilities

P 30,000 __1,500

Total assets Less: Cash balance before realization Cash after payment of liabilities payment of liabilities Cash realized

P 31,500 P 11,100 1,500 ( 11,600)

__1,000

Non-cash asset Less: cash realized

P 30,500 _11,600

L oss on r eali zation

P 18,900

P

72

Chapter 4

4-19: d

LL

MM

NN

TOTAL

Capital balances Salary of LL (P600 X 8 months)

P 50,000 __4,800

P 20,000 _______

P 10,000 _______

P 80,000 ___4,800

Capital balances before liquidation Loss on realization

P 54,800 ( 44,880)

P 20,000 ( 14,960)

P 10,000 ( 14,960)

P 84,800

Balances Additional investment by NN

P 9,920 ______ –

P 5,040 _____ –

(P 4,960) __4,960


P 9,920

P 5,040

P

–

4-20: b

KK's total interest (P60,000-P10,000) Less: Cash to be paid to KK

P 50,000 __10,000

Share of total loss (1/3)

P 40,000

Total loss on realization (P40,000/1/3)

P120,000

Total assets: Total interest of the partners before liquidation: JJ (P70,000+P30,000+P10,000) KK (P60,000-P10,000) LL (P30,000+P10,000) Divide by

P110,000 50,000 __40,000

P200,000 ______50%

Total Loss on realization

P400,000 _120,000

Cash to be r eal ized

P280,000

4-21: a

TOTAL

NN

OO

PP

P 25,000 – 20,000

P 25,000 – –

_______

400 _______

___2,500

Capital balances, July 1 Advances to NN, August 1 OO Loan, September 1 Interest, December 31 (6%) NN (5 mos.) OO (4 mos.) Compensation to PP

P 75,000 ( 10,000) 20,000

Capital balances before liquidation Loss on realization (squeeze)

P 87,650 _56,250

P 14,750 ( 17,550)

P 45,400 ( 17,550)

P 27,500 ( 17,550)

Cash distribution

P 35,000

( 2,800)

P 27,850

P 9,950

(

250) 400 __2,500

P 25,000 ( 10,000) – (

250)

NN shoul d pay P2,800 and thi s i s to be divi ded to OO & PP equall y or P1,400 each.


73

4-22: a

TOTAL

Capital balances before realization Loss on realization (squeeze) Capital balances after realization (unpaid liabilities) Elimination of AS's deficiency Cash to be absor bed

PG

P 950,000 ( 1,000,000)

P350,000 __20,000

(P 50,000) _______ –

P 50,000 ( 90,000)

–

(P 40,000)

P

JR

AS

P250,000 P350,000 ( 200,000) _500,000 P 50,000 ( 150,000) ( 60,000) P150,000 (P 10,000) P

–

4-23: a

RM

ST

Capital balances before realization (net) Loss on realization, P1,225,000

P500,000 ( 490,000)

P825,000 ( 735,000)

Payment to Part ners

P 10,000

P 90,000

4-24: a

TOTAL

LT

AM

ZP

Capital balances before realization (net) Gain on realization (squeeze)

P 27,500 __37,500

P 20,000 _18,750

P 5,000 __-9,375

P 2,500 __9,375

Capit al balances after r eali zati on

P 65,000

P 38,750

P 14,375

P 11,875

AG

BM

CP

DJ

4-25: c

Capital balances before realization (net) Loss on realization, P1,000,000

P 420,000 ( 300,000)

P375,000 ( 300,000)

P205,000 (200,000)

Balances

P 120,000

P 75,000

P

5,000 P(50,000)

Addi ti onal in vestment by DJ

50,000

4-26: a

Settlement to Uy Uy capital before liquidation (net): Uy capital Receivable from Uy Loss of Uy (50%)

P351,500 P553,500 ( 132,000)

421,500 P 70,000

Total loss on realization (P70,000 ÷ 50%)

CB before liquidation Receivable from Uy Loan to Wi Salary payable to Vi Interest before realization Loss on realization Settl ement to partn ers

P150,000 (200,000)

__ Uy__ 553,500 (132,000)

P140,000 __Vi__ 452,500

__Wi__ 486,000

421,500 ( 70,000)

135,000 587,500 ( 42,000)

445,500 ( 28,000)

__Total__ 1,492,000 (132,000) (40,500) 135,000 1,454,500 ( 140,000)

351,500

545,500

417,500

1,314,500

( 40,500)

74

Chapter 4


Case 1

Rivas and Briones Statement of Liquidation December 31, 2008

Assets Cash Others Liabilities

Rivas, Loan

Partners' Capitals Briones, Rivas Briones Loan (90%) (10%)

Balances before liquidation ... P 20,000 P200,000 P132,000 P 18,000 P 20,000 Realization of assets and distribution of loss .......... _134,000 ( 200,000) _______ _______ _______

P40,000 P10,000 ( 59,400) ( 6,600)

Balances................................. 154,000 – 132,000 Payment of liabilities ............. ( 132,000) ______ – ( 132,000)

18,000 20,000 ( 19,400) 3,400 ______ _______ _______ ______

Balances................................. Offset Rivas' loan against his capital deficiency ............

18,000

22,000

–

–

20,000

( 19,400)

3,400

_______ _______ _______ ( 18,000) _______

_18,000 ______

– – – 20,000 Balances................................. 22,000 Additional loss to Briones ..... _______ _______ _______ _______ _______

( 1,400) 3,400 __1,400 ( 1,400)

Balances................................. 22,000 Payment to partner................. P(22,000)

– –

– –

– 20,000 – P(20,000)

– 2,000 – P(2,000)

Case 2


Assets Cash Others Liabilities

Balances before liquidation ... Realization of assets and distribution of loss ..........

Rivas, Loan

Partners' Capitals Briones, Rivas Briones Loan (70%) (30%)

P20,000 P200,000 P132,000 P 18,000 P 20,000

P40,000 P10,000

134,000 ( 200,000) _______

( 46,200) ( 19,800)

Balances................................. 154,000 – 132,000 Payment of liabilities ............. ( 132,000) _______ ( 132,000)

______ _______

18,000 20,000 ( 6,200) 9,800 ______ _______ _______ ______

Balances................................. 22,000 20,000 ( 6,200) 9,800 – – 18,000 Offset loan against capital deficiency ........................ ________ _______ _______ ( 6,200) ( 9,800) __6,200 __9,800 Balances................................. 22,000 Payment to partner................. P(22,000)

– –

10,200 – 11,800 – P(11,800) P(10,200)

– –

– –


75

Case 3


Assets Cash Others

Liabilities

Rivas, Loan

Briones, Loan

Partners' Rivas (50%)

Capitals Briones (50%)

Balances before liquidation ........ Realization of assets and distribution of loss ...............

P 20,000

P200,000

P132,000

P 18,000

P20,000

P40,000 P10,000

_134,000

( 200,000)

_______

_______

______

( 33,000) ( 33,000)

Balances ..................................... Payment of liabilities ..................

154,000 ( 132,000)

18,000

20,000 __

( 7,000) ( 23,000) _ _______

Balances ..................................... Offset Briones'' loan against his capital deficiency ...........

22,000

–

–

18,000

20,000

( 7,000) ( 23,000)

_______

_______

_______

_______

( 20,000)

______ _20,000

Balances ..................................... Additional loss to Rivas ..............

22,000 _______

– _______

– _______

18,000 _______

– _______

7,000 ( 3,000) ( 3,000) __3,000

Balances ..................................... Payment to partner......................

22,000 P(22,000)

– –

18,000 – – P(18,000)

– –

– 132,000 _______ ( 132,000)

4,000 P( 4,000)

– –

Journal Entri es Case 1:

Cash ..... .... ................................................................................................... Rivas, Capital ................................................................................................ Briones, Capital ............................................................................................ Other Assets ........................................................................................... Liabilities .. ................................................................................................... Cash ... ................................................................................................... Rivas, Loan ................................................................................................... Rivas, Capital ......................................................................................... Briones, Capital ............................................................................................ Rivas, Capital ......................................................................................... Briones, Loan ................................................................................................ Briones, Capital ............................................................................................ Cash ...................................................................................................

134,000 59,400 6,600 200,000 132,000 132,000 18,000 18,000 1,400 1,400 20,000 2,000 22,000

Case 2:

Cash ..... .... ................................................................................................... Rivas, Capital ................................................................................................ Briones, Capital ............................................................................................ Other Assets ........................................................................................... Liabilities .. ................................................................................................... Cash ... ................................................................................................... Rivas, Loan ................................................................................................... Briones, Loan ................................................................................................ Rivas, Capital ......................................................................................... Briones, Capital ..................................................................................... Rivas, Loan ................................................................................................... Briones, Loan ................................................................................................ Cash ... ...................................................................................................

134,000 46,200 19,800 200,000 132,000 132,000 6,200 9,800 6,200 9,800 11,800 10,200 22,000

76

Chapter 4

Case 3:

Cash .... ... ........................................................................................... Rivas, Capital...................................................................................... Briones, Capital .................................................................................. Other Assets ................................................................................. Liabilities ........................................................................................... Cash .. ........................................................................................... Briones, Loan...................................................................................... Briones, Capital ............................................................................ Rivas, Capital...................................................................................... Briones, Capital ............................................................................ Rivas, Loan ......................................................................................... Rivas, Capital...................................................................................... Cash .. ...........................................................................................

134,000 33,000 33,000 200,000 132,000 132,000 20,000 20,000 3,000 3,000 18,000 4,000 22,000

Problem 4 – 2

Blando and Castro Statement of Liquidation April 30, 2008

A s s e t s Cash Receivables Inventory Balances before liquidation .................... P 18,000 Collection of receivables and distribution of loss ....... _37,500 Balances ............................ Realization of inventory and distribution of loss ............................... Balances ............................ Realization of other assets and distribution of loss ..........................

55,500

_30,000 85,500

_40,000

Balances ............................ 125,500 Payment of accounts payable......................... ( 42,000) Balances ............................ 83,500 Payments to partners….. … P(83,500)

Others

Accounts Payable

Blando, Loan

Partners' Blando (60%)

Capitals Castro (40 %)

P102,000

P99,000

P75,000

P90,000

P84,000

P42,000

P 24,000

( 75,000)

_______ _______

_______

_______

84,000

42,000

( 90,000) _______

–

_______ –

_______ –

_______

90,000

–

_______ –

( 22,500)

( 15,000)

24,000

79,500

84,000

_______

_______

( 36,000)

( 24,000)

84,000

42,000

24,000

43,500

60,000

( 84,000)

_______

_______

( 26,400)

( 17,600)

–

42,000

24,000

17,100

42,400

( 42,000)

_______

_______

_______

_______ _______

–

–

–

–

–

–

–

–

24,000 17,100 P(24,000) P( 17,100)

42,400 P(42,400)


77

Problem 4 – 3 a.

Electric Company Statement of Partnership Realization and Liquidation June 30, 2008

Capital Balances Amp Volt Watt 50% 30% 20%

Cash

Amp. Loan

Noncash Assets

Liabilities

Volt, Loan

20,000

15,000

135,000

30,000

10,000

80,000

36,000

14,000

_95,000

______

(135,000)

______

______

(20,000)

(12,000)

( 8,000)

115,000

15,000

-0-

30,000

10,000

60,000

24,000

6,000

_(30,000)

______

_______

(30,000)

______

_______

______

______

85,000 Offset Amp, receivable Payments to partners: Loan (10,000) Capitals _(75,000)

15,000

-0-

10,000

60,000

24,000

6,000

(45,000)

(24,000)

( 6,000)

-095,000 20,000 12,000 8,000

-0-

-0-

Balances Sale of assets at a loss Payment to creditors

-0-

(15,000)

(15,000)

_______

_______

(10,000) ______

Balances -0-0-0b. (1) Cash Amp, Capital Volt, Capital Watt, Capital Noncash Assets Sell noncash assets at a loss of P40,000.

-0-

-0-

______

135,000

(2) Liabilities Cash Pay creditors.

30,000

(3) Amp, Capital Amp, Loan Offset receivable from Amp against his capital credit .

15,000

(4) Volt, Loan Amp, Capital Volt, Capital Watt, Capital Cash Final lump-sum distribution to partners .

10,000 45,000 24,000 6,000

30,000

15,000

85,000

Note: All partners permitted Amp to offset his receivable against his capital credit. Alternatively, Amp could be required to pay the partnership the P15,000 receivable; the partnership would then pay him an additional P15,000 for his capital credit. In this case, an offset of the receivable against the capital credit is reasonable, provided the receivable is not interest-bearing, Amp has a sufficient capital credit, Amp is personally solvent, and the note is not secured against specific assts of Amp. The offset is not automatic, but must be determined by the terms of the initial note, and by the partners.

78

Chapter 4

Problem 4 – 4 a.

b.

Bina, capital before liquidation ..................................................................... .................. Payment to Bina ............................................................................................ ..................

P320,000 _128,000

Loss absorbed by Bina (40%) ....................................................................... ..................

P192,000

Loss on realization (P192,000

P480,000



40%) .......................................................... ..................

AIDA, BINA & CELIA Statement of Partnership Liquidation January 1, 2008

Cash

Other Assets

Balances before liquidation . Realization & dist. of loss ...

P80,000 240,000

P720,000 ( 720,000)

Aida (5) P320,000 ( 240,000)

Balances .... .... .................... Settlement to partners .........

320,000 (320,000)

– _______

80,000 ( 80,000)

Capital Bina (4) P320,000 ( 192,000)

Celia (1) P160,000 ( 48,000)

128,000 ( 128,000)

112,000 ( 112,000)

Problem 4 – 5 a.

LL, capital before liquidation ........................................................................ .................. Settlement to LL ........................................................................................... ..................

P 70,000 __98,000

Gain realized by LL (20%) ........................................................................... ..................

P 28,000

Total gain on realization (P28,000  20%) ................................................... .................. Other assets sold ........................................................................................... ..................

P140,000 _500,000

Selling price b.

.............................................................................................. ..................

P640,000

JJ, KK & LL Statement of Liquidation

Balances before liquidation ... Realization & Dist. of gain ...

Cash

Other Assets

Liabilities

P50,000 640,000

P500,000 ( 520,000)

P60,000 _______

Balances .... .... ...................... 690,000 Payment of liabilities ............ ( 60,000) Payment to Partners .............. (630,000)

–

_______

JJ (4)

P180,000 __56,000

60,000 236,000 ( 60,000) _______ ( 236,000)

Capital KK(4) (LL(2)

P240,000 __56,000

P70,000 _28,000

296,000

98,000

( 296,000)

( 98,000)


79

Problem 4 – 6 a.

BB ................................................... P160,000 CC ................................................... P20,000 DD................................................... P60,000 EE ................................................... P – 0 –

b.

BB, CC, DD, & EE Statement of Liquidation

Cash

Balances before liquidation ... P 0 Advances by BB to pay liabilities Deposit by DD ...................... 60,000 Balances .... .... ...................... Elimination of EE's deficiency Elimination of DD's deficiency

60,000

Payment to partners...............

60,000

Liabilities

C a p i t CC (10%)DD (20%)

BB (30%)

P80,000

a

l EE (40%)

P60,000 P160,000 ( 60,000) 60,000 ______ _______

_______

__60,000

220,000 ( 90,000) ______ __( 90,000)

80,000 ( 30,000) ( 30,000)

( 60,000) ( 180,000) ( 60,000) 180,000 120,000 –

–

40,000

–

20,000

(P120,000) P(180,000) ________

–

–

Problem 4 – 7 Sayson and Company Statement of Liquidation – Date –

Assets Cash Noncash

Liabilities Accounts Notes Payable Payable

P a r t n e r s' C a p i t a l s Peña Sayson Zobel Ayala Loan (45%) (30%) (15%)

Balances before liquidation ... Realization of assets and distribution of gain ..........

P 15,000

P155,250

P11,250

P9,000

P 1,500

P 75,345

185,000

( 155,250)

_______

______

______

17,850

11,900

Balances................................ Payment of liabilities ............

200,000 ( 20,250) ________

11,250 ( 11,250)

9,000 ( 9,000)

1,500 ______

93,195 ______

98,398 ( 14,993) ______ _______

1,650 ______

-

-

1,500

93,195

98,398 ( 14,993)

1,650

______

( 7,937)

( 5,292)

1,500

85,258

93,106

( 114)

______

______

1,386

85,258

93,106

Balances................................ Additional loss to Sayson, Zobel and Peña; 45:30:10 ..........................

179,750

-

_______ ________ ________

Balances................................ Offset Peña's loan against his capital deficiency .......

179,750

-

_______

________

Balances................................

179,750

-

Payments to partners .............

P(179,750)

________ -

______ ______ -

P 86,498 P(14,993)

Peña (10%)

P(1,386) P(85,258) P(93,106)

______

14,993 _______ -

P1,650 ______

( 1,764) (114) 114

80

Chapter 4

Problem 4 – 8 a.

Art, Bea and Cid Partnership Statement of Liquidation June 4, 2008

Cash

Assets Other

Balances before liquidation (including Bea loan, P4,000) ...... P 6,000 Realization of assets at a loss of P63,300 .................. 30,000 Unrecorded accounts payable ......... Payment to creditors ....................... (20,500)

Liabilities

Partners' Capital Art (40%) Bea (40%) Cid (20%)

P94,000

P20,000

P27,000

P43,000

( 94,000) ______

(25,320) 500 (20,500)

(25,320) (200) ______

(12,660) (200) ______

(100) ______

Balances .... .... ................................ 16,200 Eliminate Cid's deficit ..................... ______

______

______

1,480 (1,380)

17,480 (1,380)

(2,760) _2,760

Balances .... .... ................................ 16,200 Payment to Partners ........................ (16,200)

-

-

100 _( 100)

16,100 ( 16,100)

b. 2008 July 5

c.

-

-

Cash .... .... ................................ ............. .................. .................. Art capital (P63,300 x 40%) ....... ............. .................. .................. Bea capital (P63,300 x 40%) ...... ............. .................. .................. Cid capital (P63,300 x 20%) ...... ............. .................. .................. Other assets ....................... ............. .................. .................. To record realization of other assets at a loss of P63,300.

30,700 25,320 25,320 12,660

Art capital (P500 x 40%)............ ............. .................. .................. Bea capital (P500 x 40%) ........... ............. .................. .................. Cid capital (P500 x 20%) ........... ............. .................. .................. Liabilities .......................... ............. .................. .................. To record trade accounts payable .

200 200 100

Liabilities .. ................................ ............. .................. .................. Cash . ................................ ............. .................. .................. To record payment of liabilities.

20,500

Art capital .. ................................ ............. .................. .................. Bea capital . ................................ ............. .................. .................. Cid capital ......................... ............. .................. .................. To eliminate Cid's capital deficit .

1,380 1,380

Art capital .. ................................ ............. .................. .................. Bea capital . ................................ ............. .................. .................. Cid capital . ................................ ............. .................. .................. Cash . ................................ ............. .................. .................. To record payments to partners to complete liquidation .

100 4,000 12,100

P10,000

94,000

500

20,500

2,760

16,200

Cid's loss must be limited to P5,000, or P25,000 for the partnership (P5,000 / 20% = P25,000). Because the liquidation of liabilities results in a loss of P500, only P24,500 may be lost on the realization of other assets. This requires that other assets realize P69,500 (P94,000 – 24,500) to enable Cid to receive P5,000 from the partnership to pay personal creditors in full.

-

Problem 4 – 9 KGB Partnership Statement of Realization and Liquidation Lump-sum Liquidation on June 30, 2008

-

Preliquidation balances Sale of assets and distribution of 430,000 loss Cash contributed by B

Distribution of deficit of insolvent partner: 20/60 (P2,000) 40/60 (P2,000) Offset deficit with loan Contribution by G Payment of creditors Distribution to K Postliquidation balances

Capital Balances K G 20% 40% (240,000) (100,000)

B 40% (120,000)

(60,000)

86,000 (154,000)

172,000 72,000

172,000 52,000

(6 0,000)

(154,000)

72,000

50,000 2,000

Cash 50,000

Noncash Assets 950,000

Liabilities (480,000 )

G Loan (60,000)

520,000 570,000

950,000 -0-

(480,000)

-

(480,000)

50,000 620,000

-0-

(2,000) 666 620,000 620,000 13,334 633,334 (480,000) 153,334 (153,334)

-0-

-0-0-

(480,000) (480,000)

(60,000) 60,000 -0-

(153,334) (153,334)

(480,000) 480,000 -0-

-0-

(153,334) (153,334) 153,334

-0-0-

-0-

-0-

-0-

-0-

-0-

1,334 73,334 (60,000) 13,334 (13,334) -0-

-0-0-0-

-0-

-0-

-

-0-

-

-0-

-

82

Chapter 4

KGB Partnership Schedule of Distribution of Personal Assets June 30, 2008

K

Personal assets, excluding partnership capital and loan interests Personal liabilities Personal net worth, excluding partnership capital and loan interests Contribution to partnership Distribution from partnership Personal capacity

G

B

500,000 (460,000)

600,000 (480,000)

700,000 (650,000)

40,000

120,000 (13,334) -0- 106,666

5 0,000

153,334 193,334

-0- -0- -

Partnership Liquidation by Installment

83

CHAPTER 5 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 5-1: b RJ

SJ

TJ

Capital balances before liquidation Loan balances

P22,000 _10,000

P30,000 ______ –

P 8,000 ______ –

Total interest Possible loss (40,000+10,000)

32,000 ( 25,000)

30,000 ( 15,000)

8,000 ( 10,000)

Balances Additional loss to RJ & SJ, 5:3

7,000 ( 1,250)

15,000 ( 750)

( 2,000) __2,000

Cash Cash distri buti on

P 5,750

P14,250

P

–

5-2: a AR

BR

CR

DR

Capital balances Loan balances

P 5,500 _1,000

P 5,150 _____ –

P 6,850 _____ –

P 4,500 _____ –

Total interest Possible loss (23,000-6,000)

6,500 ( 6,800)

5,150 ( 5,100)

6,850 ( 3,400)

4,500 ( 1,700)

Balances Additional loss to BR, CR, DR, 3:2:1

( 300) ___300

2,800 ( 50)

Balances Additional loss to CR & DR, 2:1

– – _____ –

Payment Payment to partn ers

P

Total liabilities Total Capital

P 1,000 _22,000

Total Assets

P23,000

50 150)

(

3,450 100)

( 100) ___100

_(

3,350 67)

(

P

–

P 3,283

_(

2,750 33)

P 2,717

5-3: c B A L A N C E S DD

Capital balances Loan balances Advances

P40,000 5,000 _____ –

EE

P30,000 10,000 _____ –

P15,000 – ( 4,500)

P25,000 – ( 2,500)

45,000 ____50%

Loss Absorption balances PI - TO GG –

90,000 _____ –

133,333 _____ –

105,000 ( 91,667)

225,000 __ __ –

Balances PII - TO EE & GG, 30:10

90,000 _____ –

133,333 ( 28,333)

105,000 _____ –

133,333 ( 28,333)

Balances PIII - TO EE, FF, GG, 3:1:1

90,000 _____ –

105,000 (15,000)

105,000 ( 15,000)

10,500 ( 15,000)

P90,000

P90,000

P90,000

P90,000

10,500 ____10%

GG

Total interest Divided by P/L Ratio

Balances PIV - P/L Ratio

40,000 ____30%

FF

22,500 ____10%

84

Chapter 5 CASH PAYMENT DD

PI - To GG PII - To EE (28,833 X 30%) GG (28,833 X 10%) PIII – To To EE (15,000 X 30%) FF (15,000 X 10%) GG (15,000 X 10%)

EE

GG

– – – – – _____ –

– P 8,433 – 4,500 – _____ –

– – – – 1,500 _____ –

P 9,167 – 2,833 – – __1,500

–

P12,933

P 1,500

P13,500

Total PIV - P/L Ratio DD

Distribution of P18,000 PI - TO GG PII - TO EE & GG, 3:1, P8,833

FF

EE

FF

GG

– – _____

– _6,625

– – _____

–

P 6,625

–

Cash Cash di str ibuti on

5-4: a TAN

LIM

WAN

Capital balances before liquidation Loss on realization, P40,000

P40,000 ( 16,000)

P65,000 ( 16,000)

P48,000 ( 8,000)

Capital balances before cash distribution Possible loss, P90,000

24,000 ( 36,000)

49,000 ( 36,000)

40,000 ( 18,000)

Balances Additional loss to Lim & Wan, 4:2

( 12,000) _12,000

13,000 ( 8,000)

22,000 ( 4,000)

Cash Cash distr distr ibuti on

P

–

P 5,000

P18,000

LIM

WAN

5-5: b TAN

Capital balances before cash distribution Possible loss (90,000+3,000)

P24,000 ( 37,200)

P49,000 ( 18,600)

P40,000 ( 18,600)

Balances Additional loss to Lim & Wan, 4:2

( 13,200) _13,200

30,400 ( 8,800)

21,400 _( 4,400)


P

–

P21,600

P17,000

CARPIO

LOBO

5-6: d Tan (14,000 X 40%) L im (14,000 (14,000 X 40%) Wan (14,000 X 20%)

P5,600 P5,600 P5,600 P2,800

5-7: a Capital balances before liquidation Goodwill written-off

P72,000 ( 5,000)

P54,000 ( 5,000)

Cash balance Possible loss (100,000+10,000), 110,000

67,000 ( 55,000)

49,000 ( 55,000)

12,000 ( 6,000)

( 6,000) __6,000

Capital balances before liquidation Additional loss to Carpio

P 9,167 __2,208 P11,375


P 6,000 6,000

P

–


85

5-8: d JACOB

SANTOS

HERVAS

Capital balances before liquidation Loss on realization (120,000-90,000) Liquidation expenses, P2,000

P40,000 ( 15,000) ( 1,000)

P72,000 ( 9,000) ( 600)

P 7,000 ( 6,000) ( 400)

Capital balances before cash distribution Loan balances

24,000 __8,000

62,400 _____ –

63,600 _____ –

Total interest Possible Loss (210,000-120,000)

32,000 ( 45,000)

62,400 27,000

63,600 ( 18,000)

Balances Additional loss to Santos & Hervas

( 13,000) _13,000

35,400 ( 7,800)

45,600 ( 5,200)


P

–

P27,600

P40,400

5-9: d A

Capital balances before liquidation Salary payable –

P16,200 _____ –

B

C

D

P12,000 ___160

P37,700 ___240

P17,700 _______

Balances Loss on realization (P2,400)

16,200 ( 600)

12,000 ( 600)

37,860 ( 600)

( 17,940) ( 600)

Balances Liquidation expenses (P600)

15,600 ( 150)

11,400 ( 150)

37,260 ( 150)

17,340 ( 150)

Balances Loan balances

15,450 12,000

11,250 14,400

37,110 – _____

17,190 __9,600

27,450 ( 27,000)

25,650 ( 27,000)

37,110 ( 27,000)

26,790 ( 27,000)

Balances Additional loss to A & C

450 ( 780)

( 1,350) __1,350

10,110 ( 780)

( 210) ____210

Balances Additional loss to C

( 330) ___330

– – _____

9,330 ( 330)

– – _____

Total interest Possible Loss (126,000-18,000)


P

–

–

P

P 9,000

5-10: a BALANCES DY

SY

LEE

Total interest Profit and Loss ratio Loan absorption balances Priority I - to Sy

P22,000 2/4 44,000 _____ –

P15,500 1/4 62,000 ( 6,000)

P14,000 1/4 56,000 _____ –

Balances Priority II - to Sy & Less

44,000 _____ –

56,000 ( 12,000)

56,000 ( 12,000)

P44,000

P44,000

Total

P44,000

CASH PAYMENTS DY

Priority I - to Sy (6,000 X 1/4) Priority II - to Sy (12,000 X 1/4) to Lee (12,000 X 1/4)

– – _____ –

SY

1,500 3,000 _____ –

LEE – – _3,000

P

–

Total

P

–

P 4,500

P 3,000

86

Chapter 5 Further cash distribution, profit and loss ratio Cash distribution to Dy Divided by Dy's Profit and Loss ratio

P 6,250 2/4

Amount in excess of P7,560 Total payment under priority I & II

12,500 __7,500

Total cash distributi on to partner

P20,000

5-11: d Cash before liquidation Cash realized Total Less:

P12,000 _32,000 44,000

Payment of liquidation expense Payment of liability Payment to partners (Q 5-10)

P 1,000 5,400 20,000

Cash wit hheld

_26,400 P17,600

5-12: c Loss absorption balances: Cena (18,000/50%) Batista (27,000/30%)

P36,000 90,000

Excess of Batista Multiply by Batista's Profit & Loss ratio

54,000 ____30%

Pri ori ty I to Batista

P16,200

5-13: c

BALANCES AA

BB

CC

P15,000 10,000

P30,000 _5,000

P10,000 10,000

25,000

35,000

20,000

2/5

2/5

1/5

Loss Absorption balances Priority I to CC

62,500 _____ –

87,520 _____ –

100,000 ( 12,500)

Balances Priority II to BB & CC, 2:1

62,500 – _____

87,520 ( 25,000)

100,000 ( 25,000)

P62,500

P62,500

Capital balances Loan balances Total interest Divided by Profit and Loss Ratio

Total interest

P62,500

CASH PAYMENTS AA

Priority I to CC (12,500 X 1/5) Priority II to BB (25,000 X 2/5) to CC (25,000 X 1/5) Total Priority III – P/L Ratio Cash distribution to CC: Priority I Priority II (12,000-2,500) X 1/3

BB

– – ____ –

P

–

CC

– 10,000 _____ –

2,500 – _5,000

P10,000

P 7,500

P2,500 3,167

Total cash paid to CC

P5,667


87

5-14: c BALANCES JJ

KK

LL

MM

P 60,000 _18,000

P 64,500 _30,000

P 54,000 ______ –

P 30,000 ______ –

Total interest

_78,000

_94,500

_54,000

_30,000

Divided by Profit and Loss Ratio

____40%

_____35%

_____15%

_____10%


Loss Absorption balances Priority I to LL

195,000 ______ –

270,000 ______ –

360,000 ( 60,000)

300,000 ______ –

Balances Priority II to LL, MM, 15:10

195,000 ______ –

270,000 ______ –

300,000 ( 30,000)

300,000 ( 30,000)

Balances Priority II to KK, LL, MM, 35:15:10

195,000 ______ –

270,000 ( 75,000)

270,000 ( 75,000)

270,000 ( 75,000)

P195,000

P195,000

P195,000

Total

P195,000

CASH PAYMENT JJ

KK

LL

MM

Priority I to LL (30,000 X 15%) Priority II to LL (30,000 X 15%) to MM (30,000 X 10%) Priority II to KK (75,000 X 35%) to LL (75,000 X 15%) to MM (75,000 X 10%)

– – – – – ______ –

– – – 1,750 – ______ –

9,000 4,500 – – 11,250 ______ –

– – 3,000 – – ___7,500

Total

P

P 1,750

P 24,750

P 10,500

LL

MM

TOTAL

–

Further cash distribution, Profit and Loss ratio Cash distribution to Partners (P38,100-9,000), P29,100 JJ

KK

Priority I to LL Priority II to LL, MM, 15:10 Priority II to KK, LL, MM, 35:15:10 (29,100-16,500), 12,600

– –

– –

P 9,000 4,500

– 3,000

P 9,000 7,500

_____ –

__7,350

___3,150

__2,100

__12,600

Cash distr ibuti on

P

–

P 7,350

P 16,650

P 5,100

P 29,100

5-15: a BALANCES ARCE

BELLO

CRUZ

P 20,000 _10,000

P 24,900 ______ –

P 15,000 ______ –

Total interest

_32,000

_24,900

_15,000

Divided by Profit and Loss Ratio

_____50%

_____30%

_____20%

Loss Absorption balances Priority I to Bello

64,000 ______ –

83,000 ( 8,000)

75,000 ______ –

Balances Priority II to Bello & cruz, 3:2

64,000 ______ –

75,000 ( 11,000)

75,000 ( 11,000)


Total

P 64,000

P 64,000

P 64,000

88

Chapter 5 CASH PAYMENTS ARCE

BELLO

CRUZ

P - I to Bello (8,000 X 30%) P - II to Bello (11,000 X 30%) to Cruz (11,000 X 20%)

– – _____ –

2,400 3,300 _____ –

– – _2,200

Total

P

P 5,700

P2,200

–

Further Cash distribution, Profit and Loss ratio Based on the above cash priority program, the P2,000 is only a partial payment to Bello who is entitled to a maximum of P2,400 under Priority I. Only after satisfying Priority I, Cruz will receive payment and only after P7,900 has been distributed to Bello and Cruz will Arce receive payment. Th erefore no payments are made to Arce and Cru z.

5-16: a Cash paid to Arce Divide by Profit & Loss ratio

P2,000 _____5%

Amount in excess of P7,900 Add: cash paid under PI and PII

40,000 _7,900

Total cash distribution to partners Cash paid to Creditor (30,000-10,000)

47,900 20,000

Total Less cash before realization

67,900 _6,000

Cash reali zed f rom sale of asset

P61,900

5-17: b Cash distribution to Cruz Divide by profit and loss ratio

P 6,200 2/5

Cash distribution under Priority II Multiply by Bello's Profit and Loss ratio

15,500 3/5

Cash distribution to Bello under Priority II Cash distribution to Bello under Priority I

9,300 __2,400

Total cash distributi on to Bello

P11,700

5-18: b BALANCES MONZON

NIEVA

Total Interest

P22,500

P17,500

Profit and Loss ratio

_____60%

_____40%

Loss absorption balances Priority I - to Nieka

37,500 ______ –

Total

P37,500

Further cash distribution - Profit and Loss ratio

CASH PAYMENT MONZON

NIEVA

43,750 ( 6,250)

_____ –

_2,500

P37,500

P

P2,500

–

Al l t he P2,000 shoul d be paid Ni eva, sin ce she is enti tl ed to P2,500 under Pri ori ty I


89

5-19: b

CASH

MONZON

NIEVA

Cash distribution PI to Nieva (2,500-2,000) Balances, 6:40

P12,500 ( 500) _12,000

– – __7,200

– 500 _4,800

Cash distri bution

P

–

P 7,200

P5,300

5-20: a

Cash before liquidation June: Cash realized Payment to creditor Payment to Partners

P 5,000 18,000 ( 20,000) __2,000

Cash balances, June 30 July: Cash realized Payment of liquidation expense Payment to Partners

1,000 12,000 ( 500) ( 12,500)

Cash balances, July 31 Aug: Cash realized Cash distribution for August, Profit and Loss ratio

– _22,500

P22,500

Di str ibuti on to Partners - August M onzon (22,500 X 60%)

P13,500

Ni eva (22,500 x 40%)

P 9,000

90

Chapter 5

SOLUTIONS TO PROBLEMS Problem 5 – 1 Suarez, Tulio and Umali Statement of Liquidation January 1 to april 31, 2008 Assets Cash

Others Liabilities

Balances before liquidation . P 2,000.00 P46,000.00 P6,000.00 January Installment : Realization of assets and distribution of loss .... 10,500.00 ( 12,000.00) _______ Balances......................... 12,500.00 Payment of expenses of realization and distribution to partners ...................... ( 500.00)

Tulio, Loan

Umali, Loan

Partners' Capitals Suarez (40%) tulio (35%) Umali (25%)

P5,000.00 P2,500.00

_______

______

P14,450.00 P12,550.00

(

600.00) (

525.00)

P7,500.00

( 375.00)

34,000.00

6,000.00

5,000.00

2,500.00

13,850.00

12,025.00

7,125.00

_______

_______

_______

_______

(

(

175.00)

( 125.00)

200.00)

Balances......................... 12,000.00 34,000.00 6,000.00 Payment of liabilities ..... ( 6,000.00) _______ ( 6,000.00)

5,000.00 2,500.00 _______ _______

13,650.00 _______

11,850.00 ________

7,000.00 _______

Balances......................... 6,000.00 Payments to partners (Schedule 1) ............. ( 4,000.00)

5,000.00

13,650.00

11,850.00

7,000.00

_______

_______

_______

13,650.00

11,850.00

7,000.00

Balances......................... February Installment: Realization of assets and distribution of loss ....

34,000.00 _______

–

_______

( 3,812.50) ( 187.50)

2,000.00

34,000.00

6,000.00

( 7,000.00) _______

_______

Balances......................... 8,000.00 Payment of expenses of realization and distribution to partners ...................... ( 750.00)

27,000.00

1,187.50

Balances......................... 7,250.00 Payments to partners (Schedule 2) ............. ( 6,000.00)

27,000.00

–

–

_______ ______ –

_______ ______

Balances......................... 1,250.00 27,000.00 – March Installment : Realization of assets and distribution of loss .... 10,000.00 ( 15,000.00) ______ Balances......................... 11,250.00 Payment of expenses of realization and distribution to partners ...................... ( 600.00)

12,000.00

–

_______ ______

– Balances......................... 10,650.00 12,000.00 Payments to partners, P & L ratio ................( 10,150.00) ______ ______

Balances......................... April Installment: Realization of assets and distribution of loss ....

500.00

12,000.00

2,500.00

1,187.50

_______ 1,187.50

2,312.50

_______ 2,312.50

13,250.00

_______

(

2,312.50

12,950.00

( 1,187.50) ( 1,812.50) –

500.00

______

______

–

500.00

______ –

______

_______ 500.00 ( 500.00)

–

–

–

4,000.00 ( 12,000.00) ______

______

______

–

–

Balances......................... 4,500.00 – Payment of expenses of realization and distribution to partners ...................... _(400.00) ______

–

______

______

__(400.00) (

______

350.00)

11,500.00

300.00) (

( 250.00) 6,750.00

262.50)

( 187.50)

11,237.50

6,562.50

( 1,650.00) ( 1,350.00) 11,300.00

9,887.50

_______ 6,562.50

( 2,000.00) ( 1,750.00) ( 1,250.00) 9,300.00

(

8,137.50

240.00) ( 9,060.00

210.00) 7,927.50

5,312.50

( 150.00) 5,162.50

( 4,060.00) ( 3,552.50) ( 2,037.50) 5,000.00

4,375.00

3,125.00

( 3,200.00) ( 2,800.00) ( 2,000.00) 1,800.00

___(160.00)

1,575.00

(

140.00)

1,125.00

( 100.00)

Balances.........................

4,100.00

–

Final Payments to partnersP(41,100.00) _____ –

– – _____

– – _____

– – _____

1,640.00 1,435.00 1,025.00 P( 1,640.00) P( 1,435.00) P(1,025.00)


91

Schedul e 1

Suarez (40%)

Tulio (35%)

Umali (25%)

Capital balances ...................................... Loan balances..........................................

P13,650.00 _____ _ –

P11,850.00 __5,000.00

P7,000.00 _2,500.00

Total interests .......................................... Possible loss (P2,000 + P34,000) ...........

13,650.00 ( 14,400.00)

16,850.00 ( 12,600.00)

9,500.00 ( 9,000.00)

Balances .................................................. Additional loss to Tulio and Umali 35:25

( 750.00) ___750.00

4,250.00 ( 437.50)

500.00 ( 312.50)

–

P 3,812.50

P 187.50

–

P 3,812.50

P 187.50

Suarez (40%)

Tulio (35%)

Umali (25%)

Capital balances ...................................... Loan balances ..........................................

P12,950.00 –

P11,237.50 __1,187.50

P6,562.50 _2,312.50

Total ........................................................ Possible loss (P1,250 + P27,000) ...........

12,950.00 ( 11,300.00)

12,425.00 ( 9,887.50)

8,875.00 ( 7,062.50)

Payments to partners ............................... Apply to loan ...........................................

P 1,650.00 –

P 2,537.50 _1,187.50

P1,812.50 _1,812.50

Apply to capital .......................................

P 1,650.00

P 1,350.00

P

Payments to partners ............................... Apply to loan ...........................................

__ __

Schedul e 2

–

92

Chapter 5

Problem 5 – 2 Miller and Bell Partnership Statement of Partnership Realization and Liquidation

Capital Inventory

Accounts Payable

Bell Loan

Miller 80%

Bell 20%

120,000 ( 60,000)

15,000

60,000

65,000 (16,000)

5,000 (4,000)

______

(10,000)

______

______

______

55,000

60,000

5,000

60,000

49,000

1,000

(50,000)

______

______

(49,000)

_(1,000)

______

5,000 30,000

60,000 ( 60,000)

5,000

11,000

48,000 (24,000)

1,000 6,000)

( 5,000)

______

( 5,000)

______

______

______

– 0 –

– 0 –

11,000

24,000

(5,000)

( 5,000)

______

(5,000)

6,000

24,000

– 0 –

( 6,000) ______

(24,000)

______

– 0 –

– 0 –

– 0 –

Cash

Balances 25,000 Sale of inventory 40,000 Payment to creditors (10,000) Payments to partners (Schedule 1) Sale of inventory Payment to creditors

30,000 Offset deficit with loan

______ 30,000

Payments to partners: Loan Capitals Balances

______ – 0 –

( 6,000) (24,000)

______

– 0 –

– 0 –

______ – 0 –

______ – 0 –

Schedule 1: Miller and Bell Partnership Schedule of Safe Payments to Partners

Capital and loan balances Possible loss of 60,000 on remaining inventory Safe payment

Miller 80%

Bell 20%

49,000 (48,000)

61,000 (12,000)

1,000

49,000


93

Problem 5 – 3 HORIZON PARTNERSHIP Statement of realization and Liquidation May – July, 2008 Assets

Partners Capital TT (1/3)

Other

Liabilities

SS (1/3)

20,000 75,000

280,000 (105,000)

80,000 ______

60,000 (10,000)

70,000 (10,000)

Balances Payment to creditors

95,000 (80,000)

175,000 ______

80,000 (80,000)

50,000 ______

60,000 ______

Balances Payments to PP (Exhibit A)

15,000 (15,000)

175,000 ______

______

50,000 ______

60,000 ______

80,000 (15,000)

175,000 (61,000)

______

50,000 (12,000)

60,000 (12,000)

65,000 (12,000)

______

38,000 ______

48,000 (10,000)

53,000 (15,000)

114,000

38,000

38,000

38,000

(114,000)

(11,000)

(11,000)

(11,000)

27,000 (27,000)

27,000 (27,000)

27,000 (27,000)

Cash

Balances before liquidation May – sale of assets at a loss of P30,000

Balances June – sale of assets at a loss of P36,000 Balances Payment to partners (Exhibit A) Balances July – sale of remaining assets at a loss of P33,000 Balances Payment to partners

– 0 – 25,000

25,000 (25,000) – 0 –

81,000

114,000 ______

81,000 (81,000)

PP (1/3)

90,000 (10,000) 80,000 ______

Exhibit A – Cash distributions to partners during liquidation: SS

Capital account balances before liquidation Income sharing ratio Loss absorption balances Required reduction to bring capital account balance for PP to equal the next highest balance for TT – PI. Balances Required reduction to bring the balances for TT and PP to equal the balance for SS – PII. Balances Summary of cash distribution program: To creditors before partners receive anything To partners: (1) First distribution to PP (2) Second distribution to TT and PP equally (3) Any amount in excess of $120,000 to the three partners in incomesharing ratio

TT

PP

60,000 1 60,000

70,000 1 70,000

90,000 1 90,000

______

______

(20,000)

60,000

70,000

70,000

______

(10,000)

(10,000)

60,000

60,000

60,000

10,000

20,000 10,000

1/3

1/3

80,000 20,000 20,000

1/3

b. After the cash distri bution in June, the partners cap ital acco unts had balances corresponding to the income-sharing ratio (38,000 each). From this point on any cash payments to partners may be made in the income-sharing ratio or equally in this problem. In other words, after the creditors are paid and TT and PP receive 10,000 and 30,000,

respective, any additional cash that becomes available may be paid to the three partners equally.

94

Chapter 5

Problem 5 – 4 1.

X, Y and Z Cash Priority Program January 1, 2008

X

B a l a n c e s Y

Z

Capital balances .................................. Loan balances .....................................

P60,000 22,5000

P45,000 15,000

P20,000 6,500

Total interests ......................................

P82,500

P60,000

P26,500

P200,000 (35,000)

P132,500

165,000 (32,500)

132,500 ________ P132,500

Loss absorption balances .................... P165,000 Priority I – to Y ................................... Balances .............................................. Priority II – to X and Y .......................

165,000 (32,500)

Total .................................................... P132,500

P132,500

C a s h P a y m e n ts X (50%) Y (30%) Z (20%)

P10,500

–

P10,500

P16,250

9,750

–

26,000

P16,250

P20,250

–

P36,500

–

Any amount in excess of P36,500 .......

Total

50%

30%

20%

100%

2. January

Cash

Available for distribution .............................. Priority I – to Y .............................................

P 7,500 ( 7,500)

Payment to partner ......................................... February .......................................................

Cash

Available for distribution .............................. Priority I – to Y (P10,500 – P7,500) ............. Priority II – to X and Y; 5:3 ..........................

P20,000 ( 3,000) ( 17,000)

Payments to partners...................................... March ...........................................................

Cash

Available for distribution .............................. Priority II – to X and Y; 5:3 (P26,000 – P17,000) ................................. Excess; 5:3:2..................................................

P45,000 ( 9,000) ( 36,000)

Payments to partners...................................... April ..............................................................

Available for distribution .............................. Excess; 5:3:2.................................................. Payments to partners......................................

X

Cash

P15,000 ( 15,000)

Y

Z

P 7,500 –

P 7,500

–

X

Y

Z

P10,625

P 3,000 6,375

_____

P10,625

P 9,375

–

X

Y

Z

P 5,625 18,000

P 3,375 10,800

P7,200

P23,625

P14,175

P7,200

X

Y

Z

P 7,500

P 4,500

P3,000

P 7,500

P 4,500

P3,000


95

Problem 5 – 5 AB, CD & EF Partnership Statement of Partnership Realization and Liquidation

Cash

Able Loan

Other Assets

Accounts CD Payable Loan

AB 50%

Balances before liquidation 18,000 30,000 307,000 53,000 20,000 118,000 January transactions: 1. Collection of accounts receivable at loss of 15,000 51,000 ( 66,000) ( 7,500) 2. Sale of inventory at loss of 14,000 38,000 ( 52,000) ( 7,000) 3. Liquidation expenses paid ( 2,000) ( 1,000) 4. Share of credit memorandum ( 3,000) 1,500 5. Payments to creditors ( 50,000) _____ ______ (50,000) _____ ______ 55,000 30,000 189,000 Sale payments to partners (Schedule 1

( 45,000) ______

-0- 20,000 104,000

_____ ______ (20,000) ______

10,000 30,000 189,000

-0-

-0- 104,000

Capital CD 30%

EF 20%

90,000

74,000

( 4,500) ( 3,000) ( 4,200) ( 2,800) ( 600) ( 400) 900 600 _____ ______ 81,600

68,400

( 6,600) (18,400) 75,000

50,000

February transactions: 6. Liquidation expenses paid ( 4,000) ______

______ ______ ______ ( 2,000) ( 1,200) ( 800) 6,000 30,000 189,000 -0-0- 102,000 73,800 49,200

Safe payments to partners (Schedule 2)

-0- _____

______ ______ ___

6,000 30,000 189,000

-0-

– 0 –

-0- 102,000

– 0 –

73,800

– 0 –

49,200

March transactions: 8. Sale of mac. & equip. at a loss of 43,000 146,000 (189,000) ( 21,500) (12,900) ( 8,600) 9. Liquidation expenses paid ( 5,000) ______ _______ ______ ______ ( 2,500) ( 1,500) ( 1,000)

147,000 30,000

-0-

-0-

-0-

78,000

59,400

39,600

10. Offset AB's loan receivable against capital (30,000) ( 30,000) Payments to partners (147,000) ______ _______ ______ ______ ( 48,000) (59,400) (39,600) Balances at end of liquidation

– 0 –

– 0 –

– 0 –

– 0 –

– 0 –

– 0 –

– 0 –

– 0 –

96

Chapter 5

Partnership Schedules of Safe Payments to Partners

AB 50%

Schedule 1: January

Capital and loan balances a Possible loss: Other assets (189,000) and possible liquidation costs (10,000)

CD 30%

EF 20%

P74,000

P101,600

P68,400

( 99,500)

( 59,700)

( 39,800)

Balances Absorption of AB's potential deficit balance CD : (25,500 x 3/5 = 15,300) EF : (25,500 x 2/5 = 10,200)

( 25,500) 25,500

Safe payment

41,900

28,600

______

( 15,300) _______

( 10,200)

P

P 26,600

P 18,400

73,800

49,200

-0-

a = (104,000) capital less 30,000 loan receivable = (81,600) capital plus 20,000 loan payable = (68,400) capital Schedule 2: February

Capital and loan balances b Possible loss: Other assets (189,000) and possible liquidation costs (6,000) Absorption of AB's potential deficit balance CD : (25,500 x 3/5 = 15,300) EF : (25,500 x 2/5 = 10,200) Safe payment b = (102,000) capital less 30,000 loan receivable = (73,800) capital = (49,200) capital

72,000

( 97,500) ( 25,500) 25,500 _______ – 0 –

( 58,500) 15,300

( 39,000) 10,200

( 15,300) ________

( 10,200)

– 0 –

– 0 –


97

Problem 5 – 6 1.

M, N, O and P Cash Priority Program January 1, 2008

M

B a l a n c e s N O

P

M (3/8)

Capital balances .. P 70,000 Loan balances ..... 20,000

P 70,000 5,000

P 30,000 25,000

P 20,000 15,000

Total interests ..... P 90,000

P 75,000

P 55,000

P 35,000

Cash Payments N (3/8) O (1/8) P (1/8)

Total

Loss absorption balances ......... P240,000 P200,000 P440,000 P280,000 Priority I – to O .. _______ _______ ( 160,000) ________

–

–

P20,000

Balances ............. 240,000 Priority II – to O and P .............. _______

–

–

5,000

P5,000

10,000

_______ ( 40,000) ( 40,000) P15,000

–

5,000

5,000

25,000

Balances ............. 240,000 Priority III – to M, O and P ..... ( 40,000)

200,000

280,000

280,000

_______ ( 40,000) ( 40,000) 200,000

240,000

Total ................... P200,000 P200,000 P200,000

– P20,000

240,000

P200,000

P15,000

Any amount in excess of P55,000

3/8

– P30,000

3/8

P10,000 P55,000

1/8

1/8

8/8

2. Schedule 1

Cash

Available for distribution .................... Priority I – to O ................................... Priority II – to O and P; 1:1 .................

P25,000 ( 20,000) ( 5,000)

M

N

O

________

_______

–

–

–

–

Payments to partners............................ Apply to loan ....................................... Apply to capital ...................................

P

P20,000 2,500

P2,500

P22,500 ( 22,500) –

2,500 ( 2,500) –

Schedule 2

Cash

Available for distribution .................... Priority II – to O and P; 1:1 ................. Priority III – to M, O and P; 3:1:1 ....... Excess, 3:3:1:1 ..................................... Payments to partners............................ Apply to loan ....................................... Apply to capital

P40,000 ( 5,000 ( 25,000) ( 10,000)

M

N

O

P15,000 3,750

P3,750

P 2,500 5,000 1,250

18,750 ( 18,750) –

P3,750 ( 3,750) –

8,750 ( 2,500) P 6,250

P

P2,500 5,000 1,250 8,750 ( 8,750) –

98

Chapter 5

Problem 5 – 7

Bronze, Gold & Silver Cash Distribution Plan June 30, 2008

Loss Absorption Balances Bronze Gold Silver

Profit and loss ratio

Capital and Loan Accounts Bronze Gold Silver 50% 30% 20%

Pre-liquidation capital and loan balances

P55,000

P45,000

P24,000

Loss absorption balances (Capital and loan balances/P& L ratio)

P110,000

P150,000

P120,000

Decrease highest LAB to next highest: Gold: (30,000 x .30)

_______

( 30,000)

_______

______

( 9,000)

______

110,000

120,000

120,000

55,000

36,000

24,000

_______

( 10,000) ________

( 10,000)

_______

( 3,000) _______ _( 2,000)

P110,000

P110,000

P110,000

P 55,000

P 33,000

Accounts Payable

Bronze 50%

Gold 30%

_______

P37,500

P 9,000 3,000 22,500

P 2,000 15,000

P 17,000

P37,500

P34,500

P17,000

Decrease LAB's to next highest: Gold: (10,000 x .30) Silver: (10,000 x .20)

P 22,000

Summary of Cash Distribution (If Offer of P100,000 is Accepted)

Cash available First Next Next Additional paid in P&L ratio

P106,000 ( 17,000) ( 9,000) ( 5,000) ( 75,000) P

-0-

Silver 20%

P 17,000


99

Problem 5 – 8 Part A Bal ances

Cash Payments

North South East West North Total Interest (capital and loan balances P120,000 P 88,000 P109,000 P 60,000 Divided by P/L ratio 30% 10% 20% 40%

Loss absorption potential Priority II – To South Balances

P400,000 400,000

Priority II – To South and East, 10:20

Balances 400,000 Priority III – To North, South, and east 30:10:20 (250,000) Total

150,000

P150,000 ________

South

East

P880,000 (335,000)

P545,000

545,000 (145,000)

545,000 (145,000)

150,000

400,000

400,000

150,000

(250,000)

(250,000)

______

75,000 25,000 50,000 _____

150,000

150,000

150,000

75,000 73,000 79,000

33,500 14,500 29,000

Further cash distribution – P/L ratio Part B (1) Cash 65,600 North capital (30% of P16,400 loss) 4,920 South capital (10%) 1,640 East capital (20%) 3,280 West capital (40%) 6,560 Accounts receivable To records collection of receivables with losses allocated to partners.

(2)

(3)

Cash North capital (30% x P103,000) South capital (10%) East capital (20%) West capital (40%) Property and equipment To record sale of property and equipment.

82,000

150,000 30,900 10,300 20,600 41,200 253,000

North capital 31,800 South capital 58,600 East capital 35,000 West capital 15,200 Cash 140,600 To record cash installment to partners of P230,600 based on the cash distribution plan in Part A. First P90,000 is held to pay liabilities (P74,000) and estimated liquidation expenses of P16,000. Next P33,500 goes entirely to South. Next P43,500 is split between to South (P14,500) and East (P29,000). Remaining P63,600 is allocated to North (P31,800), South (P10,600) and East (P21,200)

(4)

Liabilities Cash

West

74,000 74,000

–

To record payment of liabilities.

100

(5)

Chapter 5

Cash North capital (30% of P30,000 loss) South capital (10%) East capital (20%) West capital (40%) Inventory To record inventory sold.

71,000 9,000 3,000 6,000 12,000 101,000

(6)

North capital 35,500 South capital 11,833 East capital 23,667 Cash 71,000 To record distribution of cash according to cash distribution plan. Although P87,000 cash is being held, P16,000 must be retained to pay liquidation expenses. The Remaining P71,000 is divided among North, South, and East on a 30:20 basis.

(7)

North capital (30% of expenses) South capital (10%) East capital (20%) West capital (40%) Cash To record liquidation expenses paid.

(8)

11,000

North capital (30/60 of deficit) 2,080 South capital (10/60) 693 East capital (10/60) 1,387 West capital To eliminate capital deficiency of West as computed below:

Capital balances, beginning Loss on accounts receivable Loss on property and equipment Cash distribution Liquidation expenses Subtotal Elimination of West deficiency Capital balances (9)

3,300 1,100 2,200 4,400

North capital South capital East capital Cash To record final cash distribution.

4,160

North P120,000 (4,920) (30,900) (31,800) ( 3,300)

South P88,000 ( 1,640) (10,300) (58,600) ( 1,100)

East P109,000 ( 3,280) (20,600) (50,200) ( 2,200)

West P60,000 ( 6,560) (41,200) – 0 – ( 4,400)

4,580 ( 2,090)

1,527 ( 693)

3,053 ( 1,666)

( 4,160) 4,160

P 2,500

P

834

P 1,666

2,500 834 1,666 5,000

P – 0 –


101

Problem 5 – 9 DR Company Schedule of Safe Payments to Partners

Capital and loan balances, August 1, 2008 Write-off of P24,000 in goodwill Write-off of P12,000 of receivables Gain of P6,000 on sale of P32,000 of inventory (one-half of P64,000 book value) Capital and loan balances, August 31, 2008 Possible loss of P16,000 for remaining receivables and P32,000 for remaining inventory Possible liquidation costs of P4,000 Balances (* = deficit) Distribute Ben’s potential deficit To Dan: P7,600 x 40/70 To Red: P7,600 x 30/70 Safe payments to partners

Dan (40%)

Red (30%)

Ben (30%)

(42,000) 9,600 4,800

(45,000) 7,200 3,600

(17,000) 7,200 3,600

(2,400) (30,000)

(1,800) (36,000)

(1,800) (8,000)

19,200 1,600 (9,200)

14,400 1,200 (20,400)

14,400 1,200 7,600* (7,600)

3,257 (17,143)

-0- -

4,343 (4,857)

Of the P84,000 in cash at the end of August, P58,000 will be required to liquidate the debts to outside creditors, and P4,000 must be held in reserve to pay possible liquidation costs. Thus, a total of P22,000 in cash can be safely distributed to partners as of August 31, 2008.

Problem 5 – 10 (1)

Journal entry to record Jenny’s contribution:

Cash Equipment Jenny, capital

40,000 60,000 100,000

Journal entry to record Kenny’s contribution:

Cash Inventory Equipment Notes payable Kenny, capital

60,000 10,000 180,000 50,000 200,000

102

(2)

Chapter 5

Capital balances of Jenny and Kenny before admission of Lenny:

Beginning capital balance Interest on beginning capital balance Annual salary Remainder Ending capital balance

Jenny P100,000 10,000 15,000 48,000 P173,000

Kenny P200,000 20,000 20,000 72,000 P312,000

Explanation: Each partner receives 10% on beginning capital balance. Each partner receives her respective income (P15,000 to Jenny and P20,000 to Kenny). The amount distributed thus far is P65,000. The remainder to be distributed is P120,000 (P185,000 – 30,000 – 35,000). Two-fifths of this remainder of P129,000 (48,000) is allocated to Jenny; 3/5 x P120,000 (72,000) is allocated to Kenny. The total income alloc ated to Jenny and Kenny is P73,000 and P112,000 respectively. The admission of Lenny can now be recorded by the following entry: Cash

175,000 Lenny, capital Jenny, capital Kenny, capital

110,000 26,000 39,000

Explanation: The book value of the partnership after the income distribution in 2006 was P485,000 (P173,000 + P312,000). After Lenny’s contribution, the value of the partnership is P485,000 + P175,000 = P660,000. A one-sixth interest in the partnership is P660,000 x 1/6 = P110,000. Using the bonus method, we compute a bonus of P175,000 – P110,000 = P65,000. Using the 2:3 profit sharing ratio, the amount allocated to Jenny is P26,000 (2/5 x P65,000) and the amount allocated to Kenny is P39,000 (3/5 x P65,000). (3)

Schedule of Safe Payments Capital balances Partner’s loan Gain on realization Possible loss Safe payments to partners

Jenny P200,000

9,000 (156,000) P 53,000

Kenny P400,000 (50,000) 15,000 (260,000) P105,000

Lenny P200,000

6,000 (104,000) P102,000

Explanation: The sale of assets realized a gain of P30,000 (P210,000 – P180,000) which is distributed to the partners on the new profit sharing ratio: 30% to Jenny, 50% to Kenny, and 20% to Lenny. Liabilities are paid. A possible loss on the unsold assets (P520,000) is distributed to partners in their profit and loss ratio of 30:50:20 to Jenny, Kenny and Lenny respectively.

Joint Venture

103

CHAPTER 6 SOLUTIONS TO MULTIPLE CHOICES

6-1: a

6-2: a

Assets per Jessica Company- balance sheet Jessica’s proportionate interest in assets of JV (50%)

P3,550,000 1,000,000

Tot al assets of Jessi ca

P4550,000

Total l iabil iti es only of Jenny Co.

6-3: b 6-4: b

Investment of Heart Profit share: Sales Cost of sales (150,800 ÷ 125%) Gross profit Expenses Net Profit Profit/loss ratio

P80,000 150,800 120,640 30,160 10,000 20,160 x 40%

8,064

Bal ance of i nvestment i n JV

P88,064

Cash Merchandise inventory Accounts receivable Total assets Sweet Co’s, proportionate interest Sweet Company’s share in total asset

P190,000 29,360 150,800 370,160 x 60%

6-5: a

P222,096

6-6: a

Sales Cost of sales Purchases Merchandise inventory, end (50% of P10,000)

7,200 P10,000 __5,000

_5,000

Gross profit Expenses

2,200 ___500

Net prof it

P 1,700

104

Chapter 6

6-7: b

Original investment (cash) Profit share (P1,700 / 2)

P10,000 ___850

Bal ance of I nvestment account

P10,850

Joint venture account before profit distribution (credit balance) Unsold merchandise

P 9,000 __2,500

Joint venture profit before fee to Salas

P11,500

Joi nt ventu r e pr ofi t aft er f ee to Sal as (P11,500 / 115%)

P10,000

6-8: a

6-9: b

Fee of Salas (P10,000 x 15%) Profit share of Salas (P10,000 x 25%)

P 1,500 _2,500

Total

P 4,000

6-10: b

Salas

Salve

Balance before profit distribution Profit share:Sabas (P10,000 x 40%) Salve (P10,000 x 35%)

P 500 (dr) P 2,000 (cr) 4,000 ______ _3,500

Bal ance

P 3,500 (cr ) P 5,500 (cr )

6-11: d

Joint venture account balance before profit distribution (debit) Joint venture profit (P4,500 x 3)

P 6,000 _13,500

Cost of un sold merchan dise (i nventory) taken by Dant e

P19,500

Edwin Capital: Debits: Balance before profit distribution Credits: Profit share

P14,000 __4,500

6-12: b

Du e fr om Edwin (debit balance)

P 9,500

Joint Venture

105

Settlement to Ferdie (Balance of capital account) Debits: Credits: Balance before profit distribution Profit share

P – 0 – P16,000 __4,500

Du e to F er die (cr edit balance)

_20,500 P20,500

Settlement to Dante (balance of JV Cash account) Debits: Balance before cash settlement Due from Edwin Credits: Due to Ferdie

P30,000 __9,500

Balance

P39,500 _20,500 P19,000

6-13: a

JV account balance before profit distribution (cr) Unsold merchandise (required dr balance after profit distribution)

P 4,600 __2,000

Joint venture profit before fee to Jerry Joint venture profit after fee (P6,600 / 110%)

P 6,600 __6,000

F ee to Jerr y

P

600

6-14: d

Harry Capital

Balances before profit distribution Profit distribution: Harry P6,000 x 50%) Isaac (P6,000 x 20%)

(P 200)

Cash settl ements

P 2,800

Isaac Capital

P 1,800

3,000 1,200 P 3,000

6-15: b

Sales Cost of sales: Merchandise inventory, beg (contributions) Freight Purchases

P14,000 300 __4,000

Goods available for sale Merchandise inventory, end (P8,300/2)

P18,300 __4,150

Gross profit (loss) Expenses (P400 + P200) Net prof it (l oss)

P14,000

14,150 (150) __600 P( 750)

6-16: c

Contributions to the Joint Venture (P5,000 + P8,000) Loss share (P750 x 50%) Unsold merchandise taken (withdrawal)

P13,000 ( 375) ( 4,150)

F i nal settl ement to jack

P 8,475

106

Chapter 6


Books of Blanco (Manager)

JV Cash Joint Venture Cash Ablan Capital

100,000 90,000

Investment in JV Merchandise inventory

90,000

Investment in JV Profit from JV

15,000

90,000

100,000 90,000

Joint Venture JV cash

60,000

Joint Venture JV cash

20,000

JV cash Joint Venture

Books of Ablan

60,000

20,000 200,000 200,000

Computation of JV Profi t

Total debit to JV Total credit to JV

P170,000 P200,000

Credit balance (Profit)

P 30,000

Distribution

Joint Venture Profit from JV Ablan capital Ablan capital JV cash Cash JV cash

30,000 15,000 15,000 105,000 105,000 155,000 155,000

Cash Investment in JV

15,000

105,000 105,000

Joint Venture

107

Problem 6 – 2 Books of the Joint Venture 1.

2.

3.

4.

Computer equipment Ella capital Fabia capital

105,000 60,000 45,000

Purchases Supplies Diaz capital

80,000 2,000

Expenses Diaz capital

9,000

Cash

82,000

9,000 150,000

Sales 5.

6.

7.

8.

150,000

Expenses Cash

30,000

Merchandise inventory Ella capital

20,000

Fabia capital Cash

10,000

30,000

20,000

10,000

Adjusting and closing entries: (a)

(b)

Expenses Supplies

500 500

Sales Income summary

150,000

Income summary Merchandise inventory Purchases

77,500 2,500

Income summary Expenses

39,500

150,000

80,000

39,500

Di stri bution of profi t:

Income summary Diaz capital Ella capital Fabia capital

33,000 11,000 11,000 11,000

108

Chapter 6

Books of Diaz (1) Investment in Joint Venture Cash

82,000

(2) Investment in Joint Venture Cash

9,000

(3)

82,000

9,000

To record profit share: Investment in Joint Venture Profit from Joint Venture

11,000 11,000

Books of Ella: (1) Investment in Joint Venture Computer equipment

60,000

(2) Investment in Joint Venture Merchandise inventory

20,000

(3)

60,000

20,000


11,000 11,000

Books of Fabia: (1) Investment in Joint Venture Computer equipment (2)

(3)

Cash Investment in Joint Venture

45,000 45,000 10,000 10,000


11,000 11,000

Joint Venture

109

Problem 6 – 3

(1)

No Separate Set of Joint Venture Books is Used

Books of Dur an (M anager)

May 1:

7:

Joint Venture Castro capital Cash

12,500

JV cash Bueno capital

10,000

26: Joint Venture JV cash

12,000 500

10,000 9,500 9,500

30: JV accounts receivable Joint Venture

16,000

June 30: JV cash JV accounts receivable

15,000

27: JV cash Joint Venture

16,000

15,000 9,000 9,000

30: To r ecord un sold merchandi se taken by Du r an:

Merchandise inventory Joint Venture

3,000 3,000

To r ecord profit distri bution:

Joint Venture Profit from JV Bueno capital Castro capital

6,000 2,000 2,000 2,000

To r ecor d settl ement s:

Bueno capital Castro capital JV cash Cash Accounts receivable JV accounts receivable

12,000 14,000 24,500 1,500 1,000 1,000

110

Chapter 6

Books of Bueno

May 7:

Investment in Joint Venture Cash

June 30: Investment in Joint Venture Profit from Joint Venture Cash Investment in Joint Venture

10,000 10,000 2,000 2,000 12,000 12,000

Books of Castr o

May 1:

Investment in Joint Venture Merchandise inventory

June 30: Investment in Joint Venture Profit from Joint Venture Cash Investment in Joint Venture (2)

12,000 12,000 2,000 2,000 14,000 14,000

A Separate Set of Books is used:

Books of the Joint Ventur e

May 1:

7:

Merchandise inventory Castro capital Duran capital

12,500

Cash Bueno capital

10,000

26: Purchases Cash

12,000 500

10,000 9,500 9,500

30: Accounts receivable Sales

16,000

June 20: Cash Accounts receivable

15,000

27: Cash

16,000

15,000 9,000

Sales

9,000

Joint Venture

111

June 30: Closin g entr entr ies: ies: Sales Income summary summary

25,000

Income summary summary Merchandise Merchandise inventory, inventory, end end Merchandise Merchandise inventory inventory Purchases

19,000 3,000

25,000

12,500 9,500

Distribution of profit:

Income summary summary Bueno capital capital Castro capital Duran capital capital

6,000 2,000 2,000 2,000

Settl Settl ements to V entu r er s:

Bueno capital capital Castro capital Duran capital capital Merchandise Merchandise inventory inventory Accounts receivable receivable Cash

12,000 14,000 2,500 3,000 1,000 24,500

Books of Du r an (M anage anager/ Oper Oper ator)

May 1:

Investment Investment in Joint Venture Cash

June 30: Investment Investment in Joint Venture Profit from Joint Joint Venture Venture

Cash Investment in Joint Venture Venture Books of B ueno and Castr Castr o (Same (Same as i n N o. 1 requir ement)

500 500 2,000 2,000 2,500 2,500

112

Chapter 6

Problem 6 – 4 (1)

Books of Seiko (M anager anager /Oper /Oper ator)

April 1:

May:

June:

JV Cash Notes payable payable – PNB Roles capital capital Timex capital

August :

34,000 34,000 34,000

Joint venture venture Cash Rolex capital capital

64,100

Rolex capital capital JV cash

30,000

Joint venture venture Cash Rolex capital capital Timex capital

July:

102,000

16,300 7,800

30,000 111,400 37,400 64,700 9,300

Cash Rolex capital capital Timex capital JV cash

40,000 15,000 10,000


55,770

Cash Rolex capital capital Timex capital JV cash

45,000 67,000 13,500


30,600

65,000

13,970 31,240 10,560

125,500

9,730 16,560 4,310

To r ecor ecor d sal sale es:

JV cash (P421,000 (P421,000 x 96%) Joint venture venture

404,160 404,160

Joint Venture

113

To r ecor cor d payme payment nt of loan to PNB :

Notes payable payable – PNB Rolex capital capital Timex capital Joint venture venture (Interest (Interest expense) expense) JV cash

34,000 34,000 34,000 8,000 110,000

To record record distri distri bution of profi t:

Joint venture venture Gain from JV (30%) Rolex capital capital (60%) (60%) Timex capital (10%)

134,290 40,287 80,574 13,429

Computed as f oll ows: ows:

Total debits tot he JV account Total credits to the JV account

P269,870 _404,160

Gain (credit balance)

P134,290

To r ecord settl settl ement:

Cash Rolex capital capital Times capital JV cash

32,687 128,874 14,099 175,660

Computations: Settl Settl ement to Rolex - Bal ance of capit al account:

Debits: June July August Payment of note payable

P30,000 15,000 67,000 _34,000

P146,000

Credits: April 1 May June July August Profit share

P34,000 47,800 64,700 31,240 16,560 _80,574

__274,874

Credit balance

P 128,874

114

Chapter 6

– Balance of capital account Settl ement to ti mex

Debits: July August Payment of loan

P 10,000 13,500 __34,000

P 57,500

Credits: April 1 June July August Profit share

P 34,000 9,300 10,560 4,310 __13,429

_71,599

Credit balance

P 14,099

– Bal ance of J V cash account Settl ement to Seiko

Debits: April 1 Loan proceeds

P102,000 _404,160

P506,160

Credits: June July August Payment of loan

P 30,000 65,000 125,500 _110,000

_330,500

Balance of JV cash Less: Settlement to Rolex Settlement to Timex

175,660 P128,874 __14,099

Settlement to Seiko (2)

_142,973 P 32,687

Partial Balance Sheet June 30, 2008 Books of Sei ko (M anager /oper ator)

Current assets: Investment in joint Venture: Joint Venture assets: Cash Joint Venture Less: Equity of other venturers (P116,500 + P43,300) Current liabilities: Notes payable – PNB

P 72,000 _175,500

P247,500 _159,800

87,700

34,000

Joint Venture

115

Computation of balances as of June 30, 2008: JV Cash

April 1 P102,000 Balance P 72,000

P30,000

Joint Ventur e

June

May June

P 64,100 _111,400

Balance P175,500 Not es Payable

P34,000

Rol ex capit al

April

June

P 30,000 _______

P 34,000 47,800 __64,700

P 30,000

P146,500

April 1 May June

P116,500 Ti mex capital

P34,000 __9,000

April June

P43,300 Problem 6 – 5

Consolidated Balance Sheet

Cash Receivables Inventory Other assets

P 61,000 122,000 102,500 __40,500

Total assets

P326,000

Accounts payable Other liabilities Capital stock Retained earnings

P 61,000 96,500 50,000 _118,500

Total liabilities and stockholders' equity

P326,000

Consolidated Income Statement

Sales Cost of sales

P246,750 _124,750

Gross profit Operating expenses

122,000 __58,250

Consolidated net income

P 63,750

116

Chapter 6

Problem 6 – 6

(a)

Journal entries on venture books June 15:

Cash

1,000,000

MacDo Initial contribution at 6% July 1:

Land

1,000,000

2,400,000

Mortgage payable Cash Purchased land for cash and 6% mortgage. Aug 1:

Cash

1,650,000 750,000

1,100,000

MacDo Additional contribution at 6%. Land

1,100,000

950,000

Cash Paid for improvements. Sept 30:

Oct 31:

Nov 30:

Dec 31:

950,000

Mortgage payable Interest expense- Mortgage Cash Reduced mortgage and paid interest.

250,000 3,750


400,000 8,000


300,000 7,500

253,750

408,000

Mortgage payable 200,000 Interest expense- Mortgage 21,000 Cash Reduced mortgage and make semi-annual interest payment.

307,500

221,000

Joint Venture

31:

117

Cash

2,600,000

Sales Sales to date. 31:

31:

31:

31:

2,600,000

Commissions Cash P2,600,000 x 5%

130,000

Expenses Cash Paid expenses

628,100

Interest expense- Venturer MacDo 6% on P1,000,000 from June 15 to December 31, and on P1,100,000 from August 1 to December 31. Sales

130,000

628,100

60,000 60,000

2,600,000

Land (cost of land sold) Expenses Commissions Interest expense- mortgage Interest- venturer Income summary To close income and expense accounts. 31:

31:

1,145,000 628,100 130,000 40,250 60,000 596,650

Income summary MacDo MacEn To divide gain, 60:40.

596,650

MacDo

801,650

596,650 238,660

Cash Payment on account. (b)

801,650

Journal entries on MacDo’s books:

June 15:

Aug 1:

Investment in Joint Venture Cash Initial contribution.

1,000,000

Investment in Joint Venture Cash Additional contribution.

1,100,000

1,000,000

1,100,000

118

Chapter 6

Dec 31:

31:

31:

Investment in Joint Venture Interest income Interest earned on cash advanced.

60,000 60,000

Investment in Joint Venture Gain on Joint Venture 60% of gain on venture.

357,990

Cash

801,650

357,990

Investment in Joint Venture Repayment in part of advances. (c)

801,650

MacDo and MacEn Joint Venture Income Statement For the period from June 15 to December 31, 2008

Sales Cost of land sold: Land Improvements Total Unsold land Gross profit Expenses: Advertising and office expenses Interest on mortgage Interest on advances Commissions Net gain Distributions: MacDo (P596,650 x 60%) MacEn (P596,650 x 40%)

P2,600,000 P2,400,000 950,000 P3,350,000 2,205,000

P 628,100 40,250 60,000 130,000

1,145,000 1,455,000

858,350 P 596,650

P 357,990 238,660

Mac Do and MacEn Joint Venture Balance Sheet December 31, 2008

Assets Cash Land Total Assets

P 250,000 2,205,000 P2,455,000

Liabilities and equity: Mortgage payable MacDo MacEn Total liabilities and equity

P 500,000 1,716,340 238,660 P2,455,000

Joint Venture

119

Venturers equity (interest)

Invested Shares: Gain Interest on advances Commissions Total Balances Withdrawn Equity (interests)

MacDo P2,100,000

MacEn

Total P2,100,000

P 357,990 60,000

P238,660

P 596,650 60,000 130,000 786,650 2,886,650 (931,650) P1,955,000

417,990 2,517,990 (801,650) P1,716,340

130,000 368,660 368,660 (130,000) P238,660

120

Chapter 7

CHAPTER 7 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 7-1: c

Amount realized secured by inventory Unsecured claim (P10,000 x 25%)

P 30,000 __2,500

Total amount r ecei ved

P 32,500

Amount realized secured by inventory Unsecured claim (P88,000 x 75%)

P120,000 __66,000

Total amount r ecei ved

P186,000

7-2: d

7-3: d

(P15,000,000 + P200,000)

7-4: a

Realizable value: Current assets Land and building Less mortgage payable

P 50,000 P240,000 _200,000

__40,000

Total Less accounts payable

90,000 _160,000

Estim ated defi ciency to unsecur ed creditor s

P 70,000

7-5: c

Total realizable value to unsecured creditors (P90,000)/total unsecured Claims (P160,000) = 56.25% 7-6: a

Free assets: Current assets Buildings and equipment Total Liabilities with priority: Administrative expenses Salary payable Income taxes Total

P 33,000 _110,000 P143,000

P 20,000 6,000 __8,000 P 34,000

Corporation in Financial Difficulty – Liquidation

Free assets after payment of liabilities with priority: (P143,000 – P34,000) Unsecured liabilities Notes payable Accounts payable Bonds payable Total

121

P109,000 P 30,000 83,000 __70,000 P183,000

Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60% Payment of notes payable: Value of security (land) 60% of remaining P30,000 Total coll ected

P 90,000 __18,000 P108,000

7-7: c

Free assets: Other assets Excess from assets pledged with secured Creditors (P116,000 – P70,000) Total Liabilities with priority Free assets after payment of liabilities with priority (P126,000 – P42,000) Unsecured liabilities: Excess of partially secured liabilities over pledge Assets (P130,000 – P50,000) Unsecured creditors Total

P 80,000 __46,000 P126,000 P 42,000 P 84,000

P 80,000 _200,000 P280,000

Recovery percentage: P84,000 / P280,000 = 30% Payment of partially secured debt: Value of pledged assets 30% of remaining P80,000 Total coll ected

P 50,000 __24,000 P 74,000

122

Chapter 7

7-8: a

The holder of Debt Two will receive P100,000 from the sale of the pledged asset. Since the holder wants to receive P142,000 out of the total debt of P170,000, the company must be able to generate enough cash to pay off 60% of the unsecured liabilities (P42,000/P70,000) after paying 100% of the liabilities with priority (P110,000). Unsecured liabilities: Unsecured creditors Excess liability of Debt One in excess of pledged Asset (P210,000 – P180,000) Excess liability of Debt Two in excess of pledged Asset (P170,000 – P100,000)

P230,000 30,000 __70,000

Total unsecured liabilities Necessary percentage

P330,000 ____60%

Cash needed for these liabilities

P198,000

I n or der f or t he holder of Debt Two to r ecei ved exactl y P142,000, the other f r ee assets must be sold for P308,000. With that much money, the liabilities with priority

(P110,000) can be paid with the remaining P198,000 going to the unsecured debts of P330,000. This 60% figure would insure that the holder of Debt Two would get P100,000 from the pledged asset and P42,000 (P70,000 x 60%) from the free assets. 7-9: c

Estate equity, beg. (P100,000 – P85,000) Loss on realization (P100,000 – P75,000) Unrecorded liabilities: Interest expense Administrative expense Estate def ici t

P 15,000 ( 25,000) P

250 4,000

(

4,250)

P( 14,250)

7-10: c

Total assets at net realizable value Fully secured liabilities Estimated administrative expense

P 75,000 (40,000) _( 4,000)

Estimated amount available Unsecured claims (P45,000 + P250)

P 31,000 (45,250)

Estim ated defi ciency to unsecur ed creditor s

P 14,250


123

7-11: b

Assets pledged with fully secured creditors Fully secured creditors Free assets

P185,000 _130,000

55,000 _160,000

Total free assets Less: Liabilities with priority

215,000 __35,000

Avail able to unsecured non-pr ior it y claims

P180,000

Machinery Recoveries of unsecured claims (50,000 - 10,000) X .50

P 10,000 __20,000

Amount to be realized

P 30,000

Notes Payable Less: Inventories

P 23,940 19,200

7-12: b

7-13: b

_

Unsecured Liabilities % of recovery

4,740 ____78%

Recovery Add: Inventories

3,697 _19,200

Am oun t to be r eceived by Wood

7-14: a 7-15: a 7-16: b 7-17: d

P 22,897

- P7,000 - P30,000 - P57,200 [52,000 + (8,000 X .65)] - P72,800 (112,000 X .65)

7-18: d

Estimated loss: Account Receivable Inventories (28,000 - 18,500) Building (59,000 - 22,000) Equipment (5,600 - 2,000) Goodwill Prepaid expenses Less: Stockholder's equity Common stock Deficit Estim ated defi ciency

3

P 8,160 9,500 7,000 3,600 5,650 ___430

P 64,340

P 72,000 ( 16,660)

_55,340 P 9,000

124

Chapter 7

7-19: d

Accounts Receivable (39,350 - 16, 110) Notes Receivable (18,500 - 12,500) Inventories (87,850 - 45,100) Prepaid expenses Equipment (48,800 - 9,000)

P 23,240 600 42,750 950 __39,800

Tot al esti mated l oss

P112,740

7-20: b P33,750 (95,000 - 61,250) on Land and Building 7-21: d

Total Free Assets: Balance of Assets Pledged to Fully Secured Creditor (95,000 - 90,000) Free Assets: Cash Accounts Receivable Inventories Equipment

P 5,000 P 2,700 16,110 45,100 __9,000

Total Less: Unsecured liabilities with priority (1,850 + 4,650) Net Free Assets Divide by Unsecured creditors: Balance of Partially Secured Creditor Notes Payable - PNB Notes Receivable Accounts Payable Notes Payable

__72,910 77,910 ___6,500 P 71,410

P 15,000 __12,500 52,500 __51,250

2,500 103,750 ÷ P106,250

Estim ated r ecover y %

67%

7-22: d

Fully secured (Notes Payable) Partially secured: Notes Payable - PNB Add (2,500 X 67%) Unsecured Creditor with Priority Unsecured Creditor without Priority (103,750 X 67%) Total

P 90,000 P12,500 __1,675

14,175 6,500 __69,513 P180,188


125

7-23: a

Unsecured creditors without priority Estimated deficiency to unsecured creditors: Loss on realization Estimated liquidation expenses Total Stockholders’ equity Net free assets Liabilities with priority

P1,102,500 551,250 55,125 606,375 441,000

F r ee assets

165,375 937,125 122,500 P 1,059,625

7-24: a

Estimated net gain (loss) on realization: Gain on realization Loss on realization Estimated claims Total Stockholders equity

78,750 (336,700)

(257,950) ( 43,750) (301,700) 295,750

Estim ated def i ciency

P( 5,950)

Notes payable (175,000 – 140,000) Unsecured liabilities (420,000 – 52,500) Total Free assets (157,500 + 210,000)

P 35,000 367,500 402,500 367,500

7-25: b

Estim ated def i ciency

35,000

7-26: a

Old receivable (net) Marketable securities Old inventory Depreciable assets- net

P 38,000 12,000 60,000 96,000

Tot al assets to be r eali zed

P206,000

Old receivable New receivable Marketable securities Sales of inventory

P

7-27: a

Tot al asset r eal i zed

21,000 47,000 10,500 75,000

P153,500

7-28: a

Gain on sale of inventory (P75,000 – 60,000) Loss on realization: Marketable securities (12,000 – 10,500) Trustee’s expenses Depreciation Net l oss

15,000 1,500 4,300 16,000

(21,800) P( 6,800)

126

Chapter 7

SOLUTIONS TO PROBLEMS Problem 7 – 1 (A)

Laguna Company Statement of Affairs October 31, 2008

Book Value

Estimated Realizable Value

Free Assets

P67,400 50,400

P17,000

Assets Assets pledge for fully secured creditors: P107,000 ... Plant assets .................................................. Less; Fully secured liabilities...................... _ Assets pledged for partially secured creditors: 39,000 . ... Inventories...................................................

Free Assets: 4,000 .. ... Cash............................................................. 46,000 .. ... Accounts, receivable ................................... 2,000 .. ... Supplies .......................................................

P18,000

P 4,000 46,000 __1,500

_51,500

Total free assets ............................................... Less: Unsecured liabilities with priority..........

P68,500 __7,000

Net Free Assets................................................ Estimated deficiency to unsecured creditors (to balance)

P61,500 _20,500

P198,000 Book Value

Liabilities & Stockholders' Equity Fully secured liabilities: P50,400 ... ... Mortgage payable (including interest, P400) Partially secured liabilities: 21,000 ... ... Notes payable .............................................. Less: Inventory............................................ Unsecured creditors with priority: 5,800 ... ... Wages payable 1,200 ... ... Property taxes payable ................................

Total ............................................................ Unsecured creditors without priority: 60,000 ... ... Accounts payable ........................................ 19,000 ... ... Notes payable .............................................. Stockholders' Equity........................................ P198,000 (B) Creditor Group Unsecured liabilities with priority .................................... Fully secured creditors...................................................... Partially secured creditors................................................. Unsecured creditors without priority ................................ * P18,000 + (P3,000 X 0.75) = P20,250 (C) See statement of affairs in requirement (A)

Creditors' Claim

P82,000 Unsecured Liabilities

P50,400 P21,000 _18,000

P 3,000

P 5,800 _1,200 P 7,000 60,000 19,000 _____ – Amount of Claim

P7,000 50,400 21,000 79,000

P82,000 Amount to Percentage be Paid to be paid P7,000 50,400 20,250 * 59,250

100.0% 100.0% 96.4% 75.0%


127

Problem 7 – 2 VC Corporation Statement of Realization and Liquidation Month Ended January 31, 2008

Assets to be realized: Land ....................... P10,000 Building ................. 43,000 Equipment.............. 28,000 Patents .................... __4,400 Assets Acquired..............

P85,400 0

Liabilities Liquidated: Account payable .... P14,000 Loans payable ........ __7,000

21,000

Liabilities not Liquidated: Accounts payable ... Loans payable ........

99,000

Assets realized: land.............................. P 0 Building ...................... 0 Equipment ................... 8,800 Patents ......................... _12,000 Assets not realized: Land ............................ P10,000 Building ...................... 43,000 Equipment ................... _13,000

P20,800

66,000

Liabilities to be Liquidated: Accounts payable ........ P80,000 Loans payable ............. _40,000

120,000

Gain on realization ......... ............... ___7,600

Loss on realization ...... ..............

___6,200

Total ............................... ............... P213,000

Total ............................ ..............

P213,000

Accounts payable ......................... Loans payable .............................. Estate deficit.................................

P 66,000 33,000 ( 26,300)

66,000 33,000

VC Corporation Balance Sheet January 31, 2008

Cash ............................................... Land ............................................... Building .......................................... Equipment ......................................

P 6,700 10,000 43,000 _13,000

Total ............................................... P 72,700

P 72,700

VC Corporation Estate Deficit January 31, 2008

Gain on realization .................................................................... Loss in realization .................................................................... Trustee's expenses ....................................................................

P 7,600 ( 6,200) ( 1,300)

Net gain on realization............................................................... Estate deficit, January 1, 2008...................................................

P 100 ( 26,400)

Estate deficit, January 31, 2008.................................................

P(26,300)

128

Chapter 7 Problem 7 – 3

Rizal Corporation Statement of Affairs Book Values

Assets

Assets pledged to fully secured creditors: P 80,000 ...... .... Land and building .............................................. Less: Mortgage payable .....................................


Free Assets

P102,000 43,000

P 59,000

Finished Goods .................................................. Less: Loan payable .............................................

P 55,000 50,000

5,000

Assets pledged to partially secured creditors: 32,000 ...... .... Accounts receivable (80% x 30,000) ................. 12,000 ...... .... Trucks ................................................................

24,000 3,500

Totals..................................................................

27,500

Free Assets: .... Cash.................................................................... .... AR (20% x 30,000) ............................................ .... Inventory – Materials ......................................... .... Prepaid expense.................................................. .... Trucks ................................................................ .... Equipment .......................................................... .... Intangible ...........................................................

4,000 6,000 27,000 0 2,500 25,000 _______

50,000 ...... ....

4,000 ...... 8,000 ...... 36,000 ...... 1,000 ...... 8,000 ...... 45,000 ...... 16,000 ......

Total Free Assets .................................................... Less: Unsecured liability with priority (12,000 + 8,000) ________

P128,500 20,000

Net free assets ......................................................... Estimated deficiency to unsecured creditors (to Balance)

108,500 81,000

P 292,000 ...... .... Total unsecured liabilities ....................................... Book Values

Liabilities and Equity Fully secured creditors: P 43,000 ...... .... Mortgage payable ............................................... 50,000 ...... .... Loans payable ....................................................

64,500

P189,500 Creditors' Claim

Unsecured Liabilities

94,000 50,000

Total ...................................................................

144,000

Partially secured creditors': 25,000 ...... .... Bank Loan .......................................................... Less: Receivable (80% x 30,000) .......................

25,000 24,000

P 1,000

Truck Loan ......................................................... Less: trucks ........................................................

5,000 3,500

1,500

Unsecured creditors with Priority: 12,000 ...... .... Wages payable ................................................... 8,000 ...... .... Taxes payable .....................................................

12,000 8,000

Totals..................................................................

20,000

Unsecured creditors: 77,000 ...... .... Accounts payable ............................................... 110,000 ...... .... Stockholder Loan ............................................... ( 38,000) ...... .... Stockholder Equity .................................................

77,000 110,000

5,000 ...... ....

P 292,000

Total ........................................................................

187,000 – P189,500


129

Problem 7 – 4 Mapayapa Corporation Statement of Affairs November 1

Book Value

Assets


Free Assets

Assets pledged to fully secured creditors: P60,000.... ... Investments ................................................. 180,000.... ... Accounts receivable ....................................

P 69,000 171,000

Total ............................................................ Less: Note payable ......................................

240,000 210,000

P 30,000

Free assets: 66,000.... ... Cash............................................................. P 66,000 248,000.... ... Accounts receivable .................................... 193,500 291,000.... ... Merchandise inventory................................ 180,000 870,000.... ... Plant & equipment ...................................... 330,000 114,000.... ... Notes receivable .......................................... 108,300 – .... ... Patent........................................................... __12,000

_889,800

Total free assets........................................... Less: Unsecured liabilities with priority..........

919,800 __13,800

_________

Net free asset ............................................... Estimated deficiency (to balance) ...................

906,000 60,300

P1,839,000

Total ................................................................

P966,300

Book Value

Liabilities & Equity

Fully secured creditors: P 210,000.... ... Notes payable ..............................................

Creditor's Claim

Unsecured Liabilities

P210,000

Unsecured creditor with priority: Accrued wages ............................................ P 7,200 Accrued property tax ................................... ___6,600 Total ............................................................ Unsecured creditor: 960,000.... ... Account payable.......................................... Accrued expenses........................................ 300,000.... ... Capital stock __369,000.... ... Retained earnings ............................................ P1,839,000

Total ................................................................

P 13,800

P960,000 6,300 _______ P966,300

130

Chapter 7

Problem 7 – 5 a.

b.

Total fair value of assets (estimated proceeds) .......................... Less: Fully and partially secured creditors claim: Notes payable, interest (secured by receivable and inventory) ................................................................... 125,000 Bonds payable (secured by land & building) .................... 231,000

P471,000

Available to unsecured creditors................................................ Less: Unsecured creditors with priority: Wages payable .................................................................. P 9,500 Taxes payable.................................................................... __14,000

115,000

__23,500

Amount available to unsecured creditors...................................

P 91,500

Unsecured portion of notes payable and interests (P195-P125) Accounts payable .......................................................................

P 70,000 __95,000

Total claims of unsecured creditors ...........................................

P165,000

356,000

P91,500 ––––––– = 55.45% P165,000 c.

Distribution of P471,000:

Creditors

Accounts payable Wages payable Taxes payable Notes payable & interests Bonds payable & interests

Amount

Percent Realized

Total Payment

P 95,000 .... 9,500 .... 14,000..... 125,000 .... 70,000 231,000 ....

55.45% 100% 100% 100% 55.45% 100%

P 52,678 9,500 14,000 125,000 38,815 _231,000

Total estimated payment ........................................

P470,993


131

Problem 7 – 6

1.

Evergreen Company Statement of Affairs June 30, 2008

Book Values

Estimated Realizable Values

ASSETS

Available for Unsecured Creditors

: Pledged with f ul ly secur ed creditor s

P460,000

Land and building ..................................... Less: Mortgage payable (including accrued interest)

P340,000 (330,000)

P 10,000

P 80,000 126,000 84,000 40,000 _ _____0_

330,000

F r ee Assets:

80,000 140,000 100,000 120,000 100,000

Cash ......................................................... Accounts receivable – net ......................... Inventories ................................................ Machinery – net ........................................ Goodwill ...................................................

Total free assets ........................................ ................... Less: liabilities with priority ..................... ...................

340,000 _140,000

Net fr ee assets .......................................... ...................

200,000 _130,000

Estimated deficiency (Squeeze figure) ..... ................... P1,000,000

P330,000 LIABILITIES AND STOCKHOLDERS' EQUITY Secured & Priority Claims

Unsecured Non-priority Liabilities

L iabili ties with pri ority

P120,000 20,000

Wages payable .......................................... Property taxes payable ..............................

P120,000 __20,000

Total .........................................................

P140,000

F ul ly secured creditors

300,000 30,000

Mortgage payable ..................................... Interest on mortgage payable ....................

300,000 __30,000

Total .........................................................

P330,000

Un secur ed creditor s

220,000 100,000 10,000

Accounts payable ...................................... ................... Note payable-unsecured............................ ................... Interest payable-unsecured ....................... ...................

P220,000 100,000 10,000

Stockholders' Equi ty

400,000 Capital stock ............................................. (200,000) Retained earnings (deficit)........................ ...................

___ P330,000

P1,000,000 2.

Settlement per peso of unsecured creditors is P.6250 (P200,000/P320,000). No payment is made for the P10,000 unsecured interest claim.

Chapter 7

132 ____ Problem 7 – 7 1.

Entries on trustee's books. 2008 March 1: Cash ............................................... ........ P8,000 Accounts receivable – net .............. ........ 16,000 Inventories ..................................... ........ 72,000 Land ............................................... ........ 40,000 Buildings – net ............................... ...... 200,000 Intangible assets ............................. ........ 52,000 Accounts payable .................... ................... Note payable............................ ................... Deferred revenue ..................... ................... Wages payable......................... ................... Mortgage payable .................... ................... Estate equity ............................ ................... To record custody of Kimerald Corporation .

March 1 to 31: Cash ............................................... ........ 15,200 Estate equity ................................... ............. 800 Accounts receivable-net .......... ................... To record collection of receivables and recognize loss. Cash ............................................... ........ 38,800 Estate equity ................................... ........ 33,200 Inventories ............................... ................... To record sale of inventories at a loss. Cash ............................................... ...... 180,000 Estate equity ................................... ........ 60,000 Land......................................... ................... Buildings-net ........................... ................... To record sale of land and buildings at a loss. Estate equity ................................... ........ 52,000 Intangible assets ...................... ................... To write off intangible assets. Estate equity ........................................ ......... 16,400 Administrative expenses payable . ....................

To accrue trustee expenses.

P100,000 80,000 2,000 6,000 160,000 40,000

16,000

72,000

40,000 200,000

52,000

16,400


2.

133

Financial Statements Kimerald Corporation in Trusteeship Balance Sheet March 31, 2008

Assets Cash ..................... ................................................. ...................

P242,000

Liabilities and Deficit Accounts payable . ................................................. ................... Note payable-unsecured......................................... ................... Revenue received in advance................................. ................... Wages payable ..... ................................................. ................... Mortgage payable ................................................. ................... Administrative expense payable-new .................... ...................

P100,000 80,000 2,000 6,000 160,000 __16,400

Total liabilities ..... ................................................. ................... Less: Estate deficit ................................................. ...................

P364,400 _122,400

Total liabilities net of deficit.................................. ...................

P242,000

Kimerald Corporation in Trusteeship Statement of Cash Receipts and Disbursements March 1 to 31, 2008

Cash balance, March 1, 2008 ................................. ................... Add: Cash receipts Collections of receivables ............................. ..... P 15,200 Sale of inventories......................................... ........ 38,800 Sale of land and buildings ............................. ...... 180,000

P

8,000

_234,000

Total ..................... ................................................. ................... Less: Cash disbursements ...................................... ...................

242,000 ____ – 0 –

Cash balance, March 31, 2008 ............................... ...................

P242,000

Kimerald Corporation in Trusteeship Statement of Changes in Estate Equity March 1 to 31, 2008

Estate equity, March 1 ........................................... ................... Less: Loss on uncollectible receivables.................. ....... P 800 Loss on sale of inventories............................ ........ 33,200 Loss on sale of land and buildings ................ ........ 60,000 Loss on write off of intangibles .................... ........ 52,000 Administrative expenses ............................... ...... _16,400

P 40,000

_162,400

Estate deficit, March 31 ......................................... ...................

P122,400

134

3.

Chapter 7

Entries on trustee's books:

2008 April: Mortgage payable ..................................... ...... 160,000 Cash.................................................. ................... To record payment of secured creditors from proceeds from sale of Land and buildings. Administrative expenses payable-new...... ........ 16,400 Deferred revenue ...................................... .......... 2,000 Wages payable .......................................... .......... 6,000 Cash.................................................. ................... To record payment of priority liabilities . Accounts payable ...................................... ........ 32,000 Note payable-unsecured............................ ........ 25,600 Cash.................................................. ................... To record payment of P.32 per peso to unsecured creditors (available Cash of P57,600 divided by unsecured claims of P180,000). Accounts payable ...................................... ........ 68,000 Note payable-unsecured............................ ........ 54,400 Estate equity ..................................... ................... To write-off remaining liabilities and close trustee's records.

160,000

24,400

57,600

122,400

Reorganization and Troubled Debt Restructuring

135


Trade accounts payable (P52,000 + P62,700) 12% preferred stock (5,000 x P1) Paid in capital in excess of par (5,000 x P9) Cash (P62,700 x P0.80)

P114,700 P 5,000 45,000 _50,160

Gain f r om dischar ge of i ndebtedness

_100,160 P 14,540

8-2: c 8-3: c 8-4: b

Carrying value of the note payable: Principal Interest Restructured value: Principal Interest

P600,000 __60,000

P660,000

P400,000 _110,000

_510,000

Gain on debt restr uctur in g

P150,000

Other income: Fair value of land Books value of land

P450,000 _360,000

8-5: d

Oth er i ncome

Extraordinary gain: Book value of note payable Principal Interest Fair value of land

P 90,000

P500,000 __60,000

P560,000 _450,000

Ext raor dinar y gain

P110,000

8-6: a

Book value of bonds payable Par value of preferred stock (5,000 shares x P100)

P500,000 _500,000

No gain no l oss

P

– 0 –

136

Chapter 8

8-7: a

Book value of notes payable: Principal Interest Par value of common stock issued (200 shares x P5) Additional paid in capital Add gain on payment of accounts payable: Book value Payment

P 2,500 ___500

P 3,000 __1,000 P 2,000

P 10,000 __8,000

Total gain on debt discharge

__2,000 P 4,000

8-8: a

Carrying value of debt: Note payable Interest payable Fair value machinery Balance of debt Restructured debt: Note payable Interest (P50,000 x .08 x 2)

P100,000 __12,000

P112,000 _(36,000) P 76,000

P 50,000 ___8,000

__58,000

Restr uctur in g dif ference (gain)

P 18,000

Principal Interest payable (300,000 x 10%)

P300,000 __30,000

Car r yin g value

P330,000

8-9: d

8-10: c

Should be P310,600 Restructured principal of note payable Interest payable: On book value (P300,000 x 10% 30%) On res tru ctu red (P2 60, 000 x 8% x 2)

P260,000 P 9,000 _41,600

F utu r e cash f l ows to l i qui date th e debt

__50,600 P310,600

8-11: d 8-12: d L oss on tr ansf er of l and:

Original cost Market value

P290,000 _270,000

P 20,000

P300,000 _270,000

P 30,000

Gain on r estr uctur in g of debt:

Carrying value of debt Market value of land


137

8-13: a

Transfer gain (loss): Carrying amount of equipment Fair value of equipment

P80,000 75,000

Tr ansfer l oss

P(5,000)

Restructuring gain: Carrying amount of the debt Fair value of equipment transferred

P100,000 75,000

Restr uctur in g gain

P 25,000

8-14: d

Carrying amount of real estate transferred Fair value of real estate

P100,000 90, 000

L oss on r estr uctu ri ng of payables

P(10,000)

Carrying amount of liability Fair value of real estate transferred

P150,000 90,000


P 60,000

8-15: d

8-16: c

Gain on revaluation of land (120,000 – 85,000) Gain on the extinguishment of debt (185,000 – 120,000)

P 35,000 65,000

Total gain

P100,000

Carrying value of debt (P800,000 + 80,000) Total future payments (P700,000 + 80,000)

P880,000 780,000


P100,000

8-17: a

8-18: a

First determine the expected future cash flows as follows: 70,000 x .79719 = P55,803 5,600 x 1.69005 = 9,464 Present value of future cash flow P65,267 The interest revenue can be computed using the effective interest method as follows: Present value at 12/31/06 P65,267 Interest income at 12/31/07 (65,267 x 12%) 7,832 Interest receivable at 12/31/07 (70,000 x 8%) 5,600 2,232 Present value at 12/31/07 P67,499 I nterest i ncome at 12/31/08 (67,499 x 12%)

P 8,100

138

Chapter 8

SOLUTIONS TO PROBLEMS Problem 8 – 1 J o u r n a l e n t r i es f o r c o m p an y em er g i n g f r o m ba n k r u p t c y u si n g f r esh s t ar t accounting:

–

Receivables .... ..... ..............................................................................10,000 Inventory . ...... ..... ..............................................................................10,000 Building .. ...... ..... 100,000 Reorganization value in excess of amount Allocable to tangible assets ..........................................................60,000 Additional paid in capital....................................................... 180,000 To adjust accounts to market value as part of fresh start accounting. Since the company has a reorganization value of P760,000 but the assets have a market value of only P700,000 (P90,000 + P210,000 + P400,000), and account entitled Reorganization Value in Excess of Amount Allocable to Tangible Assets must be recorded for P60,000. Liabilities ....... .... 300,000 Common stock (P330,000 x 80%) ............................................... Gain on debt discharge ................................................................. To record settlement of liabilities .

264,000 36,000

Problem 8 – 2

2008 July 14: Costs of reorganization.................................................................50,000 Cash with escrow agent .........................................................

50,000

Common stock 580,000 Common stock (60,000 x P1) ................................................ Additional paid in capital.......................................................

60,000 520,000

Note payable – 10% 120,000 Interest payable (P120,000 x 10% x 3/12) ................................... 3,000 Note payable – 12% ...............................................................

123,000

Trade accounts payable 100,000 Cash P100,000 x 0.80) ........................................................... Gain on debt discharge ..........................................................

80,000 20,000

Additional paid in capital 290,000 Gain on debt discharge 20,000 Retained earnings................................................................... Costs of reorganization ..........................................................

260,000 50,000


139

Problem 8 – 3 Jade Corporation Balance Sheet December 31, 2008 ASSETS Current assets: Cash ..... ...... ... ...... ..... ........................................................ P 23,000 Inventory ..... ... ...... ..... ........................................................ __45,000 Property and equipment: Land ..... ...... ... ...... ..... ........................................................ 140,000 Buildings ..... ... ...... ..... ........................................................ Equipment ... ... ...... ..... ........................................................ _154,000

220,000 _514,000

Total assets .. ... ...... ..... ........................................................

P582,000

LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities not subject to compromise Current liabilities: Accounts payable ... ..... ........................................................ Long-term liabilities: Note payable (2006) ..... P100,000 Note payable (2003) ..... _100,000 .. _ Liabilities subject of compromise Accounts payable ... ..... ........................................................ Accrued expenses ... ..... ........................................................ Income taxes payable ... ........................................................ Note payable (due 2008) .......................................................

P 68,000

P 60,000

200,000

P260,000

123,000 30,000 22,000 _170,000

_345,000

Total liabilities. ...... ..... ........................................................ Stockholders' Equity Common stock . ...... ..... ........................................................ 200,000 Retained earnings (deficit) .................................................... (223,000)

Total liabilities and stockholders' equity (deficit) .................

605,000

_(23,000) P582,000

Problem 8 – 4 Preliminary computations: Book values prior to reorganization: Total assets (P100,000 + P112,000 + P420,000 + P78,000) .............. Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 + P185,000 + P200,000) .................................................................. Common stock (given) ....................................................................... Deficit (given) ..............................................................................

P710,000 P800,000 P240,000 P330,000

140

Chapter 8

Book values after reorganization: Total assets (reorganization value) ............................................................... P780,000 Total liabilities (P5,000 + P4,000 + P100,000 + P50,000 + P71,000 + P110,000) ............................................................................. P340,000 Common stock (returned shares are reissued)............................................... P240,000 – 0 – Deficit (eliminated) ..................................................................................... Additional paid in capital (squeeze).............................................................. P200,000

Since the company will have 30,000 shares outstanding after the reorganization, the additional paid in capital equals P6.66 per share. Because the company has a reorganization value of P780,000 but the assets have a market value of only P735,000, an account entitled Reorganization Value in Excess of Amount allocable to Tangible Assets must be recognized for P45,000. JOURNAL ENTRIES: Land and buildings ..................................................................................... 80,000 1. Reorganization Value in excess of amount allocable to tangible assets ..................................................................... 45,000 Accounts receivable ........................................................................ Inventory ..................................................................................... Equipment ..................................................................................... Additional paid in capital ................................................................ To adjust accounts to market value as part of fresh start accounting.

20,000 22,000 13,000 70,000

2.

Common stock . ...... ..................................................................................... 144,000 Additional paid in capital ....................................................................... 144,000 To record shares turned in to the company by the owners as part of the reorganization plan. 18,000 shares at P8 par value.

3.

Accounts payable .... ..................................................................................... 80,000 Note payable .... ..................................................................................... Common stock, P8 par value ................................................................. Additional paid in capital (P6.66 per share) .......................................... Gain on debt discharge .......................................................................... To record settlement of accounts payable.

5,000 8,000 6,666 60,334

Accrued expenses.... ..................................................................................... 35,000 Note payable .... ..................................................................................... Gain on debt discharge .......................................................................... To record settlement of accrued expenses.

4,000 31,000

4.

5.

6.

Note payable .... ...... 200,000 Note payable .... ..................................................................................... Common stock, P8 par value ................................................................. Additional paid in capital (P6.66 per share) .......................................... Gain on debt discharge .......................................................................... To record settlement of note payable due in 2007

50,000 80,000 66,667 3,333

Note payable .... ...... 185,000 Note payable .... ..................................................................................... Common stock, P8 par value ................................................................. Additional paid in capital, P6.66 per share ............................................ Gain on debt discharge .......................................................................... To record settlement of note payable due in 2008

71,000 56,000 46,667 11,333


141

Problem 8 – 5 7.

8.

Note payable .. ..... ..............................................................................200,000 Note payable.. .............................................................................. Gain on debt discharge ................................................................. To record settlement of note payable due in 2009

110,000 90,000

Additional paid in capital (P334,000 – P200,000)..............................134,000 Gain on debt discharge .......................................................................196,000 Retained earnings (deficit) ........................................................... 330,000 To adjust additional paid in capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.

Since the Company has a reorganization value of P800,000 but only P653,000 can be assigned to specific assets based on market value, the remaining P147,000 is reported as a Reorganization Value in Excess of Amount Allocable to Identifiable Assets. Sun Corporation Balance Sheet – Fresh Start Accounting December 31, 2008 ASSETS Current assets Accounts receivable ..... .............................................................................. P 18,000 Inventory ..... ... ...... ..... .............................................................................. _111,000 Property and equipment Land and buildings . ..... .............................................................................. 278,000 Machinery.... ... ...... ..... .............................................................................. _121,000 Intangible assets Patents ...... ... ...... ..... .............................................................................. 125,000 Reorganization value in excess of amount allocable To identifiable assets _147,000

Total assets .. ... ...... ..... ..............................................................................

P129,000

399,000

_272,000 P800,000

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ... ..... .............................................................................. Long-term liabilities Note payable (due in 2 years) ...................................................................... P 35,000 Note payable (due in 5 years) ...................................................................... 50,000 Note payable (due in 8 years) ...................................................................... _100,000

_185,000

Total liabilities. ...... ..... ..............................................................................

P282,000

Stockholders' Equity: Common stock . ...... ..... .............................................................................. P500,000 Additional paid in capital (squeeze) ............................................................ __18,000

_518,000

Total liabilities and stockholders' equity ................................................................

P 97,000

P800,000

142

Chapter 9

CHAPTER 9 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 9-1: d

Deferred gross profit, Dec. 31 (before adjustment) P1,050,000 Less: Deferred gross profit, Dec. 31 (after adjustment) Installment accounts receivable, Dec. 31 P1,500,000 Gross profit rate ____  25% __375,000 Reali zed zed gr oss oss pr of i t, 2008

P 675,000

OR Installment Sales (P1,050,000  25%) Less: Installment account receivable, Dec. 31

P4,200,000 __1,500,00

Collection Gross profit rate

P2,700,000 ___X 25%

Reali zed zed gr oss oss pr ofi of i t, 2008

P 675,000

9-2: a

2006

2007

2008

Deferred gross profit, before adjustment Deferred gross profit, end 2006 (6,000 X 35%) 2007 (61,500 X 33%) 2008 (195,000 X 30%)

P7,230

P 60,750

P 120,150

Reali zed zed gr oss oss pr ofi of i t, December December 31, 2008 – – P107,235) (Total

P5,130

2,100 20,295 ___58,500 P 40,455

P 61,650 61,650

9-3: c

Deferred gross profit balance, end Divide by Gross profit rate based on sales (25%

P 202,000 

125%)

____  20%

Installment Accounts Receivable, end Collection

P1,010,000 ___440,000

I nstall ment Sal Sal es

P1,450,000 P1,450,000

Sales Cost of installment sales

P1,000,000 __700,000

Deferred gross profit Less: Deferred gross profit, end Installment accounts receivables, 12/31 (1,000,000-400,000) Gross profit rate (300,000  1,000,000)

P 300,000

9-4: b

P 600,000 ___X 30%

__180,000

Realized gross profit Operating expenses

P 120,000 ___80,000

Operating income Interest and financing charges

40,000 __100,000

Net i ncome

P 140,000 140,000

Installment Sales

143

9-5: a

Market value of repossessed merchandise (before reconditioning cost) Less: unrecovered cost Unpaid balance (80,000-30,000) Less: Deferred gross profit (50,000X20%)

P 30,000

P 50,000 ___10,000

L oss oss on r epos eposse ses ssion

__40,000 (P 10,000)

9-6: a

Installment sales Less: collection on installment sales

P1,000,000 __200,000

Installment account receivables, 12/31/08 Gross profit rate (500,000  1,000,000)

800,000 ___X 50%

Defer r ed gross pr ofi t, 12/31/08

P 400,000 400,000

OR Deferred gross profit (1,000,000-500,000) Less: Realized Gross Profit (200,000 X 50%)

P500,000 _100,000

Defer r ed gross prof it , 12/31/08

P400,000 P400,000

Fair value of repossessed merchandise Less: unrecovered cost Unpaid balance Less: Deferred gross profit (200,000 X 32.5%)

P120,000

9-7: d

P 200,000 ___65,000

L oss oss on r epos eposse ses ssion

_135,000 (P 15,000)

9-8: b

Realized gross gross profit: Collections: Downpayment Installment received (205,000-200,000)

P 35,000 ___5,000

Total Gross Profit Rate (150,000

40,000 _X 62.5%



240,000)

Reali Reali zed gross prof it

Gain (loss) on repossession: repossession: Appraised value of repossessed merchandise Less: unrecovered cost unpaid balance less: deferred gross profit (200,000 X 62.5%) Gai n on r eposs possess essi on

P 25,000 25,000

P165,000 P 200,000 __125,000

__75,000 P 90,000

144

Chapter 9

9-9: b

Sch.1

Date

Apr-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1

Collection

750 625 625 625 625

Applying to Interest

Applying to principal

Balance of principal

125.00 115.00 104.80 __94.40

750.00 500.00 510.00 520.20 ___530.60

P7,000.00 6,250.00 5,750.00 5,240.00 4,719.80 4,189.00

P439.20

P2,810.80

Gain (loss) on repossession: repossession: Market value of repossessed merchandise Less: unrecovered cost unpaid balance of principal (sch. 1) less: deferred gross profit (4,189 X 35%)

P 1,875 P 4,189 __1,466

L oss oss on r eposs epossess essi on (r oun ded) ded)

___2,723 (P

Realized gross gross profit: Collection applying to principal (sch. 1) Gross profit rate

848)

P2,810.80 __X 35%

Reali Reali zed gross pr ofi t

P 983.78 983.78

9-10: c

Year of Sales 2007

Deferred gross profit (Sales X Gross Profit Rate) 2007 (P300,000 X 30%) 2008 (P450,000 X 40%) 2007: Accounts written-off (P25,000 X 30%) Realized gross profit (P100,000 X 30%) 2008: Accounts written-off, 2007 (P75,000 X 30%) Accounts written-off, 2008 (P50,000 X 40%) Realized gross profit, 2007 (P50,000 X 30%) Realized gross profit, 2008 (P150,000 X 40%) Defer r ed gross prof it , 12/31/08 (P75,000) (P75,000)

2008

P 90,000 P 180,000 ( 7,500) ( 30,000) ( 22,500) ( 60,000) ( 15,000) ________

( 60,000)

P 15,000 15,000

P 60,000 60,000

9-11: a

Deferred gross profit, 2007 (P1,050,000 - 735,000) Realized gross profit, 2007 (P150,000 X 30%)

P 315,000 ( 45,000)

Deferred gross profit, 12/31/07 Realized gross profit, 2008 (P390,000-90,000) X 30%

270,000 ( 90,000)

Defer r ed gross prof it , 12/31/08

P 180,000 180,000

Installment Sales

145

9-12: a

2007

2008

Deferred gross profit (Sales - Cost of Installment Sales) Realized gross profit, 2007 (P630,000 X 40%) Realized gross profit, 2007 (P450,000 X 40%) Realized gross profit, 2008 (P900,000 X 30%)

P 480,000 ( 252,000) ( 180,000) _______

P450,000

( 270,000)

Defer r ed gross prof it , 12/31/08 (P228,000)

P 48,000

P180,000

9-13: c

Trade-in value Less: Actual value Estimated selling price Less: reconditioning cost normal gross profit (25,000 X 15%)

P 30,000 P 25,000 P 1,250 __3,750

___5,000

Overallowance

__20,000 P 10,000

Reali zed gr oss pr ofi t :

Collection: Downpayment Actual value of merchandise-Trade In Installment collected (5,000 X 3)

P 5,000 20,000 _15,000

Gross Profit Rate: Sales Overallowance

P 40,000

P 85,000 ( 10,000)

Net Sales Cost of Installment Sales

P 75,000 _60,000

Gross Profit Gross Profit Rate (15,000

P 15,000 _X 20%



75,000)

Reali zed Gr oss Pr ofi t

P 8,000

9-14: c

Collection excluding interest (P900,000-P300,000) Gross profit rate (P1,200,000  P3,600,000)

P 600,000 X 33 1/3%

Realized Gross Profit, December 31, 2008 Add Interests

200,000 __300,000

Tot al Revenue

P 500,000

9-15: a

Wholesale value of repossessed merchandise Less: unrecovered cost Unpaid balance: Sales, 10/1/07 P 24,000 Collection, 2007 (6,000  2,000) ( 8,000) Collection, 2008 (1,000 X 7) ( 7,000) Deferred gross profit (9,000 X 25%) L oss on r epossession

P

P

4,000

9,000 __2,250

___6,750 (P 2,750)

146

Chapter 9

9-16: a

Trade-in Value (P300 X 6) Less: Actual value Estimated selling price (P315 X 6) Less: Reconditioning cost (P25 X 6) Gross Profit (P1,890 X 10%)

P

1,800

P 1,890 P150 _189

___339

___1,551

Over -al lowan ce

P

249

Deferred gross profit, before adjustment Deferred gross profit, end 2007: P32,500 X (30%  130%) 2008: P180,000 X (33 1/3%  133 1/3%)

P 76,000

9-17: a

P 7,500 _45,000

__52,500

Reali zed gross prof it on i nstall ment sales

P 23,500

Unpaid balance (P27,000 - P16,000) Multiply by gross profit rate (P734,400

P 11,000 ___X 34%

9-18: d 

P2,160,000)

Deferr ed gross pr of it to be cancell ed on repossession

P

3,740

Collection: 2007 Downpayment 2008 Installment collection Interest

P 600,000 600,000 __540,000

9-19: b

Total

P1,740,000

Cost to be recovered

P4,000,000

Since cost i s not yet f ul l y recover ed, then n o gross prof it i s to be recogni zed i n 2008 .

9-20: d

Regular Sales Cost of regular sales

P 187,500 __112,500

Gross profit on regular sales Add: Realized gross profit on installment sales 2007 (25,000 X 50%) 2008 (62,500 X 55%)

P P12,500 _34,375

75,000

__46,875

Total realized gross profit Operating expenses

121,875 ___31,250

Net i ncome, 12/31/08

P

90,625

Installment Sales

147

9-21: a

Installment sales – 2007 Collections: Down payment (20% x 785,000) Installment (40% x 628,000) Installment accounts receivable 2007, 12/31/07 Gross profit rate on sales

P785,000 P157,000 251,200

Deferr ed gross prof it - 2007, 12/31/07

408,200 376,800 35/135 P 97,689

9-22: a

Regular sales Cost of regular sales Gross profit on regular sales Realized gross profit on installment sales: Installment sales (1,093,750 x 240%) Installment accounts receivable-12/31/08 Collections Gross profit on rate on sales Total realized gross profit Operating expenses (1,137,500 x 70%)

P1,575,000 1,050,000 525,000 2,625,000 1,575,000 1,050,000 140/240

Net i ncome

612,500 1,137,500 796,250 P 341,250

9-23: a

Regular sales Cost of regular sales Gross profit on regular sales Realized gross profit on installment sales: Collections excluding Interest (312,000 – 24,000)288,000 Gross profit rate (270,000/900,000) 30% Total realized gross profit Loss on repossession Fair value of repossessed merchandise 54,000 Less: Unrecovered cost (100,000 x 70%) 70,000 Total realized GP after loss on repossession Less: Operating expenses 72,000 Installment accounts written-off (44,000 x .70) 30,800 Net operating income Interest income Net i ncome

P375,000 215,000 160,000

86,400 246,400

( 16,000) 230,400 102,800 127,600 24,000 P151,600

148_

Chapter 9

SOLUTIONS TO PROBLEMS

Problem 9 – 1

: Journal Entr ies 2006

Installment A/R – 2006 ............... 104,000 Installment A/R – 2007 ............... – Installment A/R – 2008 ............... – Installment Sales ................. 104,000 Cost of Installment Sales ........... Inventory .............................

64,480

Cash ........................................... Installment A/R – 2006 Installment A/R – 2007 ......... Installment A/R – 2008 ......... Interest Revenue .................

66,980

Computations: 2006: P57,200 X .38 =

2007:

2008:

– 116,000 –

116,000

64,480

68,440

57,200 – 9,780

– – 21,736

P21,736

P29,120 X .38 = P71,920 X .41 =

P11,066 29,987

Total RGP

P40,553

P15,000 X .38 = P26,680 X .41 = P76,230 X .39 =

P 5,700 10,939 29,730

Total RGP

P46,369

121,000 73,810

125,520

21,736

2008 – – 121,000

68,440

Installment Sales........................ 104,000 Cost of Installment Sales .... 64,480 Deferred Gross Profit – 2006 39,520 Deferred Gross Profit – 2007 – Deferred Gross Profit – 2008 – Deferred Gross Profit – 2006 ...... Deferred Gross Profit – 2007 ...... Deferred Gross Profit – 2008 ...... Realized Gross Profit ..........

2007

73,810 145,460

29,120 71,920 _ 24,480 116,000

15,000 26,680 76,230 27,550 121,000

68,440 – 47,560 – 11,066 29,487 – 40,553

73,810 – – 47,190 5,700 10,939 29,730 46,369

Installment Sales

2007:

Problem 9 – 2 Inventory ................................................................................................ 45,200 Cash ................................................................................................

45,200

Notes Receivable 2007 (P32,000 + P62,000 + 3,600) ........................... 97,600 Unearned Interest Revenue (P7,167 + P3,600) ............................... Installment Sales .............................................................................

10,767 86,833

Cost of Installment Sales (P45,200 – P2,000 inventory i ncrease) ......... 43,200 Inventory.........................................................................................

43,200

Cash ... ................................................................................................... 35,600 Notes Receivable 2007 ...................................................................

35,600

Unearned Interest Revenue 2007 ........................................................... 3,600 Interest Revenue .............................................................................

2008:

149

3,600

Installment Sales .................................................................................... 86,833 Cost of Installment Sales ................................................................ Deferred Gross Profit on Installment Sales – 2007...........................

43,200 43,633

Deferred Gross Profit on Installment Sales – 2007 .................................. 16,080* Realized Gross Profit on Installment Sales .....................................

16,080

*Gross profit percentage: 50.25% (P43,633  P86,833) .5025 x 32,000 = P16,080 Inventory ................................................................................................ 52,020 Cash ................................................................................................

52,020

1 Notes Receivable – 2008 ......................................................................... 89,500 Unearned Interest Revenue ............................................................. Installment Sales .............................................................................

11,9552 77,545

160,000 + (P50,000 + P5,500) – P26,000* = 89,500 *2007 Notes receivable collected in 2008 2Interest revenue from 2007 notes: P7,167 – P5,579 = P1,588 Interest revenue from 2008 notes: P5,500 – P1,588 = P3,912 Discount on notes receivable at end of 2008 ......................................... P 8,043 Interest revenue from 2008 notes (see above)........................................ 3,912 Total discount at time of sale ................................................................. P11,955 Cost of Installment Sales (P52,020 – P8,000) ....................................... 44,020 Inventory.........................................................................................

44,020

Cash ... ................................................................................................... 55,500 Notes Receivable – 2007 (P62,000 – P36,000) ................................ Notes Receivable – 2008 ..................................................................

26,000 29,500*

* P89,500 – P60,000 = P29,500 Discount on Notes Receivable – 2007 ..................................................... 1,588 Discount on Notes Receivable – 2008 ..................................................... 3,912 Interest Revenue ............................................................................. Installment Sales .................................................................................... 77,545 Cost of Installment Sales ................................................................ Deferred Gross Profit on Installment Sales – 2008........................... Deferred Gross Profit on Installment Sales – 2007 (P26,000 – P1,538 = P24,412; P24,412 x .5025) .................................................. 12,267 Deferred Gross Profit on Installment Sales – 2008 .................................. 11,062* Realized Gross Profit on Installment Sales ..................................... .4323 x (P29,500 – P3,912) = P11,062

5,500 44,020 33,525

23,329

150


1.

2.

=

Deferred gross profit, 1/1 ––––––––––––––––––––– = Install. contracts rec'l, 1/1

P24,000 ––––––– = P60,000

40%

2007: Gross profit rate

=

Deferred gross profit, 1/1 P24,000 ––––––––––––––––––––– = ––––––– = Install. contracts rec'l, 1/1 P140,000

42%


Gross profit = ––––––––––––– Installment sales


=

P86,000 –––––––––– = P200,000

Journal Entries: Accounts Receivable ..................................................................................... Sales... ................................................................................................... Installment Contracts Receivable – 2008 ...................................................... Installment Sales .................................................................................... Cost of Installment Sales .............................................................................. Shipments on Installment Sales ............................................................. Purchases .. ................................................................................................... Cash ... ................................................................................................... Selling Expenses ........................................................................................... Cash ... ...................................................................................................

Cash ..... .... ................................................................................................... Accounts Receivable.............................................................................. Installment Contracts Receivable – 2006............................................... Installment Contracts Receivable – 2007............................................... Installment Contracts Receivable – 2008...............................................

43%

600,000 600,000 200,000 200,000 114,000 114,000 476,000 476,000 210,000 210,000 790,000 560,000 40,000 80,000 110,000

Adjusting Entries:

Installment Sales ........................................................................................... Cost of Installment Sales ....................................................................... Deferred Gross Profit on Installment sales – 2008 ................................

200,000

Deferred Gross Profit – 2006 (P40,000 x 40%) ............................................ Deferred Gross Profit – 2007 (P80,000 x 42%) ............................................ Deferred Gross Profit – 2008 (P110,000 x 43%) .......................................... Realized Gross Profit .............................................................................

16,000 33,600 47,300

Doubtful Accounts Expense (1/4 x 1% x P600,000) ..................................... Allowance for Doubtful Accounts .........................................................

1,500

Closing Entries: Sales ..... .... ................................................................................................... Merchandise Inventory, December 31 .......................................................... Shipments on Installment Sales .................................................................... Merchandise Inventory, January 1 ......................................................... Purchases ............................................................................................... Selling Expenses .................................................................................... Doubtful Accounts Expense .................................................................. Income Summary ................................................................................... Realized Gross profit .................................................................................... Income Summary ................................................................................... Income Summary .......................................................................................... Retained Earnings ..................................................................................

114,000 86,000

96,900 1,500

600,000 260,000 114,000 240,000 476,000 210,000 1,500 46,500 96,900 96,900 143,400 143,400

Installment Sales 3. Good Buy Mart Income Statement Year Ended December 31, 2008

151

Sales ..... .... ................................................................................................... Cost of sales: Merchandise inventory, January 1 ......................................................... P240,000 Purchases ............................................................................................... 476,000 Cost of goods available for sale ............................................................. Less Shipments on installment sales ......................................................

716,000 114,000

Cost of goods available for regular sales ............................................... Less Merchandise inventory, December 31 ...........................................

602,000 260,000

P600,000

342,000

Gross profit on regular sales ......................................................................... Add Realized gross profit on installment sales (Schedule 1) ........................

258,000 96,900

Total realized gross profit ............................................................................. Operating expenses: Selling expenses..................................................................................... Doubtful accounts expense ....................................................................

354,900 210,000 1,500

Net income ...................................................................................................

211,500 P143,400

Schedule 1

4.

2006

Years of Installment Sales 2007 2008

Collections .......................................... Multiply by Gross profit rate ...............

P40,000 40%

P80,000 42%

P110,000 43%

Realized gross profit ............................

P16,000

P33,600

P 47,300

Total

P 96,900

Good Buy Mart Balance Sheet December 31, 2008 A s s e t s

Cash ..... .... ................................................................................................... Merchandise inventory .................................................................................. Accounts receivable ...................................................................................... Allowance for doubtful accounts .................................................................. Installment contracts receivable – 2006 ........................................................ Installment contracts receivable – 2007 ........................................................ Installment contracts receivable – 2008 ........................................................ Other assets ...................................................................................................

P144,000 260,000 P 62,000 3,500

Total Assets ...........................................................................................

58,500 20,000 60,000 90,000 200,000 P832,500

Liabilities and Equity

Liabilities: Accounts payable ................................................................................... Deferred gross profit on installment sales – 2006.................................. Deferred gross profit on installment sales – 2007 .................................. Deferred gross profit on installment sales – 2008 .................................. Total Liabilities...................................................................................... Equity: Capital stock .......................................................................................... Retained earnings................................................................................... Total Liabilities and Equity ...................................................................

P 60,000 8,000 25,200 38,700 131,900 P406,000 294,600

700,600 P832,500

152


1.

Deferred gross profit, 1/1 = 2007: GP rate = ––––––––––––––––––––– = Install. contracts rec'l, 1/1

2008: GP rate =

2.

Gross profit –––––––––––––– Installment sales

=

P21,600 + P1,200 –––––––––––––––– P24,000 + P52,000 P150,000 – P97,500 –––––––––––––––– P150,000

Installment Sales ........................................................................................... Cost of Installment Sales ....................................................................... Deferred Gross Profit, 2008 ................................................................... Deferred Gross profit, 2007 .......................................................................... Deferred Gross Profit, 2008 .......................................................................... Realized Gross Profit .............................................................................

= =

=

P22,800 ––––––– P76,000

=

30%

P52,500 –––––––– P150,000

=

35%

150,000 97,500 52,500 14,400 25,900 40,300

Computation: 2007 Sales

2008 Sales

Installment contracts receivable, 1/1 .................... Less Installment contracts receivable, 12/31 .......

P76,000 24,000

P150,000 76,000

Total credit for the period .................................... Less Credit representing repossession .................

52,000 4,000

74,000 –

Credit representing collections ............................ Multiply by Gross profit rate ...............................

P48,000 30%

P 74,000 35%

Realized gross profit ............................................

P14,400

P 25,900

Sales ..... .... ................................................................................................... Realized Gross Profit .................................................................................... Loss on Repossession ............................................................................ Cost of Sales .......................................................................................... Selling and Administrative Expenses .................................................... Income Summary ................................................................................... Income Summary .......................................................................................... Retained Earnings .................................................................................. 3.

Total

P 40,300

212,000 40,300 400 165,000 66,000 20,900 20,900 20,900

Apple Company Income Statement Year Ended December 31, 2008

Sales ..... .... ................................................................................................... .................. Cost of sales .................................................................................................. ..................

P212,000 165,000

Gross profit on regular sales ......................................................................... .................. Add Realized gross profit on installment sales (Schedule 1) ........................ ..................

47,000 40,300

Total realized gross profit ............................................................................. .................. Less Loss on repossession............................................................................. ..................

87,300 400

Total realized gross profit after adjustment for loss on repossession ............ .................. Selling and administrative expenses ............................................................. ..................

86,900 66,000

Net income ................................................................................................... ..................

P 20,900

Installment Sales

153

Problem 9 – 4 Schedule 1

2007 Sales

2008 Sales

Installment contracts receivable, 1/1 ....................... Less Installment contracts receivable, 12/31 ...........

P76 000 24,000

P150,000 76,000

Total credit for the period ........................................ Less Credit representing repossession .....................

52,000 4,000

74,000 –

Credit representing collections ................................ Multiply by Gross profit rate ...................................

P48,000 30%

P 74,000 35%

Realized gross profit ................................................

P14,400

P 25,900

Total

P40,300

Problem 9 – 5 1.

Cost of Installment Sales .................................................................... Shipments on Installment Sales....................................................

54,400

Installment Sales ................................................................................. Cost of Installment Sales .............................................................. Deferred Gross Profit, 2008 .........................................................

80,000

54,400

54,400 25,600

Gross profit = P25,600  P80,000 = 32%

Deferred Gross Profit, 2007 ................................................................ Deferred Gross Profit, 2008 ................................................................ Realized Gross Profit ...................................................................

14,000 8,000 22,000

Computation: 2007 Sales

2008 Sales

Installment contracts receivable, 1/1 ............. Less Installment contracts receivable, 12/31.

P82,000 _ 36,000

P 80,000 _55,000

Total credit for the period.............................. Less Credit representing repossession...........

46,000 __6,000

25,000 ___ –

Credit representing collections ...................... Multiply by Gross profit rate .........................

P40,000 __35%*

P 25,000 ___32%

Realized gross profit .....................................

P14,000

P 8,000

DGP, 1/1 P28,700 (26,600 + 2,100) *2007 Gross profit rate= ––––––– = ––––––– = ICR, 1/1 P82,000 (36,000 + 40,000 + 6,000)

Total

P 22,000

35%

154

2.

Chapter 9

Sales .... ... ........................................................................................... Merchandise Inventory, December 31 ................................................ Shipments on Installment Sales .......................................................... Merchandise Inventory, January 1 ............................................... Purchases ...................................................................................... Repossessed Merchandise ............................................................ Loss on Repossession................................................................... Operating Expenses...................................................................... Income Summary .........................................................................

200,000 52,000 54,400

Realized Gross Profit .......................................................................... Income Summary .........................................................................

22,000

Income Summary ................................................................................ Retained Earnings ........................................................................

31,500

60,000 180,000 3,000 900 53,000 9,500

22,000

31,500

PPG Discount Center, Inc. Income Statement Year Ended December 31, 2008

Sales .... ... ................................................... Cost of sales: Inventory, January 1 ............................. P 60,000 Purchases .............................................. 180,000 Repossessed merchandise .................... __3,000 Cost of goods available for sale ........... Less Shipments on installment sales ....

Installment

Total

P200,000

P80,000

P280,000

188,600 _136,600

54,400

191,000

P 63,400

25,600

89,000

17,600

17,600

243,000 _54,400

Cost of goods available for regular sales Less Inventory, December 31............... _52,000 Gross profit ................................................. Less Deferred gross profit on installment sales, 2008 ............................................

Regular

Realized gross profit, 2008 ......................... Add Realized gross profit on 2007 installment sales ...................................

8,000

71,400

14,000

14,000

Total realized gross profit ........................... Less Loss on repossession ..........................

22,000 ___900

85,400 __900

Total realized gross profit after adjustment for loss on repossession........................

P21,100

84,500

Operating expenses .....................................

_53,000

Net income ..................................................

P31,500

Installment Sales

155 Problem 9 – 6

1.

2.

London Products Schedule of Cost of Goods Sold Year Ended December 31, 2008

Merchandise inventory, January 1 ................................................................ .................. Purchases ................................................................................................... .................. Freight-in ................................................................................................... .................. Repossessed merchandise ............................................................................. ..................

P 48,000 238,000 12,000 14,000

Cost of goods available for sale .................................................................... .................. Less Merchandise inventory, December 31 .................................................. ..................

312,000 52,000

Cost of goods sold ......................................................................................... ..................

P260,000

London Products Schedule of Allocation of Cost of Goods Sold Year Ended December 31, 2008

Amount

Cash sales .................. Charge sales ................. Installment sales ...........

P60,000 120,000 300,000

 

120% 125%

On Cash Price Basis

Ratio to Total

P 60,000 100,000 240,000

60/400 100/400 240/400

P 400,000 3.

Allocated Cost

P 39,000 65,000 156,000 P260,000

London Products Income Statement Year Ended December 31, 2008

Total

Installment Sales

Charge Sales

Cash Sales

Sales ..... .... ....................................... Cost of goods sold .............................

P480,000 260,000

P 300,000 156,000

P120,000 65,000

P 60,000 39,000

Gross profit ....................................... Less Unrealized gross profit: On installment contracts receivable,12/31 (192,000 x 144/300)

P 220,000

P 144,000

P 55,000

P 21,000

92,160

92,160

127,840

51,840

33,900

33,900

Total realized gross profit ................. Less Loss on repossession (Schedule 2) ............................... Total realized gross profit after adjustment for loss on repossession ............................... Less Operating expenses ...................

161,740

85,740

10,200

10,200

151,540 93,000

P 75,540

Net income .......................................

P 58,540

Realized gross profit ......................... Add Realized gross profit on prior years' sales (Schedule 1): 2006 .................................... 2007 ....................................

19,200 14,700

156

Chapter 9

Schedule 1

2006

Installment contracts receivable, January 1: 2006 – P32,000  40% ................................................................. 2007 – P56,000  35% ................................................................. Less Installment contracts receivable, December 31 ..........................

2007

P80,000 _22,000

Total credits ........................................................................................ 58,000 Less Credit representing repossession ................................................ _10,000

P160,000 __90,000 70,000 28,000

Total collections.................................................................................. Multiply by Gross profit rate ..............................................................

P48,000 ___40%

P 42,000 ___35%

Realized gross profit ...........................................................................

P19,200

P 14,700

Schedule 2

Fair market value of repossessed merchandise .... Less Unrecovered cost: Unpaid balance .............................................. Less Unrealized profit – 2006 – P10,000 x 40%............................. 2007 – P28,000 x 35%.............................

2006

2007

Total

P 2,000

P12,000

P 14,000

10,000

28,000

38,000

4,000 9,800

13,800

Balances ............................................................

__6,000

18,200

__24,200

Gain (loss) on repossession .................................

P(4,000)

P( 6,200)

P( 10,200)

2007

2008

Problem 9 – 7 1.

2007 2007 installment sales (P400,000 x 42%*) .................................. P 168,000 2008: 2007 installment sales (P173,000 x 42%) .................................... 2008 installment sales (P560,000 x 38.5%*) ............................... ________

P 72,660 __215,600

Deferred gross profit ........................................................................... P 168,000

P 288,260

*Computation of Gross profit percentages (see next page) 2007

2008

Installment sales..................................................................................P2,210,000 Less Trade-in allowances (P226,000 – P158,000).............................. _______ –

P3,100,000 ____68,000

Adjusted installment sales .................................................................. 2,210,000

_3,032,000

Cost of sales: Inventories, January 1 (new) ........................................................ – Purchases (new) ........................................................................... 1,701,800 Repossessed merchandise ............................................................ –

420,000 1,767,000 _83,000*

Cost of goods available for sale ................................................... 1,701,800

2,270,000

Installment Sales

157

Less: Inventories, December 31 – New merchandise................................................................... 420,000 Repossessed merchandise ...................................................... _______ – Total .......................................................................................

358,820 ____46,500

420,000

405,320

Cost of sales ................................................................................. 1,281,800

_1,864,680

Gross profit ......................................................................................... P 928,200

P1,167,320

Gross profit percentages ..................................................................... *2007 : P195,000 x 20% =P39,000 2008 : P110,000 x 40% =_44,000

42%

38.5%

P83,000

Uncollectible installment contracts expense, per books Correct Uncollectible installment contracts expense: Fair market value of repossessed merchandise – 2007 sales (P195,000 x 20%) ........................... P 39,000 2008 sales (P110,000 x 40%) ........................... __44,000

P 99,000

P 83,000

Unrecovered cost – 2007 sales [ P105,000 x (100% – 42%)] ........... 60,900 2008 sales [ P82,000 x (100% – 38.5%)] .......... __50,430

__111,330

Adjustment to Uncollectible installment contracts expense

__28,330 P 70,670

Fortune Sales Corporation Income Statement Year Ended December 31, 2008

Cash Sales

Installment Sales

Total Sales

Sales ...................................................................... P205,000 Cost of sales ................................................................... _158,000

P3,032,000 _1,864,680

P3,237,000 _2,022,680

Gross profit .................................................................... P 47,000 Less Unrealized gross profit on 2005 installment sales (Schedule 1) ....................................................

1,167,320

1,214,320

__247,170

__247,170

Realized gross profit on 2008 sales ............................... Add Realized gross profit on 2007 installment sales (Schedule 2) ....................................................

920,150

967,150

___51,240

___51,240

Total realized gross profit .............................................. Less Uncollectible installment contracts expense..........

971,390 ___28,330

1,018,390 ___28,330

Total realized gross profit after adjustment ................... Operating expenses ........................................................

P 943,060

990,060 __592,960

Net income .....................................................................

P 397,100

158

Chapter 9

Schedule 1

Installment contracts receivable 2008, December 31 ....... ............ Installment contracts receivable 2008 defaulted ............... ............

P 560,000 ___82,000

Total .... ... ......................................................................... ............ Multiply by 2008 gross profit percentage ......................... ............

P 642,000 ___38.5%

Unrealized gross profit on 2008 installment sales ............ ............

P 247,170

Schedule 2

1.

Installment contracts receivable 2007, January 1 ............................... Less Installment contracts receivable 2007, December 31 .................

P 400,000 __173,000

Total credits for the period ................................................................. Less Installment contracts receivable 2007 defaulted ........................

227,000 __105,000

Total collections.................................................................................. Multiply by 2007 gross profit percentage ...........................................

P 122,000 _____42%

Realized gross profit on 2007 installment sales..................................

P

51,240

Apportionment of cost (P600,000) to Lots 1, 2 and 3:

Lot 1 : 2/3 x P360,000.................................... Lot 2 : 2/3 x P240,000.................................... Lot 3 : 1/3 ....................................................... 1/3 x P240,000 ........................................

P 240,000 160,000 P120,000 __80,000

Total cost ....................................................... Journal Entries for 2007 March 31 Cash .... ... ...................................................................................... Notes Receivable (Lot 2) ............................................................... Lot 2 ...................................................................................... Deferred gain on Sale of Land ................................................

June 30 Cash .... ... ...................................................................................... Notes Receivable (Lot 3) ............................................................... Lot 3 . ...................................................................................... Deferred Gain on Sale of Land ............................................... Cash .... ... ...................................................................................... Interest Income (P364,000 x 12% x 3/12) ............................... Notes Receivable (Lot 2)............................. ............................ September 30 Cash .... ... ...................................................................................... Interest Income (P358,920 x 12% x 3/12) ............................... Notes Receivable (Lot 2)............................. ............................

__200,000 P 600,000

36,000.00 364,000.00 160,000.00 240,000.00 120,000.00 720,000.00 200,000.00 640,000.00 16,000.00 10,920.00 5,080.00 16,000.00 10,767.60 5,232.40

Installment Sales

159

October 31 Cash .... ... ...................................................................................... Notes Receivable (Lot 1) ............................................................... Lot 1 . ...................................................................................... Deferred Gain on Sale of Land ............................................... December 31 Cash .... ... ...................................................................................... Notes Receivable (Lot 1)............................. ............................ Notes Receivable (Lot 2)............................. ............................ Notes Receivable (Lot 3)............................. ............................ Interest Income ........................................................................

72,000.00 288,000.00 240,000.00 120,000.00 78,000.00 6,240.00 5,389.37 6,800.00 59,570.63

Computation: Total

2.

Lot 1

P12,000.00

Lot 2

Lot 3

P16,000.00

P50,000.00

_43,200.00 P 6,800.00

Collections....................................... P78,000.00 Apply to interest: Lot 1 – P288,000.00 x 12% x 2/12 Lot 2 – P353,687.60 x 12% x 3/12 59,570.63 Lot 3 – P720,000.00 x 12% x 6/12 _________

_________

10,610.63 _________

Apply to principal............................ P18,429.37

P 6,240.00

P 5,389.37

5,760.00

Deferred Gain on Sale of Land (Lot 1) ............................................... 26,080.00 Deferred Gain on Sale of Land (Lot 2) ............................................... 31,021.06 Deferred Gain on Sale of Land (Lot 3) ............................................... 96,368.00 Realized Gain on Sale of Land .....................................................

153,469.06

Computation: Lot 1

3.

Collections applied to principal....... Multiply by Gross profit rates: Lot 1 – P120,000  P360,000 ..... Lot 2 – P240,000  P400,000 ..... Lot 3 – P640,000  P840,000 .....

P78,240.00

Realized gain ...................................

Lot 2

Lot 3

P51,701.77 P126,800.00

33.33% _________

60% _________

_____76%

P26,080.00

P31,021.06

P96,368.00

Lot 3 (80% x P200,000) ......................................................................160,000.00 Deferred Gain on Sale of Land (Lot 3) (P640,000 – P96,368) ..........543,632.00 Loss on Repossession ......................................................................... 9,568.00 Notes Receivable (Lot 3) (P720,000 – P6,800) ...........................

713,200.00

160


Galaxy Investment Company Income Statement Year Ended December 31, 2008

Sales Schedule 1) ................................................................................................... Cost of sales (Schedule 2) .......................................................................................

P 8,060,000 1,612,000

Gross profit .... .... ................................................................................................... Less Sales commissions .........................................................................................

6,448,000 221,000

Gross profit .... .... ................................................................................................... Less Deferred gross profit

6,227,000

Installment Notes Balance P5,370,000 ––––––––––––––––––––– = –––––––––– Installment Sales P8,060,000

=67% x P6,227,000

4,172,090

Realized gross profit ............................................................................................... Expenses: Advertising and promotion ........................................................................... P 730,000 Sales manager's salary................................................................................... 120,000 General office expenses (1/4 x P236,000) .................................................... 59,000 Net profit ...... .... ...................................................................................................

2,054,910

909,000 P 1,145,910

Schedule 1

Total Sales Price

Cash Received

Installment Notes Balance

A lots : 26 @ P150,000 ............................................... B lots : 32 @ P100,000................................................ C lots : 12 @ P80,000 ..................................................

P3,900,000 3,200,000 960,000

P1,650,000 800,000 240,000

P 2,250,000 2,400,000 720,000

........................................................

P8,060,000

P2,690,000

P 5,370,000

Schedule 2

Class

Number of Lots

A ... ...... .... ........................................................ B .... ...... .... ........................................................ C .... ...... .... ........................................................

80 100 120

Total ... ........................................................

300

Unit Price

P150,000 100,000 80,000

Total Sales Value

P12,000,000 10,000,000 9,600,000 P31,600,000

Cost of tract: Cost of land ................................................................................................... Legal fees, etc. .............................................................................................. Grading contract............................................................................................ Water and sewerage system contract ............................................................ Paving contract ............................................................................................. General office expenses (3/4 x P236,000) ....................................................

P 4,800,000 600,000 225,000 184,900 266,300 177,000

Total ..... .... ...................................................................................................

P 6,253,200

P6,253,200 Cost rate : –––––––––––– = 20% (rounded off) P31,600,000 Cost of sales (P8,060,000 x 20%) ...........................................................................

P 1,612,000

Installment Sales

161

Problem 9 – 10 Rizal Company Income Statement Year Ended December 31, 2008

Installment sales [ (P14,300 x 7) + (P725 x 4) ] ........................................... Cost of goods sold on installment (schedule 1) ...........................................

P103,000 __79,310

Gross profit .. ... ........................................................................................... Less Deferred gross profit on 19x8 sales (P103,000 – P21,000 = P82,000 x 23%*) ..........................................

23,690

Realized gross profit on 2008 sales ............................................................. Add Realized gross profit on prior years' sales – 2006 : P60,000 x 33-1/3*.................................................................... 2007 : P115,000 x 35%*.....................................................................

__18,860 4,830 P20,000 _40,250

__60,250

Total realized gross profit............................................................................ Less Loss on repossession (Schedule 4) ......................................................

65,080 __33,100

Total realized gross profit after adjustment ................................................. General and administrative expenses ..........................................................

31,980 __50,000

Net income (loss).........................................................................................

P(18,020)

*See Schedule 3 Schedule 1

Purchases (P10,500 x 8) .............................................................................. Repossessed merchandise............................................................................

P 84,000 ___2,520

Cost of goods available for sale................................................................... Less Inventory, December 31 – Number of units on hand .................................................................... Multiply by average unit cost (Schedule 2) ........................................

86,520

Cost of goods sold on installment ...............................................................

1 P 7,210

___7,210 P 79,310

Schedule 2

Purchases during 2008 (P10,500 x 8) .......................................................... Add Repossessed merchandise ....................................................................

P 84,000 ___2,520

Total ..... ...... ... ........................................................................................... divide by Number of units (8 + 4)...............................................................

P 86,520 _____12

Average unit cost .........................................................................................

P

7,210

162

Chapter 9

Schedule 3

........................................................

Sales – 2006 : P15,000 x 10 ....................................... 2007 : P14,000 x 20 ....................................... 2008 : P14,300 x 7 ......................................... P725 x 4 ..............................................

2006

2007

2008

P150,000 P280,000 _______

_______

100,100 __2,900

........................................................

150,000

280,000

103,000

Cost of goods sold: Inventory, January 1 ........................................ Purchases ........................................................ Repossessed merchandise ................................

– 120,000 _____ –

20,000 162,000 _____ –

– 84,000 _2,520

Cost of goods available for sale ....................... Less Inventory, December 31 ..........................

120,000 _20,000

182,000 _____ –

86,520 _7,210

Cost of goods sold ...........................................

100,000

182,000

79,310

Gross profit .. ... ........................................................

P 50,000

P 98,000

P23,690

Gross profit rates ......................................................

33-1/3%

35%

23%

Fair market value of repossessed merchandise............................................ Less Unrecovered cost – Unpaid balance: Original sales amount (P14,000 x 4) ............................................ P 56,000 Collections prior to repossession.................................................. __1,200

P 2,520

Sales

Schedule 4

Total . ........................................................................................... Less Unrealized profit (P54,800 x 35%) ............................................ Loss on repossession ...................................................................................

54,800 _19,180

_35,620 P33,100

Long-Term Construction Contracts

163

CHAPTER 10 MULTIPLE CHOICE ANSWERS AND SOLUTIONS

10-1: a Per centage of Compl eti on M ethod:

Contract Price Less: Total estimated cost Cost incurred Estimated remaining cost

P1,000,000 P 200,000 _400,000

__600,000

Gross profit estimated % of completion (200,000/600,000)

400,000 __33 1/3%

Gr oss prof i t to be r ecognized

P 133,333

Zero Profit Method:

0

10-2: a P100,000

2007

Contract Price Less: Total estimated cost

2008

P9,000,000 P9,000,000 _7,800,000 _8,100,000

Estimated gross profit % of completion: 2007 (3,900,000/7,800,000) 2008(6,300,000/8,100,000)

1,200,000

900,000

50% _________ ______78%

Gross profit earned to date Less: Gross profit earned in prior year

600,000 700,000 ________ – ___600,000

Gr oss pr ofi t earn ed each year

P 600,000 P 100,000

10-3: a

Contract Price Less: Total estimated cost (3,600,000 + 1,200,000)

P6,000,000 _4,800,000

Estimated gross profit % of completion (3,600,000/4,800,000)

1,200,000 _____75%

Gross profit earned to date Less: Gross profit earned in 2007

900,000 __600,000

Gr oss prof i t ear ned i n 2008

P 300,000

Contract Price Less: Total estimated cost (930,000 + 2,170,000)

P3,000,000 _3,100,000

L oss

(P 100,000)

10-4: b

164

Chapter 10

10-5: b

Total cost to date, 2008 (4,800,000 X 60%) Less: Cost incurred in 2007 (4,500,000 X 20%)

P2,880,000 __900,000

Cost i ncur r ed i n 2008

P1,980,000

10-6: a

Percentage of Completion Method: Contract Price Less: Total estimated cost (900,000/1,800,000)

P3,000,000 _2,700,000

Estimated gross profit % of completion (900,000/2,700,000)

300,000 ___33.33%

Gross profit recognized, 2007 Add: Cost Incurred

100,000 ___900,000

Constru cti on in Progr ess - 2007

P 1,000,000

Zero Profit Method: Cost in cur r ed to Constru ction i n Progr ess - 2007

P

900,000

10-7: a

2007

2008

Contract Price Less: Total estimated cost

P4,200,000 P4,200,000 _3,000,000 _3,750,000

Estimated gross profit % of completion

1,200,000 _____20%

Gross Profit earned to date Gross Profit earned in prior year Gr oss Pr ofi t ear ned thi s year

450,000 ____100%

240,000 450,000 _______ – __240,000 P 240,000

P 210,000

10-8: b

Collections: Contract Billings Less: Accounts receivable

P 47,000 ___15,000

Coll ection s

Initial Gross Profit: Contract Price Gross Profit rate: Income recognized

Divide by Construction in Progress I ni tial Gross Prof it

P

32,000

P 800,000 10,000 50,000 = _____20% P 160,000


165

10-9: a

Gross profit (loss) earned in 2008 Gross profit earned in prior years

(P 20,000) _180,000

Gross profit earned to date - 2008 Divide by percentage of completion - 2008

160,000 ___100%

Estimated gross profit - 2008 Less: Contract price

160,000 2,000,000

Total estimated cost Less: Cost incurred - 2008

1,840,000 _820,000

Cost incurred to date - 2007 Less: Cost incurred - 2006

1,020,000 __360,000

Cost i ncur r ed i n 2007

P 660,000

Gross profit earned to date - 2007 (P40,000 + P140,000) Divide by estimated gross profit - 2007: Contract price P2,000,000 Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15%

P 180,000

10-10: b

__300,000

Per centage of completion - 2007

60%

10-11: a, Refer to Q 10-10 solutions. 10-12: d

Contract price Estimated gross profit - 2007 (Refer to Q 10-10) Total estimated cost Less: Cost incurred to date - 2007 (refer to Q 10-9)

P2,000,000 __300,000 1,700,000 1,020,000

Esti mated cost to compl ete - 2007

P 680,000

2007:

Construction in progress Less: Construction costs

P 244,000 __210,000

Gr oss pr ofi t r ecognized - 2007

P

Construction in progress (P728,000-P244,000) Less: Construction costs

P 484,000 __384,000

Gr oss pr ofi t r ecognized - 2008

P 100,000

10-13: d

2008:

34,000

166

Chapter 10

10-14: d

Project 1 Percentage of Completion Method: Contract price Less: Total estimated cost Cost incurred to date - 2008 Estimated cost to complete

Project 2

P 420,000 P 300,000 P 240,000 P 280,000 __120,000 ___70,000

Total

__360,000 __350,000

Estimated gross profit (Loss) Percentage of completion

60,000 (50,000) __66.67% _______ –

Pr ofi t (l oss) to be r ecognized Total i s (P10,000)

P 40,000 (P 50,000)

Zero Pr ofi t M ethod - T he loss (P50,000) f or pr oject 2 onl y.

10-15: a

2006

Contract price (cost X 120%) Less: Total estimated costs (1) Cost incurred to date Estimated cost to complete (2)

Total

Estimated gross profit Percentage of completion (1

2007

2008

P3,744,000 P3,744,000 P3,744,000 546,000 1,544,400 3,120,000 _2,054,000 _1,315,000 ________ – _2,600,000 _2,860,000 _3,120,000



2)

1,144,000 _____20%

884,000 624,000 _____54% ____100%

Gross profit earned to date Gross profit earned in prior years

240,240 477,360 624,000 _______ – __240,240 __477,360

Gr oss prof i t ear ned thi s year

P 240,240

P 237,120 P 146,640

10-16: d

2007

Contract price Less: Total estimated cost Cost incurred to date Estimated cost to complete Total

2008

P6,300,000 P6,300,000 1,425,000 3,040,000 _4,075,000 _1,960,000 P5,500,000 P5,000,000

Estimated gross profit Percentage of completion: 2007 (1,425,000 - 50,000)  5,500,000 2008 (3,040,000 - 50,000)  5,000,000

800,000 1,300,000 25% ________ – __59.80%

Profit earned to date Less: Gross profit earned in prior year

200,000 777,400 ________ – __200,000

Gr oss prof i t ear ned thi s year

P 200,000 P 577,400


167

10-17: a

Cash collections: Progress billings Less: Accounts receivable, end

P1,500,000 __500,000

Collection

P1,000,000

Cost incurred to date: Construction in Progress Less: Gross profit earned

P1,600,000 __200,000

Cost in cur r ed to date

P1,400,000

10-18: d

Percentage of Completion Method: Apartment A 2007

Contract price Less: Total Estimated Costs (1) Cost incurred to date Estimated cost to complete

1,620,000

2008

1,620,000

Apartment B 2007

2008

2,520,000 2,520,000

P 600,000 P1,200,000 P1,560,000 P2,310,000 840,000 240,000 690,000 –

(2) Total estimated cost Estimated Gross Profit Percentage of completion (1  2)

1,440,000 180,000 _41.67%

1,440,000 180,000 _83.33%

2,250,000 2,310,000 270,000 210,000 _69.33% _100.00%

Gross profit earned to date Less: Gross profit earned in Prior years

75,000 150,000 _______ – ___75,000

187,200 210,000 _______ – __187,200

Gross Profit earned this year

P 75,000

P 187,000 P

Total Gr oss Prof it 20 (P75,000 + P22,800)

P 75,000

22,800

P97,800

Zero Prof it M ethod - P210,000 gross prof it earn ed in 2008 for Apartment B.

10-19: d

2007

Contract price: 2007 2008 (P6,000,000-P50,000) Less: Total estimated costs (1) Cost incurred to date Estimated cost to complete (2)

Total estimated cost

Estimated Gross Profit Percentage of completion (1



2)

Gross profit earned to date Less: Gross profit earned in Prior year Gr oss Pr ofi t ear ned thi s year

2008

P6,000,000 _________ P5,950,000 2,340,000 2,650,000 260,000 – 2,600,000 2,650,000 3,400,000 3,300,000 ____90% ___100% 3,060,000 3,300,000 – 3,060,000 _______ P3,060,000 P 240,000

168

Chapter 10

10-20: a 2006

(1) Cost incurred to date (2) Estimated cost to complete

P3,400,000 1,600,000

(3) Total Estimated Costs Percentage of completion (1



3)

2007

2008

P5,950,000 P6,150,000 150,000 –

5,000,000

6,100,000

6,150,000

68%

98%

100%

Contract price Less: Total estimated cost

P6,000,000 5,000,000

Estimated Gross Profit Percentage of completion

1,000,000 68%

(100,000) 100%

(150,000) 100%

Gross profit earned (loss) to date Add: Cost incurred to date

680,000 3,400,000

(100,000) 5,950,000

(150,000) 6,150,000

Construction in Progress Less: Contract billings

4,080,000 3,200,000

5,850,000 5,200,000

6,000,000 6,000,000

Bal ance

P 880,000

P6,000,000 P6,000,000 6,100,000 6,150,000

P 650,000

–

10-21: c Construction in Progress: Cost incurred to date, 2007 Gross profit earned, 2007 (Schedule 1) Less: Contract billings, 2006 (P3,250,000 x 75%)

P2,625,000 100,000 P2,725,000 2,437,500

Excess of Constru ction in Progress over Contract Bi ll in gs (CA)

P 287,500

Schedule 1 – Computation of gross profit earned, 2006 2006 2007 P3,250,000 P3,250,000

Contract price Total estimated cost: Cost to date Estimated cost to complete

1,075,000 1,612,500

2,625,000 750,000

2,687,500

3,375,000

Estimated gross profit (loss) % of completion

562,500 40%

(125,000) –

Gross profit (loss) to date Gross profit earned in prior years

225,000 –

(125,000) 225,000

P 225,000

P 100,000

Total

Gross profit earned this year

10-22: a Contract price Estimated cost: Cost to date Estimated costs to complete

2005 P2,800,000

2006 2007 P2,800,000 P2,800,000

1,300,000 1,360,000

1,960,000 780,000

2,440,000 380,000

2,660,000

2,740,000

2,820,000

Estim ated gross prof it

140,000

60,000

(20,000)

% of completion

48.87%

71.53%

–

Total


169

10-23: b Project A P2,900,000

Project B P3,400,000

Project C P 1,700,000

1,680,000 1,120,000

1,440,000 1,760,000

320,000 960,000

2,800,000

3,200,000

1,280,000

100,000 60%

200,000 45%

420,000 25%

P 60,000

P 90,000

P 105,000

Project B P3,400,000

Project C P1,700,000

Project D P 2,000,000

2,120,000 – 0 –

1,183,000 1,360,000

560,000 117,000

1,040,000

2,640,000

3,480,000

1,300,000

1,600,000

2007 Contract price Estimated costs: Cost to date Estimated cost to complete

Total Estimated gross profit % of completion Gross profit earned this year (P255,000) 2008 Contract price Estimated costs Cost to date 2,640,000 Estimated costs to complete

Total

Project A P2,900,000

Estimated gross profit (loss) % of completion

260,000 100%

(80,000) –

400,000 91%

400,000 35%

Gross profit (loss) to date Gross profit earned in prior year

260,000 60,000

(80,000) 90,000

364,000 105,000

140,000 – 0 –

P 200,000

P 10,000

P 259,000

P 140,000

2007 P 255,000 120,000

2008 P 609,000 120,000

Gross profit earned this year(P609,000)

Gross profit earned General and administrative expenses Net in come

P 135,000

P 489,000

10-24: c Contract price Gross profit earned to date, 2008 (P900,000 – P100,000)

P10,000,000 800,000

Total cost to date, 2008 Less: cost incurred in 2008

9,200,000 4,100,000

Cost to date, 2007

P 5,100,000

Gross profit earned to date Divided by % of completion: (P5,100,000 + P900,000) / P10,000,000

P

Estim ated gross prof it , 2007

P 1,500,000

900,000 60%

10-25: d Construction in progress: Cost incurred to date Gross profit earned to date (P2,500,000 – P2,000,000) Total Less: Contract billings (P2,500,000 x 30%) Excess of contract bi ll ings over constru ction i n pr ogress (CL )

P 440,000 110,000 550,000 750,000 P( 200,000)

170

Chapter 10

10-26: a

Contract price Total estimated cost: Cost incurred to date: Site labor cost Cost of construction materials Depreciation of special plant & equip Total Estimated cost to complete Estimated gross profit Percentage of completion (45/100) Gross profit to be recognized

P120,000,000

10,000,000 30,000,000 5,000,000 45,000,000 55,000,000

100,000,000 20,000,000 45% P 9,000,000

10-27: a

Cost incurred to date- 2007 Total estimated cost (8,000,000 / 40%) Estimated cost to complete Cost incurred in 2007 Cost incurred in 2006 Estimated cost at completion- 2006 Total estimated cost- 2006

20,000,000 8,000,000

P12,000,000 3,700,000 8,300,000 12,450,000 P20,750,000

Per centage of completion- 2006 (8,300,000/ 20,750,000) = 40%

10-28: a

Contract price Total estimated cost: Cost incurred to date Estimated cost to complete Total estimated cost Estimated gross profit Percentage of completion Gross profit recognized

Contract price Total estimated cost Estimated gross profit Percentage of completion Gross profit earned to date Gross profit earned in 2007 Gross profit earned this year

2007 Contract 1 Contract 2 P600,000 P450,000 150,000 150,000 300,000 300,000 50% P150,000

Contract 1 600,000 350,000 250,000 80% 200,000 150,000 50,000

CIP-2007

87,500 162,500 250,000 200,000 35% P70,000

P237,500

P220,000

2008 Contract 2 450,000 300,000 150,000 60% 90,000 70,000 20,000

Contract 3 900,000 500,000 400,000 36% 144,000 144,000


171

10-29: a

Contract price Total estimated cost Cost incurred Est. cost to complete Total estimated cost Estimated gross profit Percentage of completion Gross profit earned

Total cost incurred Total gross profit earned Construction in progress Less: Billings

Bicol P875,000

656,250 656,250 218,750 100% P218,750

Davao Aklan P1,225,000 P437,500

175,000 700,000 875,000 350,000 20% P 70,000

Percentage of completion 1,006,250 332,500 1,338,750 1,312,500

Du e f r om (to)

26,250

175,000 175,000 350,000 87,500 50% P43,750

Total

1,006,250

332,500

Zero Profit 1,006,250 218,750 1,225,000 1,312,500 (87,500)

10-30: a

Contract price Total estimated cost: Cost incurred Estimated cost to complete Estimated gross profit Percentage of completion Gr oss prof i t r ecognized

P40,825,000 8,475,000 28,400,000

36,875,000 3,950,000 22.983% P 907,830

172

Chapter 10


(a)

2007

Contract Price Less: Total estimated cost (1) Cost incurred to date Estimated costs to complete (2) Total Estimated gross profit Percentage of completion (1



2)

Estimated gross profit to date Less: Gross profit earned in prior year

(c)

P 450,000

P 450,000

200,000 __100,000

320,000 _______ –

__300,000

_320,000

150,000 ______2/3

130,000 ___100%

100,000 130,000 _______ – __100,000

Gross profit earned this year (b)

2008

P 100,000

P

30,000

Contract Price Less: Total cost incurred

P 450,000 __320,000

Gross profit

P 130,000

2007:

2008:

Construction in Progress Cost of construction Construction Revenue Construction in Progress Cost of Construction Construction Revenue

100,000 200,000 300,000 30,000 320,000 350,000 Problem 10 – 2

(a)

(b)

Construction Revenue Less: Cost incurred

P1,250,000 _1,250,000

Gross profit – 2008

P

Construction in Progress (cost incurred) Less: Contract billings (P5,800,000 x 30%)

P1,250,000 _1,740,000

Billings in excess of related costs

P(490,000)

Contract price Less: Total estimated costs Cost incurred to date Estimated costs to complete

P5,800,000

Estimated gross profit Percentage of Completion (P1,250,000

P1,250,000 3,740,000 

500,000)

Gross profit

– 0 –

5,000,000 800,000 _____25% P 200,000

Construction on Progress (P1,250,000 + P200,000) Less: Contract billings

P1,450,000 _1,740,000

Billings in excess of related costs

P(290,000)


173

Problem 10 – 3 2005

(a)

Contract Price P55,000,000 Less: Total estimated costs (1) Cost incurred to date 15,000,000 Estimated costs to complete _35,000,000

2006

P55,000,000

2007

2008

P55,000,000 P55,000,000

25,000,000 25,000,000

35,000,000 15,000,000

50,000,000 ________ –

_50,000,000

50,000,000

50,000,000

50,000,000

2)

5,000,000 ______30%

5,000,000 _____50%

5,000,000 _____70%

5,120,000 ____100%

Gross profit earned to date Gross profit earned in prior yr(s)

1,500,000 ________ –

2,500,000 _1,500,000

3,500,000 _2,500,000

5,000,000 _3,500,000

P 1,500,000

P 1,000,000

P 1,000,000

P 1,500,000

(2) Total Estimated gross profit Percentage of completion (1



Gross profit earned the year (b)

2007

(1) Construction in Progress Cash or Payable

15,000,000

(2) Accounts Receivable Contract Billings

15,000,000

(3) Cash Accounts Receivable

12,000,000

(4) Construction in Progress Cost of Construction Construction Revenue

1,000,000 15,000,000

2008

15,000,000 15,000,000

15,000,000 20,000,000

15,000,000

20,000,000 25,000,000

12,000,000

25,000,000 1,500,000 15,000,000

16,000,000

16,500,000

Problem 10 – 4

(a)

2006

2008

Cost incurred to date

P 1,000,000

P 5,500,000 P10,000,000

Divide by total estimated cost

P 9,000,000

P11,000,000

_12,000,000

11.11%

50%

83.33%

Percentage of Completion

2006

(b)

2007

Contract Price Less: Total Estimated Cost Cost incurred to date Estimated costs to complete

2007

2008

P15,000,000

P15,000,000 P15,000,000

1,000,000 __8,000,000

5,500,000 __5,500,000

10,000,000 __2,000,000

__9,000,000

_11,000,000

_12,000,000

Estimated gross profit Percentage of completion

6,000,000 ___11.11%

4,000,000 ______50%

3,000,000 ___83.33%

Gross profit earned to date Less: Gross profit earned in prior yrs.

666,600 ________ –

2000,000 ___666,600

9,500,000 _2,000,000

Gross profit earned this year

P 666,600

P 1,333,400

P 500,000

Total

174

(c)

Chapter 10

(1) Construction in progress (cost incurred) Cash

1,000,000

(2) Accounts Receivable Contract Billings

1,325,000

(3) Cash Accounts Receivable

1,200,000

(4) Construction in progress (gross profit) Cost of construction Construction Revenue

666,600 1,000,000

1,000,000

1,325,000

1,200,000

1,666,600

Problem 10 – 5

(1)

2005

Contract Price Less: Total Estimated Cost Cost incurred to date Estimated cost to complete

2006

2007

2008

P14,000,000

P14,000,000

6,500,000 __6,800,000

9,800,000 _3,900,000

12,200,000 _1,900,000

13,900,000 ________ –

_13,300,000

13,700,000

14,100,000

13,900,000


700,000 ___48.87%

300,000 ___71.53%

( 100,000) _____100%

100,000 ____100%

Gross profit (loss) to date Less: Gross profit (loss) in prior yrs.

342,090 ________ –

214,590 ___342,090

( 100,000) ___214,590

100,000 ( 100,000)

Gross profit (loss) this year

P 342,090

P( 127,500)

P( 314,590)

P 200,000

Total

(2)

2005

2006

P14,000,000 P14,000,000

2007

2008

Cost of construction 6,500,000 3,300,000 2,400,000 1,700,000 Construction in progress 342,090 127,500 314,590 200,000 Construction Revenue 6,842,090 3,172,500 2,085,410 1,900,000

Problem 10 – 6

(1)

2005

2006

P 6,000,000

P 6,000,000

P 6,000,000

3,400,000

5,950,000

6,150,000

Estimated costs to complete

_2,100,000

___150,000

________ –

Total

_5,500,000

_6,100,000

_6,150,000


500,000 ___61.82%

( 100,000) _______ –

( 150,000) ________ –

Gross profit (loss) to date Gross profit (loss) in prior yrs.

309,100 ________ –

( 100,000) __309,100

( 150,000) ( 100,000)

Gross profit (loss) this year

P 309,100

P 409,100

P

Contract Price Less: Total estimated costs Cost incurred to date

2007

50,000


175

(2)

2005

Cost of construction Construction in progress Construction Revenue (3)

Cash Accounts Receivable Contract Billings Construction in progress

2006

3,400,000 309,100

2007

2,550,000

200,000 409,100 2,140,900

3,709,100

50,000 150,000

400,000 400,000 6,000,000 6,000,000 Problem 10 – 7

(1)

2006

Contract Price Less: Total Estimated Cost Cost incurred to date Estimated costs to complete

2007

2008

P16,000,000

P16,000,000

P16,000,000

4,600,000 __9,640,000

9,100,000 __5,100,000

14,350,000 _________ –

_14,240,000

_14,200,000

_14,350,000

1,760,000 ______31%

1,800,000 ______58%

1,650,000 _____100%

Gross profit to date 545,600 Less: Gross profit earned in prior yrs. ________ –

1,044,000 __545,600

1,650,000 _1,044,000

P 498,410

P 606,000

Total Estimated gross profit Engineer's estimate of comp.

Gross profit earned this yr. (2) (a) Construction on progress Cash

P 545,600 2006 4,600,000

2007 4,500,000

4,600,000

(b) Accounts receivable Contract billings

5,000,000

(c) Cash Accounts receivable

4,500,000

2008 5,250,000

4,500,000 6,000,000

5,000,000

5,000,000 6,000,000

5,400,000 4,500,000

5,250,000

5,000,000 6,100,000

5,400,000

6,100,000

(d) Cost of constructions 4,600,000 4,500,000 5,250,000 Construction in progress 545,600 498,400 606,000 Construction revenue 5,145,600 4,998,400 5,856,000 (e) Contract billings 16,000,000 Construction on progress 16,000,000 (3)

Zero Prof it M ethod: 2008 En tr es

(a) Construction in progress Cash / accounts payable

5,250,000

(b) Accounts receivable Contract billings

5,000,000

5,250,000

5,000,000

176

Chapter 10

(c) Cash Accounts receivable

6,100,000

(d) Cost of construction Construction in progress Construction revenue

5,250,000 1,650,000

6,100,000

6,900,000

(e) Contract billings Construction in progress (4)

16,000,000 16,000,000

The following entry would be the only one different from (2). 2006 2007 2008 4,414,400 3,821,600 6,114,000 545,600 498,400 606,000 4,960,000 4,320,000 6,720,000

*

Cost of construction Construction in progress Construction revenue

*

Total estimated costs x estimated percentage of completion.

Problem 10 – 8

(1)

2006

2007

2008

P6,500,000

P6,500,000

P6,500,000

2,150,000 _3,850,000

5,250,000 _1,500,000

6,850,000 ________ –

_6,000,000

_6,750,000

_6,850,000

Estimated gross profit (loss) Less: Gross profit (loss) in prior yrs.

500,000 ________ –

(250,000) ___520,000

(350,000) _(250,000)

Gross profit (loss) this years

P 520,000

P( 250,000)

P( 600,000)

Contract Price Less: Total Estimated Costs Cost incurred to date Estimated costs to complete Total

(2)

In 2008 when the project is completed.

Franchise Accounting

177

CHAPTER 11 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 11-1: b No r evenue is to be r eported. Because the f ran chi sor f ail s to r ender substanti al ser vices to the f r anch isee as of December 31, 2008.

11-2: c

Initial franchise fee Less: Cost of franchise

P5,000,000 ____50,000

Net i ncome

P4,950,000

11-3: a

The total initial franchise fee of P500,000 is to be recognized as earned because the collectibility of the note for the balance is reasonably assured. 11-4: b

Cash downpayment Collection of note applying to principal

P 100,000 __200,000

Revenue fr om in iti al fr anchise fee

P 300,000

Cash downpayment, January 2, 2008 Collection applying to principal, December 31, 2008

P2,000,000 _1,000,000

Total Collection Gross profit rate [(5,000,000-500,000)  5,000,000]

3,000,000 _____90%

11-5: a

Reali zed gr oss pr ofit, December 31, 2008

P2,700,000

11-6: b

Face value of the note (P1,200,000 - P400,000) Present value of the note (P200,000 X 2.91)

P 800,000 __582,000

Un earn ed i nterest i ncome, Ju ly 1, 2008

P 218,000

Initial franchise fee Less: unearned interest income

P1,200,000 __218,000

Defer r ed revenue f r om f r anchi se f ee

P 982,000

11-7: d

11-8: d

Initial franchise fee Continuing franchise fee (P400,000 X .05)

P 500,000 ___20,000

Total revenue Cost

520,000 ___10,000

Net i ncome

P 510,000

178

Chapter 11

11-9: b

Deferred Revenue from franchise fee: Downpayment Present value of the note (P1,000,000 X 2.91) Less: Cost of franchise fee

P6,000,000 2,910,000

Deferred gross profit Gross profit rate (6,910,000

P8,910,000 _2,000,000 P6,910,000



8,910,000)

77.55%

Downpayment (collection during 2008) Gross profit rate

P6,000,000 ___77.55%

Realized gross profit from initial franchise fee Add: Continuing franchise fee (5,000,000 X .05)

P4,653,000 __250,000

Total Less: Franchise expense

P4,903,000 ___50,000

Operating income Interest income, 12/31/05 (P2,910,000 X 14%) X 6/12

P4,853,000 __203,700

Net i ncome

P5,056,700

Face value of the note receivable Present value of the note receivable

P1,800,000 1,263,900

Unearned interest income

P 536,100

Initial franchise fee Less: Unearned interest income

P3,000,000 __ 536,100

Defer r ed revenue f r om f r anchi se f ee

P2,463,900

Revenues from: Initial franchise fee Continuing franchise fee (P2,000,000 X .05) Total r evenue fr om fr anchise fee s

P1,000,000 100,000 P1,100,000

Realized gross profit from initial franchise fee [(350,000 + 90,000) x 37%] Continuing franchise fee (P121,000 + P147,500) x 5%

P 162,800 ___13,425

Total revenue Expenses

176,225 ___42,900

Net operating profit Interest income (P900,000 x 15%) x 6/12

133,325 ___67,500

Net i ncome

P 200,825

11-10: b

11-11: a

11-12: d


179

11-13: c

Cash down-payment Present of the note (P40,000 x 3.0374)

P 95,000 __121,496

Total

P 216,496

11-14: a

Initial franchise fee Continuing franchise fee (P400,000 x 5%)

P 50,000 __20,000

Total r evenu e

P 70,000

Should be P80,000 Initial franchise fee – down-payment (P100,000 / 5) Continuing franchise fee (P500,000 x 12%)

P 20,000 __60,000

Total earn ed fr anchi se f ee

P 80,000

11-15: c

11-16: a

The unearned interest credited is the difference between the face value and the present value of the notes receivable (900,000 – 720000). The down payment of P600,000 is recognized as revenue since it is a fair measure of the services already performed by the franchisor. 11-17: b

Cora (P100,000 + P500,000) Dora (P100,000 + P500,000)

P 600,000 600,000

Total

P1,200,000

Down payment (3,125,000 x 40%) Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 Adjusted sales value of initial franchise fee Direct cost of services Gross profit

P1,250,000 1,425,000 2,675,000 802,500 1,872,500

11-18:

Gross profit rate (1,872,500 ÷ 2,675,000)

70%

180

Chapter 11

Date Collection Interest Principal 1/1 6/30 468,750 171,000 297,750 12/30 468,750 135,270 333,480 Total collection applying to principal 631,230 Down payment 1,250,000 Total collection 1,881,230 Gross profit rate 70% Reali zed gr oss pr ofi t on in iti al fr anchise fee

11-19: c

1,316,861

Balance of PV of NR P1,425,000 1,127,250 793,770


181

SOLUTIONS TO PROBLEMS Problem 11 – 1 a.

The collectibility of the note is reasonably assured. Jan. 2:

Cash ..... ..............................................................................12,000,000 Notes receivable................................................................. 8,000,000 Deferred Revenue from IFF. ........................................

July 31:

Deferred cost of Franchises................................................ 2,000,000 Cash ..............................................................................

Nov. 30: Cash/AR ............................................................................ Revenue from continuing franchise fee (CFF) ..............

29,000

Dec. 31:

36,000

Cash / AR .......................................................................... Revenue from CFF ........................................................

20,000,000

2,000,000

29,000

Cash .... .............................................................................. 2,800,000 Notes receivable ............................................................ Interest income (P8,000,000 x 10%) .............................

36,000

2,000,000 800,000

Adj usti ng Entr ies:

(1)

Cost of franchise revenue ........................................... 2,000,000 Deferred cost of franchises ...................................

Deferred revenue from IFF .........................................20,000,000 Revenue from IFF ................................................... To recognize revenue from the initial franchise fee.

2,000,000

(2)

b.

20,000,000

The collectibility of the note is not reasonably assured. Jan. 2 to Dec. 31 = Refer to assumption a. Adjusting entry: to recognized revenue from the initial franchise fee (installment method) (1)

To defer gross pr ofi t:

Deferred Revenue from IFF ........................................20,000,000 Cost of Franchise Revenue ................................... Deferred gross profit – Franchises ....................... GPR = P18,000  P20,000,000 = 90% (2)

2,000,000 18,000,000

To r ecognize gross prof i t:

Deferred gross profit – Franchises ..............................12,600,000 Realized gross profit............................................. (P14,000,000 X 90%)

12,600,000

182

a.

Chapter 11

Problem 11 – 2 Collection of the note is reasonably assured. Jan. 5: Cash .. ..... .............................................................................. 600,000 Notes Receivable ................................................................... 1,000,000 Unearned interest income .................................................. Deferred revenue from F.F. ...............................................

401,880 1,198,120

Face value of NR ............................................................................ Present value (P200,000 x P2,9906) ...............................................

1,000,000 __598,120

Unearned interest ............................................................................

401,880

Nov. 25: Deferred cost of Franchise .............................. .................. Cash .............................................................................. Dec. 31:

179,718 179,718

Cash / AR .......................................................................... Revenue from CFF ........................................................ (P80,000 X 5%)

4,000

Cash .... .............................................................................. Notes Receivable ...........................................................

200,000

4,000

200,000

Adj usti ng Entr ies:

1) Unearned interest income .................................................. Interest income............................................................

119,624 119,624

P598,120 x 20%

2) Cost of Franchise............................................................... Deferred cost of Franchise ..........................................

b.

179,718 179,718

3) Deferred revenue from FF ................................................. 1,198,120 Revenue from FF ........................................................ Collection of the note is not reasonably assured. Jan. 5 to Dec. 31 before adjusting entries – Refer to Assumption a. Dec. 31: Adj usting Entr ies: 1) Unearned interest income ................................................. Interest income ........................................................... 2) Cost of franchise................................................................ Deferred cost of franchise ...........................................

1,198,120

119,624 119,624 179,718 179,718

3) Deferred revenue from FF ................................................. 1,198,120 Cost of Franchise ........................................................ Deferred gross profit – Franchise ............................... GPR = 1,018,402  1,198,120 = 85%)

179,718 1,018,402

4) Deferred gross profit – Franchise ......................................578,319.60 Realized gross profit – Franchise................................ (P600,000 + P200,000- P119,624) x 85%

578,319.60


183

Problem 11 – 3

2007

July 1:

Cash .. ...... ..... .............................................................................. 120,000 Notes Receivable.......................................................................... 320,000 Unearned interest income ...................................................... Deferred revenue from FF ..................................................... Face value of NR .......................................................................... P320,000 Present value (P80,000 x 3.1699)................................................. _253,592

66,408 373,592

Unearned interest income ............................................................. P 66,408 Sept. 1 to Nov. 15: Deferred cost of franchise ............................................................ Cash .. ..... .............................................................................. (P50,000 + P30,000) Dec. 31: Adjusting Entry: Unearned interest income ............................................................. Interest income ...................................................................... (P253,592 x 10% x 1/2)

80,000 80,000

12,680 12,680

2008

Jan. 10: Deferred cost of franchise ............................................................ Cash .. ..... ..............................................................................

50,000

July 1:

80,000

Cash .. ...... ..... .............................................................................. Note receivable ......................................................................

Dec. 31: Adjusting Entri es : (1) Cost of franchise .................................................................... Deferred cost of franchise .................................................

50,000

80,000

130,000 130,000

(2) Deferred revenue from FF ..................................................... Revenue from FF ...............................................................

373,592

(3) Unearned interest income ...................................................... Interest income ..................................................................

25,360

373,592

25,360

184

Chapter 11

Problem 11 – 4

2008

Jan. 10: Cash .. ...... ..... .............................................................................. 6,000,000 Deferred revenue from FF. ....................................................

6,000,000

Jan. 10 to July 15: Franchise expense ........................................................................ 2,250,000 Cash .. ..... ..............................................................................

2,250,000

Deferred revenue from FF ............................................................ 4,000,000 Revenue from FF ................................................................... Initial Franchise fee .....................................................................P6,000,000 Deficiency Market value of costs (P180,000  90%) x 10 yrs. ................( 2,000,000)

4,000,000

Adjusted initial fee (revenue) .......................................................P4,000,000

July 15: (a) Continuing expenses .............................................................. Cash / Accounts payable ...................................................

180,000

(b) Deferred revenue from FF ..................................................... Revenue from CFF ............................................................ (P180,000  90%) Problem 11 – 5 Adjusted initial franchise fee: Total initial F.F............................................................................. Less: Face Market value of kitchen equipment ............................

200,000

a)

180,000

Adjusted initial FF........................................................................ Revenues: Initial FF .. ..... .............................................................................. Sale of kitchen equipment ............................................................ Continuing F.F. (P2,000,000 x 2%) .............................................

b)

200,000

P4,500,000 _1,800,000 P2,700,000 P2,700,000 1,800,000 ___40,000

Total . ...... ..... .............................................................................. Expenses: Initial expenses ............................................................................. P 500,000 Cost of kitchen equipment............................................................ 1,500,000

4,540,000

_2,000,000

Net income ..... ..... ..............................................................................

P2,540,000

Journal Entries: Jan. 2: Cash .. ..... .............................................................................. 1,500,000 Notes receivable..................................................................... 3,000,000 Deferred revenue from FF (adjusted SV) .......................... Revenue from FF (Market value of equipment) ................

2,700,000 1,800,000

Cost of kitchen equipment ..................................................... 1,500,000 Kitchen equipment ............................................................

1,500,000


185

Jan. 18: Franchise expense ........................................................................ Cash .... ..............................................................................

500,000 500,000

April 1: Cash ...... ..... ..............................................................................2,000,000 Notes receivable ................................................................

2,000,000

Dec. 31: Cash ...... ..... ..............................................................................1,000,000 Notes receivable ................................................................

1,000,000

Cash / Account receivable ............................................................ Revenue from continuing FF .............................................

40,000 40,000

Deferred revenue from FF ............................................................ 2,700,000 Revenue from FF ...............................................................

2,700,000

Problem 11 – 6

Recognition of initial franchise fee (IFF) (6 mos. after opening) Revenue from initial FF: Total initial FF ..... ..............................................................................P2,500,000 Less: Deficiency in continuing FF (Sch. 1) ........................................ 160,000 Expense (costs of initial services) ...............................................................

2,340,000 __700,000

Net income .. ... ...... ..... ..............................................................................

P1,640,000

Schedule 1 – Estimated defi ciency in CFF (1) Yr. of Estimated Contract Continuing FF 1 2 3 4 5 6 7 8 9 10

(2) Market Value of Continuing Services

P220,000 220,000 220,000 220,000 220,000 150,000 150,000 150,000 90,000 90,000

(Excess of 2 over 1) Deficiency

P250,000 250,000 250,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000

P 30,000 30,000 30,000 – – – – – 35,000 __35,000 P160,000

: Recogni tion of r evenue fr om CF F and costs Years 1-3

Years 4-5

Years 6-8

Years 9-10

Revenue from CFF ........................ P250,000 Expenses . ...... ..... ......................... _200,000

P220,000 _100,000

P150,000 _100,000

P125,000 _100,000

Net income ..... ..... ......................... P 50,000

P120,000

P 50,000

P 25,000

186


1/12/2008

6/1/2008

7/1/2008

6/30/2009

– – – 62,500

– – – 80,000

287,200

–

– 45,490* 48,000 –

– ( 68,000)

( 70,000) – –

– ( 36,000) –

P 12,000

P217,200

P 57,490

Revenues: Initial FF (Sch. 1) Interest income – Continuing FF – Others Expenses: Initial expenses – Continuing expense Others

– – ( 50,000)

Net Income

P 12,500

* P454,900 x 10% = P45,490 Schedule 1: Computation of initial FF to the recognized : Total initial fee ...... ................................................................................................... Less: Interest unearned on the note ........................................................................ Market value of inventory ............................................................................ Market value of equipment ........................................................................... Deficiency in continuing costs ......................................................................

P750,000 ( 145,100) ( 80,000) ( 62,500 ( 175,200)

Adjusted initial FF .. ...................................................................................................

P287,200

Unearned Interest: Face value of the note .......................................................................................... Present value (120,000 x 3.7908) ........................................................................

P600,000 454,900

Unearned interest .................................................................................................

P145,100

A.

B.

Market value of equipment and inventory : Equipment (P50,000  80%)................................................................................ Inventory... ...... ...................................................................................................

A B B C

rounded

P62,500 80,000

Income from Sales:

C.

Equipment

Inventory

Sales Price . ...... .......................................... Cost .... ...... ...... ..........................................

P62,500 50,000

P80,000 68,000

P142,500 118,000

Net income ...... ..........................................

P12,500

P12,000

P 24,500

Analysis of Continuing costs : Market value of costs is P4,000/Mo. or P48,000 / yr. Continuing Fees: Years 1-4

Years 5-16

Total

Years 17-20

Gross revenues .......................................... Gross fees per month ..................................

P330,000/mo. P 2,475/mo.

P450,000/mo. P 3,375/mo.

P500,000/mo. P 3,750/mo.

Gross fees per year...................................... Market value of continuing costs ................

P 29,700 ( 48,000)

P 40,500 ( 48,000)

P 45,000 ( 48,000)

Deficiency per year ..................................... Number of years .........................................

(

18,300) x4

(

7,500) x 12

(

3,000) x4

Deficiency

P(

73,200)

P(

90,000)

P(

12,000)

..........................................

Total deficiency for 20 years is P175,200

Advance Accounting Book 1

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