UNIT I: ACCOUNTING FOR A PARTNERSHIP Lecture Notes PARTNERSHIP ACCOUNTING – unlimited liability – easy to form
FORMATION OF PARTNERSHIP – Cash contribution of the partners recorded @ face value – Non-cash assets recorded @ agreed value, usually the fair value o
Bonus Method 1. No recording of unidentifiable assets pertaining to goodwill 2. Total Agreed Agreed Capital (TAC) = Total Contributed Capital (TCC) 3. There would only be a transfer of of capital from one partner to another
o Cash Invested/Withdrawn Invested/With drawn 1. If adjusted capital is more than the unadjusted capital ADDITIONAL ADDITIONAL INVESTMENT INVESTMENT 2. If adjusted capital is less than the unadjusted capital WITHDRAWAL
OPERATIONS o
Profit and Loss Agreement
Scenario 1. Both profit and loss agreement agreement are given. 2. There is a profit agreement but no loss agreement 3. No profit agreement but there is a loss agreement 4. Both profit and loss agreement
o
Profit
Loss
Result Follow the agreement
Follow profit agreement
For profit, use original capital ratio For loss, follow the agreement For both, use original capital ratio.
Salaries and Interest 1. Salaries & interest should be recorded as provided regardless of of the result of the operations. 2. This could be fractional year. * Payments of salaries, interest & bonus are not treated as part of expense
Bonus – – it should only be given if there is profit and bases depends on partners agreement
o
MODADV1 Handout Dr. Rodiel C. Ferrer
Statement of Changes in Partner’s Capital P
Beginning Capital Add: Additional Investment Less: Irregular or Permanent Withdrawal Balance Before Net Income Add: Share In Net Income Less: Regular Drawings CAPITAL, END
xxx xxx (xxx) xxx xxx (xxx) xxx
P
P
* If withdrawal is SILENT to permanent or regular, it will be considered as permanent withdrawal.
DISSOLUTION 1. Admission by purchase without revaluation Purchase price is to be ignored. Transaction between new partner and the partner who is selling shares is considered as PERSONAL TRANSACTION. The total agreed capital would still be equal to the total contributed capital
2. Admission by purchase with revaluation Purchase price is used to determine the amount of revaluation
example: purchase price % of interest
= Total Agreed Capital Less: Total Contributed Capital REVALUATION
* Amount of revaluation increases the amount of capital of the old partner and so is distributed among P& L ratio 3. Admission by investment Bonus method is to be applied if the problem is silent. Revaluation method should also be applied if the problem says so. TAC = TCC
Pro-forma: o Bonus to old partner Cash Capital, old partner Capital, old partner Capital, new partner o
Bonus to new partner Cash Capital, old partner Capital, old partner Capital, new partner
xxx xxx xxx xxx
xxx xxx xxx xxx
MODADV1 Handout Dr. Rodiel C. Ferrer
4. K- Old Partner 1 T – Old Partner 2 Total R – New Partner 1 TOTAL
P P P
TCC xxx xxx xxx xxx xxx
TAC P xxx xxx P xxx xxx P xxx
BONUS P xxx xxx P xxx xxx 0
TAC
BONUS
5. Admission by purchase and admission by investment UNADJUSTED
K- Old Partner 1 T – Old Partner 2 Total R – New Partner 1 TOTAL
P P P
xxx xxx xxx xxx xxx
ADJUSTED TCC
P P P
xxx xxx xxx xxx xxx
RETIREMENT 1. Computation of Total Interest Capital +/- Share in Net Income/Loss +/- Revaluation +/- Loan Balance TOTAL INTEREST o
P P P
xxx xxx xxx xxx xxx
P P
P
P
xxx xxx xxx xxx 0
xxx xxx xxx xxx xxx
Classification of Loan Balances ADDED TO CAPITAL (LIABILITY) – Loan FROM partner – Due TO partner – Loan payable TO partner
DEDUCTED FROM CAPITAL(ASSET) – Loan TO partner – Due FROM partner – Loan payable FROM partner
2. Total interest is more than settlement of its retiring partners Bonus to REMAINING PARTNERS 3. Total interest is less than settlement of the retiring partner Bonus to RETIRING PARTNER
LIQUIDATION 1. Lump-sum liquidation 2. Installment liquidation or piecemeal o
Lump-sum Liquidation 1. Assets – realization 2. Liabilities – payment 3. Capital – distribution
MODADV1 Handout Dr. Rodiel C. Ferrer
4. Marshalling of asssets o Partnership Assets Who do you prioritize first? i. Partnership creditors ii. Personal creditors iii. Partners o Personal assets Who do you prioritize first? i. Personal creditors ii. Partnership creditors iii. Partners
o
Installment Liquidation o Cash Priority Program (CPP) 1. Determine the total interest 2. Compute loss absorption balance (LAB) LAB =Total Interest P & L ratio 3. Equalize loss absorption balance from the highest to the second highest until equal to determine priority of payment 4. Distribution to partners (difference in LAB x P&L ratio) Partner A
Total Interest Divided by P&L ratio Loss Absorption Balance Priority I Priority II Priority III CASH DISTRIBUTION
P P
xxx xxx xxx
Partner B
P P
xxx xxx xxx
Partner C
P P P
P P P
xxx xxx
P
xxx xxx xxx
P
xxx xxx xxx xxx xxx xxx xxx
TOTAL
P P P
P
xxx xxx xxx xxx xxx xxx xxx
When to use CPP? – If there is no deficiency in the partners capital – When the problem gives payment to any of the partners ex. If partner A receives P xxx, how much will partner B receive? 3. If there is no additional investment o
Schedule of Safe Payment 1. Determine the total interest 2. Compute the maximum possible loss 2.1. Unsold non cash assets @ book value; plus 2.2. Liquidation expenses or cash withheld 3. Distributed deficit 4. Distribution to partners
* Under the statement of liquidation, partners are assumed to be solvent. * Under the schedule of safe payment, partners are assumed to be insolvent
MODADV1 Handout Dr. Rodiel C. Ferrer
COMPUTATION OF CASH DISTRIBUTION: Cash, beginning + Proceeds from sale of Non Cash Assets - Total Liabilities recorded & unrecorded - Liquidation expenses CASH DISTRIBUTION
P xxx xxx (xxx) (xxx) P xxx
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT II: CORPORATE LIQUIDATION Lecture Notes CORPORATE LIQUIDATION 1) Assets should be recorded at Fair Value (FV) or Net Realizable Value (NRV) 2) Intangible assets and pre-payments are DERECOGNIZED upon Corporate Liquidation o
o
Statement of Affairs – initial report that shows the available asset values and debts of the debtor corporation Statement of Realization and Liquidation – periodic report of the reviewer shows how the receiver managed the assets of the debtor corporation on behalf of the creditors Assets are classified into three (3) categories: 1. Assets pledged to FULLY secured creditors (APTFSC) FV of asset >Liability 2. Assets pledged to PARTIALLY secured creditors (APTPSC) FV of asset < Liability 3. Free assets – assets not pledged as security for any liability – includes value of APTFSC in excess of liability
Liabilities are classified into four (4) categories: 1. Unsecured liability with priority a. Administrative expenses – trustees expenses b. Salaries and wages c. Taxes 2. Fully secured creditors (FSC) 3. Partially secured creditors (PSC) 4. Unsecured creditors
NUMERATOR 1) Excess of APTFSC over FSC: APTFSC P xxx FSC ( xxx) 2) Free Assets TOTAL FREE ASSETS 3) Less: Liabilities w/ priority a. Administrative exp. P xxx b. Salaries xxx c. Taxes xxx NET FREE ASSETS P
% of recovery =
P
xxx
DENOMINATOR 4) Excess of PSC over APTPSC: PSC P xxx APTPSC ( xxx)
P
xxx xxx
5) Liability w/o priority TOTAL UNSECURED LIAB P
P
xxx xxx
xxx
( xxx) xxx
NET FREE ASSETS . TOTAL UNSECURED LIABILITY
Estimated deficiency = Net Free Assets – Total Unsecured Liability
MODADV1 Handout Dr. Rodiel C. Ferrer
COMPUTATION FOR TOTAL PAYMENT TO ALL CREDITORS: Fully Secured Creditors Partially Secured Creditors: Assets Pledged to Partially Secured Creditors (P xxx * 100%) Excess of PSC over APTPSC ( P xxx * % of recovery) Liability with Priority Liability without Priority ( P xxx * % of recovery) TOTAL PAYMENT TO ALL CREDITORS
P
P
xxx
P
xxx xxx xxx xxx
xxx xxx
OR Net Realizable Value of Assets = Total Payment to Creditors
STATEMENT OF REALIZATION AND LIQUIDATION Assets to be realized Assets acquired Liabilities liquidated Liabilities not liquidated Supplementary charges Net Income
xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx xxx
Assets realized Assets not realized Liabilities to be liquidated Liabilities assumed Supplementary credits Net Loss
COMPUTATION FOR ENDING CASH BALANCE:
A =
L+E
Cash Assets not realized
Equity Liabilities NOT liquidated Less: Assets NOT realized ENDING CASH BALANCE
Liabilities not
SHE ITEMS
liquidated
P
P
xxx xxx xxx xxx
NOTE: If Retained Earnings balance is ending, it already includes net income or net loss. If not, then add or deduct the net income or net loss.
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT III: INSTALLMENT SALES Lecture Notes INSTALLMENT SALES 1) If collectability of the note is REASONABLY ASSURED, ACCRUAL METHODshould be applied. In this topic the entire amount of GP becomes part of the net income. 2) If the collectability of the note is NOT REASONABLY ASSURED, INSTALLMENT METHOD should be applied COMPUTATION OF NET INCOME: Gross Profit (GP) on Regular Sales Realized Gross Profit (RGP) on Installment Sales TOTAL RGP Less: Expenses 1) Selling Expenses 2) Loss on Repossession 3) Loss on Write-off NET INCOME *GP on Regular Sales Sales Less: Cost of Regular Sales GP ON REGULAR SALES
P P P
xxx xxx xxx
xxx xxx xxx
( P
xxx) xxx
*RGP on Installment Sales P ( P
xxx xxx) xxx
Collection Multiplied by GP rate RGP ON INSTALLMENT SALES
P ( P
xxx xxx) xxx
3) Installment Accounts Receivable IAR, beginning (prior year) or Installment sales (current year)
xxx
xxx
Collections
xxx
Repossessed accounts or IAR defaulted Write-off
xxx IAR, ending
xxx
4) Gain or Loss on Repossession COMPUTATION OF FV OF REPOSSESSED MERCHANDISE: Estimated Selling Price Reconditioning cost Normal Profit Cost to sell FV OF REPOSSESSED MERCHANDISE AFTER RECONDITIONING COST
P ( ( (
xxx xxx) xxx) xxx)
P
xxx
* If it is BEFORE reconditioning cost, IGNORE the amount of reconditioning cost. * If the problem is SILENT if the estimated selling price is before or after recondition cost, deduct the reconditioning cost * If the problem says ESTIMATED WHOLESALE VALUE or APPRAISED VALUE, the normal profit should not be deducted anymore.
MODADV1 Handout Dr. Rodiel C. Ferrer
COMPUTATION OF GAIN (LOSS) ON REPOSSESSION: FV of Repossessed Merchandise Less: Unrecovered cost 1) IAR-defaulted Less: DGP related to receivables
P P (
xxx
xxx xxx )
or
2) IAR x cost ratio GAIN (LOSS) ON REPOSSESSION
xxx
( P
xxx) xxx
* If Unrecovered Cost > FV or Repossessed Merchandise = LOSS ON REPOSSESSION * If Unrecovered Cost < FV of Repossessed Merchandise = GAIN ON REPOSSESSION Journal entry: Repossessed Merchandise @ FV DGP Loss on Repossession IAR – defaulted Gain on Respossession (if any)
xxx xxx xxx xxx xxx
4) Write-off Journal entry:
Regular Sales Allowance on Doubtful accounts Accounts Receivable
xxx xxx
Installement Sales DGP Loss on Write-off IAR
xxx xxx xxx
5) Deferred Gross Profit COMPUTATION OF DEFERRED GROSS PROFIT: Installment Sales Cost of Installment Sales DGP
RGP (Collection x GP rate) DGP on Repossessed Merchandise DGP on Write-off
P ( P DGP xxx xxx xxx xxx xxx
xxx xxx) xxx
DGP, beginning
DGP, ending
MODADV1 Handout Dr. Rodiel C. Ferrer
COMPUTE GP RATE FOR INSTALLMENT SALES: IS – prior year
IS – current year
DGP IAR
DGP IS
6) Trade-In Downpayment – Cash Downpayment – FV of merchandise traded in Collection – Interest TOTAL COLLECTION X GP Rate RGP
P
P * P
xxx xxx xxx xxx % xxx
COMPUTE FOR GP RATE OF MERCHANDISE TRADED IN: Installments Sales Less: Over allowance Add: Under allowance (if any) ADJUSTED SALES Less: Cost of Sales GP Gross Profit Adjusted Sales
P (xxx) xxx P (xxx) P
xxx
xxx xxx
= GP Rate
* Trade in value of merchandise > FV of merchandise traded in = OVERALLOWANCE * Trade in value of merchandise < FV of merchandise traded in = UNDERALLOWANCE
NOTE: If the trade in allowance is deducted from the invoice price before computing the amount of down payment if the problem says that the trade-in is part of the down payment. or [(Adjusted sales – FV of RM) x % of DP] = Amount of Downpayment
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT IV: LONG TERM CONSTRUCTION CONTRACTS Lecture Notes Long-term Construction Contracts 1) Contract Price = Progress Billings 2) Contract Price + Escalation Clause – Penalty Clause = Progress Billings 3) Two Methods:
a) b) c) d) e) f)
a) b) c) d)
Percentage of Completion Method – With dependable estimates are available – a.k.a. cost to cost model Contract Price Cost Incurred (to date) Estimated costs to complete Total Estimated costs (a + b) Total Estimated Gross Profit (a – d) Multiply by Percentage of Completion (b/d) Gross Profit to date (e x f) Gross Profit (previous year) Gross Profit (current year)
Cost Incurred (to date) Gross Profit (to date) Construction In Progress Progress Billings (to date) DUE FROM/DUE TO
20x2 P xxx P xxx xxx xxx P xxx x P P
20x3 P xxx P xxx xxx xxx P xxx
% x xxx P ( xxx P
20x4 P xxx P xxx xxx xxx P xxx
% x xxx P xxx ) ( xxx P
20x2 20x3 P xxx P xxx xxx xxx P xxx P xxx xxx xxx P xxx P xxx
% xxx xxx ) xxx
20x4 P xxx xxx P xxx xxx P xxx
NOTE: Due From (Current Asset), Due To (Current Liability)
MODADV1 Handout Dr. Rodiel C. Ferrer
Zero Profit Method No dependable estimates are available
–
a) b) c) d) e) f)
Contract Price Cost Incurred (to date) Estimated costs to complete Total Estimated costs (a + b) Total Estimated Gross Profit (a – d) Multiply by: 100% or 0% Gross Profit to date (e x f) Gross Profit (previous year) Gross Profit (current year)
20x2 P xxx P xxx xxx xxx P xxx x P P
20x3 P xxx P xxx xxx xxx P xxx
% x xxx P ( xxx P
20x4 P xxx P xxx xxx xxx P xxx
% x xxx P xxx ) ( xxx P
% xxx xxx ) xxx
NOTE: No profit is recognized until the construction contract is completed. : When it is probable that total estimated costs will exceed the contract price, the expected loss shall be treated as an expense immediately. 4) Contract Retention may be part of billing but not paid to contractor – Does not have an income element Journal entry: Cash Contract Retention Accounts Receivable Upon Completion: Cash Contract Retention
xxx xxx xxx
xxx xxx
5) Mobilization fee – Deducted from the bills of contractors in equal installments covering the project period – Does not have income element
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT V: FRANCHISE ACCOUNTING Lecture Notes FRANCHISE ACCOUNTING 1) CRS – Criteria in recognizing initial franchise fee as revenue: (1) Cash or the down payment must be NON-REFUNDABLE. All the conditions (2) Notes Receivables must be REASONABLY ASSURED. MUST BE met (3) Services must be SUBSTANTIALLY PERFORMED. If the problem is silent , the best indicator of the criterion is when the company commences operation * If any of the conditions is not followed, the entire amount of IFF becomes an unearned revenue, except when: a) The down payment is non-refundable; and b) The down payment represents the fair measure of the services performed. Under the two conditions, the amount of down payment becomes revenue, however, the remaining balance is considered unearned revenue. 2) If the notes receivable is REASONABLY ASSURED, the ACCRUAL METHOD is used, however, if it is NOT REASONABLY ASSURED, use INSTALLMENT METHOD. Franchise Cost DIRECT COST Direct Cost Expense
IFF CFF
INDIRECT COST Expense Expense
3) If the problem is silent, the notes receivable is considered reasonably assured. Case 1 – Interest bearing – NR - reasonably assured
Revenue (IFF) - Cost of Sales Gross Profit + CFF (Sales x %) + Interest Income - Expense NET INCOME
Case 2 – Interest bearing – NR - not reasonably assured
Downpayment + Collection Total Collection x GP% RGP + CFF (Sales x %) + Interest Income - Expense NET INCOME
Common Question for Case 3: How much is the revenue from franchise? 1) Revenue (DP + PV) 2) CFF TOTAL REVENUE FROM FRANCHISE
Case 3
Case 4
– Non -Interest bearing – NR - reasonably assured
– Non - Interest bearing – NR –not reasonably assured
Revenue (DP + PV) - Cost of Sales Gross Profit + CFF (Sales x %) + Interest Income - Expense NET INCOME
Downpayment + Collection - Interest Total Collection x GP% RGP + CFF (Sales x %) + Interest Income - Expense NET INCOME
P P
xxx xxx xxx
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT VI: INTEREST ON JOINT VENTURES Lecture Notes JOINT VENTURES IFRS 11 (Jan 1, 2013) IAS 31
IFRS -
(1)
(2)
jointly controlled entity
jointly contributed assets
11 (1) jointly controlled entity Contractual Establishes joint control Equity method SNI: Investment – Joint Venture xxx Investment Income xxx Dividends: Cash xxx Inv. Income xxx
1-19% financial asset @ FV through P&L @ FV through OCI cost method or FV method 20-49% investment in associate equity method 50 % joint control equity method
jointly controlled operations
(2)
jointly controlled operations - Sharing of control - Unanimous consent in operating & financial decisions Joint Venture - P/L Purchases
Sales
Expenses CR - unadjusted
Cash
Unsold merchandise CAPITAL Loss Profit Withdraw Invested
Merchandise
Section No. 15: Joint Ventures for SMEs 1) Equity Method 2) Cost Method 3) FV Model
Loss
Profit
DR
CR
Due from
Due to managing operations
COMPUTATION OF CARRYING VALUE OF INVESTMENT: EQUITY METHOD Purchase Price + Transaction Cost + Share in Net Income - Dividends - Amortization of UVA + Amortization of OVA - Impairment Loss CV OF INVESTMENT
Cash Merchandise
51-100% investment in subsidiary cost method
(3)
COST METHOD Purchase Price + Transaction Cost - Impairment Loss CV OF INVESTMENT
FV MODEL Purchase Price + Unrealized Gain - Unrealized Loss CV OF INVESTMENT
* Share in net income – fractional year
MODADV1 Handout Dr. Rodiel C. Ferrer
COMPUTATION OF PROFIT (LOSS): EQUITY METHOD + Share in Net Income +/- Gain (Loss) on Sale + Amortization of UVA - Amortization of OVA - Impairment Loss PROFIT (LOSS)
COST METHOD Dividends +/- Gain (Loss) on Sale - Impairment Loss PROFIT (LOSS)
FV MODEL Dividends + Unrealized Gain - Unrealized Loss - Transaction Cost +/- Gain (Loss) on Sale PROFIT (LOSS)
COMPUTATION OF HOW MUCH THE SETTLEMENT TO VENTURERS: Investment in terms of cash or merchandise + Share in Net Income - Withdrawal of cash or merchandise - Unsold merchandise given to venturers FINAL SETTLEMENT
P ( ( P
xxx xxx xxx) xxx) xxx
P
xxx
COMPUTATION OF TOTAL INTEREST: Joint venture –cash +/- Settlement to (A) venture [ A, Capital + SNI – unsold merchandise given to (A) ] Settlement to (B) + Unsold merchandise given to (B) TOTAL INTEREST
SME’s Methods used Cost Model
xxx xxx xxx xxx
P P
Change to Public price quotation (public offering)
FV Model
FV cannot be determined reliably without undue effort
Cost Model
FV Model
FV Model – Use FV model, if there is a published price quotation given, if cost method is used. – Under this model, SNI is not considered in computing net income however the dividend is treated as income Cash xxx Dividend Income xxx – Any cost to sell is ignored. The FV of investment should only be considered. – The CV is of how much is the FV at the end of the year
Cost Model – Same with FV, the entity will record dividend income Cash xxx Dividend Income xxx MODADV1 Handout Dr. Rodiel C. Ferrer
Equity Model – Equity model is always equity model unless there is a change in ownership. – If the company loses joint control, there would be a shift to cost model or fair model.
MODADV1 Handout Dr. Rodiel C. Ferrer
UNIT VII: DEBT RESTRUCTURING Lecture Notes DEBT RESTRUCTURING - Debt restructuring is a situation where the creditor for economic or legal reasons related to the debtor’s financial difficulties, grants to the debtor concession that would not be granted in a normal business relationship.
Types 1. 2. 3.
of Debt Restructuring: Asset Swap Equity Swap Modification of terms
ASSET SWAP - Under PFRS 9 , asset swap is treated as a derecognition of a financial liability or extinguishment of an obligation - The difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss Carrying Value of Liability Less: Carrying Value of Asset GAIN ON EXTINGUISHMENT OF DEBT -
-
P ( P
xxx xxx) xxx
Under USA GAAP, asset swap is recorded as if two transactions have taken place, namely, the sale of the asset and the extinguishment of the liability. FMV of property given Less: CV of property given GAIN ON EXCHANGE
P ( P
xxx xxx) xxx
Carrying Value of Liability Less: FMW of Asset GAIN ON EXTINGUISHMENT OF DEBT
P ( P
xxx xxx) xxx
PFRS 9 should be followed as this in conformity with international accounting standard
EQUITY SWAP -
Issuance of share capital by the debtor to the creditor in full or partial payment of an obligation Carrying Value of Liability Less: FMV of Stock * GAIN ON EXTINGUISHMENT OF DEBT
P ( P
xxx xxx) xxx
* FMV of stock includes Ordinary Shares and Share Premium
MODADV1 Handout Dr. Rodiel C. Ferrer
-
If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments issued to extinguish a financial liability shall be measured at the following amounts in order of priority : a. Fair value of equity instruments issued b. Fair value of liability extinguished c. Carrying amount of liability extinguished
MODIFICATION OF TERMS -
-
PFRS 9 provides that a substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old financial liability and recognition of a new financial liability There is substantial modification of terms, if the amount of gain on existing of debt is AT LEAST 10% of the carrying amount of the old liability Carrying Value of Liability Present Value of Restructured Liability* GAIN ON EXTINGUISHMENT OF DEBT
P ( P
xxx xxx) xxx
* PV of new or restructured liability which is discounted using the old effective rate -
Premium is recognized if the new carrying value of the old liability is greater than the new liability when there is modification
MODADV1 Handout Dr. Rodiel C. Ferrer
