CHAPTER 1 MULTIPLE CHOICE ANSWERS AND SOLUTIONS

Partnership – Basic Considerations and Formation 1

CHAPTER 1

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 1-1: a

Jose's capital should be credited for the market value of the computer contributed by him.

1-2: b (40,000 + 80,000) ÷ 2/3 = 180,000 x 1/3 = 60,000. 1-3: a Cash P100,000 Land 300,000 Mortgage payable ( 50,000)

Net assets (Julio, capital) P350,000 1-4: b Total Capital (P300,000/60%) P500,000 Perla's interest ______40%

Perla's capital P200,000 Less: Non-cash asset contributed at market value Land P 70,000 Building 90,000 Mortgage Payable ( 40,000) _120,000

Cash contribution P 80,000 1-5: d - Zero, because under the bonus method, a transfer of capital is only required. 1-6: b Reyes Santos

Cash P200,000 P300,000 Inventory – 150,000 Building – 400,000 Equipment 150,000 Mortgage payable ________ ( 100,000)

Net asset (capital) P350,000 P750,000 1-7: c AA BB CC

Cash P 50,000 Property at Market Value P 80,000 Mortgage payable ( 35,000) Equipment at Market Value _______ _______ P55,000

Capital P 50,000 P 45,000 P55,000

2 Chapter 1 1-8: a PP RR SS

Cash P 50,000 P 80,000 P 25,000 Computer at Market Value __25,000 _______ __60,000

Capital P 75,000 P 80,000 P 85,000 1-9: c Maria Nora

Cash P 30,000 Merchandise inventory P 90,000 Computer equipment 160,000 Liability ( 60,000) Furniture and Fixtures 200,000 ________

Total contribution P230,000 P190,000 Total agreed capital (P230,000/40%) P575,000 Nora's interest ______60%

Nora's agreed capital P345,000 Less: investment 190,000

Cash to be invested P155,000 1-10: d Roy Sam Tim

Cash P140,000 – – Office Equipment – P220,000 – Note payable ________ _( 60,000) ______

Net asset invested P140,000 P160,000 P – Agreed capitals, equally (P300,000/3) = P100,000 1-11: a Lara Mitra

Cash P130,000 P200,000 Computer equipment – 50,000 Note payable ________ _( 10,000)

Net asset invested P130,000 P240,000 Goodwill (P240,000 - P130,000) = P110,000 1-12: a Perez Reyes

Cash P 50,000 P 70,000 Office Equipment 30,000 – Merchandise – 110,000 Furniture 100,000 Notes payable _______ ( 50,000)

Net asset invested P 80,000 P230,000


1-12: Continued Bonus Method: Total capital (net asset invested) P310,000 Goodwill Method: Net assets invested P310,000 Add: Goodwill (P230,000-P80,000) _150,000

Net capital P460,000 1-13: b Required capital of each partner (P300,000/2) P150,000 Contributed capital of Ruiz: Total assets P105,000 Less Liabilities __15,000 __90,000

Cash to be contributed by Ruiz P 60,000 1-14: d Total assets: Cash P 70,000 Machinery 75,000 Building _225,000 P370,000 Less: Liabilities (Mortgage payable) __90,000

Net assets (equal to Ferrer's capital account) P280,000 Divide by Ferrer's P & L share percentage ____70%

Total partnership capital P400,000 Required capital of Cruz (P400,000 X 30%) P120,000 Less Assets already contributed: Cash P 30,000 Machinery and equipment 25,000 Furniture and fixtures __10,000 __65,000

Cash to be invested by Cruz P 55,000 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 P 44,000 Asset contributed by D. Arce: Cash P 20,000 Merchandise __10,000 __30,000

Total assets of the partnership P 74,000

4 Chapter 1 1-16: a Cash to be invested by Mendez: Adjusted capital of Lopez (2/3) Unadjusted capital P158,400 Adjustments: Prepaid expenses 17,500 Accrued expenses ( 5,000) Allowance for bad debts (5% X P100,000) _( 5,000)

Adjusted capital P165,900 Total partnership capital (P165,900/2/3) P248,850 Multiply by Mendez's interest ⅓

Mendez's capital P 82,950 Less Merchandise contributed __50,000

Cash to be invested by Mendez P 32,950 Total Capital: Adjusted capital of Lopez P165,900 Contributed capital of Mendez __82,950

Total capital P248,850 1-17: d Moran, capital (40%) Cash P 15,000 Furniture and Fixtures _100,000 P115,000 Divide by Moran's P & L share percentage ______40%

Total partnership capital P287,500 Multiply by Nakar's P & L share percentage ______60%

Required capital of credit of Nakar: P172,500 Contributed capital of Nakar: Merchandise inventory P 45,000 Land 15,000 Building __65,000

Total assets P125,000 Less Liabilities __30,000 P 95,000

Required cash investment by Nakar P 77,500 1-18: c Garcia's adjusted capital (see schedule 1) P40,500 Divide by Garcia's P & L share percentage ______40%

Total partnership capital P101,250 Flores' P & L share percentage ______60%

Flores' capital credit P 60,750 Flores' contributed capital (see schedule 2) __43,500

Additional cash to be invested by Flores P 17,250

Partnership – Basic Considerations and Formation 5 1-18: Continued Schedule 1: Garcia, capital: Unadjusted balance P 49,500 Adjustments: Accumulated depreciation ( 4,500) Allowance for doubtful account ( 4,500)

Adjusted balance P 40,500 Schedule 2: Flores capital: Unadjusted balance P 57,000 Adjustments: Accumulated depreciation ( 1,500) Allowance for doubtful accounts ( 12,000)

Adjusted balance P 43,500 1-19: d Ortiz Ponce Total

( 60%) ( 40%) Unadjusted capital balances P133,000 P108,000 P241,000 Adjustments: Allowance for bad debts ( 2,700) ( 1,800) ( 4,500) Inventories 3,000 2,000 5,000 Accrued expenses _( 2,400) ( 1,600) ( 4,000)

Adjusted capital balances P130,900 P106,000 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 P296,875 Multiply by Roxas' interest ______20%

Cash to be invested 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%) P120,000 Less Cash investment __30,000

Merchandise to be invested by Gomez P 90,000 Cash to be invested by Jocson: Adjusted capital of Jocson: Total assets (at agreed valuations) P180,000 Less Accounts payable __48,000 P132,000 Required capital of Jocson _180,000

Cash to be invested by Jocson P 48,000

6 Chapter 1 1-21: b Unadjusted Ell, capital (P75,000 – P5,000) P 70,000 Allowance for doubtful accounts ( 1,000) Accounts payable ( 4,000)

Adjusted Ell, capital P 65,000 1-22: c Total partnership capital (P113,640/1/3) P340,920 Less Divino's capital _113,640

Cortez's capital after adjustments P227,280 Adjustments made: Allowance for doubtful account (2% X P96,000) 1,920 Merchandise inventory ( 16,000) Prepaid expenses ( 5,200) Accrued expenses ___3,200

Cortez's capital before admission of Divino P211,200 1-23: a Total assets at fair value P4,625,000 Liabilities (1,125,000) Capital balance of Flora P3,500,000 1-24: c Total capital of the partnership (P3,500,000 ÷ 70%) P5,000,000 Eden agreed profit & loss ratio 30% Eden agreed capital 1,500,000 Eden contributed capital at fair value 812,000 Allocated cash to be invested by Eden P 688,000 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 transfer (Bonus) P 88,200 P(91,800) P 3,600 - 1-26: d Total agreed capital (P90,000 ÷ 40%) P225,000 Contributed capital of Candy (P126,000+P36,000-P12,000) 150,000 Total agreed capital (P90,000 ÷ 40%) 225,000 Candy, agreed capital interest 60% Agreed capital of Candy 135,000 Contributed capital of Candy 150,000 Withdrawal of Candy P 15,000

Partnership – Basic Considerations and Formation 7 1-27: a Total agreed capital (210,000 ÷ 70%) P300,000 Nora’s interest 30% Agreed capital of Nora P 90,000 Cash invested 42,000 Merchandise to be invested by Nora P 48,000 1-28: a Contributed capital of May (P194,000 - P56,000) P138,000 Agreed capital of May (P300,000 x 70%) 210,000 Cash to be invested by May P 72,000 1-29: d Zero, because the bonus method involves only a transfer of capital. 1-30: b Noy Bi Cash P 10,000 P 14,000 Accounts receivable- Net 92,000 92,000 Merchandise inventory 216,000 150,000 Computer equipment 24,000 14,000 Furniture and fixtures 18,000 ---- Total assets at fair value 360,000 270,000 Accounts payable (108,000) (72,000) Net assets invested 252,000 198,000 Agreed capital 250,000 200,000 Goodwill (withdrawal) P (2,000) P 2,000 1-31: c Villar Roxas Cash P 2,205,000 P - Office equipment 630,000 - Merchandise inventory - 1,575,000 Notes payable ( 210,000) - Contributed capital 2,625,000 1,575,000 Agreed capital 2,520,000 1,680,000 Bonus to Roxas P( 105,000) P 105,000 1-32: b Total capital before adjustments (P210,750 + P103,000) P313,750 Allowance for doubtful accounts ( 10,000) Accumulated depreciation (P1,000 – P500) 500 Obsolete inventory ( 3,500) Total assets of the partnership P300,750

8 Chapter 1 1-33: b Gibo Edu Cash P 19,200 P136,800 Accounts receivable 163,200 129,600 Merchandise inventory 240,000 216,000 Equipment 60,000 - Accounts payable (60,000) (96,000) Notes payable (12,000) - Contributed capital 410,400 386,400 Loss on sale of equipment (1,800) 1,800 Net assets 408,600 388,200 Additional investment by Edu - 20,400 Agreed capital P408,600 P408,600 1-34: a Garnett Bryant Unadjusted capital P2,443,364 P3,097,528 Accumulated depreciation ( 80,000) 200,000 Accounts receivable written off ( 108,000) ( 140,000) Adjusted capital contributed 2,255,364 3,157,528 Agreed capital 2,255,364 1,503,576* Capital withdrawal P - P 1,653,952 * Total agreed capital (P2,255,364 / 60%) P3,758,940 Bryant’s interest 40% Agreed capital of Bryant P1,503,576 1-35: a Total capital P3,758,940 Total liabilities 4,299,396 Total assets P8,058,336 1-36: a Gordon Fernando Unadjusted capital P220,000 P309,375 Undervaluation of inventory 11,000 - Allowance for doubtful accounts (2,750) ( 4,125) Accrued expenses - (20,250) Contributed capital 228,250 285,000 Agreed capital of Gordon (P285,000/75%) x 25% 133,250 285,000 Capital withdrawal by Gordon P 95,000 P -


SOLUTIONS TO PROBLEMS

Problem 1 – 1

1. a. Books of Pedro Castro will be retained by the partnership To adjust the assets and liabilities of Pedro Castro. 1. Pedro Castro, Capital ............................................................. 600 Merchandise Inventory ...................................................... 600 2. Pedro Castro, Capital ............................................................. 200 Allowance for Bad Debts .................................................. 200 3. Accrued Interest Receivable .................................................. 35 Pedro Castro, Capital ......................................................... 35 Computation: P1,000 x 6% x 3/12 = P15 P2,000 x 6% x 2/12 = _20

Total ......................... ...... P35 4. Pedro Castro, Capital ............................................................. 100 Accrued Interest Payable ................................................... 100 (P4,000 x 5% x 6/12 = P100) 5. Pedro Castro, Capital ............................................................. 800 Accumulated Depreciation – Furniture and Fixtures ........ 800 6. Office Supplies ...................................................................... 400 Pedro Castro, Capital ......................................................... 400 To record the investment of Jose Bunag. Cash .. ........................................................................................... 15,067.50 Jose Bunag, Capital ............................................................... 15,067.50 Computation:

Pedro Castro, Capital (1) P600 P31,400 (2) 200 35 (3) (4) 100 400 (6) (5) ___800 P1,700 P31,835 P30,135

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

10 Chapter 1 b. A new 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 ............................................................................... 4,000 Accounts Payable ......................................................................... 10,000 Accrued Interest Payable .............................................................. 100 Allowance for Bad Debts ............................................................. 1,200 Accumulated Depreciation – Furniture and Fixtures ................... 1,400 Pedro Castro, Capital ................................................................... 30,135 Cash ....................................................................................... 6,000 Notes Receivable ................................................................... 3,000 Accounts Receivable ............................................................. 24,000 Accrued Interest Receivable .................................................. 35 Merchandise Inventory .......................................................... 7,400 Office Supplies ...................................................................... 400 Furniture and Fixtures............................................................ 6,000

New Partnership Books To record the investment of Pedro Castro. Cash ........................................................................................... 6,000 Notes Receivable .......................................................................... 3,000 Accounts Receivable .................................................................... 24,000 Accrued Interest Receivable......................................................... 35 Merchandise Inventory ................................................................. 7,400 Office Supplies ............................................................................. 400 Furniture and Fixtures .................................................................. 6,000 Notes Payable ........................................................................ 4,000 Accounts Payable................................................................... 10,000 Accrued Interest Payable ....................................................... 100 Allowance for Bad Debts ....................................................... 1,200 Accumulated Depreciation – Furniture and Fixtures ............. 1,400 Pedro Castro, Capital ............................................................. 30,135 To record the investment of Jose Bunag. Cash .. ........................................................................................... 15,067.50 Jose Bunag, Capital ............................................................... 15,067.50

Partnership – Basic Considerations and Formation 11 2. Castro and Bunag Partnership

Statement of Financial Position October 1, 2011

A s s e t s Cash ..... ...... ... ........................................................................................... P21,067.50 Notes receivable .......................................................................................... 3,000.00 Accounts receivable .................................................................................... P 24,000 Less Allowance for bad debts...................................................................... ___1,200 22,800.00 Accrued interest receivable ......................................................................... 35.00 Merchandise inventory ................................................................................ 7,400.00 Office supplies ........................................................................................... 400.00 Furniture and fixtures .................................................................................. 6,000 Less Accumulated depreciation ................................................................... ___1,400 __4,600.00 Total Assets ........................................................................................ P59,302.50

Liabilities and Capital Notes payable ........................................................................................... P 4,000.00 Accounts payable ........................................................................................ 10,000.00 Accrued interest payable ............................................................................. 100.00 Pedro Castro, Capital ................................................................................... 30,135.00 Jose Bunag, Capital ..................................................................................... _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) P 135,000 Pedro: Cash ....................................................................................... 28,000 Pablo: Cash ....................................................................................... 11,000 Marketable securities ............................................................. _57,500 ___68,500 Total contributed capital .............................................................................. P 231,500 Agreed Capitals: Bonus Method: Jose (P231,500 x 50%) ................................................................. P115,750 Pedro (P231,500 x 25%) .............................................................. 57,875 Pablo (P231,500 x 25%)............................................................... __57,875 Total . ........................................................................................... P231,500

12 Chapter 1 Goodwill Method. To have a goodwill, the only possible base is the capital of Pablo. The computation is: Contributed Agreed Capital Capital Goodwill

Jose P135,000 P137,000 (50%) 2,000 Pedro 28,000 68,500 (25%) 40,500 Pablo __68,500 __68,500 (25%) _____– Total P231,500 274,000 42,500 Total agreed capital (P68,500 ÷ 25%) = 274,000

Jose, Pedro and Pablo Partnership Statement of Financial Position

June 30, 2011 Bonus Method Goodwill Method Assets: Cash P 49,000 P 49,000 Accounts receivable (net) 48,000 48,000 Marketable securities 57,500 57,500 Inventory 85,000 85,000 Equipment (net) 45,000 45,000 Goodwill ______– __42,500 Total P284,500 P327,000 Liabilities and Capital: Accounts payable P 53,000 P 53,000 Jose, capital (50%) 115,750 137,000 Pedro, capital (25%) 57,875 68,500 Pablo, capital (25%) __57,875 __68,500 Total P284,500 P327,000

Problem 1 – 3

1. Books of Pepe Basco To adjust the assets. a. Pepe Basco, Capital ...................................................................... 3,200 Estimated Uncollectible Account .......................................... 3,200 b. Pepe Basco, Capital ...................................................................... 500 Accumulated Depreciation – Furniture and Fixtures ............. 500

Partnership Basic Considerations and Formation 13 To close the books. Estimated Uncollectible Account ....................................................... 4,800 Accumulated Depreciation – Furniture and Fixtures .......................... 1,500 Accounts Payable ................................................................................ 3,600 Pepe Basco, Capital ............................................................................ 31,500 Cash .. ........................................................................................... 400 Accounts Receivable .................................................................... 16,000 Merchandise Inventory ................................................................. 20,000 Furniture and Fixtures .................................................................. 5,000 2. Books of the Partnership To record the investment of Pepe Basco. Cash .... ... ........................................................................................... 400 Accounts Receivable .......................................................................... 16,000 Merchandise Inventory ....................................................................... 20,000 Furniture and Fixtures ......................................................................... 5,000 Estimated Uncollectible account .................................................. 4,800 Accumulated Depreciation – Furniture and Fixtures ................... 1,500 Accounts Payable ......................................................................... 3,600 Pepe Basco, Capital ...................................................................... 31,500 To record the investment of Carlo Torre. Cash .... ... ........................................................................................... 47,250 Carlo Torre, Capital ..................................................................... 47,250 Computation: Pepe Basco, capital (Base) ........................................................... P31,500 Divide by Pepe Basco's P & L ratio ............................................. ___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 will be used by the partnership

Books of Sales 1. Adjusting Entries (a) Sales, Capital ......................................................................... 3,200 Accumulated Depreciation – Fixtures ............................... 3,200 (b) Goodwill ................................................................................ 32,000 Sales, Capital ..................................................................... 32,000

14 Chapter 1 2. Closing Entry Allowance for Bad Debts ............................................................. 12,800 Accumulated Depreciation – Delivery Equipment ...................... 8,000 Accumulated Depreciation – Fixtures .......................................... 91,200 Accounts Payable ......................................................................... 64,000 Notes Payable ............................................................................... 40,000 Accrued Taxes .............................................................................. 8,000 Sales, Capital ................................................................................ 224,000 Cash ....................................................................................... 4,800 Accounts Inventory ................................................................ 72,000 Merchandise Inventory .......................................................... 192,000 Prepaid Insurance................................................................... 3,200 Delivery Equipment ............................................................... 48,000 Fixtures .................................................................................. 96,000 Goodwill ................................................................................ 32,000

Books of Roces (Books of the Partnership) 1. Adjusting Entries (a) Roces, Capital .............................................................................. 1,600 Allowance for Bad Debts ....................................................... 1,600 (b) Accumulated Depreciation – Fixtures .......................................... 16,000 Roces, Capital ........................................................................ 16,000 (c) Merchandise Inventory ................................................................. 8,000 Roces, Capital ........................................................................ 8,000 (d) Goodwill ....................................................................................... 40,000 Roces, Capital ........................................................................ 40,000 2. To record the investment of Sales. Cash .... ... ........................................................................................... 4,800 Accounts Receivable .......................................................................... 72,000 Merchandise Inventory ....................................................................... 192,000 Prepaid Insurance ................................................................................ 3,200 Delivery Equipment ............................................................................ 48,000 Fixtures ... ........................................................................................... 96,000 Goodwill . ........................................................................................... 32,000 Allowance for Bad Debts ............................................................. 12,800 Accumulated Depreciation – Delivery Equipment ...................... 8,000 Accumulated Depreciation – Fixtures .......................................... 91,200 Accounts Payable ......................................................................... 64,000 Notes Payable ............................................................................... 40,000 Accrued Taxes .............................................................................. 8,000 Sales, Capital ................................................................................ 224,000

Partnership – Basic Considerations and Formatio 15 b. Sales' books will be used by the partnership

Books of Roces 1. Adjusting Entries See Requirement (a). 2. Closing Entry Allowance for Bad Debts ............................................................. 1,600 Accumulated Depreciation – Delivery Equipment ...................... 12,800 Accumulated Depreciation – Fixtures .......................................... 64,000 Accounts Payable ......................................................................... 104,000 Accrued Taxes .............................................................................. 6,400 Roces, Capital .............................................................................. 224,000 Cash ....................................................................................... 14,400 Accounts Receivable ............................................................. 57,600 Merchandise Inventory .......................................................... 132,800 Prepaid Insurance................................................................... 4,800 Delivery Equipment ............................................................... 19,200 Fixtures .................................................................................. 144,000 Goodwill ................................................................................ 40,000

Books of Sales (Books of the Partnership) 1. Adjusting Entries See Requirement (a). 2. To record the investment of Roces. Cash .... ... ........................................................................................... 14,400 Accounts Receivable .......................................................................... 57,600 Merchandise Inventory ....................................................................... 132,800 Prepaid Insurance ................................................................................ 4,800 Delivery Equipment ............................................................................ 19,200 Fixtures ... ........................................................................................... 144,000 Goodwill . ........................................................................................... 40,000 Allowance for Bad Debts ............................................................. 1,600 Accumulated Depreciation – Delivery Equipment ...................... 12,800 Accumulated Depreciation – Fixtures .......................................... 64,000 Accounts Payable ......................................................................... 104,000 Accrued Taxes .............................................................................. 6,400 Roces, Capital .............................................................................. 224,000

16 Chapter 1 c. A new set of books will be opened by the partnership

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 .... ... ........................................................................................... 19,200 Accounts Receivable .......................................................................... 129,600 Merchandise Inventory ....................................................................... 324,800 Prepaid Insurance ................................................................................ 8,000 Delivery Equipment (net) ................................................................... 46,400 Fixtures (net) ....................................................................................... 84,800 Goodwill ........................................................................................... 72,000 Allowance for Bad Debts ............................................................. 14,400 Accounts Payable ......................................................................... 168,000 Notes Payable ............................................................................... 40,000 Accrued Taxes .............................................................................. 14,000 Roces, Capital .............................................................................. 224,000 Sales, Capital ................................................................................ 224,000


Problem 1 – 5 1. To close Magno's books. Allowance for Bad Debts .................................................................... 1,000 Accounts Payable ................................................................................ 6,000 Notes Payable ..................................................................................... 10,000 Accrued Interest Payable .................................................................... 300 R. Magno, Capital ............................................................................... 24,700 Cash .. ........................................................................................... 5,000 Accounts Receivable .................................................................... 13,000 Merchandise Inventory ................................................................. 12,000 Equipment .................................................................................... 3,000 Other Assets ................................................................................. 9,000 2. To adjust the books of Lagman. Goodwill . ........................................................................................... 8,000 Allowance for Bad Debts ............................................................. 210 J. Lagman, Capital ........................................................................ 7,790 3. To record the investment of Magno. Cash .... ... ........................................................................................... 5,000 Accounts Receivable .......................................................................... 13,000 Merchandise Inventory ....................................................................... 12,000 Equipment ........................................................................................... 3,000 Other Assets ........................................................................................ 9,000 Allowance for Bad Debts ............................................................. 1,000 Accounts Payable ......................................................................... 6,000 Notes Payable ............................................................................... 10,000 Accrued Interest Payable .............................................................. 300 R. Magno, Capital ........................................................................ 24,700 To adjust the investments of the partners. Cash .... ... ........................................................................................... 10,300 R. Magno, Capital ........................................................................ 10,300 (P35,000 – P24,700 = P10,300) J. Lagman, Capital .............................................................................. 35,790 Cash .. ........................................................................................... 23,300 Accounts Payable to J. Lagman ................................................... 12,490 (P63,000 + P7,790 = P70,790 – P35,000 = P35,790)

18 Chapter 1

4. Lagman and Magno Statement of Financial Position

December 31, 2011

A s s e t s Cash .... ... ........................................................................................... P – Accounts receivable ............................................................................ P34,000 Less Allowance for bad debts ............................................................. 1,210 32,790 Merchandise inventory ....................................................................... 21,000 Equipment ........................................................................................... 8,000 Other assets ......................................................................................... 46,000 Goodwill ........................................................................................... ___8,000 Total Assets .................................................................................. P115,790

Liabilities and Capital Accounts payable ................................................................................ P 18,000 Notes payable...................................................................................... 15,000 Accrued interest payable ..................................................................... 300 Accounts payable to J. Lagman .......................................................... 12,490 J. Lagman, capital ............................................................................... 35,000 R. Magno, capital ................................................................................ __35,000 Total Liabilities and Capital ......................................................... P115,790

Problem 1 – 6

1. Books of Toledo Toledo, Capital ............................................................................. 4,800 Allowance for Bad Debts (15% x P32,000) .......................... 4,800 Books of Ureta Ureta, Capital ............................................................................... 2,400 Allowance for Bad Debts (10% x P24,000) .......................... 2,400 Cash (90% x P12,000) .................................................................. 10,800 Loss from Sale of Office Equipment ............................................ 1,200 Office Equipment................................................................... 12,000 Toledo, Capital (1/4 x P1,200) ..................................................... 300 Ureta, Capital ............................................................................... 900 Loss from Sale of Office Equipment ..................................... 1,200

Partnership – Basic Considerations and Formation 19 2. New Partnership Books Cash .. ........................................................................................... 3,200 Accounts Receivable .................................................................... 32,000 Merchandise ................................................................................. 40,000 Office Equipment ......................................................................... 10,000 Allowance for Bad Debts ....................................................... 4,800 Accounts Payable................................................................... 10,000 Notes Payable ........................................................................ 2,000 Toledo, Capital ...................................................................... 68,400 To record the investment of Toledo. Cash .. ........................................................................................... 22,800 Accounts Receivable .................................................................... 24,000 Merchandise ................................................................................. 36,000 Toledo, Capital ............................................................................. 300 Allowable for Bad Debts ....................................................... 2,400 Accounts Payable................................................................... 16,000 Ureta, Capital ......................................................................... 64,700 To record the investment of Ureta. 3. Cash .... ... ........................................................................................... 3,400 Ureta, Capital ............................................................................... 3,400 To record Ureta's cash contribution. 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

20 Chapter 1 4. Toledo and Ureta Partnership

Statement of Financial Position July 1, 2011

A s s e t s

Cash .... ... ........................................................................................... P 29,400 Accounts receivable ............................................................................ P56,000 Less Allowance for bad debts ............................................................. __7,200 48,800 Merchandise ........................................................................................ 76,000 Office equipment ................................................................................ __10,000 Total Assets .................................................................................. P164,200

Liabilities and Capital Accounts payable ................................................................................ P 26,000 Notes payable...................................................................................... 2,000 Toledo, capital .................................................................................... 68,100 Ureta, capital ....................................................................................... __68,100 Total Liabilities and Capital ......................................................... P164,200

Partnership Operations 21

CHAPTER 2

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 2-1: d Jordan Pippen Total Annual salary P120,000 P80,000 P200,000 Balance, equally ( 10,000) ( 10,000) ( 20,000) Total P110,000 P 70,000 P180,000 2-2: a JJ KK LL Total Bonus (.20 X P90,000) P18,000 – – P 18,000 Interest JJ (.15 X P100,000) P15,000 – –) KK (.15 X P200,000) P 30,000 –) LL (.15 X P300,000) P45,000) 90,000 Balance, equally ( 6,000) ( 6,000) ( 6,000) ( 18,000) Total profit share P27,000 P 24,000 P39,000 P 90,000 2-3: a 2-4: a Allan Michael Total Interest Allan - .10 X (P40,000 + 60,000 /2) P 5,000 ) Michael - .10 X (P60,000 + 70,000/2) P 6,500) P 11,500 Balance, equally _14,000 _14,000 __28,000 Total P 19,000 P20,500 P 28,000 2-5: a Fred Greg Henry Total Interest (.10 of average capital) P12,000 P 6,000 P 4,000 P 22,000 Salaries 30,000 20,000 50,000 Balance, equally ( 35,000) ( 35,000) ( 35,000) (105,000) Total P 7,000 ( P29,000) (P11,000) (P 33,000) 2-6: b Average Capital Capital Months Peso Date Balance Unchanged Months January 1 140,000 6 P 840,000 July 1 180,000 1 180,000 August 1 165,000 5 __825,000 12 P1,845,000 Average capital - P1,845,000/12 = P153,750 Interest (P153,750 X 10%) = P 15,375

22 Chapter 2 2-7: c Capital Months Peso Date Balance Unchanged Months January 1 P16,000 3 P 48,000 April 1 17,600 2 35,200 June 1 19,200 3 57,600 September 1 15,200 4 __60,800 12 P201,600 Average Capital(P201,600/12) = P16,800 2-8: a Net profit before bonus P 24,000 Net profit after bonus (P24,000/120%) __20,000 Bonus to RJ 4,000 Balance (P24,000-P4,000)X3/5 __12,000 Total profit share P 16,000 2-9: a LT AM Total Interest P3,200 P 3,600 P 6,800 Salaries 15,000 7,500 22,500 Balance, 3:2 (11,580) ( 7,720) ( 19,300) Total P 6,620 P 3,380 P 10,000 2-10: b Net income after salary, interest and bonus P467,500 Add back: Salary (P10,000 X 12) P120,000 Interest (P250,000 X .05) __12,500 _132,500 Net income after bonus (80%) P600,000 Net income before bonus (P600,000/80%) _750,000 Paul's bonus P150,000 2-11: b CC DD EE Total Salary P 14,000 P 14,000 Balance P14,000 P 8,400 5,600 28,000 Additional profit to DD ( 1,500) __2,100 ( 600) ______– Total P12,500 P10,500 P 19,000 P 42,000 Net income Fees Earned P90,000 Expenses _48,000 Net Income P42,000

Partnership Operations 23 2-12: c LL MM NN Total Interest P 2,000 P 1,250 P 750 P 4,000 Annual Salary 8,500 – – 8,500 Additional profit to give LL, P20,000 9,500 5,700 3,800 19,000* Additional profit to give MM, P14,000 _____– __7,050 _____– __7,050 Total P20,000 P14,000 P 4,550 P 38,550 *(P9,500/50%) = P19,000 2-13: a RR SS TT Total Excess (Deficiency) RR (P80,000 - P95,000) P15,000 – –) SS (P50,000 - P40,000) – (P10,000) –) P 5,000 Balance 4:3:1 _47,500 _35,625 _11,875 __95,000 Total P62,500 P25,625 P11,875 P100,000 Net Income (200,000 - 100,000) = P100,000 2-14: b AA BB CC Total AA - 100,000 X 10% P 10,000 ) 150,000 X 20% 30,000 ) P 40,000 Remainder, 210,000 BB (60,000 X .05) P 3,000 ) CC (60,000 X .05) P 3,000 6,000 Balance, equally __68,000 _68,000 _68,000 _204,000 Total P108,000 P71,000 P71,000 P250,000 2-15: a AJ BJ CJ Total Bonus to CJ Net profit before bonus P44,000 Net profit after bonus (P44,000/110%)P40,000 – – P4,000 P4,000 Interest to BJ – P1,000 – 1,000 Salaries P 10,000 – 12,000 22,000 Balance, 4:4:2 __6,800 _6,800 __3,400 _17,000 Total P 16,800 P7,800 P19,400 P44,000 2-16: c Total profit share of Pedro P200,000 Less: Salary to Pedro P 50,000 Interest __20,000 __70,000 Share in the balance (40%) P130,000 Net profit after salary and interest (130,000/40%) P325,000 Add: Total Salaries P150,000 Total Interest __70,000 _220,000 Total Partnership Income P545,000

24 Chapter 2 2-17: c Net income before extraordinary gain and bonus (69,600-12,000) P 57,600 Net income after bonus (57,600/120%) _48,000 Bonus to RR P 9,600 Distribution of Net Income: JJ RR Total Bonus – P 9,600 P 9,600 Balance, equally P 24,000 24,000 48,000 Net profit before extraordinary gain P 24,000 P 33,600 P 57,600 Extraordinary gain __4,800 __7,200 _12,000 Total P 28,800 P 40,800 P 69,600 2-18: a Mel Jay Total Interest P 20,000 P 12,000 P 32,000 Annual Salary 36,000 – 36,000 Remainder 60:40 __60,000 _40,000 _100,000 Total P116,000 P 52,000 P168,000 2-19: a DV JE FR Total Interest on excess (Deficiency) P 15,000 P 3,750 (P 7,500) P 11,250 Remainder 5:3:2 ( 36,875) ( 22,125) ( 14,750) ( 73,750) Total (P 21,875) (P 18,375) (P 22,250) (P 62,500) 2-20: c Correction of 1998 profit: Net income per books P 19,500 Understatement of depreciation ( 2,100) Overstatement of inventory, December 31 ( 11,400) Adjusted net income P 6,000 Pete Rico Total Distribution of net income per book: Equally P 9,750 P 9,750 P 19,500 Distribution of adjusted net income Equally ( 3,000) ( 3,000) ( 6,000) Required Decrease P 6,750 P 6,750 P 13,500 2-21: a Tiger Woods Total Salaries P 64,000 P100,000 P164,000 Interest 24,000 30,000 54,000 Bonus (P360,000-P54,000)X.25 76,500 – 76,500 Remainder, 30:70 __19,650 __45,850 __65,500 Total P184,150 P175,850 P360,000

Partnership Operations 25 2-22: a Clotty Cotto Total Salaries P 20,000 – P 20,000 Commission – P 25,000 25,000 Interest 32,000 33,600 65,600 Bonus, schedule 1 30,000 – 30,000 Remainder, 60:40 __35,640 _23,760 __59,400 Total P117,640 P 82,360 P200,000 Schedule 1 Net income before salary, commission, interest and bonus P200,000 Less: salaries __20,000 Net income before bonus P180,000 Net income after bonus (P180,000/120%) _150,000 Bonus P 30,000 2-23: a Mike Tyson Total Capital balance, beginning P600,000 P400,000 P1,000,000 Additional investment 100,000 200,000 300,000 Capital withdrawal -200,000 ( 100,000) _-300,000 Capital balance before profit and loss distribution P500,000 P500,000 P1,000,000 Net income: Salary P200,000 P300,000 P 500,000 Balance, 3:2 __60,000 __40,000 __100,000 Total P260,000 P340,000 P 600,000 Total P760,000 P840,000 P1,600,000 Drawings ( 200,000) ( 300,000) ( 500,000) Capital balance, end P560,000 P540,000 P1,100,000 2-24: d Average Capital - King: Capital Months Peso Date Balance Unchanged Months January 1 P40,000 3 P120,000 April 1 55,000 9 _495,000 12 P615,000 Average capital – P615,000/12 = P51,250 Average Capital - Queen: Capital Months Peso Date Balance Unchanged Months January 1 P100,000 7 P700,000 April 1 130,000 5 __650,000 12 P1,350,000 Average capital - P1,350,000 / 12 =P112,500

26 Chapter 2 2-24: Continued Distribution of Net Income - Schedule 1 King Queen Total Interest P 5,125 P11,250 P16,375 Bonus, Schedule 2 12,725 – 12,725 Salaries 25,000 30,000 55,000 Residual, 50:50 ( 2,050) _(2,050) _(4,100) Total P40,800 P39,200 P80,000 Schedule 2 Net income before allocation P80,000 Less: Interest _16,375 Net income before bonus P63,625 Net income after bonus (P63,625/125%) _50,900 Bonus P12,725 Capital Balance December 31: King Queen Total Capital balance, January 1 P40,000 P100,000 P140,000 Additional investment _15,000 __30,000 __45,000 Capital balance before profit and loss distribution P55,000 P130,000 P185,000 Net income (Schedule 2) 40,800 39,000 80,000 Drawings (P400 X 52) ( 20,800) ( 20,800) ( 41,600) Capital balance, December 31 P75,000 P148,400 P223,400 2-25: d Total receipts (P1,500,000 + P1,625,000) P3,125,000 Expenses ( 1,080,000) Net income P2,045,000 Distribution to Partners Red – P1,500,000/P3,125,000 X P2,045,000 = P 981,600 (1) Blue – P1,625,000/P3,125,000 X P2,045,000 = _1,063,400 P2,045,000 Capital balance of Blue Dec. 31 Capital Balance, Jan. 1 P 374,000 Additional investment ___22,000 Capital balance before profit and loss distribution P 396,000 Profit share 1,063,400 Drawings ( 750,000) Capital balance, Dec. 31 P 709,400 (2)

Partnership Operations 27 2-26: a Ray Sam Total Capital balances, March 1 P150,000 P180,000 P330,000 Additional investment, Nov. 1 _______ __60,000 __60,000

Capital balances before salaries, profit and Drawings 150,000 240,000 390,000 Profit share: Interest 15,000 20,000 35,000 Balance, 60:40 51,000 34,000 85,000

Total 66,000 54,000 120,000

Total 216,000 294,000 510,000 Salaries _18,000 _24,000 _42,000

Total 234,000 318,000 552,000 Drawings (18,000) (24,000) (42,000)

Capital balances, Feb. 28 P216,000 P294,000 P510,000 2-27: a Susan Tanny Total Capital balances, 1/1 P150,000 P30,000 P180,000 Additional investment, 4/1 8,000 8,000 Capital withdrawals, 7/1 _______ (6,000) _(6,000)

Balances before profit distribution 158,000 24,000 182,000 Profit distribution: Interest 23,400 4,050 27,450 Bonus (20% x P30,000) 6,000 6,000 Balance, equally (1,725) (1,725) (3,450)

Total 21,675 _8,325 30,000

Total 179,675 32,325 212,000 Drawings (12,000) (12,000) (24,000)

Capital balances, 12/31 P167,675 P20,325 P188,000

28 Chapter 2 2-28: a Sin Tan Uy Total Capital balances, beg. 1st year P110,000 P80,000 P110,000 P300,000 Loss distribution, 1st year: Salaries 20,000 10,000 30,000 Interest 11,000 8,000 11,000 30,000 Balance, 5:3:2 (40,000) (16,000) (24,000) (80,000) Total ( 9,000) ( 8,000) ( 3,000) (20,000) Total 101,000 72,000 107,000 280,000 Drawings (10,000) (10,000) (10,000) (30,000) Capital balances, beg. 2nd year 91,000 62,000 97,000 250,000 Profit distribution, 2nd year: Salaries 20,000 10,000 30,000 Interest 9,100 6,200 9,700 25,000 Balance, 5:3:2 ( 7,500) ( 4,500) ( 3,000) (15,000) Total 21,600 _1,700 16,700 40,000 Total 112,600 63,700 113,700 290,000 Drawings _(10,000) (10,000) _(10,000) _(30,000) Capital balances, end of 2nd year P102,600 P53,700 P103,700 P260,000 2-29: c Jay Kay Loi Total Capital balances, 1/1/06 P30,000 P30,000 P30,000 P90,000 Additional investment, 2006 5,000 5,000 Capital withdrawal, 2006 _(5,000) _(4,000) ______ _(9,000) Capital balances 25,000 26,000 35,000 86,000 Profit distribution, 2006: Interest 3,000 3,000 3,000 9,000 Salary 7,000 7,000 Balance, equally _1,000 _1,000 _1,000 __3,000 Capital balances, 1/1/07 36,000 30,000 39,000 105,000 Additional investment, 2007 5,000 5,000 Capital withdrawal, 2002 ______ _(3,000) _(8,000) (11,000) Capital balances 41,000 27,000 31,000 99,000 Profit distribution, 2007: Interest 3,600 3,000 3,900 10,500 Salary 7,000 7,000 Balance, equally _1,500 _1,500 _1,500 __4,500 Capital balances, 1/1/08 53,100 31,500 36,400 121,000 Additional investment, 2008 6,000 6,000 Capital withdrawal, 2008 ______ _(4,000) _(2,000) _(6,000) Capital balances 53,100 27,500 40,400 121,000 Profit distribution, 2008: Interest 5,310 3,150 3,640 12,100 Salary 7,000 7,000 Balance, equally __3,300 __3,300 __3,300 ___9,900 Capital balances, 12/31/08 per books P68,710 P33,950 P47,340 P150,000 Understatement of depreciation (2,000) (2,000) (2,000) (6,000) Adjusted capital balances, 12/31/08 P66,710 P31,950 P45,340 P144,000

Partnership Operations 29 2-30: a Ken Len Mon Total

Capital balances, 1/1/07 P100,000 P100,000 P100,000 P300,000 Additional investment, 2007 40,000 40,000 Capital withdrawal, 2007 ( 20,000) _______ _______ ( 20,000)

Balances 80,000 140,000 100,000 320,000 Profit distribution, 2007 (Schedule 1) Salary 60,000 60,000 Balance, beg. Capital ratio 20,000 20,000 20,000 60,000

Capital balances, 1/1/08 100,000 160,000 180,000 440,000 Capital withdrawal, 2008 ( 20,000) ( 40,000) _______ ( 60,000)

Balances 80,000 120,000 180,000 380,000 Profit distribution, 2008: Salary 60,000 60,000 Balance, beg. capital ratio __13,636 __21,818 __24,546 __60,000

Capital balances, 12/31/08 P 93,636 P141,818 P264,546 P500,000 Schedule 1 – Computation of net profit: Total capital, 2008 (P647,500 – P147,500) P500,000 Total capital, 2007 (P300,000 + P40,000 – P80,000) _260,000

Total profit for 2 years P240,000 Net profit per year (P240,000 / 2) P120,000 2-31: d _Nardo_ __Orly __Pedro_ _Total_ Capital balance, 1/1/08 P280,000 P300,000 P170,000 P750,000 Additional investment 96,000 60,000 - 156,000 Withdrawals ( 90,000 ) ( 72,000 ) (162,000) Cap. bal. before P/L dist. 376,000 270,000 98,000 744,000 NP: Salary (16,500 x 12) - 198,000 - 198,000 Interest on EC (15%) 42,000 45,000 25,500 112,500 Balance 25:30:45 ( 19,875 ) ( 23,850 ) ( 35,775 ) (79,500 ) Total 22,125 219,150 ( 10,275 ) 231,000 Capital balance 12/31/08 P398,125 P 489,150 P 87,725 P975,000 2-32: d Sam capital, beginning P120,000 Additional investment (Land) 60,000 Drawings ( 80,000 ) Capital balance before net profit (loss) 100,000 Capital balance, end 150,000 Profit share (40%) 50,000 Net profit (P50,000 ÷ 40%) P125,000

30 Chapter 2 2-33: a __Joe__ __Tom__ __Total__ Capital balance, 1/2/07 P 80,000 P 40,000 P120,000 Net loss- 2007: Annual salary 96,000 48,000 144,000 10% interest on beg. capital 8,000 4,000 12,000 Bal. beg. cap. ratio: 8:4 ( 108,000) ( 54,000) ( 162,000) Total ( 4,000) ( 2,000) ( 6,000) Capital balance 76,000 38,000 114,000 Drawings ( 4,000) ( 4,000) ( 8,000) Capital balance, 12/31/07 72,000 34,000 106,000 Net profit- 2008: Annual salary 96,000 48,000 144,000 10% interest on BC 7,200 3,400 10,600 Bonus to Joe–NPBB – P 22000 NPAB (22000/110%)20000 2,000 2,000 Balance equally ( 67,300) ( 67,300) ( 134,600) Total 37,900 ( 15,900) 22,000 Total 109,900 18,100 128,000 Drawings ( 4,000) ( 4,000) ( 8,000) Capital balance, 12/31/08 105,900 14,100 120,000 2-34: a Decrease in capital P 60,000 Drawings ( 130,000) Contribution 25,000 Profit share 45,000 Net income (45,000 ÷ 30) P150,000 2-35: b

2009: Original profit allocation Cris Paul Bryan Total Salaries P 80,000 P 60,000 P 60,000 P200,000 Balance of profit 100,000 100,000 100,000 300,000 Total P180,000 P160,000 P160,000 P500,000 Revised profit allocation Salaries P 80,000 P 60,000 P 60,000 P200,000 Interest on capital (Sch. A) 7,500 13,200 5,700 26,400 Balance of profit 91,200 91,200 91,200 273,600 Total P178,799 P164,400 P156,900 P500,000 Difference in total P 1,300 P (4,400) P 3,100 P 0

Partnership Operations 31 2-35: Continued 2010

Original profit allocation: Cris Paul Bryan Total Salaries P 80,000 P 60,000 P 60,000 P200,000 Balance of profit 70,000 70,000 70,000 210,000 Total P150,000 P130,000 P130,000 P410,000 Revised allocation: Salaries P 80,000 P 60,000 P 60,000 P200,000 Interest on capital (Sch. B) 3,944 2,428 3,528 9,900 Balance of profit 66,700 P 66,700 P 66,700 P200,000 Total P150,644 P129,128 P130,228 P410,000 Difference in totals P (644) P 872 P (228) P 0 Total of differences P 656 P (3,528) P 2,872 P 0

Therefore Paul capital should be increased by P3,528 Schedule A: Revised Computation of Interest on Average Capital

Capital Fraction of Average Partner Date Balance Year Unchanged Capital Cris January 1 P180,000 3/12 P45,000 March 31 30,000 6/12 15,000 September 30 10,000 3/12 2,500 P62,500 Paul January 1 P250,000 3/12 P62,500 March 31 80,000 6/12 40,000 September 30 30,000 3/12 7,500 P110,000 Bryan January 1 P60,000 9/12 P45,000 September 30 10,000 3/12 2,500 P47,500

Interest at 12%: Cris: P62,500 x 12% = P7,500 Paul: P110,000 x 12%= P13,200 Bryan: P47,500 x 12% = P5,700

32 Chapter 2 2-35: Continued Schedule B: Revised Computation of Interest on Average Capital

Capital Fraction of Average Partner Date Balance Year Unchanged Capital Cris January 1 P188,700 1/12 P15,725 March 31 18,700 11/12 17,142 P32,867 Paul January 1 P194,400 1/12 P16,200 March 31 4,400 11/12 4,033 P20,233 Bryan January 1 P166,900 1/12 P13,908 September 30 16,900 11/12 15,492 P29,400

Interest at 12%: Cris: P32,867 x 12% = P3,944 Paul: P20,233 x 12%= P2,428 Bryan: P29,400 x 12% = P3,528 2-36: a

Gabriel Harry Cumulative Total Salaries P35,000 P40,000 P 75,000 Bonus (Sch. A) 12,000 87,000 Interest on capital (Sch. B) 11,467 5,333 103,800 Remainder of profit 11,280 16,920 132,000 Total P69,747 P62,253

Schedule A: Computation of Bonus to Gabriel Bonus = 10% (net income – Bonus) 110% Bonus = 10% (net income) 110% Bonus = P13,200 Bonus = P12,000 Schedule B: Calculation of average capital balances:

Partner Date Capital Balance Fraction Average Capital Gabriel January 1 P120,000 3/12 P 30,000 April 1 140,000 512 58,333 November 1 170,000 2/12 28,333 November 1 160,000 2/12 26,667 P143,333

Partnership Operations 33 2-36: Continued:

Partner Date Capital Balance Fraction Average Capital Harry January 1 60,000 10/12 P50,000 November 1 100,000 2/12 16,667 P66,667

Interest therefore: Gabriel: P143,333 x 8% = P11,467 Harry: P66,667 x 8% = P5,333 2-37: a Adjustments to Income:

2009 2010 Amortization of business name P(5,000) P (5,000) Prepaid expenses, 2009 3,000 (3,000) Accrued expenses, 2009 (2,000) 2,000 Fees billed in 2010 8,400 (8,400) Inventory overstatement 4,000 Accrued expenses, 2010 (8,600) Accrued income, 2010 (3,000) Adjustments to income P 4,400 P(22,000)

Computations of Adjusted Capital Balances:

Cory Dory Eva Unadjusted balances, December 31, 2010 P25,000 P30,000 P28,000 Bonus to Cory on change in 2009 income (Sch. 1) 400 Allocation of remaining adjustments to 2009 income 1,200 1,200 1,600 Bonus to Cory on change in 2010 income (Sch. 2) (2,000) Allocation of remaining adjustments to 2010 income (7,000) (7,000) (6,000) Correction of capital withdrawal (5,000) Adjusted capital balances, December 31, 2010 P12,600 P24,200) P23,600

Schedule 1: Bonus = 10% (1 - Bonus) Bonus = 10% (P4,400 – Bonus) 110% Bonus = P440 Bonus = P400 Schedule 2: Bonus = 10% )1 – Bonus) Bonus = 10% (P22,000 – Bonus) 110% Bonus = (P2,200) Bonus = (P2,000)

34 Chapter 2 2-38: b Old Partners Capital Balances before Admission of New Partner:

Alma Betty Total Capital balances, March 1, 2009 P480,000 P240,000 P720,000 2009 net loss: Salaries (10 months) 480,000 240,000 720,000 Interest on beginning capital balances 48,000 24,000 72,000 Balance, beginning capital ratio (552,000) (276,000) (828,000) Total (24,000) (12,000) (36,000) Total 456,000 228,000 684,000 Drawings (24,000) (24,000) (48,000) Capital balances, 1/1/2010 432,000 204,000 636,000 2010 net profit: Salaries

576,000

288,000

864,000

Interest on beginning capital balances 43,200 20,400 63,600 Balance, equally (397,800) (397,800) (795,600) Total 221,400 (89,400) 132,000 Total 653,400 114,600 768,000 Drawings (24,000) (24,000) (48,000) Capital balances, 12/31/010 P629,400 P90,600 P720,000

Contributed capital of new partner Cora P400,000 Agreed capital of Cora (P720,000 + P400,000) x 40% 448,000 Bonus from Alma and Betty, original capital ratio(reduction from capital) P 48,000 Therefore entry a is correct.



Problem 2 – 1

1. Castro : (P26,000/P42,500) x P23,800 = P14,560 Diaz : (P16,500/P42,500) x P23,800 = __9,240 P23,800 2. Castro : (P31,250/P50,000) x P23,800 = P14,875 Diaz : (P18,750/P50,000) x P23,800 = __8,925 P23,800 Computation of Average Capitals: Castro: Capital Months Peso Date Balances Unchanged Months 1/1 ..................................... P26,000 3 P 78,000 4/10 ................................... 29,000 1 29,000 5/1 ..................................... 36,000 3 108,000 8/1 ..................................... 32,000 5 _160,000 12 P375,000 Average capital = P375,000 ÷ 12 months = P31,250 Diaz: Capital Months Peso Date Balances Unchanged Months 1/1 ..................................... P16,500 5 P 82,500 6/1 ..................................... 21,500 3 64,500 9/1 ..................................... 19,500 4 __78,000 12 P225,000 Average capital = P225,000 – 12 months = P18,750 3. Castro Diaz Total Interest ........................................................ P 7,500 P4,500 P12,000 Salaries ........................................................ 36,000 24,000 60,000 Balance, equally .......................................... ( 24,100) (24,100) ( 48,200) Total ............................................................ P19,400 P 4,400 P23,800 4. Castro Diaz Total Bonus (a) .................................................... P 4,760 P – P 4,760 Interest (b) ................................................... 1,100 – 1,100 Balance, 3:2 ................................................ _10,764 _7,176 _17,940 Total ............................................................ P16,624 P7,176 P23,800

36 Chapter 2 Computations: a. Net profit before bonus................................................. P23,800 Net profit after bonus (P23,800 ÷ 125%) ..................... _19,040 Bonus ............................................................................ P 4,760 b. Average capital of Castro [(P26,000 + P32,000) ÷ 2] ........................... P29,000 Average of Diaz [(P16,500 + P18,500) ÷ 2]....... .................................. _18,000 Castro's excess ..................................................... .................................. P11,000 Multiply by .......................................................... .................................. ___10% Interest ................................................................. .................................. P 1,100 5. Castro : (P3,000/P5,000) x P23,800 = P14,280 Diaz : (P2,000/P5,000) x P23,800 = __9,520 P23,800

Problem 2 – 2

a. Average Capital: Robin: Date Balances Months Peso Unchanged Months Jan. 1 P135,000 2 P270,000 Feb. 28 95,000 2 190,000 Apr. 30 175,000 5 875,000 Sept. 30 195,000 3 __585,000 12 P1,920,000 Ave. Capital (P1,920,000 ÷ 12) = P160,000 Hood: Date Balances Months Peso Unchanged Months Jan. 1 P140,000 3 P420,000 Mar. 31 200,000 3 600,000 June 30 150,000 2 300,000 Aug. 31 220,000 2 440,000 Oct. 31 200,000 2 __400,000 12 P2,160,000 Ave. Capital (P2,160,000 ÷ 12) = P180,000 Profit Distribution: Robin : P160,000 ÷ P340,000 x P510,000 = P240,000 Hood : P180,000 ÷ P340,000 x P510,000 = _270,000 P510,000

Partnership Operations 37 b. Robin Hood Total Interest on ave. capital ......................................... P 14,400 P 16,200 P 30,600 Salaries ................................................................. 60,000 100,000 160,000 Bonus (P510,000 – 30,600 – 160,000) x 25%) .... 78,850 – 79,850 Balance, equally ................................................... _119,775 _119,775 _239,550 Totals ................................................................... P274,025 P235,975 P510,000 c. Robin Hood Totals Interest: Robin (P195,000 – P135,000) 10%............. P 6,000 Hood (P200,000 – P140,000) 10% ............. P 6,000 P 12,000 Balance, equally ................................................... 249,000 249,000 498,000 Totals ................................................................... 255,000 255,000 510,000 d. Robin Hood Total Salaries ................................................................. P 80,000 P120,000 P200,000 Bonus (see computations below) ......................... 62,000 62,000 Balance, equally ................................................... _124,000 _124,000 _248,000 Totals ................................................................... P266,000 P244,000 P510,000 Bonus Computations: Net income before salaries and bonus ......... ..................... ....................... P510,000 Less Salaries ................................................ ..................... ....................... 200,000 Net income before bonus ............................ ..................... ....................... 310,000 Net income after bonus (P310,000 ÷ 125%) ..................... ....................... _248,000 Bonus .......................................................... ..................... ....................... P 62,000

Problem 2 – 3 a. De Villa De Vera Total Salaries ................................................................. P 30,000 – P 30,000 Commission (2% x P1,000,000) .......................... P 20,000 20,000 Interest of 8% on average capital ......................... 32,800 31,200 64,000 Bonus (see computations below) ......................... 9,818 9,818 19,636 Balance, equally ................................................... __44,182 __44,182 __88,364 Total ..................................................................... P116,800 P105,200 P222,000 Bonus Computations: Income before salary, commissions, interest & bonus ...... ....................... P222,000 Salary and commission (P30,000 + P20,000) ................... ....................... ( 50,000) Interest ......................................................... ..................... ....................... ( 64,000) Income before bonus ................................... ..................... ....................... 108,000 Income after bonus (P108,000 ÷ 110%) ..... ..................... ....................... _98,182 Bonus .......................................................... ..................... ....................... P 9,818 b. Income Summary ................................................. P 222,000 De Villa, capital .......................................... 116,800 De Vera, capital........................................... 105,200

38 Chapter 2

Problem 2 – 4 a. East North West Total Salaries ................................................ P15,000 P20,000 P18,000 P53,000 Bonus (see computation below) .......... 3,760 3,760 Interest (see computation below) ........ 2,800 4,000 4,800 11,600 Balance, 3:3:4 ..................................... __3,180 __3,180 __4,240 _10,600 Total .................................................... P24,740 P27,180 P27,040 P78,960 Bonus computations: Net income before bonus ........... .................... ..................... ..................... P78,960 Net income after bonus (P78,960 ÷ 105%) ..... ..................... ..................... _75,200 Bonus ......................................... .................... ..................... ..................... P 3,760 Interest computations: East (10% x P28,000)................. .................... ..................... ..................... P 2,800 North (10% x P40,000) .............. .................... ..................... ..................... 4,000 West (10% x P48,000) ............... .................... ..................... ..................... __4,800 Total ........................................... .................... ..................... ..................... P11,600 b. East North West Total Interest (see computations below) ...... P 3,133 P 3,633 P 5,200 P11,966 Salaries ................................................ 24,000 21,000 25,000 70,000 Bonus (see computations below) ........ 4,280 4,280 Balance, equally .................................. ( 6,056) ( 6,055) ( 6,055) ( 18,166) Total .................................................... P 21,077 P 22,858 P 24,145 P 68,080 Interest computations: Average capitals: East: Months Pesos Date Balances Unchanged Months 1/1 P30,000 4 P120,000 5/1 36,000 4 144,000 9/1 28,000 4 _112,000 12 P376,000 Average capital (P376,000 ÷ 12) .......................................... P 31,333 North: Months Pesos Date Balances Unchanged Months 1/1 P40,000 2 P80,000 3/1 31,000 4 124,000 7/1 36,000 2 72,000 9/1 40,000 4 _160,000 12 P436,000 Average capital (P436,000 ÷ 12) ........................................... P 36,333

Partnership Operations 39 West: Months Pesos Date Balances Unchanged Months 1/1 P50,000 3 P150,000 4/1 57,000 2 114,000 6/1 60,000 2 120,000 8/1 48,000 5 _240,000 12 P624,000 Ave. capital (P624,000 ÷ 12) .................................... P 52,000 Interest Computations: East (10% x P31,333) ............ ............................................... P 3,133 North (10% x P36,333) ......... ............................................... 3,633 West (10% x P52,000)........... ............................................... __5,200 Total ... .................................. ............................................... P 11,966 Bonus Computations: Net income ............................ ............................................... P 68,000 Less Salary ............................ ............................................... _21,000 Net income before bonus ....... ............................................... 47,080 Net income after bonus (P47,080 ÷ 110%) ........................... _42,800 Bonus to North ...................... ............................................... P 4,280 * To Total c. East North West Total Bonus (see comp. below) .................... P 8,990 P 8,990 Salaries ........................................... P21,000 P 18,000 – 39,000 Interest on beginning capital ............... 3,000 4,000 5,000 12,000 Remainder, 8:7:5 ................................. _13,180 _11,532.50 __8,237.50 _32,950 Total ........ ........................................... P37,180 P33,532.50 P22,227.50 P92,940 Bonus Computations: Net income before salaries & bonus ............... ..................... ..................... P92,940 Less Salaries (P21,000 + P18,000) ................. ..................... ..................... _39,000 Net income before bonus ........... .................... ..................... ..................... P53,940 Net income after bonus (P53,940 ÷ 120%) ..... ..................... ..................... _44,950 Bonus to West ............................ .................... ..................... ..................... P 8,990

Problem 2 – 5 a. Schedule of Income Distribution: Maria Clara Rita Total Salaries .... ........................................... P12,000 P10,000 P 8,000 P30,000 Interest (see computation on p. 30) ..... 7,200 9,600 13,800 30,600 Balance, equally .................................. __3,133 __3,133 __3,134 __9,410 Total ........ ........................................... P22,333 P22,733 P24,934 P70,000

40 Chapter 2 Problem 2-5: Continued Interest on Average Capital: Maria: P80,000 x 8% x 6 months .. .................... P 3,200 P100,000 x 5% x 6 months .................... __4,000 P 7,200 Clara: P120,000 x 8% .................. .................... 9,600 Rita: P180,000 x 8% x 9 Mos. ... .................... P10,800 P150,000 x 8% x 3 Mos. ... .................... __3,000 _13,800 Total ........................................... .................... P30,600 b. Statement of Partners Capital: Maria Clara Rita Total Balances, Jan. 1................................... P 80,000 P120,000 P180,000 P380,000 Additional Investment ........................ 20,000 – – 20,000 Capital Withdrawal ............................. – – ( 30,000) ( 30,000) Net Income.......................................... 22,333 22,733 24,934 70,000 Drawings ........................................... ( 10,000) ( 10,000) ( 10,000) ( 30,000) Balance, Dec. 31 ................................. P112,333 P132,733 P164,934 P410,000

Problem 2 – 6

1. Allocation of net loss for 2011: Alvin Benny Celia Total Salary to Alvin .................................... P 20,000 P20,000 Interests on average capital: Alvin (P120,000 x 10%) ............ 12,000 Benny (P200,000 x 10%) ........... 20,000 Celia (P220,000 x 10%) ............. 22,000 54,000 Balance, 30:30:40 ............................... (29,400) _(29,400) _(39,200) _(98,000) Total ........ ........................................... P 2,600 P( 9,400) P(17,200) P(24,000) 2. Statement of Partnership Capital Year Ended December 31, 2011 Alvin Benny Celia Total Capitals, January 1, 2011 .................... P120,000 P180,000 P220,000 P520,000 Additional investments ....................... 60,000 40,000 100,000 Capital withdrawals ............................ _______ ________ _(20,000) _(20,000) Balances .. ........................................... 120,000 240,000 240,000 600,000 Net loss (see above) ............................ __2,600 __(9,400) _(17,200) _(24,000) Balances .. ........................................... 122,600 230,600 222,800 576,000 Drawings . ........................................... _(16,000) _______ _______ _(16,000) Capitals, December 31, 2011 .............. P106,600 P230,600 P222,800 P560,000

Partnership Operations ..................................... 41 Problem 2-6: Continued 3. 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 Celia Correct loss allocation ........................ P2,600 P(9,400) P(17,200) Actual loss allocation .......................... __(400) __9,600 __14,800 Adjustment .......................................... P2,200 P 200 P ( 2,400)

Problem 2 – 7 Dino Nelson Oscar Total Capital balances, 1/2/09............................... P45,000 P45,000 P45,000 P135,000 Additional investment, 2009 ....................... _15,000 _15,000 __6,000 __36,000 Balances....................................................... 60,000 60,000 51,000 171,000 Net income (Loss) - 2009, equally .............. (1,800) ( 1,800) ( 1,800) ( 5,400) Withdrawals, 2009 ....................................... (17,000) ( 7,000) ( 3,200) ( 27,200) Capital balances, 12/31/09........................... 41,200 51,200 46,000 138,400 Additional investment, 2010 ....................... _____– _____– __6,000 ___6,000 Balances....................................................... 41,200 51,200 52,000 144,400 Net income - 2010, 40: 30: 30 ..................... 10,800 8,100 8,100 27,000 Withdrawals, 2010 ....................................... (17,000) ( 7,000) ( 3,200) ( 27,200) Capital Balances, 12/31/010 ........................ 35,000 52,300 56,900 144,200 Additional investment, 2011 ....................... ______– ______– ___6,000 ___6,000 Balances....................................................... 35,000 52,300 62,900 150,200 Net income, 2011 (schedule 1) .................... 56,365 42,272 20,363 120,000 Withdrawals, 2011 ....................................... (19,000) ( 9,000) ( 3,200) ( 31,200) Capital balances, 12/31/011......................... P72,365 P86,572 P80,063 P239,000 Schedule 1: Dino Nelson Oscar Total Annual salaries.................................... P48,000 P24,000 P12,000 P84,000 Bonus (see computations below) ........ – 10,909 – 10,909 Interest ................................................ 3,600 3,600 3,600 10,800 Balance, equally .................................. _* 4,765 __4,763 __4,763 __14,291 Totals .................................................. P56,365 P43,272 P20,363 P120,000 Bonus computations: Net income before bonus ........... ................ ..................... ..................... P120,000 Net income after bonus (P120,000 ÷ 110%) ..................... ..................... _109,091 Bonus to Nelson ......................... ................ ..................... ..................... P 10,909 * To Total

42 Chapter 2 Problem 2 – 8

Red, White & Blue Partnership Statement of Partners' Capital

For Year Ended December 31, 2011 Red White Blue Green Total Balances, beginning of year 40,200 20,200 40,600 P101,000 Add: 20% of fees billed to personal clients 8,800 4,800 4,400 18,000 Green's share of fees (Exhibit A) 3,200 3,200 Remaining net income (Exhibit A) _22,800 _22,800 _11,400 ______ _57,000 Subtotals _71,800 _47,800 _56,400 __3,200 179,200 Less: Withdrawals 10,400 8,800 11,600 5,000 35,800 Uncollectible accounts identified with clients of each partner 2,400 900 3,300 Excess rent charged to Blue 1,800 1,800 Total deductions P12,800 P 9,700 P13,400 P 5,000 P 40,900 Balances, end of year 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, 2011 Total revenue from fees P120,000 Expenses, excluding depreciation and doubtful accounts expense P38,700 Less: Excess rent charged to N ($300 x 6) __1,800 Subtotal 36,900 Add: Depreciation, computed as follows: $26,000 x 0.10 2,600 $10,000 x 0.10 x 1/2 ____500 Total expenses, excluding doubtful accounts expense P40,000 Add: Doubtful accounts expense ($3,000 x 0.60) __1,800 Total expenses 41,800 Net income for year ended Dec. 31 P 78,200 Division of net income: Fees billed to personal clients: Red P44,000 x 20% P 8,800 White P24,000 x 2% 48,000 Blue, P22,000 x 20% 4,400 P18,000 Green's share of fees: Gross fees from new clients after April 1, Year 1 24,000 Less: Allocated expenses ($40,000 x $24,000/ $120,000) __8,000 Net income from new clients P16,000 Green's share (P16,000 x 20%) P 3,200 Total divided pursuant to special agreement __21,200 Balance, divided in income-sharing ratio as follows: P 57,000 To Red, 40% P22,800 To White, 40% 22,800 To Blue, 20% _11,400 Total P57,000


Problem 2 – 9 Allan, Eman and Gino Partnership Statement of Profit Distribution Year Ended December 31, 2011 Allan Eman Gino Total

Interest P 4,000 P 750 P 250 P 5,000 Commission (P16,120 – P5,000) x 10% – 1,112 1,112 2,224 Balance, equally __5,926 _5,925 _5,925 _17,776

Total P 9,926 P7,787 P7,287 P25,000 Adjustments (50% of P25,000 to Allan) __2,574 (1,287) (1,287) _____–

Total P12,500 P6,500 P6,000 P25,000

Problem 2 – 10 Gary, Sonny, and Letty Partnership Statement of Partners' Capital Accounts Year Ended December 31, 2011 Gary Sonny Letty Total

Capital balances, 1/1/08 P210,000 P180,000 P 90,000 P480,000 Additional investments ___9,100 _______ _______ __9,100

Total _219,100 _180,000 _90,000 489,100 Profit distribution: Salaries 13,680 11,520 10,640 35,840 Interest 25,920 21,600 10,800 58,320 Bonus to Gary and Sonny (Schedule 1) – – – Balance, equally __(9,720) _(9,720) _(9,720) (29,160)

Total __29,880 _23,400 _11,720 _65,000

Total 248,980 203,400 101,720 554,100 Drawings _(21,000) (18,000) __(9,000) _(48,000)

Capital balances, 12/31/08 P227,980 P185,400 P 92,720 P506,100 Schedule 1: Computation of the bonus. Net profit before interest, salaries and bonus P 65,000 Less: Salaries P35,840 Interest _58,320 __94,160

Net profit (loss) before bonus P(29,160) Therefore no bonus is to be given to Gary and Sonny.

44 Chapter 2

Problem 2 – 11 a. Entries to record the formation of the partnership and the events that occurred during 2008: Cash 1,100,000 Inventory 800,000 Land 1,300,000 Equipment 1,000,000 Mortgage payable 500,000 Installment note payable 200,000 Kobe, capital (P600,000 + P800,000 + P1,000,000 – P200,000) 2,200,000 Lebron, capital (P500,000 + P1,300,000 - P500,000) 1,300,000 (1) Inventory 300,000 Cash 240,000 Accounts payable 60,000 (2) Mortgage payable 50,000 Interest expense 20,000 Cash 70,000 (3) Installment note payable 35,000 Interest expense 20,000 Cash 55,000 (4) Accounts receivable 210,000 Cash 1,340,000 Sales 1,550,000 (5) Selling and general expenses 340,000 Cash 278,000 Accrued expenses payable 62,000 (6) Depreciation expense 60,000 Accumulated depreciation 60,000 (7) Kobe, drawing 104,000 Lebron, drawing 104,000 Cash 208,000 (8) Sales 1,550,000 Income summary 1,550,000 (9) Cost of goods sold 900,000 Inventory 900,000 P900,000 = P800,000 + P300,000 – P200,000

Partnership Operations 45 Problem 2-11: Continued Income summary 1,340,000 Cost of good sold 900,000 Selling and general expenses 340,000 Depreciation expense 60,000 Interest expense 40,000 Income summary 210,000 Kobe, capital 105,000 Lebron, capital 105,000 Kobe, capital 104,000 Lebron, capital 104,000 Kobe, drawing 104,000 Lebron, drawing 104,000 Schedule to allocate partnership net income for 2008: Kobe Lebron Total Profit percentage 60% 40% 100% Beginning capital balance P2,200,000 P1,300,000 P3,500,000 Net income (P1,550,000 revenue - P 1,340,000 expenses) 210,000 Interest on beginning capital balances (3%) 66,000 39,000 (105,000) P105,000 Salaries 120,000 120,000 (240,000) P(135,000) Residual deficit (81,000) (54,000) (135,000) Total P105,000 P105,000 -0- b. Kobe-Lebron Partnership

Statement of Comprehensive Income For the Year Ended December 31, 2011

Sales P1,550,000 Less: Cost of goods sold: Inventory, January 1 P800,000 Purchases 300,000 Goods available for sale P1,100,000 Less: Inventory, December 31 (200,000) (900,000) Gross profit P650,000 Less: Selling and general expenses 340,000 Depreciation expenses 60,000 400,000 Operating income P250,000 Nonoperating expense- interest (40,000) Net income P210,000

46 Chapter 2 c. Kobe-Lebron Partnership

Statement of Financial Position At December 31, 2011

Assets

Cash P1,589,000 Accounts receivable 210,000 Inventory 200,000 Land 1,300,000 Equipment (net) 940,000 Total assets P4,239,000

Liabilities and Capital Liabilities: Accounts payable P60,000 Accrued expenses payable 62,000 Installment note payable 165,000 Mortgage payable 450,000 Total liabilities P737,000 Capital: Kobe, capital P2,201,000 Lebron, capital 1,301,000 Total capital 3,502,000 Total liabilities and capital P4239,000

Partnership Dissolution – Changes in Ownership 47

CHAPTER 3

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 3-1: c Implied capital of the partnership (P90,000/20%) P450,000 Actual value of the partnership ( 420,000) Goodwill P 30,000 AQUINO LOCSIN DAVID HIZON Capital balances before Goodwill P252,000 P126,000 P42,000 – Goodwill to old partners __18,000 ___9,000 __3,000 _____– Total P270,000 P135,000 P45,000 – Purchase by Hizon (20%) ( 54,000) ( 27,000) ( 9,000) _90,000 Capital balances after admission P216,000 P108,000 P36,000 P 90,000 3-2: b AQUINO LOCSIN DAVID HIZON Capital balances before admission P252,000 P126,000 P42,000 – Purchase by Hizon (20%) ( 50,400) ( 25,200) ( 8,400) _84,000 Capital balances after admission P201,600 P100,800 P33,600 P 84,000 3-3: d AQUINO LOCSIN DAVID TOTAL Capital transferred P 50,400 P 25,200 P 8,400 P 84,000 Excess divided using profit and loss ratio __3,600 __1,800 ___600 __6,000 Cash distribution P 54,000 P 27,000 P 9,000 P 90,000 3-4: b Selling price P132,000 Interest sold (444,000X1/5) ( 88,800) Combine gain P 43,200 3-5: b Implied value of the partnership (P40,000/1/4) P160,000 Actual value ( 140,000) Goodwill P 20,000 BERNAL CUEVAS DIAZ Cash balances P 80,000 P40,000 P 20,000 Goodwill, Profit and Loss ratio __12,000 __6,000 __2,000 Total P 92,000 P46,000 P 22,000 Capital Transfer (1/4) ( 23,000) ( 11,500) ( 5,500) Capital balances after admission P 69,000 P34,500 P 16,500

48 Chapter 3 3-6: b BANZON CORTEZ TOTAL Capital Transfer (20%) P 16,000 P 4,000 P20,000 Excess, Profit and Loss ratio __6,000 __4,000 _10,000 Cash distribution P 22,000 P 8,000 P30,000 3-7: d PEREZ CADIZ TOTAL Capital balances beginning P 24,000 P 48,000 P 72,000 Net profit, 1:2 5,430 10,860 16,290 Drawings ( 5,050) ( 8,000) ( 13,050) Capital balances before admission P 24,380 P 50,860 P 75,240 Capital transfer (squeeze) ( 5,570) ( 13,240) (18,810) (1/4) Capital balances after admission 1:2 P 18,810 P 37,620 P 56,430 Capital transfer P 5,570 P 13,240 P18,810 Excess, 1:2 __3,730 __7,460 _11,190 Cash P 9,300 P 20,700 P30,000 3-8: a Total agreed capital (P150,000/5/6) P180,000 Diana's Interest 1/6 Cash distribution P 30,000 3-9: a Total agreed capital (P36,000/1/5) P180,000 Total contributed capital (80,000+40,000+36,000) ( 156,000) Unrecognized Goodwill P 24,000 3-10: b Contributed Agreed Increase Capital Capital (Dec.) Old partners P110,000 P100,000 (P 10,000) New partner __40,000 __50,000 _10,000 Total P150,000 P150,000 P – Ben, capital balance before admission P 60,000 Bonus share to new partner (10,000X60%) ( 6,000) Ben, capital after admission P 54,000 3-11: c Total agreed capital (P40,000+20,000+17,000) P 77,000 Pete's interest 1/5 Pete's agreed capital balance P 15,400

Partnership Dissolution – Changes in Ownership 49 3-12: b Contributed Agreed Increase Capital Capital (Dec.) Old partner P 65,000 P60,000 (P 5,000) New partner 25,000 (1/3) 30,000 _5,000 Total P 90,000 P90,000 P – FRED RAUL LORY Capital balances before admission P 35,000 P30,000 – Investment by Lory – – 25,000 Bonus to Lory ( 3,500) ( 1,500) __5,000 Capital balances after admission P 31,500 P28,500 P 30,000 3-13: c Total agreed capital (90,000+60,000+70,000) P220,000 Augusts' interest _____1/4 Agreed capital P 55,000 Contributed capital __70,000 Bonus to June & July P 15,000 JUNE JULY Capital balances before admission P90,000 P 60,000 Bonus from August, equally __7,500 __7,500 Capital balances after admission P97,500 P 67,500 3-14: a Total agreed capital (52,000 + 88,000)/80%) P175,000 Total capital of Mira & Nina after admission ( 140,000) Cash paid by Elma P 35,000 3-15: a Total agreed capital (P41,600/2/3) P 62,400 Total contributed capital (P23,000+18,600+16,000) ( 57,600) Goodwill to new partner, Ang P 4,800 LIM ONG ANG Capital balances before admission P23,000 P 18,600 – Investment by Ang – – 16,000 Goodwill to August _____– ______– __4,800 Capital balances after admission P23,000 P 18,600 P20,800

50 Chapter 3 3-16: a ANG BENG CHING DONG TOTAL Capital balances before admission P600,000 P 400,000 P 300,000 – P1,300,000 Admission by Dong: By Purchase (1/2) ( 300,000) – – 300,000 – By Investment _______– _______– _______– _300,000 ___300,000 Capital balances before Goodwill and Bonus P300,000 P 400,000 P 300,000 P600,000 P1,600,000 Goodwill to Old Partners (sch. 1) 150,000 150,000 100,000 – 400,000 Bonus to Old Partners (sch. 1) __37,500 __37,500 __25,000 ( 100,000) ________– Capital balances after admission P487,500 P 587,500 P 425,000 P500,000 P2,000,000 Schedule 1: CC AC Inc. (Dec.) Old Partners P 1,000,000 P1,500,000 P500,000 New Partner 600,000 (25%) __500,000 ( 100,000) Bonus Total P 1,600,000 P2,000,000 P400,000 GW 3-17: b MONA LIZA ALMA LORNA TOTAL Capital balances before admission of Alma P150,000 P 50,000 – – P 200,000 Admission of Alma: Investment – – 80,000 – 80,000 Goodwill to old partner, 70:30 (sch. 1) __28,000 ___12,000 _______– ______– ___40,000 Capital balances before admission of Lorna P178,000 P 62,000 P 80,000 – P 320,000 Admission of Lorna: Goodwill Written off, 5:3:2 (P 20,000) (P 12,000) ( P8,000) – ( P40,000) Investment – – – 75,000 75,000 Goodwill to old partners, 5:3:2 (sch. 2) __10,000 ____6,000 ____4,000 ______– ___20,000 Capital balances after admission P168,000 P 56,000 P 76,000 P 75,000 P 375,000 Schedule 1: Total agreed capital (80,000/25%) P 320,000 Total capital contributed (200,000+80,000) ( 280,000) Goodwill to old partners, 70:30 P 40,000 Schedule 2: Total agreed capital (75,000/20%) P 375,000 Total contributed capital (280,000+75,000) ( 355,000) Goodwill to old partners, 5:3:2 P 20,000

Partnership Dissolution – Changes in Ownership 51 3-18: c RED WHITE BLUE TOTAL Unadjusted capital balances P175,000 P100,000 P 45,000 P320,000 Overvaluation of Marketable Securities ( 12,500) ( 7,500) ( 5,000) ( 25,000) Allowance for Bad Debts ( 12,500) ( 7,500) ( 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) P405,000 Green's interest 1/3 Investment P135,000 3-19: b XX YY ZZ WW TOTAL Capital balances before admission P360,000 P225,000 P135,000 – P720,000 Capital transfer to WW (1/6) ( 60,000) ( 37,500) ( 22,500) _120,000 ______– Balances P300,000 P187,500 P112,500 P120,000 P720,000 Equalization of capital ( 100,000) __12,500 __87,500 ______– ______– Balances P200,000 P200,000 P200,000 P120,000 P720,000 Net profit, equally 3,150 3,150 3,150 3,150 12,600 Drawings (2 months) _( 1,500) _( 2,000) _( 1,500) _( 2,000) _( 7,000) Capital balances before WWs Investment P201,650 P201,150 P201,650 P121,150 P725,600 Total agreed capital (201,650+201,150+201,650)/2/3 P906,675 WW's interest 1/3 Agreed capital of WW P302,225 Contributed capital (see above) _121,150 Cash to be invested P181,075 3-20: a A B C Capital balances P 20,750 P 19,250 P 45,000 Understatement of assets, P12,000 __3,000 __3,000 __6,000 Balances before settlement to A P 23,750 P 22,250 P 51,000 Settlement to A P 30,250 A's interest (23,750+5,000) _28,750 Partial Goodwill to A P 1,500 Therefore: 1. Under partial Goodwill method the capital balances of B is P 22,250 2. Under Bonus method the capital balances of B would be: B, capital balances before settlement to A P 22,250 Bonus to A (1,500X25/75) _( 500) B, capital after retirement of A P 21,750

52 Chapter 3 3-21: a Perez Reyes Suarez Capital balances P 100,000 P 150,000 P 200,000 Net income, P140,000 70,000 42,000 28,000 Undervaluation of inventory, P20,000 ___10,000 ____6,000 ____4,000 Capital balances before settlement to Perez P 180,000 P 198,000 P 232,000 Settlement to Perez ( 195,000) – – Bonus to Perez ___15,000 _( 9,000) _( 6,000) Capital balances after retirement P – P 189,000 P 226,000 3-22: c ELY FLOR GLOR Capital balances P 320,000 P 192,000 P 128,000 Settlement to Ely ( 360,000) – – Total Goodwill (P40,000/50%)P80,000 __40,000 ___24,000 ___16,000 Capital balances after retirement of Ely P – P 216,000 P 144,000 3-23: c _Alma_ _Betty_ _Total_ Capital balance 3/1/07 480,000 240,000 720,000 Net loss-2007: Salary (10 months) 480,000 240,000 720,000 Interest (10 months) 40,000 20,000 60,000 Bal. beg. cap. ratio: 48:24 ( 544,000) ( 272,000) ( 816,000) Total ( 24,000) ( 12,000) ( 36,000) Capital balance 456,000 228,000 684,000 Drawings ( 24,000) ( 24,000) ( 48,000) Capital balance, 12/31/07 432,000 204,000 636,000 Net profit- 2008: Salary 576,000 288,000 864,000 Interest 43,200 20,400 63,600 Balance, equally ( 397,800) ( 397,800) ( 795,600) Total 221,400 ( 89,400) 132,000 Capital balance 653,400 114,600 768,000 Drawings ( 24,000) ( 24,000) ( 48,000) Capital balance 12/31/08 629,400 90,600 720,000 Total contributed capital (720,000 + 400,000) 1,120,000 Cora’s interest 40% Cora’s agreed capital 448,000 Cora’s contributed capital 400,000 Bonus to Cora, from Alma and Betty 4:2 48,000 Therefore entry (c) is correct.

Partnership Dissolution – Changes in Ownership 53 3-24: a _Pete_ _Carlos_ _Total_ Capital balance, beg. 2007 P80,000 P30,000 P110,000 2007 net profit (90,000 – 59,000): Interest 8,000 3,000 11,000 Compensation 5,000 20,000 25,000 Balance, 4:6 ( 2,000) ( 3,000) ( 5,000) Total 11,000 20,000 31,000 Balance 91,000 50,000 141,000 Withdrawal ( 8,000) ( 11,000) (19,000) Repairs (charge to Pete) ( 5,000) - ( 5,000) Capital balance, 12/31/07 78,000 39,000 117,000 1/1/08: Admission of Sammy Total agreed capital (P117,000 +43,000) P160,000 Sammy’s interest 20% Sammy’s agreed capital 32,000 Sammy’s contributed capital 43,000 Bonus to Pete & Carlos, 4:6 11,000 Therefore entry (a) is correct. 3-25: d, Should be P700,269.5

Maria Ana Paz Total Capital balances, 8/1/010 P300,000 P1,500,000 P - P1,800,000 Capital withdrawal (25,000) (25,000) (50,000) Balances before P/L distribution 275,000 1,475,000 1,750,000 Net income, 12/31, P100,000: Interest 6,250 31,250 37,500 Salary to Maria 40,000 - 40,000 Balance, equally 11,250 11,250 22,500 Balances, 12/31/010 332,500 1,517,500 1,850,000 Capital withdrawal (30,000) (30,000) (60,000) Balances before P/L distribution 302,500 1,487,500 1,790,000 Net income, 7/1/011, P150,000: Interest 8,312.5 37,937.5 46,250 Salary to Mara 48,000 48,000 Balance, 60:40 33,450 22,300 55,750 Balances before admission of Paz 392,262.5 1,547,737.5 1,940,000 Admission of Paz: Cash investment 800,000 800,000 Goodwill to Maria and Ana,6:4 276,000 184,000 - 460,000* Balances, 7/1/011 668,262.5 1,731,737.5 800,000 3,200,000

* Total agreed capital (P800,000/25%) P3,200,000 Total contributed capital (P1,940,000 + P800,000) 2,740,000 Goodwill to Maria and Ana, 6:4 P460,000

54 Chapter 3 3-25: Continued

Maria Ana Paz Total Balances after admission of Paz P668,262.5 P1,731,737.5 P800,000 P3,200,000 Capital withdrawal (12,000) (12,000) (12,000) (36,000) Balance before P/L distribution 656,262.5 1,719,737.5 788,000 3,164,000 Net income 12/31/011, P150,000: Interest 16,707 43,293 20,000 80,000 Salaries 12,000 12,000 12,000 36,000 Balance, 45:30:25 15,300 10,200 8,500 34,000 Capital balance, 12/31/011 P700,269.5 P1,785,230.5 P828,500 P3,314,000

3-26: a

Total agreed capital of the new partnership (P84,000 / 30%) P 280,000 Total contributed capital:

Old partners (P45,000 + P65,000) + P30,000 P140,000 New partner 84,000 224,000

Goodwill P 56,000

If the P56,000 goodwill proved to be worthless, Warren would be charged 35% of P56,000, or P19,600. However, the real harm to Warren would be that of having paid more to enter the partnership than he should have. If the goodwill did not exist, then the adjusted assets of the previous partners would have been P140,0000, which represents 70% of the total partnership value of P200,000. In that case, Warren would have only paid P60,000 for a 30% interest in capital. Therefore, Warren would have paid extra P24,000 (P84.000 against P60,000) for the goodwill that proved to be worthless.

3-27: c Allocation of profits under the original partnership’s agreement:

Amor Bea Cora Total Salaries P30,000 P30,000 P40,000 P100,000 Bonus to Amor* 12,000 12,000 Remaining profits 10,000 4,000 6,000 20,000 Total P52,000 P34,000 P46,000 P132,000

*Bonus = 10% (Net income – Bonus) 110% Bonus = 10% (Net income) 110% Bonus = P13,200 Bonus = P12,000

Partnership Dissolution – Changs in Ownership Interest 55 3-27, Continued Allocation of new partnership profits necessary to satisfy Bea: Amor Bea Cora Dina Total Salaries P30,000 P30,000 P40,000 P30,000 P130,000 Remaining profits (Sch. 1) 42,000 14,000 42,000 42,000 140,000 Bonus to Dina, (Sch. 2) 20,000 20,000 Total P72,000 P44,000 P82,000 P92,000 P290,000 Sch. 1: In order for Bea to increase his allocation by P10,000, she would need to received a P14,000 allocation based on the profit ratio. Therefore, the total amount of profit subject to this allocation would be P140,000 (P14,000 / 10%). Sch. 2: If the cumulative total of income allocated before the bonus to Dina is P270,000, then Dina would be entitled to the P20,000 bonus under the revised agreement. 3-28: a

Total capital of the new partnership (P56,000 / 70%) P80,000 Total fair value of the net assets of the original partnership :

(P530,000 – P474,000) 56,000 Dina should pay P24,000

3-29: a.

Fair value of the original partnership: Value of recorded net assets P268,000 Value of goodwill 40,000 Total fair value P308,000

Total agreed capital of new partnership (P308,000 / 70%) P440,000 Total capital of the original partnership 308,000 Total contribution needed from Carlos 132,000 Fair value of recorded assets contributed (90,000) Fair value of intangible contributed (20,000) Necessary cash contribution P 22,000

56 Chapter 3 3-30: 1. b Net income per books P50,000 Adjustments: Accrued expenses 2,400 Inventory overstated (6,200) Unrecorded purchases (4,000) Income received in advance 3,000 Supplies 1,800 Corrected net income P47,000 Lina’s new P/L ratio (50% x 80%) 40% Lina’s share P18,800 2. b 3. b 4. d Computations:

Lina Mina Nina Olga Total Capital balances P150,000 P90,000 P60,000 P340,000 Admission of Olga 40,000 40,000 Bonus to Olga (Sch. 1) (14,000) 8,400) (5,600) 28,000 - Balances, 1/1/010 136,000 81,600 54,400 68,000 340,000 Division of profit 18,800 11,280 7,520 9,400 47,000 Balances, 12/31/010 154,800 92,880 61,920 77,400 387,000 Sale of interest of L to M (154,800) 154,800 - Division of profit 100,000 100,000 100,000 300,000 Drawings (20,000) (10,000) (5,000) (35,000) Balances, 12/31/011 327,680 151,920 172,400 652,000 Division of profit 65,000 65,000 65,000 195,000 Inventory overvalued (5,000) (5,000) (5,000) (15,000) Balances before retirement 387,680 211,920 232,400 832,000 Settlement to Mina (425,360) (425,360) Total goodwill 37,680 37,680 37,680 113,040 Balances, 12/31/012 249,600 270,080 P519,680

Partnership Dissolution – Changes in Ownership Interest 57 3-31: a Correction in the problem: Interest to be acquired by new partner in Partnership AA should be 30%. Partnership

AA BB CC Fair value of original partnership: Assets at book value P500,000 P600,000 P800,000 Liabilities at book and fair value (369,500) (410,000) (558,000) (a) Book value of original partnership 130,500 190,000 242,000 assets appreciation (depreciation) (50,000) 125,000 50,000 (b) Net assets 80,500 315,000 292,000 Percent of new partnership represented by: (c) Investment of new partner 30% 25% 20% (d) Fair value of the original partnership 70% 75% 80% (e) Fair value of new partnership suggested by the fair value of the original partnership (b / d) P115,000 P420,000 P365.000 (f) Fair value of original partnership 80,500 315,000 292,000 (g) Fair value of consideration that should be conveyed by the Darna (e-f) P34,500 P105,000 P73,000

3-32: 1.a 2.a 3.b 4.b Computations:

Maya Rita Hara Perla Total 2008: Balances, 12/31/07

P54,000

P76,000

P -

P -

P130,000

Allocation of profit, sch. 1 127,000 102,400 230,000 Distributions (100,000) (100,000) (200,000) Balances, 12/31/08 P81,600 P78,400 P - P - P160,000 2009: Balances, 1/1/09 P81,600 P78,400 P - P160,000 Admission of Hara * 30,000 20,000 P 70,000 120,000 Allocation of profit,sch. 1 145,250 98,875 85,875 330,000 Distributions (80,000) (80,000) (80,000) (240,000) Balances, 12/31/09 P176,850 P117,275 P 75,875 P - P370,000

58 Chapter 3 3-32, Continued

Maya Rita Hara Perla Total 2010: Balances, 12/31/010

P176,850

P117,272

P75,875

P -

P370,000

Sale of interest to Rita (176,850) 176,850 - Allocation of profit, sch. 1 Distributions

- -

100,000 (60,000)

100,000 (80,000)

200,000 (140,000)

Balances, 12/31/08 P - P334,125 P95,875 P - P430,000 2011: Balances, 1/1/011 P - P334,125 P95,875 P - P430,000 Adjustment of net assets - (5,000) (5,000) (10,000) Recognition of goodwill** Sale of interest by Rita

- 20,875 (350,000)

-

20,875 (350,000)

Subtotal Admission of Perla***

P - P - P90,875 21,625

P - 75,000

P90,875 96,625

Balances, 12/31/011 P - P - P112,500 P 75,000 P187,500 Schedule 1: 2008 Allocation of profit:

Maya Rita Total Profit and loss ratio 40% 60% Salary P80,000 P100,000 P180,000 Bonus (see schedule 2) 46,000 46,000 Balance 1,600 2,400 4,000 Total P127,600 P102,400 P230,000

2009 Allocation of profit: Maya Rita Hara Total Profit and loss ratio 30% 45% 25% Salary P80,000 P100,000 P70,000 P250,000 Bonus (see schedule 2) 66,000 16,500 82,500 Balance (750) (1,125) (625) (2,500) Total P145,250 P98,875 P85,875 P330,000

Schedule 2: 2008 Bonus: Maya (P230,000 x 20%) P46,000 2009 Bonus: Maya (P330,000 x 20%) P66,000 Hara (P330,000 x 20%) 16,500 P82,500

Partnership Dissolution – Changes in Ownership 59 3-32, Continued * Admission of Hara: Total agreed capital of new partnership (P70,000 / 25%) P280,000 Total contributed capital (P160,000 + P70,000) 230,000 Goodwill to old partners P 50,000 ** Sale of interest by Rita: Settlement to Rita P350,000 Rita’s adjusted capital balance 329,125 Goodwill traceable to Rita P 20,875 *** Admission of Perla: Total agreed capital of the new partnership (P75,000 / 40%) P187,500 Total contributed capital of all the partners (P90,875 + P75,000) 165,875 Goodwill to Hara P 21,625

60 Chapter 3


Problem 3 – 1 (a) 1. Revaluation of Assets: Total agreed capital (P75,000 ÷ 25%) ..................................... P300,000 Total contributed capital .......................................................... _275,000 Upward revaluation of assets, P/L ratio ................................... P 25,000 Entry Assets ................................................................................ 25,000 Cash ................................................................................... 75,000 Red, capital ................................................................... 5,000 White, capital ................................................................ 10,000 Blue, capital .................................................................. 10,000 Green, capital ................................................................ 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 ................................................................................... 75,000 Green, capital ................................................................ 68,750 Red, capital ................................................................... 1,250 White, capital ................................................................ 2,500 Blue, capital .................................................................. 2,500 (b) 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 ............................................................................ 100,000 Red, capital ................................................................... 20,000 White, capital ................................................................ 40,000 Blue, capital .................................................................. 40,000 Red, capital (25% x P80,000) ............................................ 20,000 White, capital (25% x p120,000) ....................................... 30,000 Blue, capital (25% x P100,000) ......................................... 25,000 Green, capital ................................................................ 75,000 2. Red, capital (25% x P10,000) ....................................................... 15,000 White, capital (25% x P80,000) ................................................... 20,000 Blue, capital (25% x P60,000) ..................................................... 15,000 Green, capital ......................................................................... 50,000

Partnership Dissolution – Changes in Ownership Interest 61

Problem 3 – 2 a. (1) Bonus Method: Contributed capital of Tomas ......................................................... .................. P140,000 Agreed capital of Tomas (P640,000 x 20%) ................................... .................. _128,000 Bonus to old partners, P/L ratio ...................................................... .................. P 12,000 BRUNO MARIO TOMAS TOTAL Balances before admission .................... P200,000 P300,000 – P500,000 Admission of Tomas .............................. ___9,000 ___3,000 _128,000 _140,000 Balances after admission ....................... P209,000 P303,000 P128,000 P640,000 (2) Goodwill Method: Total agreed capital (P140,000 ÷ 20%) . .................. ..................... P700,000 Total contributed capital ........................ .................. ..................... _640,000 Goodwill to old partners, P/L ratio ........ .................. ..................... P 60,000 BRUNO MARIO TOMAS TOTAL Balances before admission .................... P200,000 P300,000 P – P500,000 Admission of Tomas .............................. __45,000 __15,000 _140,000 _200,000 Balances after admission ....................... P245,000 P315,000 P140,000 P700,000 (3) Goodwill with subsequent write-off. BRUNO MARIO TOMAS TOTAL Balances from A-2 ................................. P245,000 P315,000 P140,000 P700,000 Goodwill written off, 6:2:2 .................... ( 36,000) ( 12,000) ( 12,000) ( 60,000) Balances ................................................. P209,000 P303,000 P128,000 P640,000 b. BRUNO MARIO TOMAS TOTAL Balances from A-2 ................................. P245,000 P315,000 P140,000 P700,000 Goodwill written off, 4:4:2 .................... ( 24,000) ( 24,000) ( 12,000) ( 60,000) Balances ................................................. P221,000 P291,000 P128,000 P640,000

Problem 3 – 3

a. Total capital after admission (P76,000 + P104,000) ..................................... .................. P180,000 Total capital before admission (P60,000 + P80,000) .................................... .................. _140,000 Goodwill recorded ........................................................................................ .................. P 40,000 Total capital of the partnership (P180,000 ÷ 75%) ....................................... .................. P240,000 Less: Total capital of old partners plus Goodwill (P140,000 + 40,000) ....... .................. _180,000 Cash payment by Barry ................................................................................. .................. P 60,000 b. Total capital after admission (P52,000 + P68,000) ....................................... .................. P120,000 Total capital before admission ...................................................................... .................. _140,000 Bonus to Barry .............................................................................................. .................. P 20,000 Agreed capital of Barry (P120,000 ÷ 75%) x 25% ....................................... .................. P 40,000 Less: Bonus .............................................................................................. .................. __20,000 Cash payment by Barry ................................................................................. .................. P 20,000

62 Chapter 3

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 .. .... ...................................................................................... 60,000 Goodwill ...................................................................................... 100,000 Gene, capital .......................................................................... 80,000 Nancy, capital ........................................................................ 20,000 Ellen, capital .......................................................................... 60,000 b. Cash ..... .. .... ...................................................................................... 60,000 Ellen, capital ................................................................................. 60,000

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

c. Gene, capital ...................................................................................... 20,000 Nancy, capital ..................................................................................... 8,000 Ellen, capital ................................................................................. 28,000 d. Cash .... ... .... ...................................................................................... 32,000 Ellen, capital ................................................................................. 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 3,000 Entry: Cash .. .... ...................................................................................... 32,000 Goodwill ...................................................................................... 3,000 Ellen, capital .......................................................................... 35,000

Problem 3 – 5 a. Cash ..... .. .... ...................................................................................... 40,000 Cherry capital ............................................................................... 40,000 b. 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

Partnership Dissolution – Changes in Ownership Interest 63 Problem 3-5, continued: Entry: Cash .. .... ...................................................................................... 50,000 Cherry, capital ....................................................................... 42,500 Helen, capital ......................................................................... 5,250 Cathy, capital ......................................................................... 2,250 c. 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 .. .... ...................................................................................... 25,000 Helen, capital ................................................................................ 7,875 Cathy, capital ................................................................................ 3,375 Cherry, capital ....................................................................... 36,250 d. 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 ...................................................................................... 50,000 Goodwill ...................................................................................... 30,000 Cherry, capital ....................................................................... 50,000 Helen, capital ......................................................................... 21,000 Cathy, capital ......................................................................... 9,000 e. 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 ...................................................................................... 25,000 Goodwill ...................................................................................... 15,000 Cherry, capital ....................................................................... 40,000

Problem 3 – 6 a. Total agreed capital (P600,000 ÷ 3/4) ................................................................. P800,000 Santos interest ...................................................................................................... _____1/4 Contribution of Santos ......................................................................................... P200,000 b. Total agreed capital (P630,000 ÷ 3/4) ................................................................. P840,000 Santos' interest ..................................................................................................... _____1/4 Contribution of Santos ......................................................................................... P210,000

64 Chapter 3 Problem 3-6, continued: c. Total agreed capital (P624,000 ÷ 3/4) ....................................................................... .................... P832,000 Less: Contributed capital of old partners ................................................................... .................... _600,000

Contributed capital of Santos .................................................................................... .................... P232,000 d. Total agreed capital (P600,000 ÷ 3/4) ....................................................................... .................... P800,000 Less: Goodwill ........................................................................................................ .................... __10,000

Contributed capital .................................................................................................... .................... 790,000 Contributed capital of old partners ............................................................................ .................... _600,000

Contributed capital of Santos .................................................................................... .................... P190,000 e. Total agreed capital (Contributed) ............................................................................. .................... P820,000 Less: Contributed capital of old partners ................................................................... .................... _600,000

Contributed capital of Santos .................................................................................... .................... P220,000 Problem 3 – 7

a. Tony, capital ........................................................................................................ 40,000 Noel, capital ...................................................................................................... 40,000 b. Cash ........................................................................................................ 90,000 Noel, capital ...................................................................................................... 90,000 (P180,000 ÷ 2/3) x 1/3 = P90,000. c. Cash ....... ..... .... ........................................................................................................ 56,000 Goodwill ..... .... ........................................................................................................ 4,000 Noel, capital ...................................................................................................... 60,000 Total agreed capital (P180,000 ÷ 3/4) ....................................................................... ..... P240,000 Total contributed capital (P180,000 + P56,000) ........................................................ ..... _236,000

Goodwill to new partner ............................................................................................ ..... P 4,000 d. Subas, capital……………………………………………………………… ..... 14,400 Tony, capital………………………………………………………………… .. 9,600 Inventory………………………………………………………………............. 24,000 Cash ....... ..... .... ........................................................................................................ 52,000 Noel, capital ...................................................................................................... 52,000 Total agreed capital (P52,000 ÷ 1/4) ......................................................................... ..... P208,000 Total capital before inventory write-down (180,000 + 52,000) ................................. ..... (232,000)

Write-down to old partners capital ............................................................................ ..... ( 24,000) e. Land……………………………………………………………………………………….. 92,000 Subas, capital…………………………………………………………………… 55,200 Tony, capital……………………………………………………………………. 36,800 Subas, capital (P155,200 x 1/4) ................................................................................. 38,800 Tony, capital (P116,800 x 1/4) .................................................................................. 29,200 Noel, capital ...................................................................................................... 68,000 Total resulting capital (P68,000 ÷ 1/4) ...................................................................... ..... P272,000 Total capital 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

Partnership Dissolution – Changes in Ownership Interest 65 Problem 3-7, continued: f. Cash .... ... .... ...................................................................................... 40,000 Subas, capital ...................................................................................... 2,400 Tony, capital ...................................................................................... 1,600 Noel, capital ................................................................................. 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 .... ... .... ...................................................................................... P60,000 Goodwill . .... ...................................................................................... 60,000 Noel, capital ................................................................................. P 60,000 Subas, capital (P60,000 x 3/5) ...................................................... 36,000 Tony, capital (P60,000 x 2/5) ....................................................... 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. Conny, capital ..................................................................................... 40,000 Andy, capital (P8,000 x 3/4) ............................................................... 6,000 Benny, capital (P8,000 x 1/4) ............................................................. 2,000 Cash .. .... ...................................................................................... 48,000 b. Goodwill . .... ...................................................................................... 10,000 Conny, capital ..................................................................................... 40,000 Cash .. .... ...................................................................................... 50,000 c. Goodwill (P5,000 ÷ 1/5) ..................................................................... 25,000 Conny, capital ..................................................................................... 40,000 Andy, capital (P25,000 x 3/5) ...................................................... 15,000 Benny, capital (P25,000 x 1/5) ..................................................... 5,000 Cash ...................................................................................... 45,000

Problem 3 – 9 a. Spade, capital ...................................................................................... 120,000 Jack, capital .................................................................................. 120,000 b. Goodwill (P30,000 ÷ 50%) ................................................................. 60,000 Ace, capital ................................................................................... 12,000 Jack, capital .................................................................................. 18,000 Spade, capital ............................................................................... 30,000 Spade, capital (P120,000 + P30,000) .................................................. 150,000 Jack, capital .................................................................................. 150,000

66 Chapter 3 Problem 3-9 (Continued) c. Spade, capital ...................................................................................... 180,000 Cash .. .... ...................................................................................... 180,000 Ace, capital (P60,000 x 2/5) ............................................................... 24,000 Jack, capital (P60,000 x 3/5) ............................................................... 36,000 Spade, capital ............................................................................... 60,000 d. Land .... ... .... ...................................................................................... 20,000 Ace, capital (20%) ........................................................................ 4,000 Jack, capital (30%) ....................................................................... 6,000 Spade, capital (50%) .................................................................... 10,000 Spade, capital ...................................................................................... 130,000 Ace, capital (P50,000 x .40) ............................................................... 20,000 Jack, capital (P50,000 x .60) ............................................................... 30,000 Cash .. .... ...................................................................................... 60,000 Land.. .... ...................................................................................... 120,000 e. Goodwill . .... ...................................................................................... 30,000 Spade, capital ...................................................................................... 120,000 Cash .. .... ...................................................................................... 150,000 f. Goodwill (P30,000 ÷ 50%) ................................................................. 60,000 Spade, capital ...................................................................................... 120,000 Ace, capital (P60,000 x 20%)....................................................... 12,000 Jack, capital (P60,000 x 30%) ...................................................... 18,000 Cash .. .... ...................................................................................... 150,000 g. Land .... ... .... ...................................................................................... P40,000 Ace, capital (20%) ........................................................................ 8,000 Jack, capital (30%) ....................................................................... 12,000 Spade, capital (50%) .................................................................... 20,000 Spade, capital (P120,000 + P20,000) .................................................. 140,000 Ace, capital (P10,000 x 40%) ............................................................. 4,000 Jack, capital (P10,000 x 60%) ............................................................ 6,000 Land.. .... ...................................................................................... 100,000 Note payable ................................................................................. 50,000

Partnership Dissolution – Changes in Ownership Interest 67

Problem 3 – 10

Case 1: Bonus of P10,000 to Eddy: Eddy, capital ................................................................................. 70,000 Charly, capital (P10,000 x 3/5) .................................................... 6,000 Danny, capital (P10,000 x 2/5)..................................................... 4,000 Cash ...................................................................................... 80,000 Case 2: Partial Goodwill to Eddy: Goodwill ...................................................................................... 4,000 Eddy, capital ................................................................................. 70,000 Cash ...................................................................................... 74,000 Case 3: Bonus of P5,000 to remaining partner: Eddy, capital ................................................................................. 70,000 Charly, capital (P5,000 x 3/5) ................................................ 3,000 Danny, capital (P5,000 x 2/5) ................................................ 2,000 Cash ...................................................................................... 65,000 Case 4: Total Implied Goodwill of P24,000: Goodwill ...................................................................................... 24,000 Eddy, capital ................................................................................. 70,000 Charly, capital (P24,000 x 3/6) .............................................. 12,000 Danny, capital (P24,000 x 2/6) .............................................. 8,000 Cash ...................................................................................... 74,000 Case 5: Other assets disbursed: Eddy, capital ................................................................................. 70,000 Other assets .................................................................................. 20,000 Charly, capital (P60,000 x 3/6) .............................................. 30,000 Danny, capital (P60,000 x 2/6) .............................................. 20,000 Cash ...................................................................................... 40,000 Case 6: Danny purchases Eddy's capital interest: Eddy, capital ................................................................................. 70,000 Danny, capital ........................................................................ 70,000

68 Chapter 3

Problem 3 – 11 a. 1/1/08 Building ............................................................... 52,000 Equipment ............................................................ 16,000 Cash .................................................................... 12,000 Santos capital .............................................. 40,000 To record initial investment. 12/31/08Reyes capital ......................................................... 22,000 Santos capital .............................................. 12,000 Income summary ......................................... 10,000 To record distribution of loss as follows: Santos Reyes Total Interest ................................................................. P 8,000 P – P 8,000 Additional profit .................................................. 4,000 4,000 Balance to Reyes.................................................. ______ (22,000) (22,000)

Total .................................................................... P12,000 P(22,000) (P10,000) 1/1/09 Cash .................................................................... 15,000 Santos capital (15%) ............................................ 300 Reyes capital (85%) ............................................. 1,700 Cruz capital ................................................. 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].)

12/31/09 Santos capital ....................................................... 10,340 Reyes capital ........................................................ 5,000 Cruz capital .......................................................... 5,000 Santos drawings .......................................... 10,340 Reyes drawings ........................................... 5,000 Cruz drawings ............................................. 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].)

12/31/09 Income summary ................................................. 44,000 Santos capital .............................................. 16,940 Reyes capital ............................................... 16,236 Cruz capital ................................................. 10,824 To allocate P44,000 income figure as computed below: Santos Reyes Cruz Interest (20% of P51,700) .................................... P10,340 15% of P44,000 income ....................................... 6,600 Balance, 60:40 ..................................................... ______ P16,236 P10,824

Total .................................................................... P16,940 P16,236 P10,824

Partnership Dissolution – Changes in Ownership Interest 69 Problem 3-11, continued: Capital balances as of December 31, 2009 Santos Reyes Cruz Initial investment, 2008 ....................................... P40,000 P40,000 2008 profit ........................................................... 12,000 (22,000) Cruz investment ................................................... (300) (1,700) P17,000 2009 drawings ...................................................... (10,340) (5,000) (5,000) 2009 profit ........................................................... _16,940 _16,236 _10,824

Capital, 12/31/09 ................................................. P58,300 P27,536 P22,824 1/1/010 Cruz capital .......................................................... 22,824 Diaz capital ................................................. 22,824 To transfer capital purchase from Cruz to Diaz 12/31/010 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). 12/31/010 Income summary ................................................. 61,000 Santos capital .............................................. 20,810 Reyes capital ............................................... 24,114 Diaz capital ................................................. 16,076 To distribute profit for 2008 computed as follows: Santos Reyes Diaz Interest (20% of P58,300) .................................... P11,660 15% of P61,000 profit.......................................... 9,150 Balance, P40,190, 60:40 ...................................... ______ P24,114 P16,076

Total .................................................................... P20,810 P24,114 P16,076 1/1/011 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. b. 1/1/08 Building ............................................................... 52,000 Equipment ............................................................ 16,000 Cash .................................................................... 12,000 Goodwill .............................................................. 80,000 Santos capital .............................................. 80,000 Reyes capital ............................................... 80,000 To record initial investments. Reyes is credited with goodwill of P80,000 to match

Santos investment.

70 Chapter 3 Problem 3-11, continued: 12/31/08 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.

1/1/09 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 = 20% (current capital + P15,000 + goodwill) P15,000 + goodwill = 20% (P150,000 + P15,000 + goodwill) P15,000 + goodwill = P33,000 + .20 goodwill .80 goodwill = P18,000 goodwill = P22,500 12/31/09 Santos capital ....................................................... 20,000 Reyes capital ........................................................ 10,000 Cruz capital .......................................................... 7,500 Santos drawings .......................................... 20,000 Reyes drawings ........................................... 10,000 Cruz drawings ............................................. 7,500 To close drawings accounts based on 20% of beginning capital Balances: Santos, p100,000; Reyes, P50,000; and Cruz, P37,500. 12/31/09 Income summary ................................................. 44,000 Santos capital .............................................. 26,600 Reyes capital ............................................... 10,400 Cruz capital ................................................. 6,960 To allocate P44,000 profit as follows: Santos Reyes Cruz Interest (20% of P100,000) .................................. P20,000 15% of P44,000 profit.......................................... 6,600 Balance of P17,400, 60:40 ................................... ______ P10,440 P 6,960

Total .................................................................... P26,600 P10,440 P 6,960 Capital balances as of December 31, 2009: Santos Reyes Cruz Initial investment, 2008 ....................................... P80,000 P80,000 2008 profit allocation ........................................... 20,000 (30,000) Additional investment .......................................... P37,500 2009 drawings ...................................................... (20,000) (10,000) (7,500) 2009profit allocation ............................................ __26,600 _10,440 __6,960

Capitals, 12/31/09 ................................................ P106,600 P50,440 P36,960

Partnership Dissolution – Changes in Ownership Interest 71 Problem 3-11, continued: 1/1/010 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%).

1/1/010 Cruz capital .................................................................. 46,000 Diaz capital ........................................................ 46,000 To transfer of capital purchase. 12/31/010 Santos capital ............................................................... 22,118 Reyes capital ................................................................ 12,800 Diaz capital .................................................................. 9,200 Santos drawings ................................................. 22,118 Reyes drawings .................................................. 12,800 Diaz drawings .................................................... 9,200 To close drawings accounts based on 20% of beginning capitals. 12/31/010 Income summary ......................................................... 61,000 Santos capital ..................................................... 31,268 Reyes capital ...................................................... 12,800 Diaz capital ........................................................ 9,200 To allocate profit for 2008 as follows: Santos Reyes Diaz Interest (20% of P110,588) .......................................... P22,118 15% of P61,000 ........................................................... 9,150 Balance of P29,732, 60:40 ........................................... ______ P17,839 P11,893

Totals ........................................................................... P31,268 P17,839 P11,893 Capital balances as of December 31, 2010: Santos Reyes Diaz 12/31/07 balances ........................................................ P106,600 P50,440 Goodwill ...................................................................... 3,988 13,560 Capital purchased ........................................................ P46,000 Drawings ...................................................................... (22,118) (12,800) (9,200) Profit allocation ........................................................... __31,268 _17,839 _11,893

12/31/08 balances ........................................................ P119,738 P69,039 P48,693 1/1/011 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.

1/1/011 Diaz capital .................................................................. 53,562 Cash.................................................................... 53,562 To record settlement to Diaz.

72 Chapter 3

Problem 3 – 12 Partnership Books Continued as Books of Corporation Entries in the Books of the Corporation (1) Inventories ..... .................................................................... ................. 26,000 Land ...... ........ .................................................................... ................. 40,000 Building . ........ .................................................................... ................. 20,000 Accumulated depreciation – bldg. ...................................... ................. 20,000 Accumulated depreciation – equipment .............................. ................. 30,000 Equipment .................................................................. ................. 20,000 Jack capital ................................................................ ................. 58,000 Jill capital................................................................... ................. 34,800 Jun capital .................................................................. ................. 23,200 To adjust assets and liabilities of the partnership to their current fair values. (2) Cash ...... ........ .................................................................... ................. 4,000 Jack capital .... .................................................................... ................. 18,000 Jill capital................................................................... ................. 20,200 Jun capital .................................................................. ................. 1,800 To adjust capital accounts of the partners to 4:3:3 ratio. (3) Jack capital .... .................................................................... ................. 100,000 Jill capital ...... .................................................................... ................. 75,000 Jun capital ...... .................................................................... ................. 75,000 Capital stock ............................................................... ................. 250,000 To record issuance of stock to the partners. New Books Opened for the New Corporation Entries in the Books of the Partnership (1) Inventories ..... .................................................................... ................. 26,000 Land ...... ........ .................................................................... ................. 40,000 Building . ........ .................................................................... ................. 20,000 Accumulated depreciation – bldg. ...................................... ................. 20,000 Accumulated depreciation – equipment .............................. ................. 30,000 Equipment .................................................................. ................. 20,000 Jack capital ................................................................ ................. 58,000 Jill capital................................................................... ................. 34,800 Jun capital .................................................................. ................. 23,200 To adjust assets and liabilities of the partnership. (2) Cash ...... ........ .................................................................... ................. 4,000 Jack capital .... .................................................................... ................. 18,000 Jill capital................................................................... ................. 20,200 Jun capital .................................................................. ................. 1,800 To adjust capital accounts of the partners.

Partnership Dissolution – Changes in Ownership Interest 73 Problem 3-12, continued: (3) Stock of JJJ Corporation .................................................... ................. 250,000 Accounts payable ................................................................ ................. 30,000 Loans payable – Jill ............................................................ ................. 40,000 Cash in bank ............................................................... ................. 44,000 Accounts payable ....................................................... ................. 26,000 Inventories .................................................................. ................. 60,000 Land....... .................................................................... ................. 60,000 Building . .................................................................... ................. 70,000 Equipment .................................................................. ................. 60,000 To record transfer of assets and liabilities to The corporation and the receipt of capital stock (4) Jack capital .... .................................................................... ................. 100,000 Jill capital ...... .................................................................... ................. 75,000 Jun capital ...... .................................................................... ................. 75,000 Stock of JJJ Corporation ............................................ ................. 250,000 To record issuance of stock to the partners. Entries in the Books of the Corporation (1) To record the acquisition of assets and liabilities from the partnership: Cash in bank .. .................................................................... ................. 44,000 Accounts receivable ............................................................ ................. 26,000 Inventories ..... .................................................................... ................. 60,000 Land ...... ........ .................................................................... ................. 60,000 Building (net) . .................................................................... ................. 70,000 Equipment (net) ................................................................... ................. 60,000 Accounts payable ....................................................... ................. 30,000 Loans payable ............................................................ ................. 40,000 Capital stock ............................................................... ................. 250,000

Problem 3 – 13 1. Bonus Method a. 2010 journal entries Jan. 1: Cash 40,000 Inventory 12,000 Equipment 48,000 Notes payable 10,000 Aquino, capital (50%) 45,000 Binay, capital (50%) 45,000 To record initial investments at fair value along with equal capital balances.

74 Chapter 3 Problem 3-13: Continued

Oct. 1: Cash 12,000 Aquino, capital 12,000 To record additional investment of Aquino. Dec. 31: Computation of the bonus: Net profit before bonus P33,000 Net profit after bonus (P33,000 / 110%) 30,000 Bonus P 3,000 Computation of interest on average capital: Aquino: Beginning capital: P45,000 x 9 months = P405,000 New balance : P57,000 x 3 months = 171,000 Total P576,000 Average capital: P576,000 / 12 = P 48,000 Interest rate 10% Interest credited to Aquino P 4,800 Binay: P45,000 x 10% = P 4,500 Allocation of P33,000 profit:

Aquino Binay Total Bonus P 3,000 P- P 3,000 Interest 4,800 4,500 9,300 Balance of income 12,420 8,280 20,700 Total P20,220 P12,780 P33,000

Closing Entry: Aquino, Capital 9,600 Binay, capital 9,600 Aquino, drawing 9,600 Binay, drawing 9,600 To close P800 per month drawing accounts for the year. Income summary 33,000 Aquino, capital 20,220 Binay, capital 12,780 To close profit for the year.

Partnership Dissolution – Changes in Ownership Interest 75 Problem 3-13, continued: b. Statement of Changes in Partner’s Equity

Aquino Binay Total Capital balances, beginning P45,000 P45,000 P 90,000 Additional investments 12,000 - 12,000 Net income 20,220 12,780 33,000 Drawings (9,600) (9,600) (19,200) Capital balances, end P67,620 P48,180 P115,800

2011 journal entries: Jan. 1: Admission of Roxas. Total agreed capital of the new partnership (P115,800 + P66,000) P181,800 Roxas’ interest 1/3 Roxas’ agreed capital P 60,600 Roxas’ contributed capital 66,000 Bonus to Aquino and Binay, 60:40 P 5,400 Cash 66,000 Roxas, capital 60,600 Aquino, capital 3,240 Binay, capital 2,160 To record admission of Roxas with bonus to original partners. Several Withdrawal of Binay: Years Binay capital balance P78,000 Later Settlement 90,000 Bonus to Binay, from Aquino and Roxas P12,000

Binay, capital 78,000 Aquino, capital 6,000 Roxas, capital 6,000 Cash 90,000 To record withdrawal of Binay with bonus from the Remaining partners split equally. 2. Goodwill Method: a. 2010 Journal Entries: Jan. 1: Cash 40,000 Inventory 12,000 Equipment 48,000 Goodwill 14,000 Note payable 10,000 Aquino, capital 52,000 Binay, capital 52,000 To record investments of the partners with goodwill

attributed to Aquino.

76 Chapter 3 Problem 3-13: Continued Oct. 1: Cash 12,000 Aquino, capital 12,000 To record additional investment of Aquino. De. 31: Bonus to Aquino (the same) P3,000 Interest on average capital: Aquino: Beginning capital: P52,000 x 9/12 = P39,000 New balance: P64,000 x 3/12 = 16,000 Average capital P55,000 Interest rate x 10% Interest P 5,500 Binay: P52,000 x 10% = P 5,200 Allocation of income of P33,000:

Aquino Binay Total Bonus P 3,000 P- P 3,000 Interest 5,500 5,200 10,200 Balance of income 11,580 7,720 19,300 Total P20,080 P12,920 P33,000

Closing Entries: Aquino, Capital 9,600 Binay, capital 9,600 Aquino, drawing 9,600 Binay, drawing 9,600 To close out drawing accounts for the year. Income summary 33,000 Aquino, capital 20,080 Binay, capital 12,920 To allocate profits computed above. b. Statement of Changes in Partners’ Equity

Aquino Binay Total Capital balances, beginning P52,000 P52,000 P104,000 Additional investments 12,000 - 12,000 Net income 20,080 12,920 33,000 Drawings (9,600) (9,600) (19,200) Capital balances, end P74,480 P55,320 P129,800

Partnership Dissolution – Changes in Ownership Interest 77 Problem 3-13, continued: 2011 Journal Entries: Jan. 1: Admission of Roxas

Total agreed capital of the new partnership (P66,000 / 1/3) P198,000 Total contributed capital (P129,800 + P66,000) 195,800 Goodwill to old partners P 2,200 Goodwill 2,200 Aquino, capital (60%) 1,320 Binay, capital (40%) 880 To recognize goodwill based on Roxas investment. Cash 66,000 Roxas, capital 66,000 To record admission of Roxas. Several: Withdrawal of Binay Years Binay capital balance P78,000 Later: Settlement 90,000 Goodwill to Binay (20%) P12,000 Total goodwill (P12,000/20%) P60,000 Goodwill 60,000 Aquino, capital (40%) 24,000 Binay, capital (20%) 12,000 Roxas, capital (20%) 12,000 To recognize total goodwill. Binay, capital 90,000 Cash 90,000 To record cash settlement to Binay.

78 Chapter 4

CHAPTER 4

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 4-1: a PAR BOOGIE BIRDIE Capital balances before realization P 20,000 P 16,000 P 10,000 Loss on liquidation, P40,000 ( 20,000) ( 12,000) ( 8,000) Cash distribution P – P 4,000 P 2,000 4-2: c PING PANG PONG Capital balances before liquidation P 50,000 P 50,000 P 10,000 Gain of P10,000 (150,000-140,000) __6,000 __2,000 __2,000 Cash distribution P 56,000 P 52,000 P 12,000 4-3: b PING PANG PONG Capital balances before liquidation P 50,000 P 50,000 P 10,000 Loss of P40,000 (P140,000-P100,000) ( 24,000) ( 8,000) ( 8,000) Cash distribution P 26,000 P 42,000 P 2,000 4-4: a PING PANG PONG Capital balances before liquidation P 50,000 P 50,000 P 10,000 Loss of P70,000 (P140,000-P70,000) ( 42,000) ( 14,000) ( 14,000) Balances P8,000 P 36,000 ( 4,000) Absorption of Pong's deficiency, 6:2 ( 3,000) ( 1,000) __4,000 Cash distribution P 5,000 P 35,000 – 4-5: b COLT MARK CLOCK Capital balances before liquidation (net of loans)P290,000 P200,000 P220,000 Loss of P130,000, 4:3:3 ( 52,000) ( 39,000) ( 39,000) Cash distribution P238,000 P161,000 P181,000 4-6: c JONAS CARLOS TOMAS Capital balances before liquidation P160,000 P 45,000 P 55,000 Loss of P60,000, 40:50:10 ( 24,000) ( 20,000) ( 6,000) Cash distribution P136,000 P 25,000 P 49,000

Partnership Liquidation 79 4-7: a ARIEL BERT CESAR Capital balances before liquidation P40,000 P180,000 P 30,000 Loss of P100,000, 4:3:3 ( 40,000) ( 30,000) ( 30,000) Cash distribution P – P150,000 P – 4-8: b NORY OSCAR Capital balances before realization P23,000 P 13,500 Additional investment by Nory for the unpaid liabilities (33,000-18,000) 15,000 – Loss on realization (schedule 1) ( 30,900) ( 20,600) Payment by Oscar to Nory P 7,100 ( P7,100) Schedule 1 Total capital before liquidation P 36,500 Unpaid liabilities 15,000 Total loss on realization P 51,500 4-9: d BLACK WHITE GREEN Capital balances before liquidation (net) P99,000 P 91,500 P138,000 Loss on realization (schedule 1) P27,500 ( 13,750) ( 27,500) _( 5,500) Balances, cash distribution P85,250 P 64,000 P132,500 Schedule 1: Capital balances of white (net) P 91,500 Cash received by White _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 Capital balances before liquidation (net) P27,000 P 43,000 P 10,000 Loss on realization, P63,600 ( 25,320) ( 25,320) ( 12,660) Balances P 1,680 P 17,680 ( 2,660) Unrecorded liabilities, P500 ( 200) ( 200) ( 100) Balances P 1,480 P 17,480 ( 2,760) Elimination of Nora's deficiency ( 1,380) ( 1,380) __2,760 Payment to partners P 100 P 16,100 P – 4-11: d ARIES LEO TAURUS Capital balances before liquidation (net) P33,500 P 49,000 P 36,500 Loss on realization (schedule 1) P45,000 ( 22,500) ( 13,500) ( 9,000) Payment to partners P11,000 P 35,500 P 27,500

80 Chapter 4 4-11, continued: Schedule 1: Taurus capital (net) P36,500 Payment to Taurus ( 27,500) Share of total loss (20%) P 9,000 Total loss on realization (9,000/20%) P45,000 4-12: c TOTAL MOLY NORA OLGA Capital balances, June 11 P32,700 P15,000 P13,500 P 4,200 Net loss from operation (squeeze) ( 9,800) ( 4,200) ( 2,800) ( 2,800) Capital balances, August 30 before liquidation (48,500-25,600) P22,900 P10,800 P10,700 P 1,400 Loss on realization (47,500-30,000) ( 17,500) ( 7,500) ( 5,000) ( 5,000) Balances P 5,400 P 3,300 P 5,700 ( 3,600) Additional investment by Olga _1,500 _____– _____– _1,500 Balances P 6,900 P 3,300 P 5,700 ( 2,100) Elimination of Olga's deficiency ______ ( 1,260) ( 840) _2,100 Payment to partners P 6,900 P 2,040 P 4,860 P – 4-13: b RITA SARA TITA Capital balances before liquidation P49,000 P18,000 P10,000 Operating loss, P21,000 ( 3,500) ( 7,000) ( 10,500) Drawings ( 10,000) ( 15,000) ( 20,000) Loans – 8,000 25,000 Loss on realization, P12,000 ( 2,000) ( 4,000) ( 6,000) Balances P33,500 P – ( 1,500) Absorption of Tita's deficiency __1,500 _____– _1,500 Payment to Nora P32,000 P – P – 4-14: a CLARO PEDRO ANDRO Capital balances before liquidation P45,000 P27,000 P50,000 Loss on realization Accounts Receivable (P50,000 X 40%) P20,000 Investment (P30,000 - P20,000) 10,000 Equipment (P60,000-P30,000) _30,000 Total P60,000 ( 24,000) ( 24,000) ( 12,000) Payment to partners P21,000 P 3,000 P38,000 4-15: c TOTAL MONA LISA Capital balances before liquidation (inclusive loans) P47,500 P28,500 P19,000 Loss on realization, (squeeze) ( 38,500) ( 23,100) ( 15,400) Capital balances - cash distribution P 9,000 P 5,400 P 3,600

Partnership Liquidation 81 4-15, continued: Cash after realization P 37,500 Less Liabilities (P36,000-P7,500) ( 28,500) Total capital after realization P 9,000 4-16: a FF capital before distribution of net loss P100,000 Add: share of net loss (P10,000 X 40%) _( 4,000) FF capital before liquidation 96,000 Cash settlement to FF ( 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) P250,000 Add: Liabilities _100,000 Total assets P350,000 Cash before liquidation ( 50,000) Non-cash assets P300,000 Loss on realization ( 40,000) Cash to be realized P260,000 4-17: d TOTAL CC DD EE Capital balances before realization (net) P100,000 P 15,000 P22,500 P62,500 Loss on realization (squeeze) ( 125,000) ( 62,500) ( 37,500) ( 25,000) Capital balances after realization (liabilities-unpaid) (P 25,000) ( 47,500) ( 15,000) P37,500 Elimination of CC's deficiency _______– __47,500 ( 28,500) ( 19,000) Balances (P 25,000) – (P43,500) P18,500 Investment by DD __43,500 ______– _43,500 _____– Payment to EE P 18,500 P – P – P18,500 4-18: d Total capital before liquidation P 30,000 Liabilities __1,500 Total assets P 31,500 Less: Cash balance before realization Cash after payment of liabilities P 11,100 payment of liabilities 1,500 Cash realized ( 11,600) __1,000 Non-cash asset P 30,500 Less: cash realized _11,600 Loss on realization P 18,900

82 Chapter 4 4-19: d LL MM NN TOTAL Capital balances P 50,000 P 20,000 P 10,000 P 80,000 Salary of LL (P600 X 8 months) __4,800 _______ _______ ___4,800 Capital balances before liquidation P 54,800 P 20,000 P 10,000 P 84,800 Loss on realization ( 44,880) ( 14,960) ( 14,960) Balances P 9,920 P 5,040 (P 4,960) Additional investment by NN ______– _____– __4,960 Payment to partners P 9,920 P 5,040 P – 4-20: b KK's total interest (P60,000-P10,000) P 50,000 Less: Cash to be paid to KK __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) P110,000 KK (P60,000-P10,000) 50,000 LL (P30,000+P10,000) __40,000 P200,000 Divide by ______50% Total P400,000 Loss on realization _120,000 Cash to be realized P280,000 4-21: a TOTAL NN OO PP Capital balances, July 1 P 75,000 P 25,000 P 25,000 P 25,000 Advances to NN, August 1 ( 10,000) ( 10,000) – – OO Loan, September 1 20,000 – 20,000 – Interest, December 31 (6%) NN (5 mos.) ( 250) ( 250) OO (4 mos.) 400 400 Compensation to PP __2,500 _______ _______ ___2,500 Capital balances before liquidation P 87,650 P 14,750 P 45,400 P 27,500 Loss on realization (squeeze) _56,250 ( 17,550) ( 17,550) ( 17,550) Cash distribution P 35,000 ( 2,800) P 27,850 P 9,950 NN should pay P2,800 and this is to be divided to OO & PP equally or P1,400 each.

Partnership Liquidation 83 4-22: a TOTAL PG JR AS Capital balances before realization P 950,000 P350,000 P250,000 P350,000 Loss on realization (squeeze) ( 1,000,000) __20,000 ( 200,000) _500,000 Capital balances after realization (unpaid liabilities) (P 50,000) P 50,000 P 50,000 ( 150,000) Elimination of AS's deficiency _______– ( 90,000) ( 60,000) P150,000 Cash to be absorbed P – (P 40,000) (P 10,000) P – 4-23: a RM ST Capital balances before realization (net) P500,000 P825,000 Loss on realization, P1,225,000 ( 490,000) ( 735,000) Payment to Partners P 10,000 P 90,000 4-24: a TOTAL LT AM ZP Capital balances before realization (net) P 27,500 P 20,000 P 5,000 P 2,500 Gain on realization (squeeze) __37,500 _18,750 __-9,375 __9,375 Capital balances after realization P 65,000 P 38,750 P 14,375 P 11,875 4-25: c AG BM CP DJ Capital balances before realization (net) P 420,000 P375,000 P205,000 P150,000 Loss on realization, P1,000,000 ( 300,000) ( 300,000) (200,000) (200,000) Balances P 120,000 P 75,000 P 5,000 P(50,000) Additional investment by DJ 50,000 4-26: a Settlement to Uy P351,500 Uy capital before liquidation (net): Uy capital P553,500 Receivable from Uy ( 132,000) 421,500 Loss of Uy (50%) P 70,000 Total loss on realization (P70,000 ÷ 50%) P140,000 __Uy__ __Vi__ __Wi__ __Total__ CB before liquidation 553,500 452,500 486,000 1,492,000 Receivable from Uy (132,000) (132,000) Loan to Wi ( 40,500) (40,500) Salary payable to Vi 135,000 135,000 Interest before realization 421,500 587,500 445,500 1,454,500 Loss on realization ( 70,000) ( 42,000) ( 28,000) ( 140,000) Settlement to partners 351,500 545,500 417,500 1,314,500

84 Chapter 4


Problem 4 – 1 Case 1 Rivas and Briones Statement of Liquidation December 31, 2011 Partners' Capitals Assets Rivas, Briones, Rivas Briones Cash Others Liabilities Loan Loan (90%) (10%) Balances before liquidation ... P 20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000 P10,000 Realization of assets and distribution of loss .......... _134,000 ( 200,000) _______ _______ _______ ( 59,400) ( 6,600) Balances................................. 154,000 – 132,000 18,000 20,000 ( 19,400) 3,400 Payment of liabilities ............. ( 132,000) ______– ( 132,000) ______ _______ _______ ______ Balances................................. 22,000 – – 18,000 20,000 ( 19,400) 3,400 Offset Rivas' loan against his capital deficiency ............ _______ _______ _______ ( 18,000) _______ _18,000 ______ Balances................................. 22,000 – – – 20,000 ( 1,400) 3,400 Additional loss to Briones ..... _______ _______ _______ _______ _______ __1,400 ( 1,400) Balances................................. 22,000 – – – 20,000 – 2,000 Payment to partner ................. P(22,000) – – – P(20,000) – P(2,000) Case 2 Rivas and Briones Statement of Liquidation December 31, 2011 Partners' Capitals Assets Rivas, Briones, Rivas Briones Cash Others Liabilities Loan Loan (70%) (30%) Balances before liquidation ... P20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000 P10,000 Realization of assets and distribution of loss .......... 134,000 ( 200,000) _______ ______ _______ ( 46,200) ( 19,800) Balances................................. 154,000 – 132,000 18,000 20,000 ( 6,200) 9,800 Payment of liabilities ............. ( 132,000) _______ ( 132,000) ______ _______ _______ ______ Balances................................. 22,000 – – 18,000 20,000 ( 6,200) 9,800 Offset loan against capital deficiency ........................ ________ _______ _______ ( 6,200) ( 9,800) __6,200 __9,800 Balances................................. 22,000 – – 11,800 10,200 – – Payment to partner ................. P(22,000) – – P(11,800) P(10,200) – –

Partnership Liquidation 85 Problem 4-1, continued: Case 3 Rivas and Briones Statement of Liquidation December 31, 2011 Partners' Capitals Assets Rivas, Briones, Rivas Briones Cash Others Liabilities Loan Loan (50%) (50%) Balances before liquidation ........ P 20,000 P200,000 P132,000 P 18,000 P20,000 P40,000 P10,000 Realization of assets and distribution of loss ............... _134,000 ( 200,000) _______ _______ ______ ( 33,000) ( 33,000) Balances ..................................... 154,000 – 132,000 18,000 20,000 ( 7,000) ( 23,000) Payment of liabilities .................. ( 132,000) _______ ( 132,000) __ _ _______ Balances ..................................... 22,000 – – 18,000 20,000 ( 7,000) ( 23,000) Offset Briones'' loan against his capital deficiency ........... _______ _______ _______ _______ ( 20,000) ______ _20,000 Balances ..................................... 22,000 – – 18,000 – 7,000 ( 3,000) Additional loss to Rivas .............. _______ _______ _______ _______ _______ ( 3,000) __3,000 Balances ..................................... 22,000 – – 18,000 – 4,000 – Payment to partner ...................... P(22,000) – – P(18,000) – P( 4,000) – Journal Entries Case 1: Cash ..... .... ................................................................................................... 134,000 Rivas, Capital ................................................................................................ 59,400 Briones, Capital ............................................................................................ 6,600 Other Assets ........................................................................................... 200,000 Liabilities .. ................................................................................................... 132,000 Cash ... ................................................................................................... 132,000 Rivas, Loan ................................................................................................... 18,000 Rivas, Capital ........................................................................................ 18,000 Briones, Capital ............................................................................................ 1,400 Rivas, Capital ........................................................................................ 1,400 Briones, Loan ................................................................................................ 20,000 Briones, Capital ............................................................................................ 2,000 Cash ................................................................................................... 22,000 Case 2: Cash ..... .... ................................................................................................... 134,000 Rivas, Capital ................................................................................................ 46,200 Briones, Capital ............................................................................................ 19,800 Other Assets ........................................................................................... 200,000 Liabilities .. ................................................................................................... 132,000 Cash ... ................................................................................................... 132,000 Rivas, Loan ................................................................................................... 6,200 Briones, Loan ................................................................................................ 9,800 Rivas, Capital ........................................................................................ 6,200 Briones, Capital ..................................................................................... 9,800 Rivas, Loan ................................................................................................... 11,800 Briones, Loan ................................................................................................ 10,200 Cash ... ................................................................................................... 22,000

86 Chapter 4 Problem 4-1, continued: Case 3: Cash .... ... ........................................................................................... 134,000 Rivas, Capital ..................................................................................... 33,000 Briones, Capital .................................................................................. 33,000 Other Assets ................................................................................. 200,000 Liabilities ........................................................................................... 132,000 Cash.. ........................................................................................... 132,000 Briones, Loan ...................................................................................... 20,000 Briones, Capital ........................................................................... 20,000 Rivas, Capital ..................................................................................... 3,000 Briones, Capital ........................................................................... 3,000 Rivas, Loan ......................................................................................... 18,000 Rivas, Capital ..................................................................................... 4,000 Cash.. ........................................................................................... 22,000

Problem 4 – 2

Blando and Castro Statement of Liquidation April 30, 2011 Partners' Capitals A s s e t s Accounts Blando, Blando Castro Cash Receivables Inventory Others Payable Loan (60%) (40%) Balances before liquidation .................... P 18,000 P75,000 P90,000 P84,000 P42,000 P 24,000 P102,000 P99,000 Collection of receivables and distribution of loss ....... _37,500 ( 75,000) _______ _______ _______ _______ ( 22,500) ( 15,000) Balances ............................ 55,500 – 90,000 84,000 42,000 24,000 79,500 84,000 Realization of inventory and distribution of loss ............................... _30,000 _______ ( 90,000) _______ _______ _______ ( 36,000) ( 24,000) Balances ............................ 85,500 – – 84,000 42,000 24,000 43,500 60,000 Realization of other assets and distribution of loss .......................... _40,000 _______ _______ ( 84,000) _______ _______ ( 26,400) ( 17,600) Balances ............................ 125,500 – – – 42,000 24,000 17,100 42,400 Payment of accounts payable......................... ( 42,000) _______ _______ _______ ( 42,000) _______ _______ _______ Balances ............................ 83,500 – – – – 24,000 17,100 42,400 Payments to partners….. … P(83,500) – – – – P(24,000) P( 17,100) P(42,400)

Partnership Liquidation 87 Problem 4 – 3

a. Electric Company Statement of Partnership Realization and Liquidation June 30, 2011 Capital Balances Amp. Noncash Liabil- Volt, Amp Volt Watt Cash Loan Assets ities Loan 50% 30% 20%

Balances 20,000 15,000 135,000 30,000 10,000 80,000 36,000 14,000 Sale of assets at a loss _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 Payment to creditors _(30,000) ______ _______ (30,000) ______ _______ ______ ______ 85,000 15,000 -0- -0- 10,000 60,000 24,000 6,000 Offset Amp, receivable (15,000) (15,000) Payments to partners: Loan (10,000) (10,000) Capitals _(75,000) ______ _______ _______ ______ (45,000) (24,000) ( 6,000) Balances -0- -0- -0- -0- -0- -0- -0- -0- b. (1) Cash 95,000 Amp, Capital 20,000 Volt, Capital 12,000 Watt, Capital 8,000 Noncash Assets 135,000 Sell noncash assets at a loss of P40,000. (2) Liabilities 30,000 Cash 30,000 Pay creditors. (3) Amp, Capital 15,000 Amp, Loan 15,000 Offset receivable from Amp against his capital credit. (4) Volt, Loan 10,000 Amp, Capital 45,000 Volt, Capital 24,000 Watt, Capital 6,000 Cash 85,000 Final lump-sum distribution to partners. 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.

88 Chapter 4

Problem 4 – 4 a. Bina, capital before liquidation ..................................................................... .................. P320,000 Payment to Bina ............................................................................................ .................. _128,000 Loss absorbed by Bina (40%) ....................................................................... .................. P192,000 Loss on realization (P192,000 ÷ 40%) .......................................................... .................. P480,000 b. AIDA, BINA & CELIA Statement of Partnership Liquidation January 1, 2011 Capital Cash Other Assets Aida Bina Celia (5) (4) (1) Balances before liquidation . P80,000 P720,000 P320,000 P320,000 P160,000 Realization & dist. of loss ... 240,000 ( 720,000) ( 240,000) ( 192,000) ( 48,000) Balances .... .... .................... 320,000 – 80,000 128,000 112,000 Settlement to partners ......... (320,000) _______ ( 80,000) ( 128,000) ( 112,000)

Problem 4 – 5 a. LL, capital before liquidation ........................................................................ .................. P 70,000 Settlement to LL ........................................................................................... .................. __98,000 Gain realized by LL (20%) ........................................................................... .................. P 28,000 Total gain on realization (P28,000 ÷ 20%) ................................................... .................. P140,000 Other assets sold ........................................................................................... .................. _500,000 Selling price .............................................................................................. .................. P640,000 b. JJ, KK & LL Statement of Liquidation Other Capital Cash Assets Liabilities JJ (4) KK(4) (LL(2) Balances before liquidation ... P50,000 P500,000 P60,000 P180,000 P240,000 P70,000 Realization & Dist. of gain ... 640,000 ( 520,000) _______ __56,000 __56,000 _28,000 Balances .... .... ...................... 690,000 – 60,000 236,000 296,000 98,000 Payment of liabilities ............ ( 60,000) ( 60,000) Payment to Partners .............. (630,000) _______ _______ ( 236,000) ( 296,000) ( 98,000)

Partnership Liquidation 89

Problem 4 – 6 a. BB ................................................... P160,000 CC ................................................... P20,000 DD ................................................... P60,000 EE ................................................... P –0– b. BB, CC, DD, & EE Statement of Liquidation C a p i t a l Cash Liabilities BB (30%) CC (10%)DD (20%) EE (40%) Balances before liquidation ... P 0 P60,000 P160,000 P80,000 (P120,000) P(180,000) Advances by BB to pay liabilities ( 60,000) 60,000 Deposit by DD ...................... 60,000 ______ _______ _______ __60,000 ________ Balances .... .... ...................... 60,000 – 220,000 80,000 ( 60,000) ( 180,000) Elimination of EE's deficiency ( 90,000) ( 30,000) ( 60,000) 180,000 Elimination of DD's deficiency ______ __( 90,000) ( 30,000) 120,000 – Payment to partners............... 60,000 – 40,000 20,000 – –

Problem 4 – 7

Sayson and Company Statement of Liquidation –Date– Liabilities P a r t n e r s' C a p i t a l s Assets Accounts Notes Peña Sayson Zobel Ayala Peña Cash Noncash Payable Payable Loan (45%) (30%) (15%) (10%) Balances before liquidation ... P 15,000 P155,250 P11,250 P9,000 P 1,500 P 75,345 P 86,498 P(14,993) P1,650 Realization of assets and distribution of gain .......... 185,000 ( 155,250) _______ ______ ______ 17,850 11,900 ______ ______ Balances ................................ 200,000 - 11,250 9,000 1,500 93,195 98,398 ( 14,993) 1,650 Payment of liabilities ............ ( 20,250) ________ ( 11,250) ( 9,000) ______ ______ ______ _______ ______ Balances ................................ 179,750 - - - 1,500 93,195 98,398 ( 14,993) 1,650 Additional loss to Sayson, Zobel and Peña; 45:30:10 .......................... _______ ________ ________ ______ ______ ( 7,937) ( 5,292) 14,993 ( 1,764) Balances ................................ 179,750 - - - 1,500 85,258 93,106 - (114) Offset Peña's loan against his capital deficiency ....... _______ ________ ________ ______ ( 114) ______ ______ _______ 114 Balances ................................ 179,750 - - - 1,386 85,258 93,106 - Payments to partners ............. P(179,750) P(1,386) P(85,258) P(93,106)

90 Chapter 4

Problem 4 – 8 a. Art, Bea and Cid Partnership Statement of Liquidation June 4, 2011 Assets Partners' Capital Cash Other Liabilities Art (40%) Bea (40%) Cid (20%) Balances before liquidation (including Bea loan, P4,000) ...... P 6,000 P94,000 P20,000 P27,000 P43,000 P10,000 Realization of assets at a loss of P63,300 .................. 30,000 ( 94,000) (25,320) (25,320) (12,660) Unrecorded accounts payable ......... 500 (200) (200) (100) Payment to creditors ....................... (20,500) ______ (20,500) ______ ______ ______ Balances .... .... ................................ 16,200 - - 1,480 17,480 (2,760) Eliminate Cid's deficit ..................... ______ ______ ______ (1,380) (1,380) _2,760 Balances .... .... ................................ 16,200 - - 100 16,100 Payment to Partners ........................ (16,200) - - _( 100) ( 16,100) - b. 2011 July 5 Cash .... .... ................................ ............. .................. .................. 30,700 Art capital (P63,300 x 40%) ...... ............. .................. .................. 25,320 Bea capital (P63,300 x 40%) ..... ............. .................. .................. 25,320 Cid capital (P63,300 x 20%) ...... ............. .................. .................. 12,660 Other assets ...................... ............. .................. .................. 94,000 To record realization of other assets at a loss of P63,300. Art capital (P500 x 40%) ........... ............. .................. .................. 200 Bea capital (P500 x 40%) .......... ............. .................. .................. 200 Cid capital (P500 x 20%) ........... ............. .................. .................. 100 Liabilities .......................... ............. .................. .................. 500 To record trade accounts payable. Liabilities .. ................................ ............. .................. .................. 20,500 Cash . ................................ ............. .................. .................. 20,500 To record payment of liabilities. Art capital . ................................ ............. .................. .................. 1,380 Bea capital ................................ ............. .................. .................. 1,380 Cid capital ........................ ............. .................. .................. 2,760 To eliminate Cid's capital deficit. Art capital . ................................ ............. .................. .................. 100 Bea capital ................................ ............. .................. .................. 4,000 Cid capital . ................................ ............. .................. .................. 12,100 Cash . ................................ ............. .................. .................. 16,200 To record payments to partners to complete liquidation.

c. 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, 2011

- Capital Balances - Noncash G K G B Cash Assets Liabilities Loan 20% 40% 40% - Preliquidation balances 50,000 950,000 (480,000) (60,000) (240,000) (100,000) (120,000) Sale of assets and distribution of 430,000 loss 520,000 950,000 - - 86,000 172,000 172,000 570,000 -0- (480,000) (60,000) (154,000) 72,000 52,000 Cash contributed by B 50,000 - - - - - 50,000 620,000 -0- (480,000) (60,000) (154,000) 72,000 2,000 Distribution of deficit of insolvent partner: (2,000) 20/60 (P2,000) 666 40/60 (P2,000) - - - - - 1,334 - 620,000 -0- (480,000) (60,000) (153,334) 73,334 -0- Offset deficit with loan - - - 60,000 - (60,000) - 620,000 -0- (480,000) -0- (153,334) 13,334 -0- Contribution by G 13,334 - (13,334) - 633,334 -0- (480,000) -0- (153,334) -0- -0- Payment of creditors (480,000) - 480,000 - - - - 153,334 -0- -0- -0- (153,334) -0- -0- Distribution to K (153,334) - - 153,334 - - Postliquidation balances -0- -0- -0- -0- -0- -0- -0- -

92 Chapter 4 Problem 4-9, continued:

KGB Partnership Schedule of Distribution of Personal Assets

June 30, 2011 K G B Personal assets, excluding partnership capital and loan interests 500,000 600,000 700,000 Personal liabilities (460,000) (480,000) (650,000) Personal net worth, excluding partnership capital and loan interests 40,000 120,000 50,000 Contribution to partnership (13,334) Distribution from partnership 153,334 -0- - -0- - Personal capacity 193,334 106,666 -0- -

Joint Venture 113

CHAPTER 6

SOLUTIONS TO MULTIPLE CHOICES 6-1: a Assets per Jessica Company- balance sheet P3,550,000 Jessica’s proportionate interest in assets of JV (50%) 1,000,000 Total assets of Jessica P4550,000 6-2: a Total liabilities only of Jenny Co. 6-3: b 6-4: b Investment of Heart P80,000 Profit share: Sales 150,800 Cost of sales (150,800 ÷ 125%) 120,640 Gross profit 30,160 Expenses 10,000 Net Profit 20,160 Profit/loss ratio x 40% 8,064 Balance of investment in JV P88,064 6-5: a Cash P190,000 Merchandise inventory 29,360 Accounts receivable 150,800 Total assets 370,160 Sweet Co’s, proportionate interest x 60% Sweet Company’s share in total asset P222,096 6-6: a Sales 7,200 Cost of sales Purchases P10,000 Merchandise inventory, end (50% of P10,000) __5,000 _5,000

Gross profit 2,200 Expenses ___500

Net profit P 1,700

114 Chapter 6 6-7: b Original investment (cash) P10,000 Profit share (P1,700 / 2) ___850

Balance of Investment account P10,850 6-8: a Joint venture account before profit distribution (credit balance) P 9,000 Unsold merchandise __2,500

Joint venture profit before fee to Salas P11,500 Joint venture profit after fee to Salas (P11,500 / 115%) P10,000 6-9: b Fee of Salas (P10,000 x 15%) P 1,500 Profit share of Salas (P10,000 x 25%) _2,500

Total P 4,000 6-10: b Salas Salve

Balance before profit distribution P 500 (dr) P 2,000 (cr) Profit share:Sabas (P10,000 x 40%) 4,000 Salve (P10,000 x 35%) ______ _3,500

Balance P 3,500 (cr) P 5,500 (cr) 6-11: d Joint venture account balance before profit distribution (debit) P 6,000 Joint venture profit (P4,500 x 3) _13,500

Cost of unsold merchandise (inventory) taken by Dante P19,500 6-12: b Edwin Capital: Debits: Balance before profit distribution P14,000 Credits: Profit share __4,500

Due from Edwin (debit balance) P 9,500

Joint Venture 115 6-12, continued Settlement to Ferdie (Balance of capital account) Debits: P –0– Credits: Balance before profit distribution P16,000 Profit share __4,500 _20,500

Due to Ferdie (credit balance) P20,500 Settlement to Dante (balance of JV Cash account) Debits: Balance before cash settlement P30,000 Due from Edwin __9,500 P39,500 Credits: Due to Ferdie _20,500

Balance P19,000 6-13: a JV account balance before profit distribution (cr) P 4,600 Unsold merchandise (required dr balance after profit distribution) __2,000

Joint venture profit before fee to Jerry P 6,600 Joint venture profit after fee (P6,600 / 110%) __6,000 Fee to Jerry P 600 6-14: d Harry Capital Isaac Capital

Balances before profit distribution (P 200) P 1,800 Profit distribution: Harry P6,000 x 50%) 3,000 Isaac (P6,000 x 20%) 1,200

Cash settlements P 2,800 P 3,000 6-15: b Sales P14,000 Cost of sales: Merchandise inventory, beg (contributions) P14,000 Freight 300 Purchases __4,000

Goods available for sale P18,300 Merchandise inventory, end (P8,300/2) __4,150 14,150

Gross profit (loss) (150) Expenses (P400 + P200) __600

Net profit (loss) P( 750) 6-16: c Contributions to the Joint Venture (P5,000 + P8,000) P13,000 Loss share (P750 x 50%) ( 375) Unsold merchandise taken (withdrawal) ( 4,150)

Final settlement to jack P 8,475

116 Chapter 6


Problem 6 – 1

Books of Blanco (Manager) Books of Ablan JV Cash 100,000 Investment in JV 90,000 Joint Venture 90,000 Merchandise inventory 90,000 Cash 100,000 Ablan Capital 90,000 Joint Venture 60,000 JV cash 60,000 Joint Venture 20,000 JV cash 20,000 JV cash 200,000 Joint Venture 200,000 Computation of JV Profit Total debit to JV P170,000 Total credit to JV P200,000

Credit balance (Profit) P 30,000 Distribution of Profit: Joint Venture 30,000 Investment in JV 15,000 Profit from JV 15,000 Profit from JV 15,000 Ablan capital 15,000 Ablan capital 105,000 Cash 105,000 JV cash 105,000 Investment in JV 105,000 Cash 155,000 JV cash 155,000

Joint Venture 117

Problem 6 – 2 Requirement (1) - Books of the Joint Venture 1. Computer equipment 105,000 Ella capital 60,000 Fabia capital 45,000 2. Purchases 80,000 Supplies 2,000 Diaz capital 82,000 3. Expenses 9,000 Diaz capital 9,000 4. Cash 150,000 Sales 150,000 5. Expenses 30,000 Cash 30,000 6. Merchandise inventory 20,000 Ella capital 20,000 7. Fabia capital 10,000 Cash 10,000 8. Adjusting and closing entries: (a) Expense 1,500 Supplies 1,500 (b) Sales 150,000 Income summary 150,000 Income summary 97,500 Merchandise inventory 2,500 Merchandise inventory, beg (Investment of Ella) 20,000 Purchases 80,000 Income summary 40,500 Expenses 40,500 Distribution of profit: Income summary 12,000 Diaz capital 4,000 Ella capital 4,000 Fabia capital 4,000

118 Chapter 6 Problem 6-2, continued: Requirement #2

Books of Diaz Books of Ella Books of Fabia Investment in JV 91,000 Investment in JV 80,000 Investment in JV 45,000 Cash 91,000 Comp. Equip. 60,000 Comp. Equip. 45,000 MI 20,000 Cash 10,000 Investment in JV 10,000 Investment in JV 4,000 Investment in JV 4,000 Investment in JV 4,000 Inv. Income 4,000 Inv. Income 4,000 Inv. Income 4,000 Cash (110,000 x 44%) 48,000* C.E (105,000 x 44%) 46,000* MI (2,500 x 44%) 1,100 Supplies (500 x 44%) 200* COS (97,500 x 44%) 42,900 Expense (40,500 x44%) 17,800 Inv. Income 4,000 Sales (150,000x44%) 66,000 Investment in JV 95,000 *rounded to balance

Cash (110,000x38.5%) 42,350 CE (105,000 x38.5%) 40,000* MI (2,500 x 38.5%) 960* Supplies (500 x 38.5%) 190* COS (97,500 x 38.5%) 37.500* Exp (40,500 x 38.5%) 16,000* Inv. Income 4,000 Sales (150,000 x 38.5%) 57,000* Investment in JV 84,000 *rounded to balance

Cash (110,000 x 17.5%) 19,000 CE (105,000 x 17.5%) 18,000 MI (2,500 x 17.5%) 400 Supplies (500 x 17.5%) 90 COS (97,500 x 17.5%) 17,000 Exp (40,500 x 17.5%) 7,000 Inv. Income 4,000 Sales (150,000 x 17.5%) 26,000 Investment in JV 39,000 Diff. of P490 due to rounding of the amounts.

Note. Under the proportionate consolidation method, difference will exist in the journal entry (see above) because the profit and loss ratio (equally) is not equal to the venturer’s capital interest as computed below: Computation of capital interest: Diaz Ella Favia Total Investments P91,000 P80,000 P45,000 P196,000 Withdrawal (10,000) (10,000) Profit share 4,000 4,000 4,000 12,000 Venturer’s capital P95,000 P84,000 P39,000 P218,000 Interest in the Joint Venture Diaz (P95,000/P218,000) 44% Ella (P84,000/P218,000) 38.5% Favia (P39,000/P218,000) 17.5% It may be concluded that the proportionate consolidation method can be properly applied only if the profit and loss ratio and the venturer’s capital interest are equal. In US GAAP there is an exposure draft to eliminate the proportionate consolidation method. US GAAP favor the use of the equity method contrary to IFRS No. 31 which favors the use of the proportionate consolidation method

Joint Venture 119

Problem 6 – 3

(1) No Separate Set of Joint Venture Books is Used Books of Duran (Manager)

May 1: Joint Venture 12,500 Castro capital 12,000 Cash 500 7: JV cash 10,000 Bueno capital 10,000 26: Joint Venture 9,500 JV cash 9,500 30: JV accounts receivable 16,000 Joint Venture 16,000 June 30: JV cash 15,000 JV accounts receivable 15,000 27: JV cash 9,000 Joint Venture 9,000 30: To record unsold merchandise taken by Duran: Merchandise inventory 3,000 Joint Venture 3,000 To record profit distribution: Joint Venture 6,000 Profit from JV 2,000 Bueno capital 2,000 Castro capital 2,000 To record settlements: Bueno capital 12,000 Castro capital 14,000 JV cash 24,500 Cash 1,500 Accounts receivable 1,000 JV accounts receivable 1,000

120 Chapter 6 Problem 6-3, continued:

Books of Bueno

May 7: Investment in Joint Venture 10,000 Cash 10,000 June 30: Investment in Joint Venture 2,000 Profit from Joint Venture 2,000 Cash 12,000 Investment in Joint Venture 12,000 Books of Castro

May 1: Investment in Joint Venture 12,000 Merchandise inventory 12,000 June 30: Investment in Joint Venture 2,000 Profit from Joint Venture 2,000 Cash 14,000 Investment in Joint Venture 14,000 (2) A Separate Set of Books is used: Books of the Joint Venture

May 1: Merchandise inventory 12,500 Castro capital 12,000 Duran capital 500 7: Cash 10,000 Bueno capital 10,000 26: Purchases 9,500 Cash 9,500 30: Accounts receivable 16,000 Sales 16,000 June 20: Cash 15,000 Accounts receivable 15,000 27: Cash 9,000 Sales 9,000

Joint Venture 121 Problem 6-3, continued: June 30: Closing entries: Sales 25,000 Income summary 25,000 Income summary 19,000 Merchandise inventory, end 3,000 Merchandise inventory 12,500 Purchases 9,500 Distribution of profit: Income summary 6,000 Bueno capital 2,000 Castro capital 2,000 Duran capital 2,000 Settlements to Venturers: Bueno capital 12,000 Castro capital 14,000 Duran capital 2,500 Merchandise inventory 3,000 Accounts receivable 1,000 Cash 24,500 Books of Duran (Manager/Operator)

May 1: Investment in Joint Venture 500 Cash 500 June 30: Investment in Joint Venture 2,000 Profit from Joint Venture 2,000 Cash 2,500 Investment in Joint Venture 2,500 Books of Bueno and Castro (Same as in No. 1 requirement)

122 Chapter 6

Problem 6 – 4 (1) Books of Seiko (Manager/Operator) April 1: JV Cash 102,000 Notes payable – PNB 34,000 Roles capital 34,000 Timex capital 34,000 May: Joint venture 64,100 Cash 16,300 Rolex capital 7,800 June: Rolex capital 30,000 JV cash 30,000 Joint venture 111,400 Cash 37,400 Rolex capital 64,700 Timex capital 9,300 July: Cash 40,000 Rolex capital 15,000 Timex capital 10,000 JV cash 65,000 Joint venture 55,770 Cash 13,970 Rolex capital 31,240 Timex capital 10,560 August: Cash 45,000 Rolex capital 67,000 Timex capital 13,500 JV cash 125,500 Joint venture 30,600 Cash 9,730 Rolex capital 16,560 Timex capital 4,310 To record sales: JV cash (P421,000 x 96%) 404,160 Joint venture 404,160

Joint Venture 123 Problem 6-4, continued: To record payment of loan to PNB: Notes payable – PNB 34,000 Rolex capital 34,000 Timex capital 34,000 Joint venture (Interest expense) 8,000 JV cash 110,000 To record distribution of profit: Joint venture 134,290 Gain from JV (30%) 40,287 Rolex capital (60%) 80,574 Timex capital (10%) 13,429 Computed as follows: Total debits tot he JV account P269,870 Total credits to the JV account _404,160

Gain (credit balance) P134,290 To record settlement: Cash 32,687 Rolex capital 128,874 Times capital 14,099 JV cash 175,660 Computations: Settlement to Rolex - Balance of capital account: Debits: June P30,000 July 15,000 August 67,000 Payment of note payable _34,000 P146,000 Credits: April 1 P34,000 May 47,800 June 64,700 July 31,240 August 16,560 Profit share _80,574 __274,874 Credit balance P 128,874

124 Chapter 6 Problem 6-4, continued: Settlement to timex – Balance of capital account Debits: July P 10,000 August 13,500 Payment of loan __34,000 P 57,500 Credits: April 1 P 34,000 June 9,300 July 10,560 August 4,310 Profit share __13,429 _71,599 Credit balance P 14,099 Settlement to Seiko – Balance of JV cash account Debits: April 1 P102,000 Loan proceeds _404,160 P506,160 Credits: June P 30,000 July 65,000 August 125,500 Payment of loan _110,000 _330,500

Balance of JV cash 175,660 Less: Settlement to Rolex P128,874 Settlement to Timex __14,099 _142,973

Settlement to Seiko P 32,687 (2) Partial Statement of Financial Position June 30, 2011 Books of Seiko (Manager/operator) Current assets: Investment in joint Venture: Joint Venture assets: Cash P 72,000 Joint Venture _175,500 P247,500 Less: Equity of other venturers (P116,500 + P43,300) _159,800 87,700 Current liabilities: Notes payable – PNB 34,000

Joint Venture 125 Problem 6-4, continued: Computation of balances as of June 30, 2011: JV Cash Joint Venture

April 1 P102,000 P30,000 June May P 64,100 Balance P 72,000 June _111,400

Balance P175,500 Notes Payable Rolex capital

P34,000 April June P 30,000 P 34,000 April 1 47,800 May _______ __64,700 June

P 30,000 P146,500

P116,500 Timex capital

P34,000 April __9,000 June

P43,300

Problem 6 – 5 Consolidated Statement of Financial Position Cash P 61,000 Receivables 122,000 Inventory 102,500 Other assets __40,500

Total assets P326,000 Accounts payable P 61,000 Other liabilities 96,500 Capital stock 50,000 Retained earnings _118,500

Total liabilities and stockholders' equity P326,000 Consolidated Income Statement Sales P246,750 Cost of sales _124,750

Gross profit 122,000 Operating expenses __58,250

Consolidated net income P 63,750

126 Chapter 6

Problem 6 –6 (a) Journal entries on venture books June 15: Cash 1,000,000 MacDo 1,000,000 Initial contribution at 6% July 1: Land 2,400,000 Mortgage payable 1,650,000 Cash 750,000 Purchased land for cash and 6% mortgage. Aug 1: Cash 1,100,000 MacDo 1,100,000 Additional contribution at 6%. Land 950,000 Cash 950,000 Paid for improvements. Sept 30: Mortgage payable 250,000 Interest expense- Mortgage 3,750 Cash 253,750 Reduced mortgage and paid interest. Oct 31: Mortgage payable 400,000 Interest expense- Mortgage 8,000 Cash 408,000 Reduced mortgage and paid interest. Nov 30: Mortgage payable 300,000 Interest expense- Mortgage 7,500 Cash 307,500 Reduced mortgage and paid interest. Dec 31: Mortgage payable 200,000 Interest expense- Mortgage 21,000 Cash 221,000 Reduced mortgage and make semi-annual

interest payment.

Joint Venture 127 Problem 6-6, continued: 31: Cash 2,600,000 Sales 2,600,000 Sales to date. 31: Commissions 130,000 Cash 130,000 P2,600,000 x 5% 31: Expenses 628,100 Cash 628,100 Paid expenses 31: Interest expense- Venturer 60,000 MacDo 60,000 6% on P1,000,000 from June 15 to

December 31, and on P1,100,000 from August 1 to December 31. 31: Sales 2,600,000 Land (cost of land sold) 1,145,000 Expenses 628,100 Commissions 130,000 Interest expense- mortgage 40,250 Interest- venturer 60,000 Income summary 596,650 To close income and expense accounts. 31: Income summary 596,650 MacDo 596,650 MacEn 238,660 To divide gain, 60:40. 31: MacDo 801,650 Cash 801,650 Payment on account. (b) Journal entries on MacDo’s books: June 15: Investment in Joint Venture 1,000,000 Cash 1,000,000 Initial contribution. Aug 1: Investment in Joint Venture 1,100,000 Cash 1,100,000 Additional contribution.

128 Chapter 6 Problem 6-6, continued: Dec 31: Investment in Joint Venture 60,000 Interest income 60,000 Interest earned on cash advanced. 31: Investment in Joint Venture 357,990 Gain on Joint Venture 357,990 60% of gain on venture. 31: Cash 801,650 Investment in Joint Venture 801,650 Repayment in part of advances. (c) MacDo and MacEn Joint Venture Income Statement For the period from June 15 to December 31, 2011 Sales P2,600,000 Cost of land sold: Land P2,400,000 Improvements 950,000 Total P3,350,000 Unsold land 2,205,000 1,145,000 Gross profit 1,455,000 Expenses: Advertising and office expenses P 628,100 Interest on mortgage 40,250 Interest on advances 60,000 Commissions 130,000 858,350 Net gain P 596,650 Distributions: MacDo (P596,650 x 60%) P 357,990 MacEn (P596,650 x 40%) 238,660 Mac Do and MacEn Joint Venture Statement of Financial Position December 31, 2011 Assets Cash P 250,000 Land 2,205,000 Total Assets P2,455,000 Liabilities and equity: Mortgage payable P 500,000 MacDo 1,716,340 MacEn 238,660 Total liabilities and equity P2,455,000

Joint Venture 129 Problem 6-6, continued: Venturers equity (interest) MacDo MacEn Total Invested P2,100,000 P2,100,000 Shares: Gain P 357,990 P238,660 P 596,650 Interest on advances 60,000 60,000 Commissions 130,000 130,000 Total 417,990 368,660 786,650 Balances 2,517,990 368,660 2,886,650 Withdrawn (801,650) (130,000) (931,650) Equity (interests) P1,716,340 P238,660 P1,955,000

130 Chapter 7

CHAPTER 7

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 7-1: c Amount realized secured by inventory P 30,000 Unsecured claim (P10,000 x 25%) __2,500

Total amount received P 32,500 7-2: d Amount realized secured by inventory P120,000 Unsecured claim (P88,000 x 75%) __66,000

Total amount received P186,000 7-3: d (P15,000,000 + P200,000) 7-4: a Realizable value: Current assets P 50,000 Land and building P240,000 Less mortgage payable _200,000 __40,000

Total 90,000 Less accounts payable _160,000

Estimated deficiency to unsecured creditors 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 P 33,000 Buildings and equipment _110,000

Total P143,000 Liabilities with priority: Administrative expenses P 20,000 Salary payable 6,000 Income taxes __8,000

Total P 34,000

Corporation in Financial Difficulty – Liquidation 131 7-6, continued: Free assets after payment of liabilities with priority: (P143,000 – P34,000) P109,000 Unsecured liabilities Notes payable P 30,000 Accounts payable 83,000 Bonds payable __70,000

Total P183,000 Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60% Payment of notes payable: Value of security (land) P 90,000 60% of remaining P30,000 __18,000

Total collected P108,000 7-7: c Free assets: Other assets P 80,000 Excess from assets pledged with secured Creditors (P116,000 – P70,000) __46,000

Total P126,000 Liabilities with priority P 42,000 Free assets after payment of liabilities with priority (P126,000 – P42,000) P 84,000 Unsecured liabilities: Excess of partially secured liabilities over pledge Assets (P130,000 – P50,000) P 80,000 Unsecured creditors _200,000

Total P280,000 Recovery percentage: P84,000 / P280,000 = 30% Payment of partially secured debt: Value of pledged assets P 50,000 30% of remaining P80,000 __24,000

Total collected P 74,000

132 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 P230,000 Excess liability of Debt One in excess of pledged Asset (P210,000 – P180,000) 30,000 Excess liability of Debt Two in excess of pledged Asset (P170,000 – P100,000) __70,000

Total unsecured liabilities P330,000 Necessary percentage ____60%

Cash needed for these liabilities P198,000 In order for the holder of Debt Two to received exactly P142,000, the other free 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: a Estate equity, beg. (P100,000 – P85,000) P 15,000 Loss on realization (P100,000 – P75,000) ( 25,000) Unrecorded liabilities: Interest expense P 250 Administrative expense 4,000 ( 4,250)

Estate deficit P( 14,250) 7-10: c Total assets at net realizable value P 75,000 Fully secured liabilities (40,000) Estimated administrative expense _( 4,000)

Estimated amount available P 31,000 Unsecured claims (P45,000 + P250) (45,250)

Estimated deficiency to unsecured creditors P 14,250

Corporation in Financial Difficulty – Liquidation 133 7-11: b Assets pledged with fully secured creditors P185,000 Fully secured creditors _130,000 55,000 Free assets _160,000 Total free assets 215,000 Less: Liabilities with priority __35,000 Available to unsecured non-priority claims P180,000 7-12: b Machinery P 10,000 Recoveries of unsecured claims (50,000 - 10,000) X .50 __20,000 Amount to be realized P 30,000 7-13: b Notes Payable P 23,940 Less: Inventories _ 19,200 Unsecured Liabilities 4,740 % of recovery ____78% Recovery 3,697 Add: Inventories _19,200 Amount to be received by Wood P 22,897 7-14: a - P7,000 7-15: a - P30,000 7-16: b - P57,200 [52,000 + (8,000 X .65)] 7-17: d - P72,800 (112,000 X .65) 7-18: d Estimated loss: Account Receivable P 8,160 Inventories (28,000 - 18,500) 9,500 Building (59,000 - 22,000) 3 7,000 Equipment (5,600 - 2,000) 3,600 Goodwill 5,650 Prepaid expenses ___430 P 64,340 Less: Stockholder's equity Common stock P 72,000 Deficit ( 16,660) _55,340 Estimated deficiency P 9,000

134 Chapter 7 7-19: d Accounts Receivable (39,350 - 16, 110) P 23,240 Notes Receivable (18,500 - 12,500) 600 Inventories (87,850 - 45,100) 42,750 Prepaid expenses 950 Equipment (48,800 - 9,000) __39,800 Total estimated loss 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) P 5,000 Free Assets: Cash P 2,700 Accounts Receivable 16,110 Inventories 45,100 Equipment __9,000 __72,910 Total 77,910 Less: Unsecured liabilities with priority (1,850 + 4,650) ___6,500 Net Free Assets P 71,410 Divide by Unsecured creditors: Balance of Partially Secured Creditor Notes Payable - PNB P 15,000 Notes Receivable __12,500 2,500 Accounts Payable 52,500 Notes Payable __51,250 103,750 ÷ P106,250 Estimated recovery % 67% 7-22: d Fully secured (Notes Payable) P 90,000 Partially secured: Notes Payable - PNB P12,500 Add (2,500 X 67%) __1,675 14,175 Unsecured Creditor with Priority 6,500 Unsecured Creditor without Priority (103,750 X 67%) __69,513 Total P180,188

Corporation in Financial Difficulty – Liquidation 135 7-23: a Unsecured creditors without priority P1,102,500 Estimated deficiency to unsecured creditors: Loss on realization 551,250 Estimated liquidation expenses 55,125 Total 606,375 Stockholders’ equity 441,000 165,375 Net free assets 937,125 Liabilities with priority 122,500 Free assets P 1,059,625 7-24: a Estimated net gain (loss) on realization: Gain on realization 78,750 Loss on realization (336,700) (257,950) Estimated claims ( 43,750) Total (301,700) Stockholders equity 295,750 Estimated deficiency P( 5,950) 7-25: a Notes payable (175,000 – 140,000) P 35,000 Unsecured liabilities (420,000 – 52,500) 367,500 Total 402,500 Net free assets (157,500 + 210,000) – P52,500 315,000 Estimated deficiency 87,500 7-26: a Old receivable (net) P 38,000 Marketable securities 12,000 Old inventory 60,000 Depreciable assets- net 96,000 Total assets to be realized P206,000 7-27: a Old receivable P 21,000 New receivable 47,000 Marketable securities 10,500 Sales of inventory 75,000 Total asset realized P153,500 7-28: a Gain on sale of inventory (P75,000 – 60,000) 15,000 Loss on realization: Marketable securities (12,000 – 10,500) 1,500 Trustee’s expenses 4,300 Depreciation 16,000 (21,800) Net loss P( 6,800)

136 Chapter 7 7-29: Correction of the problem: The book value of the Mortgage Payable should be P440,000.

1. c

Net free assets: Cash P 40,000 Inventory 140,000 Property and equipment (P560,000 – P440,000) 120,000 Total free assets P300,000 Less liabilities with priority 160,000 Amount available for unsecured claims without priority P140,000

2. a Net free assets / Unsecured creditors without priority P140,000 / (P50,000 + P300,000) = 40%

3. a

Unsecured liabilities with priority P160,000 Fully secured liabilities (Mortgage payable) 440,000 Partially secured liabilities (Note payable): Secured by accounts receivable P150,000 Unsecured (P50,000 x 40%) 20,000 170,000 Unsecured liabilities without priority 120,000 Total estimated payment to creditors P890,000

7-30: 1. a Debits:

Assets to be realized P 330,000 Assets acquired 360,000 Liabilities liquidated 360,000 Liabilities not liquidated 450,000 Supplementary charges 468,000 Total P1,968,000 Credits: Assets realized P 420,000 Assets not realized 150,000 Liabilities to be liquidated 540,000 Liabilities assumed 180,000 Supplementary credits P1,800,000 Net loss P 168,000

Corporation in Financial Difficulty – Liquidation 137

7-3-, continued: 2. a Capital stock P300,000 Retained earnings 120,000 Liabilities not liquidated 450,000 Total assets P870,000 Less assets not realized 150,000 Cash balance P720,000 7-31: 1. a 2. a 3. a 4. d Supporting computations:

Fully Partially Unsecured Unsecured Liabilities Secured Secured W/Priority W/O Prio. Total Accounts payable P130,000 P150,000 P 280,000 Note payable – A P560,000 40,000 600,000 Note payable – B 300,000 200,000 500,000 Mortgage payable 180,000 180,000 Accrued interest 12,000 12,000 Other liabilities P10,000 14,000 24,000 Total P322,000 P860,000 P10,000 P404,000 P1,596,000 Realizable Assets to be applied: Value Inventory P 150,000 P130,000 P 20,000 P 150,000 Inventory 200,000 P200,000 200,000 Receivables 360,000 360,000 360,000 Equipment 300,000 300,000 300,000 Equipment 60,000 60,000 60,000 Land 260,000 192,000 68,000 260,000 Cash 60,000 P10,000 50,000 60,000 Other assets 45,000 45,000 45,000 Total P1,435,000 P322,000 P860,000 P10,000 P243,000 P1,435,000 Recovery 100% 100% 100% 60.15%

5. d Total consideration to be received by Note B: Partially secured portion P300,000 Unsecured portion (P200,000 x 60.15%) 120,300 Total consideration received P420,300

138 Chapter 7


Problem 7 – 1 (A) Laguna Company Statement of Affairs October 31, 2011 Book Estimated Value Assets Realizable Value Free Assets Assets pledge for fully secured creditors: P107,000 ... Plant assets .................................................. P67,400 Less; Fully secured liabilities ...................... _ 50,400 P17,000 Assets pledged for partially secured creditors: 39,000 . ... Inventories ................................................... P18,000 Free Assets: 4,000 .. ... Cash............................................................. P 4,000 46,000 .. ... Accounts, receivable ................................... 46,000 2,000 .. ... Supplies ....................................................... __1,500 _51,500 Total free assets ............................................... P68,500 Less: Unsecured liabilities with priority.......... __7,000 Net Free Assets ................................................ P61,500 Estimated deficiency to unsecured creditors (to balance) _20,500 P198,000 P82,000 Book Creditors' Unsecured Value Liabilities & Stockholders' Equity Claim Liabilities Fully secured liabilities: P50,400 ... ... Mortgage payable (including interest, P400) P50,400 Partially secured liabilities: 21,000 ... ... Notes payable .............................................. P21,000 Less: Inventory ............................................ _18,000 P 3,000 Unsecured creditors with priority: 5,800 ... ... Wages payable P 5,800 1,200 ... ... Property taxes payable ................................ _1,200 Total ............................................................ P 7,000 Unsecured creditors without priority: 60,000 ... ... Accounts payable ........................................ 60,000 19,000 ... ... Notes payable .............................................. 19,000 Stockholders' Equity ........................................ _____– P198,000 P82,000 (B) Creditor Group Amount of Amount to Percentage Claim be Paid to be paid Unsecured liabilities with priority .................................... P7,000 P7,000 100.0% Fully secured creditors ...................................................... 50,400 50,400 100.0% Partially secured creditors ................................................. 21,000 20,250 * 96.4% Unsecured creditors without priority ................................ 79,000 59,250 75.0% * P18,000 + (P3,000 X 0.75) = P20,250 (C) See statement of affairs in requirement (A)


Problem 7 – 2

VC Corporation Statement of Realization and Liquidation Month Ended January 31, 2011 Assets to be realized: Assets realized: Land ....................... P10,000 land .............................. P 0 Building ................. 43,000 Building ...................... 0 Equipment .............. 28,000 Equipment ................... 8,800 Patents .................... __4,400 P85,400 Patents ......................... _12,000 P20,800 Assets Acquired .............. 0 Assets not realized: Land ............................ P10,000 Building ...................... 43,000 Equipment ................... _13,000 66,000 Liabilities liquidated: Liabilities to be liquidated: Account payable .... P14,000 Accounts payable ........ P80,000 Loans payable ........ __7,000 21,000 Loans payable ............. _40,000 120,000 Liabilities not liquidated: Account payable .... 66,000 Loans payable ........ 33,000 99,000 Gain on realization ......... ............... ___7,600 Loss on realization ...... .............. ___6,200 Total ............................... ............... P213,000 Total ............................ .............. P213,000 VC Corporation Statement of Financial Position January 31, 2011 Cash ............................................... P 6,700 Accounts payable ......................... P 66,000 Land ............................................... 10,000 Loans payable .............................. 33,000 Building .......................................... 43,000 Estate deficit ................................. ( 26,300) Equipment ...................................... _13,000 Total ............................................... P 72,700 P 72,700 VC Corporation Estate Deficit January 31, 2011 Gain on realization .................................................................... P 7,600 Loss in realization .................................................................... ( 6,200) Trustee's expenses .................................................................... ( 1,300) Net gain on realization............................................................... P 100 Estate deficit, January 1, 2011 ................................................... ( 26,400) Estate deficit, January 31, 2011 ................................................. P(26,300)

140 Chapter 7

Problem 7 – 3 Rizal Corporation Statement of Affairs Book Estimated Free Values A s s e t s Realizable Value Assets Assets pledged to fully secured creditors: P 80,000 ...... .... Land and building .............................................. P102,000 Less: Mortgage payable ..................................... 43,000 P 59,000 50,000 ...... .... Finished Goods .................................................. P 55,000 Less: Loan payable ............................................. 50,000 5,000 Assets pledged to partially secured creditors: 32,000 ...... .... Accounts receivable (80% x 30,000) ................. 24,000 12,000 ...... .... Trucks ................................................................ 3,500 Totals .................................................................. 27,500

Free Assets: 4,000 ...... .... Cash.................................................................... 4,000 8,000 ...... .... AR (20% x 30,000) ............................................ 6,000 36,000 ...... .... Inventory – Materials ......................................... 27,000 1,000 ...... .... Prepaid expense .................................................. 0 8,000 ...... .... Trucks ................................................................ 2,500 45,000 ...... .... Equipment .......................................................... 25,000 16,000 ...... .... Intangible ........................................................... _______ 64,500 Total Free Assets .................................................... P128,500 Less: Unsecured liability with priority (12,000 + 8,000) 20,000 Net free assets ......................................................... 108,500 ________ Estimated deficiency to unsecured creditors (to Balance) 81,000 P 292,000 ...... .... Total unsecured liabilities ....................................... P189,500 Book Creditors' Unsecured Values Liabilities and Equity Claim Liabilities Fully secured creditors: P 43,000 ...... .... Mortgage payable ............................................... 94,000 50,000 ...... .... Loans payable .................................................... 50,000 Total ................................................................... 144,000 Partially secured creditors': 25,000 ...... .... Bank Loan .......................................................... 25,000 Less: Receivable (80% x 30,000) ....................... 24,000 P 1,000 5,000 ...... .... Truck Loan ......................................................... 5,000 Less: trucks ........................................................ 3,500 1,500

Unsecured creditors with Priority: 12,000 ...... .... Wages payable ................................................... 12,000 8,000 ...... .... Taxes payable ..................................................... 8,000 Totals .................................................................. 20,000

Unsecured creditors: 77,000 ...... .... Accounts payable ............................................... 77,000 110,000 ...... .... Stockholder Loan ............................................... 110,000 187,000 ( 38,000) ...... .... Stockholder Equity ................................................. – P 292,000 Total ........................................................................ P189,500


Problem 7 – 4

Mapayapa Corporation Statement of Affairs November 1 Book Estimated Free Value Assets Realizable Value Assets Assets pledged to fully secured creditors: P60,000.... ... Investments ................................................. P 69,000 180,000.... ... Accounts receivable .................................... 171,000 Total ............................................................ 240,000 Less: Note payable ...................................... 210,000 P 30,000 Free assets: 66,000.... ... Cash............................................................. P 66,000 258,000.... ... 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 ........................................... 919,800 Less: Unsecured liabilities with priority.......... __13,800 Net free asset ............................................... 906,000 _________ Estimated deficiency (to balance) ................... 60,300 P1,839,000 Total ................................................................ P966,300 Book Creditor's Unsecured Value Liabilities & Equity Claim Liabilities Fully secured creditors: P 210,000.... ... Notes payable .............................................. P210,000 Unsecured creditor with priority: Accrued wages ............................................ P 7,200 Accrued property tax ................................... ___6,600 Total ............................................................ P 13,800 Unsecured creditor: 960,000.... ... Account payable .......................................... P960,000 Accrued expenses ........................................ 6,300 300,000.... ... Capital stock __369,000.... ... Retained earnings ............................................ _______ P1,839,000 Total ................................................................ P966,300

142 Chapter 7

Problem 7 – 5 a. Total fair value of assets (estimated proceeds) .......................... P471,000 Less: Fully and partially secured creditors claim: Notes payable, interest (secured by receivable and inventory) ................................................................... 125,000 Bonds payable (secured by land & building) .................... 231,000 356,000 Available to unsecured creditors................................................ 115,000 Less: Unsecured creditors with priority: Wages payable .................................................................. P 9,500 Taxes payable .................................................................... __14,000 __23,500 Amount available to unsecured creditors ................................... P 91,500 b. Unsecured portion of notes payable and interests (P195-P125) P 70,000 Accounts payable ....................................................................... __95,000 Total claims of unsecured creditors ........................................... P165,000 P91,500 ––––––– = 55.45% P165,000 c. Distribution of P471,000: Percent Total Creditors Amount Realized Payment Accounts payable P 95,000 .... 55.45% P 52,678 Wages payable 9,500 .... 100% 9,500 Taxes payable 14,000..... 100% 14,000 Notes payable & interests 125,000 .... 100% 125,000 70,000 55.45% 38,815 Bonds payable & interests 231,000 .... 100% _231,000 Total estimated payment ........................................ P470,993


Problem 7 – 6 1. Evergreen Company Statement of Affairs June 30, 2011 Estimated Available for Book Realizable Unsecured Values ASSETS Values Creditors Pledged with fully secured creditors: P460,000 Land and building ..................................... P340,000 Less: Mortgage payable (including accrued interest) (330,000) P 10,000 Free Assets: 80,000 Cash ......................................................... P 80,000 140,000 Accounts receivable – net ......................... 126,000 100,000 Inventories ................................................ 84,000 120,000 Machinery – net ........................................ 40,000 100,000 Goodwill ................................................... _ _____0_ 330,000

Total free assets ........................................ ................... 340,000 Less: liabilities with priority ..................... ................... _140,000

Net free assets .......................................... ................... 200,000 Estimated deficiency (Squeeze figure) ..... ................... _130,000

P1,000,000 P330,000 LIABILITIES AND STOCKHOLDERS' EQUITY Secured & Unsecured Priority Non-priority Claims Liabilities Liabilities with priority P120,000 Wages payable .......................................... P120,000 20,000 Property taxes payable .............................. __20,000

Total ......................................................... P140,000 Fully secured creditors 300,000 Mortgage payable ..................................... 300,000 30,000 Interest on mortgage payable .................... __30,000

Total ......................................................... P330,000 Unsecured creditors 220,000 Accounts payable ...................................... ................... P220,000 100,000 Note payable-unsecured ............................ ................... 100,000 10,000 Interest payable-unsecured ....................... ................... 10,000 Stockholders' Equity 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.

144 ____ Chapter 7

Problem 7 – 7 1. Entries on trustee's books. 2011 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 ..................... ................... P100,000 Note payable ............................ ................... 80,000 Deferred revenue ..................... ................... 2,000 Wages payable......................... ................... 6,000 Mortgage payable ................... ................... 160,000 Estate equity ............................ ................... 40,000 To record custody of Kimerald Corporation. March 1 to 31: Cash ............................................... ........ 15,200 Estate equity ................................... ............. 800 Accounts receivable-net .......... ................... 16,000 To record collection of receivables and recognize loss. Cash ............................................... ........ 38,800 Estate equity ................................... ........ 33,200 Inventories ............................... ................... 72,000 To record sale of inventories at a loss. Cash ............................................... ...... 180,000 Estate equity ................................... ........ 60,000 Land ......................................... ................... 40,000 Buildings-net ........................... ................... 200,000 To record sale of land and buildings at a loss. Estate equity ................................... ........ 52,000 Intangible assets ...................... ................... 52,000 To write off intangible assets. Estate equity ........................................ ......... 16,400 Administrative expenses payable .. .................... 16,400 To accrue trustee expenses.

Corporation in Financial Difficulty – Liquidation 145 Problem 7-7, continued: 2. Financial Statements Kimerald Corporation in Trusteeship Statement of Financial Position March 31, 2011 Assets Cash ..................... ................................................. ................... P242,000 Liabilities and Deficit Accounts payable . ................................................. ................... P100,000 Note payable-unsecured ......................................... ................... 80,000 Revenue received in advance ................................. ................... 2,000 Wages payable ..... ................................................. ................... 6,000 Mortgage payable ................................................. ................... 160,000 Administrative expense payable-new .................... ................... __16,400

Total liabilities ..... ................................................. ................... P364,400 Less: Estate deficit ................................................. ................... _122,400

Total liabilities net of deficit .................................. ................... P242,000 Kimerald Corporation in Trusteeship Statement of Cash Receipts and Disbursements March 1 to 31, 2011 Cash balance, March 1, 2011 ................................. ................... P 8,000 Add: Cash receipts Collections of receivables ............................. ..... P 15,200 Sale of inventories ......................................... ........ 38,800 Sale of land and buildings ............................. ...... 180,000 _234,000

Total ..................... ................................................. ................... 242,000 Less: Cash disbursements ...................................... ................... ____–0–

Cash balance, March 31, 2011 ............................... ................... P242,000 Kimerald Corporation in Trusteeship Statement of Changes in Estate Equity March 1 to 31, 2011 Estate equity, March 1 ........................................... ................... P 40,000 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 _162,400

Estate deficit, March 31 ......................................... ................... P122,400

146 Chapter 7 Problem 7-7, continued: 3. Entries on trustee's books:

2011 April: Mortgage payable ..................................... ...... 160,000 Cash.................................................. ................... 160,000

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.................................................. ................... 24,400 To record payment of priority liabilities. Accounts payable ...................................... ........ 32,000 Note payable-unsecured ............................ ........ 25,600 Cash.................................................. ................... 57,600 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 ..................................... ................... 122,400 To write-off remaining liabilities and close trustee's records.

Reorganization and Troubled Debt Restructuring 147

CHAPTER 8

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 8-1: a Trade accounts payable (P52,000 + P62,700) P114,700 12% preferred stock (5,000 x P1) P 5,000 Paid in capital in excess of par (5,000 x P9) 45,000 Cash (P62,700 x P0.80) _50,160 _100,160

Gain from discharge of indebtedness P 14,540 8-2: c 8-3: c 8-4: b Carrying value of the note payable: Principal P600,000 Interest __60,000 P660,000 Restructured value: Principal P400,000 Interest _110,000 _510,000

Gain on debt restructuring P150,000 8-5: d Other income: Fair value of land P450,000 Books value of land _360,000

Other income P 90,000 Extraordinary gain: Book value of note payable Principal P500,000 Interest __60,000 P560,000 Fair value of land _450,000

Extraordinary gain P110,000 8-6: a Book value of bonds payable P500,000 Par value of preferred stock (5,000 shares x P100) _500,000

No gain no loss P –0–

148 Chapter 8 8-7: a Book value of notes payable: Principal P 2,500 Interest ___500 P 3,000 Par value of common stock issued (200 shares x P5) __1,000

Additional paid in capital P 2,000 Add gain on payment of accounts payable: Book value P 10,000 Payment __8,000 __2,000

Total gain on debt discharge P 4,000 8-8: a Carrying value of debt: Note payable P100,000 Interest payable __12,000 P112,000 Fair value machinery _(36,000)

Balance of debt P 76,000 Restructured debt: Note payable P 50,000 Interest (P50,000 x .08 x 2) ___8,000 __58,000

Restructuring difference (gain) P 18,000 8-9: c Principal P300,000 Interest payable (300,000 x 10%) __30,000

Carrying value P330,000 8-10: c Correction: Should be P310,600 Restructured principal of note payable P260,000 Interest payable: On book value (P300,000 x 10% 30%) P 9,000 On restructured (P260,000 x 8% x 2) _41,600 __50,600

Future cash flows to liquidate the debt P310,600 8-11: d 8-12: d Loss on transfer of land: Original cost P290,000 Market value _270,000 P 20,000 Gain on restructuring of debt: Carrying value of debt P300,000 Market value of land _270,000 P 30,000

Reorganization and Troubled Debt Restructuring 149 8-13: a Transfer gain (loss): Carrying amount of equipment P80,000 Fair value of equipment 75,000 Transfer loss P(5,000) Restructuring gain: Carrying amount of the debt P100,000 Fair value of equipment transferred 75,000 Restructuring gain P 25,000 8-14: d Carrying amount of real estate transferred P100,000 Fair value of real estate 90, 000 Loss on restructuring of payables P(10,000) 8-15: d Carrying amount of liability P150,000 Fair value of real estate transferred 90,000 Restructuring gain P 60,000 8-16: c Gain on revaluation of land (120,000 – 85,000) P 35,000 Gain on the extinguishment of debt (185,000 – 120,000) 65,000 Total gain P100,000 8-17: a Carrying value of debt (P800,000 + 80,000) P880,000 Total future payments (P700,000 + 80,000) 780,000 Restructuring gain P100,000 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 Interest income at 12/31/08 (67,499 x 12%) P 8,100

150 Chapter 8 8-19: 1. b 2. a Supporting computations: Effect on Net Income

Alternative 1 Alternative 2 Gain on restructuring P30,000 (a) P 0 (b) Interest expenses - (55,000) (c) Increase (decrease) P30,000 (d) P(55,000) (a) P620,000 – (P350,000 + P120,000 + P120,000)

(b) There is no gain because the sum of the payments (5 x P135,000) exceeds the book value of the debt (P620,000). (c) (5 x P135,000) – P620,000. (d) If the gain of the disposition of the land were included, this alternative would have an even larger effect on in come. However, the land gain could also be realized under Alternative 2 if management elected to dispose this property. 8-20: b Exchange of preferred stock for debt (P5,100,000 of preferred stock, at Market value in exchange for P5,500 of debt) P 400,000 Exchange of land for debt (3,000,000 of land at book value in Exchange for P4,500,000 of debt 1,500,000 Restructuring of remaining debt of P10,875,000 with semiannual Payments of P818,016. The sum of the payments is P16,360,320 (20 x P818,016). Since the sum of the payments exceeds the

unpaid balance, no gain is recognized on the restructuring 0 Total effect on net income (increase) P1,900,000

Retained earnings before restructuring (3,400,000) Adjusted retained earnings P1,500,000

Reorganization and Troubled Debt Restructuring 151


Problem 8 – 1 Journal entries for company emerging from bankruptcy using fresh start 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%) 264,000 Gain on debt discharge 36,000 To record settlement of liabilities

Problem 8 – 2 2011 July 24: Costs of reorganization 50,000 Cash with escrow agent 50,000 Common stock 580,000 Common stock (60,000 x P1) 60,000 Additional paid in capital 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) 80,000 Gain on debt discharge 20,000 Additional paid in capital 290,000 Gain on debt discharge 20,000 Retained earnings 260,000 Costs of reorganization 50,000

152 Chapter 8

Problem 8 – 3 Jade Corporation Statement of Financial Position December 31, 2011 ASSETS Current assets: Cash P 23,000 Inventory 45,000 P 68,000 Property and equipment: Land 140,000 Buildings 220,000 Equipment 154,000 514,000

Total asset P582,000 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities not subject to compromise Current liabilities: Accounts payable P 60,000 Long-term liabilities: Note payable (2006) P100,000 Note payable (2003) _100,000 200,000 P260,000 Liabilities subject of compromise Accounts payable 123,000 Accrued expenses 30,000 Income taxes payable 22,000 Note payable (due 2011) 170,000 345,000

Total liabilities 605,000 Stockholders' Equity Common stock 200,000 Retained earnings (deficit ) (223,000) (23,000)

Total liabilities and stockholders' equity (deficit) P582,000

Problem 8 – 4 Preliminary computations: Book values prior to reorganization: Total assets (P100,000 + P112,000 + P420,000 + P78,000) .............. P710,000 Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 + P185,000 + P200,000) .................................................................. P800,000 Common stock (given) ....................................................................... P240,000 Deficit (given) .............................................................................. P330,000

Reorganization and Troubled Debt Restructuring 153 Problem 8-4, continued: 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 Deficit (eliminated) ..................................................................................... –0– 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: 1. Land and buildings ..................................................................................... 80,000 Reorganization Value in excess of amount allocable to tangible assets .................................................................... 45,000 Accounts receivable ........................................................................ 20,000 Inventory ..................................................................................... 22,000 Equipment ..................................................................................... 13,000 Additional paid in capital ............................................................... 70,000 To adjust accounts to market value as part of fresh start accounting. 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 .... ..................................................................................... 5,000 Common stock, P8 par value ................................................................. 8,000 Additional paid in capital (P6.66 per share) ......................................... 6,666 Gain on debt discharge .......................................................................... 60,334 To record settlement of accounts payable. 4. Accrued expenses .... ..................................................................................... 35,000 Note payable .... ..................................................................................... 4,000 Gain on debt discharge .......................................................................... 31,000 To record settlement of accrued expenses. 5. Note payable .... ...... 200,000 Note payable .... ..................................................................................... 50,000 Common stock, P8 par value ................................................................. 80,000 Additional paid in capital (P6.66 per share) ......................................... 66,667 Gain on debt discharge .......................................................................... 3,333 To record settlement of note payable due in 2007 6. Note payable .... ...... 185,000 Note payable .... ..................................................................................... 71,000 Common stock, P8 par value ................................................................. 56,000 Additional paid in capital, P6.66 per share ........................................... 46,667 Gain on debt discharge .......................................................................... 11,333 To record settlement of note payable due in 2008

154 Chapter 8

Problem 8 – 5 7. Note payable .. ..... ..............................................................................200,000 Note payable .. .............................................................................. 110,000 Gain on debt discharge ................................................................ 90,000 To record settlement of note payable due in 2009 8. 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 Statement of Financial Position – Fresh Start Accounting December 31, 2011 ASSETS Current assets Accounts receivable P 18,000 Inventory 111,000 P129,000 Property and equipment Land and building 278,000 Machinery 121,000 399,000 Intangible assets Patents 125,000 Reorganization value in excess of amount allocable to identifiable assets 147,000 272,000

Total assets P800,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable P 97,000 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 P800,000

Installment Sales 155

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 Realized gross profit, 2008 P 675,000

OR Installment Sales (P1,050,000 ÷ 25%) P4,200,000 Less: Installment account receivable, Dec. 31 __1,500,00 Collection P2,700,000 Gross profit rate ___X 25% Realized gross profit, 2008 P 675,000 9-2: a 2009 2010 2011 Deferred gross profit, before adjustment P7,230 P 60,750 P 120,150 Deferred gross profit, end 2009 (6,000 X 35%) 2,100 2010 (61,500 X 33%) 20,295 2011 (195,000 X 30%) ___58,500 Realized gross profit, December 31, 2011 P5,130 P 40,455 P 61,650 (Total – P107,235) 9-3: c Deferred gross profit balance, end P 202,000 Divide by Gross profit rate based on sales (25% ÷ 125%) ____÷ 20% Installment Accounts Receivable, end P1,010,000 Collection ___440,000 Installment Sales P1,450,000 9-4: b Sales P1,000,000 Cost of installment sales __700,000 Deferred gross profit P 300,000 Less: Deferred gross profit, end Installment accounts receivables, 12/31 (1,000,000-400,000) P 600,000 Gross profit rate (300,000 ÷ 1,000,000) ___X 30% __180,000 Realized gross profit P 120,000 Operating expenses ___80,000 Operating income 40,000 Interest and financing charges __100,000 Net income P 140,000

156 Chapter 9 9-5: a Market value of repossessed merchandise P 30,000 (before reconditioning cost) Less: unrecovered cost Unpaid balance (80,000-30,000) P 50,000 Less: Deferred gross profit (50,000X20%) ___10,000 __40,000 Loss on repossession (P 10,000) 9-6: a Installment sales P1,000,000 Less: collection on installment sales __200,000 Installment account receivables, 12/31/08 800,000 Gross profit rate (500,000 ÷ 1,000,000) ___X 50% Deferred gross profit, 12/31/011 P 400,000

OR Deferred gross profit (1,000,000-500,000) P500,000 Less: Realized Gross Profit (200,000 X 50%) _100,000 Deferred gross profit, 12/31/011 P400,000 9-7: d Fair value of repossessed merchandise P120,000 Less: unrecovered cost Unpaid balance P 200,000 Less: Deferred gross profit (200,000 X 32.5%) ___65,000 _135,000 Loss on repossession (P 15,000) 9-8: b Realized gross profit: Collections: Downpayment P 35,000 Installment received (205,000-200,000) ___5,000 Total 40,000 Gross Profit Rate (150,000 ÷ 240,000) _X 62.5% Realized gross profit P 25,000 Gain (loss) on repossession: Appraised value of repossessed merchandise P165,000 Less: unrecovered cost unpaid balance P 200,000 less: deferred gross profit (200,000 X 62.5%) __125,000 __75,000 Gain on repossession P 90,000

Installment Sales 157 9-9: b Sch.1 Applying Applying Balance to to of Date Collection Interest principal principal Apr-1 P7,000.00 Apr-1 750 750.00 6,250.00 May-1 625 125.00 500.00 5,750.00 Jun-1 625 115.00 510.00 5,240.00 Jul-1 625 104.80 520.20 4,719.80 Aug-1 625 __94.40 ___530.60 4,189.00 P439.20 P2,810.80 Gain (loss) on repossession: Market value of repossessed merchandise P 1,875 Less: unrecovered cost unpaid balance of principal (sch. 1) P 4,189 less: deferred gross profit (4,189 X 35%) __1,466 ___2,723 Loss on repossession (rounded) (P 848) Realized gross profit: Collection applying to principal (sch. 1) P2,810.80 Gross profit rate __X 35% Realized gross profit P 983.78 9-10: c Year of Sales 2010 2011 Deferred gross profit (Sales X Gross Profit Rate) 2010 (P300,000 X 30%) P 90,000 2011 (P450,000 X 40%) P 180,000 2010: Accounts written-off (P25,000 X 30%) ( 7,500) Realized gross profit (P100,000 X 30%) ( 30,000) 2011: Accounts written-off, 2010 (P75,000 X 30%) ( 22,500) Accounts written-off, 2011 (P50,000 X 40%) ( 60,000) Realized gross profit, 2010 (P50,000 X 30%) ( 15,000) Realized gross profit, 2011 (P150,000 X 40%) ________ ( 60,000) Deferred gross profit, 12/31/011 (P75,000) P 15,000 P 60,000 9-11: a Deferred gross profit, 2010 (P1,050,000 - 735,000) P 315,000 Realized gross profit, 2010 (P150,000 X 30%) ( 45,000) Deferred gross profit, 12/31/010 270,000 Realized gross profit, 2011 (P390,000-90,000) X 30% ( 90,000) Deferred gross profit, 12/31/011 P 180,000

158 Chapter 9 9-12: b 2010 2011 Deferred gross profit (Sales - Cost of Installment Sales) P 480,000 P450,000 Realized gross profit, 2010 (P630,000 X 40%) ( 252,000) Realized gross profit, 2010 (P450,000 X 40%) ( 180,000) Repossession (P2,400 x .40) (9,600) Realized gross profit, 2011 (P900,000 X 30%) _______ ( 270,000) Deferred gross profit, 12/31/011 (P218,400) P 38,400 P180,000 9-13: 1c Trade-in value P 30,000 Less: Actual value Estimated selling price P 25,000 Less: reconditioning cost P 1,250 normal gross profit (25,000 X 15%) __3,750 ___5,000 __20,000 Overallowance P 10,000 Realized gross profit: Collection: Downpayment P 5,000 Actual value of merchandise-Trade In 20,000 Installment collected (5,000 X 3) _15,000 P 40,000 Gross Profit Rate: Sales P 85,000 Overallowance ( 10,000) Net Sales P 75,000 Cost of Installment Sales _60,000 Gross Profit P 15,000 Gross Profit Rate (15,000 ÷ 75,000) _X 20% Realized Gross Profit P 8,000 9-14: c Collection excluding interest (P900,000-P300,000) P 600,000 Gross profit rate (P1,200,000 ÷ P3,600,000) X 33 1/3% Realized Gross Profit, December 31, 2011 200,000 Add Interests __300,000 Total Revenue P 500,000 9-15: a Wholesale value of repossessed merchandise P 4,000 Less: unrecovered cost Unpaid balance: Sales, 10/1/010 P 24,000 Collection, 2010 (6,000 ÷ 2,000) ( 8,000) Collection, 2011 (1,000 X 7) ( 7,000) P 9,000 Deferred gross profit (9,000 X 25%) __2,250 ___6,750 Loss on repossession (P 2,750)

Installment Sales 159 9-16: a Trade-in Value (P300 X 6) P 1,800 Less: Actual value Estimated selling price (P315 X 6) P 1,890 Less: Reconditioning cost (P25 X 6) P150 Gross Profit (P1,890 X 10%) _189 ___339 ___1,551 Over-allowance P 249 9-17: a Deferred gross profit, before adjustment P 76,000 Deferred gross profit, end 2010: P32,500 X (30% ÷ 130%) P 7,500 2011: P180,000 X (33 1/3% ÷ 133 1/3%) _45,000 __52,500 Realized gross profit on installment sales P 23,500 9-18: d Unpaid balance (P27,000 - P16,000) P 11,000 Multiply by gross profit rate (P734,400 ÷ P2,160,000) ___X 34% Deferred gross profit to be cancelled on repossession P 3,740 9-19: b Collection: 2010 Downpayment P 600,000 2011 Installment collection 600,000 Interest __540,000 Total P1,740,000 Cost to be recovered P4,000,000 Since cost is not yet fully recovered, then no gross profit is to be recognized in 2011. 9-20: d Regular Sales P 187,500 Cost of regular sales __112,500 Gross profit on regular sales P 75,000 Add: Realized gross profit on installment sales 2010 (25,000 X 50%) P12,500 2011 (62,500 X 55%) _34,375 __46,875 Total realized gross profit 121,875 Operating expenses ___31,250 Net income, 12/31/011 P 90,625

160 Chapter 9 9-21: a Installment sales – 2010 P785,000 Collections: Down payment (20% x 785,000) P157,000 Installment (40% x 628,000) 251,200 408,200 Installment accounts receivable 2010, 12/31/010 376,800 Gross profit rate on sales 35/135 Deferred gross profit- 2010, 12/31/010 P 97,689 9-22: a Regular sales P1,575,000 Cost of regular sales 1,050,000 Gross profit on regular sales 525,000 Realized gross profit on installment sales: Installment sales (1,093,750 x 240%) 2,625,000 Installment accounts receivable-12/31/011 1,575,000 Collections 1,050,000 Gross profit on rate on sales 140/240 612,500 Total realized gross profit 1,137,500 Operating expenses (1,137,500 x 70%) 796,250 Net income, 12/31/011 P 341,250 9-23: a Regular sales P375,000 Cost of regular sales 215,000 Gross profit on regular sales 160,000 Realized gross profit on installment sales: Collections excluding Interest (312,000 – 24,000)288,000 Gross profit rate (270,000/900,000) 30% 86,400 Total realized gross profit 246,400 Loss on repossession Fair value of repossessed merchandise 54,000 Less: Unrecovered cost (100,000 x 70%) 70,000 ( 16,000) Total realized GP after loss on repossession 230,400 Less: Operating expenses 72,000 Installment accounts written-off (44,000 x .70) 30,800 102,800 Net operating income 127,600 Interest income 24,000 Net income P151,600 9-24: 1. a Fair value of repossessed air conditioners (5 x P4,000) P20,000 Less unrecovered cost (P25,600 x 65%) 16,640 Loss on repossession P 3,360

Installment Sales 161 9-24, continued: 2. a Sales price (P100,000 x 90%) P90,000 Add underallowance (P12,000 – P10,000) 2,000 Adjusted sales value P92,000 Less cost of sales 59,800 Gross profit P32,200 Sales price P90,000 Less fair value of merchandise traded in 10,000 Balance P80,000 Fair value of merchandise traded in P12,000 Down payment (P80,000 x 20%) 16,000 Installment collected (P6,400 x 6) 38,400 Total collection P66,400 Gross profit rate (P32,200/92,000) 35% Realized gross profit P23,240 9-25: 1. a Sales price P850,000 Add underallowance on trade in (P97,500 – P80,000) 17,500 Adjusted sales price 867,500 Cost of sales 650,625 Gross profit P216,875 Gross profit rate (P216,875 / P867,500) 25% Sales price P850,000 Less trade in value of merchandise traded in 80,000 Balance 770,000 Cash downpayment (25% of P850,000) 212,500 Installment accounts receivable P557,500

Date Collection Interest income Principal Balance July P557,500 July P30,000 P5,575 P24,425 533,075 August 30,000 5,331 24,669 508,506 September 30,000 5,084 24,916 483,490 Total P15,990 P74,010

Fair value of repossessed merchandise P300,000

Unrecovered cost (P483,490 x 75%) 362.617.5 Loss on repossession P(62,617.5)

162 Chapter 9

9-24, continued: 2. a Fair value of merchandise traded in P 97,500 Cash downpayment 212,500 Installment collected applying to principal (see table) 74,010 Total collections 384,010 Gross profit rate 25% Realized gross profit P 96,003 9-25. c Fair value of repossessed merchandise P112,500 Loss on repossessions 13,500 Unrecovered cost 126,000 Divided by account defaulted 180,000 Cost ratio (P126,000 / P180,000) 70% Installment sales (P525,000 / 70%) P750,000 Installment accounts receivable, 12/31 (P108,000 / 30%) 360,000 Collections during the year P390,000 9-26: 1. a Trade in value of merchandise traded in P128,000 Less fair value: Estimated sales price P160,200 Reconditioning cost (7,660) Normal gross profit (20% x P160,200) (32,040) 120,500 Overallowance on merchandise traded in P 7,500 Net sales price (P525,000 – P7,500) P517,500 Cost of installment sales 414,000 Gross profit P103,500 Gross profit rate (P103,500 / P517,500) 20%

Installment Sales 163 9-26, continued:

Fair value of merchandise traded in (downpayment) P120,500 Installment collected (517,500 – P120,500) / 10 x 6 238,200 Total collections P358,700 Gross profit rate 20% Realized gross profit – Mew merchandise P 71,740 Realized gross profit – Repossessed merchandise: Sales price P128,750 Cost of repossessed merchandise 103,000 25,750 Total realized gross profit P 97,490 2. a Realized gross profit P 97,490 Loss on repossession: Fair value of repossessed merchandise P 93,750 Unrecovered cost (P397,000 x 4/10 x 80%) 127,040 (33,290) Net income P 64,200 9-27: b

2009 2010 2011 Installment sales (Cost of sales / Cost ratio) P828,000 P980,000 P1,250,000 Total collections (617,000) (578,000) (425,000) Accounts written off (7,200) Repossessed accounts (4,200) Installment accounts receivable, 12/31 Gross profit rates

P203,800 28%

P397,800 30%

P825,000 32%

Deferred gross profit, 12/31 (P440,404) P57,064 P119,340 P264,000 9-28 1. a 2. a Supporting computations:

2009 2010 2011 Installment accounts receivable, 1/1/011 P180,000 P625,000 P900,000 Installment accounts receivable, 12/31/011 - 125,000 650,000 Collections (P930,000) P180,000 P500,000 P250,000

Installment accounts receivable, 1/1/011: 2009 sales (P45,000 / 25%) P180,000 2010 sales (P150,000 / 24%) P625,000 Installment accounts receivable, 12/31/011: 2010 sales (P30,000 / 24%) P125,000 2011 sales (P195,000 / 30%) 650,000 Total P775,000

164 Chapter 9


Problem 9 – 1 Journal Entries: 2009 2010 2011 Installment A/R–2009 ............... 104,000 – – Installment A/R–2010 ............... – 116,000 – Installment A/R–2011 ............... – – 121,000 Installment Sales ................. 104,000 116,000 121,000 Cost of Installment Sales ........... 64,480 68,440 73,810 Inventory ............................. 64,480 68,440 73,810 Cash ........................................... 66,980 125,520 145,460 Installment A/R–2009 57,200 29,120 15,000 Installment A/R–2010 ......... – 71,920 26,680 Installment A/R–2011 ......... - _ 76,230 Interest Revenue ................. 9,780 24,480 27,550 Installment Sales ........................ 104,000 116,000 121,000 Cost of Installment Sales .... 64,480 68,440 73,810 Deferred Gross Profit–2009 39,520 – – Deferred Gross Profit–2010 – 47,560 – Deferred Gross Profit–2011 – – 47,190 Deferred Gross Profit–2009 ...... 21,736 11,066 5,700 Deferred Gross Profit–2010 ...... – 29,487 10,939 Deferred Gross Profit–2011 ...... – – 29,730 Realized Gross Profit .......... 21,736 40,553 46,369 Computations: 2009: P57,200 X .38 = P21,736 2010: P29,120 X .38 = P11,066 P71,920 X .41 = 29,987 Total RGP P40,553 2011: P15,000 X .38 = P 5,700 P26,680 X .41 = 10,939 P76,230 X .39 = 29,730 Total RGP P46,369


Problem 9 – 2 2010: Inventory ................................................................................................ 45,200 Cash ................................................................................................ 45,200 Notes Receivable 2010 (P32,000 + P62,000 + 3,600) .......................... 97,600 Unearned Interest Revenue (P7,167 + P3,600) .............................. 10,767 Installment Sales ............................................................................. 86,833 Cost of Installment Sales (P45,200 – P2,000 inventory increase) ......... 43,200 Inventory ......................................................................................... 43,200 Cash ... ................................................................................................... 35,600 Notes Receivable 2010 .................................................................... 35,600 Unearned Interest Revenue 2010 ........................................................... 3,600 Interest Revenue ............................................................................. 3,600 Installment Sales .................................................................................... 86,833 Cost of Installment Sales ................................................................ 43,200 Deferred Gross Profit on Installment Sales–2010 .......................... 43,633 Deferred Gross Profit on Installment Sales–2010 ................................. 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 2011: Inventory ................................................................................................ 52,020 Cash ................................................................................................ 52,020

Notes Receivable–2008 .......................................................................... 89,5001 Unearned Interest Revenue ............................................................. 11,9552 Installment Sales ............................................................................. 77,545

160,000 + (P50,000 + P5,500) – P26,000* = 89,500 *2010 Notes receivable collected in 2008 2Interest revenue from 2010 notes: P7,167 – P5,579 = P1,588 Interest revenue from 2011 notes: P5,500 – P1,588 = P3,912 Discount on notes receivable at end of 2011 ......................................... P 8,043 Interest revenue from 20011notes (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–2010 (P62,000 – P36,000) ................................ 26,000 Notes Receivable–2011 ................................................................... 29,500* * P89,500 – P60,000 = P29,500 Discount on Notes Receivable–2010...................................................... 1,588 Discount on Notes Receivable–2011...................................................... 3,912 Interest Revenue ............................................................................. 5,500 Installment Sales .................................................................................... 77,545 Cost of Installment Sales ................................................................ 44,020 Deferred Gross Profit on Installment Sales–2011 .......................... 33,525 Deferred Gross Profit on Installment Sales–2010 (P26,000 – P1,538 = P24,412; P24,412 x .5025) ................................................. 12,267 Deferred Gross Profit on Installment Sales–2011 ................................. 11,062* Realized Gross Profit on Installment Sales .................................... 23,329 p .4323 x (P29,500 – P3,912) = P11,062

166 Chapter 9 Problem 9 – 3

Deferred gross profit, 1/1 P24,000 1. 2009: Gross profit rate = ––––––––––––––––––––– = ––––––– = 40% Install. contracts rec'l, 1/1 P60,000 Deferred gross profit, 1/1 P24,000 2010: Gross profit rate = ––––––––––––––––––––– = ––––––– = 42% Install. contracts rec'l, 1/1 P140,000 Gross profit P86,000 2011: Gross profit rate =––––––––––––– = ––––––––––= 43% Installment sales P200,000 2. Journal Entries: Accounts Receivable ..................................................................................... 600,000 Sales ... ................................................................................................... 600,000 Installment Contracts Receivable – 2011 ..................................................... 200,000 Installment Sales .................................................................................... 200,000 Cost of Installment Sales ............................................................................... 114,000 Shipments on Installment Sales .............................................................. 114,000 Purchases .. ................................................................................................... 476,000 Cash ... ................................................................................................... 476,000 Selling Expenses............................................................................................ 210,000 Cash ... ................................................................................................... 210,000 Cash ..... .... ................................................................................................... 790,000 Accounts Receivable .............................................................................. 560,000 Installment Contracts Receivable – 2009 .............................................. 40,000 Installment Contracts Receivable – 2010 .............................................. 80,000 Installment Contracts Receivable – 2011 .............................................. 110,000 Adjusting Entries: Installment Sales ........................................................................................... 200,000 Cost of Installment Sales ........................................................................ 114,000 Deferred Gross Profit on Installment sales – 2011 ............................... 86,000 Deferred Gross Profit – 2009 (P40,000 x 40%) ........................................... 16,000 Deferred Gross Profit – 2010 (P80,000 x 42%) ........................................... 33,600 Deferred Gross Profit – 2011 (P110,000 x 43%) ......................................... 47,300 Realized Gross Profit ............................................................................. 96,900 Doubtful Accounts Expense (1/4 x 1% x P600,000) ...................................... 1,500 Allowance for Doubtful Accounts .......................................................... 1,500 Closing Entries: Sales ..... .... ................................................................................................... 600,000 Merchandise Inventory, December 31 .......................................................... 260,000 Shipments on Installment Sales ..................................................................... 114,000 Merchandise Inventory, January 1 ........................................................ 240,000 Purchases ............................................................................................... 476,000 Selling Expenses .................................................................................... 210,000 Doubtful Accounts Expense ................................................................... 1,500 Income Summary ................................................................................... 46,500 Realized Gross profit .................................................................................... 96,900 Income Summary ................................................................................... 96,900 Income Summary ........................................................................................... 143,400 Retained Earnings ................................................................................. 143,400

Installment Sales 167 Problem 9-3, continued: 3. Good Buy Mart Statement of Comprehensive Income Year Ended December 31, 2011 Sales ..... .... ................................................................................................... P600,000 Cost of sales: Merchandise inventory, January 1 ......................................................... P240,000 Purchases ............................................................................................... 476,000 Cost of goods available for sale ............................................................. 716,000 Less Shipments on installment sales ...................................................... 114,000 Cost of goods available for regular sales ............................................... 602,000 Less Merchandise inventory, December 31 ........................................... 260,000 342,000 Gross profit on regular sales ......................................................................... 258,000 Add Realized gross profit on installment sales (Schedule 1) ........................ 96,900 Total realized gross profit ............................................................................. 354,900 Operating expenses: Selling expenses ..................................................................................... 210,000 Doubtful accounts expense .................................................................... 1,500 211,500 Net income ................................................................................................... P143,400 Schedule 1: Years of Installment Sales 2006 2007 2008 Total Collections .......................................... P40,000 P80,000 P110,000 Multiply by Gross profit rate ............... 40% 42% 43% Realized gross profit ............................ P16,000 P33,600 P 47,300 P 96,900 4. Good Buy Mart Statement of Financial Position December 31, 2011 A s s e t s

Cash ..... .... ................................................................................................... P144,000 Merchandise inventory .................................................................................. 260,000 Accounts receivable ...................................................................................... P 62,000 Allowance for doubtful accounts .................................................................. 3,500 58,500 Installment contracts receivable – 2009 ........................................................ 20,000 Installment contracts receivable – 2010 ........................................................ 60,000 Installment contracts receivable – 2011 ........................................................ 90,000 Other assets ................................................................................................... 200,000 Total Assets ........................................................................................... P832,500 Liabilities and Equity

Liabilities: Accounts payable ................................................................................... P 60,000 Deferred gross profit on installment sales – 2009 .................................. 8,000 Deferred gross profit on installment sales – 2010 .................................. 25,200 Deferred gross profit on installment sales – 2011 .................................. 38,700 Total Liabilities ...................................................................................... 131,900 Equity: Capital stock .......................................................................................... P406,000 Retained earnings ................................................................................... 294,600 700,600 Total Liabilities and Equity ................................................................... P832,500

168 Chapter 9

Problem 9 – 4 Deferred gross profit, 1/1 = P21,600 + P1,200 = P22,800 1. 2010: GP rate = ––––––––––––––––––––– = –––––––––––––––– = ––––––– = 30% Install. contracts rec'l, 1/1 P24,000 + P52,000 P76,000 Gross profit P150,000 – P97,500 P52,500 2011: GP rate = –––––––––––––– = –––––––––––––––– = –––––––– = 35% Installment sales P150,000 P150,000 2. Installment Sales ........................................................................................... 150,000 Cost of Installment Sales ........................................................................ 97,500 Deferred Gross Profit, 2011 .................................................................. 52,500 Deferred Gross profit, 2010 .......................................................................... 14,400 Deferred Gross Profit, 2011 ......................................................................... 25,900 Realized Gross Profit ............................................................................. 40,300 Computation: 2010 2011 Sales Sales Total Installment contracts receivable, 1/1 .................... P76,000 P150,000 Less Installment contracts receivable, 12/31 ....... 24,000 76,000 Total credit for the period .................................... 52,000 74,000 Less Credit representing repossession ................. 4,000 – Credit representing collections ............................ P48,000 P 74,000 Multiply by Gross profit rate ............................... 30% 35% Realized gross profit ............................................ P14,400 P 25,900 P 40,300 Sales ..... .... ................................................................................................... 212,000 Realized Gross Profit .................................................................................... 40,300 Loss on Repossession ............................................................................. 400 Cost of Sales .......................................................................................... 165,000 Selling and Administrative Expenses ..................................................... 66,000 Income Summary ................................................................................... 20,900 Income Summary ........................................................................................... 20,900 Retained Earnings ................................................................................. 20,900 3. Apple Company Statement of Comprehensive Income Year Ended December 31, 2011

Sales ..... .... ................................................................................................... .................. P212,000 Cost of sales .................................................................................................. .................. 165,000 Gross profit on regular sales ......................................................................... .................. 47,000 Add Realized gross profit on installment sales (Schedule 1) ........................ .... 40,300 Total realized gross profit ............................................................................. .................. 87,300 Less Loss on repossession............................................................................. .... 400 Total realized gross profit after adjustment for loss on repossession ............ .................. 86,900 Selling and administrative expenses ............................................................. .................. 66,000 Net income ................................................................................................... .................. P 20,900

Installment Sales 169 Problem 9-4, continued:

Schedule 1 2010 2011 Sales Sales Total Installment contracts receivable, 1/1 ....................... P76 000 P150,000 Less Installment contracts receivable, 12/31 ........... 24,000 76,000 Total credit for the period ........................................ 52,000 74,000 Less Credit representing repossession ..................... 4,000 – Credit representing collections ................................ P48,000 P 74,000 Multiply by Gross profit rate ................................... 30% 35% Realized gross profit ................................................ P14,400 P 25,900 P40,300

Problem 9 – 5 1. Cost of Installment Sales .................................................................... 54,400 Shipments on Installment Sales .................................................... 54,400 Installment Sales ................................................................................. 80,000 Cost of Installment Sales .............................................................. 54,400 Deferred Gross Profit, 2011......................................................... 25,600

Gross profit = P25,600 ÷ P80,000 = 32%

Deferred Gross Profit, 2010 ............................................................... 14,000 Deferred Gross Profit, 2011 ............................................................... 8,000 Realized Gross Profit ................................................................... 22,000 Computation: 2010 2011 Sales Sales Total Installment contracts receivable, 1/1 ............. P82,000 P 80,000 Less Installment contracts receivable, 12/31 . _ 36,000 _55,000 Total credit for the period.............................. 46,000 25,000 Less Credit representing repossession ........... __6,000 ___ – Credit representing collections ...................... P40,000 P 25,000 Multiply by Gross profit rate ......................... __35%* ___32% Realized gross profit ..................................... P14,000 P 8,000 P 22,000 DGP, 1/1 P28,700 (26,600 + 2,100) *2010 Gross profit rate= ––––––– = ––––––– = 35% ICR, 1/1 P82,000 (36,000 + 40,000 + 6,000)

170 Chapter 9 Sales .... ... ........................................................................................... 200,000 Merchandise Inventory, December 31 ................................................ 52,000 Shipments on Installment Sales .......................................................... 54,400 Merchandise Inventory, January 1 ............................................... 60,000 Purchases ..................................................................................... 180,000 Repossessed Merchandise ............................................................ 3,000 Loss on Repossession ................................................................... 900 Operating Expenses ..................................................................... 53,000 Income Summary .......................................................................... 9,500 Realized Gross Profit .......................................................................... 22,000 Income Summary .......................................................................... 22,000 Income Summary ................................................................................ 31,500 Retained Earnings ........................................................................ 31,500 2. PPG Discount Center, Inc. Statement of Comprehensive Income Year Ended December 31, 2011 Regular Installment Total Sales .... ... ................................................... P200,000 P80,000 P280,000 Cost of sales: Inventory, January 1 ............................. P 60,000 Purchases .............................................. 180,000 Repossessed merchandise .................... __3,000 Cost of goods available for sale ........... 243,000 Less Shipments on installment sales .... _54,400 Cost of goods available for regular sales 188,600 Less Inventory, December 31............... _52,000 _136,600 54,400 191,000 Gross profit ................................................. P 63,400 25,600 89,000 Less Deferred gross profit on installment sales, 2011 ............................................ 17,600 17,600 Realized gross profit, 2011 ......................... 8,000 71,400 Add Realized gross profit on 2010 installment sales ................................... 14,000 14,000 Total realized gross profit ........................... 22,000 85,400 Less Loss on repossession .......................... ___900 __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 171 Problem 9 – 6

1. London Products Schedule of Cost of Goods Sold Year Ended December 31, 2011 Merchandise inventory, January 1 ................................................................ .................. P 48,000 Purchases ................................................................................................... .................. 238,000 Freight-in ................................................................................................... .................. 12,000 Repossessed merchandise ............................................................................. ..... 14,000 Cost of goods available for sale .................................................................... .................. 312,000 Less Merchandise inventory, December 31 .................................................. .................. 52,000 Cost of goods sold ......................................................................................... .................. P260,000 2. London Products Schedule of Allocation of Cost of Goods Sold Year Ended December 31, 2011 On Cash Ratio to Allocated Amount Price Basis Total Cost Cash sales .................. P60,000 P 60,000 60/400 P 39,000 Charge sales ................. 120,000 ÷ 120% 100,000 100/400 65,000 Installment sales ........... 300,000 ÷ 125% 240,000 240/400 156,000 P 400,000 P260,000 3. London Products Statement of Comprehensive Income Year Ended December 31, 2011 Installment Charge Cash Total Sales Sales Sales Sales ..... .... ....................................... P480,000 P 300,000 P120,000 P 60,000 Cost of goods sold ............................. 260,000 156,000 65,000 39,000 Gross profit ....................................... P 220,000 P 144,000 P 55,000 P 21,000 Less Unrealized gross profit: On installment contracts receivable,12/31 (192,000 x 144/300) 92,160 92,160 Realized gross profit ......................... 127,840 51,840 Add Realized gross profit on prior years' sales (Schedule 1): 2009 .................................... 19,200 2010 .................................... 14,700 33,900 33,900 Total realized gross profit ................. 161,740 85,740 Less Loss on repossession (Schedule 2) ............................... 10,200 10,200 Total realized gross profit after adjustment for loss on repossession ............................... 151,540 P 75,540 Less Operating expenses ................... 93,000 Net income ....................................... P 58,540

172 Chapter 9 Problem 9-6, continued: Schedule 1 2009 2010 Installment contracts receivable, January 1: 2009 – P32,000 ÷ 40% ................................................................. P80,000 2010 – P56,000 ÷ 35% ................................................................. P160,000 Less Installment contracts receivable, December 31 .......................... _22,000 __90,000 Total credits ........................................................................................ 58,000 70,000 Less Credit representing repossession ................................................ _10,000 28,000 Total collections.................................................................................. P48,000 P 42,000 Multiply by Gross profit rate .............................................................. ___40% ___35% Realized gross profit ........................................................................... P19,200 P 14,700 Schedule 2 2009 2010 Total Fair market value of repossessed merchandise .... P 2,000 P12,000 P 14,000 Less Unrecovered cost: Unpaid balance .............................................. 10,000 28,000 38,000 Less Unrealized profit – 2009 – P10,000 x 40% ............................. 4,000 2010 – P28,000 x 35% ............................. 9,800 13,800 Balances ............................................................ __6,000 18,200 __24,200 Gain (loss) on repossession ................................. P(4,000) P( 6,200) P( 10,200)

Problem 9 – 7 1. 2010 2011 2010 2010 installment sales (P400,000 x 42%*) .................................. P 168,000 2011: 2010 installment sales (P173,000 x 42%) .................................... P 72,660 2011 installment sales (P560,000 x 38.5%*) ............................... ________ __215,600 Deferred gross profit ........................................................................... P 168,000 P 288,260 *Computation of Gross profit percentages (see next page) 2010 2011 Installment sales..................................................................................P2,210,000 P3,100,000 Less Trade-in allowances (P226,000 – P158,000).............................. _______– ____68,000 Adjusted installment sales .................................................................. 2,210,000 _3,032,000 Cost of sales: Inventories, January 1 (new) ........................................................ – 420,000 Purchases (new) ........................................................................... 1,701,800 1,767,000 Repossessed merchandise ............................................................ – _83,000* Cost of goods available for sale ................................................... 1,701,800 2,270,000

Installment Sales 173 Problem 9-7, continued: Less: Inventories, December 31 – New merchandise................................................................... 420,000 358,820 Repossessed merchandise ...................................................... _______– ____46,500 Total ....................................................................................... 420,000 405,320 Cost of sales ................................................................................. 1,281,800 _1,864,680 Gross profit ......................................................................................... P 928,200 P1,167,320 Gross profit percentages ..................................................................... 42% 38.5% *2010 : P195,000 x 20% =P39,000 2011 : P110,000 x 40% =_44,000 P83,000 2. Uncollectible installment contracts expense, per books P 99,000 Correct Uncollectible installment contracts expense: Fair market value of repossessed merchandise – 2010 sales (P195,000 x 20%) ........................... P 39,000 2011 sales (P110,000 x 40%) ........................... __44,000 83,000 Unrecovered cost – 2010 sales [P105,000 x (100% – 42%)] ........... 60,900 20011 sales [P82,000 x (100% – 38.5%)] ........ __50,430__ 111,330 28,330 Adjustment to Uncollectible installment contracts expense P 70,670 3 Fortune Sales Corporation Statement of Comprehensive Income Year Ended December 31, 2011 Cash Installment Total Sales Sales Sales Sales ...................................................................... P205,000 P3,032,000 P3,237,000 Cost of sales ................................................................... _158,000 _1,864,680 _2,022,680 Gross profit .................................................................... P 47,000 1,167,320 1,214,320 Less Unrealized gross profit on 2011 installment sales (Schedule 1) .................................................... __247,170 __247,170 Realized gross profit on 2011 sales ............................... 920,150 967,150 Add Realized gross profit on 2010 installment sales (Schedule 2) .................................................... ___51,240 ___51,240 Total realized gross profit .............................................. 971,390 1,018,390 Less Uncollectible installment contracts expense.......... ___28,330 ___28,330 Total realized gross profit after adjustment ................... P 943,060 990,060 Operating expenses ........................................................ __592,960 Net income ..................................................................... P 397,100

174 Chapter 9

Schedule 1 Installment contracts receivable 2011, December 31 ....... ............ P 560,000 Installment contracts receivable 2011 defaulted ............... ............ ___82,000 Total .... ... ......................................................................... ............ P 642,000 Multiply by 2011 gross profit percentage ......................... ............ ___38.5% Unrealized gross profit on 2011 installment sales ............ ............ P 247,170 Schedule 2 Installment contracts receivable 2010, January 1 ............................... P 400,000 Less Installment contracts receivable 2010, December 31 ................. __173,000 Total credits for the period ................................................................. 227,000 Less Installment contracts receivable 2010 defaulted ........................ __105,000 Total collections.................................................................................. P 122,000 Multiply by 2010 gross profit percentage ........................................... _____42% Realized gross profit on 2010 installment sales .................................. P 51,240 1. Apportionment of cost (P600,000) to Lots 1, 2 and 3: Lot 1 : 2/3 x P360,000 .................................... P 240,000 Lot 2 : 2/3 x P240,000 .................................... 160,000 Lot 3 : 1/3 ....................................................... P120,000 1/3 x P240,000 ........................................ __80,000 __200,000 Total cost ....................................................... P 600,000 Journal Entries for 2010 March 31 Cash .... ... ...................................................................................... 36,000.00 Notes Receivable (Lot 2) ................................................................ 364,000.00 Lot 2 ...................................................................................... 160,000.00 Deferred gain on Sale of Land ................................................ 240,000.00

June 30 Cash .... ... ...................................................................................... 120,000.00 Notes Receivable (Lot 3) ................................................................ 720,000.00 Lot 3 . ...................................................................................... 200,000.00 Deferred Gain on Sale of Land ............................................... 640,000.00 Cash .... ... ...................................................................................... 16,000.00 Interest Income (P364,000 x 12% x 3/12) ............................... 10,920.00 Notes Receivable (Lot 2) ......................................................... 5,080.00

September 30 Cash .... ... ...................................................................................... 16,000.00 Interest Income (P358,920 x 12% x 3/12) ............................... 10,767.60 Notes Receivable (Lot 2) ......................................................... 5,232.40


Problem 9-8, continued:

October 31 Cash .... ... ...................................................................................... 72,000.00 Notes Receivable (Lot 1) ................................................................ 288,000.00 Lot 1 . ...................................................................................... 240,000.00 Deferred Gain on Sale of Land ............................................... 120,000.00

December 31 Cash .... ... ...................................................................................... 78,000.00 Notes Receivable (Lot 1) ......................................................... 6,240.00 Notes Receivable (Lot 2) ......................................................... 5,389.37 Notes Receivable (Lot 3) ......................................................... 6,800.00 Interest Income ........................................................................ 59,570.63 Computation: Total Lot 1 Lot 2 Lot 3 Collections ....................................... P78,000.00 P12,000.00 P16,000.00 P50,000.00 Apply to interest: Lot 1 – P288,000.00 x 12% x 2/12 5,760.00 Lot 2 – P353,687.60 x 12% x 3/12 59,570.63 10,610.63 Lot 3 – P720,000.00 x 12% x 6/12 _________ _________ _________ _43,200.00 Apply to principal ............................ P18,429.37 P 6,240.00 P 5,389.37 P 6,800.00 2. 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 Lot 2 Lot 3 Collections applied to principal ....... P78,240.00 P51,701.77 P126,800.00 Multiply by Gross profit rates: Lot 1 – P120,000 ÷ P360,000 ..... 33.33% Lot 2 – P240,000 ÷ P400,000 ..... 60% Lot 3 – P640,000 ÷ P840,000 ..... _________ _________ _____76% Realized gain ................................... P26,080.00 P31,021.06 P96,368.00 3. 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

176 Chapter 9

Problem 9 – 9

Galaxy Investment Company Income Statement Year Ended December 31, 2011 Sales Schedule 1) ................................................................................................... P 8,060,000 Cost of sales (Schedule 2) ....................................................................................... 1,612,000 Gross profit .... .... ................................................................................................... 6,448,000 Less Sales commissions ......................................................................................... 221,000 Gross profit .... .... ................................................................................................... 6,227,000 Less Deferred gross profit

Installment Notes Balance P5,370,000 ––––––––––––––––––––– =–––––––––– =67% x P6,227,000 4,172,090 Installment Sales P8,060,000

Realized gross profit ............................................................................................... 2,054,910 Expenses: Advertising and promotion ........................................................................... P 730,000 Sales manager's salary................................................................................... 120,000 General office expenses (1/4 x P236,000) .................................................... 59,000 909,000 Net profit ...... .... ................................................................................................... P 1,145,910 Schedule 1 Total Cash Installment Sales Price Received Notes Balance A lots : 26 @ P150,000 ............................................... P3,900,000 P1,650,000 P 2,250,000 B lots : 32 @ P100,000 ................................................ 3,200,000 800,000 2,400,000 C lots : 12 @ P80,000 .................................................. 960,000 240,000 720,000 ........................................................ P8,060,000 P2,690,000 P 5,370,000 Schedule 2 Number of Unit Total Class Lots Price Sales Value A ... ...... .... ........................................................ 80 P150,000 P12,000,000 B .... ...... .... ........................................................ 100 100,000 10,000,000 C .... ...... .... ........................................................ 120 80,000 9,600,000 Total ... ........................................................ 300 P31,600,000 Cost of tract: Cost of land ................................................................................................... P 4,800,000 Legal fees, etc. .............................................................................................. 600,000 Grading contract............................................................................................ 225,000 Water and sewerage system contract ............................................................ 184,900 Paving contract ............................................................................................. 266,300 General office expenses (3/4 x P236,000) .................................................... 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


Problem 9 – 10

Rizal Company Statement of Comprehensive Income Year Ended December 31, 2011 Installment sales [(P14,300 x 7) + (P725 x 4)] ........................................... P103,000 Cost of goods sold on installment (schedule 1) ........................................... __79,310 Gross profit .. ... ........................................................................................... 23,690 Less Deferred gross profit on 2011 sales (P103,000 – P21,000 = P82,000 x 23%*) .......................................... __18,860 Realized gross profit on 2011 sales ............................................................. 4,830 Add Realized gross profit on prior years' sales – 2009 : P60,000 x 33-1/3* .................................................................... P20,000 2010 : P115,000 x 35%* ..................................................................... _40,250 __60,250 Total realized gross profit ............................................................................ 65,080 Less Loss on repossession (Schedule 4) ...................................................... __33,100 Total realized gross profit after adjustment ................................................. 31,980 General and administrative expenses .......................................................... __50,000 Net income (loss) ......................................................................................... P(18,020) *See Schedule 3 Schedule 1 Purchases (P10,500 x 8) .............................................................................. P 84,000 Repossessed merchandise ............................................................................ ___2,520 Cost of goods available for sale................................................................... 86,520 Less Inventory, December 31 – Number of units on hand .................................................................... 1 Multiply by average unit cost (Schedule 2) ........................................ P 7,210 ___7,210 Cost of goods sold on installment ............................................................... P 79,310 Schedule 2 Purchases during 2008 (P10,500 x 8) .......................................................... P 84,000 Add Repossessed merchandise .................................................................... ___2,520 Total ..... ...... ... ........................................................................................... P 86,520 divide by Number of units (8 + 4)............................................................... _____12 Average unit cost ......................................................................................... P 7,210

178 Chapter 9 Problem 9-10, continued: Schedule 3 2009 2010 2011 Sales – 2009 : P15,000 x 10 ....................................... P150,000 2010 : P14,000 x 20 ....................................... P280,000 2011 : P14,300 x 7 ......................................... 100,100 P725 x 4 .............................................. _______ _______ __2,900 Sales ........................................................ 150,000 280,000 103,000 Cost of goods sold: Inventory, January 1 ........................................ – 20,000 – Purchases ........................................................ 120,000 162,000 84,000 Repossessed merchandise ................................ _____– _____– _2,520 Cost of goods available for sale ....................... 120,000 182,000 86,520 Less Inventory, December 31 .......................... _20,000 _____– _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% Schedule 4 Fair market value of repossessed merchandise............................................ P 2,520 Less Unrecovered cost – Unpaid balance: Original sales amount (P14,000 x 4) ............................................ P 56,000 Collections prior to repossession .................................................. __1,200 Total . ........................................................................................... 54,800 Less Unrealized profit (P54,800 x 35%) ............................................ _19,180 _35,620 Loss on repossession ................................................................................... P33,100

Problem 9-11 The key to this solution is solving the gross profit rate for 2009 (3)

1. P39,000 (P50,000 – P11,000) 2. P11,000 (P60,000 x 0.22) 3. 22%: 2010 realized gross profit on 2010 cash collections, P5,000 (P20,000 x .25)

2010 realized gross profit on 2009 cash collections, P5,500 (P10,500 – P5,000) Gross profit rate – 2009, 22% (P5,500 / P25,000 cash collections)

4. P5,000 (P1,100 / .22) 5. P60,000 (P80,000 – P20,000) 6. P20,000 (P80,000 x .25) 7. P120,000 (P91,000 + P28,200) 8. 23.5% (P28,200 / P120,000) 9. P25,275: 2011 realized gross profit on 2009 collections, (P10,000 x .22)

2011 realized gross profit on 2010 collections, (P50,000 x .25) 2011 realized gross profit on 2011 collections, (P45,000 x .235)


Problem 9-12

2009 2010 2011 Installment sales P92,000 P103,000 P115,000 (a) Cost of installment sales 58,880 (b) 62,830 74,750 Gross profit rates 36% 39% (c) 35% Cash collections: 2009 sales 27,200 48,300 12,200 2010 sales 36,600 33,280 (d) 2011 sales 43,450 Realized gross profit 0 (e) 16,620 (f) 19,250 (g) Computations:

(a) P74,750 / .66 = P115,000 (b) P92,000 x .64 = P58,880 (c) 1 - (P62,830 / P103,000) = 39%

(d) Gross profit recognized in 2011 P19,250 All costs from 2009 sales are recovered. Cash collections equals gross profit (12,200) Cash collected goes to recover costs – gross profit 0 Gross profit reported in 2011 from 2010 sales P 7,050

Cost of 2010 sales P62,830 Costs recovered in 2010 36,660 Costs to be recovered in 2011 26,230 Cash collected related to 2010 sales P33,280

(e) Cash collections in 2009 do not exceed cost of sales: Realized gross profit in 2009 = P0

(f) Cash collections for 2009 sales (P27,200 + P48,300) P75,500 Cost of 2009 sales 58,880 Realized gross profit in 2010 P16,620 (g) Cash collections for 2009 sales P12,200 Cash collections for 2010 sales (P36,600 + P33,280) P69,880 Cost of 2010 sales 62,830 7,050 Realized gross profit in 2011 P19,250

Problem 9-13

1. Repossessed Inventory 2010 repossessi0ns (P37,500 x 20%) P 7,500 2011 repossessions (P24,000 x 50%) 12,000 P19,500 Trade-In inventory: Fair value P40,875 Sold 27,000 13,875 Total inventory P33,375

180 Chapter 9 Problem 9-13, continued: 2. Repossessed Inventory 19,500 Loss on repossession or Allowance for bad debts 13,900 Accounts receivable 33,400 To record repossessions on defaulted contracts. Note: No deferred gross profit is cancelled because no Ggoss profit rate on installment sales is given. 3. Sales (P64,035 – P40,875) 23,160 Cost of trade-Ins sold 27,000 Trade-In inventory 11,160 Loss on trade-in inventory 12,000 Sales-trade-ins 27,000 To reduce trade-in inventory to wholesale market value And to reflect this in lower sales and losses. To reflect sales and cost of sales for trade-ins in separate accounts.

Long-Term Construction Contracts 181

CHAPTER 10

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 10-1: a Percentage of Completion Method: Contract Price P1,000,000 Less: Total estimated cost Cost incurred P 200,000 Estimated remaining cost _400,000 __600,000 Gross profit estimated 400,000 % of completion (200,000/600,000) __33 1/3% Gross profit to be recognized P 133,333 Zero Profit Method: 0 10-2: a P100,000 2007 2008 Contract Price P9,000,000 P9,000,000 Less: Total estimated cost _7,800,000 _8,100,000 Estimated gross profit 1,200,000 900,000 % of completion: 2007 (3,900,000/7,800,000) 50% 2008(6,300,000/8,100,000) _________ ______78% Gross profit earned to date 600,000 700,000 Less: Gross profit earned in prior year ________– ___600,000 Gross profit earned each year P 600,000 P 100,000 10-3: a Contract Price P6,000,000 Less: Total estimated cost (3,600,000 + 1,200,000) _4,800,000 Estimated gross profit 1,200,000 % of completion (3,600,000/4,800,000) _____75% Gross profit earned to date 900,000 Less: Gross profit earned in 2007 __600,000 Gross profit earned in 2008 P 300,000 10-4: b Contract Price P3,000,000 Less: Total estimated cost (930,000 + 2,170,000) _3,100,000 Loss (P 100,000)

182 Chapter 10 10-5: b Total cost to date, 2011 (4,800,000 X 60%) P2,880,000 Less: Cost incurred in 2010 (4,500,000 X 20%) __900,000 Cost incurred in 2011 P1,980,000 10-6: a Percentage of Completion Method: Contract Price P3,000,000 Less: Total estimated cost (900,000/1,800,000) _2,700,000 Estimated gross profit 300,000 % of completion (900,000/2,700,000) ___33.33% Gross profit recognized, 2010 100,000 Add: Cost Incurred ___900,000 Construction in Progress - 2010 P 1,000,000 Zero Profit Method: Cost incurred to Construction in Progress - 2010 P 900,000 10-7: a 2010 2011 Contract Price P4,200,000 P4,200,000 Less: Total estimated cost _3,000,000 _3,750,000 Estimated gross profit 1,200,000 450,000 % of completion _____20% ____100% Gross Profit earned to date 240,000 450,000 Gross Profit earned in prior year _______– __240,000 Gross Profit earned this year P 240,000 P 210,000 10-8: b Collections: Contract Billings P 47,000 Less: Accounts receivable ___15,000 Collections P 32,000 Initial Gross Profit: Contract Price P 800,000 Gross Profit rate: Income recognized 10,000 Divide by Construction in Progress 50,000 = _____20% Initial Gross Profit P 160,000

Long-Term Construction Contracts 183 10-9: a Gross profit (loss) earned in 2011 (P 20,000) Gross profit earned in prior years _180,000 Gross profit earned to date - 2011 160,000 Divide by percentage of completion - 2011 ___100% Estimated gross profit - 2011 160,000 Less: Contract price 2,000,000 Total estimated cost 1,840,000 Less: Cost incurred - 2011 _820,000 Cost incurred to date - 2010 1,020,000 Less: Cost incurred - 2009 __360,000 Cost incurred in 2010 P 660,000 10-10: b Gross profit earned to date - 2010 (P40,000 + P140,000) P 180,000 Divide by estimated gross profit - 2010: Contract price P2,000,000 Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15% __300,000 Percentage of completion - 2010 60% 10-11: a, Refer to Q 10-10 solutions. 10-12: d Contract price P2,000,000 Estimated gross profit - 2010 (Refer to Q 10-10) __300,000 Total estimated cost 1,700,000 Less: Cost incurred to date - 2010 (refer to Q 10-9) 1,020,000 Estimated cost to complete - 2010 P 680,000 10-13: d 2010: Construction in progress P 244,000 Less: Construction costs __210,000 Gross profit recognized - 2010 P 34,000 2011: Construction in progress (P728,000-P244,000) P 484,000 Less: Construction costs __384,000 Gross profit recognized - 2011 P 100,000

184 Chapter 10 10-14: d Project 1 Project 2 Percentage of Completion Method: Contract price P 420,000 P 300,000 Less: Total estimated cost Cost incurred to date - 2011 P 240,000 P 280,000 Estimated cost to complete __120,000 ___70,000 Total __360,000 __350,000 Estimated gross profit (Loss) 60,000 (50,000) Percentage of completion __66.67% _______– Profit (loss) to be recognized P 40,000 (P 50,000) Total is (P10,000) Zero Profit Method - The loss (P50,000) for project 2 only. 10-15: a 2009 2010 2011 Contract price (cost X 120%) P3,744,000 P3,744,000 P3,744,000 Less: Total estimated costs (1) Cost incurred to date 546,000 1,544,400 3,120,000 Estimated cost to complete _2,054,000 _1,315,000 ________– (2) Total _2,600,000 _2,860,000 _3,120,000 Estimated gross profit 1,144,000 884,000 624,000 Percentage of completion (1 ÷ 2) _____20% _____54% ____100% Gross profit earned to date 240,240 477,360 624,000 Gross profit earned in prior years _______– __240,240 __477,360 Gross profit earned this year P 240,240 P 237,120 P 146,640 10-16: d 2010 2011 Contract price P6,300,000 P6,300,000 Less: Total estimated cost Cost incurred to date 1,425,000 3,040,000 Estimated cost to complete _4,075,000 _1,960,000 Total P5,500,000 P5,000,000 Estimated gross profit 800,000 1,300,000 Percentage of completion: 2010 (1,425,000 - 50,000) ÷ 5,500,000 25% 2011 (3,040,000 - 50,000) ÷ 5,000,000 ________– __59.80% Profit earned to date 200,000 777,400 Less: Gross profit earned in prior year ________– __200,000 Gross profit earned this year P 200,000 P 577,400

Long-Term Construction Contracts 185 10-17: a Cash collections: Progress billings P1,500,000 Less: Accounts receivable, end __500,000 Collection P1,000,000 Cost incurred to date: Construction in Progress P1,600,000 Less: Gross profit earned __200,000 Cost incurred to date P1,400,000 10-18: d Percentage of Completion Method: Apartment A Apartment B 2010 2011 2010 2011 Contract price 1,620,000 1,620,000 2,520,000 2,520,000 Less: Total Estimated Costs (1) Cost incurred to date P 600,000 P1,200,000 P1,560,000 P2,310,000 Estimated cost to complete 840,000 240,000 690,000 – (2) Total estimated cost 1,440,000 1,440,000 2,250,000 2,310,000 Estimated Gross Profit 180,000 180,000 270,000 210,000 Percentage of completion (1 ÷ 2) _41.67% _83.33% _69.33% _100.00% Gross profit earned to date 75,000 150,000 187,200 210,000 Less: Gross profit earned in Prior years _______– ___75,000 _______– __187,200 Gross Profit earned this year P 75,000 P 75,000 P 187,000 P 22,800 Total Gross Profit 20 11 (P75,000 + P22,800) P97,800 Zero Profit Method : P210,000 gross profit earned in 2011 for Apartment B. 10-19: d 2010 2011 Contract price: 2010 P6,000,000 2011 (P6,000,000-P50,000) _________ P5,950,000 Less: Total estimated costs (1) Cost incurred to date 2,340,000 2,650,000 Estimated cost to complete 260,000 – (2) Total estimated cost 2,600,000 2,650,000 Estimated Gross Profit 3,400,000 3,300,000 Percentage of completion (1 ÷ 2) ____90% ___100% Gross profit earned to date 3,060,000 3,300,000 Less: Gross profit earned in Prior year _______– 3,060,000 Gross Profit earned this year P3,060,000 P 240,000 186 Chapter 10

10-20: a 2009 2010 2011 (1) Cost incurred to date P3,400,000 P5,950,000 P6,150,000 (2) Estimated cost to complete 1,600,000 150,000 – (3) Total Estimated Costs 5,000,000 6,100,000 6,150,000 Percentage of completion (1 ÷ 3) 68% 98% 100% Contract price P6,000,000 P6,000,000 P6,000,000 Less: Total estimated cost 5,000,000 6,100,000 6,150,000 Estimated Gross Profit 1,000,000 (100,000) (150,000) Percentage of completion 68% 100% 100% Gross profit earned (loss) to date 680,000 (100,000) (150,000) Add: Cost incurred to date 3,400,000 5,950,000 6,150,000 Construction in Progress 4,080,000 5,850,000 6,000,000 Less: Contract billings 3,200,000 5,200,000 6,000,000 Balance P 880,000 P 650,000 – 10-21: d Construction in Progress: Cost incurred to date, 2010 P2,625,000 Gross profit (loss), 2010 (Schedule 1) (125,000) P2,500,000 Less: Contract billings, 2009 (P3,250,000 x 75%) 2,437,500

Excess of Construction in Progress over Contract Billings (CA) P 62,500 Schedule 1 – Computation of gross profit earned: 2009 2010 Contract price P3,250,000 P3,250,000 Total estimated cost: Cost to date 1,075,000 2,625,000 Estimated cost to complete 1,612,500 750,000

Total 2,687,500 3,375,000

Estimated gross profit (loss) 562,500 (125,000) % of completion 40% –

Gross profit (loss) to date 225,000 (125,000) Gross profit earned in prior years – 225,000

Gross profit earned this year P 225,000 P(350,000) 10-22: b 2008 2009 2010 Contract price P2,800,000 P2,800,000 P2,800,000 Estimated cost: Cost to date 1,300,000 1,960,000 2,440,000 Estimated costs to complete 1,360,000 780,000 380,000

Total 2,660,000 2,740,000 2,820,000

Estimated gross profit 140,000 60,000 (20,000) % of completion 48.87% 71.53% – RGP to date 68,418 42,918 (20,000) RGP in prior years - 68,418 42,918 RGP each year 68,418 (25,500) (62,918)

Long-Term Construction Contracts 187 10-23: a 2010 Project A Project B Project C Contract price P2,900,000 P3,400,000 P 1,700,000 Estimated costs: Cost to date 1,680,000 1,440,000 320,000 Estimated cost to complete 1,120,000 1,760,000 960,000

Total 2,800,000 3,200,000 1,280,000

Estimated gross profit 100,000 200,000 420,000 % of completion 60% 45% 25%

Gross profit earned this year (P255,000) P 60,000 P 90,000 P 105,000 2011 Project A Project B Project C Project D Contract price P2,900,000 P3,400,000 P1,700,000 P 2,000,000 Estimated costs Cost to date 2,640,000 2,120,000 1,183,000 560,000 Estimated costs to complete –0– 1,360,000 117,000 1,040,000

Total 2,640,000 3,480,000 1,300,000 1,600,000

Estimated gross profit (loss) 260,000 (80,000) 400,000 400,000 % of completion 100% – 91% 35%

Gross profit (loss) to date 260,000 (80,000) 364,000 140,000 Gross profit earned in prior year 60,000 90,000 105,000 –0–

Gross profit earned this year(P429,000) P 200,000 P(170,000) P 259,000 P 140,000 2010 2011 Gross profit earned P 255,000 P 429,000 General and administrative expenses 120,000 120,000

Net income P 135,000 P 309,000 10-24: c Contract price P10,000,000 Gross profit earned to date, 2008 (P900,000 – P100,000) 800,000

Total cost to date, 2011 9,200,000 Less: cost incurred in 2011 4,100,000

Cost to date, 2010 P 5,100,000 Gross profit earned to date P 900,000 Divided by % of completion: (P5,100,000 + P900,000) / P10,000,000 60%

Estimated gross profit, 2107 P 1,500,000 10-25: d Construction in progress: Cost incurred to date P 440,000 Gross profit earned to date (P2,500,000 – P2,000,000) 110,000

Total 550,000 Less: Contract billings (P2,500,000 x 30%) 750,000

Excess of contract billings over construction in progress (CL) P( 200,000) 188 Chapter 10

10-26: a Contract price P120,000,000 Total estimated cost: Cost incurred to date: Site labor cost 10,000,000 Cost of construction materials 30,000,000 Depreciation of special plant & equip 5,000,000 Total 45,000,000 Estimated cost to complete 55,000,000 100,000,000 Estimated gross profit 20,000,000 Percentage of completion (45/100) 45% Gross profit to be recognized P 9,000,000 10-27: a Cost incurred to date- 2010 Total estimated cost (8,000,000 / 40%) 20,000,000 Estimated cost to complete 8,000,000 P12,000,000 Cost incurred in 2010 3,700,000 Cost incurred in 2009 8,300,000 Estimated cost at completion- 2009 12,450,000 Total estimated cost- 2009 P20,750,000 Percentage of completion- 2009 (8,300,000/ 20,750,000) = 40% 10-28: a 2010 Contract 1 Contract 2 Contract price P600,000 P450,000 Total estimated cost: Cost incurred to date 150,000 87,500 Estimated cost to complete 150,000 162,500 Total estimated cost 300,000 250,000 Estimated gross profit 300,000 200,000 Percentage of completion 50% 35% Gross profit recognized P150,000 P70,000 2011 Contract 1 Contract 2 Contract 3 Contract price 600,000 450,000 900,000 Total estimated cost 350,000 300,000 500,000 Estimated gross profit 250,000 150,000 400,000 Percentage of completion 80% 60% 36% Gross profit earned to date 200,000 90,000 144,000 Gross profit earned in 2007 150,000 70,000 - Gross profit earned this year 50,000 20,000 144,000 Actual cost incurred to date P 640,000 Gross profit earned to date (P220,000 P214,000) 434,000 Construction in Progress, 12/31/011 P1,074,000 Long-Term Construction Contracts 189

10-29: a Bicol Davao Aklan Total Contract price P875,000 P1,225,000 P437,500 Total estimated cost Cost incurred 656,250 175,000 175,000 1,006,250 Est. cost to complete - 700,000 175,000 Total estimated cost 656,250 875,000 350,000 Estimated gross profit 218,750 350,000 87,500 Percentage of completion 100% 20% 50% Gross profit earned P218,750 P 70,000 P43,750 332,500 Percentage of completion Zero Profit Total cost incurred 1,006,250 1,006,250 Total gross profit earned 332,500 218,750 Construction in progress 1,338,750 1,225,000 Less: Billings 1,312,500 1,312,500 Due from (to) 26,250 (87,500) 10-30: a Contract price P40,825,000 Total estimated cost: Cost incurred 8,475,000 Estimated cost to complete 28,400,000 36,875,000 Estimated gross profit 3,950,000 Percentage of completion 22.983% Gross profit recognized P 907,830 10-31: a Cost of direct materials used P220,000 Cost of direct labor, including supervision 150,000 Cost of indirect materials used 55,000 Depreciation of plant and equipment used on the contract 120,000 Payroll of design and technical department 80,000 Insurance costs 60,000 Costs of contracted research and development activities 105,000 General and administrative expenses 30,000 Borrowing costs 130,000 Total cost incurred to date P930,000 Estimated gross profit (P2,950,000 – P2,600,000) P350,000 % of completion (P930,000 / P2,600,000) 35.77% Realized gross profit P125,195 190 Chapter 10

10-32: 1. a

Project 1 Project 2 Contract price P420,000 P150,000 Less total estimated costs 180,000 175,000 Estimated gross profit (loss) 240,000 (25,000) % of completion: Project 1 (P120,000 / P180,000) 66.67% Project 2 100% Realized gross profit (loss) 160,000 (25,000) Expenses 10,000 5,000 Net income (loss), Dec. 31, 2011, P120,000 P150,000 P(30,000)

2. a, Project 2 only. 10-33: a

AA BB CC DD Contract price P384,000,000 P35,000,000 P175,000,000 P99,400,000 Total estimated costs 350,240,000 30,552,000 143,640,000 91,200,000 Estimated gross profit 33,760,000 4,448,000 31,360,000 8,200,000 % of completion * 5% 75% 75% 50% Realized gross profit P1,688,000 P3,336,000 P23,520,000 P4,100,000

* Actual cost incurred / Total estimated cost. Total realized gross profit P 32,644,000 Total cost incurred to date 193,756,000 Construction in progress 226,400,000 Billings: Contract signing (P693,400,000 x 20%) P 138,680,000 AA: P384,000,000 – (384,000 x 20%) x 5% 15,360,000 BB: P35,000,000 – (35,000,000 x 20%) x 75% 21,000,000 CC: P175,000,000 – (P175,000 x 20%) x 75% 105,000,000 DD: P99,400 - (P99,400 x 20%) x 50% 39,760,000 319,800,000 Due to P 93,400,000 10-34: b (P1.2 Billion x 10%) Long-Term Construction Contracts 191

10-35: Supporting Computation:

2009 2010 2011 Contract price P6,600,000 P6,600,000 P6,600,000 Reduction due to delay 90,000 Net contract price 6,600,000 6,600,000 5,910,000 Less total estimated cost: Cost incurred to date 1,782,000 3,850,000 5,500,000 Estimated costs to complete 3,618,000 1,650,000 - Total 5,400,000 5,500,000 5,500,000 Estimated gross profit 5,400,000 5,500,000 5,500,000 % of completion (CITD / TEC) 33% 70% 100% Realized gross profit to date 396,000 770,000 410,000 Realized gross profit in prior years - 396,000 770,000 Realized gross profit (loss) this year P396,000 P374,000 P(360,000)

1. a Realized gross profit P374,000 Operating expenses 90,000 Net income P284,000

2. a

Construction in progress (P770,000 + P3,850,000) P4,620,000 Contract billings 3,100,000 Balance P1,520,000

3. a Construction in progress P2,850,000 Contract billings 3,100,000 Balance 750,000

192 Chapter 10


Problem 10 – 1

(a) 2010 2011 Contract Price P 450,000 P 450,000 Less: Total estimated cost (1) Cost incurred to date 200,000 320,000 Estimated costs to complete __100,000 _______– (2) Total __300,000 _320,000 Estimated gross profit 150,000 130,000 Percentage of completion (1 ÷ 2) ______2/3 ___100% Estimated gross profit to date 100,000 130,000 Less: Gross profit earned in prior year _______– __100,000 Gross profit earned this year P 100,000 P 30,000 (b) Contract Price P 450,000 Less: Total cost incurred __320,000 Gross profit P 130,000 (c) 2010: Construction in Progress 100,000 Cost of construction 200,000 Construction Revenue 300,000 2011: Construction in Progress 30,000 Cost of Construction 320,000 Construction Revenue 350,000

Problem 10 – 2 (a) Construction Revenue P1,250,000 Less: Cost incurred _1,250,000 Gross profit – 2011 P – 0 – Construction in Progress (cost incurred) P1,250,000 Less: Contract billings (P5,800,000 x 30%) _1,740,000 Billings in excess of related costs P(490,000) (b) Contract price P5,800,000 Less: Total estimated costs Cost incurred to date P1,250,000 Estimated costs to complete 3,740,000 5,000,000 Estimated gross profit 800,000 Percentage of Completion (P1,250,000 ÷ 500,000) _____25% Gross profit P 200,000 Construction on Progress (P1,250,000 + P200,000) P1,450,000 Less: Contract billings _1,740,000 Billings in excess of related costs P(290,000) Long-Term Construction Contracts 193

Problem 10 – 3

(a) 2008 2009 2010 2011 Contract Price P55,000,000 P55,000,000 P55,000,000 P55,000,000 Less: Total estimated costs (1) Cost incurred to date 15,000,000 25,000,000 35,000,000 50,000,000 Estimated costs to complete _35,000,000 25,000,000 15,000,000 ________– (2) Total _50,000,000 50,000,000 50,000,000 50,000,000 Estimated gross profit 5,000,000 5,000,000 5,000,000 5,120,000 Percentage of completion (1 ÷ 2) ______30% _____50% _____70% ____100% Gross profit earned to date 1,500,000 2,500,000 3,500,000 5,000,000 Gross profit earned in prior yr(s) ________– _1,500,000 _2,500,000 _3,500,000 Gross profit earned the year P 1,500,000 P 1,000,000 P 1,000,000 P 1,500,000 (b) 2010 2011 (1) Construction in Progress 15,000,000 15,000,000 Cash or Payable 15,000,000 15,000,000 (2) Accounts Receivable 15,000,000 20,000,000 Contract Billings 15,000,000 20,000,000 (3) Cash 12,000,000 25,000,000 Accounts Receivable 12,000,000 25,000,000 (4) Construction in Progress 1,000,000 1,500,000 Cost of Construction 15,000,000 15,000,000 Construction Revenue 16,000,000 16,500,000

Problem 10 – 4 (a) 2009 2010 2011 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 Percentage of Completion 11.11% 50% 83.33% 2009 2010 2011 (b) Contract Price P15,000,000 P15,000,000 P15,000,000 Less: Total Estimated Cost Cost incurred to date 1,000,000 5,500,000 10,000,000 Estimated costs to complete __8,000,000 __5,500,000 __2,000,000 Total __9,000,000 _11,000,000 _12,000,000 Estimated gross profit 6,000,000 4,000,000 3,000,000 Percentage of completion ___11.11% ______50% ___83.33% Gross profit earned to date 666,600 2000,000 9,500,000 Less: Gross profit earned in prior yrs. ________– ___666,600 _2,000,000 Gross profit earned this year P 666,600 P 1,333,400 P 500,000 194 Chapter 10

Problem 10-4, continued: (c) (1) Construction in progress (cost incurred) 1,000,000 Cash 1,000,000 (2) Accounts Receivable 1,325,000 Contract Billings 1,325,000 (3) Cash 1,200,000 Accounts Receivable 1,200,000 (4) Construction in progress (gross profit) 666,600 Cost of construction 1,000,000 Construction Revenue 1,666,600

Problem 10 – 5 (1) 2008 2009 2010 2011 Contract Price P14,000,000 P14,000,000 P14,000,000 P14,000,000 Less: Total Estimated Cost Cost incurred to date 6,500,000 9,800,000 12,200,000 13,900,000 Estimated cost to complete __6,800,000 _3,900,000 _1,900,000 ________– Total _13,300,000 13,700,000 14,100,000 13,900,000 Estimated gross profit 700,000 300,000 ( 100,000) 100,000 Percentage of completion ___48.87% ___71.53% _____100% ____100% Gross profit (loss) to date 342,090 214,590 ( 100,000) 100,000 Less: Gross profit (loss) in prior yrs. ________– ___342,090 ___214,590 ( 100,000) Gross profit (loss) this year P 342,090 P( 127,500) P( 314,590) P 200,000 (2) 2008 2009 2010 2011 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) 2008 2009 2010 Contract Price P 6,000,000 P 6,000,000 P 6,000,000 Less: Total estimated costs Cost incurred to date 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 Estimated gross profit 500,000 ( 100,000) ( 150,000) Percentage of completion ___61.82% _______– ________– Gross profit (loss) to date 309,100 ( 100,000) ( 150,000) Gross profit (loss) in prior yrs. ________– __309,100 ( 100,000) Gross profit (loss) this year P 309,100 P 409,100 P 50,000 Long-Term Construction Contracts 195

(2) 2008 2009 2010 Cost of construction 3,400,000 2,550,000 200,000 Construction in progress 309,100 409,100 50,000 Construction Revenue 3,709,100 2,140,900 150,000 (3) Cash 400,000 Accounts Receivable 400,000 Contract Billings 6,000,000 Construction in progress 6,000,000

Problem 10 – 7 (1) 2009 2010 2011 Contract Price P16,000,000 P16,000,000 P16,000,000 Less: Total Estimated Cost Cost incurred to date 4,600,000 9,100,000 14,350,000 Estimated costs to complete __9,640,000 __5,100,000 _________– Total _14,240,000 _14,200,000 _14,350,000 Estimated gross profit 1,760,000 1,800,000 1,650,000 Engineer's estimate of comp. ______31% ______58% _____100% Gross profit to date 545,600 1,044,000 1,650,000 Less: Gross profit earned in prior yrs. ________– __545,600 _1,044,000 Gross profit earned this yr. P 545,600 P 498,410 P 606,000 (2) 2009 2010 2011 (a) Construction on progress 4,600,000 4,500,000 5,250,000 Cash 4,600,000 4,500,000 5,250,000 (b) Accounts receivable 5,000,000 6,000,000 5,000,000 Contract billings 5,000,000 6,000,000 5,000,000 (c) Cash 4,500,000 5,400,000 6,100,000 Accounts receivable 4,500,000 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 Profit Method: 2011 Entries (a) Construction in progress 5,250,000 Cash / accounts payable 5,250,000 (b) Accounts receivable 5,000,000 Contract billings 5,000,000 196 Chapter 10

Problem 10-7, continued: (c) Cash 6,100,000 Accounts receivable 6,100,000 (d) Cost of construction 5,250,000 Construction in progress 1,650,000 Construction revenue 6,900,000 (e) Contract billings 16,000,000 Construction in progress 16,000,000 (4) The following entry would be the only one different from (2). 2009 2010 2011 * Cost of construction 4,414,400 3,821,600 6,114,000 Construction in progress 545,600 498,400 606,000 Construction revenue 4,960,000 4,320,000 6,720,000 * Total estimated costs x estimated percentage of completion.

Problem 10 – 8 (1) 2009 2010 2011 Contract Price P6,500,000 P6,500,000 P6,500,000 Less: Total Estimated Costs Cost incurred to date 2,150,000 5,250,000 6,850,000 Estimated costs to complete _3,850,000 _1,500,000 ________– Total _6,000,000 _6,750,000 _6,850,000 Estimated gross profit (loss) 500,000 (250,000) (350,000) Less: Gross profit (loss) in prior yrs. ________– ___520,000 _(250,000) Gross profit (loss) this years P 520,000 P( 250,000) P( 600,000) (2) In 2011 when the project is completed.

Problem 10-9

1. P20,000 (P220,000 – P200,000) 2. P260,000 (P250,000 + P10,000) 3. P370,000 [P850,000 – (P220,000 + P260,000)] 4. P380,000 (P370,000 + PP10,000) 5. P830,000 (P200,000 + P250,000 + P380,000) 6. P86,095: 2011: 450/640 = 0.7031 x P850,000 = P597,635 Less cost to date 450,000 Gross profit to date 147,635 2010: 200/650 = 0.3077 x P200,000 = (61,540) RGP - 2011 P86,095

Long-Term Construction Contracts 197

Problem 10-10

Building 1 Building 2 Building 3 Bldg. 4 Prior Prior Prior To 2011 2011 To 2011 2011 To 2011 2011 2011 a. Contract price P4,000,000 P4,000,000 P9,000,000 P9,000,000 P13,150,000 P13,150,000 P2,500,000 b. Cost to date 2,070,000 3,000,000 6,318,0000 8,118,000 3,000,000 10,400,000 800,000 c. ECTC 1,380,000 750,000 1,782,000 - 9,000,000 2,800,000 1,200,000 d. TEC 3,450,000 3,750,000 8,100,000 9,118,000 12,000,000 13,200,000 2,000,000 e. Est. GP a - d 550,000 250,000 900,000 882,000 1,150,000 (50,000) 500,000 f. % of comp. b / d 60% 80% 78% 100% 25% 78.79% 40% g. RGP to date a x f 2,400,000 3,200,000 7,020,000 9,000,000 3,287,500 10,360,885 1,000,000 h RGP-prior yr - 2,400,000 - 7,020,000 - 3,287,500 - i RGP this yr 2,400,000 800,000 7,020,000 1,980,000 3,287,500 7,073,385 1,000,000 j CITD (b) 2,070,000 3,000,000 6,318,000 8,118,000 3,000,000 10,410,885* 800,000 k CITD prior yr. - 2,070,000 - 6,318,000 - 3,000,000 - l CITD this yr. 2,070,000 930,000 6,318,000 1,800,000 3,000,000 7,410,885 800,000 m GP (loss) P330,000 P(130,000) P702,000 P180,000 P287,500 P(337,500) P200,000 *P10,360,885 + P50,000 = P10,410,885 1 Prior to 2011 2011 Total revenue all buildings P12,707,500 P10,853,385 Total costs – all buildings 11,388,000 10,940,885 Total gross profit – all buildings P1,319,500 P (87,500) 2. Revenue – Building 2 P9,000,000 Cost – Building 2 8,118,000 Gross profit P 882,000 Less anticipated loss on Building 3 ( 50,000) Gross profit P 832,000

198 Chapter 11

CHAPTER 11

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 11-1: b

No revenue is to be reported. Because the franchisor fails to render substantial services to the franchisee as of December 31, 2011.

11-2: c Initial franchise fee P5,000,000 Less: Cost of franchise ____50,000 Net income 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 P 100,000 Collection of note applying to principal __200,000 Revenue from initial franchise fee P 300,000 11-5: a Cash downpayment, January 2, 2008 P2,000,000 Collection applying to principal, December 31, 2008 _1,000,000 Total Collection 3,000,000 Gross profit rate [(5,000,000-500,000) ÷ 5,000,000] _____90% Realized gross profit, December 31, 2008 P2,700,000 11-6: b Face value of the note (P1,200,000 - P400,000) P 800,000 Present value of the note (P200,000 X 2.91) __582,000 Unearned interest income, July 1, 2008 P 218,000 11-7: d Initial franchise fee P1,200,000 Less: unearned interest income __218,000 Deferred revenue from franchise fee P 982,000 11-8: d Initial franchise fee P 500,000 Continuing franchise fee (P400,000 X .05) ___20,000 Total revenue 520,000 Cost ___10,000 Net income P 510,000

Franchise Accounting 199 11-9: b Deferred Revenue from franchise fee: Downpayment P6,000,000 Present value of the note (P1,000,000 X 2.91) 2,910,000 P8,910,000 Less: Cost of franchise fee _2,000,000

Deferred gross profit P6,910,000 Gross profit rate (6,910,000 ÷ 8,910,000) 77.55% Downpayment (collection during 2008) P6,000,000 Gross profit rate ___77.55%

Realized gross profit from initial franchise fee P4,653,000 Add: Continuing franchise fee (5,000,000 X .05) __250,000

Total P4,903,000 Less: Franchise expense ___50,000 Operating income P4,853,000 Interest income, 12/31/05 (P2,910,000 X 14%) X 6/12 __203,700 Net income P5,056,700 11-10: b Face value of the note receivable P1,800,000 Present value of the note receivable 1,263,900

Unearned interest income P 536,100 Initial franchise fee P3,000,000 Less: Unearned interest income __ 536,100

Deferred revenue from franchise fee P2,463,900 11-11: b Revenues from: Adjusted sales value of IFF (P1,000,000 – 282,260) P 717,740 Continuing franchise fee (P2,000,000 X .05) 100,000 Total revenue from franchise fees P817,740 11-12: a Realized gross profit from initial franchise fee [(350,000 + 180,000) x 37%] P 196,100 Continuing franchise fee (P121,000 + P147,500) x 5% ___13,425

Total revenue 209,525 Expenses ___42,900

Net operating profit 166,625 Interest income (P900,000 x 15%) x 6/12 ___67,500

Net income P 234,125

200 Chapter 11 11-13: c Cash down-payment P 95,000 Present of the note (P40,000 x 3.0374) __121,496

Total P 216,496 11-14: a Initial franchise fee P 50,000 Continuing franchise fee (P400,000 x 5%) __20,000

Total revenue P 70,000 11-15: b Initial franchise fee – down-payment (P100,000 / 5) P 20,000 Continuing franchise fee (P500,000 x 1%) __5,000

Total earned franchise fee P 25,000 11-16: a

The unearned interest to be credited is P180,000, the difference between the face value and the present value of the notes receivable (900,000 – 720,000). The non-refundable 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) P 600,000 Dora (P100,000 + P500,000) 600,000 Total P1,200,000 11-18: c Down payment (3,125,000 x 40%) P1,250,000 Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 1,425,000 Adjusted sales value of initial franchise fee 2,675,000 Direct cost of service s 802,500 Gross profit 1,872,500 Gross profit rate (1,872,500 ÷ 2,675,000) 70%

Franchise Accounting 201 Date Collection Interest Principal Balance of PV of NR 1/1 P1,425,000 6/30 468,750 171,000 297,750 1,127,250 12/30 468,750 135,270 333,480 793,770 Total collection applying to principal 631,230 Down payment 1,250,000 Total collection 1,881,230 Gross profit rate 70% Realized gross profit on initial franchise fee 1,316,861 11-19: c 11-20: d, The total initial franchise fee. 11-21: a. Initial franchise fee P500,000 Continuing franchise fee (9M x 5%) 450,000 Earned franchise fee P950,000 11-22: b, because the collectivity of the note is reasonable assured, therefore all the initial franchise fee is considered earned at December 31, 2011. 11-23: a, should be P11,137.50 the interest income on December 31, 2011.

Interest income (P1,209,375 – P590,625) / 5 x 9/12 =P11,137.50.

No income is recognized in the initial franchise fee since the collectability of the note Issued by Ms. Manalo is doubtful. No continuing franchise fee is also recognize since no monthly sales is given.

202 Chapter 11


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. ........................................ 20,000,000 July 31: Deferred cost of Franchises ............................................... 2,000,000 Cash .............................................................................. 2,000,000 Nov. 30: Cash/AR ............................................................................. 29,000 Revenue from continuing franchise fee (CFF) .............. 29,000 Dec. 31: Cash / AR ........................................................................... 36,000 Revenue from CFF ........................................................ 36,000 Cash .... .............................................................................. 2,800,000 Notes receivable ............................................................ 2,000,000 Interest income (P8,000,000 x 10%) ............................. 800,000 Adjusting Entries: (1) Cost of franchise revenue ........................................... 2,000,000 Deferred cost of franchises .................................. 2,000,000 (2) Deferred revenue from IFF .........................................20,000,000 Revenue from IFF ................................................... 20,000,000 To recognize revenue from the initial franchise fee. b. 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 profit: Deferred Revenue from IFF ........................................20,000,000 Cost of Franchise Revenue ................................... 2,000,000 Deferred gross profit – Franchises ...................... 18,000,000 GPR = P18,000 ÷ P20,000,000 = 90% (2) To recognize gross profit: Deferred gross profit – Franchises .............................12,600,000 Realized gross profit ............................................. 12,600,000 (P14,000,000 X 90%)

Franchise Accounting 203

Problem 11 – 2 a. Collection of the note is reasonably assured. Jan. 5: Cash .. ..... .............................................................................. 600,000 Notes Receivable .................................................................... 1,000,000 Unearned interest income ................................................. 401,880 Deferred revenue from F.F. .............................................. 1,198,120 Face value of NR ............................................................................ 1,000,000 Present value (P200,000 x P2,9906) .............................................. __598,120 Unearned interest ........................................................................... 401,880 Nov. 25: Deferred cost of Franchise ................................................ 179,718 Cash .............................................................................. 179,718 Dec. 31: Cash / AR ........................................................................... 4,000 Revenue from CFF ........................................................ 4,000 (P80,000 X 5%) Cash .... .............................................................................. 200,000 Notes Receivable ........................................................... 200,000 Adjusting Entries: 1) Unearned interest income ................................................. 119,624 Interest income ............................................................ 119,624 P598,120 x 20% 2) Cost of Franchise .............................................................. 179,718 Deferred cost of Franchise ......................................... 179,718 3) Deferred revenue from FF ................................................ 1,198,120 Revenue from FF ........................................................ 1,198,120 b. Collection of the note is not reasonably assured. Jan. 5 to Dec. 31 before adjusting entries – Refer to Assumption a. Dec. 31: Adjusting Entries: 1) Unearned interest income ................................................. 119,624 Interest income ........................................................... 119,624 2) Cost of franchise ................................................................ 179,718 Deferred cost of franchise ........................................... 179,718 3) Deferred revenue from FF ................................................ 1,198,120 Cost of Franchise ........................................................ 179,718 Deferred gross profit – Franchise .............................. 1,018,402 GPR = 1,018,402 ÷ 1,198,120 = 85%) 4) Deferred gross profit – Franchise .....................................578,319.60 Realized gross profit – Franchise ............................... 578,319.60 (P600,000 + P200,000- P119,624) x 85%

204 Chapter 11

Problem 11 – 3 2010 July 1: Cash.. ...... ..... .............................................................................. 120,000 Notes Receivable .......................................................................... 320,000 Unearned interest income ...................................................... 66,408 Deferred revenue from FF ..................................................... 373,592 Face value of NR .......................................................................... P320,000 Present value (P80,000 x 3.1699) ................................................ _253,592 Unearned interest income ............................................................ P 66,408 Sept. 1 to Nov. 15: Deferred cost of franchise ............................................................ 80,000 Cash .. ..... .............................................................................. 80,000 (P50,000 + P30,000) Dec. 31: Adjusting Entry: Unearned interest income ............................................................ 12,680 Interest income ...................................................................... 12,680 (P253,592 x 10% x 1/2) 2011 Jan. 10: Deferred cost of franchise ............................................................ 50,000 Cash .. ..... .............................................................................. 50,000 July 1: Cash.. ...... ..... .............................................................................. 80,000 Note receivable ...................................................................... 80,000 Dec. 31: Adjusting Entries: (1) Cost of franchise .................................................................... 130,000 Deferred cost of franchise ................................................. 130,000 (2) Deferred revenue from FF ..................................................... 373,592 Revenue from FF ............................................................... 373,592 (3) Unearned interest income ...................................................... 25,360 Interest income .................................................................. 25,360


Problem 11 – 4 2011 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 ................................................................... 4,000,000 Initial Franchise fee .....................................................................P6,000,000 Deficiency Market value of costs (P180,000 ÷ 90%) x 10 yrs. ................( 2,000,000) Adjusted initial fee (revenue) .......................................................P4,000,000 July 15: (a) Continuing expenses .............................................................. 180,000 Cash / Accounts payable ................................................... 180,000 (b) Deferred revenue from FF ..................................................... 200,000 Revenue from CFF ............................................................ 200,000 (P180,000 ÷ 90%)

Problem 11 – 5 a) Adjusted initial franchise fee: Total initial F.F. ............................................................................ P4,500,000 Less: Face Market value of kitchen equipment ............................ _1,800,000 Adjusted initial FF ........................................................................ P2,700,000 Revenues: Initial FF .. ..... .............................................................................. P2,700,000 Sale of kitchen equipment ............................................................ 1,800,000 Continuing F.F. (P2,000,000 x 2%) ............................................. ___40,000 Total . ...... ..... .............................................................................. 4,540,000 Expenses: Initial expenses ............................................................................. P 500,000 Cost of kitchen equipment............................................................ 1,500,000 _2,000,000 Net income ..... ..... .............................................................................. P2,540,000 b) Journal Entries: Jan. 2: Cash .. ..... .............................................................................. 1,500,000 Notes receivable..................................................................... 3,000,000 Deferred revenue from FF (adjusted SV) .......................... 2,700,000 Revenue from FF (Market value of equipment) ................ 1,800,000 Cost of kitchen equipment ...................................................... 1,500,000 Kitchen equipment ............................................................. 1,500,000

206 Chapter 11 Problem 11-5, continued: Jan. 18: Franchise expense ........................................................................ 500,000 Cash .... .............................................................................. 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 ............................................................ 40,000 Revenue from continuing FF ............................................. 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 2,340,000 Expense (costs of initial services) ............................................................... __700,000 Net income .. ... ...... ..... .............................................................................. P1,640,000 Schedule 1 – Estimated deficiency in CFF (1) (2) Yr. of Estimated Market Value (Excess of 2 over 1) Contract Continuing FF of Continuing Services Deficiency 1 P220,000 P250,000 P 30,000 2 220,000 250,000 30,000 3 220,000 250,000 30,000 4 220,000 125,000 – 5 220,000 125,000 – 6 150,000 125,000 – 7 150,000 125,000 – 8 150,000 125,000 – 9 90,000 125,000 35,000 10 90,000 125,000 __35,000 P160,000 Recognition of revenue from CFF and costs: Years 1-3 Years 4-5 Years 6-8 Years 9-10 Revenue from CFF ........................ P250,000 P220,000 P150,000 P125,000 Expenses . ...... ..... ......................... _200,000 _100,000 _100,000 _100,000 Net income ..... ..... ......................... P 50,000 P120,000 P 50,000 P 25,000


Problem 11 – 7 1/12/2011 6/1/2011 7/1/2011 6/30/2011 Revenue Initial FF (Sch. 1) – – 287,200 – Interest income – – – 45,490* Continuing FF – – – 48,000 Others 62,500 80,000 – – Expenses: Initial expenses – – ( 70,000) – Continuing expense – – – ( 36,000) Others ( 50,000) ( 68,000) – – Net Income P 12,500 P 12,000 P217,200 P 57,490 * P454,900 x 10% = P45,490 Schedule 1: Computation of initial FF to the recognized: Total initial fee ...... ................................................................................................... P750,000 Less: Interest unearned on the note ........................................................................ ( 145,100) A Market value of inventory ............................................................................ ( 80,000) B Market value of equipment ........................................................................... ( 62,500 B Deficiency in continuing costs ...................................................................... ( 175,200) C Adjusted initial FF .. ................................................................................................... P287,200 A. Unearned Interest: Face value of the note .......................................................................................... P600,000 Present value (120,000 x 3.7908) ........................................................................ 454,900 rounded Unearned interest ................................................................................................. P145,100 B. Market value of equipment and inventory: Equipment (P50,000 ÷ 80%)................................................................................ P 62,500 Inventory ... ...... ................................................................................................... 80,000 Income from Sales: Equipment Inventory Total Sales Price . ...... .......................................... P62,500 P80,000 P142,500 Cost .... ...... ...... .......................................... 50,000 68,000 118,000 Net income ...... .......................................... P12,500 P12,000 P 24,500 C. Analysis of Continuing costs: Market value of costs is P4,000/Mo. or P48,000 / yr. Continuing Fees: Years 1-4 Years 5-16 Years 17-20 Gross revenues .......................................... P330,000/mo. P450,000/mo. P500,000/mo. Gross fees per month .................................. P 2,475/mo. P 3,375/mo. P 3,750/mo. Gross fees per year ...................................... P 29,700 P 40,500 P 45,000 Market value of continuing costs ................ ( 48,000) ( 48,000) ( 48,000) Deficiency per year ..................................... ( 18,300) ( 7,500) ( 3,000) Number of years ......................................... x 4 x 12 x 4 Deficiency .......................................... P( 73,200) P( 90,000) P( 12,000) Total deficiency for 20 years is P175,200

208 Chapter 11 Problem 11-7, continued: Dates of Revenue Recognition: ..................................................... Types of Revenue January 12, 2011 ............................................................ Sale of equipment June 1, 2011 ................................................................... Sale of inventory July 1, 2011 .................................................................... Initial FF (as adjusted0 June 30, 2012 ................................................................. Interest income and

continuing revenue.

CHAPTER 1 MULTIPLE CHOICE ANSWERS AND SOLUTIONS

Documents

Transcript of CHAPTER 1 MULTIPLE CHOICE ANSWERS AND SOLUTIONS