NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

PARTNERSHIP
Partnership Formation

Valuation:

(1) Cash-Face value

(2) NCA-Agreed value/Fair value/Appraised value (in order of priority)
(3) Liabilities- Agreed value/Fair value (considered assumed if silent)
(4) Capital
 Reallocation of capital using bonus method (if silent use bonus method)
 Investment or withdrawal (one partner will serve as a basis)
- If adjusted capital > Unadjusted Capital: Investment
- If adjusted capital < Unadjusted capital: Withdrawal

Additional Notes:

(1) Due from/Advances to/Loan to: are receivables from partners, therefore, deduct from capital balance.
(2) Due to/Advances from/Loan from: are payables to partners, therefore add to capital balance.

Partnership Operations

Profit Ratio Loss Ratio Allocate based on

(1)   Agreement
(2)  X Profit Ratio
(3) X  Original Capital Ratio
(4) X X Original Capital Ratio

Salaries:

(1) Based on provision

(2) Could be fractional year
(3) If NI is not sufficient to pay salaries, pro rate using salary ratio (especially when the problem says up to the
extent of profit)
(4) Should be provided whether profit or loss

Interests:

(1) Normally per annum

(2) Could also be fractional year
(3) Provided whether profit or loss

Bonus:

(1) Also based on provision

(2) Distributed only when there is a profit
(3) If problem is silent, NI is assumed to be after tax but before salaries, interests and bonuses.

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Formula for computation of bonus:

𝑁𝐼 𝑙𝑒𝑠𝑠 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
𝐵=( ) 𝑋 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
1 + 𝐵𝑜𝑛𝑢𝑠 𝑟𝑎𝑡𝑒

- If NI after salaries, interests and bonuses is given, but the problem is looking for NI before salaries, interests and
bonuses:

𝑁𝐼 𝑎𝑑𝑑 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
𝐵=( ) 𝑋 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
1 − 𝐵𝑜𝑛𝑢𝑠 𝑟𝑎𝑡𝑒

Partnership Dissolution

(1) Change in ownership

(2) Capital balances in dissolution do not include loan, except in the total interest of the retiring partner

Admission by purchase:

(1) Without revaluation: (if silent use this)

 Purchase price is ignored
 Total assets, liabs and capital will not change
 Personal transaction between partners

(2) With revaluation:

 Purchase price is considered
 Allocation of over/undervalued asset (UVA/OVA)
 Transfer of capital to the new partner
 Computation of UVA/OVA:

Purchase price P XX
÷ Interest of new partner %
Adjusted capital balance of old partners P XX
Unadjusted capital balance of old partners (XX)
UVA(+)/OVA(-) P XX

Partnership Liquidation

(1) Lump sum or total liquidation

(2) Installment or piecemeal liquidation

Marshaling of Assets (order of priority):

(1) Personal Assets

 Personal creditors
 Partnership creditors
 Other partners

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

(2) Partnership Assets

 Partnership creditors
 Personal creditors
 Other partners

Steps in Liquidation:

1. Sell NCA
2. Payment of liquidation expenses and liabilities (DR: Capital /CR: Cash)
3. Distribution to partners
 If problem is silent, partners are INSOLVENT.

Computation of Cash Distribution to partners:

Cash, beg P XX
Proceeds from sale of NCA XX
Total liabs (XX)
Liquidation expense paid (XX)
Cash withheld for liquidation expense to be incurred (XX)
Total Cash Distribution P XX

Computation of Capital:

Capital, beg P XX
Gain/loss on realization XX/(XX)
Liquidation expense paid (XX)
Maximum possible loss (XX)
 BV of unsold NCA
 Cash withheld for liquidation expense
Condonation of liabs XX
Total Cash Distribution P XX

Cash at the end of the month:

Cash, beg P XX
Proceeds from sale of NCA XX
Payment of liabs (XX)
Liquidation expense paid (XX)
Payment to partners (XX)
Cash, end P XX

Schedule of safe payment:

(1) Compute the total interest (after gains/losses n realization)

(2) Allocate maximum possible loss
(3) Distribution of deficiency to partners
(4) Distribution to partners

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Cash Priority Program (CPP):

(1) Compute the total interests 9does not include gains/losses on realization)
(2) Determine the Loss Absorption Balance (LAB): Total Interest ÷ P/L Ratio
(3) Equalize the LAB to determine priority 1 and 2
(4) Distribution to partners: Difference in LAB X P/L Ratio

When to use CPP?

-If it is an “if” question

When not to use CPP?

-If there is additional investment from partners

BUSINESS COMBINATION
 FV Approach
-transaction where acquirer obtains control

 Types:
1. Asset Acquisition
a. 100%
b. Statutory merger: A+B = A or B
c. Statutory consolidation: A+B = C
2. Stock acquisition
a. A+B = AB
b. Fully owned subsidiary (100%)
c. Partially owned subsidiary (less than 100%)

Accounting Method:
1. Identify the acquirer
2. Determine acquisition date (the net assets can be adjusted within 1 year from the date of acquisition)
3. Measure and record NCI and identifiable assets
4. Measure and record goodwill or GBP

Computation of Goodwill or GBP:

FV of consideration given P XX
FV of PHI (Previously held interest) XX
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
( ) 𝑋 𝑃𝐻𝐼 %
𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑖𝑛𝑔 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡%
FV of contingent consideration XX
FV of NCI XX
FV of Subsidiary P XX
FV of subsidiary’s Net Assets (XX)
Goodwill/GBP P XX

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Alternative computation:

Purchase Price or PP (can be cash, NCA, Liabs or Equity (at FV) P XX

NCI (either at FV or INAS, whichever is HIGHER) XX
FV of subsidiary’s NA P XX
BV of subsidiary’s NA (XX)
Excess of cost over BV P XX
UVA (XX)
OVA XX
Goodwill/GBP P XX

* Acquisition related costs: (under Full PFRS)

1. Direct costs: Expensed
2. Indirect Costs: Expensed
3. Cost to issue or register shares: deduct from share premium
4. Excess of cost to issue or register over share premium: deduct from retained earnings or total shareholders’
equity

*Value of NCI: (The value of the NCI should be the FV or INAS, whichever is higher)

1. FV of NCI (Full Goodwill)

-If not given use implied goodwill: [(PP-Control Premium) ÷ Controlling Interest%] X NCI%
2. Proportionate share in the FV of NA or INAS (Partial Goodwill or PFRS for SMEs)

*Components of Assets, Liabs and Equity on the date of Business Combination:

ASSETS

1. Assets of parent @ Book value P XX

2. Assets of subsidiary @ Fair value XX
3. Goodwill XX
4. Purchase Price (If asset) (XX)
5. Direct cost (DC) (XX)
6. Indirect cost (IDC) If paid (XX)
7. Cost to issue or register (CITR) (XX)
Total assets P XX

LIABILITIES

1. Liabs of parent @ Book value P XX o Contingent Consideration Payable:

2. Liabs of subsidiary @ Fair value XX
-If changed within 1 year and not related
3. Contingent Consideration Payable (CCP) XX
4. Purchase Price (If liability) XX to achievement of target profits, then
5. Direct cost (DC) XX adjust goodwill:
6. Indirect cost (IDC) If not paid XX Goodwill XX
7. Cost to issue or register (CITR) XX CCP XX
Total liabilities P XX -If related to target profits: EXPENSED

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

EQUITY

1. SHE of parent P XX
2. NCI XX
3. Purchase Price (if stocks @ FV) XX
4. Gain on contingent consideration, bargain purchase XX
option and previously held interest
5. Direct cost (DC) (XX)
6. Indirect cost (IDC) Whether (XX)
7. Cost to issue or register (CITR) paid or not (XX)
Total SHE P XX

Additional Notes:
1. If full goodwill: allocate impairment loss between parent and subsidiary based on its goodwill balance.
2. If proportionate share of NA: impairment loss is not allocated (only the parent bears the loss)
3. Gain on bargain purchase is NOT ALLOCATED.
4. Control premium is included in the PP, it affects goodwill but is not considered in computing NCI (at FV)

SUBSEQUENT TO COMBINATION (CONSOLIDATION)

*Consolidated NI:

Subsidiary:

1. Subsidiary’s own net income P XX

2. Amortization of UVA (FV > BV) based on remaining useful life (XX)
3. Amortization of OVA ( BV > FV) based on remaining useful life XX
4. Impairment loss (If full goodwill or if allocated) (XX)
5. RP on BI and other intercompany sales-upstream XX
6. UP on EI and other intercompany sales-upstream (XX) Attributable to parent
Adjusted NI of Subsidiary P XX
Attributable to NCI

Parent:

1. Parent’s own NI P XX
2. Dividends received from subsidiary (XX)
Income from own operations P XX
3. Share in adjusted net income of subsidiary XX
4. Gain (on BPO, PH and CCP) XX
5. Impairment loss (if not allocated) (XX)
6. RP on BI and other intercompany sales-downstream XX
7. UP on EI and other intercompany sales-downstream (XX)
Controlling Net Income/ Income attributable to parent P XX

o Consolidated NI= Controlling Net Income/Income attributable to parent + Income attributable to NCI

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Entries for intercompany sale of mdse:

Downstream Upstream

UP on EI: COGS XX UP on EI: COGS XX

Inventory XX Inventory XX

RP on BI: RE, Parent XX RP on BI: RE, Parent XX

COGS XX NCI XX
COGS XX

Consolidated Retained Earnings: Consolidated Sales:

RE, beg P XX Sales of parent P XX

CNI, Parent XX Sales of subsidiary XX
Dividends declared by parent (XX) Intercompany sales @ SP (XX)
RE, end P XX Consolidated Sales P XX

Consolidated COGS: Consolidated Inventory:

COGS of parent P XX Inventory of parent @ BV P XX

COGS of subsidiary XX Inventory of subsidiary @ BV XX
Intercompany sales and purchases @ (XX) UVA-Inventory XX
SP OVA-Inventory (XX)
UP on EI XX Amort. Of UVA (Inventory) (XX)
RP on BI (XX) Amort. Of OVA (Inventory) XX
Amort. Of UVA (Inventory) XX Allowance for inventory writedown (if (XX)
Amort. Of OVA (Inventory) (XX) net method)
Consolidated COGS P XX Consolidated Inventory P XX

NCI:
NCI, beg P XX
Share in dividends (XX)
Share in net income XX
NCI, end P XX

NOTE: Review differences between Full PFRS & PFRS for SMEs when it comes to business combination and
consolidation.

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

HOME OFFICE AND BRANCH ACCOUNTING

 Normal Transactions:
Home Office Branch

1. Shipments Inv. In Branch XX SFHO (@BP) XX

STB XX Freight in XX
AFOBI XX HO XX
Cash (Prepaid) XX Cash (collect) XX

2. Returns STB XX HO XX
AFOBI XX SFHO XX
Inv. In Branch XX

3. Collection Cash XX HO XX
of A/R of branch Inv. In Branch XX SD XX
by home office A/R XX
(w/ sales disc.)

4. Branch collected Inv. In Branch XX Cash XX

A/R of HO (w/ sales disc.) SD XX HO XX
A/R XX

5. Net income of Inv. In Branch XX Income summary XX

Branch Branch Income XX HO XX

6. Realized gross AFOBI XX

Profit (RGP) Branch Income XX

NOTE: RGP does not have an effect on the reciprocal accounts.

 Interbranch transfers:

Home office Branch 1 Branch 2

1. Cash Inv. In B2 XX HO XX Cash XX

(B1 to B2) Inv. In B1 XX Cash XX HO XX

2. Mdse Inv. In B1 XX SFHO XX

(HO to B1) STB1 XX Freight XX
AFOBI-B1 XX HO XX
Cash (prepaid) XX Cash (C) XX

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Home office Branch 1 Branch 2

3. Mdse Inv. In B2 XX HO XX SFHO XX

(B1 to B2) STB1 XX SFHO XX Freight XX
AFOBI-B1 XX Freight XX HO XX
Expense XX Cash (P) XX Cash (C)XX
Inv. In B1 XX
STB2 XX
AFOBI-B2 XX Balancing figure Amount of
freight if
shipment was
Excess Freight:
made directly
HO to B1 XX
from HO to B2
B1 to B2 XX
HO to B2 (XX)
Excess P XX

NOTE: Be careful of goods in transit, it should be added in SFHO and EI of branch (including the freight charge)

REVENUE RECOGNITION TOPICS

INSTALLMENT SALES
Computation of adjusted sales: Computation of Net Income:

Installment Sales P XX GP on Regular Sales P XX

Less: Overallowance (T-in Allow. > FV) (XX) RGP on Installment Sales XX
Add: Underallowance (T-in Allow. < FV) XX Total RGP P XX
Adjusted Sales P XX Expenses
Selling & Admin
Loss on repossessions
Alternative computation:
Loss on write off (XX)
Installment Sales P XX Net Income P XX
Add: FV of T-in XX
Less: Allowance for T-in (XX)
Adjusted Sales P XX

NOTE: Adjusted sales should be the basis of computing the gross profit rate.

Repossessions: o Repossessed Accounts:

FV of repossessed mdse:
Selling price (after reconditioning costs) P XX
Less: Reconditioning costs (XX) Unrecovered Cancelled profit
Normal profit on repossessed mdse (XX) Cost (Acct X (Acct X GP Rate)
FV of repossessed mdse P XX Cost %)

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Gain or loss on repossession: Unrecovered cost – FV of repossessed Mdse

Entries:
1. Repossession 2. Write off
Repossessed Mdse @ FV XX Loss on write off XX
Loss on repossession XX Deferred Gross Profit XX
Deferred Gross Profit XX Installment A/R XX
Installment A/R XX
Gain on repossession XX

Computation of COGS: Combo of T-in & Repossessed Mdse (RM):

Beginning Inventory P XX DP-Cash P XX
Net Purchases XX FV of Trade in XX
Freight In XX Collection, net of interest XX
Repossessed Mdse at FV XX Total Collection P XX
Ending Inventory (Repossessed and new (XX) X GP% %
mdse) RGP P XX
COGS (of regular and installment sales) P XX Normal Profit on sale of RM XX
Total RGP P XX
Collections:
Current year= Installment Sales-Installment A/R, end
Prior year= Installment A/R, beg-Installment A/R, end

GP Rate or GP %:
Current year= GP for Installment Sales ÷ Installment Sales of current year
Prior Year= DGP, beg ÷ Installment A/R, beg

Realized gross profit:

Collections X GPR based on sales or
Collections X GPR based on cost ÷ Sales rate based on cost

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

LONG TERM CONSTRUCTION CONTRACTS

-Accounted for using either:

1. Percentage of completion
2. Cost recovery/Zero profit

Components of cost incurred to date:

1. Direct Materials P XX
2. Direct Labor XX
3. Manufacturing OH XX
4. Reimbursable Costs (if not reimbursable or not XX
recoverable it is a period cost)
5. Dep’n of Construction Equipment XX
6. Materials or supplies not yet used but there is no XX
alternative use
7. incidental income from ale of scrap materials (XX)
Cost incurred to date (CITD) P XX

Computational Pattern:

Year 1 Year 2 Year 3

Contract Price P XX P XX P XX
Cost incurred to date XX XX XX
Estimated cost to complete XX XX XX If negative, %
T otal Costs P(XX) P(XX) P(XX) of completion
of that year
Estimated gross profit P XX P XX P XX
and
X % of completion % % % succeeding
RGP (to date) P XX change P XX change P XX years is 100%
RGP(prior year) (XX) sign (XX) sign (XX)
RGP (current year) P XX P XX P XX
*% of completion=Cost incurred to date ÷ T otal costs

Due to/from customers:

Construction in progress (to date)* P XX
Less: Progress billings (to date) (XX)
Due from/(Due to) P XX

*Construction in progress to date: Cost incurred to date + Profit recognized to date or – Loss recognized to date

Alternative computation of Construction in progress:

1. If profit: CIP= Contract Price X Percentage of completion (POC)
2. If loss: CIP= (Contract Price X POC)- Loss to date or CIP= (Total costs X POC) – Loss to date

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Total revenue or Progress Billings:

Contract Price P XX
Escalation/De-escalation clause XX
Penalty Clause (XX)
Change order XX
Incentive Pay XX
Progress Billings/Total Revenue P XX

Entry to record revenue, cost and profit:

Cost of Construction (COC) XX (balancing figure)

Construction in progress (debit if profit/ credit if loss) XX
Construction Revenue XX (Change in % of completion X Contract Price)

Additional Notes:

1. In cost recovery, the revenue recognized is equal to actual collections in excess of cost.
2. Recognition of loss:
-% of completion: Excess of cost over Contract Price + Previously recognized profits
-Cost recovery: Excess of cost over Contract Price only
3. Be careful about the % of completion, remember that it is CUMULATIVE.

FRANCHISE ACCOUNTING
Criteria that should be met for the down payment to be recognized immediately as revenue: (all must be met)

1. Collection of receivable is reasonably assured

2. Down payment is non-refundable
3. When franchise services have been substantially performed

However, when the down payment is non-refundable and it represents the fair value of services already rendered,
then the down payment is immediately recognized as revenue regardless if the criteria mention above is met or not.

Computation of Net Income:

Case 1: Note receivable is interest bearing and collection is reasonably assured.

Revenue (Initial Franchise Fee) P XX

COGS (For initial services) (XX)
GP P XX
Continuing Franchise Fee XX
Interest Income XX
Expenses (XX)
Net Income P XX

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NOTES IN PRACTICAL ACCOUNTING PROBLEMS II

Case 2: Note receivable is interest bearing and collection is not reasonably assured.

Down payment P XX
Collection, gross of interest XX
Total Collection P XX
X GPR %
Realized Gross Profit P XX
Continuing Franchise Fee XX
Interest Income XX
Expenses (XX)
Net Income P XX

Case 3: Note receivable is non-interest bearing and collection is reasonably assured.

-Same as Case 1. Except for the composition of revenue which is: PV of note + Down payment + Continuing
franchise fee + Interest Income.
-Income from franchise= PV of note + Down payment + Continuing franchise fee (without interest income)

Case 4: Note receivable is non-interest bearing and collection is not reasonably assured.
-Same as Case 2. Except for the collection which should be NET of interest.

Gross profit rate (GPR) = Gross profit* ÷ Revenue

*Gross profit=Revenue (Down Payment + PV of note) – COGS (Direct Costs only)

Additional Notes:

1. If substantial future services are still required, the receivable is still UNEARNED. If substantial services have been
performed the receivable is recognized as EARNED.

2. Cost-recovery and installment method is also applicable to franchise if collection is not reasonably assured.

3. If there is a purchase option, deduct it to arrive at the revenue recognized.

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