CASH & CASH EQUIVALENTS - drawn but not yet given to payee before end of

Cash (accounting parlance) reporting period

- includes money and any other negotiable instrument - no payment when check is pending delivery to the
that is payable in money and acceptable by the bank for payee
deposit or immediate encashment. - it is still subject to entities control and may be
- Must be readily available, thus it is unrestricted in use cancelled anytime before delivery
- Ex (checks, bank drafts & money orders) Entry to adjust:
Cash xx
Composition of Cash A/P xx
1. Cash on Hand – undeposited cash collections
- Other cash items awaiting deposit such as Postdated Check Delivered
customer’s checks, traveller’s check, bank drafts - a check drawn, recorded and already given to payee
and money orders. but it bears a date subsequent(after) the reporting
2. Cash in Bank – unrestricted to withdrawal period
- includes demand and saving deposit - thus it must be adjusted and restored to cash
*Bank Overdraft – Credit balance of cash in Entry to adjust:
bank. It is a current liability and must be offset Cash xx
to bank. A/P xx
*Compensating Balance – Minimum cash to be
maintained in connection with a borrowing Stale Check /Long outstanding
arrangement with a bank - check not yet encashed by payee within 6 months
Classification of compensating balance: from time of issuance
a. If not restricted to withdrawal, it is part of If amount of stale check is immaterial it will be
Cash accounted as:
b. If it is legally restricted and the related loan is Cash xx
Short-term, it is part of Cash held as Miscellaneous Income xx
compensating balance If the amount is Material, cash will be restored and
c. If loan is long-term, the compensating liability is again set up:
balance is classified as Long Term investment Cash xx
A/P xx
3. Cash Fund – Set aside for current purposes like
petty cash fund, payroll fund and dividend fund RECIPIENT’S POINT OF VIEW
-Checks removed from cash
Cash Equivalents
- short term and highly liquid investments that are NSF (daif) checks
readily convertible into cash - checks collected which has no sufficient balance in the
- present insignificant risk of changes in interest rates bank. Adjustment entry:
Ex. Money market instruments, 3 month time deposit, A/R xx
treasury bills Cash xx
- if problem is silent, time deposit is within 3 months Post dated checks received
- check collected bearing a date subsequent to reporting
MEASUREMENT period. Adjustment entry:
- at face value; if foreign currency measured at Current A/R xx
exchange rate Cash xx
- if cash is in financial institution facing bankruptcy, Stale Checks
should measured at lower of face value and NRV - checks collected but not encashed in 6 months
A/R xx
Cash xx

ISSUER’S POINT OF VIEW

Undelivered/ Unreleased Checks
Accounting for Cash Shortage
- where cash is less than the balance per book PCF xx
- cash short and over account are only temporary or Cash in Bank xx
suspense account. To record cash shortage: f. Decrease in fund
Cash Short xx Cash in Bank xx
Cash xx Petty cash fund
*If Cashier or Cash custodian is held responsible for
cash shortage, adjustment should be: B. Fluctuating fund system
Due from Cashier xx - checks drawn to replenish the fund do not necessarily
Cash Short xx equal the petty cash disbursements.
*If efforts fail to disclose the cause of shortage,
adjustment entry would be: a. Check is drawn to establish the fund
Loss from cash shortage xx PCF xx
Cash Short xx Cash in Bank xx
b. Payment of expense out of the fund
Accounting for Cash Overage Expenses xx
- where cash count is more than balance per book. To PCF xx
record cash overage: c. Replenishment or increase of fund
Cash xx PCF xx
Cash Over xx Cash in Bank xx
d. at end of accounting period, no adjustments is
*If there is no claim, treated as misc. income: necessary
Cash Over xx e. decrease of fund entry:
Miscellaneous Inc xx Cash in Bank xx
*If found to be the money of cashier: PCF xx
Cash over xx
Payable to cashier xx
BANK RECONCILIATION
METHODS OF ACCOUNTING FOR PETTY CASH FUND 3 Kinds of Bank Deposits
A. Imprest fund System 1. Demand Deposit
- system of control of cash which requires that all cash - current account or checking account where deposits
receipts should be deposited and all disbursements are covered by deposit slips
should be made by means of check - funds are withrawavle on demand by drawing checks
- cash payments are recorded upon replenishment and against the bank
at the end of accounting period - noninterest bearing

a. Check is drawn to establish the fund 2. Saving Deposit

PCF xx - depositor is given a passbook upon initial deposit
Cash in Bank xx - passbook is required when making deposits or
b. Payment of expense out of the fund withdrawal
No Journal entry - it is interest bearing

c. Replenishment of petty cash payments 3. Time Deposit

- This would be equal to petty cash disbursement - it is interest bearing
Expenses xx - evidenced by a formal agreement in an instrument
Cash in Bank xx called Certificate of deposit
d. at end of accounting period, adjust the unreplenished - may be withdrawn on demand or after a period of
expenses to state the correct petty cash balances. time agreed upon
Expenses xx
PCF xx
*should be reversed in the beg. of next period Bank Reconciliation – statement which brings into
PCF xx agreement the cash balance per book and cash balance
Expenses xx per bank
e. Increase in Fund entry:
- prepared monthly because bank provides depositor - errors are not yet included because it has to be
the Bank Statement at the end of every month analysed for proper treatment
- errors are reconciling items of the party which
RECONCILING ITEMS committed them
BOOK Reconciling Items
a. Credit Memos b. Book to Bank Method
- items that are not deposits credited by bank and not - the book balance is reconciled with the bank balance
yet recorded by the depositor - it is adjusted to equal the bank balance
- Ex. NR collected by bank in favour of the depositor,
proceeds of Bank Loan, matured time deposits Book Balance xx
Add; Credit Memo xx
b. Debit memos Outstanding Checks xx xx
- items that are not checks paid by bank which are Total xx
debited to the account of depositor and not yet Less: Debit Memos xx
Deposits in Transits xx xx
recorded as cash disbursement
Bank Balance xx
- this decreasse bank balances
- Ex. NSF Checks, defective checks, bank service charges,
reduction of loan c. Bank to book Method
- bank balance is reconciled with the book balance
c. Errors - bank balance is adjusted to equal book balance

BANK Reconciling Items Bank Balance xx

a. Deposits in Transit Add; Deposits in Transit xx
- collections already recorded by depositor as cash Debit Memos xx xx
receipts but not yet recorded by bank Total xx
- Ex. Collections already forwarded but too late to Less: Outstanding Checks xx
appear in the bank statement, Cash on hand awaiting Credit Memos xx xx
Book Balance xx
delivery to bank for deposit

b. Outstanding Checks
- checks already recorded by depositor as cash Some errors and their corrections
disbursements but not yet reflected on bank statement a. Understatement of cash receipts
- Ex. Checks drawn given to payees but not yet Cash in Bank xx
presented for payment, certified checks, Acc. Receivable xx
b. Understatement of Checks drawn by depositor
c. Errors Acc. Payable xx
Cash in bank xx
FORMS OF BANK RECONCILIATION c. deposit of another entity is credited by bank to the
account of depositor
a. Adjusted Balance Method *this would be deduction from the bank balance
- the book balance and the bank balance are brought to because it erroneously increased the account of
a correct cash balance depositor
- most preferred method *no adjustment on the book of depositor
d. Check of another entity charged to the account of
Book Balance xx
Add; Credit Memo xx
depositor
Total xx *this is an addition to the bank balance becasueit
Less: Debit Memos xx erroneously decreased the balance of depositor in the
Adjusted Book Balance xx bank.
*no adjustment on book of depositor
Bank Balance xx
Add: Deposit in Transit xx
Total xx
Less: Outstanding Checks xx
Adjusted Bank Balances xx
 PROOF OF CASH Computation of Outstanding Checks
- is an expanded reconciliation that includes proof of
receipts and disbursements Outstanding Checks - beg xx
- useful in discovering discrepancies in handling cash Add; Checks drawn by depositor during the month xx
Total checks to be paid by bank xx
Less: Checks paid by bank during the month xx
Computation of Book Balance Outstanding Check – end of month xx

Balance per book-beg xx

Add; Book debits during the month xx ACCOUNTS RECEIVABLE
Total xx - financial assets represents a contractual right to
Less: Book Credits during the month xx receive cash or another financial asset from another
Balance per book – end of month xx
entity
- any claims held against others
Book Debits
- cash receipts or all items debited to the cash in bank Trade receivables
account - claims arising from sale of merchandise or service in
Book Credits the ordinary course of the business
- cash disbursements or all items credited to the cash in - Classified as Current Assets
bank account - ex. Accounts Receivables(Customer’s accounts, trade
debtors), Notes receivable

Computation of Bank Balance Nontrade Receivables

Balance per bank-beg xx
Add; Bank credits during the month xx
Total xx
Less: Bank debits during the month xx
Balance per bank – end of month xx
Bank Credits
- all items credited to the account of the depositor
which include deposits acknowledged by bank and
credit memos
- in absence of statement, it is assumed to be
acknowledged by bank
Bank Debits
- all items debited to the account of depositor, like
checks paid by bank and debit memos
- in absence of statement, bank debits are assumed to
be checks paid by bank
Computation of Deposit in Transit
Deposit in transit - beg
Add; Cash receipts deposited during the month
Total deposits to be acknowledged during the month
Less: Deposits acknow by bank during the month
Deposit in transit – end of month
- claims arising from sources other than sale of
merchandise or services in the ordinary course of
business
- if expected to be realized within one year, it is Current
assets
- if collectible beyond one year, it is Noncurrent assets
- Ex. Advances to or receivables from shareholders,
advances to affiliates and to supplier, subscription
receivables, accrued income, claims receivable
*Customers’ Credit Balances
- cr balances in AR resulting from overpayments, returns
and allowances and advance paymnets from customers.
- these are current liabilities, and are not offset against
debit balances except if it is not material
Measurement of Accounts Receivable
- measured initially at Face amount or original
invoiceamount
- subsequently, it shall be measured at Amortized cost
which is the Net Realizable Value of AR
xx Net Realizable Value – estimated recoverable amount
xx or cash expected to be collected. The following
xx deductions are made:
xx
a. Allowance for freight charge
xx
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

Terms Related to Freight Charge

1. FOB Destination METHODS OF RECORDING CREDIT SALES
- ownership of the goods purchased is in the buyer upon A. Gross Method
the receipt thereof - The accounts receivables and sales are recorded in
- seller is responsible for freight charges Gross amount of the invoice

2. FOB Shipping Point 1. Sales on account P50,000, 2/10, n/30

- ownership is in the buyer upon shipment thereof Accounts Receivable 50,000
- Buyer will pay for transportation expenses Sales 50,000

3. Freight Collect 2. Collection within discount period

- the freight charge is not yet paid Cash 49,000
Sales Discount(50kx2%) 1,000
4. Freight Prepaid Accounts Rec. 50,000
- freight charge is already paid by the seller
3. Collection beyond discount period
ACCOUNTING FOR FREIGHT Cash 50,000
Buyer’s Book Accounts Rec. 50,000

1. FOB Shipping Point, Freight Prepaid

Freight In xx B. Net Method
Accounts Payable xx - the accounts receivables and sales are ecorded at net
2. FOB Shipping Point, Freight Collect amount of invoice
Freight in xx - Invoice price minus cash discount
Cash xx
3. FOB Destination, Freight Prepaid 1. Sales on account P50,000, 2/10, n/30
No entry Accounts Receivable 49,000
4. FOB Destination, Freight Collect Sales(50k-1k) 49,000
Accounts Payable xx
Cash xx 2. Collection within discount period
Cash 49,000
Seller’s Book Accounts Rec. 49,000

1. FOB Shipping Point, Freight Prepaid 3. Collection beyond discount period

Acc Rec xx Cash 50,000
Cash xx Accounts Rec. 49,000
2. FOB Shipping Point, Freight Collect Sales Disc. Forfeited 1,000
No entry
3. FOB Destination, Freight Prepaid Accounting for Bad debts
Freight Out xx - assuming the risk that some customers will not pay
Cash xx their accounts
4. FOB Destination, Freight Collect - this loss is one of the costs of doing business on credit
Freight Out xx Two Methods
All. For freight charge xx 1. Allowance Method
- requires recognition of bad debt loss if the accounts
are Doubtful of collection, entry is:
Sales Discount Doubtful accounts xx
– reduction from invoice price on part of seller Allow. For Doubtful acc. xx
If Doubtful accounts are worthless, it is written off:
Purchase Discount Allow. For doubtful acc xx
- reduction from invoice price on part of buyer Accounts Receivable xx
2. Direct writeoff method
*If buyer failed to pay the discount within the given - recognized bad debts loss when proved to be
period, the buyer shall pay the gross amount. worthless or uncollectible
CHAPTER 5: ESTIMATION OF DOUBTFUL ACCOUNTS Rate= Bad Debt Losses / Charge sales
Doubtful Account Expense= Sales for the year x
THREE METHODS OF ESTIMATING DOUBTFUL rate
ACCOUNT
1. Aging the A/R or Statement of Financial Correction in Allowance for Doubtful Accounts
Position Approach- involves the ANALYSIS -correction is to be reported as an addition to or
where the accounts are classified into not due subtraction from doubtful accounts expense-
or past due. natural result of a change in estimate.
a. Not due
b. 1 to 30 days past due
c. 31-60 days past due CHAPTER 6: NOTES RECEIVABLE
d. 61-90 days past due Notes Receivable (N/R)- claims supported by
e. 91-120 days past due formal promises to pay usually in the form of
f. 121-180 days past due notes.
g. 181-365 days past due
h. More than 1 year past due Dishonored Notes- when promissory note
matures and is not paid. Removed from the N/R
-This method is more accurate and scientific in account and transferred to A/R.
computing the allowance for doubtful accounts.
Allowance= Total of each classification x rate or Initial Measurement- initially at Present Value
percent of loss. Subsequent Measurement- at Amortized Cost
using effective interest method-
-Presented FAIRLY the A/R in the balance sheet -minus principal payment
at net realizable value -plus or minus cumulative amortization
of any difference between initial carrying
-time consuming if a large number of accounts
amount and the principal
were involved.
-minus reductions for impairment or
When is an account past due? uncollectibility.

-credit terms 2/10, n /30- if the account is 45- Notes receivable- non-interest portion Pxx
day old, it is 15 days past due. Unearned Interest Income (xx)
2. Percent of A/R or Statement of Financial Carrying amount at Amortized Cost Pxx
Position Approach- has the advantage of
presenting A/R at ESTIMATED net realizable Short Term N/R- measured at Face Amount
value. It is simple to apply.
-it violates the principle of matching bad debt To compute for Unearned Interest Income:
loss against sales revenue.
Face Value of Note Pxx
Allowance= open Accounts x rate PV of Note xx
Unearned Interest Income Pxx
3. Percent of Sales or Income Statement
Approach- this procedure of determining the To compute for gain on sale of equipment:
rate has the advantage of eliminating extra
work of making a record of cash sales and credit Present Value of Note Pxx
sales. Cash Received- downpayment xx
-however, this method is unsatisfactory when Sale Price xx
there is fluctuations in cash sales. Cost of Equipment (xx)
-proper matching of cost against revenue is Gain on Sale Pxx
achieved, because bad debt loss is directly
related to sales.
-has the disadvantage of the allowance for
doubtful accounts being inadequate and
excessive.
 Interest-Bearing N/R
-The measurement of long term notes will
depend whether the notes are interest-bearing
or not.
Interest-bearing long term notes – at Face
Amount.
Non-interest bearing notes- at Present value
CHAPTER 8- RECEIVABLE FINANCING
Receivable Financing- financial flexibility or capability to
raise money out of receivables. It is done when the
company is under financial distress (tight cash
position), when the receivables are being delayed but
the company must maintain of its currently matured
obligations (liabilities).

CHAPTER 7: LOANS RECEIVABLE TYPES OF FORMS OF RECEUVABLE FINANCING

Loans Receivable- arises form loans granted from 1.PLEDGING OF A/R – A/R in general is use as a
customers by banks and other financing institutions collateral for the loan. It is disclosed only.

Valuation: Amortized cost= Carrying Value -Journal entries are on the transactions
related to loans only.
Initial Valuation
2. ASSIGNMENT OF A/R- specific A/R is used as
Principal(a) Pxx collateral security for loans obtained.
Origination Fees- charge to customers (xx)
Orignation Fees- not charge to customer xx - Journal Entries for the transactions related to
Carrying Value (b) Pxx the loan and A/R assigned.
- Disclose equity on the A/R assigned
Subsequent Valuation
A/R- assigned Pxx
Principal Pxx Note Payable- related bank- assignee (xx)
Unamortized Income (xx) Equity in A/R assigned Pxx
Carrying Value- end Pxx
Or TYPES OF ASSIGNMENT A/R
1. Notification basis- assignee (creditor)
Carrying Value, beg Pxx collects A/R.
Amortization of Income xx - customers are notified to make payments
Carrying value, end Pxx directly to the assignee.
IMPAIRMENT OF LOANS- when the value of the loans is 2. Non-notification basis- assignor- (debtor)
decreased due to uncollectibility of interest and or collects A/R.
principal
3. FACTORING ASSIGNMENT OF A/R- A/R sold
Impairment Loss charged to remove interest are approved by the factor.
receivables and allowance for loan impairment. -It is characterized by the presence of:
To compute for impairment loss: 1. Service Charge- for costs related to
Carrying Value @ impairment date Pxx credit approval, collection of A/R and risks of
PV of Cash Flows (collectible loans) (xx) uncollectibility.
Impairment Loss Pxx 2. Factor’s holdback (receivable from
factor)- portion of the price that is withheld by
To compute for end carrying value: the factor as a protection against customer
Principal Pxx returns, allowances and other adjustments. It is
Allowance for loan impairment (decreased by refunded to seller company upon full collection
Interest income recognized) (xx) of the A/R.
Carrying value- end Pxx
Interest Income= Effective rate (original) x Carrying
value, beg.
 CHAPTER 25: PROPERTY, PLANT &  Cash discounts are reduction of cost NOT
INCOME
EQUIPMENT - Journal entries
 CHARACTERISTICS: GROSS METHOD
- Tangible assets  Acquisition
- Used in business – production/supply, rental, admin Equipment xx
- Used over a period of more than one year A/P xx
 RECOGNITION;  Within discount period
a) future economic benefits to the entity A/P xx
b) cost measured reliably Cash (net amount) xx
 ELEMENTS OF COST Equipment (discount) xx
a) (Purchase price + import + non-refundable tax) less
(discounts and rebates)  Beyond discount period
b) Directly attributable – location and condition A/P xx
 Employee benefits Purchase Discount Lost xx
 Site preparation Cash xx
 Professional fees Equipment xx
 Delivery and condition NET METHOD
 Installation and assembly  Acquisition
 Testing Equipment xx
c) Dismantling, removing, & restoring the site – A/P (net amount) xx
obligation  Within discount period
 EXPENSED A/P xx
- “new” Cash (net amount) xx
- Advertising and promotion  Beyond discount period
- Admin and general overhead A/P xx
- Less than full capacity Purchase Discount Lost xx
- Initial operating losses Cash xx
- Relocating and reorganizing
 AFTER RECOGNITION ACQUISITION ON INSTALLMENT BASIS
- Cost model: Cost less accumulated depreciation and - Cash price (excess = interest to be amortized)
impairment loss - No cash price = present value of all payments
- Revaluation model: Fair value less accumulated - Journal Entries
depreciation and impairment loss  Acquisition with Cash Price
 ACQUISITION OF PROPERTY Machinery (cash price) xx
ACQUISITION ON CASH BASIS Discount on N/P xx
- Cash price equivalent N/P (balance) xx
- Cash paid + freight, installation, etc. Cash (down) xx
- “basket price”/lump sum = apportion  Acquisition without Cash Price
- Computation: Machinery xx
FAIR VALUE FRACTION ALLOCATED Discount on N/P xx
COST N/P xx
ASSET 1 XX X/X XX Cash (down) xx
ASSET 2 XX X/X XX Computation:
Down Payment xx
XX BASKET PRICE
PV of NP (PV of 1) xx
Cost xx
ACQUISITION ON ACCOUNT
- Invoice price minus discount (regardless taken or
NP xx
not)
PV of NP (xx)
 Not taken = purchase discount lost
Implied Interest xx
 Recorded cost = net amount Amortization Table:
DATE PAYMENT INTEREST(% x PV) PRINCIPAL PV
 x/x/x1 - - - XX Bonds Payable (Face) xx
x/x/x1 XX - XX = XX XX
x/x/x2 XX - XX = XX XX EXCHANGE
x/x/x3 XX - XX = XX - - Commercial substance: cash flows change
significantly
 Installment Payment - Fair value
N/P xx - Carrying amount if:
Cash xx a) Lacks commercial substance
 Amortization b) Not reliably measurable
Interest Expense xx I. With Commercial Substance
Discount on N/P xx  Silent problems
DATE NP FRACTION INTEREST  Cost
EXPENSE  Journal entries
20x1 XX X/X XX PAYOR
20x2 XX X/X XX Equipment – New xx
20x3 XX X/X XX Accumulated Depreciation xx
XX DISCOUNT Loss on Exchange xx
ON NP Equipment – Old xx
Cash xx
ISSUANCE OF SHARE CAPITAL Computation:
- Order of priority: FV of Asset Given xx
a) FV of Property Received Cash Payment xx
b) FV of Share Capital Cost xx
c) Par value or stated value of the share capital
- Journal Entries FV of Asset Given xx
 FV of Property Received Carrying Amount (xx)
Asset xx Gain (Loss on Exchange) (xx)
Share Capital (Par) xx
Share Premium xx RECIPIENT
 FV of Share Capital Equipment – New xx
Asset (Quoted) xx Accumulated Depreciation xx
Share Capital (Par) xx Cash xx
Share Premium xx Equipment – Old xx
 Par value or stated value of SC Gain on Exchange xx
Asset (Par) xx Computation:
Share Capital (Par) xx FV of Asset Given xx
Cash Received xx
ISSUANCE OF BONDS PAYABLE Cost xx
- Order of priority:
d) FV of Bonds Payable FV of Asset Given xx
e) FV of Asset Received Carrying Amount (xx)
f) Face Amount of BP Gain (Loss on Exchange) xx
- Journal Entries
 FV of Bonds Payable II. No Commercial Substance
Asset (Quoted) xx  Carrying amount
Bonds Payable (Face) xx  No gain or loss
Premium on BP xx  Cash: Add to payor; deduct to recipient
 FV of Asset Received  Journal entries
Asset xx PAYOR
Bonds Payable (Face) xx Equipment – New xx
Premium on BP xx Accumulated Depreciation xx
 Face Amount of BP Equipment – Old xx
Asset (Face) xx Cash xx
Computation: DONATION
Carrying Amount xx - Market Value
Cash Payment xx I. From Shareholders
Cost xx  FV to donated capital (Cr)
 Expenses (registration and legal fees) are
RECIPIENT charged to the donated capital account
Equipment – New xx  Do not increase or enhance value of asset
Accumulated Depreciation xx II. From Non-Shareholders
Cash xx  FV when received or receivable
Equipment – Old xx  Subsidies = income (income from donation)
Computation:  Not subsidies = liability account then transferred
Carrying Amount xx to income once initial restrictions are met
Cash Received xx CONSTRUCTION
Cost xx Cost:
1) Direct materials
III. Trade In 2) Direct Labor
 Nondealer acquiring from a dealer 3) Indirect Cost (identifiable) = allocation may be
 Has commercial substance done
 Order of priority: CONSTRUCTED FINISHED TOTAL
a) FV of asset given plus cash payment ASSET GOODS
b) Trade in value of asset given plus cash Materials XX XX XX
payment Labor XX XX XX
 Journal entries Man. XX XX XX
FAIR VALUE APPROACH Overhead
Equipment – New xx XX XX XX
Accumulated Depreciation xx
Loss on Exchange xx DIRECT FRACTION OVERHEAD
Equipment – Old xx LABOR
Cash xx Constructed XX X/X XX
Computation: Asset
FV of Asset Given xx Finished XX X/X XX
Cash Payment xx Goods
Cost xx XX XX

FV of Asset Given xx - Saving or loss

Carrying Amount (xx)  Actual cost < price = saving
Gain (Loss on Exchange) (xx)
 Actual cost > price = not loss (recorded at actual
cost)
TRADE IN VALUE APPROACH
 Incidental operations = profit or loss
Equipment – New xx
- Derecognition
Accumulated Depreciation xx
 Removed from accounts
Equipment – Old xx
 Disposal/no future economic benefit
Gain on Exchange xx
Cash xx  Difference of net disposal proceeds and carrying
Computation: amount
Trade In Value of Asset Given xx - Fully depreciated
Cash Received xx  Carrying amount is equal to 0 or salvage value or
Cost xx residual value
PROPERTY CLASSIFIED AS HELD FOR SALE
Trade In Value of Asset Given xx  Within 1 year; available for immediate sale
Carrying Amount (xx)  Current asset
Gain (Loss on Exchange) xx  Lower of carrying amount or fair value less cost of
disposal
  Not depreciated Deferred Grant Income xx
IDLE OR ABANDONED PROPERTY  Acquire asset
 Not held for sale Building xx
 Temporary idle = PPE (still depreciates) Cash xx
OPTIONAL DISCLOSURES  Depreciation Expense
 Carrying amount of temporary idle Depreciation xx
 Gross carrying amount of fully depreciated Accumulated Depreciation xx
 Carrying amount of PPE held for sale retired from  Recognize income
active use Deferred Grant Income xx
 Cost model: materially different Grant Income xx
NONDEPRECIABLE ASSET
CHAPTER 26: GOVERNMENT GRANT - Allocated: cost of meeting the conditions
 Assistance: transfer of resources in return for future - Journal entries
compliance with certain conditions relating to  Received grant
operating activities Land xx
 Fair value if: entity will comply Deferred Grant Income xx
: grant will be received  Construct asset
 Income over the periods Refinery xx
 Classifications Cash xx
- Grant related to asset: purchase, construct or *Depreciation and income same years*
acquire long-term asset COMPENSATION
 Deferred income - Financial support
 Deducting the grant in arriving at the carrying - Journal entries
amount  Income immediately
- Grant related to income: “others” Cash xx
 Separately or “other income” Grant Income xx
 Grant is deducted from expense APPROACH FOR PRESENTATION
SPECIFIC EXPENSES I. DEFERRED INCOME APPROACH
- Allocated: specific expenses over the period of the  Acquisition
related expenses Equipment xx
- Journal entries Cash xx
 Received grant  Deferred Income
Cash xx Cash xx
Deferred Grant Income xx Deferred Grant Income xx
 Recognize income  Depreciation Expense
Deferred Grant Income xx Depreciation xx
Grant Income xx Accumulated Depreciation xx
 Incur expenses  Recognize income
Environmental Expenses xx Deferred Grant Income xx
Cash xx Grant Income xx
Computation:
EXPENSES FRACTION GRANT II. DEDUCTION FROM ASSET APPROACH
INCOME - Allocated: proportion to the depreciation
20X1 XX X/X XX - Journal entries
20X2 XX X/X XX  Acquisition
20X3 XX X/X XX Equipment xx
XX XX Cash xx
 Deduction
DEPRECIABLE ASSET Cash xx
- Allocated: proportion to the depreciation Equipment xx
- Journal entries  Depreciation Expense
 Received grant Depreciation xx
Cash xx Accumulated Depreciation xx
REPAYMENT  Amortization
- Noncompliance = change in accounting estimate Interest Expense xx
I. GRANT RELATED TO INCOME Discount on Notes Payable xx
- Unamortized deferred income first  Recognize income
- Excess = expense Deferred Grant Income xx
 Entry Grant Income xx
Deferred Grant Income xx  Paid (End)
Loss on repayment of grant xx Notes Payable xx
Cash xx Cash xx

II. GRANT RELATED TO ASSET CHAPTER 27: BORROWING COST

- Increasing carrying amount
 In connection with borrowing of funds; includes:
 Deferred Income Approach
a) Interest expense
Deferred Grant Income xx
b) Finance charge
Loss on repayment of grant xx
c) Exchange difference (foreign currency)
Cash xx
 Qualifying asset – substantial period of time to get
Depreciation Expense xx
ready for the intended use or sale
Accumulated Depreciation xx
Computation:  Excluded from capitalization:
Building xx a) Fair value (biological assets)
Accumulated Depreciation (xx) b) Repetitive basis (ex. Maturing whiskey)
c) Ready for intended use/sale when acquired
Carrying Amount – 12/31 xx
 PAS 23 mandates:
 Deduction from asset Approach - Borrowing cost directly attributable: capitalized as
Building xx cost of the asset
Cash xx - Other borrowing costs (not directly attributable):
Depreciation xx expensed
Accumulated Depreciation xx  Commencement of capitalization
Computation: - When conditions are met:
Depreciation on original carrying amount xx a) Incurs expenditure
Depreciation on increased carrying amount xx b) Incurs borrowing cost
Total Depreciation xx c) Undertakes activities to prepare asset intended
for use/sale
Building xx  Ex. Technical and admin work
Accumulated Depreciation (xx)  Development activity
Carrying Amount – 12/31 xx  Suspension of capitalization
- Suspension = active development is interrupted
GRANT OF INTEREST-FREE LOAN - Not normally suspended = substantial technical and
- Forgivable loan: reasonable assurance that the admin work carried out
entity will meet the terms of forgiveness - Not also suspended = temporary delay is a necessary
- Amortization table part of the process
AMORTIZATION DISCOUNT ON NP PV (previous PV - Continues = delay is caused by common occurrence
(%) (previous – + amortization) in geographical region
amortization)
1/1/X1 - XX XX  Cessation of capitalization: substantially activities
12/31/X1 XX XX XX necessary are complete
12/31/X2 XX XX XX  Disclosures
12/31/X3 XX XX XX
a) Amount of borrowing cost
b) Capitalization rate
- Journal entries
 Received grant
ASSET FINANCED BY SPECIFIC BORROWING
Cash xx
- Specifically for the purpose of acquiring a qualifying
Discount on Notes Payable xx
asset
Note Payable xx
- Computation:
Deferred Grant Income xx
 Actual Borrowing Cost xx Specific (𝑥𝑥 × %) xx
Interest Income from investment proceeds (xx) General (𝑥𝑥 × %) xx
Capitalizable Borrowing Cost xx Total cost of new bldg xx

ASSET FINANCED BY GENERAL BORROWING MORE THAN 1 YEAR BUT LESS THAN 2 YEARS
- Generally; used for acquiring a qualifying asset DATE EXPENDITURE FRACTION AVERAGE
- Capitalizable borrowing cost shall not exceed the Jan 1 XX 8/8 XX
actual interest incurred Jul 1 XX 2/8 XX
- Investment income is not deducted XX XX
- Computations Cumulative Actual Expenditures in 20x2 xx
DATE EXPENDITURES MONTHS AVERAGE Capitalizable B.C. in 20x2:
OUTSTANDING Specific (𝑥𝑥 × %) xx
Jan 1 XX 12/12 XX General (𝑥𝑥 × %) xx
Mar 31 XX 9/12 XX Total cost of building xx
Jun 30 XX 6/12 XX
Sep 30 XX 3/12 XX SPECIFIC BORROWING FOR ASSET USED FOR GENERAL
Dec 31 XX - - PURPOSES
Average Carrying Amount XX - Specific but a portion is for working capital purposes
𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 - General borrowing = determining capitalizable
Capitalization Rate =
𝑇𝑜𝑡𝑎𝑙 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔
borrowing cost
Capitalizable borrowing cost =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 × 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
*not exceed the actual cost* CHAPTER 28: LAND & BUILDING
ASSET FINANCED BOTH BY SPECIFIC AND GENERAL  Land account
BORROWING I. STATEMENT CLASSIFICATION
- Computations - Used as a plant site = PPE
DATE EXPENDITURES MONTHS AVERAGE - Held for a currently undetermined use =
(actual expenditures) Investment Property
OUTSTANDING
Jan 1 XX 12/12 XX - Definitely as a future plant size = PPE
Mar 31 XX 9/12 XX - Held for current sale = Inventory (current asset)
Jun 30 XX 6/12 XX II. COSTS CHARGEABLE TO LAND
Sep 30 XX 3/12 XX - Purchase price
Dec 31 XX - - - Legal fees and other expenditures (clean title)
Average Expenditures XX - Broker or agent commission
- Escrow fees
Average Expenditures xx - Registration and transfer
Specific borrowing xx - Relocation or reconstruction
General Borrowing xx - Mortgages, exncumbrances and interest
- Unpaid taxes up to date of acquisition
Specific borrowing xx - Cost of survey
General Borrowing (xx) - Tenants: vacate; not to make room for new
Total Capitalizable B.C. xx building
- Permanent improvements
CONSTRUCTION PERIOD MORE THAN ONE YEAR - Option to buy the acquired land
- Group it by year muna III. LAND IMPROVEMENTS
- Computation: - Not subject to depreciation = Land Account
20x1 Actual Expenditures in 20x1 xx - Depreciable = Land Improvements
Capitalizable B.C. in 20x1: IV. SPECIAL ASSESSMENTS
Specific (𝑥𝑥 × %) xx - Taxes paid by landowners = cost of land
General (𝑥𝑥 × %) xx  Increase definitely the value
Total cost of new bldg to date xx V. REAL PROPERTY TAXES
- Real property taxes = Expense
20x2 Cumulative Actual Expenditures in 20x2 xx - Unpaid and assumed in acquisition = capitalized
Capitalizable B.C. in 20x2:
 Building account - Net demolition cost = capitalized to land
I. WHEN PURCHASED (COST) III. PRIOR PERIOD USED BUT DEMOLISHED
- Purchase price - Carrying amount of old building = loss
- Legal fees and other expenses in connection - Net demolition cost = capitalized to new building
- Unpaid taxes - Contract lease = charged to cost of new building
- Interest, mortgage, liens and other CHAPTER 29: MACHINERY
encumbrances I. COST OF MACHINERY
- Tenants to vacate - Purchase price
- Renovating or remodeling - Freight, handling, storage and other directly
II. WHEN CONSTRUCTED - Insurance while in transit
- Direct material, direct labor, factory overhead
- Installation
- Building permit or license - Testing and trial run
- Architect fee - Dismantling, removing, restoring (with present
- Superintendent fee obligation)
- Excavation - Fee to consultants
- Temporary buildings
- Safety rail and platform
- Loans and insurance: expenses during - Water device
construction
 Removed and retired to make room = Expense
- Service equipment and fixture: permanent part
 VAT = not capitalizable (input tax and the offset)
- Temporary safety fence (permanent = land
 Irrecoverable or non-refundable tax = Capitalized
improvement)
II. TOOLS
- Safety inspection fee
- Machine = drills and punches
III. SIDEWALKS, PAVEMENTS, PARKING LOT,
- Hand = hammer and saws
DRIVEWAYS
III. PATTERNS AND DIES
- Part of blueprint = Building account
- Regular = assets
- Occasionally made or incurred not in connection
- Special = cost of special
= Land improvements
IV. EQUIPMENT
IV. CLAIMS FOR DAMAGES
- Delivery: cars, trucks, etc.
- Insurance taken = charged to building
 Registration fees = expensed
 Necessary and reasonable cost
- Store and office: computers, cash register, etc.
- Insurance not take = Expensed
 Selling function = store
 Management failure or negligence
- Furniture and Fixture
V. BUILDING FIXTURES
V. RETURNABLE CONTAINERS
- Immovable = Building
- Big units/great bulks = PPE
- Movable = Furniture and Fixtures
- Small and individually = other noncurrent assets
VI. VENTILATING SYSTEM, LIGHTING SYSTEM,
- Not returnable = expense
ELEVATOR
VI. CAPITAL VS. REVENUE EXPENDITURE
- Installed during construction = Building
- Current period = revenue expenditure = expense
- Otherwise = Building improvements
- Current and future = capital expenditure = asset
 Depreciation = useful life or remaining life (w/c
VII. SUBSEQUENT COSTST
shorter)
a) Future economic benefits flow to the entity
 PIC Interpretation on Land and Building
- Extends the life
I. PURCHASED AT A SINGLE COST
- Increases capacity
- Usable = allocated based on FV
- Improves efficiency and safety
- Unusable = Land only
b) Cost can be measured reliably
II. DEMOLISHED IMMEDIATELY
- Increase = capitalized
- Usable = loss if old building is PPE/Investment
- Maintains = expense
Property
 Additions: increase physical
- Usable = capitalized to new building if old
- New unit: depreciation useful life
building is inventory
- Expansion: depreciation expansion/remaining
- Demolition cost minus salvage = capitalize the
(w/c is shorter)
new whether PPE/Investment
 Improvements or betterments: increase service life
Property/Inventory
 - Better or superior = capitalized Accumulated Depreciation (xx-xx) (xx)
 Replacements: substitution (not better) Carrying Amount – 12/31 xx
- Replace old by a new asset Annual Depreciation (xx/x) xx
- Major parts/extra ordinary
- Minor parts/ordinary CHAPTER 30: DEPRECIATION –
 Repairs: restore to good condition
- Extraordinary = large sums = capitalized STRAIGHT LINE AND VARIABLE
- Ordinary = small sums = expense  Allocated to expense:
 Maintenance = keeps good condition a) Depreciation – PPE
 Rearrangement cost: relocation/redeployment b) Depletion – Wasting Assets
- Expensed as incurred = maintains level c) Amortization – Intangible Assets
VIII. ACCOUNTING FOR MAJOR REPLACEMENT  Systematic allocation of the depreciable amount of
- Practicable = asset an asset over the useful life
 Cost of part and accumulated depreciation of  Cost allocation: exhaustion of the useful life
part = removed  Period benefiting from the use of the asset
 Remaining = loss  Expense: cost of goods manufactured & operating
- Not practicable = cost of replacement (discounted) expense
SEPARATE IDENTIFICATION IS PRACTICABLE - Unless it is included in the carrying amount of
- Journal entries another asset
 Eliminate original cost  Depreciation period
Loss on retirement of building xx - Begins = available for use (location and condition)
Accumulated Depreciation xx - Ceases = derecognized
Building xx  PFRS 5: held for sale = discontinued
 Kinds of depreciation
- Physical
 Replacement  Wear and tear (frequent use)
Building xx  Passage of time (non-use)
Cash xx  Action of the elements (wind, sunshine, etc.)
 Subsequent annual depreciation  Casualty or accident (fire, flood, etc.)
Depreciation xx  Disease or decay
Accumulated Depreciation xx - Functional or economic
 Inadequacy – no longer useful because of
- Computation: increase in the volume of operations
Building xx  Supersession – new asset available can
Accumulated Depreciation (xx) perform the same function efficiently
Carrying Amount – 12/31 xx  Obsolence – no future demand (encompasses
Annual Depreciation (xx/x) xx inadequacy and supersession)
 Factors of depreciation
SEPARATE IDENTIFICATION IS NOT PRACTICABLE 1) Depreciable amount
- Journal entries - Cost less residual value
 Eliminate cost - Part that is significant in relation to the total
Loss on retirement of building xx cost is depreciated separately
Accumulated Depreciation xx 2) Residual value
Building (PV) xx - Net amount currently obtainable at the end of
 Replacement the useful life
Building xx - Reviewed at least annually at year-end
Cash xx - Change = change in accounting estimate
 Subsequent annual depreciation - If residual value ≥ carrying amount → residual
Depreciation xx value = 0
Accumulated Depreciation xx - If residual value does not exceed the carrying
amount
- Computation:
Building (xx-xx+xx) xx
 3) Useful life – period available for use or number
of production expected d) Replaced by a similar asset
a. Time periods Asset xx
b. Output Cash xx
c. Service hours *afterwards, rate x balance = periodic depreciation*
 Factors 𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑅𝑎𝑡𝑒 =
- Expected usage (capacity or physical output) 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
- Expected physical wear and tear (repair & 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝐿𝑖𝑓𝑒 =
maintenance; care while idle) 𝑇𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
- Technical or commercial substance (market  Retirement of asset in the group
demand) Cash xx
- Legal limits (expiry date of related lease) Accumulated Depreciation xx
 Service life – useful life Asset xx
 Physical life – how long asset shall last  No proceeds from retirement
 Depreciation method Accumulated Depreciation xx
- Reviewed year-end Asset xx
- Significant change = change in accounting estimate 𝑁𝑒𝑤 𝑎𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
1) Equal or uniform = 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 × 𝑐𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑟𝑎𝑡𝑒
a. Straight line method VARIABLE CHARGE OR ACTIVITY METHODS
b. Composite method - Function of use
c. Group method - Depreciate more rapidly if fulltime or overtime
2) Variable charge or use-factor or activity methods - Direct relationship between utilization and realization
a. Working hours or service hours of revenue
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
b. Output or production method 1) 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 𝑚𝑒𝑡ℎ𝑜𝑑 =
𝐻𝑜𝑢𝑟𝑠
3) Decreasing charge or accelerating or diminishing 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
2) 𝑂𝑢𝑡𝑝𝑢𝑡 𝑚𝑒𝑡ℎ𝑜𝑑 =
balance 𝑂𝑢𝑡𝑝𝑢𝑡

a. Sum of years digits CHAPTER 31: DEPRECIATION – SYD &

b. Declining balance method
c. Double declining method
DECLINING
 Decreasing charge or accelerated methods (higher
4) Other methods
depreciation in earlier years; lower depreciation in
a. Inventory or appraisal
later years)
b. Retirement method
c. Replacement method  More revenue earlier
STRAIGHT LINE METHOD  Cost of using – includes depreciation and repairs
- Allocating equally  Repair cost = systematic and uniform basis
- Constant charge  3 decreasing charge methods
- Passage of time a) Sum of years digits
- Simplicity b) Declining balance
𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 c) Double declining
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = SUM OF YEARS’ DIGITS
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
100% 𝐴
𝑆𝑡𝑟𝑎𝑖𝑔ℎ𝑡 𝐿𝑖𝑛𝑒 𝑅𝑎𝑡𝑒 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = × 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
𝐿𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠 𝐵
*A = remaining life
COMPOSITE AND GROUP METHOD
*B = SYD
- Many individual assets as a single asset 𝐿𝑖𝑓𝑒 + 1
- Composite –dissimilar 𝑆𝑌𝐷 = 𝐿𝑖𝑓𝑒 ( )
2
- Group – similar Sum of half years digits = multiply life by 2
- Accounting procedures *Consider calendar year and acquisition date
a) Not related to a specific asset DOUBLE DECLINING BALANCE METHOD
b) Composite/group rate is multiplied by the total - Balance = Book Value
cost 200%
c) Retired = no gain or loss 𝑅𝑎𝑡𝑒 =
𝐿𝑖𝑓𝑒
Accumulated Depreciation xx - Fixed rate is multiplied by declining carrying amount
Asset xx - Approximation of declining
 - Declining (mathematical formula) vs. Double  Change in useful life
Declining (Straight line x 2) - Unexpected physical deterioration or
- 150% declining = fixed rate is 150% technological improvement = useful life <
INVENTORY METHD estimated
- Estimating value - Improved maintenance procedures or revision =
- Depreciation = balance of asset – value at the end prolong the useful life
- No accumulated depreciation → Credited directly to - Adjusted
asset - Computation:
- Asset: small and relatively inexpensive Cost xx
- It is not systematic Accumulated Depreciation (xx)
- Journal entries Carrying Amount – 1/1 xx
 Acquisition Annual Depreciation - New (xx/new life) xx
Tools xx  Change in Depreciation method
Cash xx - Solve for latest carrying amount then apply new
 Sale method
Cash xx -
Tools xx
 Depreciation
CHAPTER 32: DEPLETION
Depreciation xx  IFRS 6: exploration and evaluation of mineral
Tools xx resources
- Computation  Search after legal right; exploration and evaluation
Balance of tools account xx before technical feasibility and commercial viability
Inventory tools – 12/31 (xx)  Do not include: before legal right; after technical
Depreciation xx feasibility and commercial viability
 Exploration and evaluation expenditures
RETIREMENT METHOD - Acquisition of rights
- No depreciation until retired - Studies
- Depreciation = cost minus salvage proceeds - Drilling
- Journal entries - Trenching
 Acquisition - Sampling
Tools xx - Evaluating feasibility and viability
Cash xx - General and administrative costs directly
 Retirement attributable
Cash xx  Initially at cost → subsequent at cost/revaluation
Depreciation xx model
Tools (FIFO) xx  Wasting assets are physically consumed and
REPLACEMENT METHOD irreplaceable
- No depreciation until retired and replaced  Cost of wasting asset
- Depreciation = replacement cost minus salvage - Acquisition cost
proceeds  Price paid to obtain
- Journal entries  Initial cost
 Acquisition  Residual land value: may be included (land is a
Tools (excess of retirement) xx separate account)
Cash xx  Land value: residual value
 Replacement  Depletable amount: deducted from cost
 Depreciation xx - Exploration cost
 Tools  Before feasibility and viability
xx  Methods
- Computation a) Successful effort method (large companies):
Replacement cost of tools retired xx unsuccessful = expensed
Proceeds from retirement (xx) b) Full cost method (small entities): capitalized
Depreciation xx whether successful or unsuccessful
- Development cost
  Incurred to exploit or extract  Share capital of a corporation: trust fund for
 Tangible: not capitalized; depreciated the protection of creditors; capital cannot be
 Intangible: capitalized returned to shareholders
- Estimated restoration cost  Can pay dividends: only to the balance of
 Bring property to original condition retained earnings
 Added to cost OR “netted” against residual  Cannot pay dividend: if corporation has deficit
value - Wasting asset doctrine
 PAS 16: capitalized only when incurs the  Wasting asset corporation: can legally return
obligation capital to shareholders
 Must be an existing present obligation and  Can pay dividend: not only retained earnings
discounted also extent of accumulated depreciation
 Systematic allocation of a wasting asset over the  Excess of retained earnings: accounted as
period resource is extracted or produced liquidating dividend or return of capital
USUALLY OUTPUT OR PRODUCTION METHOD  Journal entry
𝐷𝑒𝑝𝑙𝑒𝑡𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 Retained earnings xx
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑒𝑥𝑡𝑟𝑎𝑐𝑡𝑒𝑑 Capital liquidated xx
Depletion (% per unit x units extracted) xx Dividends payable xx
Accumulated Depletion xx *Accumulated depreciation – not charged
- Income Statement: Depletion = Cost of Sales because it is not a source of dividend (only for
- Financial Position: Separate line item purposes of determining how much can be
Resource deposit, at cost xx legally returned
Accumulated Depletion (xx) * Capital liquidated – deduction from
Carrying Amount xx shareholders equity
REVISION OF DEPLETION RATE  Computation
Original cost of wasting asset xx Retained earnings xx
Additional cost in subsequent year xx Add: Accumulated depletion xx
Total xx Total xx
Capital liquidated in prior years xx
Accumulated depletion (xx)
Unrealized depletion in ending inventory xx xx
Remaining depletable amount xx Maximum dividend xx
New depletion rate per unit (xx/xx) xx
DEPRECIATION OF MINING PROPERTY
- Depreciation of equipment: life of equipment vs. life
CHAPTER 33: REVALUATION
of wasting asset (w/c is shorter)  Initially at cost; subsequently at cost/revaluation
 If equipment life is shorter = straight line model
 If wasting asset life is shorter = output method  Basis of revaluation
- Shutdown 1) Fair value - appraisal
 Output method cannot be used 2) Depreciated replacement cost – market value is
not available
 Based on remaining life; straight line method
 Depreciated replacement cost – replacement cost
 Computation (if operations resume after
minus depreciation; sound value
shutdown)
Equipment, at cost xx  Revaluation surplus – fair value minus carrying
Accumulated depreciation (xx + xx) (xx) amount; revaluation increment
Carrying amount xx  Appreciation – revaluation increase
 Computation: Original useful life
Original estimate of deposit xx Accumulated depreciation – cost xx
Extracted in first year (xx) Divide by: age of asset x
Remaining estimate of deposit xx Annual depreciation xx
Asset at cost xx
Depreciation rate per unit (xx/xx) x Divide by: annual depreciation on cost xx
Original useful life x
Depreciation for current year(xx/x) xx
 Trust fund doctrine vs. wasting asset doctrine PROPORTIONAL APPROACH
- Trust fund doctrine
 - Depreciation is restated proportionately with the Depreciation on cost (xx/x) xx
change in gross carrying amount Depreciation on appreciation (xx/x) xx
COST REPLACEMENT APPRECIATION Total depreciation xx
COST (RC – COST)  Piecemeal realization
Asset XX XX XX Revaluation surplus xx
Acc. Dep. XX XX XX Retained earnings xx
CA/SV/RS XX XX XX
Journal entry for revaluation: REVERSAL OF REVALUATION SURPLUS
Machinery xx - Revaluation decrease: revaluation surplus to the
Accumulated depreciation xx extent of a previous revaluation and the balance is
Revaluation Surplus xx charged to expense
ELIMINATION APPROACH - Computation:
- Depreciation is eliminated against the gross Equipment xx
carrying amount Acc. Dep. (xx + xx) (xx)
Accumulated depreciation is offset against carrying Depreciated Replacement cost xx
amount: Revaluation surplus (xx-xx) xx
Accumulated depreciation xx Journal entry:
Machinery xx Accumulated depreciation xx
Machinery account is then adjusted: Revaluation surplus xx
Machinery xx Revaluation loss xx
Revaluation surplus xx Equipment xx
Computation for entry: (refer to values under
Sound value xx decrease)
Debit balance in machinery (xx) PER BOOK ADJUSTED DECREASE
Revaluation surplus xx Replacement XX XX XX
cost
Acc. Dep. XX XX XX
*Piecemeal realization of revaluation surplus: annual
Depreciated
realization through retained earnings replacement
Revaluation surplus xx cost XX FAIR VALUE XX
Retained earnings xx
CHANGE IN LIFE AND RESIDUAL VALUE SALE OF REVALUED ASSET
COST REPLACEMENT APPRECIATION
 Sale
COST
Asset XX XX XX
Cash xx
Residual value NEW NEW - Accumulated depreciation xx
Depreciable XX XX XX Asset xx
amount Gain on sale of asset xx
Accumulated Old salvage; New salvage; XX
depreciation old life old life Computation for entry:
Remaining Sale price xx
depreciable
amount XX XX XX Carrying amount (xx)
- Journal entries; Gain on sale of asset xx
 Revaluation  Revaluation surplus
Machinery xx Revaluation surplus xx
Accumulated depreciation xx Retained earnings xx
Revaluation surplus xx
 Annual depreciation CHAPTER 34: IMPAIRMENT OF ASSET
Depreciation xx
Accumulated depreciation xx
– INDIVIDUAL ASSET
 Impairment – fall in market value where
Computation:
recoverable amount < carrying amount
Revised useful life x
Age of machinery (x)  Asset shall not be carried above the recoverable
Remaining revised useful life x amount
  If carrying amount cannot be recoverable in full Carrying amount with impairment xx
→write down Journal entry for impairment reversal
 Carrying amount > recoverable → impairment loss Accumulated depreciation xx
 Issues to consider Gain on reversal of impairment xx
a) Indication of possible impairment Computation:
 External sources Carrying amount – no impairment xx
- Decrease or decline in market value Carrying amount – with impairment (xx)
- Change in environment of the business Gain on reversal of impairment xx
- Increase in the interest rate or market rate *Carrying amount – no impairment = would have
- Carrying amount is more than the market been carrying amount as though it were not
capitalization ( CA exceeds the FV) impaired
 Internal sources
- Obsolescence or physical damage CHAPTER 35: IMPAIRMENT OF ASSET
- Manner or extent used
- Evidence economic performance will be used – CASH GENERATING UNIT(CGU)
b) Measurement of the recoverable amount  Smallest identifiable group of assets that generate
 Fair value less cost of disposal (exit price or cash inflows that are independent from other assets
selling price) vs. Value in use (w/c is higher)  Recoverable amount is determined individually; if
c) Recognition of impairment loss not possible determine recoverable amount of the
 Entries and computations CGU
GENERALLY  PAS 36 – impairment loss is allocated to:
Impairment loss xx a) Goodwill
Accumulated depreciation xx b) Then to noncash assets (pro-rata based on their
Computation for values: carrying amount)
Carrying amount xx GENERALLY (no goodwill)
Recoverable amount (xx) *after allocation of impairment
Impairment loss xx Journal entry for impairment loss:
Impairment loss xx
Accumulated depreciation – building xx
USING FUTURE CASH FLOWS
Land (non-depreciable) xx
YEAR REVENUE COSTS, NET CASH Accumulated depreciation – equipment xx
EXCLUDING FLOWS
DEP’N Inventory (non-depreciable) xx
20X1 XX - XX = XX
20X2 XX - XX = XX WITH INDICATED EXIT PRICE OF AN ASSET
20X3 XX - XX = XX - PAS 36 Paragraph 105: carrying amount of an asset
XX - XX = XX shall not be reduced below the recoverable amount
 Otherwise: impairment is allocated to the other
YEAR (a) (b) (a x b) assets of the CGU
NET CASH PV of 1 PV  Reallocate the loss to the other assets
FLOWS *same entry
20X1 XX XX XX
20X2 XX XX XX CGU WITH GOODWILL
20X3 XX XX XX - PAS 36: CGU is tested for impairment at least
XX VALUE IN USE annually
a) Recoverable amount exceeds carrying amount =
*same computation for impairment loss and same
not impaired
entry*
b) Carrying amount exceeds recoverable amount =
recognize impairment loss
REVERSAL OF AN IMPAIRMENT LOSS
Journal entry for impairment loss:
*solve for impairment
Impairment loss xx
Asset xx
Goodwill (allocated to GW first) xx
Accumulated depreciation (xx + xx) (xx)
Accumulated depreciation xx
Adjusting carrying amount xx
Depreciation for 2020 (xx)
REVERSAL OF IMPAIRMENT LOSS ON GOODWILL
- PAS 36: impairment loss recognized for goodwill shall  Classification
not be reversed in a subsequent period a) Intangible assets with definite life – amortize;
useful life vs. legal life (w/c is shorter)
CHAPTER 36: INTANGIBLE ASSETS – b) Intangible assets with indefinite life – do not
amortize but test for impairment
GOODWILL  Amortization and impairment of intangible assets
 PAS 38: intangible asset - identifiable nonmonetary - Amortization: systematic allocation of the
asset without physical substance amortizable amount over the useful life (Dr
 Essential criteria Amortization expense; Cr Intangible asset account)
a) Identifiability: separable and arises from - Method: reflect the pattern in w/c future
contractual or other legal rights economic benefits are consumed (if cannot be
b) Control: power to obtain the future economic determined then use straight line method)
benefits and restrict access  Derecognition: on disposal of the asset or when no
c) Future economic benefits: benefits resulting future economic benefits are expected (Proceeds
from the use of the asset by the entity less Carrying amount = Gain or Loss)
 Recognition  Goodwill – most intangible and identified with the
a) Probable future economic benefits entity as a whole
b) Cost can be measured reliably - Arises when earnings exceed normal earnings by
- Judgement: degree of certainty (based on reason of good name (reputation, responding
external evidence) promptly and helpfully, and personality of the
 Initial measurement (at cost) staff)
SEPARATE ACQUISITION - Continually changing
- Cost = purchase price + import and non-refundable - Recognition:
taxes + directly attributable a) Developed or internal goodwill: “homegrown”
- Expensed immediately: “new”, administration and and not recorded
other general overhead, has yet to be brought into b) Purchased goodwill: been paid for and
use, initial operating loss recognized
ACQUISITION AS PART OF A BUSINESS COMBINATION RESIDUAL APPROACH
- Fair value on the date of acquisition - Compares purchase price with the net tangible and
ACQUISITION BY WAY OF A GOVERNMENT GRANT identifiable assets (meaning excluding goodwill)
- Either fair value or nominal amount + expenditure - Net assets at fair value
directly attributable - Excess of purchase price and fair value of net assets =
ACQUISITION BY EXCHANGE goodwill
- Fair value of the asset given plus any cash payment
- Lacks commercial substance: carrying amount of Purchase price xx
asset given plus any cash payment Net assets acquired at fair value (xx)
ACQUISITION BY SELF-CREATION OR INTERNAL Goodwill xx
GENERATION Journal entry to record the purchase
- Costs Cash xx
a) Materials and services generating intangible Accounts Receivable xx
asset Inventory xx
b) Employee benefits from generation of PPE xx
intangible asset Patent xx
Goodwill xx
c) Fees to register a legal right
Accounts Payable xx
d) Amortization of patents and licenses Notes Payable xx
- PAS 38: internally generated brands, mastheads, Accrued liabilities xx
publishing titles, customer lists and items similar in Cash xx
substance = not intangible
 Identifiable vs. unidentifiable (ex. goodwill) DIRECT APPROACH: GENERALLY
- Identifiable: transfer of legal right; could be - Requires following information:
sold/transferred/licensed/rented separately a) Normal rate of return
- Unidentifiable – identified with the entity as a b) Fair value of tangible assets and identifiable
whole intangible assets
 c) Estimated future normal earnings - Cost = purchase price + import duties + non-
d) Probable duration of any “excess earnings” refundable taxes + directly attributable cost of
DIRECT APPROACH – METHOD 1: Purchase of “average preparing for intended use
excess earnings - Internally developed (went through R & D):
Average earnings xx includes licensing and legal fees
Normal earnings (xx) - Research and development: expensed (time of
Average excess earnings xx technological feasibility development cost =
Goodwill (average excess x no. of years) xx capitalized)
- Cost of litigation
DIRECT APPROACH – METHOD 2: Capitalization of  Successful = expensed (intended to maintain)
“average excess earnings”  Unsuccessful = written off as loss
Average excess earnings xx - Amortization
Divide by: capitalization rate %  Internally developed = legal vs. useful (w/c is
Goodwill xx shorter)
 Acquired from a patentee = legal vs. useful (w/c
DIRECT APPROACH – METHOD 3:Capitalization of is shorter)
“average earnings”  Competitive patent (protect) = remaining life of
Average earnings xx old patent
Divide by: capitalization rate %  Related patent (extend) = extended life; no
Net assets, including goodwill xx extension = own life (remainder of its life)
Net assets, excluding goodwill (S.H.E.) xx  Development of patent
Goodwill xx Research and development expense xx
Cash xx
DIRECT APPROACH – METHOD 4: Present value method  Licensing of patent
IMPAIRMENT Patent xx
Average excess earnings xx Cash xx
Multiply by: PV factor x  Amortization
Goodwill xx Amortization of Patent xx
Patent xx
NEGATIVE GOODWILL  Successful defense
Purchase price xx Legal expenses xx
Net assets acquired at fair value (xx) Cash xx
Negative goodwill (xx)  Acquisition of competing patent
Patent xx
Cash xx Cash xx
Accounts Receivable xx
 Update amortization of patent
Inventory xx
PPE xx
Patent xx
Patent xx Cash xx
Accounts Payable xx Computation:
Notes Payable xx Original patent xx
Accrued liabilities xx Competing patent(xx/x) xx
Cash (Purchase price) xx Total xx
Gain on bargain purchase xx  Write off patent
Patent written-off xx
CHAPTER 37: IDENTIFIABLE Patent xx
PATENT
INTANGIBLE ASSETS Original XX Amortization XX
 Patent cost
- Exclusive right granted to an inventor to control Competing XX Amortization XX
the use of invention for a specified period of time patent
- Legal life = 20 years (R.A. No. 8293) Amortization XX
- Cannot be renewed but can be extended Amortization XX
- Technology-based intangible asset Write - off XX
 XX XX  Definite period = useful life vs. definite life (w/c
is shorter)
- Impairment PERIODIC FRANCHISE FEE
Impairment Loss xx Franchise fee expense (%) xx
Patent xx Cash xx
Computation: INITIAL FRANCHISE FEE
Carrying amount xx  Initial franchise fee
PV of cash flows (value in use) (xx) Franchise xx
Impairment Loss xx Cash xx
Note payable xx
 Trademark  First installment
- Symbol, sign, slogan or name to distinguish Note payable xx
- Market-related intangible asset Interest expense xx
- Purchased: price + directly attributable Cash xx
- Internally developed: expenditures to establish  Amortization
- Successfully prosecuted: outright expense Amortization of Franchise xx
(maintain) Franchise xx
- Legal life = 10 years
- May be renewed → indefinite life → not amortized
- Impairment  Lease Right
Impairment Loss xx - IFRS 16
Patent xx - Initially recognize a right of use (separate line item)
Computation: asset and a lease liability
Carrying amount xx - Leasehold improvement: not cost; alteration and
PV of cash flows (value in use) (xx) modification
Impairment Loss xx - Residual value of leasehold improvement: ignored
- Renewal option: too uncertain = ignored
 Copyright - Renewal of the lease contract = highly probable pr
- Exclusive right to the author, composer or artist to certain
benefit
- Artistic related intangible asset  Broadcasting license
- Cost = expenses required to establish or obtain - Indefinite useful life
right  Expires in 5 years
- Purchased: cash paid plus directly attributable  Renewable
- Term for protection = during the life and 50 years  May be renewed indefinitely at little cost
after death  Contribute to net cash inflows indefinitely
- Reviewed for impairment - Definite useful life
- Amortization: useful life benefits, sales and  Expires in 3 years
royalties are expected  Will no longer renew but will auction the license
 Continue to contribute to net cash inflows
 Franchise  Cannot be renewed
- Franchisor grants to a franchisee  Should be amortized over remaining useful life
- Contract based intangible asset
- Between government and private entity: use public  Airline right
property - Renewed every 5 years
- Between private entities: use trademark, patent - Routinely granted at a minimal cost
and process - Indefinite useful life = not amortized
- Cost = lump sum payment + directly attributable
 Customer list
- Lump sum payment = initial franchise fee
- Database
- Periodic payment (periodic franchise fee) =
- PAS 38: internally generated is not intangible asset
expense
- Acquired customer list: may be intangible and is
- Amortization
amortized over useful life
- Purchase does not provide control by an entity
 Organization cost  Classification of computer software
a) Legal fees a) Intangible
b) Incorporation fees b) For resale = inventory
c) Share issuance cost c) Purchased as an integral part = PPE
- PAS 38: start up costs that include legal and d) Not an integral part = intangible
secretarial costs = expense
 Organization cost = expensed
 Share issuance costs = Dr to share premium
(excess = Dr to share issuance cost)
 Web site development cost
- Does not meet the requirement to be recognized
as an intangible asset
- Expensed as incurred

CHAPTER 38: RESEARCH AND

DEVELOPMENT COST – COMPUTER
SOFTWARE
 Research
- Original and planned investigation with prospect of
gaining scientific or technical knowledge and
understanding
- To discover new knowledge
- PAS 38: expenditure on research = expense (too
much uncertainty)
 Development
- Application of research findings
- Probability of success may be more apparent
- Criteria:
 Technical feasibility of completing when a
prototype or model is produced
 Intention to complete the intangible asset and
use or sell it
 Ability to use or sell
 Produce probable future economic benefits
 Availability of resources or funding
 Ability to measure reliably the expenditure
 R & D can be capitalized if it has an alternative future
use
 Activities – prior to beginning of commercial
production (if it relates to commercial production =
do not result to R & D cost)
 Internally developed computer software
- Creating a computer software = expense until
technical feasibility
- So much uncertainty = expensed
- Costs that actually produce the software from
masters and package the software for sale =
inventory
 Amortization – finite useful life
 Impairment – tested whenever there is an indication
of impairment at year-end
 corporation

CMPC 131 Accounting for Special Transactions Accounting for the Equity of a Partnership
 Formation – for initial investments to the
CHAPTER 1 PARTNERSHIP FORMATION partnership
Partnership – an unincorporated association of two or  Operations – division of profits or losses
more individuals to carry on, as co-owners, a business,  Dissolution – admission of a new partner and
with the intention of dividing the PROFITS among withdrawal. Retirement or death of partner
themselves.  Liquidation – winding-up of affairs
General Partnership – all partners are
individually liable PARTNERSHIP FORMATION
Limited Partnership – at least one partner is - It is created by the agreement of the partners
personally liable (consensual) which may be constituted in any form
Partnership Sole Corporation (oral or written). It will be made in a public
Joint Venture
Proprietorship instrument and recorded in the Securities and
Exchange Commission in instances of: 1) immovable
- Owned by two or - Owned by - Created by the - May or or real
mayrights are contributed to the partnership; 2)
more individuals only one operation of law not betheformed
partnership has a capital of 3,000 pesos or
individual for more.an
- Created by - The inventory of any immovable property
undertaking
agreement between
that iscontributed
to be to the partnership should be made,
the parties signed by the parties and attached to the public
continued
- Formed for a over instrument.
several Otherwise, the partnership shall be
deemed void.
business undertaking years.
- A partnership’s legal existence begins from the
normally of moment the contract is executed, unless it is
continuing nature otherwise stipulated.

Valuation of Contribution of Partners

Characteristics of Partnership
- All assets contributed to (and related liabilities
a. Ease of formation
assumed by) the partnership are initially measured
b. Separate legal responsibility
at fair value.
c. Mutual agency
d. Co-ownership of property
Type of contribution Measurement
e. Co-ownership of profit
f. Limited life Cash and cash equivalents Face amount
g. Transfer of ownership
h. Unlimited Liability Inventory Net Realizable Value
(estimated selling price
Advantages Disadvantages less costs to complete and
sell), if lower than cost
Ease of formation Easily dissolved/limited life
Non-cash assets a. Agreed Value
Shared responsibility of Unlimited liability
b. Fair Value
running the business
Industry Memo entry is prepared
Flexibility in decision Conflict among partners
- A partner’s subsequent share in profits (losses) shall
making also be credited (debited) to his capital account.
Greater capital than sole Lesser capital than - PERMANENT WITHDRAWALS of capital are debited
proprietorship corporation to the partner’s capital account. TEMPORARY
WITHDRAWALS may be debited to the partner’s
Relative lack of regulation Taxed like a corporation drawings account.
by the government than
- The sum of the balances in the partner’s individual - The cash settlement among the partners is not
capital accounts represents the total equity of the recorded in the partnership’s books because this is
partnership. not a transaction of the partnership but rather a
transaction among the partners themselves.
Juan Dela Cruz, Capital (Real account) CHAPTER 2 PARTNERSHIP OPERATIONS
Debit Credit (normal balance) - Profit and Loss shall be shared according to:
1. Agreed Ratio
Permanent withdrawals Initial investment
2. If there is no agreement of distribution of
of capital
loss but there is agreement of ratio of
Share in losses Additional investments
profit, same with profit.
Debit balance of Share in profits 3. If there is no stipulation, it shall be
drawings account proportionate of they have contributed.
- Industrial partners do not absorb loss.
Juan Dela Cruz, Drawings (Nominal account)
Debit (normal balance) Credit Salaries
- This could be in fractional year.
Temporary withdrawals Recurring reimbursable
- Always given to partners, regardless of the
during the period costs paid by the partner
result of operation.
Temporary funds held Interest
to be remitted to the - This could be in fractional year.
partnership - Always given to partners, regardless of the
result of operation.
Receivable from/Payable to a partner Bonus
- RECEIVABLE is recorded as the loan extended by the - Given if there is profit only.
partnership TO a partner. PAYABLE is recorded as - If profit after salaries and interest is a loss, it is
the loan obtained by the partnership FROM the not given.
partner.
B = Bonus
Bonus on initial investments
P = Profit
- BONUS is the excess or deficiency if the partner’s
capital balance is credited for an amount greater
I = Interest
than or less than the fair value of his net S = Salaries
contribution. Under the bonus method, any Br = Bonus Rate
increase or decrease in the capital credit of a
partner is deducted from or added to the capital Bonus after bonus
credits of the other partners. The total partnership 𝑷
capital remains equal to the fair value of the
𝑩=𝑷− 𝟏+𝑩𝒓
partners’ net contributions to the partnership. Bonus based on Profit after Interest, Salaries, and
Bonus
Variations to the bonus method 𝑷−𝑰−𝑺
- A partnership agreement may stipulate a certain 𝑩 = (𝑷 − 𝑰 − 𝑺) − 𝟏+𝑩𝒓
ratio to be maintained by the partners representing
their specific interests in the equity of the
partnership. Technically, there will be no “bonus” Bonus based on Profit after Interest and Salaries
given to a certain partner. Any increase or decrease 𝑩 = (𝑷 − 𝑰 − 𝑺)
to the capital credit of a partner is not deducted
from his co-partners’ capital accounts. The
adjustment is accounted for as either: CHAPTER 3 PARTNERSHIP DISSOLUTION
o Cash settlement among the partners; Major Considerations in Partnership Dissolution
o Additional investment or withdrawal of
1. Admission of a partner
investment of partner
 2. Withdrawal, retirement or death of a
partner
3. Incorporation of a partnership
ADMISSION OF A PARTNER
By purchase:
 There is no gain or loss.
 Transfer between capital accounts only.
 Payment happened between the partners and
is not recorded in the books of the
partnership.
 The amount of the capital before admission is
the same after admission.
 If there is a revaluation, only the old partners
receive gain on their capital.
By investment:
 Any payment is recorded in the partnership
books.
 Transaction is between new partner and
partnership.
 No gain or loss.
 The amount of total capital is changed (agreed
capital).
 If the credited amount of capital of new partner
is greater than his investment, there is a bonus.
The excess will be debited to old partners’
capital accounts according to P/L ratio.
 If the credited amount of capital of new partner
is lower than his investment, there is a bonus
to the old partners. The excess will be credited
to old partners’ capital accounts according to
P/L ratio.
WITHDRAWAL OF A PARTNER
Purchase of interest by remaining partners:
 The debited amount of withdrawing partner
will be distributed and credited to remaining
partners according to P/L Ratio.
 The consideration given to the withdrawing
partner is ignored and not recorded in
partnership books.
 Total capital remains the same.
 There is no gain or loss.
RETIREMENT/DEATH OF A PARTNER
Purchase of interest by partnership:
 Adjust the capital(e.g. Profit/Loss, Revaluation,
Withdrawals) before retirement.
 If the settlement is greater than the capital of
retiring partner, there is bonus to retiring
partner.
 If the settlement is lower than the capital of
retiring partner, there is bonus to retiring
partner.
 The settlement is recorded in the books of
partnership.
 Partnership capital is decreased.
 There is no gain or loss.
 In a situation of a death of a partner, a liability
account should be credited with the amount of
settlement.
INCORPORATION OF A PARTNERSHIP
 Partners’ capital balances are adjusted because
of revaluation and profit or loss.
 Determine the par value of a share and then
determine the number of shares to distributed
to each partners who will become
stockholders.
If the adjusted capital is greater than the total par
value of shares issued, there will be share
premium credited.
CHAPTER 4 PARTNERSHIP LIQUIDATION
LIQUIDATION
- The termination of business operations or the
winding-up of affairs. It is the process by which:
o Assets are converted into cash
o Liabilities are settled
o Any remaining amount is distributed to the
owners
- May either be voluntary (e.g., agreement of the
partners) or involuntary (e.g., bankruptcy).
Methods of Liquidation
1. Lump-sum liquidation
2. Installment Liquidation
Settlement of claims in order of priority
1. Outside creditors
2. Inside creditors (e.g., payable to partners)
3. Owner’s capital balances
*Right to offset
- Allows a deficit in a partner’s capital account to be
offset by a loan payable to that partner.
Procedure of Liquidation
Lump-sum Installment
1. ALL of the non-cash 1. Some of the non-cash balances of the other partners. If after
assets are converted assets are converted into allocating the capital deficiency of an insolvent
to cash. cash. partner, a solvent partner’s capital balance
results to a negative amount, the solvent
2. The total gain or loss 2. The carrying amount of partner is required to provide additional
on the sale is allocated any unsold non-cash asset contribution.
to the partner’s capital is considered as a loss.
balances based on This is allocated to the Non-cash asset used as payment for claim
their P/L ratios. partners’ capital balances - If a creditor or a partner agrees to receive non-cash
based on their P/L ratios. assets as settlement of his claim, the non-cash
assets is considered sold at the amount agreed to
3. Actual liquidation 3. Actual and estimated be debited to the creditor’s or partner’s claim.
expenses are allocated future liquidation - The difference between the carrying amount of the
to the partners’ capital expenses are allocated to non-cash asset and the agreed settlement amount
balances based on the partners’ capital is treated as either gain or loss to be apportioned to
their P/L ratios. balances based on their all of the partner’s capital balances.
P/L ratios.
Safe Payment Schedule
4. The liabilities to 4. The liabilities to outside - May be used as supporting information in the
outside creditors are creditors are partially or Statement of Liquidation that shows how much
fully settled. fully settled. cash can be “safely” paid to the partners during
installment liquidation, which avoids overpayment.
5. The liabilities to inside 5. The liabilities to inside - Maximum loss possible is the sum of:
creditors are fully creditors are partially or o Unsold non-cash assets
settled. fully settled but only after o Expected future liquidation costs and
the full settlement of the potential unrecorded liabilities
liabilities to outside
creditors. Cash priority program (Cash distribution program)
- Determines which partner shall be paid first and
6. Any remaining cash is 6. If both the liabilities to which partner shall be paid last, after all the
distributed to the outside and inside liabilities are settled.
owners in full creditors are fully settled, - Ranking the partners in accordance with their
settlement of their any remaining cash less Maximum Loss Absorption Capacity (MLAC). The
interests. partner with the highest MLAC shall be paid first
cash set aside for future
and the lowest shall be paid last.
liquidation expenses is
- When all of the priorities are paid, any remaining
distributed to the owners
cash distribution is allocated to the partners based
as partial settlement of on their respective P/L ratios.
their interests. MLAC = Total partner’s interest in the partnership ÷
Partners P/L percentage
Doctrine of marshalling of assets
CHAPTER 5 CORPORATE LIQUIDATION AND
- Applied when the partnership and some of the
REORGANIZATION
partners are insolvent.
- There is financial difficulty (A<L) because of
1. Available assets of the partnership are used to
insolvency.
settle the partnership’s liabilities.
- VOLUNTARY INSOLVENCY – the insolvent
2. In case the assets of the partnership are
corporation voluntarily applies a petition to a court
insufficient to pay all liabilities, the solvent
of law to be discharged from its liabilities.
general partners are required to provide
- INVOLUNTARY INSOLVENCY – three or more
additional funds from their personal assets
creditors of the insolvent corporation file a petition
(only up to the excess of their personal assets
to a court of law for the adjudication of the
and personal liabilities).
corporation as insolvent.
3. In case some partners are insolvent, their
- Measurement is based on realizable value.
capital deficiency is offset to the capital
 o Assets – estimated selling price less
estimated costs to sell
o Liabilities – expected net settlement
amount
Liquidation Financial Reports
1. Statement of Affairs
- In lieu of Balance Sheet
- Assets and liabilities are restated at their
realizable values
- ASSETS:
o Assets pledged to fully secured creditors –
assets with realizable values equal to or
greater than the realizable values of the
related liability for which they have been
pledged as security.
o Assets pledged to partially secured creditors
– assets with realizable values less than the
realizable values of the related liability for
which they have been pledged as security.
o Free assets – assets that have not been
pledged as security of liabilities. Also
include the excess of realizable values of
assets pledged to fully secured creditors
over the realizable values of the related
liabilities for which they have been pledged.
- LIABILITIES:
o Unsecured liabilities with priority – liabilities
that although not secured by any asset, are
mandated by law to be paid first before any
other unsecured liabilities.
o Fully secured creditors – liabilities secured
by assets with realizable values equal to or
greater than the realizable values of such
liabilities
o Partially secured creditors – liabilities
secured by assets with realizable values less
than the realizable values of such liabilities
o Unsecured liabilities without priority – all
other liabilities not classified in the items
above
2. Statement of Realization and Liquidation
- Summarizes assets (realization) and obligations
(liquidation)
Debits Credits
Supplementary expenses Supplementary income
REORGANIZATION
- The implementation of a business plan to
restructure or rehabilitate a corporation with the
hopes of increasing company value.
- Involves changing the entity’s capital structure
1. Group Reorganization – ownership within a group
of companies changes due to new acquisitions,
buyouts, takeovers and other forms of changes
2. Recapitalization – change in the capital structure of
an entity by the cancellation of old shares and
issuance of new shares as replacement.
a. Change from par to no-par or vice-versa
b. Reduction of par value or stated value
c. Share splits or reverse splits
3. Quasi-reorganization – financially troubled
corporation with favourable future prospects is
permitted but not required, to revalue its assets and
liabilities, and realign its equity, subject to the
provisions of relevant regulations
4. Corporate Rehabilitation – the entity is
administered by another party in order to bring
back the entity to its former financial condition and
solvency
5. Troubled Debt Restructuring – the creditor grants
the debtor concession. Effected through (a) asset
swap, (b) equity swap, or (c) substantial
modification of the terms of debt.

Assets to be realized, Assets realized

excluding cash
Assets not realized
Assets acquired

Liabilities liquidated Liabilities to be liquidated

Liabilities not liquidated Liabilities assumed