AFAR 1 Dayag Solution Manual PDF

Advanced Accounting Solution Manual
Antonio J. Dayag
Chapter 1
Problem I
Requirement 1: Assuming that A and B agree that each partner is to receive a capital credit equal to
the agreed values of the net assets each partner invested:
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record investments:
Partnership books:
Cash………………………………………………………………………………. 120,000
Inventory…………………………………………………………………………. 120,000
Equipment……………………………………………………………………….. 240,000
A, capital………………………………………………………………... 480,000
Initial investment.
Cash……………………………………………………………………………….. 120,000
Land……………………………………………………………………………….. 240,000
Building……………………………………………………………………………. 480,000
Mortgage payable……………………………………………………. 240,000
B, capital……………………………………………………………….. 600,000
Initial investment.
Requirement 2: Assuming that A and B agree that each partner is to receive an equal capital interest.
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
Partnership books:
Bonus Approach:
Cash…………………………………………………………………………… 120,000
Inventory……………………………………………………………………… 120,000
Equipment……………………………………………………………………. 240,000
A, capital…………………………………………………………….. 480,000
Cash…………………………………………………………………………… 120,000
Land……………………………………………………………………………. 240,000
Building………………………………………………………………………… 480,000
Mortgage payable………………………………………………… 240,000
B, capital.……………………………………………………….…… 600,000
B, capital……………………………………………………………………….. 60,000
A, capital……………………………………………………………… 60,000
Total agreed capital (P480,000 + P600,000)….P 1,080,000

Multiplied by: Capital interest (equal)………... 1/2
Partner’s individual capital interest…………….P 540,000
Less: A’s capital interest………………………..….480,000
Bonus to A…….……………………………………..P 60,000
Revaluation (Goodwill) Approach:

Cash…………………………………………………………………………… 120,000
Inventory……………………………………………………………………… 120,000
Equipment………………………………………………………………… .... 240,000
A, capital…………………………………………………………….. 480,000
Cash…………………………………………………………………………… 120,000
Land……………………………………………………………………………. 240,000
Building………………………………………………………………………... ..480,000
Mortgage payable………………………………………………… 240,000
B, capital.……………………………………………………….…… 600,000
Assets (or goodwill or intangible asset)…………………………………... 120,000

A, capital…………………..……………………………………….. 120,000
Total agreed capital (P600,000 / 1/2)………..…. P1,200,000
Less: Total contributed capital
(P480,000 + P 600,000)………………………………....… 1,080,000
Goodwill to A……………..…………………………. P 120,000
Problem II
Invested Invested Invested
Agreed Fair Values by John by Jeff by Jane
Cash P100,000 --- ---
Equipment P 110,000 ---
Total assets 100,000 P 110,000 0
Note payable assumed by partnership --- 30,000 ---
Net assets invested P100,000 P 80,000 P 0
1. Bonus Method 2. Goodwill Method (Revaluation of Asset)
Cash 100,000
Cash 100,000 Equipment 110,000
Equipment 110,000 Goodwill 90,000
Note Payable 30,000 Note Payable 30,000
John, Capital 60,000 John, Capital 90,000
Jeff, Capital 60,000 Jeff, Capital 90,000
Jane, Capital 60,000 Jane, Capital 90,000
2. The bonus method is used when John and Jeff recognize that Jane is bringing something of value to
the firm other than a tangible asset, but they do not want to recognize an intangible asset. To
equalize the capital accounts, P40,000 is transferred from John's capital account and P20,000 is
transferred from Jeff's capital account.
The goodwill method is used when the partners recognize the intangible nature of the skills Jane is
bringing to the partnership. However, the capital accounts are equalized by recognizing an
intangible asset and a corresponding increase in the capital accounts of the partners. Unless the
intangible asset can be specifically identified, such as a patent being invested, it should not be
recognized, because of a lack of justification for goodwill in a new business.
Problem III
1. (a) Cash 13,000
Accounts Receivable 8,000
Office Supplies 2,000
Office Equipment 30,000
Accounts Payable 2,000
Tom, Capital 51,000
Cash 12,000
Accounts Receivable 6,000
Office Supplies 800
Land 30,000
Accounts Payable 5,000
Mortgage Payable 18,800
Julie, Capital 25,000
(b) Tom, Drawing 15,000
Cash 15,000
Julie, Drawing 12,000
Cash 12,000
(c) Income Summary 50,000
Tom, Capital P50,000 (P51,000/P76,000) 33,553
Julie, Capital P50,000 (P25,000/P76,000) 16,447
Tom, Capital 15,000
Julie, Capital 12,000
Tom, Drawing 15,000

Julie, Drawing 12,000
2. TOM AND JULIE PARTNERSHIP

Statement of Changes in Partners' Capital
For the Year Ended December 31, 20x4
Tom Julie Total
Capital balances, Jan. 1 P 0 P0 P 0

Add: Additional investments 51,000 25,000 76,000
Net income allocation 33,553 16,447 50,000
Totals P 84,553 P 41,447 P126,000
Less: Withdrawals 15,000 12,000 27,000
Capital balances, Dec. 31 P 69,553 P 29,447 P99,000
Problem IV
Book of H is to be retained by the new partnership.
The following procedures are to be followed:
Individual versus Sole Proprietor
Books of *Books of
Individual Sole Proprietor
Adjusting entries N/A Yes
Closing entries (real accounts) N/A No
Investments Yes**
Balance Sheet Yes
* Books of H; Partnership books

** Investments of individual; additional investments or withdrawals of sole proprietor.
1. Books of Sole Proprietor (H):

a. To record adjustments:
a. H, capital………………………………………………………………… 1,800
Allowance for doubtful accounts……………………………. 1,800
Additional provision computed as follows:
Required allowance: 10% x P48,000 = P 4,800
Less: Previous balance………………… 3,000
Additional provision…………………… P 1,800
b. Interest receivable or accrued interest income…………………. 3,600

H, capital…………………………………………………………… 3,600
Interest income for nine months computed as follows:
P60,000 x 8% x 9/12 = P3,000.
c. H, capital………………………………………………………………….. 6,000
Merchandise inventory………………………………………….. 6,000
Decline in the value of merchandise.
P27,000 – P21,000 = P6,000.
d. H, capital…………………………………………………………………. 4,800
Accumulated depreciation……………………………………. 4,800
Under depreciation.
e. Prepaid expenses………………………………………………………... 2,400

H, capital…………………………………………………………… 2,400
Expenses paid in advance.
H, capital…………………………………………………………………… 7,200
Accrued expenses…………………………………………………. 7,200
Unrecorded expenses.
Note: All adjustment that reflects nominal accounts should be coursed through the
capital account, since all nominal accounts are already closed at the time of
formation.
b. To close the books: nothing to close since the books of H will be retained.
c. To record investment:
Cash……………………………………………………………………………. 116,100
I, capital……………………………………………………………… 116,100
Initial investment computed as follows:

Unadjusted capital of H………………………………P 246,000
Add (deduct): adjustments:
a. Doubtful accounts...……………………...( 1,800)
b. Interest income…………………………….. 3,600
c. Decline in the value of merchandise….( 6,000)
d. Under-depreciation……………………….( 4,800)
e. Prepaid expenses………………………….. 2,400
Accrued expenses………………………...( 7,200)
Adjusted capital balance of H……………..……...P 232,200
Divided by: Capital interest of H…………………… 2/3
Total agreed capital…………………………….…….P 348,300
Multiplied by: Capital interest of I……………..…… 1/3
Investment of I…………………………………………P 116,100
Note: The initial investment of H is already recorded since his books are already
retained. No further entry is required since there are no additional investments or
withdrawals made by H.
2. The balance sheet for both cases presented above is as follows:
HI Partnership
Balance Sheet
November 1, 20x4
Assets
Cash P 236,100
Accounts receivables P 48,000
Less: Allowance for doubtful accounts………........... 4,800 43,200

Notes receivable……................................................... 60,000
Interest receivable……………….................................. 3,600
Merchandise Inventory................................................ 21,000
Prepaid expenses………….......................................... 2,400
Equipment (net)…………............................................. P 72,000
Less: Accumulated depreciation………………........ 10,800 61,200

Total Assets.................................................................... P 427,500
Liabilities and Capital
Liabilities
Accrued expenses…….. ....................................... P 7,200
Accounts payable................................................... 12,000
Notes payable…………........................................... 60,000
Total Liabilities................................................................ P 79,200
Capital...........................................................................
H, capital……………………….................................. P 232,200
I, capital…………………........................................... 116,100
Total Capital.................................................................. P 348,300
Total Liabilities and Capital.......................................... P 427,500
Problem V
New set of books. The following procedures are to be followed:
Sole Proprietor versus Sole Proprietor

Books of Books of
Sole Proprietor Sole Proprietor *New Set of
(Baker) (Carter) Books
Adjusting entries Yes Yes
Closing entries (real accounts) Yes Yes
Investments Yes**
Balance Sheet Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors.
1. Books of Sole Proprietor
a. To record adjustments:
Books of J Books of K
a. J, capital…………………………12,000 a. Merchandise Inventory………… 6,000
Merchandise Inventory…… 12,000 K, capital……………………… 6,000
Worthless inventory. Upward revaluation.
b. J, capital………………………… 7,200 b. K, capital……….…………………. 3,000
Allowance for doubtful Allowance for doubtful
Accounts………………….. 7,200 accounts……………………. 3,000
Worthless accounts. Additional provision.
Required allowance:
5% x P180,000…….. P9,000
Less: Previous
Balance……….. 6,000
Additional
Provision....…………P3,000
c. Rent receivable…………………12,000 c. K, capital……………………………. 9,600
J, capital……………………. 12,000 Salaries payable………………. 9,600
Income earned. Unpaid salaries.
d. Interest receivable…………………1,200
K, capital………….................. 1,200
Interest income from August
17 to October 1.
P60,000 x 16% x 45/360
e. J, capital………………………… 8,400
Office supplies………………. 8,400
Expired office supplies.
f. J, capital………………………… 6,000
Accumulated depreciation
- equipment……………… 6,000
Under-depreciated.
g. K, capital……………………………12,000
Accumulated depreciation-
Furniture and fixtures……… 12,000
Under-depreciated.
h. J, capital…………………………. 1,800
Interest payable……………. 1,800
Interest expense from
July 1 to October 1.
P60,000 x 12% x 3/12
i. Patent………………………………. 48,000
K, capital…………………….. 48,000
Unrecorded patent.
Unadjusted capital of J…….……….P 372,000 Unadjusted capital of K..……………...P432,000
Add(deduct): adjustments: Add(deduct): adjustments:
a. Worthless merchandise……..( 12,000) a. Merchandise revaluation…….. 6,000
b. Worthless accounts………….( 7,200) b. Worthless accounts…………….( 3,000)
c. Rent income……………….…. 12,000 c. Salaries…………….…….………..( 9,600)
e. Office supplies expense…….( 8,400) d. Interest income………………….. 1,200
f. Additional depreciation……( 6,000) g. Additional depreciation………( 12,000)
h. Interest expense………………( 1,800) h. Patent………….……….…………. 48,000
Adjusted capital of J…………………P348,600 Adjusted capital of K….………………..P462,600
b. To close the books:

Books of J Books of K
Allowance for doubtful Allowance for doubtful
accounts................................. 12,000 accounts................................. 9,000
Accumulated depreciation – Accumulated depreciation –
equipment…………………… 60,000 furniture and fixtures ………. 36,000
Accounts payable……………159,600 Accounts payable……………. 120,000
Notes payable………………… 60,000 Salaries payable………………. 9,600
Interest payable………………. 1,800 K, capital…….…………………. 462,600
J, capital…….………………….348,600 Cash…………………………. 54,000
Cash………………………… 90,000 Accounts receivable…….. 180,000
Accounts receivable……. 216,000 Notes receivable…………. 60,000
Merchandise inventory…. 180,000 Interest receivable………... 1,200
Office supplies……………. 24,000 Merchandise inventory….. 150,000
Equipment…………………. 120,000 Furniture and fixtures.…….. 144,000
Rent receivable…………... 12,000 Patent………….……………. 48,000
Close the books of J. Close the books of K..
2. New Set of Books -

Cash………………………………………………………………. 90,000
Accounts receivable………………………………………….. 216,000
Merchandise inventory……………………………………….. 180,000
Office supplies………………………………………………….. 24,000
Equipment (net)………………………………………………... 60,000
Rent Receivable……………………………………………….. 12,000
Allowance for doubtful accounts……………………. 12,000
Accounts payable……………………………………….. 39,600
Notes payable……………………………………………. 60,000
Interest payable………………………………………….. 1,800
J, capital…………………………………………………… 468,600
Cash………………………………………………………………. 54,000
Accounts receivable………………………………………….. 180,000
Notes receivable………………………………………………. 60,000
Interest receivable…………………………………………….. 1,200
Merchandise inventory……………………………………….. 150,000
Furniture and fixtures (net)…..……………………………….. 108,000
Patent…………..………………………………………………... 48,000
Allowance for doubtful accounts……………………. 9,000
Accounts payable……………………………………….. 120,000
Salaries payable….………………………………………. 9,600
K, capital…………………………………………………… 462,600
3.
H I
Unadjusted capital (refer to 1a) P372,000 P432,000

Adjusted capital (refer to 1b) 348,600 462,600
Net adjustments (debit)/credit (P 23,400) P 30,600
4. The balance sheet after formation is as follows:
J and K Partnership
Balance Sheet
October 1, 20x4
Assets
Cash............................................................................... P 144,000
Accounts receivables................................................. P396,000
Less: Allowance for doubtful accounts………......... 21,000 375,000

Notes receivable……................................................... 60,000
Interest receivable……………….................................. 1,200
Rent receivable………………....................................... 12,000
Merchandise Inventory................................................ 330,000
Office supplies............................................................... 24,000
Equipment (net)…………............................................. 60,000
Furniture and fixtures (net)…………………................. 108,000
Patent……………………............................................... 48,000
Total Assets.................................................................... P1,162,200
Liabilities and Capital
Liabilities
Salaries payable……………................................... P 9,600
Accounts payable.................................................. 159,600
Notes payable………….......................................... 60,000
Interest payable…………….................................... 1,800
Total Liabilities............................................................... P 231,000

Capital
J, capital……………………….................................. P 468,600
K, capital…………………......................................... 462,600
Total Capital.................................................................. P 931,200
Total Liabilities and Capital.......................................... P1,162,200
Problem VI
1. Total assets – P1,094,000, at fair value
2. Total liabilities - P540,000, at fair value
3. Total capital - P554,000 (P1,094,000 – P540,000)
Balance Sheet
January 1, 2009
Assets Liabilities and Capital
Cash P 70,000 Liabilities
Account Receivable (net) 108,000 Accounts Payable P 190,000

Merchandise Inventory 208,000 Mortgage Payable __350,000
Building (net) 600,000 Total Liabilities P 540,000
Furniture and Fixture (net) 108,000 Capital:
Accounts Payable L, Capital P 260,000
Mortgage Payable M, Capital ___294,000
__________ Total Capital P 554,000
Total Assets P1,094,000 Total Liabilities and Capital P 1,094,000
Multiple Choice Problems

1. c – P45,000
2. d – the prevailing selling price which is also the fair market value.
3. b - (P400,000 - P190,000) + [P270,000 - (P400,000 - P190,000)]/3 = P230,000
4. c
5. b - P60,000 + P80,000 + P100,000 = P240,000
6. c - P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000 - P30,000 = P5,000
7. a
Total Agreed Capital (P50,000/40%)…………………………............... P125,000
Less: Total Contributed Capital (P65,000 + P50,000)…….................. 115,000
Goodwill (revaluation of assets upward)………………….................. P 10,000
Assets, fair value (P20,000 + P60,000 + P15,000)…………………………P 95,000

Less: Liabilities assumed…………………………………………………..… 30,000
Bill, capital..…………………………………………………………………… P 65,000
8. b The capital balances of William (WW) and Martha (MM) at the date of partnership
formation are determined as follows:
William Martha
Cash P20,000 P 30,000
Inventory - 15,000
Building - 40,000
Furniture and equipment 15,000 -
Total P35,000 P 85,000
Less mortgage assumed
by partnership (10,000)
Amounts credited to capital P35,000 P 75,000
9.c
Evan Helen
Unadjusted capital 59,625 33,500

Add (deduct) adjustments:
Allowance ( 555) ( 405)

Depreciation ______ ( 900)
Adjusted capital 59,070 32,195
10. c: Jones – P80,000 + P400,000 – P120,00 = P360,000

Smith – P40,000 + P280,000 – P60,000 = P260,000
11. c – P35,374 – refer to No. 12

12. c – P17,687
Unadjusted capital of CC………………………………………………………………….P 33,000
Add (deduct): adjustments-
Allowance for doubtful accounts (3% x P14,200)………………………………...( 426)
Increase in merchandise inventory (P23,000 – P20,000)………………………… 3,000
Prepaid salary………………………………………………………………………….... 600
Accrued rent expense…………………………………………………………………( 800)
Adjusted capital balance of CC……………………………………… P35,374
Divided by: Capital interest of CC…………………………………………………….... 2/3
Total capital of the partnership……………………………………………………………P 53,061
Less: Adjusted capital balance of CC………………………………………………….. 35,374
Capital balance of DD…………………………………………………………………….. P 17,687
13. a
Total assets:
Cash P 70,000
Machinery 75,000
Building 225,000 P 370,000
Less Liabilities (Mortgage payable) 90,000
Net assets (equal to FF’s capital account) P 280,000
14. d
FF, capital (see no.13) P 280,000
Divide by FF’s P & L share percentage 70%
Total partnership capital P 400,000
Required capital of CC (P400,000 x 30%) P 120,000
Less: Assets already contributed:
Cash P 30,000
Machinery and equipment 25,000
Furniture and fixtures 10,000 65,000
Cash to be invested by CC P 55,000
15. a
Agreed Fair Values Invested Invested Invested
by John by Jeff by Jane
Cash 100,000 --- ---
Equipment 110,000 ---
Total assets 100,000 110,000 0
Note payable assumed by partnership --- 30,000 ---
Net assets invested 100,000 80,000 0
Bonus Method Goodwill Method
Cash 100,000
Cash 100,000 Equipment 110,000
Equipment 110,000 Goodwill 90,000
Note Payable 30,000 Note Payable 30,000
John, Capital 60,000 John, Capital 90,000
Jeff, Capital 60,000 Jeff, Capital 90,000
Jane, Capital 60,000 Jane, Capital 90,000
Note:
The bonus method is used when John and Jeff recognize that Jane is bringing something of value to the
firm other than a tangible asset, but they do not want to recognize an intangible asset. To equalize the
capital accounts, P40,000 is transferred from John's capital account and P20,000 is transferred from Jeff's
capital account.
The goodwill method is used when the partners recognize the intangible nature of the skills Jane is
bringing to the partnership. However, the capital accounts are equalized by recognizing an intangible
asset and a corresponding increase in the capital accounts of the partners. Unless the intangible asset
can be specifically identified, such as a patent being invested, it should not be recognized, because of a
lack of justification for goodwill in a new business.
16. c – refer to No. 15 for computation.

17. a
FF, capital:
Unadjusted balance P 57,000
Adjustments:
Accumulated depreciation ( 1,500)
Allowance for doubtful account (12,000)
Adjusted balance P 43,500
GG, capital:
Adjustments:
Allowance for doubtful account ( 4,500)
18. c
GG’s adjusted capital (see no. 17) P 40,500
Divide by GG’s P & L share percentage 40%
Total partnership capital P 101,250
Multiply by FF’s P & L share percentage 60%
FF’s capital credit 60,750
FF’s contributed capital (see no. 1) 43,500
Additional cash to be invested by FF P 17,250
19. d
Total capital of the new partnership (see no. 20) P 296,875
Multiply by RR’s interest 20%
Cash to be invested by RR P 59,375
20. (a)
OO PP Total
(60%) (40%)
Unadjusted capital balances P133,000 P108,000 P241,000
Adjustments:
Allowance for bad debts ( 2,700) ( 1,800) ( 4,500)
Inventories 3,000 2,000 5,000
Accrued expenses ( 2,400) ( 1,600) ( 4,000)
Adjusted capital balances P130,900 P106,600 P237,500
Total capital before the formation of the new partnership (see above) P 237,500
Divide by the total percentage share of OO and PP (50% + 30%) 80%
Total capital of the partnership after the admission of RR P 296,875
21. a
Agreed Capital Contributed Capital Settlement
OO P148,437.50 (50% x P296,875) P 130,900 P 17,537.50
PP 89,062.50 (30% x P296,875) 106,600 (17,537.50)
Therefore, OO will pay PP P17,537.50
22. c
Total partnership capital (P113,640/1/3) P 340,920
Less DD’s capital 113,640
CC’s capital after adjustments P 227,280
Adjustments made:
Allowance for doubtful account (2% x P96,000) 1,920
Merchandise inventory ( 16,000)
Prepaid expenses ( 5,200)
Accrued expenses 3,200
CC’s capital before adjustments P 211,200
23. a
Assets invested by CC:
Cash:
Capital P211,200
Add Accounts payable 49,600
Total assets (excluding cash) 260,800
Less Noncash assets (96,000 + P144,000) 240,000 P20,800
Accounts receivable (96,000 – P1,920) 94,080
Merchandise inventory 160,000
Prepaid expenses 5,200 P 280,080
Cash invested by DD 113,640
Total assets of the partnership P 393,720
24. d
Total partnership capital (P180,000/60%) P 300,000
GG’s Capital (P300,000 x 40%) P 120,000
Less Cash investment 30,000
Merchandise to be invested by GG P 90,000
25. a
Adjusted capital of JJ:
Total assets (at agreed valuations) P 180,000
Less Accounts payable 48,000 P 132,000
Required capital of JJ 180,000
Cash to be invested by JJ P 48,000
Quiz-I
1. P276,000 = (P480,000 – P228,000) + [P324,000 - (P480,000 – P228,000)]/3
2. Philip, P100,000; Ray, P100,000 and Sarah, P90,000 (P300,000 – P210,000)
3. P330,000
P330,000 = P50,000 + (P310,000 - P30,000)
4. c The capital balances of each partner are determined as follows:
Apple Blue Crown
Cash P50,000
Property P 80,000
Mortgage assumed (35,000)
Equipment P 55,000
Amount credited to
capital accounts P50,000 P 45,000 P 55,000
5. P15,000
(P190,000 – P160,000) x 1/2 = P15,000
6. P18,000 – the prevailing selling price which is also the fair market value.
7.
8. P15,000
P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000
P50,000 - P35,000 = P15,000
9. P45,000
10. P225,000
11. P375,000 = P400,000 – P25,000
12. P50,000
13. P280,000
Pane Sills
Cash P 40,000 P 30,000
Building .. 350,000
Subtotal P140,000 P380,000
Less: Liability assumed by the partnership .. (100,000)
Capital balances, 7/1/06 P140,000 P280,000
14. d
Adjusted capital of LL P 165,900
Contributed capital of MM 82,950
Total capital P 248,850
15. a
FF, capital:
Adjustments:
Allowance for doubtful account (12,000)
GG, capital:
Adjustments:
Allowance for doubtful account ( 4,500)
THEORIES
Completion statements:
1. accounting
2. GAAP
3. a. cash basis instead of accrual basis
b. prior period adjustments
c. use of fair (or current) values instead of historical cost
d. recognition of goodwill in situations not involving business combinations
4. drawings
5. fair (or current) values
6. achieving equity among the partners
7. capital balances
8. professional corporation
True or False
9 False 14. True 19. False 24. False 29. False
10. True 15. False 20. True 25. True 30. True
11. False 16. False 21. False 26. False
12. True 17. False 22. True 27. True
13. False 18. True 23. False 28. True
Note for the following numbers:
17. Individuals, partnerships, and corporations are allowed to be partners in a partnership.
19. All of the general partners are liable for all the partnership’s debts.
21. Most small partnerships maintain their financial information using the tax basis.
23., While the partnership does not pay income taxes, it is responsible for other taxes such as payroll taxes and franchise taxes.
24. The proprietary theory is based on the notion that the business entity is an aggregation of the owners
26. This is an example of the proprietary theory of equity.
28. Any basis (i.e., carrying value, tax basis, or market value) can be used to value noncash assets contributed to a partnership
MULTIPLE-CHOICE QUESTIONS
31. a 36. d 41. c 46. a 51. d
32. B 37. b 42. c 47. c 52. b
33. a 38. c 43. a 48. b 53. b
34. e 39. a 44. d 49. b
35. d 40. a 45. b 50. c

Chapter 2
Problem I
1. Beginning Capital.
Income summary………… 345,600
X, drawing……. 144,000
Y, drawing……. 201,600
X, capital, January 1……….. P 360,000

X, capital, January 1……….. 504,000
Total capitals P 864,000
X’s share of net income: 360/864 of P345,600 P 144,000

Y’s share of net income 504/864of P345,600 201,600
2. Ending Capital.
X, drawing……. 153,600
Y, drawing……. 192,000
X, capital, December 31……….. P 432,000

X, capital, December 31……….. 540,000
X’s share of net income: 432/972 of P345,600 P 153,600

Y’s share of net income 540/972 of P345,600 192,000
Total P 345,600
3. Interest on Excess Average Capital Balance.

Y, drawing……. 4,320
Interest allowed based on average capitals.
Y’s interest on excess average capital:

6% of (P486,000 – P414,000)………………….. P 4,320
Capital No. of Mos.

X: balance Unchanged
1/1/x4: P360,000 x 3 P1,080,000
4/1/x4: 432,000 x 9 3,888,000
12 P4,968,000
Average P 414,000
Capital No. of Mos.

Y: balance Unchanged
1/1/x4: P504,000 x 2 P 1,008,000
3/1/x4: 468,000 X 8 3,744,000
11/1/x4: 540,000 x 2 1,080,000
12 P5,832,000
Average P 486,000
Total P 900,000
The net effect of the foregoing on capitals is:
X Y Total
Interest on excess P 4,320 P 4,320
average capital……
Balance (1:2)……….. P 113,760 227,520 341,280
Total P 113,760 P 231,840 P345,600
The allocation of net income may be summarized in a single entry as follows:
Income summary……………. 345,600

X, drawing……. 113,760
Y, drawing……. 231,840
Problem II
1. A bonus of 20% of net income before the bonus is deducted, the bonus would be computed as
follows:
Let B = Bonus
B = 20% of Net income
B = 20% of P504,000
B = P100,800
2. A bonus of 20% of net income after deduction of the bonus, the bonus would be computed as
follows:
Let B = Bonus
B = 20% of Net income after Bonus
B = 20% (P504,000 – B)
B = P100,800 - .20B
1.20 B = P100,800
B = P84,000
Problem III
1. Bonus is based on net income before bonus, salaries and interest
The schedule showing the allocation of net income is presented as follows:
A B Total
Bonus…. P 100,800 P 100,800
Salaries……… 48,000 P 72,000 120,000
Interest…………. 14,400 9,600 24,000
Balance (2;1)………. 172,800 86,400 259,200
Total P336,000 P168,000 P504,000
2. Bonus is based on net income after bonus but before salaries and interest
A B Total
Bonus…. P 84,000 P 84,000
Salaries……… 48,000 P 72,000 120,000
Interest…………. 14,400 9,600 24,000
Balance (2;1)………. 184,000 92,000 276,000
Total P330,400 P173,600 P504,000
3. Bonus is based on net income after bonus and salaries but before interest:
Let B = Bonus; S = Salaries; and I = Interest.
B = 20% of Net income after Bonus and Salaries before Interest
B = 20% (P504,000 – B – S)
B = 20% (P504,000 – B – P120,000)
B = 20% (P384,000 – B)
B = P76,800 - .20B
1.20 B = P76,800
B = P64,000
Proof:
Net income before bonus, salaries and interests…………… P504,000
Less: Bonus……………… 64,000
Salaries……………0 120,000
Net income after bonus, salaries before interests…………… P320,000
Multiplied by: Bonus rate…………. 20%
Bonus………… P 64,000

A B Total
Bonus…. P 64,000 P 64,000
Salaries……… 48,000 P 72,000 120,000
Interest…………. 14,400 9,600 24,000
Balance (2;1)………. 197,333 98,667 296,000
Total P323,733 P180,267 P504,000
4. Bonus is based on net income after bonus, salaries and interest:

B = 20% of Net income after Bonus, Salaries and Interest
B = 20% (P504,000 – B – S - I)
B = 20% (P504,000 – B – P120,000 – P24,000)
B = 20% (P360,000 – B)
B = P72,000 - .20B
1.20 B = P72,000
B = P60,000
Proof:
Net income before bonus, salaries and interests…………… P504,000
Less: Bonus……………… 60,000
Salaries…………… 120,000
Interest…………….. 24,000
Net income after bonus, salaries before interests…………… P300,000
Multiplied by: Bonus rate…………. 20%
Bonus………… P 60,000

A B Total
Bonus…. P 60,000 P 60,000
Salaries……… 48,000 P 72,000 120,000
Interest…………. 14,400 9,600 24,000
Balance (2;1)………. 200,000 100,000 300,000
Total P322,400 P181,600 P504,000
5. Bonus is based on net income after salaries but before bonus and interest:
B = 20% of Net income after Salaries before Bonus and Interest
B = 20% (P504,000 – S)
B = 20% (P504,000 – P120,000)
B = 20% (P384,000)
B = P76,800
Refer to Note of No. 3.
6. Bonus is based on net income after interest but before bonus and salaries:
B = 20% of Net income after Interest before Bonus and Salaries
B = 20% (P504,000 – P24,000I
B = 20% (P480,000)
B = P96,000
Refer to Note of No. 3.
7. Bonus is based on net income before bonus but after income tax (tax rate is 35%):
Let B = Bonus;
B = 20% (P504,000 – T)
B = P100,800 - .20T
Let T = Income tax

T = 35% (P504,000)
T = P176,400
Substituting the equation for T in the equation for B:

Let B = P100,800 - .20 (P176,400)
B = P100,800 – P35,280
B = P65,520
Proof:
Net income before bonus and income tax…………… P504,000
Less: Bonus……………… 65,520
Net income before bonus after income tax…….. P438,480
Less: Income tax…………… _176,400
Net income after bonus and income tax……… P262,080
Bonus as computed above:

Less: Income tax (35% x P504,000) 176,400
Net income after income tax before bonus…….. P327,600
Multiplied by: Bonus rate……… ____ 20%
Net income after bonus and income tax……… P 65,520
8. Bonus is based on net income, that is, after bonus and income tax:
Let B = Bonus; T = Income tax
B = 20% (P504,000 – B - T)
B = P100,800 - .20B - .20T
Let T = Income tax

T = 35% (P504,000)
T = P176,400
Substituting the equation for T in the equation for B:
Let B = P100,800 - .20B - .20T
B = P100,800 - .2B - .20 (P176,400)
1.20B = P100,800 – P35,280
1.20B = P65,520
B = P54,600
Proof:
Less: Bonus……………… 54,600
Net income before income tax…….. P449,400
Less: Income tax (35% x P504,000) 176,400
Bonus as computed above:

Multiplied by: Bonus rate……… ____ 20%
Bonus…………… P 54,600
Problem IV
B = Bonus to Rodgers
B = 0.20(Net Income - interest - salary - bonus)
B = 0.20(P168,000 - [0.08(P150,000)] - P60,000 – B)
B = 0.20(P96,000 - B)
B = P19,200 - 0.20B
1.20B = P19,200
B = P16,000
Problem V
James Keller Rivers Totals
Interest (8%) P4,400 (below) P5,600 P7,200 P17,200
Salary 13,000 15,000 20,000 48,000
Remaining income (loss):

P30,000
(17,200)
(48,000)
P(35,000) (7,040) (10,560) (17,600) (36,200)
Totals P10,360 P10,040 P9,600 P30,000
CALCULATION OF JAMES INTEREST ALLOCATION

Balance, January 1 – June 1 (P48,000 x 5 months) P240,000
Balance, June 1 – December 31 (60,000 x 7 months) 420,000
Total P660,000
Months ÷ 12
Average monthly capital balance P 55,000
Interest rate x 8%
Interest allocation (above) _P 4,400
STATEMENT OF PARTNERS’ CAPITAL
James Keller Rivers Totals
Beginning balances P 48,000 P70,000 P90,000 P208,000
Additional contribution 12,000 0 0 12,000
Income (above) 10,060 10,040 9,600 30,000
Drawings (P1,000/month) (12,000) (12,000) (12,000) (36,000)
Ending capital balances P58,360 P68,040 P87,600 P214,000
Problem VI
1: Net income is P360,000
P Q Total
Salaries P 80,000 P 100,000 P180,000
Bonus on net income 21,600 43,200 64,800
Interest on average capital balances 9,800 16,800 26,600
Remainder is P 88,600 (positive) ___53,160 __35,440 ___88,600
Totals P 164,560 P195,440 P 360,000
2. Net income is P240,000

P Q Total
Salaries P 80,000 P 100,000 P 180,000
Bonus on net income 14,400 28,800 43,200
Remainder is P 9,800 (negative) _(4,900) __(4,900) __(9,800)
Totals P 99,300 P 140,700 P240,000
3. Net loss is P40,000

P Q Total
Salaries P 80,000 P 100,000 P 180,000
Bonus (no distribution) 0 0 0
Remainder is P 246,600 (negative) (123,300) (123,300) (246,600)
Totals (P33,500) (P 6,500) (P 40,000)
Problem VII:
1 and 2. Total Carey Drew
Total to allocate: P150,000
As Bonus (Note A below) (25,000) P25,000
As Salaries (72,000) 36,000 P36,000
As Interest (Note B below) (10,720) 6,560 4,160
Subtotal: P 42,280 P67,560 P40,160
Residual Profit-sharing (42,280) 21,140 21,140
Final Allocations: P 0 P88,700 P61,300
Note A (Bonus):
Bonus = .20(Net Income Bonus)
1.2Bonus = .20(P150,000)
1.2Bonus = 30,000
Bonus = P25,000
Note B (Interest):
Capital Fraction Interest
Carey: Amount of Year Rate = Subtotal
P100,000 1/12 0.08 P 667
(12,000)
88,000 6/12 0.08 3,520
(12,000)
76,000 3/12 0.08 1,520
(12,000)
P 64,000 2/12 0.08 853
1.0000 P6,560
Capital Fraction Interest

Drew: Amount of Year Rate = Subtotal
P70,000 1/12 0.08 P 467
(12,000)
58,000 6/12 0.08 2,320
(12,000)
46,000 3/12 0.08 920
(12,000)
P34,000 2/12 0.08 453
1.0000 P4,160
Problem VIII
Jones would have to receive a bonus of P12,000 to be indifferent to the two profit-sharing options. Since
Cable would receive the same bonus, the total bonus would have to be P24,000. Therefore,
P24,000 = 10%  (Net income - Salaries - Bonuses)

P24,000 = 10%  (Net income - [30,000 + 40,000] - 24,000)
P24,000 = 10%  (Net income - 94,000)
P24,000 = 10%  Net income - 9,400
P33,400 = 10%  Net income
Net income P334,000
Problem IX
1. It should be noted that the order of priority is of no significance when it comes to allocation of net
income. Unless in cases, when there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the allocation
would still be to satisfy completely all provisions of the profit and loss agreement and use the profit
and loss ratios to absorb any deficiency or additional loss cause by such action.
Olsen Katch Total
Interest P 2,000 P 2,400 P 4,400
Bonus 10,000 10,000
Salaries 48,000 36,000 84,000
Remainder (6:4) __8,040 __5,360 _13,400
P58,040 P26,960 P85,000
Weighted Average Calculation:
Olsen:
Capital Gross
Balance # of Months Capital
1/1 to 4/1 20,000 3 60,000
4/1 to 10/1 25,000 6 150,000
10/1 to 12/31 30,000 3 90,000
Total 300,000
Average 25,000
Katch:
Capital Gross
Balance # of Months Capital
1/1 to 3/1 40,000 2 80,000
3/1 to 9/1 30,000 6 180,000
9/1 to 11/1 20,000 2 40,000
11/1 to 12/31 30,000 2 60,000
Total 360,000
Average 30,000
2. Olsen Katch Total

Salaries P48,000 P36,000 P 84,000
Bonus 10,000 10,000
Interest* 2,000 2,400 4,400
Remainder 39,960 26,640 66,600
Final Profit: P89,960 P75,040 P165,000
*see part 'a' solution for weighted average capital calculation
Problem X
Weighted Average Capital Calculation:
Matt
Cap Bal # months Gross
Cap
1/1 to 6/1 35,000 5 175,000
6/1 to 10/1 45,000 4 180,000
10/1 to 12/31 50,000 3 150,000
Total 505,000
Average 42,083
Jeff
Cap Bal # months Gross Cap
1/1 to 3/1 25,000 2 50,000
3/1 to 9/1 35,000 6 210,000
9/1 to 11/1 25,000 2 50,000
11/1 to 12/1 20,000 1 20,000
12/1 to 12/31 28,000 1 28,000
Total 358,000
Average 29,833
1. Matt Jeff Total

Salary P N/A P N/A P 0
Bonus N/A N/A 0
Interest 4,208 2,983 7,191
Subtotal P 4,208 P 2,983 P 7,191
Remainder 29,404 29,405 58,809
Total P33,612 P32,388 P66,000
2. Matt Jeff Total

Salary P 0 P 9,000 P 9,000
Bonus N/A N/A 0
Interest 5,000 2,800 7,800
Subtotal P 5,000 P11,800 P16,800
Remainder 29,520 19,680 49,200
Total P34,520 P31,480 P66,000
3. Matt Jeff Total

Salary P10,000 P15,000 P25,000
Bonus N/A N/A 0
Interest N/A N/A 0
Subtotal P10,000 P15,000 P25,000
Remainder 23,992 17,008 41,000
Total P33,992 P32,008 P66,000
4. Matt Jeff Total

Salary P20,000 P35,000 P55,000
Bonus* 6,000 N/A 6,000
Interest 4,208 2,983 7,191
Subtotal P30,208 P37,983 P68,191
Remainder (1,096) (1,095) (2,191)
Total P29,112 P36,888 P66,000
Problem XI
1. Allocation/Distribution of Net Income
AA BB CC Total
Salaries 14,400 12,000 13,600 40,000
Interest-12% of Ave. Cap. 12,960 17,280 24,840 55,080
Balance/Remainder (4:3:3) ( 1,200) ( 900) ( 900) ( 3,000)
Share in Net Income 26,160 28,380 37,540 92,080
2. Statement of Partners’ Capital

AA BB CC Total
Capital, January 2, 2010 96,000 144,000 216,000 456,000
Additional Investments
(Withdrawals) 24,000 (36,000) (12,000)
Net Income 26,160 28,380 37,540 92,080
Personal Withdrawals ( 9,000) ( 9,000) ( 9,000) (27,000)
Capital, December 31, 2010 137,160 163,380 208,540 509,080
3. Allocation/Distribution of Net Income

AA BB CC Total
Interest-12% of Ave. Cap. 12,960 17,280 24,840 55,080
Balance/Remainder (4:3:3) ( 1,200) ( 900) ( 900) ( 3,000)
Share in Net Income 11,760 16,380 23,940 52,080*
*Net income before partners’ salaries and interests…………………P 92,080
Less: Operating expenses (including salaries)……………………….. 40,000
Net Income after partners’ salaries but before interests……………P 52,080
Incidentally, the entry to record the salaries would be:

Operating expenses (for salaries)…………………. 40,000
AA, capital……………………………………………………….. 14,400
BB, capital……………………………………………………….. 12,000
CC, capital……………………………………………………….. 13,600
3. Statement of Partners’ Capital

AA BB CC
Capital, January 2, 2010 96,000 144,000 216,000
Addit’l. Inv. (Withdrawals) 24,000 ( 36,000)
Net Income 11,760 16,380 23,940
Sal. (refer to entry above) 14,400 12,000 13,600
Personal Withdrawals ( 9,000) ( 9,000) ( 9,000)
Capital. December 31, 2010 137,160 163,380 208,540
Problem XII
Partners Cumulative
Components of Allocation Durand Price Russell Total
Profit/loss percentage .................................... 35% 25% 40% ................
Gain on sale of equipment ........................... P 5,000 P 5,000 P 5,000 P 15,000
Salaries .............................................................. 40,000 20,000 45,000 105,000
Bonus (Note A) ................................................. .............. 5,000 .............. 5,000
Bonus (Note A) ................................................. 2,692 2,692 2,692 8,076
Interest on capital (Note B) ........................... 7,958 11,417 6,750 26,125
Remaining profit (loss) .................................... 14,280 10,200 16,319 40,799
Profit (loss) allocation .................................... P 69,930 P 54,309 P75,761 P200,000
Note A: Bonus to Price based on sales is 5% × (P1,100,000 – P1,000,000)

Bonus to all partners based on net income:
Bonus = 30% × [(net income – P150,000) – bonus]
Bonus = 30% × [(P185,000 – P150,000) – bonus]
130% Bonus = P10,500
Bonus = P8,076
The total bonus of P8,076 divided equally among the partners is P2,692 per partner.
Note B: Calculation of weighted-average capital (capital is reduced by draws in excess of salaries):
Durand Price Russell
P75,000 × 5/12 = P 31,250 P125,000 × 1/12 = P 10,417 P40,000 × 1/12 = P 3,333

85,000 × 4/12 = 28,333 120,000 × 2/12 = 20,000 70,000 × 11/12 = 64,167
80,000 × 3/12 = 20,000 115,000 × 3/12 = 28,750
110,000 × 6/12 = 55,000
P 79,583 P 114,167 P 67,500
10% 10% 10%
P 7,958 P 11,417 P 6,750
Problem XIII
1. Distribution of income for 20x4:
Norr Caylor Total
Interest P 12,000 P 9,600 P 21,600
Compensation __10,000 __14,000 __24,000
Subtotals P 22,000 P 23,600 P 45,600
Allocation of remainder __14,640 __9,760 __24,400
Totals P 36,640 P 33,360 P 70,000
2. Capital account balances at the end of 20x4:

Norr Caylor
Beginning capital balances P 100,000 P 80,000
Share of income 36,640 33,360
Withdrawals _(12,000) _(12,000)
Ending capital balances P 124,640 P 101,360
3. Distribution of income for 20x5:

Norr Caylor Total
Interest P 14,957 P 12,163 P 27,120
Compensation __8,000 __12,000 __240,000
Subtotals P 22,957 P 24,163 P 47,120
Allocation of remainder __13,872 __9,248 _(23,120)
Totals P 9,085 P 14,915 P 24,000
4. Capital account balances at the end of 20x5:
Norr Caylor
Beginning capital balances P 124,640 P 101,360
Share of income 9,085 14,915
Withdrawals _(12,000) _(12,000)
Ending capital balances P 121,725 P 104,275
Problem XIV
1. The interest factor was probably inserted to reward Page for contributing P50,000 more to the partnership than
Childers. The salary allowance gives an additional P15,000 to Childers in recognition of the full-time (rather
than part-time) employment. The 40:60 split of the remaining income was probably negotiated by the partners
based on other factors such as business experience, reputation, etc.
2. The drawings show the assets removed by a partner during a period of time. A salary allowance is added to
each partner's capital for the year (usually in recognition of work done) and is a component of net income
allocation. The two numbers are often designed to be equal but agreement is not necessary. For example, a
salary allowance might be high to recognize work contributed by one partner. The allowance increases the
appropriate capital balance. The partner might, though, remove little or no money so that the partnership
could maintain its liquidity.
3.
Page, Drawings ......................................................................................... 5,000
Repair Expense ................................................................................... 5,000
(To reclassify payment made to repair personal residence.)
Page, Capital ............................................................................................. 13,000
Childers, Capital ........................................................................................ 11,000
Page, Drawings (adjusted) .............................................................. 13,000
Childers, Drawings ............................................................................. 11,000
(To close drawings accounts for 2008.)
Revenues ................................................................................................. 90,000
Expenses (adjusted by first entry) .................................................... 59,000
Income Summary ............................................................................... 31,000
(To close revenue and expense accounts for 2008.)
Income Summary ...................................................................................... 31,000

Page, Capital ..................................................................................... 11,000
Childers, Capital ................................................................................ 20,000
(To close net income to partners' capital–see allocation plan shown below.)
Allocation of Income Page Childers
Interest (10% of beginning balance) P 8,000 P 3,000
Salary allowances 5,000 20,000
Remaining income (loss):
P31,000
(11,000)
(25,000)
P (5,000) (2,000) (40%) (3,000) (60%)
P11,000 P20,000
4. Total capital (original balances of P110,000 plus 2008

net income less drawings) ................................................................ P117,000
Investment by Smith .................................................................................. 43,000
Total capital after investment ................................................................. P160,000
Ownership portion acquired by Smith ................................................... 20%
Smith, capital ......................................................................................... P 32,000
Amount paid ......................................................................................... 43,000
Bonus paid by Smith—assigned to original partners ............................ P 11,000
Bonus to Page (40%) ................................................................................. P4,400
Bonus to Childers (60%) ............................................................................ P6,600
Cash ........................................................................................................ 43,000

Smith, Capital (20% of total capital) .............................................. 32,000
Page, Capital ..................................................................................... 4,400
Childers, Capital ................................................................................ 6,600

1. c
Capital, Beg 45,000
Additional Investment 50,000
Withdrawal (800 x 12) (96,000)
Net income (?) 31,000
Capital, Ending P 30,000
2. b
A B 10M
Salaries 2,000 25,000 45,000
Bonus 8,000 0 8,000
Interest (20% x average capital) 8,000 10,000 18,000
Balance - equally 8,500 8,500 1,700
10M 44,500 8,800
*Bonus= 10% (NI - B)
B= .10 (8,800 - B)
B= 8,800 - .10B
1.10B= 8,800
B= 8,000
3. b The net income of P80,000 is allocated to Blue and Green in the following
manner:
Blue Green Net Income
P 80,000
Salary allowances P 55,000 P45,000 (100,000)
Remainder P (20,000)
Allocation of the negative
remainder in the
60:40 ratio (12,000) (8,000) 20,000
Allocation of net income P 43,000 P37,000 P -0-
4. a
A B Total
Salaries 30,000 P 45,000 P 75,000
Bonus* 3,600 3,600
Interest: 10% x Ave. capital 5,000 6,500 11,500
1:3 4,625 18,500
Total P 43,225 P 108,600
*Bonus = 12% (NI – S – B)

B = .12 (108,600 – 75,000 – B)
B = .12 (33,600 – B)
B = 4,032 - .12B
1.12B = 4,032
B = 3,600
5. a
A B Total
Salaries P 40,000 P 45,000 P 85,000
Bonus (refer to Note) 0
Interest on average capital (15%) 6,000 9,000 15,000
Balance (2:1) (32,000) (16,000) (48,000)
Total P 14,000 P 38,000 P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to allocation of
net income. When there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the
allocation would still be to satisfy completely all provisions of the profit and loss agreement
and use the profit and loss ratios to absorb any deficiency or additional loss caused by such
action.
6. d
A B C Total
Salaries P 40,000 P 40,000 P 80,000
Bonus* P 1,000 1,000
3:4:3 __3,000 4,000 _3,000 10,000
Total P 43,000 P 4,000 P 91,000
*Bonus = 10% (NI – S – B)
B = .10 (91,000 – 80,000 – B)
B = .10 (11,000 – B)
B = 1,100 - .10B
1.10B = 1,100
B = 1,000
7. c
A B Total
Salaries P 41,600 P 38,400 P 80,000
Bonus (refer to Note) 0
Interest on average capital (10%) 2,000 3,500 5,500
Balance (1:2) (16,500) (49,500)
Total P 27,100 P 52,000
Note:
1. The basis of the bonus is negative, so there’s no bonus at all.
2. It should be noted that the order of priority is of no significance when it comes to allocation of
net income. When there is a resulting residual loss, wherein the residual loss should be
allocated based on their agreement. In this case, there is no such agreement, so the
allocation would still be to satisfy completely all provisions of the profit and loss agreement
and use the profit and loss ratios to absorb any deficiency or additional loss caused by such
action.
8. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual is 12 months.
9. c
Mack Ruben Total
Salaries P 90,000 P 60,000 P 150,000
6:4 _30,000 __20,000 50,000
Total P120,000 P 80,000 P 200,000
10. c – Robbie, P50,000 x 90/150 = P30,000; Ruben, P50,000 x 60/150 = P20,000

11. c - B = .05(P180,000 - P150,000)
12. d - B = {[(P540,000 - P500,000)/P500,000] - .05} P120,000
13. d - (P60,000 - P50,000)(.60) + (P80,000 - P60,000)(.70)
14. c - (P300,000 - P200,000)(.75) + (P380,000 - P300,000)(.60)
15. c - (P300,000 - P100,000)(.35) + (P450,000 - P300,000)(.55)
16. d - (P120,000 - P50,000)(.40)
17. a - (P600,000 - P350,000)(.40 - .30)
18. b
XX YY ZZ Total
Salary 60,000 48,000 36,000 144,000
Interest: 10% x average capital 7,500 48,750
Balance: equally 5,000 5,000 5,000 15,000
207,750
X: P100,000 x 6 = P600,000
P160,000 x 6 = 960,000 P1,560,000 / 12 = P 130,000
Y (same with beginning since no additional
investments or withdrawals were made) 150,000
Z: P225,000 x 9 = P2,025,000
P155,000 x 3 = 465,000 P2,490,000/12 = 207,500
P 487,500 x 10% = P48,750
19. d - ASSIGNMENT OF INCOME

ARTHUR BAXTER CARTWRIGHT TOTAL
Interest—10% of beginning capital P 6,000 P 8,000 P10,000 P24,000
Salary ........................................................ 20,000 20,000
Allocation of remaining income
(P6,000 divided on a 3:3:4 basis) ............ 1,800 1,800 2,400 6,000
Totals ............................................ P 7,800 P29,800 P12,400 P50,000
STATEMENT OF CAPITAL
ARTHUR BAXTER CARTWRIGHT TOTAL
Beginning capital ...................................... P60,000 P80,000 P100,000 P240,000
Net income (above) ................................ 7,800 29,800 12,400 50,000
Drawings (given) ....................................... (5,000) (5,000) (5,000) (15,000)
Ending capital ........................................... P62,800 P104,800 P107,400 P275,000
20. a
ASSIGNMENT OF INCOME—YEAR ONE
WINSTON DURHAM SALEM TOTAL
Interest—10% of beginning capital ........ P11,000 P 8,000 P11,000 P30,000
Salary ........................................................ 20,000 -0- 10,000 30,000
Allocation of remaining loss
(P80,000 divided on a 5:2:3 basis) ........... (40,000) (16,000) (24,000) (80,000)
Totals ............................................ P(9,000) P (8,000) P (3,000) P (20,000)
STATEMENT OF CAPITAL—YEAR ONE

Beginning capital ...................................... P110,000 P80,000 P110,000 P300,000
Net loss (above) ........................................ (9,000) (8,000) (3,000) (20,000)
Drawings (given) ....................................... (10,000) (10,000) (10,000) (30,000)
Ending capital .................................... P 91,000 P62,000 P 97,000 P250,000
ASSIGNMENT OF INCOME—YEAR TWO

Interest—10% of beginning capital P 9,100 P 6,200 P 9,700 P25,000
Salary ........................................................ 20,000 -0- 10,000 30,000
Allocation of remaining loss
(P15,000 divided on a 5:2:3 basis) .......... (7,500) (3,000) (4,500) (15,000)
Totals ............................................ P21,600 P3,200 P15,200 P40,000
STATEMENT OF CAPITAL—YEAR TWO

Beginning capital (above) ...................... P 91,000 P62,000 P 97,000 P250,000
Net income (above) ................................ 21,600 3,200 15,200 40,000
Drawings (given) ....................................... (10,000) (10,000) (10,000) (30,000)
Ending capital .................................... P102,600 P55,200 P102,200 P260,000
21. a
Capital, Beginning
Additional investment 25,000
Withdrawals (130,000)
Net income 45,000 / 30% = P 150,000
Net Decrease (60,000)
22. a
F G H Total
10% interest a Average capital 12,000 6,000 4,000 22,000
Salaries 30,000 20,000 50,000
Equally (35,000) ________ _________ (105,000)
7,000 (33,000)
23. d, P66,200; E, P34,100; F, P29,700

D E F Total
Salaries 25,000 20,000 25,000 70,000
Bonus on income (10% x P130,000) 13,000 13,000
Remainder (6:3:1) 28,200 14,100 _4,700 47,000
66,200 34,100 29,700 130,000
24. a
C W N Total
Capital, 1/1/x4 100,000 150,000 200,000 450,000
Net Income – 20x4 29,000 63,000 58,000 150,000
Withdrawal – personal (12,000) (12,000) (12,000) (36,000)
Capital, 12/31/x4 117,000 20,100 24,600 564,000
Net income – 20x4 C W N Total

10% interest on beginning capital 10,000 15,000 20,000 45,000
Salary - 10,000 - 10,000
20% : 40% : 40% 19,000 38,000 38,000 95,000
29,000 63,000 58,000 150,000
Capital, 1/1/x5 117,000 201,000 246,000 564,000

Net income 34,420 75,540 70,040 180,000
Withdrawals – personal (12,000) (12,000) (12,000) (36,000)
Capital, 12/31/x5 139,420 264,540 304,040 708,000
Net income – 20x5 117,000 201,000 246,000 564,000

10% interest a beginning capital 34,420 75,540 70,040 180,000
Salary (12,000) (12,000) (12,000) (36,000)
20% : 40% : 40% 139,420 264,540 304,040 708,000
25. d - refer to No.24

26. b - refer to No.24
27. c - refer to No.24
28. b
Y E I Total
Capital, 1/1/Year 1 143,000 104,000 143,000 390,000
Net income (loss) (11,700) (10,400) (3,900) (26,000)
Capital, 12/31/ Year I 118,300 80,600 126,100 325,000
Year I Net loss

Salary 26,000 - 13,000 3,900
Interest – 10% x beginning capital 14,300 10,400 14,300 3,900
5:2:3 (52,000) (20,800) (31,200) (10,400)
Total (11,700) (10,400) (3,900) (2,600)
Capital, 1/1/Year2 118,300 80,600 126,100 325,000

Net income (loss) 28,080 76,700 19,760 52,000
Capital, 12/31/ Year 2 133,380 144,300 132,860 338,000
Year 2 Net loss 26,000 - 13,000 3,900

Salary 11,830 8,060 12,610 32,500
Interest – 10% x beginning capital (9,750) (3,900) (5,850) (19,500)
5:2:3 28,080 76,700 19,750 52,000
29. d - refer to No.28

30. c - refer to No.28
31. a - refer to No.28
32. d
Because both partners have equal capital balances, NN's capital has to be increased to equal
that of MM's. Since MM's capital balance is P60,000 and NN's is P20,000, an additional P40,000 has
to be credited to NN's capital to make it equal MM's capital. This additional amount credited to
NN's capital is the goodwill that NN is bringing to the partnership.
33. a - MM's share of the net income of P25,000 is 60%, or P15,000.
34. b
2/1/20x4: P20,000 x 4 = P 80,000
6/1/20x4: P40,000 x 3 = 120,000
9/1/20x4: P30,000 x 4 = 120,000
P 320,000 / 12 months = P26,667
Note: Annual - 12 months.
35. b
Interest: (P500,000 x 10%) = P50,000
Salary: (P10,000 + P20,000) = P30,000
Bonus: Condition not met = P0
Total allocations = P80,000 and over-allocations =

P80,000 - P60,000 = P20,000
36. b
Bloom:
Interest allocation: P20,000
Salary allocation: P10,000
Carnes:
Interest allocation: P30,000
Salary allocation: P20,000
There is a total of P80,000 for positive allocations. To bring them down to a P20,000 loss, a
residual adjustment of (P100,000) is needed which is allocated (P40,000) to Bloom and
(P60,000) to Carnes. After these amounts are assigned to the partners, each partner’s
capital account will be reduced by a net P10,000.
37. c
J P B Total
Salaries P 50,000 P 60,000 P 30,000 P140,000
Bonus* 16,000 8,000 16,000 40,000
Remainder (3:4:3) (6,000) (8,000) (6,000) (20,000)
Total P 60,000 P 60,000 P 40,000 P160,000
*since problem is silent it should be based on net income before any deductions.
38. c
A P B Total
Salaries P 30,000 P 10,000 P 40,000 P 80,000
Bonus (10% of average capital) 5,000 3,000 2,000 10,000
Remainder (4:4:2) _ 24,000 __24,000 _12,000 60,000
Total P 59,000 P 37,000 P 54,000 P150,000
39. c
A P B Total
Salaries P 30,000 P 10,000 P 40,000 P 80,000
Bonus (10% of average capital) 5,000 3,000 2,000 10,000
Remainder (4:4:2) (16,000) (16,000) ( 8,000) (40,000)
Total P 19,000 (P3,000) P 34,000 P 50,000
40. b
Total agreed capital = total contributed capital*
(P200,000 + P100,000 + P100,000) P 400,000
Multiplied by: Capital interests of May _____35%
P 140,000
*No goodwill or asset adjustment
41 d
P60,000, salary = P25,000, salary + [.20 (NI – B)]
P60,000 = P25,000 + P35,000, bonus
Therefore, bonus would be P35,000
B = .20 (NI – B)
P35,000 = . 20 (NI – P35,000)
P35,000 = .20NI – P7,000
P35,000 + P7,000 = .20NI
P42,000 = .20NI
NI = P210,000
42. c - P30,000 + P40,000 = P70,000, annual salary to allocate net income.
43. b
[P70,000 – (P40,000 + P10,000 +P2,000)]
- Salary to partners is an allocation of net income (they are not expenses)
- Partner’s withdrawals are deduction to capital accounts.
44. c
Bonus = 20% (NI before deduction on salaries, interests and bonus)
B = 20% (NI after deduction of salaries, interests and bonus + salaries + interests + bonus)
B = 20% [P46,750 + (P1,000 x 12 months) + (.05 x P25,000) + B]
B = .20 [P60,000 + B]
B = P12,000 + .20B
1.20 B = P12,000
B = P15,000
45. a
Allocation/Distribution of Net Income
DD EE Total
Salaries 18,000 24,000 42,000
Interest (10% of Ave. Cap.) 15,000 20,000 35,000
Balance/Remainder (60%:40%) 25,800 17,200 __43,000
Share in Net Income 58,800 61,200 120,000*
*P 500,000 – P100,000 (excluding salaries and int. – P100,000
Statement of Partners’ Capital

DD EE Total
Capital, March 1, 2011 150,000 180,000 330,000
Additional Investments 60,000 60,000
Net Income 58,800 61,200 1240,000
Personal Withdrawals (18,000) (24,000) ( 42,000)
Capital, March 1, 2012 190,800 277,200 468,000
Allocation/Distribution of Net Income

DD EE Total
Interest on Average Capital – 10% P 15,000 P20,000 P 35,000
Balance/Remainder – 60%:40% 51,000 34,000 85,000
Share in Net Income P 66,000 P54,000 P 120,000
Statement of Partners’ Capital

DD EE
Capital balance, 2/28/20x4 P 150,000 P 180,000
Additional Investment 60,000
Share in Net Income 66,000 54,000
Salaries 18,000 24,000
Salary withdrawals ( 18,000) ( 24,000)
Capital balance, March 1, 20x5 P 216,000 P 294,000
46. a – refer to No. 45

47. b – refer to No. 45
48. c – refer to No. 45
49. a
NN OO Total
Salary allowances P180,000 P - P180,000
Balance/Remainder: Equally 15,000 15,000 30,000
Net Income for 20x5 P195,000 P 15,000 P 210,000
Adjustment of net income for 20x4 – 60% : 40% 24,000 16,000 40,000
Total P219,000 P31,000 P250,000
Note: Any adjustments related to a particular year, the profit and loss ratio existing on that year
should be used as a basis for allocating the required adjustments.
50 – 53: No requirement
54. b
Old P & L Interests Acquired New P & L
Abe 70% 59.50%
Bert 20% 85% 17.00%
Carl 10% 8.50%
Dave 15% 15.00%
Total 100% 100% 100%
55. b
Unadjusted net income, 20x5 P 15,000
Add (deduct): adjustments -
Accrued expense – 20x5 (1,050)
Accrued income – 20x5 875
Prepaid expense – 20x4 (1,400)
Deferred or unearned income – 20x4 __1,225
Adjusted net income, 20x5 P 14,650
Multiplied by: P& L of Dave _____17%
Share in net income – 20x5 P2,490.50
Quiz – II
1. P47,500 = [(P0,000 x 4) + (P40,000 x 6) + (P65,000 x 2)]/12
2. P6,400 = [(P60,000 x 2) + (P90,000 x 5) + (P70,000 x 4) + P110,000] (.08)
3. P3,703 - B = .08(P250,000 - P200,000 - B)
4. P39,150 = (P130,000 - P10,000 - P15,000 - P18,000) .45
5. Nick, P44,075; Joe, P48,435; Mike, P57,490
Nick Joe Mike Total
Interest on capital
P200,000 x .09 P18,000
P350,000 x .09 P31,500
P180,000 x .09 P16,200 P65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1(P150,000 - P100,000) 5,000 5,000
Residual
P4,300 x .25 1,075
P4,300 x .45 1,935
P4,500 x .30 ______ _______ 1,290 4,300
Totals P44,075 P48,435 P57,490 P150,000
6. P185,000 = P35,000 + (P500,000 - P35,000 - P50,000 - P40,000) .4

7. P78,000 = (P250,000 x .08) + [P300,000 - (P200,000 + P250,000 + P400,000)(.08)] .25
8. P10,000 = (P60,000 - P50,000)(.40) + (P80,000 - P60,000)(.30)
9. P57,000 = (P300,000 - P200,000)(.25) + (P380,000 - P300,000)(.40)
10. P197,500 = (P300,000 - P100,000)(.65) + (P450,000 - P300,000)(.45)
11. P42,000 = (P120,000 - P50,000)(.60)
12. P36,000 = (P200,000 - P120,000)(.45)
13. P105,000 = (P520,000 - P370,000)(.70)
14. P78,000 = (P650,000 - P520,000)(.60)
15. P13,000 increase = (P250,000 - P120,000)(.70 - .60)
16. P25,000 decrease = (P600,000 - P350,000)(.70 - .60)
17. P68,800
Garlic Pepper Salt Total
Salary 60,000 24,000 84,000
Interests – 10% on beginning 4,000 4,800 3,200 12,000
Equally 4,000 4,000 4,000 12,000
Total 8,000 68,800 108,000
18. P310,000
Using bonus formula to solve for income:
Bonus = .20 (NI – Bonus – Salary)
35,000 = .20 NI – [.20 x P35,000] – [.20 x P100,000*]
62,000 = .2Income
P310,000 = income
*salaries 25,000 + 75,000
19. James, P58,360; Keller, P68,040; Rivers, P87,600

James Keller Rivers Total
Interest – 8% 4,400 5,600 7,200 17,200
Salary 13,000 15,000 20,000 48,000
2:3:5 (7,040) (10,560) (17,600) (35,200)
Total 10,360 10,040 9,600 30,000
Interest:
James: P48,000 x 5 = P240,000
P60,000 x 7 = 420,000 P660,000/12 = P55,000 x 8% = P4,400
Capital, beginning 48,000 70,000 90,000 208,000

Additional investments 12,000 12,000
Net income (loss) 10,360 10,040 9,600 30,000
Withdrawals – P1,000 per month (12,000) (12,000) (12,000) (36,000)
Capital, ending 58,360 68,040 87,600 214,000
20. JJ, P27,000; KK, P24,000; LL, P39,000

JJ KK LL Total
Bonus (20%) ..................................... P18,000 P -0- P -0- P18,000
Interest (15% of average capital) 15,000 30,000 45,000 90,000
Remaining loss ($18,000) .............. (6,000) (6,000) (6,000) (18,000)
Income assignment ....................... P27,000 P24,000 P39,000 P90,000
21. PP, P64,600; SS, P49,000; TT, P2,000
PP SS TT Totals
Interest (10%) 6,600 (below) 4,000 2,000 12,600
Salary 18,000 25,000 8,000 51,000
Remaining income (loss) (16,000) ( 8,000) (16,000) (40,000)
Totals 8,600 21,000 (6,000) 23,600
CALCULATION OF PURKERSON'S INTEREST ALLOCATION

Balance, January 1—April 1 (P60,000 × 3) P180,000
Balance, April 1—December 31 (P68,000 × 9) 612,000
Total ................................................................................................... P792,000
Months ............................................................................................... ÷ 12
Average monthly capital balance ............................................. P 66,000
Interest rate ...................................................................................... × 10%
Interest allocation (above) ........................................................... P 6,600
STATEMENT OF PARTNERS' CAPITAL

PP SS TT Totals
Beginning balances ......................... 60,000 40,000 20,000 120,000
Additional contribution ................... 8,000 -0- -0- 8,000
Income (above) ............................ 8,600 21,000 (6,000) 23,600
Drawings (P1,000 per month) ......... (12,000) (12,000) (12,000) (36,000)
Ending capital balances ................. 64,600 49,000 2,000 115,600
22. Ending capital balances:

20x4 .......................................... 4,720 32,400 32,880 70,000
20x5 .......................................... 4,766 30,088 37,146 72,000
20x6 ……………………………. 9,610 36,243 36,147 82,000
INCOME ALLOCATION—20x4
LL CC RR Total
Interest (12% of beginning capital) 2,400 7,200 6,000 15,600
Salary 12,000 8,000 -0- 20,000
Remaining income/loss (19,680) (32,800) (13,120) (65,600)
Totals (5,280) (17,600) (7,120) (30,000)
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 20x4

LL CC RR Total
Beginning balances ..................... 20,000 60,000 50,000 130,000
Income allocation ........................ (5,280) (17,600) (7,120) (30,000)
Drawings ........................................ (10,000) (10,000) (10,000) (30,000)
Ending balances .................... 4,720 32,400 32,880 70,000
LL CC RR Total
Interest(12% of beginning capital above) *566 3,888 3,946 8,400
Salary ............................................. 12,000 8,000 -0- 20,000
Remaining income/loss: (2,520) (4,200) (1,680) (8,400)
Totals ...................... 10,046 7,688 2,266 20,000
*Rounded
LL CC RR Total
Beginning balances (above) 4,720 32,400 32,880 70,000
Additional investment ................. -0- -0- 12,000 12,000
Income allocation ........................ 10,046 7,688 2,266 20,000
Drawings ........................................ (10,000) (10,000) (10,000) (30,000)
Ending balances .................... 4,766 30,088 37,146 72,000
LL CC RR Total
Interest (12% of beginning capital
above)* ................................... 572 3,611 4,457 8,640
Salary ............................................. 12,000 8,000 -0- 20,000
Remaining income........................ 2,272 4,544 4,544 11,360
Totals .................................. 14,844 16,155 9,001 40,000
*Rounded

LL CC RR Total
Beginning balances (above) 4,766 30,088 37,146 72,000
Income allocation 14,844 16,155 9,001 40,000
Drawings (10,000) (10,000) (10,000) (30,000)
Ending balances 9,610 36,243 36,147 82,000
23. Julio, P2,820 decrease; Fong, P120 increase

Short-term prepayments 2,700
Julio, Capital 2,820
Fong, Capital 120
Salaries Payable 5,400
The correction to partners' capital accounts is
computed as follows:
Julio Fong
Inventories understated by P12,000,
Dec. 31, 20x5 P 6,000 P 6,000
Inventories understated by P12,000,
Jan. 1, 20x6 (7,200) (4,800)
Accrued salaries of P5,400 not recorded,
Dec. 31, 20x6 (3,240) (2,160)
Short-term prepayments of P2,700
not recorded, Dec. 31, 20x6 1,620 1,080
Net corrections to partners' capital
accounts P(2,820) P 120
THEORIES
True of False
1. False 6. False 11. True 16. True 21. False 26. False
2. True 7. True 12. True 17. False 22. True 27. True
3. True 8. False 13. False 18. False 23. False 28. False
4. False 9. True 14. True 19. True 24. True
5. True 10. False 15. False 20. True 25. False
1. While the partnership law may have indicated that the partners cannot withdraw resources and make the
partnership insolvent, withdrawals are typically controlled by the articles of partnership.
4. If the partnership agreement is silent with regard to profit and loss allocation, profits and losses are shared
equally.
6. The interest component of partnership profit and loss allocation rewards partners for capital contributions.
8. The interest on capital balances component of partnership profit and loss allocation may be based on the
beginning, ending, simple average capital balance, or weighted average capital balance.
10. The salary component of the partnership profit and loss allocation would be expected to be renegotiated
periodically as the duties of the partners change.
13. Partnerships can offer bonuses to anyone. The choice is up to the partners. On the other hand, there is no
requirement to ever offer a bonus.
15. While many bonuses are based on a measure of income, it is not required. Bonus can be based on other
criteria such as market share, revenue, or average cost per unit.
17. Residual interests may be equal but they are not required to be equal.
18. While profit residual ratios and loss residual ratios are generally the same, they can differ.
21. Residual profit and loss percentages are the last component of the profit and loss allocation process
applied because they are designed to allocate any remaining amount to the partners.
23. There are several ways that the difference between market and book value of assets can be addressed
when the profit and loss ratios are changed. Revaluing the assets is one of the possibilities along with
maintaining a record of assets with market and book value differences as well as directly adjusting capital
accounts while leaving asset values unchanged.
Multiple Choice
29. c 34. d 39. b 44. c
30. d 35. d 40. e 45. a
31. c 36. c 41. c 46. b
32. d 37. d 42. b 47. C
33. a 38. a 43. d
Chapter 3
Problem I
1.
Ben, capital 350,000
Pet, capital (50% x P700,000) 350,000
2. The total capital of BIG Entertainment Galley remains at P1,480,000. The total amount paid by Pet to
Ben does not affect the partnership and Pet does not become a partner with the assignment of half
of Ben’s interest.
Problem II
1.
a. D, capital…………………………………………………………… 24,000
F, capital…………………………………………………......... 24,000
b.1.
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000
The capital balances of the partners after the admission of F would be as follows:
D E F (book value) Total_

Capital before admission…P 72,000 P 48,000 P120,000
x: Interest remained……….. ¾ ¾ ________
Capital after admission….. P54,000 P 36,000 P 30,000 P120,000
Therefore, the profit and loss ratio of the partners after the admission of F would be as follows:
D, capital (70% x ¾)……………………………………………… 52.50%

E, capital (30% x ¾)………………………………………………. 22.50%
F, capital (equivalent to interest acquired)…………………. 25.00%
Total………………………………………………………………….100.00%
b.2
b.2.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000
The positive excess of P6,000 represents a personal gain of D and E, computed as follows:
Amount paid (P21,600 + P14,400)…………………………………. P36,000
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………............................. 30,000
Excess (Gain of D and E – personal in nature)….……………….. P 6,000
The partnership does not record this gain because it was not benefited from it.
b.2.2
Assets (Goodwill)……………………………………………….. 24,000
D, capital (P24,000 x 70%).……………………………........ 16,800
E, capital (P24,000 x 30%).……………………………......... 7,200
Or,
Amount paid (P21,600 + P14,400)…………….. P36,000 / ¼ P144,000 (100%)
(P 120,000 x ¼)……………………………... 30,000 120,000 (100%)
Excess……………………………………………….. P 6,000
Divided by (capitalized at): Interest acquired ¼
Revaluation of Asset Upward………………….. P24,000 P 24,000 (100%)
D, capital [(P72,000 + P16,800) x ¼]………………………… 22,200

E, capital [(P48,000 + P7,200) x ¼]…………………………… 13,800
F, capital…………………………………………………...... 36,000
D E F (amount paid) Total_

Capital before admission… P 72,000 P 48,000 P120,000
Revaluation upward………. 16,0800 7,200 24,000
Capital balance after
revaluation………………. P 88,800 P 55,200 P144,000
x: Interest remained……….. ¾ ¾ ________
Capital after admission….. P66,600 P 41,400 P 36,000 P144,000
Capital interest %.............. 25

P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)…… 22.50
F (1/4)…………… 25
It should be observed that the total capital balance after the admission increases equivalent to
the revaluation of assets amounting to P24,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid.
b.3
b.3.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000
The negative excess of P3,600 represents a personal loss of D and E, computed as follows:
Amount paid ……………………….…………………………………. P 26,400

(P 120,000 x ¼)……………………………............................. 30,000
Excess (Loss of D and E – personal in nature)….………………… P( 3,600)
b.3.2
The entry to record the transaction in the books follows:
D, capital (P14,400 x 70%).…………………………………….. 10,080
E, capital (P14,400 x 30%).……………………………………... 4,320
Assets ……………………………………………………..... 14,400
Or,
Amount paid ………………………….………….. P 26,400 / ¼ P 105,600 (100%)
(P 120,000 x ¼)……………………………... 30,000 120,000 (100%)
Excess……………………………………………….. P( 3,600)
Divided by: Interest acquired………………….. ¼
Revaluation of Asset Downward..…………….. P(14,400) P(14,400) (100%)
D, capital [(P72,000 – P10,080) x ¼]………………………. 15,480

E, capital [(P48,000 – P4,320) x ¼]………………………….. 10,920
F, capital………………………………………………….. 26,400
D E F (amount paid) Total_

Capital before admission…P 72,000 P 48,000 P120,000
Revaluation downward…… 10,080 4,320 14,400
Capital balance after
revaluation……………….. P 61,920 P 48,680 P 105,600
x: Interest remained………… ¾ ¾ ________
Capital after admission….. P46,440 P 32,760 P 26,400 P 105,600

P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)…… 22.50
F (1/4)…………… 25
Comparison between b.3.1 and b.3.2:

Schedule of Account Balances
Net Goodwill/Asset Capital__________

Assets Revaluation = D E F___
Book Value Approach
Balances before admission P120,000 P 72,000 P 48,000
Admission ( 18,000) (12,000) P 30,000
Balances after admission of F P 120,000 P -0- P 54,000 P 36,000 P 30,000
Revaluation Approach
Balances before admission P120,000 P 72,000 P 48,000
Revaluation P 24,000 16,800 7,200
Admission ( 22,200) (13,800) P 36,000
Balances after admission of F P120,000 P 24,000 P 66,600 P 41,400 P 36,000
Depreciation/impairment* ( 24,000) ( 12,600) ( 5,400) ( 6,000)
Totals P120,000 P -0- P 54,000 P 36,000 P 30,000
*new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)
The two methods will yield the same results computed as follows;
Capital__________
D E F___
Balances after admission of F (BV approach) P 54,000 P 36,000 P 30,000
Balances after admission of F (Revaluation approach) 54,000 36,000 30,000
Gain or (loss) through use of book value approach P -0- P -0- P -0-
Problem III
a: No Bonus or No Revaluation.
The total agreed capital is equal to total agreed capital:
Total agreed capital (given)………………………………………….P 48,000
Less: Total agreed capital (P24,000 + P12,000 + P12,000)………. 48,000
Difference…………………………………………………………………P -0-
D, capital (P72,000 x ¼)………………………………………… 18,000

E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000
b: Bonus to New Partner.

The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation
(goodwill) should be recognized as follows:
Total agreed capital (given)…………………………………………P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)…. 48,000
Difference………………………………………………………………..P -0-
The new partner’s contributed capital is less than the agreed capital, the difference is attributable
to bonus to new partner:
J’s contributed capital (given)……………………………………...P 12,000
J’s agreed capital: (P48,000 x 35%)…………………………………. 16,800
Difference (bonus to new partner)………………………………….P 4,800

Cash……………………………………………………………….. 12,000
G, capital (P4,800 x 60%)………………………………………. 2,880
H, capital (P4,800 x 40%)………………………………………. 1,920
J, capital ……………..…………………………………. 16,800
c: Revaluation (Goodwill) to New Partner

The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation
Total agreed capital: (P18,000 / 1/3)……………………………….P 54,000
Less: Total contributed capital (P24,000 + P12,000 + P12,000)… 48,000
Difference (revaluation/goodwill)………………………………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a)
is attributable to revaluation/goodwill to new partner:
J’s agreed capital (given) ………..…………………………………. 18,000
Difference (revaluation/goodwill to new partner)………………P 6,000
Cash………………………………………………………………..12,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..…………………………………. 18,000
d: Bonus to Old Partners.

Total agreed capital (should equal to TCC
since it is a bonus method)……………………………………P 60,000
[(P24,000 + P12,000 + (P30,000 – P6,000)]……………….…. 60,000
Difference………………………………………………………………..P -0-
The new partner’s contributed capital is greater than his agreed capital, the difference is
attributable to bonus to old partners:
J’s contributed capital (P30,000 – P6,000)………………………..P 24,000
J’s agreed capital: (P60,000 x 30%)………………………………... 18,000
Difference (bonus to old partners)..………………………………..P( 6,000)

Tangible asset…………………………………………………….30,000
Mortgage payable……………………………………. 6,000
J, capital ……………..…………………………………. 18,000
G, capital (P6,000 x 60%)…………………………….. 3,600
H, capital (P6,000 x 40%)…………………………….. 2,400
e: Revaluation (Goodwill) to Old Partners.

The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation should
be recognized as follows:
Total agreed capital (given) ………………………………………... P 76,800
Less: Total contributed capital (P24,000 + P12,000 +
P 8,400, revaluation + P28,800)…………………………. 73,200
Difference (revaluation/goodwill)………………..………………… P 3,600
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in (a)
is attributable to revaluation (goodwill) to old partners:
J’s contributed capital………………………………………………… P 28,800
J’s agreed capital: (P76,800 x 37.5%)….………………………….... 28,800
Difference …………………………..…………………………………… P -0-
The entries to record the transaction in the books follows:
Equipment………………………………………………………… 8,400
G, capital (P8,400 x 60%)…………………………….. 5,040
H, capital (P8,400 x 40%)……………………………… 3,360
Cash………….…………………………………………………….28,800
Other assets………………………………………………………. 3,600
J, capital ……………..…………………………………. 28,800
G, capital (P3,600 x 60%)…………………………….. 2,160
H, capital (P3,600 x 40%)……………………………… 1,440
f: Bonus and Revaluation (Goodwill) to New Partner.
Difference (revaluation/goodwill) …………………..……………..P 12,000
The new partner’s contributed capital is less than the agreed capital, the difference of P15,000 are
composed of revaluation of P12,000 in (a) above and the balance is bonus to new partner:
J’s contributed capital (given)……………………………………... P 12,000
Difference (total bonus and revaluation)..………………………...P 15,000
Less: Revaluation / goodwill to new partner………………………. 12,000
Bonus to new partner…………………………………………………... P 3,000

Cash……………………………………………………………….. 12,000
Assets (goodwill)………………………………………………… 12,000
G, capital (P3,000 x 60%)………………………………………. 1,800
H, capital (P3,000 x 40%)………………………………………. 1,200
J, capital ……………..…………………………………. 27,000
To record the admission of J.
g: Bonus and Revaluation to Old Partners.

Difference (revaluation/goodwill)…………………....…………….P 18,000
The new partner’s contributed capital is greater than the agreed capital, the difference of P3,600 is
bonus to old partners since there is already a revaluation(goodwill) as indicated by (a) above.
J’s contributed capital (given).…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 20%)………………………………… 14,400
Difference (bonus to old partners)………………………………… P( 3,600)
Less: Revaluation / goodwill to old partners……………………… 18,000
Total bonus and revaluation to old partners.……………………. P 21,600
The P3,600 difference is considered as a bonus since there was a transfer of capital (as indicated by
the decrease in capital of the new partner) made by the new partner to the old partners.

Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..………………………………… 14,400
G, capital (P21,600 x 60%)…………………………….. 12,960
H, capital (P21,600 x 40%)…………………………….. 8,640
h: Revaluation (Goodwill) to New and Old Partners.
Difference (revaluation/goodwill ) …………………..……………. P 18,000
is attributable to revaluation (goodwill) to new partner and old partners:
J’s contributed capital (given)…………………………………….. P 18,000
J’s agreed capital: (P72,000 x 30%)………………………………... 21,600
Difference (revaluation/goodwill to new partner)..…………….P 3,600
Less: Revaluation / goodwill computed in (a)..…………………. 18,000
Revaluation/goodwill to old partners……….……………………..P 14,400

Cash………………………………………………………………..18,000
Assets (goodwill)…………………………………………………18,000
J, capital ……………..…………………………………. 21,600
G, capital (P14,400 x 60%)…………………………… 8,640
H, capital (P14,400 x 40%)……………………………. 5,760
i: Bonus to Old Partners with Bonus Amount Given.

[(P24,000 + P12,000 + P24,000)……………...…………….…. 60,000
Difference………………………………………………………………..P -0-
The new partner’s contributed capital is greater than his agreed capital, the difference is
J’s contributed capital…………………….. …………………………P 24,000
J’s agreed capital (P24,000 – P6,000).……………………………... 18,000
Difference (bonus to old partners)..……………………………….. P( 6,000)

Cash………………………………………………………………..24,000
J, capital ……………..…………………………………. 18,000
G, capital (P6,000 x 60%)…………………………….. 3,600
H, capital (P6,000 x 40%)…………………………….. 2,400
j: Bonus to New Partner with an Indication of Bonus.

There is an overstatement of asset amounting to P2,400 (P6,000 – P3,600) that is needed to be
recorded to comply with the provisions of GAAP recognizing overvaluation of net assets. Therefore,
the contributed capital of partner G and H are as follows:
G, capital: P24,000 – (P2,400 x 60%)………………………….P 22,560
H, capital: P12,000 – (P2,400 x 40%)…………………………. 11,040
Total contributed capital before the admission………….. P 33,600
since it is a bonus method)…………………………………… P 40,800
Less: Total contributed capital [P33,600 (a) + P7,200].………… 40,800
Difference………………………………………………………………..P -0-
Difference (bonus to new partner)………………………………….P 5,040

G, capital (P2,400 x 60%)………………………………………. 1,440
H, capital (P2,400 x 40%)………………………………………. 960
Equipments……………………………………………… 2,400
Cash……………………………………………………………….. 7,200
G, capital (P5,040 x 60%)………………………………………. 3,024
H, capital (P5,040 x 40%)………………………………………. 2,016
J, capital ……………..…………………………………. 12,240
k: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill).

There is an understatement of asset amounting to P6,000 (P12,600 – P6,600) that is needed to be
recorded (also even in cases of overstatement) as long as the revaluation (goodwill) approach is
being used. Therefore, the contributed capital of partner G and H are as follows:
G, capital: P24,000 + (P6,000 x 60%)………………………….P 27,600

H, capital: P12,000 + (P6,000 x 40%)………………………….. 14,400
Total contributed capital before the admission…………..P 42,000
Total agreed capital (P18,000 / ¼ )*…..……….…………………...P 72,000

Less: Total contributed capital [P42,000 (a) + P18,000]………..… 60,000
Difference (revaluation/goodwill ) …………………..…………….P 12,000
*The old partner’s total contributed capital of P42,000 should not be used as a basis because it
will result to a negative revaluation. In cases of revaluation and there is no specification as to
upward or downward adjustments, the presumption should always be upward. The P18,000 was
capitalized by ¼ to determine the value of the partnership as a whole.
The new partner’s contributed capital is equal to the agreed capital, the difference of P12,000 in (a)
is attributable to revaluation (goodwill) to old partners:

J’s agreed capital……………………………………………………… 18,000
Revaluation/goodwill to new partner……….……………………...P -0-
Other assets…………………………………………………….... 6,000

G, capital (P6,000 x 60%)…………………………….. 3,600
H, capital (P6,000 x 40%)…………………………….. 2,400
Cash……………………………………………………………….. 18,000
Assets (goodwill)………………………………………………… 12,000
J, capital ……………..…………………………………. 18,000
G, capital (P12,000 x 60%)…………………………… 7,200
H, capital (P12,000 x 40%)……………………………. 4,800
l: Revaluation (Goodwill) to New Partner with Revaluation Amount Given.

Total agreed capital (TCC, P60,000 + P7,200, goodwill) ……….P 67,200

Difference (revaluation/goodwill ) …………………..……………..P 7,200
is attributable to revaluation (goodwill) to new partner:

J’s agreed capital: (P24,000 + P7,200)……………………………… 31,200
Revaluation/goodwill to new partner……….……………………..P 7,200
Cash……………………………………………………………….. 24,000
Assets (goodwill)………………………………………………… 7,200
J, capital ……………..…………………………………. 31,200
To record the admission of J.
m: Withdrawals Instead of Revaluation.

The total contributed capital (TCC) is greater than total agreed capital (TAC), so it should have
been a negative revaluation. Since there was an indication that capital balances should equal to
the profit and loss (old or new) ratio, then the difference should be considered as withdrawals (if it is
a positive revaluation it should have been additional investment and if the TCC = TAC, it should
have been settlement between partners) instead of negative revaluation.
Total agreed capital (given)………………………………………...P 48,000
Less: Total contributed capital (P24,000 + P12,000 + P24,000).. 60,000
Difference (withdrawals)……………………………………………..P 12,000
Difference……………………………..………………………………….P -0-
The withdrawals of P12,000 should be attributable to the old partners computed as follows:
Total agreed capital (given)……………………………. P 48,000
Less: J’s agreed capital (P48,000 x 50%)……………… 24,000
Total agreed capital of the old partners……………… P 24,000
Less: G’s agreed capital (P24,000 x 60%)………………P 14,400
H’s agreed capital (P24,000 x 40%)……………… 9,600 24,000
G’s withdrawal: P24,000 – P14,400……………………… P 9,600

H’s withdrawal: P12,000 – P9,600……………………….. P 2,400

Cash (P24,000 – P12,000)………………………………………. 12,000
G, capital…………………………………………………………. 9,600
H, capital………………………………………………………….. 2,400
J, capital ……………..…………………………………. 24,000
n: Bonus and Revaluation (Goodwill) When Not Specifically Stated.

n.1: Revaluation (Goodwill) or Bonus to New Partner.
n.1.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
Total agreed capital (should equal to TCC,

Difference……………………………..…………………..…………….P -0-
The new partner’s contributed capital is less than the agreed capital, the difference is
attributable to bonus to new partner:
J’s contributed capital (given).……………………………………...P 18,000

Difference (bonus to new partner)..………………………………..P 3,600
Cash………………………………………………………………..18,000
G, capital (P3,600 x 60%)……………………………………… 1,260
H, capital (P3,600 x 40%)………………………………………. 1,440
J, capital ……………..…………………………………. 21,600
n.1.2: Revaluation (Goodwill) Approach.

Total agreed capital:

(P24,000 + P12,000) / (100% - 40%)…………………………...P 60,000
Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given).…………………………………….P 18,000

J’s agreed capital: (P60,000 x 40%)……………………………….. 24,000
Difference (revaluation/goodwill to new partner)..…………...P 6,000
Cash………………………………………………………………..18,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..…………………………………. 24,000
The following items should be observed:

1. The New Profit and Loss Ratio. The capital interest of J is 40%, while his profit and loss is 25%, so the
new profit and loss interest of the new partnership is computed as follows:
____G H _ J____
P & L %: G (60% x 75%)…… 45
H (40% x 75%)…… 30
J ……..…………… 25
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)

- refer to Alternative 1 above:
G, capital (P24,000 – P2,160)………………………………P 21,840

H, capital (P12,000 – P1,440)……………………………… 10,560
J, capital…………………………………………………....... 21,600
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)

G, capital……………………………………………………...P 24,000
H, capital……………………………………………………… 12,000
J, capital (P60,000 x 40%)………………………………….. 24,000
Total…………………………………………………………….P 60,000

Assets Revaluation = G H J___
Bonus Approach
Balances after admission of J P 54,000 P -0- P 21,840 P 10,560 P 21,600
P 54,000
Balances after admission of J P 6,000 P 24,000 P 12,000 P 24,000
Totals P 54,000 P -0- P 21,300 P 10,200 P 22,500
*new profit and loss ratio (G, 45%; H, 30%, and J, 25%)
Capital__________
G H J__
Balances after admission of J (Bonus approach) P 21,840 P10,560 P 21,600
Balances after admission of J (Revaluation approach) 21,300 10,200 22,500
Gain or (loss) through use of bonus approach P 540 P 360 P( 900)
n.2: Revaluation (Goodwill) or Bonus to Old Partners.

n.2.1: Bonus Approach.
The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation
Total agreed capital (should equal to TCC,

Difference……………………………..…………………..…………….P -0-
The new partner’s contributed capital is greater than the agreed capital, the difference is
J’s contributed capital (given).……………………………………...P 18,000

Difference (bonus to old partners)..…………………………………P 1,800
Cash………………………………………………………………..18,000
J, capital ……………..…………………………………. 16,200
G, capital (P1,800 x 60%)…………………………….. 1,080
H, capital (P1,800 x 40%)……………………………… 720
n.2.2: Revaluation (Goodwill) Approach.
The total contributed capital (TCC) is greater than the total agreed capital (TAC), so revaluation
Total agreed capital: P18,000 / 30%...............…………………...P 60,000

Difference (revaluation/goodwill).…………………..…………….P 6,000
The new partner’s contributed capital is equal to the agreed capital, the difference of P6,000 in
(a) is attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given).…………………………………….P 18,000

J’s agreed capital: (P60,000 x 30%)……………………………….. 18,000
Difference………………………………………………....……………P -0-
Cash………………………………………………………………..18,000
Assets (goodwill)………………………………………………… 6,000
J, capital ……………..…………………………………. 18,000
G, capital (P6,000 x 60%)…………………………….. 3,600
H, capital (P6,000 x 40%)……………………………… 2,400
1. The New Profit and Loss Ratio. The capital interest of J is 30%, while his profit and loss is 40%, so the
new profit and loss interest of the new partnership is computed as follows:
____G H _ J____
P & L %: G (60% x 60%)…… 36
H (40% x 60%)…… 24
J ……..…………… 40
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the
new partners are computed as follows:
Bonus Approach (total agreed capital)

G, capital (P24,000 + P1,080)…..……………………………P 25,080
H, capital (P12,000 + P720)………………………………… 12,600
J, capital…………………………………………………....... 16,200
Total……………………………………………………………. P 54,000
Revaluation (goodwill) Approach (total agreed capital)

G, capital (P24,000 + P3,600)……………………………...P 27,600
H, capital (P12,000 + P2,400)………………………………. 14,400
J, capital (P60,000 x 30%)………………………………….. 18,000
Total…………………………………………………………….P 60,000

Assets Revaluation = G H J___
Bonus Approach
Balances after admission of J P 54,000 P -0- P 25,080 P 12,720 P 16,200
Balances after admission of J P 54,000 P 6,000 P 27,600 P 14,400 P 18,000
Totals P 54,000 P -0- P 25,440 P 12,960 P 15,600
*new profit and loss ratio (G, 36%; H, 24%, and J, 40%)
Capital__________
G H J__
Balances after admission of J (Bonus approach) P 25,080 P 12,720 P 16,200
Balances after admission of J (Revaluation approach) 25,440 12,960 15,600
Gain or (loss) through use of bonus approach P( 360) P( 240) P 600
Problem IV
1. Phoenix, Capital 22,500
Dallas, Capital 22,500
2. Phoenix, Capital 18,000

Tucson, Capital 10,000
3. Cash 60,000
Phoenix, Capital (P60,000 - P40,000) × .50 10,000
(P90,000 + P50,000) + P60,000 = P200,000; Therefore, no goodwill is to be recognized.

Dallas, capital = P200,000 × 0.20 = P40,000
4. Goodwill 20,000
Phoenix, Capital 10,000
P40,000/0.20 = P200,000
Goodwill = P200,000 - (P90,000 + P50,000 + P40,000) = P$20,000
Cash 40,000
Problem V
1. Book value of interest acquired = (P180,000 + P90,000) × 1/3 = $90,000
Bonus Method
Cash 90,000
Moore, Capital 90,000
2. Book value of interest acquired = (P180,000 + P120,000) × 0.45 = P135,000

Book value of interest is greater than assets invested.
Bonus Method
Cash 120,000
Brown, Capital (0.60 × P15,000) 9,000
Coss, Capital (0.40 × P15,000) 6,000
The goodwill method is not applicable because the partners agreed to total capital interest of P300,000.
1
3. Book value of interest acquired (P180,000 + P120,000) × = P100,000
3
Bonus method cannot be used because Moore will not accept less than P120,000 capital interest.
Goodwill Method
Total capital implied from contract [P120,000/(1/3)] P360,000
Minus current capital balance + Moore's investment (P180,000 + P120,000) 300,000
Goodwill P60,000
Goodwill 60,000
Brown, Capital (0.60 × P60,000) 36,000
Coss, Capital (0.40 × P60,000) 24,000
Cash 120,000
4. Book value of interest acquired (P180,000 + P40,000) × ¼ = P55,000

Book value of interest acquired is greater than assets invested.
Bonus Method
Cash 40,000
Brown, Capital (0.60 × P15,000) 9,000
Coss, Capital (0.40 × P15,000) 6,000
5. Book value of interest acquired (P180,000 + P35,000) × 0.20 = P43,000

Book value of interest acquired is greater than the asset invested.
Goodwill Method
Total capital P225,000
Minus recorded value of net assets + Moore's investment (P180,000 + P35,000) 215,000
Goodwill P10,000
Cash 35,000
Goodwill 10,000
6. Book value of interest acquired (P180,000 + P150,000) × (1/3) = P110,000

Book value of interest acquired is less than asset invested.
Bonus Method
Land 150,000
Brown, Capital (0.60 × P40,000) 24,000
Coss, Capital (0.40 × P40,000) 16,000
Goodwill Method
Net value of firm implied by contract [P150,000/(1/3)] P450,000
Minus current capital + Moore's investment (P180,000 + P150,000) 330,000
Goodwill P120,000
Goodwill 120,000
Brown, Capital (0.60 × P120,000) 72,000
Coss, Capital (0.40 × P120,000) 48,000
Land 150,000
7. Bonus Method
Brown, Capital (0.30 × P92,000) 27,600
Coss, Capital (0.30 × P88,000) 26,400
Problems- VI
1. (a) Goodwill method:
Cash………………………………………………………… 5,000
Goodwill…………………………………………………… 4,200
Mason, Capital………………………………………… 2,520
Norris, Capital………………………………………….. 1,680
Oster, Capital………………………………………….. 5,000
Computation of goodwill:
Total capital after adjustment for goodwill,
P5,000 / .25…………………………………………….. P20,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed old partners……………………..P 4,200
Distribution of goodwill:
Mason: 3/5 of P4,200…………………………………P 2,250
Norris: 2/5 of P4,200…………………………………… 1,680
P 4,200
(b) Bonus method:
Cash………………………………………………………… 5,000
Mason, Capital………………………………………… 630
Norris, Capital………………………………………….. 420
Oster, Capital………………………………………….. 3,950
Computation of bonus:
Amount invested by Oster………………………….. P 5,000
Oster’s interest, 25% of P 15,800………………..….. 3,950
Bonus allowed old partners………………………… P 1,050
Distribution of bonus:
Mason: 3/5 of P1,050…………………………………. P 630
Norris: 2/5 of P1,050…………………………………… 420
P 1,050
(c) The bonus method will be preferred by Oster, who will gain P350. Norris will gain P140,
while Mason will lose P490.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST
Good- Other Mason Norris Oster

will__ Assets Capital Capital Capital
When goodwill method is used….. P4,200 P15,800 P8,520 P6,480 P5,500
When bonus method is used……… P15,800 P6,630 P5,220 P3,950
Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)………………………. P4,200 1,400 1,400 1,400
P4,200 P15,800 P8,030 P6,620 P5,350
Gain (loss) through use of
bonus method………………………. (P 490) P 140 P350
COMPARISON WHEN GOODWILL IS NOT REALIZED

Deduct write-off of goodwill
(loss distributable equally)………… P4,200 1,400 1,400 1,400
P15,800 P7,120 P5,080 P3,600
Gain (loss) through use of bonus method…………………… (P 490) P 140 P350
2. (a) Goodwill method:

Cash………………………………………………………… 5,000
Goodwill…………………………………………………… 2,200
Oster, Capital………………………………………….. 7,200
Computation of goodwill:
Total capital after adjustment for goodwill,
P10,800 / .60…………………………………………….P18,000
Total capital before adjustment for goodwill….. 15,800
Goodwill allowed to Oster………………………….. P 2,200
(b)Bonus method:
Cash………………………………………………………… 5,000
Mason, Capital…………………………………………… 792
Norris, Capital…………………………………………….. 528
Oster, Capital………………………………………….. 6,320
Computation of bonus:
Oster’s interest, 40% of P 15,800………………..….. 6,320
Amount invested by Oster………………………….. P 5,000
Bonus allowed to Oster……………………………… P 1,320
Charge to partners for bonus allowed to Oster:
Mason: 3/5 of P1,320…………………………………. P 792
Norris: 2/5 of P1,320…………………………………… 528
P 1,320
(c) The goodwill method will be preferred by Oster, who will gain P146.66. Norris’ loss is
P205.33, and Mason’s gain is P58.67.
COMPARISON WHEN GOODWILL IS FOUND TO EXIST

Add recognition of goodwill
(gain distributed in profit and loss
ratio, equally)………………………. P2,200 733.33 733.33 733.34
P2,200 P15,800 P5,941.33 P5,005.33 P7,053.34
bonus method………………………. (P 58.67) P 205.33 (P146.66)
COMPARISON WHEN GOODWILL IS NOT REALIZED

When goodwill method is used….. P2,200 P15,800 P6,000 P4800 P7,200
Deduct write-off of goodwill
(loss distributable equally)………… P2,200 733.33 733.33 733.34
P15,800 P5,266.67 P4,066.67 P6,466.66
bonus method………………………. (P58.67) P205.33 (P146.66)
Problem VII
1. The total interest of the retiring partner K amounted to:
Capital interest………………………………………………….P 36,000
Add (deduct):
Share in net income…………………………………….. 7,200
Loan receivable………………………………………….( 6,000)
Total Interest of K before his retirement............................P 37,200
2.
a. Payment at Book Value (Settlement price is equal to the interest of retiring partner).
K, capital…………………………………………………………. 37,200
Cash………………………….………………………….. 37,200
b. Payment at More than Book Value ((Settlement price is greater than the interest of retiring partner).
b.1. Bonus to Retiring Partner. The excess is considered bonus chargeable to L and M.
K, capital…………………………………………………………. 37,200
L, capital (P4,800 x 5/7)……………………………………….. 3,429
M, capital (P4,800 x 2/7)………………………………………. 1,371
Cash………………………….………………………….. 42,000
Amount paid………………………..………………………….. P 42,000

Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Retiring Partner……………………………………… P 4,800

1. It should be observed that under bonus approach, undervaluation of net assets should not be
recorded for this will be in contradiction of current accounting standards.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit – P3,429, bonus)………………P56,571
M, capital (P18,000 + P4,800 profit – P1,371, bonus)……………….. 21,429
Assuming the same data, except that by mutual agreement the inventory is to be adjusted to their
fair value. Then, the undervalued asset should be recorded first before the settlement.

Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)……………………………. 1,440
L, capital (P4,800 x 50%)…………………………….. 2,400
M, capital (P4,800 x 20%)…………………………… 960
K, capital………………………………………………………….38,640
L, capital (P3,360 x 5/7)……………………………………….. 2,400
M, capital (P3,360 x 2/7)……………………………………… 960
Cash………………………….…………………………. 42,000
Amount paid………………………..…………………………... P 42,000

Less: BV of K’s total interest (30%) - (P37,200 + P1,440).... 38,640
Bonus to Retiring Partner……………………………………… P 3,360
b.2: Partial Revaluation (Goodwill) to Retiring Partner.
Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)…………………………….. 1,440
L, capital (P4,800 x 50%)…………………………….. 2,400
M, capital (P4,800 x 20%)……………………………. 960
K, capital…………………………………………………………. 38,640
Assets (Goodwill)……………………………………………….. 3,360
Cash………………………….………………………….. 42,000
Amount paid………………………..………………………….. P 42,000

Less: BV of K’s total interest (30%) - P37,200 + P1,440........ 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360

1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill) of P3,360 that has
been purchased should be recorded.
2. The situation at bar is the same situation in admission by investment Case 9, that recognition of
understatement of assets is in compliance with GAAP under the revaluation (goodwill) approach.
L, capital (P48,000 + P12,000, profit + P2,400, adjustment).………P62,400
M, capital (P18,000 + P4,800, profit + P960 adjustment)…….…… 23,760
A modified version of this partial revaluation (goodwill) approach happens assuming that when assets
and liabilities are revalued only to the extent of the excess payment to K, the entry to record the
transaction is as follows:
K, capital…………………………………………………………. 37,200
Assets ……………)………………………………………………. 4,800
Cash………………………….………………………….. 42,000
Amount paid………………………..………………………….. P 42,000

Less: BV of K’s total interest (30%)……………………......... 37,200
Partial revaluation (goodwill) to Retiring Partner………… P 4,800
b.3: Total Revaluation (Goodwill) to Retiring Partner.

Inventory………………………………………………………… 4,800
K, capital (P4,800 x 30%)…………………………….. 1,440
L, capital (P4,800 x 50%)…………………………….. 2,400
M, capital (P4,800 x 20%)……………………………. 960
The excess is considered as revaluation (goodwill) to be recognized.

Assets (Goodwill)……………………………………………….. 11,200
K, capital (P11,200 x 30%)…………………………….. 3,360
L, capital (P11,200 x 50%)…………………………….. 5,600
M, capital (P11,200 x 20%)……………………………. 2,240
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 36,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K............. 30%
Total Revaluation (goodwill)…………………………………. P 11,200
*The P3,360 represents K’s 30% interest in revaluation (goodwill) of P11,200. Notice that the P3,360 represents K’s
interest in the gain, which would be realized if the revaluation (goodwill) were sold. Therefore, K’s percentage is
used to suggest the total value of the revaluation (goodwill).
K, capital (P 38,640 + P3,360)…………………………………. 42,000

Cash………………………….………………………….. 42,000

1. Whether part or all of the goodwill is recognized, opponents of this procedure contend that
transactions between partners should not be viewed as arm’s length; therefore, the measure of
revaluation (goodwill) may not be determined objectively. Also, inequitable results may be produced if
the remaining partners subsequently changed their profit and loss ratio.
L, capital (P48,000 + P12,000, profit + P2,400, adjustment + P5,600).P68,000
M, capital (P18,000 + P4,400, profit + P960 adjustment + P2,240)….. 26,000
For purposes of comparison, let us assume that there is no undervalued inventory amounting to P4,800 in
Case 2 above. Refer to the following schedule for comparison.
Goodwill/Asset Capital__________
Revaluation L M_____
Bonus Approach
Balances after retirement of K P -0- P 56,571 P 21,429
Partial Revaluation (Goodwill) Approach

Balances after retirement of K* P 4,800** P 60,000 P 22,800
Depreciation/impairment*** ( 4,800) ( 3,429) ( 1,371)
Totals P -0- P 58,971 P 21,429
*excluding undervalued inventory of P2,400 and P960 for L and M, respectively.

** P42,000 – P37,200 = P4,800, partial revaluation
*** old profit and loss ratio (L, 5/7 and M, 2/7)
Total Revaluation (Goodwill) Approach

Balances after retirement of K* P 16,000** P 68,000 P 26,000
Depreciation/impairment*** ( 16,000) ( 11,429) ( 4,571)
Totals P -0- P 56,571 P 21,429
*excluding undervalued inventory of P2,400 and P960 for L and M, respectively.

** P42,000 – P37,200 = P4,800, partial revaluation / 30% = P16,000.
L, capital: (P48,000 + P12,000) + (P16,000 x 50%) = P68,000
M, capital: (P18,000 + P4,800) + (P16,000 x 20%) = P 26,000
*** old profit and loss ratio (L, 5/7 and M, 2/7)
The three methods will yield the same results computed as follows;
Total_______
L M__
Balances after retirement of K (Bonus approach) P 56,571 P 21,249
Balances after retirement of K (Partial Revaluation approach) P 56,571 P 21,249
Balances after retirement of K (Total Revaluation approach) P 56,571 P 21,249
c: Payment at Less than Book Value ((Settlement price is less than the interest of retiring partner).
c.1. Bonus to Remaining Partners. The excess is considered bonus chargeable to L and M.
K, capital…………………………………………………………. 37,200
Cash………………………….………………………….. 31,200
L, capital (P6,000 x 5/7)………………………………. 4,286
M, capital (P6,000 x 2/7)……………………………… 1,714
Amount paid………………………..…………………………… P 31,200

Less: BV of K’s total interest (30%).……..……..................... 37,200
Bonus to Remaining Partners…………………………………. P 6,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P48,000 + P12,000, profit + P4,286, bonus)……………..P64,286
M, capital (P18,000 + P4,800 profit + P1,714, bonus)……………….. 24,514
c.2: Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner).

K, capital…………………………………………………………. 37,200
Specific Asset…..……………………………………… 6,000
Cash………………………….………………………….. 31,200
Amount paid………………………..…………………………… P 31,200

Less: BV of K’s total interest (30%)………………………....... 37,200
Partial revaluation/write-down of specific assets……..… P 6,000
L, capital (P48,000 + P12,000, profit)………………………….………P60,000
M, capital (P18,000 + P4,800, profit)…………………………….…… 22,800
c.3: Total Revaluation/Write-down of Assets (Entire Entity).

K, capital (P20,000 x 30%)…………………………………...... 6,000
L, capital (P20,000 x 50%)………………………………………10,000
M, capital (P20,000 x 20%)……………………………………. 4,000
Assets……………………………………………………. 20,000
To record write-down of assets computed as follows:
Amount paid………………………..…………………………….P 31,200
Less: BV of K’s total interest (30%)………………………........ 37,200
Partial revaluation/write-down of asset……………………..P 6,000*
Divided by (capitalized at): Profit and loss % of K............ 30%
Total Revaluation/Write-down of assets….………………….P 20,000
*The P6,000 represents K’s 30% interest in write-down of assets of P20,000. Notice that the P6,000 represents
K’s interest in the loss.
K, capital (P 37,200 - P6,000)………………………………. 31,200

Cash………………………….………………………... 31,200
L, capital (P48,000 + P12,000, profit – P10,000)…………………………...P50,000
M, capital (P18,000 + P4,800, profit - P4,000)……………………….….. 18,800
Assets (Goodwill)……………………………………………….. 11,200

K, capital (P11,200 x 30%)…………………………….. 3,360
L, capital (P11,200 x 50%)…………………………….. 5,600
M, capital (P11,200 x 20%)……………………………. 2,240
To record total revaluation (goodwill) computed as follows:
Amount paid………………………..………………………….. P 42,000
Less: BV of K’s total interest (30%) - P31,000 + P1,200....... 38,640
Partial revaluation (goodwill) to Retiring Partner………… P 3,360*
Divided by (capitalized at): Profit and loss % of K............. 30%
Total Revaluation ……………………………………………….. 11,200
Problem VIII
1. Grey, Capital P200,000 + (P30,000 × 2/6) 210,000
Portney, Capital (P20,000 × 3/4) 15,000
Ross, Capital (P20,000 × 1/4) 5,000
Cash 230,000
2. Goodwill (P20,000 ÷ 2/6) 60,000

Portney, Capital 30,000
Grey, Capital 20,000
Ross, Capital 10,000
Grey, Capital 230,000

Cash 230,000
Problem IX
1. (a) C, Capital 105,000
A, Capital 21,000
B, Capital 14,000
Cash 140,000
(b) Goodwill 35,000

C, Capital 35,000
C, Capital 140,000
Cash 140,000
(c) 0.5X =P35,000

X =P70,000
Goodwill 70,000
A, Capital 21,000
B, Capital 14,000
C, Capital 35,000
C, Capital 140,000
Cash 140,000
2. The bonus method is more objective. That is, the bonus method does not require the allocation of a subjective
value to goodwill. Since this is not an arm’s length transaction, there is no objective basis to revalue the firm as
a whole.
Problem X
(1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of P80,000 (5/8
goodwill = P50,000), resulting in a total payment to Colter of P230,000. The entry would be:
Agler, Capital 50,000
Bates, Capital 30,000
Colter, Capital 150,000
Cash 230,000
(2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is recorded. Thus, the
payment to Colter was P210,000 (P150,000 + P60,000).
Under the total Goodwill, since P66,000 was credited, total goodwill of P220,000 (P66,000/0.3) is recorded. Colter
is allocated P44,000 (P220,000 × 0.20). Thus, the payment to Colter was P194,000 (P150,000 + P44,000).
Problem XI
1. Partnership Books Retained
Entries in the Books of the New Corporation using the Partnership Books:
Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . 480
Accumulated Depreciation of Equipment (P36,600 – P31,200). . 5,400
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,760
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440
To adjust assets and liabilities to agreed amounts and to divide net gain
of P22,200 between partners in 4:1 ratio
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,348

BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,652
Common stock (P10 par x 9,000 shares) . . . . . . . . . . . . . . . . . . . . 90,000
Paid-in capital in excess of par [(P11 – P10) x 9,000 shares] . . . . 9,000
To record distribution of common stock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Total shares................................................ 9,000 shares
2. New Books Opened for the Corporation

Entries in the Books of the Partnership:
Inventories (P36,000 – P 30,600) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400
Equipment (P84,000 – P72,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Allowance for Doubtful Accounts (P1,200 – P720) . . . . . . . . . . . . 480
Accumulated Depreciation of Equipment (P36,600 – P31,200). . 5,400
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320
AA, Capital (P22,200 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,760
BB, Capital (P22,200 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440
To adjust assets and liabilities to agreed amounts and to divide net gain
of P22,200 between partners in 4:1 ratio
Receivable from A&B Corporation (P76,800 + P22,200) . . . . . . . . . . 99,000

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . . 36,600
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,720
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
To record transfer of assets and liabilities to A&B Corporation.
Common Stock of A & B Corporation (9,000 shares x P11) . . . . . . . 99,000

Receivable from A & B Corporation . . . . . . . . . . . . . . . . . . . . . . . 99,000
To record receipt of 9,000 shares of P10 par common stock
valued at P11 a share in payment for net assets transferred to A
& B Corporation.
AA, Capital (P57,588 + P17,760) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,348

BB, Capital (P19,212 + P4,440) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,652
Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . 99,000
To record distribution of common stock of J & K Corporation to partners;
AA: (P57,588 + P17,760) / P11 per share = 6,850 shares
BB: (P19,212 + P4,440) / P11per share = 2,150 shares
Total shares................................................ 9,000 shares
In the Accounting Records of the Corporation:

Entries in the Books of the New Corporation:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,720
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Equipment (P84,000 - P36,600). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,400
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . ............. 99,000
To record acquisition of assets and liabilities from A&B Partnership.
Payable to A & B Partnership . . . . . . . . . . . . . . . . . . . . . . . . . 99,000

Common stock, P10 par (9,000 x P10) . . . . . . . . . . . . . . . . . . . . . 90,000
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
To record issuance of 9,000 shares of common stock valued at
P11 a share in payment for net assets of A&B Partnership.
Problem XII
Cash 8,700
Trade Accounts Receivable 13,250
Inventories 28,000
Equipment 35,000
Allowance for Doubtful Accounts 800
Notes Payable 10,000
Trade Accounts Payable 9,800
Payable to Sade and Tipp 64,350
To record acquisition of net assets from Sade & Tipp LLP.
Payable to Sade and Tipp 64,350
Common Stock, P1 par 10,000
Paid-in Capital Excess of Par 54,350
To record issuance of 10,000 shares of common stock to
Sade and Tipp.
Problem XII
1. Cash 20,000
Inventory 15,000
Equipment 67,000
Snow, Capital 102,000
Cash 50,000
Land 120,000
Mortgage Payable 40,000
Waite, Capital 130,000
2. Snow, Capital 7,680
Waite, Capital 16,320
Income Summary 24,000
Snow Waite Total

Net loss to be allocated
Interest on capital investment
P102,000 × 10% P10,200
P130,000 × 10% P13,000 P23,200
Salaries to partners 15,000 20,000 35,000
58,200
Allocation 40:60 (32,880) (49,320) (82,200)
Net loss allocated to partners P(7,680) P(16,320) P(24,000)
3. Cash 70,000
Snow, Capital (P13,400 × 40%) 5,360
Waite, Capital (P13,400 × 60%) 8,040
Young, Capital 83,400
Capital interest of Snow (P102,000 - P7,680) P94,320

Capital interest of Waite (P130,000 - P16,320) 113,680
Investment of Young 70,000
Total capital interest in new partnership 278,000
Percentage acquired by Young 30%
Capital interest of Young 83,400
Investment by Young (70,000)
Bonus to Young P13,400
4. Income Summary 150,000

Snow, Capital (P150,000 × 20%) 30,000
Waite, Capital (P150,000 × 50%) 75,000
Young, Capital (P150,000 × 30%) 45,000
5. Snow, Capital* 118,960

Waite, Capital (P18,960 × 50/80) 11,850
Young, Capital (P18,960 × 30/80) 7,110
Cash 40,000
Note Payable 60,000
*P102,000 - P7,680 - P5,360 + P30,000 = P118,960
Problem XIV

1. c
Note: A partnership is not dissolved when a partner assigns his or her interest in the partnership to a third party
because such an assignment does not in itself change the relations among partners. Such assignment only
entitles the assignee to receive the assigning interest partner’s interest in future partnership profits and in
partnership assets in the event of liquidation. The assignee does not become a partner, however, and does not
obtain the right to share in management of the partnership. If the assignee does not become a partner, the
only change required on the partnership books is for transfer of the capital interest of the assignor partner to the
assignee. The assignment by A to D of his 50% interest in the BIG Entertainment Company is recorded are
follows:
A, Capital (P168,000 x 1/4)................................................................. 42,000

D, Capital.............................................................................. 42,000
The amount of the capital transfer is equal to the recorded amount of A’s capital at the time of the
assignment, and it is independent of the consideration received by A for his 1/4 interest. If the recorded
amount of A’s is P42,000, then the amount of the transfer entry is P42,000, regardless of whether D pay A P42,000
or some amount. Therefore, the capital of the partnership after the assignment of interest remains the same at
P480,000.
2. c
Amount paid……………………………………………………………………………….P 200,000
Less: Book value of interest acquired: (P100,000 + P200,000 + P300,000) x 25%.. 150,000
Excess – partial goodwill…………………………………………………………………P 50,000
Divided by: capitalization rate based on interest acquired…………………....... 25%
Goodwill or revaluation of asset upward…………………………………………….P 200,000
Jethro: [P200,000 + (P200,000 x 30%)] x 75% = P195,000
3. b
Amount paid P40,000
Less: Book value of interest acquired:
(P140,000 x ¼) 35,000
Excess P 5,000
Capitalized at: P&L of W 1/4
Goodwill/revaluation P20,000
E: [P80,000 + (P20,000 x 60%)] x 3/4 = P69,000

G: [P40,000 + (P20,000 x 30%)] x 3/4 = P34,500
D: [P20,000 + (P20,000 x 10%)] x 3/4 = P16,500
4. a
Amount paid………………………………………………………………………………P 60,000
Less: Book value of interest acquired: P120,000 x 40%…………………................ 48,000
Difference…………..……………………………………………………………………...P 12,000
Divided by: Capital Interest…………………………………………………………....... 40%
Goodwill…………………………………………………………………………………….P 30,000
LL: P50,000 + (P30,000 x ½) = P65,000 – (P60,000 x ½) = P35,000

QQ: P70,000 + (P30,000 x ½) = P85,000 – (P60,000 x ½) = P55,000
DD: Since there is an adjustment, the capital of the new partner will always be the same with the
amount paid, P60,000.
5. d - The amount that Richard will pay Ray depends on many factors and cannot be determined from
the information provided here.
6. b
Amount paid P132,000
Less: Book value of interest acquired
(P444,000 x 1/5) 88,800
Gain- personal (to N, S & J) P 43,200
7. c
Total agreed capital* (P74,000 + P130,000 + P96,000)/80% ............ P375,000
Less: Total contributed capital *...............…………………………..... 375,000
Difference .......................................………………..………………….. ..P 0
*since no goodwill or revaluation is allowed total agreed capital is the same with total contributed
capital.
The contributed capital or investment of the new partner will be computed based on total
agreed capital.
Total contributed capital………………………………………….. . P375,000
Less: Total contributed capital of old partners............................ 300,000
Investment or contribution of new partner..................................P 75,000
or,
Total contributed capital………………………………………….. . P375,000
Multiplied by: Capital interest of Jones (new partner)………... 20%
Investment or contribution of new partner..................................P 75,000
8. b
Total Agreed Capital P180,000
Multiplied by: Interest acquired by K 1/3
Agreed capital of K P 60,000
Cash investment by K 50,000
Bonus to K P 10,000
Therefore, E= P70,000 – (P10,000 x 70%) = P63,000
D= P60,000 – (P10,000 x 30%) = P57,000
J= P50,000
9. b - Total capital is P200,000 (P110,000 + P40,000 + P50,000) after the new investment. As Kansas's
portion is to be 30 percent, the capital balance would be P60,000 (P200,000 × 30%). Since only
P50,000 was paid, a bonus of P10,000 must be taken from the two original partners based on
their profit and loss ratio: Bolcar –P7,000 (70%) and Neary – P3,000 (30%). The reduction drops
Neary's capital balance from P40,000 to P37,000.
10. d
Total of old partners' capital P 80,000
Investment by new partner 15,000
Total of new partnership capital P 95,000
Capital amount credited to Johnson
(P95,000 x .20) P 19,000
11. b
LL invests P40,000 and total capital specified as P150,000:
Investment in partnership P 40,000
New partner's proportionate book value
[(P110,000 + P40,000) x 1/3] (50,000)
Difference (investment < book value) P (10,000)
Method: Bonus or goodwill to new partner
Specified total resulting capital P 150,000

Total net assets not including goodwill
(P110,000 + P40,000) (150,000)
Estimated goodwill P -0-
Therefore, bonus of P10,000 to new partner

Boris' capital = P54,000 = P60,000 - (P10,000 x 6/10)
12. a – “preferable accounting method” refers to bonus method

Total agreed capital = Total contributed capital (under the bonus method)
(P70,000 + P30,000 + P40,000).......................................................................... P 140,000
Multiplied by: interest acquired by new partner.............................................. 20%
Capital of new partner Chapman...................................................................... P 28,000
Less: Investment by Chapman............................................................................. 40,000
Bonus to old partners to be allocated equally to old partners –
Adams and Bye......................................................................................... P 12,000
13. c - [P120,000 - (P170,000 + P260,000 + P120,000)(.25)]
14. c
Scott invests P36,000 for a 1/5 interest:
[(P120,000 + P36,000) x .20] (31,200)
Difference (investment > book value) P 4,800
Method: Goodwill to prior partners

1/5 estimated total resulting capital P 36,000
Estimated total resulting capital
(P36,000 / .20) P 180,000
Estimated total resulting capital P 180,000

Total net assets not including goodwill
(P120,000 + P36,000) (156,000)
Estimated goodwill/adjustment to prior partners P 24,000
(Use the same procedure in Nos. 9 and 10)
15. b - Total capital is P270,000 (P120,000 + P90,000 + P60,000) after the new investment. However, the
implied value of the business based on the new investment is P300,000 (P60,000/20%). Thus,
goodwill of P30,000 must be recognized with the offsetting allocation to the original partners
based on their profit and loss ratio: Bishop – P18,000 (60%) and Cotton P12,000 (40%). The
increase raises Cotton's capital from P90,000 to P102,000.
16. c
Total agreed capital* P120,000 /60% ............................................. P300,000
Multiplied by: Capital interest of Jones (new partner)………...... 60%
Agreed capital of R.............................................................................P180,000
Note: The investment of D is used as the basis to determine total agreed capital,
otherwise using the capital balance of D will lead to a “negative” goodwill or
revaluation downward.
17. c
Total agreed capital* (P250,000/20%)....................................... P 1,250,000
Less: Total contributed capital of R and S:
(P500,000 + P400,000 + P40,000) + P250,000................. 1,190,000
Goodwill or revaluation to old partners................................... P 60,000
Riley: P500,000 + (P40,000 x 60%) + (P60,000 x 60%) = P560,000
or,
Contributed Agreed
Capital Capital Goodwill
Riley [P500,000 + (P40,000 x 60%)] P 524,000 P 560,000 P 36,000 60%
Smith [P400,000 + (P40,000 x 40%)] 416,000 24,000 40%
P 940,000 P1,000,000 P 60,000
Tyler 250,000 250,000 / 20% -0-
Total P 1,190,000 P1,250,000 100% P 60,000
18. c
Total agreed capital* ................................................................. P 260,000
Less: Total contributed capital of L, M, and N
(P120,000 + P70,000 – P30,000 + P60,000) + P40,000.... 260,000
Difference..................................................................................... P 0
Total agreed capital P 260,000

Multiplied by: Interest acquired 20%
Capital credited to Ole P 52,000
or,
Contributed Agreed
Capital Capital
Old Partners: (P120,000+P70,00
- P30,000 + P60,000) P 220,000
New Partner: Ole __40,000 P 52,000 20%*
P 260,000 P 260,000 P -0-
* P52,000 is derived from multiplying P260,000 by 20%.
Notes:
1. The partners agreed that assets should revalued using fair value.
2. Since problem is silent, bonus method is used.
19. a - Admission by purchase. The implied value of the company is P900,000 (P270,000/30%). Since the
money is going to the partners rather than into the business, the capital total is P490,000 before
realigning the balances. Hence, goodwill of P410,000 must be recognized based on the implied
value (P900,000 – P490,000). This goodwill is assumed to represent unrealized business gains and is
attributed to the original partners according to their profit and loss ratio. They will then each
convey 30 percent ownership of the P900,000 partnership to Darrow for a capital balance of
P270,000.
Formal presentation:
Amount paid ………………………….………….. P 270,000 / 30% P900,000 (100%)
(P220,000 + P160,000 + P110,000) x 30%….... 147,000 490,000 (100%)
Excess……………………………………………….. P123,000
Divided by: Interest acquired………………….. 20%
Goodwill or revaluation of Asset …………….. P410,000 P410,000 (100%)
The entry would be as follows;

Goodwill/Asset 410,000
Williams (40%) 164,000
Jennings (40%) 164,000
Bryan (20%) 82,000
Williams [P220,000 + (P410,000 x 40%)] x 30% 115,200

Jennings [P160,000 + (P410,000 x 40%)] x 30% 97,200
Bryan [P110,000 + (P410,000 x 20%)] x 30% 57,600
Darrow 270,000
20. d - Admission by investment. Since the money goes into the business, total capital becomes
P740,000 (P490,000 + P250,000). Darrow is allotted 30 percent of this total or P222,000. Because
Darrow invested P250,000, the extra P28,000 is assumed to be a bonus to the original partners.
Jennings will be assigned 40 percent of this extra amount or P11,200. This bonus increases
Jennings’ capital from P160,000 to P171,200.
Formal presentation:
Total agreed capital* (same with total contributed capital)…... P740,000
Less: Total contributed capital (P220,000 + P160,000 +
P110,000 + P250,000)..............…………………………....... 740,000
Difference .......................................………………..………………… ..P 0
*since no goodwill or revaluation is allowed total agreed is the same with total contributed capital.
The new partner’s contributed capital is equal to the agreed capital, the difference of P3,600 in
(a) is attributable to revaluation (goodwill) to old partners:
Darrow’s contributed capital………………………………………… P250,000
Darrow’s agreed capital: (P740,000 x 30%)……………………....... 222,000
Bonus to old partners ........................………………………………… P 28,000
Jennings: [P160,000 + (P28,000 x 40%)] = P171,200

or, alternatively
Contributed Capital (CC) Agreed Capital (AC)
W 220,000 11,200 40%
J 160,000 171,200 11,200 40%
B 110,000 _______ 5,600 20%
490,000 518,000 28,000
D 250,000 222,000 30% 28,000
Total 740,000 740,000 0
21. d As specified no bonus or goodwill recognized.

5/6 estimated total resulting capital P 150,000
Estimated total resulting capital (P150,000 / 5/6) 180,000
Required investment (P180,000 x 1/6) P 30,000
22. d Direct purchase; reclassify CCs capital only (if silent – book value).
23. d
Total contributed capital*
(P140,000 + P40,000) / 4/5 ............................................. P225,000
Less: Total contributed capital of Allen and David................ 180,000
Investment by David......................................................................P 45,000
*since no goodwill or revaluation is allowed total agreed capital is the same with total
contributed capital.
24. c
Total agreed capital (140,000 + 40,000) / 3/4.............................P240,000
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 10,000
Note: since the problem indicates that there is goodwill/revaluation of asset downward, total
agreed capital should be higher compared to total contributed capital (to achieve this
objective the capital of old partners should be used as a basis)
Cash 50,000
Goodwill/assets 10,000
David, capital (1/4 x P240,000) 60,000
25. b
Total agreed capital (P40,000) / 1/5............................................P200,000
(P140,000 + P40,000 + P40,000)......................................... 220,000
Revaluation of asset / inventory decreased……..…………....P( 20,000)
Note: since the problem indicates that there is revaluation of asset downward, total agreed
capital should be lower compared to total contributed capital.
26. b – refer to No. 25 for computation

Allen: P140,000 – (P20,000 x 3/4) = P125,000
Daniel: P40,000 – (P20,000 x 1/4) = P35,000
27. d
Amount paid (P34,000 + P10,000) P 44,000
Less: Book value of Allen and Daniel (1/5) x P180,000 ) 36,000
Partial goodwill/revaluation adjustment P 8,000
Capitalized at 1/5
Revaluation of land P 40,000
28. a.
Allen: [P140,000 + (P40,000 x 3/4)] x 4/5 = P136,000
Daniel: [P40,000 + (P40,000 x 1/4)] x 4/5 = P40,000
29. b
Total agreed capital (given)........................................................P220,000
(P140,000 + P40,000 + P40,000)......................................... 220,000
Difference..............................................………………..…………..P 0
Note: Since total agreed and total contributed are the same, therefore is no goodwill or
revaluation.
Total Agreed Capital P220,000

Multiplied by: Interest acquired by David 1/5
Agreed capital of David P 44,000
Cash investment by David 40,000
Bonus to David P 4,000
Cash 40,000
Allen (P4,000 x 3/4) 3,000
Daniel (P4,000 x 1/4) 1,000
David 44,000
30. d – refer to No. 29

Allen = P140,000 – (P10,000 x 3/4) = P137,000
Daniel = P40,000 – (P10,000 x 1/4) = P39,000
31. a
Total agreed capital (P50,000) / 1/5............................................P250,000
(P140,000 + P40,000 + P50,000)......................................... 230,000
Goodwill/revaluation...........................………………..…………..P 20,000
Note: since the problem indicates that there is goodwill/revaluation of asset downward, total
agreed capital should be higher compared to total contributed capital (to achieve this
objective the capital of the new partners should be used as a basis)
32. a - A P10,000 bonus is paid to Costello (P100,000 is paid rather than the P90,000 capital balance).
This bonus is deducted from the two remaining partners according to their profit and loss ratio
(2:3). A reduction of 60 percent (3/5) is assigned to Burns or a decrease of P6,000 which drops
that partner’s capital balance from P30,000 to P24,000.
33. a - (P121,000 − P100,000) x 35/60 = P12,250]
34. c - (P39,000 + P7,200 − P750 = P45,450)

35. b
Amount paid P 102,000
Less: Book value of Williams
P70,000 + (P360,000 – P300,000) x 20% 82,000
Capitalized at P&L of Dixon 20%
Brown: P65,000 + (P60,000 x 20%) + (P100,000 x 20%) P 97,000

Lowe: P150,000 + (P60,000 x 60%) + (P100,000 x 60%) P246,000
36. a
Less: Book value of Dixon (20%): (P210,000 – P160,000) 50,000
Capitalized at P&L of Dixon 20%
37. b
Amount paid……………………………………………………………………………P 80,000
Less: Book value of Interest of Bolger
P60,000 + [(P170,000 + P210,000 + P100,000) – (P180,000 +
P200,000 + P75,000)] x 35%........................................................................ 68,750
Partial Goodwill (to retiring partner)……………………………………………….P 11,250
Incidentally, the entry for the retirement (payment to Bolger) would be:
Bolger, capital……………………………………………… 68,750
Goodwill……………………………………………………… 11,250
Cash……………………………………………….. 80,000
Therefore, the capital of Grossman after the retirement of Bolger would be, P66,250 [P55,000 +
(45% x P25,000)].
38. c – no goodwill or revaluation therefore, bonus.

Tiffany 50,000
Ron (P10,000 x3/5) 6,000
Stella (P10,000 x 2/5) 4,000
Cash 60,000
39. a – refer to No. 38 (P80,000 – P6,000 = P74,000)
40. d
Less: Book value of Tiffany (1/6) ) 50,000
Capitalized at 1/6 Goodwill/revaluation
P 36,000
41. c - Roberts receives an additional P60,000 above her capital balance.

Less: Book value of Robert (40%) 100,000
Capitalized at 40% Goodwill/revaluation
P 150,000
Peter (20%) 30,000
Robert (40%) 60,000
Dana (40%) 60,000
Robert (P100,000 + P60,000) 160,000

Cash 160,000
Therefore: Peter: P80,000 + P30,000 = P110,000

Dana: P60,000 + P60,000 = P120,000
43. e – refer to No. 41

Total Assets before retirement (P80,000 + P100,000 + P60,000) P240,000
Add: Goodwill/revaluation of asset 150,000
Less: Cash paid 160,000
Total assets after retirement P230,000
44. e – same with No. 43
45. c
Total Capital of L (wherein goodwill should be generated)
Total assets, fair value (P40,000 + P52,000 + P94,000 +
P320,000 + P64,000) P 570,000
Less: Total liabilities ( P110,000 + P200,000) __310,000 P 260,000
Less; Total Capital of M
Total assets, fair value (P30,000 + P56,000 + P114,000 +
P280,000 + P44,000) P 524,000
Less: Total liabilities ( P80,000 + P150,000) 230,000 294,000
Goodwill P 34,000
46. c
L, Capital and M, Capital are each $P94,000 if L's goodwill is recognized. Total capital is P588,000,
and total liabilities and capital amount to P1,128,000.
47. d
(1) Goodwill (revaluation) method:
Less: Book value of interest acquired (P100,000 x 30%)) 30,000
Capitalized at 30%
Goodwill/revaluation P 20,000
Therefore, the capital balances after the admission of OO:

Adams: [P60,000 + (P20,000 x 60%)] x 70%………………………P 72,000
Brown: [P40,000 + (P20,000 x 40%)] x 70%...…………………….. 48,000
Call.............................................……………………………………. __36,000
Total capital after admission…………………………………….. .P156,000
(2) If Book (or bonus) method is used, the capital balances would be:
Adams...............................................................……………………P 60,000
Brown..............................................................…………………….. 40,000
Call: (P60,000 + P40,000) x 30%…………………………………. ..__ 30,000
Total capital after admission…………………………………….. .P130,000
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
Adams Brown Call

Goodwill Method is used…………………. P72,000 P48,000 P36,000
BV/Bonus Method is used………………… P60,000 P40,000 P30,000
Add: Goodwill *……................................... 8,400 5,600 6,000
P68,400 P45,600 P36,000
(Gain) loss – BV/bonus method…………. P 3,600 P 2,400 P 0
Adams: 70% x 6/10 = 42%

Brown: 70% x 4/10 = 28%
Call 30%
Alternative 2: If goodwill is not realized and written-off as a loss:

Adams Brown Call
Goodwill Method is used…………………. P 72,000 P48,000 P36,000
Less: Write-off of goodwill *………………. 8,400 5,600 6,000
P63,600 P42,400 P30,000
BV/Bonus Method is used………………… P60,000 P40,000 P30,000
(Gain) loss – bonus method………………. P 3,600 P 2,400 P 0
Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is
objective that is establishes total capital of the new partnership at an amount based on actual consideration
received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a
bonus to either old or new partners.
The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset
actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective
measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not
determined objectively and other factors may have influenced the amount of investment required from the new
partners.
Although either method can be used in achieving the required interest for the new partner, the two methods offer
the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon
admission are equal, and
2. When the former partners continue to share profits and losses between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.
48. d – refer to No. 47 for Note.

(1) Goodwill method: Using the capital balance of new partner as a basis of computing total
agreed capital,:
Total agreed capital (P5,000/25%)……………………………………. P20,000

Less: Total contributed capital (P6,000/P4,800+P5,000)…………… 15,800
Goodwill to old partners…………………………………………………. P 4,200
Therefore, the capital balances after the admission of OO:
MM: [P6,000+(P4,200x3/5)]…………………………………………………. P 8,520
NN: [P4,800+(P4,200x2/5)]………………………………………………….. 6,480
OO………………………………………………………………………………. 5,000
Total agreed capital………………………………………………………… P20,000
(2) If bonus method is used, the capital balances would be:

Total agreed capital (P6,000+P4,800+P5,000)………………………….......... P 15,800
Multiplied by: OO’s capital interest…………………………………………..... 25%
Agreed capital to be credited to OO………………………………………... P 3,950
Contributed/Invested capital of OO…………………………………….......... 5,000
Bonus to MM and NN (old partner)………………………………………......... P 1,050
The bonus would be added to MM and NN:
MM: [P60,000+(1,050,000x3/5)]……………………………………………. P 6.630

NN: [P4,800+(P1,050x2/5)]………………………………………………….. 5,220
OO……………………………………………………………………………… 3,950
Total agreed capital……………………………………………………….. P 15,800
For purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: If goodwill is found to exist:
MM NN OO
Bonus Method is used……………………... P6,630 P5,220 P3,950
Add: Goodwill (allocated equally)…….. 1,400 1,400 1,400
P8,030 P6,620 P5,350
(Gain) loss – bonus method………………. P 490 P (140) P 350 (d)
MM NN OO
Less: Write-off of goodwill
(allocated equally)…………………. 1,400 1,400 1,400
P7,120 P5,080 P3,600
(Gain) loss – bonus method………………. P 490 P (140) P 350 (d)
49. a – refer to No. 47 for Note.

Goodwill method: Using the capital balance of new partner as a basis of computing total agreed
capital.
Total agreed capital (P500,000/25%)……………………………………. P2,000,000

Less: Total contributed capital (P600,000/P480,000+P500,000)…….. 1,580,000
Goodwill to old partners…………………………………………………... P 420,000
Therefore, the capital balances after the admission of CC:

AA: [P600,000+(P420,000x3/5)]…………………………………………… P 852,000 (d)
BB: [P480,000+(P420,000x2/5)]……………………………………………. 648,000
CC……………………………………………………………………………… 500,000
Total agreed capital………………………………………………………….. P 2,000,000
Bonus Method:
Total agreed capital (P600,000+P480,000+P500,000)………………... P 1,580,000
Multiply by: CC’s capital interest………………………………………… 25%
Agreed capital to be credited to CC………………………………….. P 395,000
Contributed/Invested capital of CC……………………………………. 500,000
Bonus to AA and BB (old partners)………………………………………. P 105,000
The bonus would be added to AA and BB:

AA: [P600,000+(1,050,000x3/5)]……………………………………………. P 663,000
BB: [P480,000+(P105,000x2/5)]……………………………………………… 522,000
CC………………………………………………………………………………. 395,000
Total agreed capital………………………………………………………… P 1,580,000
For purposes of comparing bonus and goodwill, assume that goodwill is not realized and it should be
written-off as a loss:
AA BB CC
Add: Goodwill (allocated equally)…….. 140,000 140,000 140,000
P712,000 P508,000 P360,000
(Gain) loss – bonus method………………. P 49,000 P (14,000) P 35,000
50. b
Total Roy Gil
Capital, before adjustment………………… P309,000 P94,800 P214,200
Less: Net adjustment*……………………….. 35,400 11,800 23,600
Capital, after adjustment………………….. P273,600 P83,000 P190,600
Less: Portion covered by common stock,
par P10 (720 share to each partner).. 14,400 7,200 7,200
Portion to be covered by preferred stock,
par P100…………………………………..... P259,200 P75,800 P183,400
Shares to be issued:
Preferred stock………………………. 2,592 758 1,834
Common stock……………………… 1,440 720 720
*FV, P40,000 + P68,000 + P180,600 – BV, P60,000 + 90,000 + P174,000.
51. d
Fair value of the assets (P200,000 + P24,000)……………………………. P224,000
Less: Total liabilities……………………………………………………………. 40,000
Fair value of Net Assets……………………………………………………… P184,000
Less: Common stock at P1 par (10,000 shares x 2 x 1 par)…………… 20,000
Additional paid-in capital………………………………………………… P164,000
52. b
Unadjusted capital balances (P140,000 + P120,000)…………………… P260,000
Allowances for doubtful accounts……………………………… (10000)
Revaluation of inventory (P160,000 - P140,000)………………... 20,000
Additional depreciation……………………………………………. (3,000)
Adjusted capital balances equivalent to the total shares issued……P267,000
53. c
Unadjusted assets (P10,500 + P15,900 + P42,000 + P60,000)……………. P128,400
Allowances for doubtful accounts……………………………… ( 1,200)
Short-term prepayments............................................................... 800
Revaluation of inventory (P48,000 – P42,000)...………………... 6,000
Revaluation of equipment (P72,000 – P60,000)………………... 12,000
Adjusted asset balance............................................................................. P146,000
54. c
Adjusted asset balance............................................................................. P146,000
Less: Liabilities (P16,400 + P750).................................................................. 17,150
Adjusted net assets..................................................................................... P128,850
Less: Common stock, P5 par x 10,000 shares.....................……………... 50,000
Additional paid-in capital…………………………………………………… P 78,850
Quiz-III
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d
Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
[(P60,000 + P17,000) x 1/5] (15,400)
Difference (investment > book value) P 1,600
Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400
3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment. As Claudius's
portion is to be 20 percent, the new capital balance would be P90,000 (P450,000 × 20%). Since
P100,000 was paid, a bonus of P10,000 is being given to the two original partners based on their
profit and loss ratio: Messalina – P6,000 (60%) and Romulus – P4,000 (40%). The increase raises
Messalina's capital balance from P210,000 to P216,000 and Romulus's capital balance from P140,000
to P144,000.
4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)
7. Abele, P300,000; Boule, P480,000; Dann, P420,000
8. Brown, P156,000; Green, P99,000; Red, P45,000
9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250
10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the price paid by
Mary Ann.
11. P180,000
12. Net assets of the partnership will increase by P190,000, including Professor’s interest.
13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000
16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000
17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750
18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000
19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits and losses, this
allocation indicates total goodwill of P50,000.
20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000
Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of this
goodwill, an entry that raises this partner's capital balance from P130,000 to P145,000.
20. a – [(P80,000 − P60,000) ÷ 3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)
27. Donald, P55,000; Todd, P60,000
Anne receives an additional P30,000 above her capital balance. Since she is assigned 40 percent
of all profits and losses, this extra allocation indicates total goodwill of P75,000, which must be split
among all partners. 40% of Goodwill = P30,000

Less: Book value of Anne (40%) 50,000
Capitalized at 40% Goodwill/revaluation
P 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000
Anne (P50,000 + P30,000) 80,000
Cash 80,000
Donald: P40,000 + P15,000 = P55,000
Todd: PP30,000 + P30,000 = P60,000
28. Donald, P30,000; Todd, P10,000
The P30,000 bonus is deducted from the remaining partners according to their relative profit and loss
ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000
Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000
29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)
30. Prefer bonus method due to ZZ’s gain of P35,000

Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000
Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

XX YY ZZ
Less: Write-off of goodwill (equally) 140,000 140,000 140,000
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000
Note: The bonus method adheres to the historical cost concept and it is often used in accounting practice. It is
objective that is establishes total capital of the new partnership at an amount based on actual consideration
received from the new partner. The bonus method indirectly acknowledges the existence of goodwill by giving a
bonus to either old or new partners.
The goodwill method results in the recognition of an asset implied by a transaction rather than recognizing an asset
actually purchased. Historically, goodwill has been recognized only when purchased so that a more objective
measure of its value is established. Therefore, opponents of the goodwill method contend that goodwill is not
determined objectively and other factors may have influenced the amount of investment required from the new
partners.
Although either method can be used in achieving the required interest for the new partner, the two methods offer
the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage interest in assets upon
admission are equal, and
2. When the former partners continue to share profits and losses between themselves in the original ratio.
If these conditions are not fully met, however, results will be different.
31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000
Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000
Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000
For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0
*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

XX YY ZZ
Less: Write-off of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0
32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Capitalized at 40%
Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-off Impaired Goodwill (125,000 × 0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000
33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-off Impaired Goodwill
125,000 × 0.60 (75,000)
125,000 × 0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500
**The excess paid to Neal of P50,000 would have been divided equally between Palmer and Ruppe as
follows:
Palmer Ruppe
Capital balance before withdraw 150,000 100,000
Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000
34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000
35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110

Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
THEORIES
True or False
1. False 6. False 11. True 16. True 21. False 26. False 31. True
2. True 7. False 12. True 17. True 22. True 27. True 32. True
3. False 8. True 13. True 18. False 23. False 28. False
4. True 9. False 14. False 19. False 24. True 29. True
5. False 10. False 15, True 20. True 25. False 30. False
1. A dissolution occurs every time there is a change in relationship among the partners. This can occur when a
new partner enters the partnership or an existing partner leaves the partnership. A dissolution occurs when the
partnership is going out of business but the termination of business is not a requirement for a dissolution.
3. A new partner's liability for actions that occurred before joining the partnership is limited to the amount invested
in the partnership.
5. Regardless how a new partner enters a partnership, the other partners have to approve the admission because
they must accept unlimited liability due to actions of the new partner taken on behalf of the partnership.
6. There is no necessary relationship between the percentage of equity acquired and the amount of profit or loss
received. These are separate contractual issues.
7. There are three methods that may be used when a new partner is paying an amount more than book value for
the investment: revaluation of existing assets, bonus method, and goodwill method. The partners do not have
to choose one method. It would not be inconsistent to revalue the assets and apply either the bonus or the
goodwill method to record the investment.
9. Existing partners share the difference between market value and book value equally if that is the manner in
which profits and losses are shared. If profits and losses are shared in some other manner, then the difference
between market and book values are shared in that manner.
10. While it is possible that an error has been made, it is more likely that the existing partners recognized an
increase in their capital accounts via a bonus. The difference between the amount credited to the new
partner’s capital account and the amount invested is shared by the existing partners.
14. New partners may receive a bonus if they bring value to the partnership in excess of the tangible assets
invested. This additional amount may be from such things as expertise, experience, or business contacts. The
bonus allocated to the new partner is payment for these types of unidentifiable assets contributed to the
partnership.
18. Goodwill may be recognized with regard to the existing partners but it may also be recognized with regard to
the new partner.
19. When goodwill is recognized with regard to the new partner, the new partner’s capital account will be greater
than the amount invested by the recognized goodwill.
21. The articles of partnership may include an agreement on the length of advanced notice a partner must give
before withdrawing from a partnership. Failure to provide the agreed notice may result in the withdrawing
partner being liable for damages suffered by the partnership.
23. If existing partners acquire a withdrawing partner’s equity, they can divide the purchase of that equity among
themselves in any manner they choose.
25. Partnership assets may be revalued but they may also remain at their carrying value.
26. The revaluation of the partnership’s assets is unrelated to the purchase of the withdrawing partners ownership
interest in the partnership.
28. The revaluation of partnership assets at the time of a partner’s withdrawal has no impact on the recognition of a
bonus or goodwill.
30. While the partners can recognize either the withdrawing partner’s goodwill or the entire partnership’s goodwill,
there is no requirement to recognize any goodwill when a partner withdraws from a partnership.
Multiple Choice
33. b 38. e 43. c 47. a 53. c 58. a 63. c
34 d 39. e 44. c 48. c 54. c 59. c 64. d
35. d 40. d 45. d 50. c 55. c 60. b 65. c
36. d 41. d 46. c 51. a 56. b 61. b 66. d
37. d 42. b 47. b 52. d 57. b 62. b 67. d
68. a
Chapter 4
Problem I
1: Gain on Realization Fully Allocated to Partner’s Capital Balances.
QRS Partnership
Statement of Realization and Liquidation
November 1 – 30, 20x4
Non- Q, R, S,
Cash Capital Capital Capital
Cash Assets Liabilities Q, Loan 30%) (50%) (20%)
Balances before liquidation 24,000 84,000 12,000 2,400 9,600 48,000 36,000
Realization and distribution
of gain 96,000 (84,000) _____ ______ 3,600 6,000 2,400
Balances after realization 120,000 12,000 2,400 13,200 54,000 38,400
Payment of liabilities (12,000) (12,000)
Balances after payment of
liabilities 108,000 2,400 13,200 54,000 38,400
Payment to partners - loan (2,400) (2,400) ______ ______ _______
partners’ loans 105,600 13,200 54,000 38,400
Payment to partners -
capital (105,600) (13,200) (54,000) (38,400)
2: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised).
QRS Partnership
Non- Q, R, S,
Cash capital Capital Capital
Cash Assets Liabilities Q, Loan (30%) (50%) (20%)
of loss 48,000 (84,000) _____ ______ (10,800) (18,000) (7,200)
Balances after realization 72,000 12,000 2,400 (1,200) 30,000 28,800
liabilities 60,000 2,400 (1,200) 30,000 28,800
Offset deficit versus loans _______ (1,200) 1,200 _______ _______
Balances after offsetting 60,000 1,200 30,000 28,800
Payment to partners – loan (1,200) (1,200) _______ ______
partners’ loans 58,800 30,000 28,800
capital (58,800) (30,000) (28,800)
3: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer from
Partner’s Loan Account (Right of Offset Exercised and Additional Capital Investment is Required and
Made).
QRS Partnership
Non- Q, R, S,
of loss 36,000 (84,000) ________ ________ (14,400) (24,000) (9,600)
Balances after realization 60,000 12,000 2,400 ( 4,800) 24,000 26,400
Payment of liabilities (12,000) (12,000) ________ _______ _______ _______
liabilities 48,000 2,400 ( 4,800) 24,000 26,400
Offset loan versus deficit – _______ (2,400) 2,400 _______ _______
Balances after offsetting
partner’s loan 48,000 (2,400) 24,000 26,400
Additional investment by Q __2,400 2,400 _______ _______
Balances after additional
Investment 50,400 24,000 26,400
capital (50,400) (24,000) (26,400)
4: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Non- Q, R, S,
of gain 42,000 (84,000) _______ ________ (12,600) (21,000) (8,400)
Payment of liabilities (12,000) (12,000) _______ _______ _______ _______
liabilities 54,000 2,400 (3,000) 27,000 27,600
Offset loan versus deficit _______ (2,400) 2,400 ______ ______
Balances after offsetting 54,000 ( 600) 27,000 27,600
Additional loss due to
insolvency of Q _______ 600 ( 429) ( 171)
Balances after additional ,
Loss 54,000 26,571 27,429
capital (54,000) (26,571) (27,429)
5: Loss on Realization Creates a Deficit Balance in One Partner’s Capital Account Requiring Transfer
Partner’s Loan Account (Right of Offset Is Exercised) and Additional Investment is Required but not Made
(Personally Insolvent).
QRS Partnership
Non- Q, R, S,
of gain 24,000 (84,000) _______ _______ (18,000) (30,000) (12,000)
liabilities 36,000 2,400 ( 8,400) 18,000 24,000
Offset loan versus deficit ______ (2,400) 2,400 ______ _______
Balances after offsetting 36,000 (6,000), 18,000 24,000
Additional investment by Q _3,600 _ 3,600 ______ _______
investment 39,600 (2,400) 18,000 24,000
Additional loss due to
insolvency of Q ______ 2,400 (1,714) ( 686)
Loss 39,600 16,286 23,314
capital (39,600) (16,286) (23,314)
6: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) and All Partners are Personally Solvent.
QRS Partnership
Non- Q, R, S,
Payment of liquidation
expenses (14,400) ______ ________ ________ (4,320) (7,200) (2,880)
liquidation expenses 9,600 84,000 12,000 2,400 5,280 40,800 33,120
Write-off goodwill and
prepaid expenses _______ (72,000) _______ ________ (21,600) (36,000) (14,400)
Balances after write-offs 9,600 12,000 12,000 2,400 (16,320) 4,800 18,720
of loss 1,200 (12,000) _______ ________ ( 3,240) ( 5,400) ( 2,160)
Balances after realization 10,800 12,000 2,400 ( 19,560) ( 600) 16,560
Payment of liabilities (10,800) (10,800) ________ _______ ________ _______
Liabilities -0- 1,200 2,400 (19,560) ( 600) 16,560
Offset loan versus deficit ______ _______ (2,400) 2,400 _______ _______
Balances after offsetting -0- 1,200 (17,160) ( 600) 16,560
Additional investment by Q
and R 17,760 _______ 17,160 600 ______
Investment 17,760 1,200 16,560
Payment of liabilities (1,200) (1,200) _______
Liabilities 16,560 16,560
Payment to partners - Capital (16,560) (16,560)
7: Loss on Realization Creates a Deficit Balance in Partner’s Capital Account Requiring Transfer Partner’s
Loan Account (Right of Offset Is Exercised) with Revaluation of Assets.
QRS Partnership
Non- Q, R, S,
Increase in equipment 1,200 360 600 240
Decrease in furniture ______ (600) _______ ______ _(180) (300) (120)
Balances after revaluation 24,000 84,600 12,000 2,400 9,780 48,300 36,120
Refund of prepaid
expenses _6,960 (8,400) _______ ______ _(432) (720) (288)
Balances after refunds 30,960 76,200 12,000 2,400 9,348 47,580 35,832
Received noncash assets ______ (10,200) _______ ______ _____ (7,200) (3,000)
Balances after receipt
of noncash assets 30,960 66,000 12,000 2,400 9,348 40,380 32,832
Realization and distribution (
of loss 32,400 (66,000) _______ ______ 10,080) ( 16,800) ( 8,064)
Balances after realization 63,360 12,000 2,400 ( 732) 23,580 26,112
liabilities 51,360 2,400 ( 732) 23,580 26,112
Offset loan versus deficit _______ ( 732) 732 ______ ______
Balances after offsetting 51,360 1,668 23,580 26,112
loan (1,668) (1,668) ______ _______
Balances after payment
of loans 49,692 23,580 26,112
Payment to partners-
capitals (49,692) (23,580) (26,112)
Problem II
DISCOUNT PARTNERSHIP
Schedule of Partnership Liquidation
January 14, 20x4
Capital Balances
Explanation Cash Other Liabilities Dawson Feeney Hardin
Assets
Balances before realization P25,000 P120,000 P(40,000) P(31,000) P(65,000) P(9,000)
Sales of noncash assets 60,000 (120,000) ______ 18,000 24,000 18,000

Balances 85,000 0 (40,000) (13,000) (41,000) 9,000
Payment of liabilities (40,000) __________ 40,000 ________ ________ ________

Balances 45,000 0 0 (13,000) (41,000) 9,000
Allocation of Hardin's debit
balance
______ __________ ______ 3,857 5,143 (9,000)
Balances 45,000 0 0 (9,143) (35,857) 0
Distribution of cash to partners (45,000) __________ ______ 9,143 35,857 ________

Balances P 0 P 0 P 0 P 0 P 0 P 0
Problem III
1.
CDG Partnership
Lump-sum Liquidation on December 10, 20X6
Capital Balances
Noncash Carlos Dan Gail
Cash Assets Liabilities 20% 40% 40%
Preliquidation balances 25,000 475,000 (270,000) (120,000) (50,000) (60,000)
Sale of assets and distribution

of P215,000 loss 260,000 (475,000) 43,000 86,000 86,000
285,000 -0- (270,000) (77,000) 36,000 26,000
Cash contributed by Gail to
extent of positive net worth 25,000 (25,000)
310,000 -0- (270,000) (77,000) 36,000 1,000
Distribution of deficit of
insolvent partner: (1,000)
20/60(P1,000) 333
40/60(P1,000) 667
310,000 -0- (270,000) (76,667) 36,667 -0-
Contribution by Dan to 36,667 (36,667)

remedy deficit
346,667 -0- (270,000) (76,667) -0- -0-
Payment to creditors (270,000) 270,000

76,667 -0- -0- (76,667) -0- -0-
Payment to partner (76,667) 76,667
Post-liquidation balances -0- -0- -0- -0- -0- -0-
2.
CDG Partnership
Net Worth of Partners
December 10, 20X6
Carlos Dan Gail
Personal assets, excluding
partnership capital interests 250,000 300,000 350,000
Personal liabilities (230,000) (240,000) (325,000)
Personal net worth, excluding
partnership capital interests, Dec. 1, 20X6 20,000 60,000 25,000
Contribution to partnership (36,667) (25,000)
Liquidating distribution from partnership 76,667 -0- -0-
Net worth, December 10, 20X6 96,667 23,333 -0-
This computation assumes that no other events occurred in the 10-day period that changed any of the
partners’ personal assets and personal liabilities. In practice, the accountant must be sure that a
computation of net worth is current and timely.
The table shows the effects of the transactions between the partnership and each partner. A
presumption of this table is that the personal creditors of Dan or Gail would not seek court action to
block the settlement transactions with the partnership. Upon winding up and liquidation, the
partnership does not have any priority to the partner’s personal assets. Thus, the personal creditors may
seek to block the transactions with the partnership in order to provide more resources from which they
can be paid. A partner who fails to remedy his or her deficit can be sued by the other partners who
had to make additional contributions or even by a partnership creditor if the failed partner is liable to
the partnership creditor. But those claims are not superior to the other claims to the partner’s individual
assets.
When accountants provide professional services to partnerships and to its partners, the accountant
should expect, at some time, legal suits involving the partnership and/or individual partners. A strong
and thorough understanding of the legal and accounting foundations of partnerships will be very
important to that accountant.
Problem IV
Noncash Capital and Loan Balances
Cash Assets Liabilities Merz Dechter Flowers
Beginning balances P 25,000 P200,000 P165,000 P 40,000 P30,000 P(10,000)

Liquidation expense (20,000) (8,000) (8,000) (4,000)
Sale of non-cash assets 160,000 (200,000) (16,000) (16,000) (8,000)
Contribution by Flowers 10,000 10,000
Allocation of Flower's (6,000) (6,000) 12,000
Distribution to partners (10,000) (10,000) 0 0
Ending balances 0 0 0 0 0 0
Problem V
Cash Liabilities Able Bower Cramer
Beginning: P20,000 P(30,000) P(10,000) P5,000 P15,000
Payment of liabilities (20,000) 20,000
P 0 P(10,000) P(10,000) P5,000 P15,000
Cramer/Bower pay in
from personal worth
to cover
deficit balances: 12,000 ________ ________ (2,000) (10,000)
P12,000 P(10,000) P(10,000) P3,000 P 5,000
Payment of liabilities (10,000) 10,000
P 2,000 P 0 P(10,000) P3,000 P 5,000
Allocation of
deficit balances: ______ ________ 8,000 (3,000) (5,000)
P 2,000 P 0 P (2,000) P 0 P 0
Able paid: (2,000) 2,000
P 0 P 0 P 0 P 0 P 0
Problem VI
Answer:
Cash 70,000
Arthur, Capital 6,000
Baker, Capital 15,000
Casey, Capital 9,000
Other Assets 100,000
To record realization of assets at a loss of $30,000, divided
among Arthur, Baker, and Casey in 2:5:3 ratio, respectively.
Trade Accounts Payable 65,000

Cash 65,000
To record payment of liabilities.

Loan Receivable from Arthur 20,000
To offset Arthur's loan account against Arthur's capital
account.

Loan Payable to Baker 20,000
Casey, Capital 1,000
Cash 35,000
To record payments to partners, computed as follows:
Arthur Baker Casey

Capital account balances P70,000 P80,000 P55,000
Add: Loan payable to Baker 30,000
Less: Loan receivable from Arthur (20,000)
Loss on realization of assets,
P30,000 (6,000) (15,000) (9,000)
Balances P44,000 P95,000 P46,000
Maximum potential additional loss
of P150,000 (P250,000 – P100,000 =
P150,000) divided in 2:5:3 ratio (30,000) (75,000) (45,000)
Cash payments P14,000 P20,000 P 1,000

1. b - (P40,000 + P10,000 – P2,000 – P4,000 = P44,000)
2. d – P80,000 – (P150,000 – P50,00) x 50% = P30,000
3. c
4. a - Phil (P35,000 + P10,000); Harry P28,000; Bill (P27,000 - P5,000)
5. c - Rick P46,000; Mary (P39,000 - P15,000); Fran (P29,000 + P10,000)
6. d - P50,000 - (P15,000 - P9,500)(.25)
7. b - P45,000 - (P15,000 - P9,500)(.30)
8. a - P108,000 + [P10,000 - (P25,000 - P18,000)](.55)
9. c - P62,000 + [P10,000 - (P25,000 - P18,000)](.20)
10. b
11. c
12. d
13. c
Vulnerability ranks:
Lang equity (P70,000 - P40,000)/.25 = P120,000 = 1
Maas equity (P80,000 + P50,0000/.25 = P520,000 = 3
Neal equity (P150,000/.5) = P300,000 = 2
Assumed loss absorption:

25% 25% 50%
Lang Maas Neal Total
Equities P 30,000 P 130,000 P 150,000 P 310,000
Loss to eliminate
Lang ( 30,000 ) ( 30,000 ) ( 60,000 ) ( 120,000 )
0 P 100,000 P 90,000 P 190,000
Loss to eliminate
Neal ( 45,000 ) ( 90,000 ) ( 135,000 )
P 55,000 P 0 P 55,000
14. c JJ CC TT Total
Profit ratio 40% 50% 10% 100%
Prior capital (160,000) (45,000) (55,000) (260,000)

Loss on sale
of inventory 24,000 30,000 6,000 60,000
(136,000) (15,000) (49,000) (200,000)
15. a Prior capital (160,000) (45,000) (55,000) (260,000)

Loss on sale
of inventory 72,000 90,000 18,000 180,000
(88,000) 45,000 (37,000) (80,000)
Allocate Charles'
capital deficit: (45,000)
JJ = .40/.50 36,000
TT = .10/.50 9,000
(52,000) -0- (28,000) (80,000)
16. c – (P234,000 – P434,000) x 20% = P40,000

17. b
T D H
Capital before realization 40,000 10,000 15,000
Loss on sale (85,000 – 33,000) (26,000) (15,600) (10,400)
14,000 ( 5,600) 4,600
Additional loss (5:2) (4,000) 5,600 ( 1,600)
10,000 3,000
18. a
T D H
Loss on sale (85,000 – 21,100) (31,950) (19,170) (12,780)
8,050 ( 9,170) 2,220
Additional loss (5:2) (6,550) 9,170 (2,620)
1,500 ( 400)
Additional loss ( 400) 400
1,100
19. b
K L M
Liquidation expenses (2,000) ( 4,000) ( 4,000)
Loss on sale (300 - 180) (24,000) (48,000) ( 48,000)
34,000 (12,000) 28,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000)
30,000 20,000
20. d
H I J Total
Capital before realization 80,000 110,000 140,000 330,000
Loss on sale (2:4:4) (61,000) (122,000) (122,000) (305,000)
19,000 (12,000) 18,000 25,000
Additional loss (2:4) ( 4,000) 12,000 ( 8,000)
15,000 10,000
21. d – [(P240,000 – P96,000) /30% = P480,000]
22. a
Capital before realization – C 130,000
Liquidation expenses (12,000 x 50%) (6,000)
Share on loss on realization (132,000)
Capital balance after realization ( 8,000)
Total loss on realization: P132,000/50% (264,000)

Non-cash assets 434,000
Proceeds 170,000
23. b
Ding Laurel Ezzard Tillman Total
Capital before realization 60,000 67,000 17,000 96,000 240,000
Loss on sale (4:2:2:2) (52,800) ( 26,400) (26,400) (26,400) (132,000)
7,200 40,600 ( 9,400) 69,600 108,000
Possible insolvency loss (4:2:2) ( 4,700) ( 2,350) ( 9,400) ( 2,350) -0-
Safe payments 2,500 38,250 0 67,250 108,000
24. e – refer to No. 23

25. b
Gonda Herron Morse Total
Loss on sale (30:45:25); [200 – 150] (15,000) ( 22,500) (12,500) (50,000)
45,000 47,500 27,500 120,000
26. c
S D F Total
Capital 40,000 15,000 5,000 60,000
Loan ________ _______ 5,000 5,000
Total interests 40,000 15,000 10,000 65,000
Loss on sale (5:3:2) - [90,000 – 26,000] (32,000) ( 19,200) (12,800) (64,000)
8,000 ( 4,200) ( 2,800) 1,000
Possible insolvency (5:3) (1,750) ( 1,050) 2,800 0
6,250 ( 5,250) 1,000
Additional investment _______ 5,250 5,250
6,250 6,250
27. b
28. a –
Since the partnership currently has total capital of P350,000, the P150,000 that is available would
indicate maximum potential losses of P200,000 that is hypothetically split among the partners.
White Sands Luke Total
Loss on sale (30:20:50); [350 – 150] (60,000) ( 40,000) (100,000) (200,000)
(10,000) 60,000 100,000 150,000
Possible insolvency (2:5) 10,000 (2,857) (7,143) 0
Safe payments 57,143 92,857 150,000
29. b - (P13,000 – P1,000 share of gain = P12,000, refer to entries below)

Revaluation entry:
Accumulated depreciation 3,000
Gym, capital 1,000
Hob, capital 1,000
Ing, capital 1,000
Withdrawal of equipment:
Accumulated depreciation (8,000 – 3,000) 5,000
Hob, capital 13,000
Equipment 18,000
30. b –
K, capital (P150,000 + P10,000 + P10,000 – P70,000) 100,000
Machinery, at cost 150,000
Rice [P110,000 – (P150,000 – P70,000)] x 1/3 10,000
Long [P110,000 – (P150,000 – P70,000)] x 1/3 10,000
31. c
X Y Z Total
Loss on sale (35%:35%:30%) (42,000) (42,000) (36,000) *(120,000)
48,000 18,000) ( 6,000) 60,000
*balancing figure – total reduction in capital
Quiz - IV
1. Zero/nil
B P L S
Loss on sale (3:2:1:4)) (45,000) ( 30,000) (15,000) (60,000)
(20,000) 80,000 85,000 5,000
Additional loss (2:1:4) (20,000) ( 5,714) ( 2,857) (11,429)
74,286 82,143 ( 6,429)
Additional loss (2:1) ( 4,286) ( 2,143) 6,429
70,000 80,000
2. Zero/nil – refer to No. 1
3. Page, P70,000 and Larry, P80,000 – refer to No. 1
4. P39,525 = P42,000 - (P15,000 - P9,500)(.45)
5. P56,750 = P56,000 + [P10,000 - (P25,000 - P18,000)](.25)
6. P(1,000) = P20,000 - [P30,000 + (P50,000 - P90,000)](.30)
7. P(1,500) = P30,000 - [P30,000 + (P50,000 - P90,000)](.45)
8. P(2,500) = P15,000 - [P30,000 + (P50,000 - P90,000)](.25)
9. P340,000 = (P147,000 + P28,000)/.35
10. P1,040,000 = (P260,000 / .25)
11. Abrams and Creighton
A B C
Liquidation expenses (3,600) (2,400) (6,000)
Loss on sale (134 - 434) (90,000) (60,000) (300,000)
(13,600) 27,600 (176,000)
12. Tom, P30,000; Dick, P4,000 and harry, P11,000

T D H
Loss on sale (85,000 – 65,000) (10,000) (6,000) (4,000)
30,000 4,000 11,000
13. P34,000
K L M
Loss on sale (300 - 180) (24,000) (48,000) ( 48,000)
34,000 (12,000) 28,000
Additional investment _____ 12,000 ______
34,000 28,000
14. P25,000
Cash, beginning P90,000
Payment of liquidation expenses ( 5,000)
Payment of liabilities ( 60,000)
Payment to partners P25,000
15. P15,000
B P L S
Loss on sale (4:2:1:3) (60,000) ( 30,000) (15,000) (45,000)
(35,000) 80,000 85,000 20,000
Additional loss (2:1:3) (35,000) (11,667) ( 5,833) (17,500)
15,000 68,333 79,167 2,500
16. P2,500 - refer to No. 15
17. Page, P68,3333 and Larry, P79,167 – refer to No.15
18. Bond: P225,000; Hamm: P115,000; Zell: P –0–
Bond’s capital balance ................................................................ P300,000
Less: Bond’s share of P140,000 loss in liquidation
(P140,000 × 50%) ........................................................................... (70,000)
P230,000
Less: Bond’s share of Zell’s capital deficiency of
P8,000 (5/8 of P8,000) ................................................................... ( 5,000)
P225,000
19. Alexa: P25,000; Bell: P75,000; Graham: P–0–
20. Jody, P5,200; Kane, P64,800; Lark, P10,000

30% 45% 25%
Assets Debts Jody Kane Lark
Balance, May 1 250,000 88,000 32,000 90,000 40,000
Plant sold 10,000 3,000 4,500 2,500
Inventory sold ( 6,000) ( 1,800 ) ( 2,700 ) ( 1,500 )
Balances before
distribution 254,000 88,000 33,200 91,800 41,000
Offset loans ( 26,000) ( 10,000 ) ( 16,000 )
Pay creditors ( 88,000) ( 88,000 )
Partner equity 140,000 23,200 91,800 25,000
Possible loss:
Plant assets 60,000) ( 18,000 ) ( 27,000 ) ( 15,000 )
Distribution 80,000 5,200 64,800 10,000
(Cash Distribution: P54,000 + P54,000 + P60,000 - P88,000 = P80,000)

May 1 Inventory Plant Creditors May 30
21. Oak, P0; Nebe, P0; and Pang, P11,000

Non- First 30% 20% 50%
Cash Cash Rank Oak Nebe Pang
Assets Debt Equity Equity Equity
Jan 1 Balance 3,000 33,000 9,000 2,000 4,000 21,000
Sale of assets 17,000 ( 15,000 ) 600 400 1,000
Subtotal 20,000 18,000 9,000 2,600 4,400 22,000
Safe Payments Schedule

Oak Nebe Pang
Equity Equity Equity
Partners’ pre-distribution balances 2,600 4,400 22,000
Possible losses on non-cash assets ( 5,400 ) ( 3,600 ) ( 9,000 )
( 2,800 ) 800 13,000
Write off Oak 2/7 and 5/7 2,800 ( 800 ) ( 2,000 )
Cash distribution to partners 0 0 11,000
Cash distribution plan on October 31:

First P9,000 goes to priority creditors, and then Pang receives P11,000.
22. Ide, P0; Hanly, P0; Jen, P92,000

Ide Hanly Jen
Cash Capital Capital Capital Total
Balance, Aug. 1 50,000 ( 60,000 ) 4,000 106,000 50,000
Ide’s personal
contribution 40,000 40,000 40,000
90,000 ( 20,000 ) 4,000 106,000 90,000
Write-off Ide 20,000 ( 7,500 )( 12,500 )
90,000 0 ( 3,500 ) 93,500 90,000
Hanly’s personal
contribution 2,000 2,000 2,000
92,000 ( 1,500 ) 93,500 92,000

Write-off Hanly 1,500 ( 1,500 )
92,000 0 92,000 92,000
Distribute cash 92,000 ) ( 92,000 ) ( 92,000 )
0 0 0
Theories
Completion Statements
1. a. partnership creditors other than partners
b. partners’ loans—if subordinated
c. partners’ capital
2. statement of realization and liquidation
3. schedule of safe payments
4. marshalling of assets
5. rule of setoff
6. legal recourse against
7. bringing the capital balances into the profit and loss ratio
True or False
8. True 13. True 18. False 23. False 28. True 33. True
9. False 14. False 19. True 24. True 29. False 34. True
10. False 15. False 20. True 25. False 30. False 35. False
11. False 16. True 21. False 26. True 31. False
12. True 17. True 22. True 27. True 32. False
9. The accountant is liable if he/she fails to meet the fiduciary responsibility of protecting the creditors’ interest
during the liquidation process.
10. The amount of cash distributed to each partner is a function of the capital balances and the profit and loss
ratios. It is unlikely that partners will receive the same amount of cash.
11. Partnership creditors have priority claims against partnership assets and partner creditors have priority
claims against partner assets.
14. Partner creditors have claims first against partner assets. They can also have a claim against partnership
assets to the extent of the partner’s equity in the partnership.
15. The accountant has a fiduciary responsibility to the partnership’s creditors to ensure that sufficient assets
exist to pay the creditors. It does not mean that creditors must be fully paid before any partner distributions
occur.
18. Gains and losses realized during the liquidation process are generally allocated using the residual profit
and loss ratio. Other profit and loss allocation components are not considered because these items are
generally relevant to the partnership’s operation and the current issue is the partnership’s liquidation.
21. This is called an installment liquidation
23. This document is called a Statement of Realization and Liquidation.
25. The Statement of Realization and Liquidation does not include income statement accounts. All income
statement amounts are allocated directly to partnership equity.
Multiple Choice Theories

36. A 41. b 46. c 51. b
37. A 42. d 47. a 52. a
38. C 43. b 48. c
39. D 44. d 49. d
40. C 45. b 50. b
Chapter 5
Problem I
1.
A, B, C and D Partnership
Statement of Liquidation
January 1, 20x4 to May 31, 20x4
Non- A, B, C, D,
Cash A, capital capital capital capital
Cash Assets Liabilities loan D, loan (40%) (20%) (20%) (20%)
Balances before
Liquidation 181,800 84,000 6,000 3,000 26,400 25,800 20,400 16,200
January
- Realization 72,000 (90,000) (7,200) (3,600) (3,600) (3,600)
- Payment of
expenses (1,200) ( 480) ( 240) ( 240) ( 240)
- Payment
of liabilities (66,000) ______ (66,000) _____ _____ ______ ______ ______ ______
Balances after Jan 4,800 91,800 18,000 6,000 3,000 18,720 21,960 16,560 12,360
February
- Realization 21,600 (30,000) (3,360) (1,680) (1,680) (1,680)
- Payment of
expenses (1,320) ( 528) ( 264)
- Payment ( 264) ( 264)
of liabilities (18,000) _______ (18,000) ______ ______ ______ _______ ______ ______
Balances before
payment to
partners 7,080 61,800 6,000 3,000 14,832 20,016 14,616 10,416
Payment to
Partners (Sch. 1) ( 5,280) ______ ______ _____ ______ (5,280) ______ _____
Balances after
February 1,800 61,800 6,000 3,000 14,832 14,736 14,616 10,416
March
- Realization 19,200 (24,000) (1,920) ( 960) ( 960) ( 960)
- Payment of
expenses ( 1,440) ______ ______ _____ ( 576) ( 288) ( 288) ( 288)
Balances before
payment to
partners 19,560 31,500 6,000 3,000 12,336 13,488 13,368 9,168
Payment to
Partners (Sch. 2) (18,360) ______ (2,736) (3,000) (5,688) (5,568) (1,368)
Balances after
March 1,200 37,800 3,264 12,336 7,800 7,800 7,800
April
- Realization 6,000 (19,800) (5,520) (2, 760) (2,760) (2,760)
- Payment of
expenses (4,800) ______ (1,920) ( 960) ( 960) ( 960)
Balances before
payment to
partners 2,000 15,000 3,264 4,896 4,080 4,080 4,080
Payment to
Partners (Note 1) (1,500) ______ ( 720) ( 360) ( 360) ( 360)
Balances after
April 500 18,000 2,554 4,896 3,720 3,720 3,720
May
- Realization 2,400 (18,000) (6,240) (3,120) (3,120) (3,120)
- Payment of
expenses ( 960) _____ ( 384) ( 192) ( 192) ( 192)
Balances before
Offsetting 1,440 2,554 ( 1,728) 408 408 408
Offset deficit vs.
Loan ______ (1,728) 1,728 _____ ______ _____
Balances before
payment 2,040 816 408 408 408
Payment to
Partners (Note 2) (2,040) (816) (408) (408) (408)
2.
A, B, C and D Partnership
Schedule of Safe Payments
Schedule 1 – February 28, 20x4
Computation of Distribution of Cash on February 28, 20x4
A, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 14,832 20,016 14,616 10,416
Total Interest 20,832 20,016 14,616 13,416
Restricted interest for possible losses:
Unrealized non-cash assets P 61,800
Cash withheld 1,800
P 63,600 (25,440) (12,720) (12,720) (12,720)
( 4,608) 7,296 1,896 696
Restricted for possible insolvency of A (2:2:2) 4,608 (1,536) (1,536) (1,536)
5,760 360 ( 840)
Restricted for possible insolvency of D (2:2) ( 420) ( 420) 840
5,340 ( 60)
Restricted for possible insolvency of C ( 60) 60
Payment to partner (s) 5,280
Applied to:
Loans -0-
Capital 5,280
5,280
Schedule 2 – March 31, 20x4

Computation of Distribution of Cash on March 31, 20x4
A, B, C, D,
capital capital capital capital
(40%) (20%) (20%) (20%)
Balances before payment to partners:
Loans 6,000 3,000
Capital 12,336 13,488 13,488 9,168
Total Interest 18,336 13,488 13,488 12,168
Restricted interest for possible losses:
Unrealized non-cash assets P 37,800
Cash withheld 1,200
P 39,000 (15,600) ( 7,800) ( 7,800) ( 7,800)
2,736 5,688 5,568 4,368
Applied to:
Loans 2,736 -0- -0- 3,000
Capital ___-0- 5,688 5,568 1,368
2,736 5,688 5,568 4,368
3.
T, U, V and W Partnership
Cash Payment Priority Program*
January 31, 20x4
Interests Payments
T, U, V, W, T, U, V, W,
capital capital capital capital capital capital capital capital
(40%) (20%) (20%) (20%) (40%) (20%) (20%) (20%) Total
Balances before
liquidation:
Loans 6,000 3,000
Capital 26,400 25,800 20,400 16,200
Total Interests 32,400 25,800 20,400 19,200
Divided by: P & L % __40% ___20% __20% __20%
Loss Absorption
Abilities 81,000 129,000 102,000 96,000
Priority I ______ (27,000) _______ _______ 5,400 5,400
81,000 102,000 102,000 96,000
Priority II ______ ( 6,000) ( 6,000) _______ 1,200 1,200 2,400
81,000 96,000 96,000 96,000
Priority III ______ (15,000) (15,000) (15,000) _______ 3,000 3,000 3,000 9,000
81,000 81,000 81,000 81,000 ____-0- 9,600 4,200 3,000 16,800
*also known as Schedule of Cash Distribution Plan / Pre-distribution Plan.
4.
T, capital U, capital V, capital W, capital
(40%) (20%) (20%) (20%)
Total Interests P 32,400 P 25,800 P 20,400 P 19,200
Divided by: P & L % ____40% ____20% ____20% ____20%
Loss Absorption
Abilities P 81,000 P129,000 P 102,000 P 96,000
Order of Cash Distribution (4) (1) (2) (3)
Vulnerability Rankings (1
Is most vulnerable) (1) (4) (3) (2)
The vulnerability ranks indicate that partner T is most vulnerable to losses because his equity were
reduced to zero with a partnership liquidation loss of P81,000. Partner U is least vulnerable because
his equity is sufficient to absorb his share of liquidation losses up to P129,000. This interpretation helps
explain why partner U received all the cash distributed to partner on the first installment distribution
(August 20x4).
Incidentally, the cash priority program developed will yield the same cash payment as the process
of computing safe payments each time cash is available. The cash distribution under the cash
priority program is as follows:
Order of Cash Distribution Creditors T U V W

1. First P70,000 100%
2. Next P 4,500 100%
3. Next P2,000 50% 50%
4. Next P7,500 33 1/3% 33 1/3% 33 1/3%
5. Remainder 40% 20% 20% 20%
The first P84,000 available is, of course paid to the creditors. Cash may be held back from
distribution if it is anticipated that additional expenses will be incurred and unrecorded liabilities will
be discovered. The distribution of cash in excess of the reserve amount proceeds as determined.
Partner U will receive all of an additional ash up to P5,400. Additional cash in excess of P5,400 and
up to P7,800 is distributed 50:50 to partners U and V. Any amount in excess of P7,800up to P16,800 is
distributed 1: 1: 1 to partners U, V, and W, respectively. After P16,800 (P5,400 + P2,400 + P9,000) has
been distributed to the partners, the capital accounts are in the desired profit and loss ratio of
4:2:2:2. Any further distributions to the partners are made in accordance with the profit and loss
ratio.
Even though both methods produce the same results, the cash payment priority program is more
informative to both personal and partnership creditors, and to the partners. Interested parties now
know the order in which the individual partners will receive cash and the amounts that each may
receive at each period of the distribution process.
One requirement that must be satisfied in the development of the advance plan is that the
partners must share income in the same ratio that they share losses. If this were not the case the
potential amount of a new loss would need to be computed after every allocation to the partners’
capital accounts. This occurs because the allocation of liquidation gain alters the order of cash
distribution computed in the priority program.
Problem II
ABC Partnership
Statement of Partnership Realization and Liquidation
For the period from January 1, 20x4, through March 31, 20x4
Capital Balances
Other Accounts AA BB CC
Cash Assets Payable 50% 30% 20%
Balances before Liquidation, 18,000 307,000 (53,000) (88,000) (110,000) (74,000)
January 1,20x4
January transactions:
1. Collection of accounts
receivable at a loss
of P15,000 51,000 (66,000) 7,500 4,500 3,000
2. Sale of inventory at a loss 38,000 (52,000) 7,000 4,200 2,800
of P14,000
3. Liquidation expenses paid (2,000) 1,000 600 400
4. Share of credit memorandum 3,000 (1,500) (900) (600)
5. Payments to creditors (50,000) 50,000
55,000 189,000 -0- (74,000) (101,600) (68,400)
Safe payments to partners
(Schedule 1) (45,000) __ 26,600 18,400
10,000 189,000 -0- (74,000) (75,000) (50,000)
February transactions:
6. Liquidation expenses paid
(4,000) __ 2,000 1,200 800
6,000 189,000 -0- (72,000) (73,800) (49,200)
(Schedule 2) -0- __ ___ -0- -0- -0-
6,000 189,000 -0- (72,000) (73,800) (49,200)
March transactions:
8. Sale of M&Eq. at a loss of 146,000 (189,000) 21,500 12,900 8,600
P43,000
9. Liquidation expenses paid
(5,000) 2,500 1,500 1,000
147,000 -0- -0- (48,000) (59,400) (39,600)
10. Payments to partners (147,000) 48,000 59,400 39,600
Balances at end of
liquidation, March 31, 20x4 -0- -0- -0- -0- -0- -0-
ABC Partnership
Schedules of Safe Payments to Partners
AA BB CC
Schedule 1: January 31, 20x4 50% 30% 20%
Capital balances (74,000) (101,600) (68,400)
Possible loss:
Other assets (P189,000) and possible
liquidation costs (P10,000) 99,500 59,700 39,800
25,500 (41,900) (28,600)
Absorption of AA’s potential deficit balance (25,500)
BB: (P25,500 x 3/5 = P15,300) 15,300
CC: (P25,500 x 2/5 = P10,200) 10,200
Safe payment, January 31, 20x4 -0- (26,600) (18,400)
Schedule 2: February 27, 20x4

Possible loss:
Other assets (P189,000) and possible
liquidation costs (P6,000) 97,500 58,500 39,000
25,500 (15,300) (10,200)
Absorption of AA’s potential deficit balance: (25,500)
BB: (P25,500 x 3/5 = P15,300) 15,300
CC: (P25,500 x 2/5 = P10,200) 10,200
Safe payment, February 27, 20x4 -0- -0- -0-
Note that the computation of safe payments on February 27, 20x4, resulted in no payments to partners. This is
due to the large book value of Other Assets still unrealized and the reservation of the $6,000 cash on hand for
possible future liquidation expenses.
Problem III: Cash Distribution Plan

PET Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power Capital Accounts
PP EE TT PP EE TT
Profit and loss
percentages 50% 30% 20%
Preliquidation
capital balances (55,000) (45,000) (24,000)
Loss absorption
Power (Capital
balances /
Loss percent) (110,000) (150,000) (120,000)
Decrease highest LAP

to next highest:
EE
(P30,000 x .30) 30,000 9,000
(110,000) (120,000) (120,000) (55,000) (36,000) (24,000)
Decrease LAPs
to next highest:
EE
(P10,000 x .30) 10,000 3,000
TT
(P10,000 x .20) 10,000 2,000
(110,000) (110,000) (110,000) (55,000) (33,000) (22,000)
Summary of Cash Distribution

(If Offer of P100,000 is Accepted)
Accounts PP EE TT
Payable 50% 30% 20%
Cash available P106,000
First (17,000) P17,000
Next (9,000) P 9,000
Next (5,000) 3,000 P 2,000
Additional paid
in P&L ratio (75,000) ______ P37,500 22,500 15,000
P -0- P17,000 P37,500 P34,500 P17,000
Problem IV
PET Partnership
Statement of Partnership Liquidation and Realization
From July 1, 20x4, through September 30, 20x4
Capital
Noncash Accounts PP EE TT
Cash Assets Payable 50% 30% 20%
Preliquidation balances 6,000 135,000 (17,000) (55,000) (45,000) (24,000)
July:
Assets Realized 26,500 (36,000) 4,750 2,850 1,900
Paid liquidation costs (1,000) 500 300 200
Paid creditors (17,000) 17,000
14,500 99,000 -0- (49,750) (41,850) (21,900)
Safe Payments (Sch. 1) (6,500) 6,500
8,000 99,000 -0- (49,750) (35,350) (21,900)
August:
Equipment withdrawn (4,000) (3,000) (1,800) 8,800
(allocate P6,000 gain)
6,500 95,000 -0- (52,000) (36,700) (12,800)
Safe Payments (Sch. 2) (4,000) 4,000
2,500 95,000 -0- (52,000) (32,700) (12,800)
September:
Assets Realized 75,000 (95.000) 10,000 6,000 4,000
76,500 -0- -0- (41,500) (26,400) (8.600)
Payments to partners (76,500) 41,500 26,400 8,600
Postliquidation balances -0- -0- -0- -0- -0- -0-
PET Partnership
Schedules of Safe Payments to Partners
PP EE TT
Schedule 1: July 31, 20x4 50% 30% 20%
Possible loss on noncash assets (P99,000) 49,500 29,700 19,800
Cash retained (P8,000) 4,000 2,400 1,600
3,750 (9,750) (500)
Absorption of Pen's potential deficit (3,750)
EE: P3,750 x .30/.50 2,250
TT: P3,750 x .20/.50 1,500
-0- (7,500) 1,000
Absorption of TT’s potential deficit (1,000)
EE P1,000 x .30/.30 1,000
Safe payment -0- (6,500) -0-
Schedule 2: August 31, 20x4

Possible loss on noncash assets (P95,000) 47,500 28,500 19,000
Cash retained (P2,500) 1,250 750 500
(3,250) (7,450) 6,700
Absorption of TTs’ potential deficit (6,700)
PP: P6,700 x .50/.80 4,188
EE: P6,700 x .30/.80 2,512
938 (4,938) -0-
Absorption of PPs potential deficit (938)
EE: P938 x .30/.30 938
Safe payment -0- (4,000) -0-
Problem V
DSV Partnership
Statement of Partnership Realization and Liquidation — Installment Liquidation
From July 1, 20x4, through September 30, 20x4
Capital Balances
Noncash D S V
Cash Assets Liabilities 50% 30% 20%
Preliquidation balances, 6/30 50,000 670,000 (405,000) (100,000) (140,000) (75,000)
July, 20x4: Sale of assets and

distribution of P120,000 loss (510,000) 60,000 36,000 24,000
390,000
440,000 160,000 (405,000) (40,000) (104,000) (51,000)
Liquidation expenses (2,500) 1,250 750 500
437,500 160,000 (405,000) (38,750) (103,250) (50,500)
Payment to creditors (405,000) 405,000
32,500 160,000 -0- (38,750) (103,250) (50,500)
Payments to partners (Sch. 1) (22,500) 22,500
10,000 160,000 -0- (38,750) (80,750) (50,500)
August, 20x4: Sale of assets &
distribution of P13,000 loss 22,000 (35,000) 6,500 3,900 2,600
32,000 125,000 -0- (32,250) (76,850) (47,900)
Liquidation expenses (2,500) 1,250 750 500
29,500 125,000 -0- (31,000) (76,100) (47,400)
Payments to partners (Sch. 2) (19,500) 13,700 5,800
10,000 125,000 -0- (31,000) (62,400) (41,600)
September, 20x4: Sale of
assets
distribution of P70,000 loss 55,000 (125,000) 35,000 21,000 14,000
65,000 -0- -0- 4,000 (41,400) (27,600)
Allocate D's deficit to S and V (4,000) 2,400 1,600
65,000 -0- -0- -0- (39,000) (26,000)
Liquidation expenses (2,500) 1,500 1,000
62,500 -0- -0- -0- (37,500) (25,000)
Payments to partners (62,500) -0- 37,500 25,000
Postliquidation balances -0- -0- -0- -0- -0- -0-
DSV Partnership
Schedule of Safe Payments to Partners
D S V
Schedule 1, July 31, 20x4: 50% 30% 20%
Capital balances, July 31,
Before cash distribution (38,750) (103,250) (50,500)
Assume full loss of P160,000 on
remaining noncash assets and
P10,000 in possible future
liquidation expenses 85,000 51,000 34,000
46,250 (52,250) (16,500)
Assume D's potential deficit
must be absorbed by S and V: (46,250)
30/50 x P46,250 27,750
20/50 x P46,250 18,500
-0- (24,500) 2,000
Assume V's potential deficit
must be absorbed by S completely 2,000 (2,000)
on July 31, 20x4 -0- (22,500) -0-
Schedule 2, August 31, 20x4:

Capital balances, August 31,
before cash distribution (31,000) (76,100) (47,400)
Assume full loss of P125,000 on
remaining noncash assets and
P10,000 in possible liquidation
Expenses 67,500 40,500 27,000
36,500 (35,600) (20,400)
Assume D's potential deficit
must be absorbed by S and V: (36,500)
30/50 x P36,500 21,900
20/50 x P36,500 14,600
Safe payments to partners -0- (13,700) (5,800)
Problem VI: Cash Distribution Plan (or better use the format presented in the discussion)
DSV Partnership
Cash Distribution Plan
June 30, 20x4
Loss Absorption Power Capital Accounts
D S V D S V
Profit and loss sharing ratio 50% 30% 20%

Preliquidation capital balances (100,000) (140,000) (75,000)
Loss absorption power (LAP)
capital accounts /
loss sharing percentage (200,000) (466,667) (375,000)
Decrease highest LAP to next

highest LAP:
Decrease S by P91,667 91,667
(Cash distribution: P91,667 x .30) 27,500
(200,000) (375,000) (375,000) (100,000) (112,500) (75,000)
Decrease LAP to next highest

level:
Decrease S by P175,000 175,000
Cash distribution: P175,000 x .30) 52,500
Decrease V by P175,000 175,000
Cash distribution: P175,000 x .20) 35,000
(200,000) (200,000) (200,000) (100,000) (60,000) (40,000)

Decrease LAPs by distributing
cash in the P/L sharing ratio 50% 30% 20%
Summary of Cash Distribution Plan

(Estimated on June 30, 20x4)
Liquidation
Creditors Expenses D S V
1. First P405,000 100%
2. Next P10,000 100%
3. Next P27,500 100%
4. Next P87,500 60% 40%
5. Any additional distributions
in the partners' profit
and loss ratio 50% 30% 20%
b. Confirmation of cash distribution plan
DSV Partnership
Capital Account Balances
June 30, 20x4, through September 30, 20x4
D S V
Profit and loss ratio 50% 30% 20%
Preliquidation balances, June 30 (100,000) (140,000) (75,000)
July loss of P120,000 on disposal of assets
and P2,500 paid in liquidation costs 61,250 36,750 24,500
(38,750) (103,250) (50,500)
July 31 distribution of P22,500 of
available cash to partners (Sch. 1)
First P22,500 of P27,500 layer:
100% to S 22,500
(38,750) (80,750) (50,500)
August loss of P13,000 on disposal of
assets and P2,500 paid in
liquidation costs 7,750 4,650 3,100
(31,000) (76,100) (47,400)
August 31 distribution of P19,500 of
Remaining P5,000 of P27,500 layer
of which P22,500 paid on July 31:
100% to S 5,000
Next $14,500 of P87,500 layer:
60% to S 8,700
40% to V 5,800
(31,000) (62,400) (41,600)
September loss of P70,000 on disposal of
assets and P2,500 paid in liquidation
Costs 36,250 21,750 14,500
5,250 (40,650) (27,100)
Distribution of D's deficit (5,250) 3,150 2,100
-0- (37,500) (25,000)
September 30 distribution of P62,500 of
Next P62,500 of P87,500 layer of which
P14,500 paid on August 31:
60% to S 37,500
40% to V 25,000
Postliquidation balances -0- -0- -0-
Schedule 1, July 31, 20x4: Computation of P22,500 of cash available to be distributed to partners on
July 31, 20x4:
Cash balance, July 1, 20x4 P 50,000
Cash from sale of noncash assets 390,000
Less: Payment of actual liquidation expenses (2,500)
Less: Payments to creditors (405,000)
Less: Amount held for possible
future liquidation expenses (10,000)
Cash available to partners, July 31, 20x4 P 22,500
Schedule 2, August 31, 20x4: Computation of P19,500 of cash available to be distributed to partners
on August 31, 20x4:
Cash balance, August 1, 20x4 P10,000

Cash from sale of noncash assets 22,000
Less: Amount held for possible
future liquidation expenses (10,000)
Cash available to partners, August 31, 20x4 P 19,500
Schedule 3, September 30, 20x4: Computation of P62,500 of cash available to be distributed to

partners on September 30, 20x4:
Cash balance, September 1, 20x4 P10,000

Cash received from sale of noncash assets 55,000
Cash available to partners, September 30, 20x4 P62,500
Problem VII
Cash distribution program:
Creditors Ames Beard Craig
First P 50,000 100%
Next 34,000 100%
Next 48,000 33 1/3% 66 2/3%
All over P132,000 40% 20% 40%
Working paper for cash distributions to partners during liquidation (not required):
Ames Beard Craig
Capital balances before liquidation P60,000 P80,000 P92,000
Income-sharing ratio 4 4 2
Capital per unit of income sharing P15,000 P40,000 P23,000
Reduce Beard's capital to next highest capital for Craig ______ (17,000) ______
Reduce Beard's and Craig's capital to Ames's capital ______ (8,000) (8,000)
Problem VIII
Cash 60,000
Quanto, Capital 5,000
Rollo, Capital 3,000
Simms, Capital 2,000
Assets 70,000
To record realization of assets at a loss of $10,000, divided
amount Quanto, Rollo, and Simms in 5:3:2 ratio, respectively.
Liabilities 30,000
Cash 30,000
To record payment to creditors.
Loan Payable to Quanto 9,500

Rollo, Capital 10,500
Simms, Capital 5,000
Cash 25,000
To record payment to partners, computed as follows:
Quanto Rollo Simms

Capital (including Quanto's
loan of P10,000)
before liquidation P42,000 P30,000 P18,000
Loss on realization of assets (5,000) (3,000) (2,000)
Balances P37,000 P27,000 P16,000
Maximum potential
additional
loss (P5,000 +
P50,000 = P55,000)
divided in 5:3:2 ratio (27,500) (16,500) (11,000)
Cash payments P 9,500 P10,500 P 5,000

1. c
JJ CC TT Total
Profit ratio 40% 50% 10% 100%
Prior capital (160,000) (45,000) (55,000) (260,000)

Loss on sale
of inventory 24,000 30,000 6,000 60,000
(136,000) (15,000) (49,000) (200,000)
2. a
Peter Paul Mary Total
Capital balances 300,000 350,000 400,000 1,050,000
Loss on sale of assets
(475,000 – 600,000) – 4:4:2 ( 50,000) (50,000) (25,000) (125,000)
250,000 300,000 375,000 925,000
Possible loss for unrealized assets
P1,000,000 – P600,000 = 400,000 160,000 160,000 80,000 400,000
(90,000 140,000 295,000 525,000
3. d
4. d AA BB CC
Capital balances 37,000 65,000 48,000
Divided by: Profit and loss ratio 40% 40% 20%
Loss absorption power 92,500 162,500 240,000
Loss to reduce CC to BB:
(77,500 x .20 = 15,500) 77,500
Balances 92,500 162,500 162,500
Loss to reduce BB & CC to AA:
(B:70,000 x .40 = 28,000) 70,000
(C:70,000 x .20 = 14,000) 70,000
Balances 92,500 92,500 92,500
Cash of P20,000 after settlement of liabilities: CC receives first P15,500;

remaining P4,500 split 2/3 to BB and 1/3 to CC
5. d Cash of P17,000: CC receives first P15,500; remaining P1,500 split 2/3 to BB and
1/3 to CC.
6. a If all partners received cash after the second sale, then the remaining 12,000 is
distributed in the loss ratio.
7. b
A B C Total
Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized NCA (36,000) (36,000) (18,000) 90,000
(15,000) 13,000 22,000 20,000
Possible insolvency loss (2:1) 15,000 (10,000) ( 5,000) 0
3,000 17,000
8. b
A B C Total
Loss on sale (2:2:1); [90 – 50] (16,000) ( 16,000) ( 8,000) (40,000)
21,000 49,000 40,000 110,000
Possible loss P90,000, unrealized NCA
plus P3,000 = P93,000 (37,200) (37,200) (18,600) 93,000
(16,200) 11,800 21,400 17,000
Possible insolvency loss (2:1) 16,200 (10,800) ( 5,400) 0
1,000 16,000 17,000
9. a AE BT KT
Profit and loss ratio 40% 30% 30%
Loss of P100,000 40,000 30,000 30,000
Remaining equities -0- (150,000) -0-
AE will receive nothing; the entire P150,000 will be paid to BT.
10. c
11. d
12. d
13. c
14. a
CC DD EE Total
Profit and loss ratio 5/10 3/10 2/10 10/10
Beginning capital 80,000 90,000 70,000 240,000
Actual loss on assets (5:3:2) (15,000) (9,000) (6,000) ( 30,000)
65,000 81,000 64,000 210,000
Possible loss – unrealized NCA ( 50,000) (30,000) (20,000) ( 20,000)
Safe payments 15,000 51,000 44,000 190,000
15. c
X Y Z
Divided by: 50% 30% 20%
Loss absorption abilities 260,000 260,000 500,000
16. a
The loan payable to AA has the same legal status as the partnership’s other
liabilities. After payment of the loan, then any available cash can be
distributed to the partners using the safe payments computations.
17. a
D R N J
Capital balances 72,000 32,000 52,000 24,000
Divided by: Profit and loss ratio 40% 20% 20% 20%
Loss absorption power 180,000 160,000 260,000 120,000
Loss to reduce N to D:
(80,000 x .20 = 16,000) 80,000 ____0
18. d – Harding, P6,107; Jones, P12,275

H J S Total
Capital balances 20,000 22,000 (10,000) 32,000
Potential loss from Sandy deficit (5,882) (4,118) 10,000 0
14,118 17,882 0 32,000
Loss to reduce H and J:
(50:35) (8,011) (5,607) (13,618)
Balances 6,107 12,275 13,382
Note:
1. Regardless there is a forthcoming contribution to be made by Sandy, it is assumed that the P10,000 deficit may
not be recovered for purposes of distribution of cash.
2. The P13,382 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Harding
and Jones is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program

H J S
Capital balances 20,000 22,000 (10,000)
Additional contribution 0 0 10,000
Capital balances 20,000 22,000
Divided by: Profit and loss ratio 50/85 35/85
Loss absorption power 34,000 53,429
Loss to reduce JJ to HH:
(19,428 x 35/85 = 8,000) 19,428
Balances 34,000 34,000

Less: Priority I to Jones (P19,428 x 35/85) 8,000 P 8,000
P10,382
Less: P& L (50:35) (10,382) P 6,107 4,275
P6,107 P 12,275
19. c
20. b
21. c
A B C Total
Loan 20,000 ______ ______ 20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000) ( 15,000) (15,000) (45,000)
75,000 15,000 35,000 125,000
22. b –liabilities should be paid first, then the balance of P30,000 should be given to Able since he is the
one entitled to the first priority.
INTERESTS PAYMENTS______
A B C A B C Total
Balances before realization
Loans………………….. P 20,000
Capital………………... 70,000 P 30,000 P 50,000
Total interests………... P 90,000 P 30,000 P 50,000
Divided by: P&L ratio………… 1/3 1/3 1/3
Loss absorption ability……….. P270,000 P 90,000 P150,000
Priority I…………………………. 120,000 - _______ P40,000 P40,000
P150,000 P90,000 P150,000
Priority II………………………… 60,000 0 60,000 20,000 0 P20,000 40,000
P 90,000 P90,000 P 90,000 P60,000 P 0 P20,000 P80,000
23. d
A B C Total
Loan 20,000 ______ ______ 20,000
Total interests 90,000 30,000 50,000 170,000
Loss on sale (240,000 – 195,000) (15,000) ( 15,000) (15,000) (45,000)
75,000 15,000 35,000 125,000
Payment of loans to partner (20,000) ______ _____ (20,000)
55,000 15,000 35,000 105,000
Asset received ______ ______ (30,000) (30,000)
Payment to partners after payment of loan 55,000 15,000 5,000 75,000
Note: The requirement is payment to partners after outside creditors and loans to partners had been paid, therefore, the
payment to partners is in so far as capital is concerned.
24. a
D E F
Less: Machine, at fair value ______ (35,000) ______
Divided by: Profit and loss ratio 1/3 1/3 1/3
Loss absorption power 120,000 165,000 90,000
Loss to reduce E to D:
(45,000 x 1/3 = 15,000) (45,000) ____0
Balances 120,000 120,000 90,000
25. c
K M B J
(170,000 x .10 = 17,000) 170,000 ____0
Balances 147,500 130,000 170,000 170,000
26. c
C P H M
(15,000 x .20 = 3,000) 15,000 ____0
Balances 150,000 90,000 200,000 200,000
27. c - the P16,000 available cash can be distributed but should be done under the assumption that all
deficit balances will be total losses. After offsetting JJ loan, the two deficits total P4,000. FF and RR, the
two partners with positive capital balances, share profits in a 30:20 relationship (the equivalent of a
60%:40% ratio). FF would absorb P2,400 of the potential loss with RR being allocated P1,600. The
remaining capital balances (P10,600 and P5,400) are safe capital balances and those amounts can
be immediately distributed.
or, alternatively:
W J F R
Capital balances (2,000) (5,000) 13,000 7,000
Loan ______ 3,000 _______ __
Total interests (2,000) (2,000) 13,000 7,000
Potential insolvency loss (3:2) 2,000 2,000 ( 2,400) (1,600)
10,600 5,400
28. b
A B C Total
Capital balances (5,000) 18,000 6,000 19,000
Potential loss from A deficit (5:3) 5,000 (3,125) (1,875) 0
14,875 4,125 19,000
Loss to reduce H and J:
(5:3) (8,750) (5,250) (14,000)
6,125 (1,125) 5,000
Possible insolvency loss (1,125) 1,125 0
5,000
29. a – installment liquidation (refer for more problems in Chapter 5)
INTERESTS PAYMENTS ___
P Q R P Q R Total
Totall interests………... P 70,000 P 50,000 P100,000
Divided by: P&L ratio………… 20% 40% 40%
Loss absorption abilities……….. P350,000 P125,000 P250,000
Priority I…………………………. (100,000) 0 P20,000 P20,000
P250,000 P125,000 P250,000
Priority II………………………… (125,000) (125,000) 25,000 P50,000 75,000
P125,000 P125,000 P125,000 P75,000 P 4,500 P50,000 P95,000
Cash, beginning P 90,000

Add (deduct):
Liquidation expenses paid ( 8,000)
Payment of liabilities (170,000)
Proceeds from sale of assets (?) 108,000
Payment to partner before payment to Renquist (priority I only) P 20,000
30. d – Justice P15,533

J Z D Total
Capital balances 23,000 22,000 (14,000) 31,000
Potential loss from Douglass (40:35) (7,467) (6,533) 14,000 0
15,533 15,467 0 31,000
Note:
1. Regardless there is a forthcoming contribution to be made by Douglass, it is assumed that the P14,000 deficit
may not be recovered for purposes of distribution of cash.
2. The P31,000 cannot be distributed in accordance with profit and loss ratio for reason that the capital balances of Justice
and Zobart is not the same with the P&L ratio (H: 20/42 =48%; J: 22/42 = 52%)
or, alternatively: Using Cash Payment Priority Program (refer to Chapter 5)

J Z D
Capital balances 23,000 22,000 (14,000)
Additional contribution 0 0 14,000
Capital balances 23,000 22,000
Divided by: Profit and loss ratio 40/75 35/75
Loss absorption power 43,125 47,143
Loss to reduce Z to D:
(4,018 x 35/55 = 1,875) 4,018
Balances 43,125 43,125

Less: Priority I to Douglass (P4,018 x 35/75) 1,875 P 1,875
P29,125
Less: P& L (40:35) (29,125) P15,533 13,592
P15,533 P15,467
31. d
D K R D K R Total
Loans………………….. P 0 P 10,000 P(20,000)
Capital………………... 170,000 170,000 100,000
Total interests………... P170,000 P180,000 P 80,000
Divided by: P&L ratio………… 50% 30% 20%
Loss absorption abilities……….. P340,000 P600,000 P400,000
Priority I…………………………. - (200,000) 0 P60,000 P60,000
P340,000 P400,000 P400,000
Priority II………………………… - (60,000) (60,000) 18,000 18,000 36,000
P340,000 P340,000 P340,000 P – P 78,000 P18,000 P 96,000
Cash received by the partner Kemp P 60,000

Add (deduct):
Liabilities paid 250,000
Expenses paid 5,000
Contingency 10,000
Cash, beginning (120,000)
Proceeds from sale of other assets P205,000
32. b
T N D T N D Total
Loans………………….. P 0 P 0 P 0
Capital………………... 22,000 15,500 14,000
Total interests………... P 22,000 P15,500 P 14,000
Loss absorption abilities……….. P 44,000 P62,000 P 56,000
Priority I………………………… - ( 6,000) 0 P 1,500 P1,500
P 44,000 P56,000 P56,000
Priority II………………………… - (12,000) (12,000) __ 3,000 P 3,000 6,000
P 44,000 P44,000 P44,000 P – P 4,500 P 3,000 P 7,500
Cash received by Tree P 6,250

Divided by: P & L ratio 2/4
Amount in excess of P7,500 P 12,500
Total cash payments – refer to program 7,500
Payment to partners P 20,000
33. d
Cash, beginning P 12,000
Add (deduct):
Proceeds from sale of certain assets 32,000
Liquidation expenses paid ( 1,000)
Payment of liabilities ( 5,400)
Payment to partners (refer to No. 30) ( 20,000)
Cash withheld P 17,600
34. d
Priority
Creditors Mattews Norell Reams Total
First P300,000………. P300,000 P300,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 22,000 34,000 44,000 100,000
P300,000 P108,000 P58,000 P84,000 P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
INTERESTS PAYMENTS______
P Q R P Q R Total
Loans………………….. P 6,000 P(10,000)
Capital………………... 24,000 P36,000 60,000
Total interests………... P30,000 P36,000 P50,000
Loss absorption abilities…….. P100,000 P120,000 P125,000
Priority I…………………………. - - (5,000) P 2,000 P 2,000
P100,000 P120,000 P120,000
Priority II………………………… - (20,000) (20,000) P6,000 8,000 14,000 (d)
P100,000 P100,000 P100,000 P – P6,000 P10,000 P16,000
35. d
Priority
Creditors Mattews Norell Reams Total
First P300,000………. P300,000 P300,000
Next P80,000 (7:3)… P56,000 P24,000 80,000
Next P70,000 (3:4)… 30,000 P40,000 70,000
Remainder*……….. 22,000 34,000 44,000 100,000
P300,000 P108,000 P58,000 P84,000 P550,000 (d)
*P550,000 – P300,000 – P80,000 – P70,000 = P100,000
Quiz - V
1. M= 0, K= 25,000, C= 0 - this problem is more on installment liquidation principles.
M K C Total
Loss on sale (50%:30%:20%) (162,500) (97,500) (65,000) *(325,000)
( 62,500) 77,500 10,000 **25,000
Additional loss (3:2) 62,500 (37,500) (25,000) ______-
40,000 (15,000) 25,000
Additional loss (15,000) 15,000 -0-
25,000
*balancing figure – total reduction in capital
Payment to partners: P200,000 – P25,000 – P150,000 = P25,000**
2. Homer, P54,000; Marge, P84,000; Bart, P177,000.
3. P150,000
4. Stan, P0; Kenney, P10,000; Cartman, P0
5. P500,000 = (P147,000 + P28,000)/.35

6. P1,040,000 = (P260,000 / .25)
7. P675,000 = (P285,000 - P15,000)/.40
8. a
9. Perry: P15,000; Quincy: P51,000; Eddy: P44,000
10.
11. b
12. P33,000
First allocation (H) (P400,000 - P380,000) (.30) P 6,000
Second allocation (H) (P380,000 - P300,000) (.30) P24,000
(F) (P380,000 - P300,000) (.25) 20,000 44,000
Third allocation, share based on profit and loss ratios 10,000
Harold: P6,000 + P24,000 + (P10,000 x .30)
13. P2,500
(F) (P380,000 - P300,000) (.25) 20,000 44,000
Sheldon: (P10,000 x .25)
14. P24,500
(F) (P380,000 - P300,000) (.25) 20,000 44,000
Fred: P20,000 + (P10,000 x .45)
15. P147,000
Losses 40% 30% 30%
Hara Ives Jack
Equities 135,000 216,000 49,000
Possible loss on
remaining assets 200,000 ( 80,000 ) ( 60,000 ) ( 60,000 )
Contingencies 10,000 ( 4,000 ) ( 3,000 ) ( 3,000 )
Subtotals 51,000 153,000 ( 14,000 )
Eliminate Jack’s
debit balance ( 8,000 ) ( 6,000 ) 14,000
Safe payments 43,000 147,000 0
16. P495,000 = (P162,000 + P36,000) / .40

17. c
P Q R
68,400 46,800 96,800
Divided by: 20% 40% 40%
Loss absorption abilities 342,000 117,000 242,000
Selling Price 183,000

Book value 300,000
Loss (117,000)
or,
Quincy capital before liquidation………………………………………………..P 50,000
Less: Share in liquidation expenses (P8,000 x 40%)………………………….… 3,200
Quincy capital before realization of non-cash assets……………………….P 46,800
Less: Cash received by Quincy (minimum)……………………………………. 0
Share in the loss on realization……………………………………………………P 46,800
Divided by: Profit and loss ratio………………………………………………….. 40%
Loss on realization…………………………………………………………………..P117,000
Less; Non-cash assets………………………………………………...................... 300,000
Proceeds from sale…………………………………………………………………P183,000
18. P29,000
(P14,000 Warle capital + P10,000 Xin capital +
P6,000 Yates capital + P5,000 Loan from Xin -
P6,000 Loan to Warle)
19. P2,000
(P4,000 beginning balance + P3,000 cash collected + P4,000 for inventory
sold - P7,000 of accounts payable - P2,000 for expenses)
20. P2,000
Warle Xin Yates Total
Equities,Jun 30 8,000 15,000 6,000 29,000
Inventory loss ( 2,000 ) ( 3,000 ) ( 5,000 ) ( 10,000 )
Contingency fund ( 400 ) ( 600 ) ( 1,000 ) ( 2,000 )
Subtotals 5,600 11,400 0 17,000
Possible losses on
remaining assets ( 3,000 ) ( 4,500 ) ( 7,500 ) ( 15,000 )
Subtotals 2,600 6,900 ( 7,500 ) 2,000
Eliminate Yates’s
Deficit ( 3,000 ) ( 4,500 ) 7,500
Subtotals ( 400 ) 2,400 0 2,000
Eliminate Warle’s
Deficit 400 ( 400 )
Cash distribution 0 2,000 0 2,000
THEORIES
True or False
1. False 6. True 11. False 16. False
2. True 7. True 12. True 17. True
3. False 8. False 13. False
4. False 9. True 14. True
5. True 10. True 15, True
1. An installment liquidation occurs over an extended period of time and partners generally receive interim
(installment) distributions.
3. The accountant must ensure that the partnership will have sufficient cash to pay current and prospective
creditors before distributions are made to partners.
4. It may not be prudent for the accountant to pay creditors as quickly as possible. However, funds should be
set aside so that creditors can be paid in a timely manner.
8. The size of the capital account must be evaluated in conjunction with the residual profit and loss ratio to
determine which partner is least likely to have a deficit occur during the partnership liquidation.
11. The cash distribution plan indicates how a distribution will be allocated among the partners but it does not
guarantee that a distribution will be made.
13. The loss absorption power indicates the amount of loss the partnership would have to occur before that
partner’s capital account balance is reduced to zero.
16. The schedule of safe payments can be used for any partnership liquidation but it provides the same
distribution as the cash distribution plan under most circumstances.
Multiple Choice
18. b 23. a 28. b 33. b 38. c 43. d
19. b 24. d 29. e 34. d 39. d 44. b
20. a 25. d 30. a 35. b 40. b 45. c
21. a 26. a 31. a 36. a 41. a 46. d
22. d 27. d 32. c 37. b 42. b
Chapter 6
Problem I
1. Statement of Affairs - Formal
MINER COMPANY
Statement of Affairs
May 31, 2012
Book Value Realizable
Assets Value
Assets Pledged with Fully Secured Creditors:
P 50,000 Notes Receivable P39,800
1,200 Accrued Interest Rec. 1,000 P 40,800
Notes Payable 40,000

Accrued Interest Pay. 800 40,800
119,000 Building 75,000

Note Payable 20,000
Accrued Interest Pay. 800 20,800 P 54,200
Assets Pledged with Partially Secured Creditors:

13,200 Equipment 4,200
Note Payable 10,000
Free Assets
6,000 Cash 6,000
61,000 Accounts Receivable 50,000
60,000 Inventory 30,000
1,100 Prepaid Insurance 400
8,500 Goodwill 0
Total Net Realizable Value 140,600
Liabilities having Priority – Wages 6,000
Taxes 2,400 8,400
Net Free Assets 132,200
Estimated Deficiency to Unsecured Creditors 53,600

P 320,000 P 185,800
Book
Value Equities Unsecured
Liabilities Having Priority:
P 6,000 Accrued Wages P 6,000
2,400 Taxes Payable 2,400 P 8,400
Fully Secured Creditors:

60,000 Notes Payable 60,000
1,600 Accrued Interest Payable 1,600 61,600
Partially Secured Creditors:

10,000 Note Payable 10,000
Equipment 4,200 P 5,800
Unsecured Creditors:
170,000 Accounts Payable 170,000
10,000 Notes Payable 10,000
Stockholders’ Equity
110,000 Common Stock
( 50,000) Retained Earnings (Deficit)
P 320,000 P 185,800
2. Deficiency Statement to determine estimated deficiency to unsecured creditors:
Deficiency Account
May 31, 2012
Estimated Losses: Estimated Gains:
Accounts Receivable P 11,000 Common Stock P 110,000
Notes Receivable 10,400 Retained Earnings (50,000)
Inventory 30,000 Estimated Deficiency to
Buildings 44,000 Unsecured Creditors 53,600
Equipment 9,000
Prepaid Insurance 700
Goodwill 8,500
P113,600 P 113,600
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%
Problem II
1. Formal
Down Dog Corporation
Statement of Affairs
June 30, 2014
Deficiency
Account
Book Value Assets Realizable Value (Loss/Gain)
Pledged with partially secured creditors
P165,000 Equipment-net P87,000 (78,000)
Less: Note payable and accrued interest (96,000) P 0
Unsecured amount (See below) (9,000)
Free Assets
3,000 Cash 3,000
72,000 Accounts receivable-net 48,000 (24,000)
60,000 Inventories 72,000 12,000
Total net realizable value 123,000
Less: Priority liabilities – wages payable (45,000)
Total available for unsecured creditors 78,000
______ Estimated deficiency to unsecured creditors 30,000 ______
P300,000 P108,000 (90,000)
Unsecured
Book Value Equities Liabilities
Priority liabilities
P 45,000 Wages payable (assumed under
P4,650 per employee) P 45,000
Partially secured creditors

96,000 Note payable and accrued interest P 96,000
Less: Equipment pledged as security (87,000) P 9,000
Unsecured creditors
72,000 Accounts payable 72,000
27,000 Rent payable 27,000
Stockholders’ equity
180,000 Capital stock 180,000
(120,000) Retained earnings (deficit) ______ (120,000)
P300,000 P108,000 P 60,000
Estimated Deficiency P(30,000)
2. Estimated payments per dollar for unsecured creditors

Distribution to partially secured and unsecured priority creditors:
Note payable and interest P87,000
Administrative expenses 24,000
Wages payable 45,000 (156,000)
Available to unsecured nonpriority creditors P 54,000
Note payable and interest (unsecured portion) P 9,000

Accounts payable 72,000
Rent payable 27,000
Unsecured nonpriority claims P108,000
(P54,000 / P108,000 = P0.50 per peso)
Expected recovery for each class of claims

Partially secured
Note payable and interest
Secured portion P87,000
Unsecured portion (P9,000 × 0.50) 4,500 P91,500
Unsecured priority
Administrative expenses P24,000
Wages payable 45,000 69,000
Unsecured nonpriority
Accounts payable (P72,000 × 0.50 P36,000
Rent payable (P27,000 × 0.50) 13,500 49,500
Total payments P210,000
Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000) P1,275,000
Allocated to:
Fully secured creditors (316,000)
Partially secured creditors (300,000)
Unsecured creditors with priority (100,000)
Remainder available to general unsecured creditors P559,000
Payment rate to general unsecured creditors

(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000)) 44.2%
Realizable value of assets:

Assets pledged to fully secured creditors P635,000
Assets pledged to partially secured creditors 300,000
Free assets 340,000
Total realizable value P1,275,000
Amounts to be paid to:

Fully secured creditors P316,000
Partially secured creditors [P300,000 + (0.442 × P100,000)] 344,200
Unsecured creditors with priority 100,000
General unsecured creditors (0.442 × P1,165,000) 514,800*
Total P1,275,000
*Rounded P130
Problem IV
Free Assets:
Current Assets ................................................................................. P 35,000
Buildings and Equipment .............................................................. 110,000
Total ........................................................................................ P145,000
Liabilities with Priority:

Administrative Expenses ................................................................ P 20,000
Salaries Payable (only P3,000 per employee) ........................... 6,000
Income Taxes ................................................................................. 8,000
Total ........................................................................................ P 34,000
Free Assets After Payment of Liabilities with Priority

(P145,000 – P34,000) ...................................................................... P111,000
Unsecured Liabilities
Notes Payable (in excess of value of security) ......................... P 30,000
Accounts Payable .......................................................................... 85,000
Bonds Payable ................................................................................ 70,000
Total ........................................................................................ P185,000
Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %

Payment On Notes Payable:
Value of Security (land) ................................................................ P 90,000
60% of Remaining P30,000 ............................................................ 18,000
Total Collected by holders ........................................................... P108,000
Problem V
Free Assets:
Cash ........................................................................................ P30,000
Receivables (30 percent collectible) .......................................... 15,000
Inventory ........................................................................................ 39,000
Land (value in excess of secured note:
P120,000 – P110,000) ................................................................ 10,000
Total ........................................................................................ P94,000
Less: Liabilities with priority

Salary payable (below maximum)........................................ (10,000)
Free assets available ................................................................ P84,000
Unsecured Liabilities:
Accounts payable .......................................................................... P90,000
Bonds payable (less secured interest in
building: P300,000 – P180,000) ................................................ 120,000
Unsecured liabilities .................................................................. P210,000
Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%
Amounts to be paid for:

Salary payable (liability with priority to be paid
in full) ........................................................................................ P10,000
Accounts payable (unsecured—will collect 40%
of debts of P90,000).................................................................. P36,000
Note payable (fully secured by land—will collect
entire balance) ........................................................................ P110,000
Bonds payable (partially secured—will collect
P180,000 from building and 40 percent of the
remaining P120,000) ................................................................. P228,000
Problem VI
Total % of Total
Amounts Claims
Expected to Expected to
Total Creditor’s be be
Class of Creditors Claims Recovered Recovered
Fully secured liabilities 183,600 183,600 100.0
Partially secured liabilities 54,600 51,720 94.7
Unsecured liabilities with priority 30,810 30,810 100.0
Unsecured liabilities without 182,500 116,800 64.0
priority
Problem VII
1. Total estimated proceeds P910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory) P150,000
Mortgage payable and interest (from
proceeds of land and building) 320,000 470,000
Total available to unsecured claimants. P440,000
Less distributions to unsecured claims
with priority:
Wages payable P 10,000
Taxes payable 20,000 30,000
Amount available for unsecured claims P410,000
2. Unsecured portion of notes payable and

interest (P500,000 + P30,000 – P150,000) P380,000
Total claims ofunsecured creditors P640,000
Dividend to Unsecured Creditors
P410,000 ÷ P640,000 = 64.1%

Interest P380,000
Dividend on unsecured amount  64.1%
Amount received on unsecured portion P243,580
Proceeds from receivables and inventory 150,000
Total Received P393,580
Dividend to note holders: P393,580 ÷ P530,000 = 74.3%
Problem VIII
1.
WILBUR CORPORATION
STATEMENT OF AFFAIRS
DECEMBER 31, 20x4
Assets
Estimated
Amount Estimated
Estimated Available to Gain
Current Unsecured (Loss) on
Book Value Values Claims Realization
(1) Assets pledged with fully secured
creditors:
P 40,000 Accounts receivable (net) P 40,000
Less: 10% note payable and
interest 38,500 P 1,500
50,000 Land P 65,000 P 15,000

110,000 Plant and equipment (net) 100,000 (10,000)
P165,000
Less: Mortgages payable and
interest (157,500) 7,500
(2) Assets pledged with partially

secured creditors:
20,000 Marketable securities P 16,000 (4,000)
Less: 10% note payable and
interest (20,800)
35,000 Inventory P 32,000 (3,000)

Less: Accounts payable (60,000)
(3) Free assets:

4,000 Cash P 4,000 4,000
35,000 Accounts receivable (net) 35,000 35,000
55,000 Inventory 50,000 50,000 (5,000)
6,000 Prepaid insurance 1,000 1,000 (5,000)
140,000 Plant and equipment (net) 60,000 60,000 (80,000)
48,000 Franchises 15,000 15,000 (33,000)
Estimated amount available P 174,000

Less: Creditors with priority (43,000)
Net available to unsecured creditors P 131,000
Estimated deficiency 45,000
P 543,000 (P 125,000)
Total unsecured debt P 176,000
2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%

Problem IX
Smith Company
Assets
Assets to be realized Assets Realized
Old Receivebles, net P 50,000 Old Receivbles P 28,000

Marketable Securities 20,000 New Receivbles 65,000
Old Inventory 72,000 Marketable Securities 15,000
Depreciable Assets, net 120,000 Sales of Inventory 100,000
Assets Acquired Assets Not Realized
New Receivables 100,000 Old Receivables, net 22,000

New Receivables, net 35,000
Depreciable Assets 96,000
Supplementary Items
Supplementary Charges Supplementary Credits
Old Current Payables P 31,000 Net Loss P 7,000
Liabilities
Liabilities Liquidated Liabilities to be Liquidated
Old Current Payables P 31,000 Old Current Payables P 65,000
Liabilities Not Liquidated Liabilities Incurred
Old Current Payables P 34,000 ________

P433,000 P 433,000
Problem X
Mallory Corporation
For the Three Months Ended July 31, 20x5
Assets
Assets Cash Non-Cash
Beginning balances assigned 5/1/x5 P 4,000 P720,000
Cash Receipts:
Collection of Accounts Receivable 60,000 (70,000)
Sale of inventory 170,000 (200,000)
Sale of land and building 20,000 (340,000)
Sale of machinery 70,000 (100,000)
Cash Disbursements:
Payment of salaries payable (60,000)
Partial payment of accounts pay. (170,000)
Partial payment of bank loan (70,000)
Ending balance P24,000 P10,000
Liabilities
Unsecured
Fully Partially With Without Owner's
Assets Secured Secured Priority Priority Equity
Beginning balances assigned P240,000 P270,000 P94,000 P0 P120,000
Cash Receipts:
Collection of Accounts (10,000)
Sale of inventory (30,000)
Sale of land and building (240,000) (80,000)
Sale of machinery (30,000)
Cash Disbursements:
Payment of salaries payable (60,000)
Partial payment of accounts (180,000) 10,000
Partial payment of bank loan ________ (90,000) ________ 20,000 ________
Ending balance P 0 P 0 P34,000 P30,000 P (30,000)

1. d – since there is parent and subsidiary relationship, any intercompany accounts are eliminated from
consolidated point of view.
2. a - [P90,000 + P36,000 + P10,000 – P45,000 = P91,000 total estimated amount available; P91,000 –
(P4,500 + P10,000) = P76,500 estimated amount available for unsecured, non-priority creditors;
P76,500 ÷ P90,000 = 0.85]
3. c – it is a partially secured liability
4. d – [(P1,110,000 – P780,000) + P960,000] – P210,000 = P1,080,000
5. b – P25,000 + [.30 x (P75,000 – P25,000)] = P40,000
6. d – (P555,000 – P390,000) + P480,000 = P645,000 – P105,000 = P540,000
7. b – P30,000 + [.30 x (P90,000 – P30,000)] = P48,000
8. c – [ P110,000 + (P150,000 – P110,000) x 40%] = P128,000
9. d
10. c – P60,000 + [(P120,000 + P6,000) – (P30,000 + P35,000) = P121,000
11. b - P20,000 + P80,000 + [P170,000 – (P150,000 + P7,000)] = P113,000 – (P10,000 + P10,000)

= P93,000
12. c – P93,000/P121,000 = 77% rounded.
13. a
Net Free Assets:
(P700,000 – P300,000) + P70,000 + P230,000 = P700,000 – P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 – P300,000) + P600,000 = P700,000
14. c - Pension P10,000 + Salaries P35,000 (= P10,600 + P10,950 + P10,950 + P2,500) + Taxes P80,000 + Liq.
expenses P40,000 = P165,000.
15. c
Assets to be Realized…………. P 1,375,000 Assets Realized…………………..P 1,200,000

Assets Acquired……………….. 750,000 Assets Not Realized…………… 1,375,000
Liabilities Liquidated…………. 1,875,000 Liabilities to be Liquidated…. 2,250,000
Liabilities Not Liquidated……. 1,700,000 Liabilities Assumed………….. 1,625,000
Supplementary charges/ Supplementary credits……… 2,800,000
debits……………………… 3,125,000
P 8,825,000 P 9,250,000
Net Gain……………………….. P 425,000
16. No requirement
17. c
Total Liabilities (refer to Liabilities not liquidated–No. 14)…………………… P1,700,000
+: Stockholders’ Equity (P1,500,000 – P500,000)………………………………… 1,000,000
Total LSHE = Total Assets…………………………………………………………… P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14)……….……………… 1,375,000
Cash balance, ending………………………………………………………………P1,325,000
18. P440,000
Total Free Assets:
Fully secured:
Land and building: P650,000 – (P300,000 + P20,000) = P 330,000
Free assets:
Cash 10,000
Equipment 100,000 P440,000
Or,
Total estimated proceeds P910,000
creditors:
Total available to unsecured claimants/total free P440,000
19. P410,000
Total available to unsecured claimants/total free P440,000
with priority:
Amount available for unsecured
claims/net free assets P410,000
20. P640,000 = P260,000 + [(P50,000 + P100,000) – (P500,000 + 30,000), or
Unsecured portion of notes payable and
interest (P500,000 + P30,000 – P150,000) P380,000
Total claims of unsecured creditors P640,000
21. 64.1%
Dividend to unsecured creditors
P410,000 ÷ P640,000 = 64.1%
22. P320,000 = P300,000 + P20,000
23. P393,580
interest P380,000
Dividend on unsecured amount x 64.1%
24. P30,000
25. P166,666 = P260,000 x 64.1
26. P910,247 = P320,000 + P393,580 + P30,000 + P166,666 (discrepancy of P247 due to rounding-off)
27. P230,000
Net free assets (No. 19) P410,000
Less: Unsecured creditors without priority (No. 20) 640,000
P230,000
28. P340,000 = P910,000 – P1,250,000
29. P340,000, same with No. 28, since there are no unrecorded expenses liabilities)
30. P60,675 – you may the same procedure in Nos. 18 to 29 to solve this problem, the following is the
formal presentation of statement of affairs
Estimated Estimated Amt Estimated
Net Avail for Gain or
Book Assets Realizable Unsecured (Loss)on
Value Value Creditors Liquidation
Assets pledged with fully secured
creditors:
98,500 Land and Bldg 92,800 22,200 (5,700)
5,800 Investment in Calandir 15,000 4,625 9,200
Total 107,800
Assets pledged with partially
secured creditors:
41,000 Inventory 20,000 (21,000)
43,000 Equipment 8,000 (35,000)
Free Assets:
1,850 Cash 1,850 1,850 0
21,200 Accounts Rec 17,000 17,000 (4,200)
15,000 Note Rec 15,000 15,000 0
Estimated Amount Avail for unsecured creditors
with and without priority 60,675
Less unsecured creditors with priority (3,775)
Estimated amounts for unsecured creditors
without priority (Net Free Assets):
Net Realizable Amount Avail 56,900
_______ Deficiency _______ 15,725 _______
226,350 169,650 72,625 (56,700)
Estimated Estimated Unsecured Amount

Book Liabilities Secured With Without
Value and Owners Equity Amount Priority Priority
Fully Secured Creditors:
600 Accrued Mtg Interest 600
70,000 Mortgage Payable 70,000
375 Accrued N/P Interest 375
10,000 Note Payable 10,000
Total 80,975
Partially Secured
Creditors:
50,000 Accounts Payable 28,000 22,000
Unsecured Creditors with
Priority:
3,775 Accrued Payroll 3,775
Unsecured creditors without
Priority:
40,625 Accounts Payable 40,625
10,000 Other Accrued Liabilities _______ 10,000
185,375 Totals 108,975 3,775 72,625
40,975 Owner Equity
226,350
31. P56,900 – refer to No. 30 for computation

32. P72,625 – refer to No. for computation
33. Dividend - P56,900/P72,625 = P.78 – refer to No. 30 for further computation
34. P80,975 – refer to No. 30 for computation
35. P45,160 = P28,000 + (P22,000 x 78%)
36. P3,775
37. P39,487.50 = 78% x (P40,625 + P10,000)
38. P169,397.50
No. 34……………..P 80.975
No. 35…………….. 45,160
No. 36…………….. 3,775
No. 37…………….. 39,487.50
P169,397.50 (discrepancy around P250 plus due to rounding-off)
39. P15,725 – refer to No. 30 or P56,700, estimated net loss – P40,975, owners’ equity
40. P56,700 – refer to No. 30 or P169,650 – P226,350
41. P56,700 (same with No. 40 since there are no unrecorded expenses liabilities)
42. P22,475
Liabilities
Unsecured
Assets Fully Partial With Without Owners'
Cash Noncash Secured Secured Priority Priority Equity
6/1/x5 Balances:
1,850 224,500 80,975 50,000 3,775 50,625 40,975
Cash
Receipts:
Securities Sale 16,000 (5,800) 10,200
N/R Collected 15,000 (15,000) 0
Equipment 7,000 (43,000) (36,000)
Sale
Inventory Sale 22,000 (41,000) (19,000)
Cash Disbursements:
Bank Loan (10,375) (10,375)
Part Pyt-A/P (29,000) ---------- --------- (50,000) ------- 21,000 ----------
6/30 Balance 22,475 119,700 70,600 0 3,775 71,625 (3,825)
43. P119,700 – refer to No. 42

44. P70,600 – refer to No. 42
45. None – refer to No. 42
46. P3,775 – refer to No. 42
47. P71,625 – refer to No. 42
48. (P3,825) deficit – refer to No. 42
49. P150,900
Estimated
Estimated Amount Estimated
Net Available for Gain or
Book Realizable Unsecured (Loss) on
Value Assets Value Creditor Liquidation
Assets pledged with fully secured creditors:
57,000 Accounts receivable (net) 45,000 12,600 (12,000)
174,000 Land, plant and equipment (net) 150,000 77,400 (24,000)
Total 195,000
Free assets:
6,000 Notes receivable 6,000 6,000 0
900 Accrued interest receivable 900 900 0
90,000 Inventories (90,000 x 60%) 54,000 54,000 (36,000)
Estimated amount available for
unsecured creditors with and
without priority 150,900
Less unsecured creditors with priority (26,900)
Estimated amounts for unsecured
creditors without priority:
Net realizable amount available 124,000
Deficiency 26,000
327,900 Totals 255,900 150,000 (72,000)
Estimated Estimated Unsecured

Secured Amount
Amount
Book Without
Value Liabilities and Owners' Equity With Priority Priority
Fully secured creditors:
3,600 Accrued interest 3,600
69,000 Note payable 69,000
2,400 Accrued interest 2,400
30,000 Note payable 30,000
Total 105,000
Unsecured creditors with priority:
24,900 Wages payable 24,900
Administration fees – accountant’s
0 fee 2,000
Unsecured creditors without priority:
0 Accrued interest 0
18,000 Cash overdraft 18,000
6,000 Notes payable 6,000
126,000 Accounts payable -------- -------- 126,000
279,900 Totals 105,000 26,900 150,000
48,000 Owners' equity--see Note A
327,900
Note A: Includes the effect of the P2,000 professional fee.
50. P124,000 – refer to No. 49

51. P150,000–
52. 82.67% = P124,000/P150,000
53. P105,000
54. None
55. P26,900
56. P124,005 = P150,000 x 82.67%
57. P255,900 = P72,000 + P26,900 + P124,005 (discrepancy of P5)
58. P26,000 = (P72,000 + P2,000 unrecorded ) – P48,000 or P150,000 – P124,000
59. P72,000 – refer to No. 49
60. P74,000 = P72,000, loss of realization of assets + P2,000 unrecorded expenses
Quiz - VI
1. P96,000
Claims of partially secured creditors ................................................................... P 120,000
Current value of assets pledged with these creditors ...................................... (80,000)
Deficiency that is unsecured ................................................................................. P 40,000
Claims of other unsecured creditors .................................................................... 360,000
Total unsecured creditors claims ........................................................................ P 400,000
Amount available to unsecured creditors:

Excess left over after paying fully secured creditors
(P195,000 – P150,000) ........................................................................................... P 45,000
Current value of free assets (net of P45,000 to
creditors with priority)........................................................................................... 115,000
Amount available to unsecured creditors ........................................................ P160,000
Settlement to unsecured claims per dollar (P160,000/P400,000) ................... P .40
Total distribution to partially secured creditors:

Current value of assets pledged ........................................................................ P 80,000
Deficiency of P40,000 × P.40 ................................................................................ 16,000
P 96,000
2. P144,000 = P360,000 x 40%
3. P56,000
Claims of partially secured creditors ................................................................... P 90,000
Current value of assets pledged with these creditors ...................................... (50,000)
Deficiency that is unsecured ................................................................................. P 40,000
Claims of other unsecured creditors .................................................................... 200,000
Total unsecured creditors claims ........................................................................ P 240,000
Amount available to unsecured creditors:

Excess left over after paying fully secured creditors
(P300,000 – P250,000) ........................................................................................... P 50,000
Current value of free assets (net of P60,000 to
creditors with priority)........................................................................................... (14,000)
Amount available to unsecured creditors ........................................................ P 36,000
Settlement to unsecured claims per peso (P36,000/P240,000) ....................... P .15
Total distribution to partially secured creditors:

Current value of assets pledged ........................................................................ P 50,000
Deficiency of P40,000 × P.15 ................................................................................ 6,000
P 56,000
4. P30,000 = P200,000 x 15%
5. P35,000 = P20,000 + (P70,000 – P20,000) x 30%
6. P96,000 = Free assets P220,000 - priority claims P100,000 = P120,000
P120,000/P300,000 unsecured = payment of 40% on unsecured peso
40% x P240,000 A/P = P96,000
7. P474,000 = Land and building sold for P450,000 leaves P60,000 unsecured still owing. 40% x
P60,000 = P24,000
8. P295,000 = P200,000 + P95,000
9. P42,950 - (P10,950 + P2,000 + P20,000 + P10,000)
10. P76,050 - Excess of salaries, P1,050 + notes pay in excess of security P25,000 + accounts pay P50,000
11. P163,800
Free assets:
Other assets P104,000
Excess from assets pledged with secured
(P150,800 – P91,000) 59,800
P163,800
12. P109,200
Total free assets P163,800
Less: Liabilities with priority 54,600
P109,200
13. P364,000
Unsecured creditors:
Excess of partially secured liabilities over
Pledged assets (P169,000 – P65,000) P104,000
Unsecured creditors 260,000
P364,000
14. P96,200
Payment of partially secured debt:
Value of pledged assets P 65,000
30%* of remaining P104,000 31,200
P 96,200
*P109,200/P364,000 = 30%
15. P78,000
Cash P 65,000
Excess of pledged with secured liabilities
(P117,000 – P104,000) 13,000
P 78,000
16. P52,000
Free assets after of liabilities with priority:
Total free assets P 78,000
Less: Liabilities with priority 26,000
P 52,000
17. P260,000
Unsecured creditors:
Excess of partially secured liabilities over
pledged assets (P195,000 – P169,000) P 26,000
P 260,000
18. P174,200
Payment on bond:
Value of pledged assets P 169,000
20%* of remaining P26,000 5,200
P 174,200
Free after priority: P52,000/P260,000 = 20%
19. P247,000
Free assets P390,000
Excess from assets pledged with fully secured
(P260,000 – P195,000) 65,000
Amount available P455,000
Unsecured liabilities with priority ( 208,000)
Net free assets / available for unsecured P247,000
20. P32,000
Cash 120,000
Mortgage payable, paid in full ( 60,000 )
60,000
Note payable to bank, secured portion ( 30,000 )
30,000
Priority claims (P16,000 of administrative costs +
P2,000 of customer deposits + P4,000 property tax) ( 22,000 )
Available for unsecured nonpriority claims 8,000
Unsecured, nonpriority claims:
Unsecured portion of note payable to bank 10,000
Total unsecured, nonpriority claims 40,000
P8,000 cash/P40,000 claims = P.20 on the dollar
Amount paid to bank:
P30,000 for secured portion + (P10,000 x .20) for unsecured
portion = 32,000
21. P15,400
Mortgage note receivable 35,000
Less: Portion secured by equipment ( 7,000 )
Unsecured portion 28,000
Estimated recovery on secured portion 7,000
Estimated recovery on unsecured portion
(P28,000 x P.30) = 8,400
Recovery on mortgage note receivable 15,400
22.
Mortgage note receivable 80,000
Less: Portion secured by marketable securities ( 60,000 )
Unsecured portion 20,000
Estimated recovery on secured portion 60,000
Estimated recovery on unsecured portion
(20,000 x P.25) = 5,000
Recovery on mortgage note receivable 65,000
23. P30,000
Book value of assets P700,000
Net realizable of assets 370,000
P330,000
Less stockholders' equity
(P700,000 – P400,000) 300,000
Deficiency P 30,000
24. P.75 Dividend = P370,000 – P250,000 – P30,000 / P400,000 – P250,000 – P30,000

25. P8,500 = P7,000 + [(P9,000 – P7,000) x .75]
26. P410,000
Total estimated proceeds P910,000
creditors:
Total available to unsecured claimants. P440,000
with priority:
Amount available for unsecured creditors P410,000
27. 64.10%
interest (P500,000 + P30,000 – P150,000) P380,000
Total claims of unsecured creditors P640,000
Dividend to unsecured creditors:

P410,000 ÷ P640,000 = 64.1%

Interest P380,000
Dividend on unsecured amount x 64.1%
THEORIES
1. debtor
2. P5,000
3. inability to pay debts as they mature
4. a. administrative costs
b. certain postfiling “gap” claims in involuntary filings
c. wages, salaries, and commissions
d. employee benefit plans
e. deposits by individuals
f. taxes
5. infrequent
6. two-thirds, more than one-half
7. fraudulent, preferential
8. realization and liquidation
9. False 14. False 19. False 24. c 29. b 34. b 39. b

10. False 15. True 20. False 25. a 30. b 35. d 40. c
11. False 16. True 21. c 26. d 31. b 36. b 41. b
12. True 17. True 22. a 27. c 32. a 37. c 42. a
13. False 18. True 23. a 28. e 33. c 38. a 43. c
44. a 49. c 54. d 59. a

45. c 50. d 55. c 60. c
46. c 51. a 56. d
47. a 52. d 57. b
48. b 53. b 58. a
Chapter 7
Problem I
1. Entries in 20x4:
Cash 3,500
Mortgage Notes Receivable 20,500
Real Estate ………………………………… 9,000
Gain on Sale of Real Estate 15,000
Cash 500
Mortgage Notes Receivable 500
Entry in 20x5:
Real Estate ………………………………………………………… 16,500
Loss on Repossession of Real Estate ……………………… 3,500
Mortgage Notes Receivable ……………………………… 20,000
2. Entries in 20x4
Cash ………………………………………………………………………… 3, 500
Mortgage Notes Receivable ………………………………… 20,500
Real Estate …………………………………………………………… 9,000
Deferred Gross Profit on Installment Sales ………… … 15,000
Cash ………………………………………………………………………… 500

Mortgage Notes Receivable ……………………………… 500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ……………… 2,500

Realized Gross Profit on Installment Sales……………… 2,500
Gross Profit Percentages

15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
Entry in 20x5
Real Estate…………………………………………………………… 16,500

Deferred Gross Profit on Installment Sales ……………… 12,500
Mortgage Notes Receivable …………………………………… 20,000
Gain in Repossession of Real Estate ………………………… 9,000
Problem II
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.
20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales
20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem III
1.
a. Installment Contracts Receivable 19X8………………… 250,000
Installment Sales …………………………………………………… 250,000
b. Cash ………………………………………………………………………… 120,000

Installment Contracts Receivable 19X8 …………………… 120,000
c. Cost of Installment Sales ………………………………………… 200,000

Merchandise Inventory …………………………………… 200,000
d. Merchandise Repossessions ………………………………… 14,500

Deferred Gross Profit on Installment Sales 19X8 ………… 4,000
Loss on Repossession …………………………………… 1,500
Installment Contracts Receivable, 19X8 ……………. 20,000
Gross Profit Percentages: 50,000/250,000, or 20%

Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise.. P 14,500

Less: Unrecovered cost:
Unpaid balance…………………………P 20,000
Less: Deferred Gross Profit
20% x P20,000…………………… 4,000 16,000
Loss on repossession……………………. P 1,500
e. Expenses ……………………………………………………………………… 16,000

Cash …………………………………………………………………. 16,000
2. Adjustment to Recognize Gross Profit on Installments Sales:
a. To set-up Cost of Installment Sales:

No entry (since perpetual inventory method is used)
b. To set-up Deferred Gross Profit on Installment Sales:

Installment Sales ……………………………………………………… 250,000
Cost of Installment Sales …………………………………. 200,000
Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000
c. Adjustment to Recognize Gross Profit on Installment Sales:
Deferred Gross Profit on Installment Sales – 20x4……… 24,000

Realized Gross Profit on Installment Sales – 20x4 ………. 24,000
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
d. Closing of nominal accounts.
Realized Gross Profit on Installment Sales – 20x4………………… 24,000
Expenses ………………………………………………………. 16,000
Loss on Repossessions ………………………………………. 1,500
Income Summary ……………………………………………. 6,500
To close the accounts for 20x4.
Problem IV
1.
January to December 31 20x4 20x5
(1) To record regular sales:
Accounts receivable 600,000 1,080,000
Sales 600,00 1,080,000
(2) To record installment sale:

Cash 60,000 144,000
Installment accounts receivable 300,000 336,000
Installment Sales 360,000 480,000
(3) To record cost of sales:

Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales 480,000 864,000
Merchandise inventory 480,000 864,000
Installment Sales:
Cost of installment sales 252,000 312,000
(4) To record collections:

Regular Sales:
Cash 144,000 360,000
Accounts receivable 144,000 360,000
Installment Sales:
Cash 108,000 204,000
Installment Accounts receivable –
20x2 72,000 72,000
Installment Accounts receivable –
20x3 60,000
Interest income 36,000 72,000
(5) to record payment of operating expenses:

Operating expenses 90,000 102,000
Cash 90,000 102,000
2.
Adjusting entries (end of the year):

(6) To recognize accrued interest receivable
Interest receivable 1,440 2,880
(7) To set-up Cost of Sales:

Periodic Method:
Perpetual Method: No entry
(7) To set-up Cost of Installment Sales:

Periodic Method:
Shipment s on installment sales 252,000 312,000
Perpetual Method: No entry
(8) To set-up Deferred Gross Profit

Installment sales 360,000 480,000
Deferred gross profit – 20x4 108,000
Gross profit rate – 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate – 20x5: P168,000 / P480,000 = 35%.
(9) To record realized gross profit on installment

sales:
Deferred gross profit – 20x4 25,200 25,200
Realized gross profit 25,200 46,200
20x4: Realized gross profit on installment sales:

Collections applying as to principal..……………………………P 72,000
Multiplied by: Gross profit rate……………………………………. 30%
Realized gross profit…………………………………………………P 21,600
20x5: Realized gross profit on installment sales;

20x4 20x5
Collections – principal…………… P 72,000 P 60,000
Multiplies by: Gross profit %.......... ____30% ____35%
Realized gross profit……………… P 21,600 P 21,000 P 42,600
Closing entries:
(10) To close realized gross profit account:
Realized gross profit 21,600 42,600
Income summary 21,600 42,600
(11) To close other nominal accounts

Sales 600,000 1,080,000
Cost of sales 480,000 864,000
(12) To close results of operations:

Retained earnings 89,040 231,480
Problem V
1.
Type of Sale Amount Ratio to Total Sales Allocated Cost
Regular Sales:
Cash sales P 225,000 P *146,250
Credit sales ___450,000 **292,500
Total regular sales P 675,000 675/1,800 P 438,750
Installment Sales _ 1,125,000 1,125/1,800 __731,250
Total Sales P 1,800,000 P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of sale is the
same. Normally, the selling prices of the merchandise are not the same for each type of sales.
2.
Amount based on Ratio to Total
Type of Sale Amount Cash Sales (100%) Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500
Credit sales 450,000 375,000* 375/1,500 292,500
Installment Sales 1,125,000 900,000** 900/1,500 __ 702,000
Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*
Cash sales P 225,000 30% 70% P 157,500
Credit sales 450,000 36% 64% 288,000
Installment Sales 1,125,000 40% 60% _ _675,000
Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repossessed merchandise………………………………… 68,400
Deferred gross profit – 20x4……………………………… 48,000
Loss on repossession……………………………………………… 3,600
Installment accounts receivable – 20x4……………………. 120,000
To record repossessed merchandise.
Repossessed merchandise……………………………… 12,000

Cash, etc (or various credits)…………………… 12,000
To record reconditioning costs
The loss on repossession is computed as follows:

Estimated selling price after reconditioning costs P 108,000
Less: Reconditioning costs……………………………………… P 12,000
Costs to sell and dispose……………………………… 6,000
Normal profit (20% x 108,000)………………………… __21,600 __39,600
Market value before reconditioning costs………………… P 68,400
Less: Unrecovered cost
Installment accounts receivable – 20x4,
unpaid balance…………………………………… P120,000
Less: Deferred gross profit – 20x4 (P120,000 x 40%) __48,000 __72,000
Loss on repossession……………………………. P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise……………………………… 840,000

Over-allowance on trade-in merchandise…………………. 360,000
Cash…………………………………………………………… 2,400,000
Installment accounts receivable – 20x4… 3,360,000
Installment sales…………………………… 6,960,000
To record installment sales with trade-in.
Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment
sales, the entry would be as follows:
Cash……………………………………………………………… 2,400,000
Installment accounts receivable – 20x4……… 3,360,000
Installment sales (net of over-allowance)… 6,600,000
To record installment sales with trade-in.
The over-allowance is computed as follows:

Trade-in allowance……………………………… P1,200,000
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs. P1,680,000
Less: Reconditioning costs…………………………… 420,000
Costs to sell (5% x P1,680,000)…………………… 84,000
Normal profit (20% x P1,680,000)……… __336,000 __840,000
Over-allowance…………………………………………………… P 360,000
The gross profit rate on installment sales is computed as follows:
Installment sales……………………………………………………… P6,960,000
Less: Over-allowance………………………………………………………… ___360,000
Adjusted Installment Sales…………………………………………………… P6,600,000
Less: Cost of installment sales……………………………………………… __3,920,000
Gross profit…………………………………………………………………… P2,680,000
Gross profit rate (P2,680,000/P6,600,000)………………………… 40.60%
Further, the entry to record the reconditioning costs is as follows:

Cash, etc (or various credits)………………… 420,000
To record reconditioning costs.
Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is
computed as follows:
Trade-in merchandise (market value before reconditioning costs)……… P 840,000

Down payment…………………………………………………………………… 2,000,000
Installment collection (March 31 – December 31: P80,000 x 10 months) ___800,000
Total collections…………………………………………………………… P3,640,000
Multiplied by: Gross profit rate in 20x4………………………………… ___40.60%
Realized gross profit on installment sales of new merchandise………… P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash ……………………………………………………………………… 20,000
Mortgage Notes Receivable ………………………………… 55,000
Real Estate ……………………………………………………… 60,000
Deferred Gross Profit on Installment Sales …………… 15,000
Nov. 30 Cash ……………………………………………………………………… 1,150

Mortgage Notes Receivable ………………………………… 600
Interest Income ………………………………………………… 550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash ………………………………………………………………………… 1,144

Mortgage Notes Receivable ……………………………… 600
Interest Income …………………………………………………… 544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales ……………… 4,240

Realized Gross Profit on Installment Sales ………………… 4,240
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the
contract:
Dec. 31 Cash ……………………………………………………………………… 20,000.00
Mortgage Notes Receivable ………………………………… 55,000.00
Real Estate ……………………………………………………… 60,000.00
Deferred Gross Profit on Installment Sales ………… 15,000.00
Nov. 30 Cash ……………………………………………………………………… 600
Mortgage Notes Receivable …………………… 50.00
Interest Income ………………………………………………… 550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50, is
reduction in principal)
Dec. 31 Cash ………………………………………………………………………. 600.00

Mortgage Notes Receivable ………………………………… 50.50
Interest Received ……………………………………………… 549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in principal.
31 Deferred Gross Profit on Installment Sales ………………… 4,020.10

Realized Gross Profit on Installment Sales ………………… 4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or P4,020.10
Problem IX
1. 6/30x4: Cash…………………………………………………………………………… 25,000
Notes Receivable …………………………………………………………… 125,000
Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300
Depreciation Expense (1/2[2% of P90,000]) …………………………… 900
Land …………………………………………………………………… 10,000
Building …………………………………………………………… 90,000
Deferred Gross Profit on Sale of Property …………………… 57,200
Deferred Gross Profit on Sale of Property ……………… 9,553

Realized Gross Profit on Sale of Property ………………… 9,553
Amount realized: (P25,000/150,000) x 57,200
2. 6/30x5: Cash …………………………………………………………………………… 30,000

Notes Receivable …………………………………………………… 30,000
Deferred Gross Profit on Sale of Property ………………… 11,440

Realized Gross Profit on Sale of Property ………………………… 11,440
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash ………………………………………………………………………… 50,000

Deferred Gross Profit on Sale of Property …………… … 19,067

Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ……………………………………………………………………… 15,000

Deferred Gross Profit on Sale of Property ………………… 5,720

Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable …………………………… 200,000
Installment Sales ……………………………………………………… 200,000
Cost of Installment Sales …………………………………………… 120,000

Merchandise Inventory ……………………………………………… 120,000
Cost of Sales: 60% of P200,000

Installment Sales ………………………………………………………… 200,000
Cost of Installment Sales …………………………………………… 120,000
Deferred Gross Profit on Installment Sales ……………………… 60,000
Cash ………………………………………………………………………………. 124,000

Installment on Contracts Receivable – 20x4…………… 30,000
Installment on Contracts Receivable – 20x5………………… 34,000
Installment on Contracts Receivable – 20x6………………… 60,000
Deferred Gross Profit on Installment Sales -20x4 …………… 13,800

Deferred Gross Profit on Installment Sales-20x5 ………… 14,280
Deferred Gross Profit on Installment Sales -20x6 ………… 24,000
Realized Gross Profit on Installment Sales ……………………… …… 52,080
Realized Gross Profit
20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment sales 20x6 27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts receivable 20x5 30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts receivable 20x4 32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ………………………………………………………………………………..................... P27,500
Installment Accounts Receivable 20x6 …………………………... P 55,000
20x5 ………………………….. 12,000
20x4 ………………………….. 3,000 70,000
Accounts receivable …………………………………………………………………………. 17,000
Inventory ……………………………………………………………… ……………………….. 60,000
Other Assets …………………………………………………………………… ………………... 40,000
Total Assets ………………………………………………………………… …………………… P 214,500
Liabilities
Accounts payable …………………… ………………………………………… P 40,000
Deferred Gross Profit 20x6 …… ……………………… P 15,125
20x5 ………… ………………… 3,600
20x4 …………… ……………… 960 19,685
Total Liabilities P 59,685
Capital Stock …………………………………………………………………….. P 100,000
Retained Earnings ……………………………………………….. P 68,400
Balance, Jan. 1, 20x6 ………………………………………. 13,585
Balance, Dec. 31, 20x6 ……………………………………………………. 54,185
Total Stockholder’s Equity ……………………………………………………… P154,815
Total Liabilities and Stockholder’s Equity ……………………………………. P 214,500
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P320,000 P125,000 P445,000
Cost of goods sold:
Merchandise Inventory, Jan. 1 ………………P 52,000
Purchases ………………………….................. 350,000
Merchandise Available for sale ................. 402,000
Less: Merchandise Inv. Dec. 31 ………… 60,000 232,000 110,000 342,000
Gross Profit ……………………………………………………….. P88,000 P15,000 P103,000
Less: Deferred Gross Profit on 19X34 ………………………… 15,125 15,125
Realized Gross Profit on current year’s sales ………………. P78,875 P15,000 P87,875
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ………………. 50,040
Total Realized Gross Profit ……………………………………. P137,915
Operating Expenses …………………………………………... 151,500
Net Loss ………………………………………………………….. P 13,585
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125
Realized Gross Profit:

20x6 20x5 20x4
Collections on Installment Contracts Receivable ………... P265,000 P138,000 P27,000
Installment sales gross profit percentage ………………….. 27.5% 30% 32%
Realized Gross Profit …………………………………………….. P 72,875 P 41,400 P 8,640
Installment Sales …………………………………………………… 320,000

Cost of Installment Sales …………………………………………. 232,000
Deferred Gross profit -20x6……………………………………………… 88,000
Deferred Gross Profit, 20x6 ……………………………............... 72,875

Realized Gross Profit on Installment sales…………… 122,915
Income Summary ………………………………………………… 170,000

Shipment on Installment of Sales ……………………………… 232,000
Merchandise Inventory, Jan. 1, 20x6 ………………. 52,000
Purchases ……………………………………………… 350,000
Merchandise Inventory, Dec. 31, 20x6 …………………….. 60,000

Income Summary …………………………………… 60,000
Sales ………………………………………………………………. 125,000

Income Summary ……………………………………. 125,000
Realized Gross Profit on Installment Sales………..………... 122,915
Income Summary ……………………………………. 122,915
Income Summary ……………………………………………… 151,500

Operating Expenses ………………………………... 151,500
Retained Earnings …………………………………………….. 13,585

Income Summary …………………………………... 13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 …………………………………………………………………………………… 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 ………………………………………………………………. 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 ………………………………………………………………. 45%
2.
Deferred Gross Profit, 20x6……………………………… 1,900
Deferred Gross profit, 20x5……………………………… 4,000
Deferred Gross Profit, 20x4……………………………… 3,600
Loss on Repossessions………………………….. 9,500
Cancellation of deferred gross profit,
balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
GG SALES CORPORATION
Income Statement
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P500,000 P192,000 P692,000
Cost of goods sold:
Merchandise Inventory, Jan. 1 …………… P 30,000
Purchases ………………………….................. 445,000
Repossessed Merchandise ……………….. 10,000
Merchandise Available for sale ................. 495,000
Less: Merchandise Inv. Dec. 31 ………… 35,000 310,000 150,000 460,000
Gross Profit ……………………………………………………….. P190,000 P42,000 P103,000
Less: Deferred Gross Profit on 20x6 sales (see schedule) 32,300 32,300
Realized Gross Profit on current year’s sales ………………. P157,700 P42,000 P199,700
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ………………. 100,650
P300,350
Deduct loss on repossession …………………………………. 3,500
Total Realized Gross Profit ……………………………………. P296,850
Operating Expenses …………………………………………… 300,000
Net Loss ………………………………………………………….. P 3,150
Analysis of Gross Profit on Installment Sales

Schedule to Accompany Income Statement
Deferred gross profit on Installment sales – before defaults, 19X8:
Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% ………………………………………………………. P 32,300
Realized Gross Profit:

20x6 20x5 20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
Installment sales gross profit percentage ……….. 38% 40% 45%
Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………... P 25,000
Installment Accounts Receivable 20x6 …………………P 80,000
20x5 ………………… 20,000
20x4 ………………… 5,000 105,000
Accounts receivable ………………………………………………………………….. 40,000
Inventory …………………………………………………………………………………. 35,000
Other Assets ……………………………………………………………………………… 52,000
Total Assets ……………………………………………………………………………….P 257,000
Liabilities
Accounts payable ……………………………………………………. P 75,000
Deferred Gross Profit 20x6 ………………………………. P 30,400
20x5 ………………………………. 8,000
20x4 ………………………………. 2,250 40,650
Capital Stock …………………………………………………………. P100,000
Retained Earnings ………………………………………. P 44,500
Balance, Jan. 1, 20x6 ……………………………… 3,150
Balance, Dec. 31, 20x6 …………………………… 41,350
Total Stockholder’s Equity …………………………………………. 141,350
Total Liabilities and Stockholder’s Equity ……………………….. P 257,000
4. Installment Sales ……………………………………………………………….. 500,000

Cost of Installment Sales ……………………………………………….. 310,000
Deferred Gross Profit, 20x6 …………………………………………….. 190,000
Deferred Gross Profit, 20x6 …………………………………………………… 157,500

Realized Gross Profit on Installment Sales… ………………………… 258,350
Income Summary ……………………………………………………………… 185,000

Shipment on Installment Sales ……………………………………………… 310,000
Merchandise Inv, January 1, 20x6 ……………………………………. 30,000
Purchases …………………………………………………………………. 455,000
Repossessed Merchandise …………………………………………….. 10,000
Merchandise Inv, December 31, 20x6……..………………………………. 35,000

Income Summary ……………………………………………………….. 35,000
Sales …………………………………………………………………………….... 192,000

Income Summary ………………………………………………………… 192,000
Realized Gross Profit on Installment Sales………………………………….. 258,350

Income Summary ……………………………………………………….. 258,350
Income Summary ……………………………………………………………… 3,500
Loss on Repossession ……………………………………………………. 3,500
Income Summary ……………………………………………………………… 300,000

Operating Expenses …………………………………………………….. 300,000
Retained Earnings ……………………………………………………………… 3,150

Income Summary …………………………………………………………. 3,150
Problem XIII
1.
Deferred gross profit – 20x4……….……………………………………. 8,407.00
Realized Gross Profit on Installment Sales (20x4 – 20x6)….. 172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%
Calculation of collections in 20x6:

20x4: Beginning balance P 24,020
20x5: P344,460 (beginning balance) – P67,440 (ending balance) –
P2,200 (write-offs on default) 274,820
20x6: P602,000 (sales) – P410,090 (ending balance) 191,910
Calculation of realized gross profit:

20x4: 35% x P24,020 P 8,407.00
20x5: 34% x P274,820 93,438.80
20x6; 37% x P191,910 71,006.70
Total P172,852.50
2. Deferred gross profit 20x5……………………………………………………… 748.00

Inventory of Repossessed Merchandise………………………………. 748.00
To reduce by 20x5 deferred gross profit related to defaulted contract and requiring
cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date); inventory
now reported at P2,200 (balance of installment contract), less P748 or P1,452.
Loss on repossession…………………………………………………………….. 381.00

Inventory of repossessed merchandise……………………………….. 381.00
To reduce inventory to “market” as follows: to realize a gross profit of 37% on a resale
estimated at P1,700, the repossessed merchandise should be reported at a value of
63% of P1,700, or P1,071; the inventory then requires a further write-down of P381
(P1,452 – P1,071)
Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on
sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit
margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248
(P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation.
Recording the goods at resale value reduced by the company’s usual profit margin on sales is
recommended, for such practice will charge the next period with no more than the utility of the
goods carried forward.
Problem XIV – HH Instruments

1. Installment Contracts Receivable ……………………………………. 1,600.00
Merchandise Inventory (Piano) ……………………………… 1,000.00
Deferred Gross Profit on Installment Sales ………………… 600.00
Cash ……………………………………………………….......................... 160.00

Installment Contracts Receivable …………………………… 160.00
2. Cash …………………………………………………………........................ 160.00

Interest Income …………………………………………………… 14.40
Installment Contracts Receivable ……………………………. 145.60
Cash ……………………………………………………………...................... 160.00

Interest Income ……………………………………………………. 11.47
Installment Contracts Receivable ……………………………… 148.53
3. Deferred Gross Profit on Installment of Sales ………………………….. 225.45

Realized Gross Profit on Installment of Sales ………………… 225.45
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
4. Merchandise Inventory (piano) …………………………………………... 560.00

Deferred Gross Profit on Installment of Sales ……………………........... 374.55
Loss on Repossessions ………………………………………………………. 64.36
Installment Contracts Receivable ……………………………… 998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
Problem XV – Big Bear

20x4:
Installment receivables 250,000
Inventory 150,000
Deferred gross profit 100,000
Cash 80,000
20x5:
Cash 120,000

Realized gross profit 50,000
20x6:
Cash 50,000
Inventory 210,000
Cash 135,000

Gross profit deferred at sale = 30% x P300,000 = P90,000.

Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XVI – Tappan Industrial

(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PV n = R(PVAF n/i ) Table IV
PV n = P187,500 x 4.3553 n = 6, i = 10%
PV n = P816,619 (rounded)
Gross profit on sale:

Sales P816,619
Cost of sales 637,500
Gross profit P179,119
Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221
Total income for 20x5 = P179,119 + P27,221 = P206,340
(2) No reasonable assurance – assume the use of installment sales method

Installment sale: Gross profit (P179,119/P816,619) = 22% rounded
Gross profit earned in 20x5 (P0 x 22%) P 0
Interest revenue 27,221
Total income for 20x5 P 27,221

1. b –
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000 P390,000
2. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P 2,200
20x5 sales: P50,000 x 25% 12,500
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) 10,575
P 25,275
Realized Gross Profit on Sales in 20x5 P 10,500

Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) 5,000
Realized Gross Profit in 20x5 for 20x4 sales P 5,500
Divided by: Collections in 20x5 for 20x4 sales P 25,000
Gross Profit % for 20x4 sales 22%
3. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128 39,375
Realized Gross Profit on Installment Sales P 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25 P384,000
Less: Collections in 20x3 140,000
Collections in 20x4 240,000
Unrecovered Cost, 12/31/20x4 P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is
recovered through cash receipts. All cash receipts, both interest and principal portions, are applied
first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all
costs have been recovered, the recognized revenue after the cost recovery represents income
(interest and realized gross profit). This method is used only when the circumstances surrounding a
sale are so uncertain that earlier recognition is impossible.
4. a P0.
5. c
6. e, 20x6 – 0; 20x7 - 0
Unrecovered costs,1/1/20x4 110,000
Less: Collections
1/1//20x4 0
Add: Sales on account 15,000
Total 15,000
Less: 1/1/20x5 10,500
Collections in 20x4 __4,500
1/1//20x5 10,500
Total 40,500
Less: 1/1/20x6 25,500
1/1//20x6 25,500
Total 85,500
Less: 1/1/20x7 40,500
1/1//20x7 40,500
Total 64,500
Less: 1/1/20x8 70,000
Collections in 20x7 ____-0-
7. b
20x4: P150,000 – (P568,620 x 10%) = P93,138.
20x5: (P568,620 – P93,138) x 10% = P47,548.
8. a – refer to No. 3 for discussion.
Cost, January 1, 20x4 P 60,000
Less: Collections including interest – 20x4 32,170
Unrecovered Cost, December 31, 20x4 P 27,830
9. c (P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3%

(P3,600,000 × .20) + [(3,600,000 × .80) × 4/12)] = P1,680,000
P1,680,000 × 33 1/3% = P560,000.
10. b [(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000.
11. b – refer to No. 3 discussion.

Cost, January 1, 20x4…………………………………………………………….P 500,000
Less: Collections including interest – 20x4……………………….P241,269
Collections including interest – 20x5……………………… 241,269 482,538
Unrecovered Cost, December 31, 20x5……………………………………….P 17,462
12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
13. c P300,000 + P50,000 = P350,000

P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 – P100,000) x 30% = P60,000.
14. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 – (P288,000 ×.4) = P364,800.
15. d – [P225,000 + (P120,000/40%)]
16. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000.
17. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30% P 400,000
20x5 Sales: P440,000/ 40% 1,100,000
P 1,500,000
18. c
Sale: Installment receivables 4,500,000
Inventory 3,600,000
Payment: Cash 500,000
Balance Sheet:
Installment receivables (4,500,000 – 500,000) P 4,000,000
Deferred gross profit (900,000 – 100,000) 800,000
Installment receivables (net) P 3,200,000
19. b
12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000
Installment receivables 2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)] 400,000
Balance sheet:
Deferred gross profit: P800,000 400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
22. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%

20x4: 50% x P300,000 = P150,000
23. c
20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40%

40% x P400,000 received in 2010 = P160,000
Total: P150,000 + P160,000 = P310,000
24. c
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P150,000 (x4 collections)
- P150,000 (x5 collections) = 150,000
Net installment receivable for 20x4 sales = P 150,000
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P200,000 (x5 collections) = 400,000
Net installment receivable for 20x5 = P 600,000
Total = P 750,000
25. a - Costs not yet recovered.

26. c
Cost, 20x4 P 30,000
20x4 cost recovery (20,000)
Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000
Gross profit – 20x5 P 5,000
27. d
Cost P 30,000
20x4 cost recovery ( 20,000)
20x5 cost recovery ( 10,000)
Remaining cost 0
The entire P20,000 payment received in 20x6 is recognized as gross profit.

28. d
Sale: Installment receivables 55,000
Inventory 30,000
Payment: Cash 20,000

Balance Sheet:
Installment receivables P55,000 – 20,000 P 35,000
Deferred gross profit ( 25,000)
Installment receivables (net) P 10,000
29. a
Sale: Installment receivables 55,000
Inventory 30,000
2008: Cash 20,000

Cash 15,000
2009: Deferred gross profit 5,000
Balance Sheet:
Installment receivables P 20,000
Deferred gross profit ( 20,000)
Installment receivables (net) P 0
30. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should be applied.
Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553) P816,619
Gross profit (realized) P179,119
31. c
Total Income for 20x4:
Gross profit (realized) – No. 51 P179,119
Interest revenue—4 months: P816,619 x 10% x 4/12.. _ 27,221
Total income for 20x4 P206,340
32. b
Gross profit (realized) – already recognized in 20x4 P 0
Interest revenue – 8 months in Year 1 (P81,662* x 8/12) P 54,441
4 months in Year 2 (P71,078* x 4/12) 23,693 78,134
Total Income for 20x5 P 78,134
*Schedule of Discount Amortization/Interest Income computation:

(1) (2) (3) (4)
Face Net Discount
Amount Unamortized Amount Amortization
Year of Note1 Discount (1) – (2) 10% × (3)
1 P1,125,000 P308,3813 P 816,6192 81,6625
2 937,500 226,7194 710,781 71,078
1 P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous balance.
2 The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3 P1,125,000 – P816,619
4 (2) – (4)
5 Discount amortization give rise to recognition of interest revenue/income.
33. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method
should be applied. Also, if the there is high degree of uncertainty as to collectibility, the cost
recovery method may be used.
Installment sale: Gross profit (P179,119/P816,619) 22% (rounded)
Gross profit earned in 20x4 (P0* x 22%) P 0

* no collections in 20x4.
34. a
Gross profit earned in 20x4 (P0* x 22%) P 0
Interest revenue (refer to No. 52 27,221
Total income for 20x4. P 27,221
35. d
Collections in 20x5 (August 31, 20x5) P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662
Collection as to principal P 105,838
x: Gross Profit % (refer to No. 54) 22%
Gross profit realized in 20x5 P 23,284
Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134
Total Income for 20x5 P 101,418
36. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
37. a (P800,000 x .25) – P90,000 = P110,000,
38. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
39. a (P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
40. d (P1,200,000 × .30) – P120,000 = P240,000.
41. a P1,050,000 × .30 = P315,000

P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000.
42. b P24,000 – P7,200 = P16,800

P16,800 – P13,500 = P3,300 loss.
43. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.

44. d P8,400 – P5,880 = P2,520
(P3,000 – P300) – P2,520 = P180 gain.
45. d
20x4: P24,000 – P0 = P24,000 collections x 39%P 9,360
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 96,600
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% 62,000
Realized gross profit on installment sales in 20x6 P167,960
46. b
20x5 Sales 20x6 Sales Net
Market Values P 4,500 P 3,500
Less: Unrecovered Cost:
IAR, unpaid balances P10,000 P 5,000
x: Cost Ratio 50% 5,800 60% 3,000
Gain (loss) P (1,300) P 500 P( 800)
47. a
(1) Gain or Loss on repossession:
Estimated selling price P 1,700
Less: Normal profit (37% x P1,700) 629
Market value of repossessed merchandise P 1,071
Less: Unrecovered Cost:
Unpaid balance – 20x3 P 2,200
Less: DGP – x3 (P2,200 x34%) 748 1,452
Loss on repossession P( 381)
(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 – P 0) x 35% P 8,407.0
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 93,438.8
20x4 Sales: (P602,000 – P410,090) x 37% 71,006.7
Realized gross profit on installment sales P 172,852.5
48. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%. 22,929.6
20x4 Sales: (P410,090 x 37%) 151,733.3
P174,662.9
49. d*
Resale Value P 8,500
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 3,145
Market Value of Repossessed Merchandise P 5,355
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000) P 11,000
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000 ___3,740 __7,260
Loss on repossession P( 1,905)
Entry made:
Inventory of RM* 11,000
IAR-20x5 11,000
Correct Entry (Should be):

Inventory of RM (at MV) 5,355
DGP-20x5 3,740
Loss on repossession 1,905
IAR-20x5 11,000
Correcting Entry:
DGP-20x5 3,740
Loss on repossession 1,905
Inventory of RM 5,645**
50. c
Installment Sales P 3,600,000
Less: Over-allowance:
Trade-in allowance P1,500,000
Less: MV of Trade-in Merchandise:
Estimated Resale Price P 1,400,000
Less: Normal profit (25% x P1,400,000) 350,000
Reconditioning costs 150,000 900,000 600,000
Adjusted Installment Sales P 3,000,000
Less: Cost of I/S 2,500,000
Gross Profit P 500,000
Gross profit rate: P500,000/ P3,000,000 16 2/3%
x: Collections –Trade-in merchandise (at MV) P 900,000
RGP on I/S in 20x4 P 150,000
51. c
Trade-in allowance P43,200
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs P36,000
Less: Reconditioning costs 1,800
Normal profit (15% x P36,000) 5,400 28,800
Over-allowance P 14,400
Installment sales P122,400
Less: Over-allowance 14,400
Adjusted Installment Sales P108,000
Less: Cost of Installment Sales 86,400
Gross profit P 21,600
Gross profit rate: P21,600/P108,000 20%
Realized gross profit:

Down payment P 7,200
Trade-in (at market value) 28,800
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600
Total collections in 2008 P 57,600
x: Gross profit rate 20%
Realized gross profit P 11,520
52. d
(Note: For financial accounting purposes, the installment-sales method is not used, and the full gross
profit is recognized in the year of sale, because collection of the receivable is reasonably assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales P4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) P4,584,000
Payment made on January 1, 20x3 936,000
Balance outstanding at 12/31/x3 3,648,000
Interest rate 9%
Interest Revenue P 328,320
Quiz - VII
1. P920,000
20x4: P1,200,000 x 30% = P 360,000

20x5: P1,400,000 x 40% = 560,000 P920,000
2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000
3. P1,600– assume the use of installment sales method. It should be noted that if the collectability is
highly uncertain or extremely uncertain, the use of cost recovery method is preferable.
4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all costs have been
recovered.
20x5
P45,000 x 63% = P28,350 Cost of sale
P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 = P14,650 Gross profit recognized
P60,000 x 59% = P35,400 Cost of sale
P40,000 - P35,400 = 4,600 Gross profit recognized
P19,250 Recognized in 20x6
6. P21,000
20x7
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... P 2,000
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... 17,000
P85,000 x 60% = P51,000 Cost of sale
P53,000 - P51,000 = .......... 2,000 Gross profit
recognized
P21,000 Recognized in 20x7
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3) _____40%
Deferred Gross Profit, end of 20x4 P 128,000
10. P25,168, determined as follows:
Gross profit percentages:

20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%
To deferred gross profit:

20x3: P160,000 x P136,000 = P24,000
20x4: P184,000 x P158,240 = 25,760
P49,760
Gross profit realized:

0.15 x P40,000 = P 6,000
0.15 x P89,600 = 13,440
0.14 x P36,800 = 5,152
P24,592
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168
11. P 0 – all profit recognized in 20x5

12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450
16. P50 gain
Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable…………………….. 750
Gain on repossession…………………………………… 50
17. 0
Unrecovered costs,1/1/20x4 100
Less: Collections 70
Unrecovered costs,1/1/20x5 30
Less: Collections 40
Profit – 20x5 10
Profit – 20x5 30
18. P10 – refer to No. 17
19. P30 –refer to No. 17
20. Zero
Unrecovered costs – 20x4 120,000
Less: Collections – 20x4 ______0
Unrecovered costs, 12/31/20x4 120,000
Additional costs – 20x5 _20,000
Total costs 140,000
Less: Collections – 20x5 80,000
Additional costs – 20x6 20,000
Total costs 80,000
Additional costs – 20x7 10,000
Total costs 50,000
Profit – 20x7 50,000
21. P50,000 profit – refer to No. 20
22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)
24. P43,700
Unrecovered costs – Cost of installment sales for 20x5 installment sales 56,050
Less: Collections in 20x5 for 20x5 installment sales _22,800
Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700
Realized GP on I/S in 20x6 for 20x5 sales *10,450
*
Realized GP on I/S in 20x6 16,050
Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is
already recovered in 20x5 equivalent to collection __5,600
Realized GP on I/S in 20x6 for 20x5 installment sales *10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized
Unrecovered costs – Cost of installment sales for 20x4 (No. 23) 31,000
26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment sales 31,000
Less: Collections in 20x5 for 20x4 installment sales 46,400
Realized GP on I/S in 20x5 for 20x4 installment sales 41,000
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs – Cost of installment sales for 20x5 installment
Sales 56,050
Less: Collections in 20x5 for 20x5 installment sales 22,800
Unrecovered costs, 12/31/20x4 33,250 ____-0-
Realized GP on I/S in 20x5 41,000
27. P 45,000
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value = P75,000
Repossessed inventory P 75,000

Deferred gross profit P 80,000
Loss on repossession (plug) P 45,000
Installment receivable P 200,000
28. Zero
P450,000 cost P300,000 collections = P150,000 unrecovered costs
29. P300,000
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of
gross profit recognized in 20x5, leaving P300,000 recognized in 20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of cost
recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of gross
profit recognized in 20x6.
Total: P300,000 + P0 = P300,000
30. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000
Net installment receivable for 20x4 sales = P 0
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P0 (all x5 collections to
cost recovery) = P 600,000
Net installment receivable for 20x5 = P 400,000
Total = P 400,000
31. 24%.
Determined from the repossession entry:
Deferred gross profit P2,400
———— = 24%
Installment accounts receivable P10,000
32. 35%
Gross profit P 42,000
Gross profit P42,000

————- = 35% gross profit rate
33.
a. 20x4 Deferred gross profit balance P 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable P 48,000
Beginning accounts receivable P 48,000
Ending accounts receivable (20,000)
Cash collected P 28,000
b. 20x5 Deferred gross profit balance P 26,400

Gross profit rate ÷ 24%
Beginning accounts receivable* P110,000
Beginning accounts receivable* P110,000
Ending accounts receivable* (50,000)
c. 20x6 Installment sales—20x6 P120,000

Accounts receivable—20x6 (90,000)
34. P31,900
Total realized gross profit in 20x6
From 20x4 P28,000 × 25% = P 7,000
20x5 P60,000 × 24% = 14,400
20x6 P30,000 × 35% = 10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.
35. 20x4 (2010), P33,750; 20x5 (2011), P95,250

Gross profit realized in 20x4 (2010):
Installment sales = [(P300,000  P165,000)/P300,000] x P75,000 = P33,750
Gross profit realized in 20x5 (2011):

From 20x4 sales = [(P300,000  P165,000)/P300,000] x P105,000 = P47,250
From 20x5 sales = [(P450,000  P270,000)/P450,000] x P120,000 = 48,000

P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250
20x4 20x5
(2010) (2011
Sales P450,000 P450,000
Cost of sales 335,000 270,000
Gross profit P115,000 P180,000
Gross profit realized on installment sales 33,750 95,250
Total gross profit P148,750 P275,250
37. 20x4 (2010), P148,750; 20x5 (2011), P275,250

. 20x4 20x5
(2010) (2011
Installment accounts receivable P225,000 P450,000
Less: Deferred gross profit 101,250 186,000
Net of deferred gross profit P123,750 P264,000
Theories
1. False 6. True 11. True 16. True 21. True 26. True
2. True 7. False 12. False 17. True 22. True 27. True
3. False 8. True 13. False 18. False 23. True 28. False
4. True 9. False 14. True 19. False 24. True 29. True
5. True 10. True 15. True 20. True 25. True
30. c 35. b 40. a 45. b 50. d 55. d

31. b 36. d 41. e 46. c 51. c 56. b
32. b 37. d 42. b 47. c 52. b 57. d
33. b 38. e 43. b 48. c 53. a 58. c
34. c 39. c 44. d 49. d 54. b 59. c
60. C 65. b
61. B 66. b
62. b 67. d
63. c 68. d
64. d 69. c
Chapter 8
Problem I
1. Input Measure - Percentage of Completion Method (Cost to Cost Method)
2008:
Contract price P 1,800,000
Actual costs to date P 450,000
Estimated costs to complete 1,200,000
Total estimated project costs 1,650,000
Estimated total gross profit 150,000
Percentage of completion:
P450,000 / P,1650,000 27.27%
Gross profit recognized P 40,905
2009: P 1,800,000
Contract price
Costs incurred:
2008 P 450,00
2009 1,100,000
Total cost 1,550,000
Total gross profit 250,000
Recognized in 2008 40,905
Recognized in 2009 P 209,095
2. Input Measure - Cost Recovery Method

2008: (all costs not yet recovered) P -0-
2009:
Contract price 1,800,00
Costs incurred: 2008 P 450,000
2009 1,100,000
Total cost 1,550,000
Total gross profit P 250,000
Problem II
1. Input Measure - Percentage of Completion Method (Cost to cost Method)
Years Gross Profit (or Loss) Supporting computations
recognized
2008 P 2 million (P108 – 90) x (P30/P90) = P6 million
2009 ( P18 million) Total loss is (P108 –120) = (P12 million)
To date, P6 million was recorded:
therefore, (P12 million) – P6 million =
(P18 million) in 2009
2010 P 10 million Total loss is P 108 – 110) = (P2 million)
To date, (P 12 million was recorded:
therefore, ( P2 million) – (P12 million)
= P10 million in 2010
2. Input Measure - Cost Recovery Method
Years Gross Profit (or Loss) Supporting computations
2008 P -0- ( P108 – 90) = P18 anticipated gross
profit, so no need to recognized a
gross loss
2009 (P 12 million) Total loss is ( P108 – 120) = (12 million)
2010 P 10 million Total loss is (P108- 110) – ( P2 million)
To date, ( P12 million was recorded:
therefore, ( P2 million) – ( P12 million)
= P10 million in 2010
Problem III
1. Journal Entries
a. Input Measure – Percentage of completion – (cost-to-cost method)
The following analysis is to determine the percentage of completion:
20x3 20x4 20x5
Contract price:
Initial amount of contract…………... P528,000 P528,000 P528,000
Variation……………………………….. _______- __12,000 __12,000
Total contract price…………………….. P528,000 P540,000 P540,000
Costs incurred each year……………… P 126,048 *P244,032 P121,920
Add: Costs incurred in prior years……. _______- _126,048 _370,080
Actual costs incurred to date (1)…..… P126,048 *P370,080 P492,000
Add: Estimated costs to complete….. _358,752 _121,920 _______-
Total estimated costs (3)……..………… P484,800 P492,000 P492,000
Estimated gross profit…………………… P 43,200 P 48,000 P 48,000
Percentage of completion (1) / (3) 26% **74% 100%
* including the P7,200 additional costs in 20x4.
** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for
the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
Recognized in Recognized in
20x3 To date prior years current year
Revenue (P528,000 x 26%) P 137,280 - P 137,280
Costs/Expenses (P484,800 x 26%) 126,048 - 126,048
Gross Profit (P43,200 x 26%) P 11,232 - P 11,232
Revenue (P540,000 x 74%) P 399,600 P 137,280 P 262,320
Costs/Expenses (P492,000 x 74%) _364,080 _126,048 238,032
Gross Profit (P48,000 x 74%) P 35,520 P 11,232 P 24,288
Revenue (P540,000 x 100%) P 540,000 P 399,600 P 140,400
Costs/Expenses (P492,000 x 100%) _492,000 _364,080 _127,920
Gross Profit (P48,000 x 100%) P 48,000 P 35,520 P 12,480
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price:
Initial amount of contract…………....... P528,000 P528,000 P528,000
Variation…………………………………… _______- __12,000 12,000
Total contract price………………………… P528,000 P540,000 P540,000
Costs incurred each year…………………. P126,048 P240,032 P121,920
Add: Costs incurred in prior years……….. _______- _126,048 _370,080
Actual costs incurred to date (1)…..……. P126,048 P370,080 P492,000
Add: Estimated costs to complete……… _358,752 _121,920 _______-
Total estimated costs (3)……..……………. P484,800 P492,000 P492,000
Estimated gross profit……………………… P 43,200 P 48,000 P 48,000
Percentage of completion (1) / (3)……... ____26% ____74% ___100%
Gross profit to date…………………………. P 11,232 P 35,520 P 48,000
Less: Gross profit in prior years……………. _______- ___11,232 __35,520
Gross profit in current year -% of completion P 11,232 P 24,288 P 12,480
Gross profit in current year –cost recovery method P 0 P 0 P 48,000
Following are the entries for the years 20x3 to 20x5:

Percentage of Completion Method
20x3 20x4 20x5
1. To record costs incurred:
Construction In Progress*………...... 126,048 232,032 127,920
Materials Inventory………………….. 6,000 6,000
Cash, payables, etc…………….. 126,048 244,032 121,920
2. To record progress billings:

Accounts receivable……………….. 144,000 240,000 156,000
Progress billings*.…………………. 144,000 240,000 156,000
3. To record collections:
Cash…………………………………..... 120,000 228,000 192,000
Accounts receivable…………… 120,000 228,000 192,000
4. To recognize Revenue, Costs

and Gross Profit:
Construction Expenses……………… 126,048 238,032 127,920
Construction in Progress*..……….... 11,232 24,288 12,480
Revenue from Construction...... 137,280 262,320 140,400
5. To close Construction In Progress**

and Progress Billings account:
Progress billings……………………… 540,000
Construction In Progress………. 540,000
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
b. Input Measure – Cost Recovery Method

The following table shows the data needed for further analysis:
20x3 20x4 20x5
Contract price:
Initial amount of contract…………... P528,000 P528,000 P528,000
Variation……………………………….. _______- __12,000 __12,000
Total contract price…………………….. P528,000 P540,000 P540,000
Costs incurred each year……………… P126,048 P244,032 P121,920
Add: Costs incurred in prior years……. _______- _126,048 _370,080
Actual costs incurred to date……....… P126,048 P370,080 P492,000
Add: Estimated costs to complete….. ____ _? ____ _? _______-
Total estimated costs ….……..………… P ? P ? P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
Revenue* P 126,048 - P 126,048
Costs/Expenses 126,048 - 126,048
Gross Profit P 0 - P 0
* equivalent to costs incurred
Revenue* P 364,080 P 126,048 P 238,032
Costs/Expenses _364,080 126,048 238,032
Gross Profit P 0 P 0 P 0
* equivalent to costs incurred
Revenue (P540,000 x 100%) P 540,000 P 364,080 P 175,200
Costs/Expenses (P492,000 x 100%) _492,000 364,080 127,920
Gross Profit (P48,000 x 100%) P 48,000 P 0 P 48,000
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price:
Initial amount of contract…………....... P528,000 P528,000 P528,000
Variation…………………………………… _______- __12,000 12,000
Total contract price………………………… P528,000 P540,000 P540,000
Costs incurred each year…………………. P 126,048 P244,032 P 121,920
Add: Costs incurred in prior years……….. _______- _126,048 _370,080
Actual costs incurred to date ……...……. P 126,048 P370,080 P492,000
Add: Estimated costs to complete……… ____ _? ____ _? _______-
Total estimated costs …….…..……………. P ? P ? P492,000
Estimated gross profit………………………. P 0 P 0 P 48,000
Percentage of completion……………….. _ -___ _ -___ ___100%
Gross profit to date…………………………. P 0 P 0 P 48,000
Less: Gross profit in prior years……………. _______- _______- __ 0
Gross profit in current year………………... P 0 P 0 P 48,000
Following are the entries for the years 20x3 to 20x5:

20x3 20x4 20x5
1. To record costs incurred:
Construction In Progress*………...... 126,048 238,032 127,920
Materials Inventory………………….. 6,000 6,000
Cash, payables, etc…………….. 126,048 244,032 121,920
2. To record progress billings:

Accounts receivable……………….. 144,000 240,000 156,000
Progress billings*.…………………. 144,000 240,000 156,000
3. To record collections:
Cash…………………………………..... 120,000 228,000 192,000
Accounts receivable…………… 120,000 228,000 192,000
4. To recognize Revenue, Costs

and Gross Profit:
Construction Expenses……………… 126,480 238,032 127,920
Construction in Progress*..……….... 48,000
Revenue from Construction...... 126,480 238,032 175,920
5. To close Construction In Progress**

and Progress Billings account:
Progress billings……………………… 540,000
Construction In Progress………. 540,000
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
2. Due from/Due to Customers

a. Input Measure - Percentage of Completion Method
Current Asset:
20x3 20x4 20x5
Accounts receivable………………………. P 24,000 P 36,000 P -
Other receivables:
Construction In Progress………………… P399,600
Less: Progress billings……………………. _384,000
Gross amount due from customers…... P 15,600
Raw materials Inventory…………………… P 6,000
Current Liability:
Payables (“Payments on Account”)
Progress billings……………………………… P144,000
Less: Construction In Progress……………. _137,280
Gross amount due to customers………… P 6,720
Construction In Progress Progress Billings
20x3 CI 126,048 144,000 20x3

Pr 11,232
end of x3 137,280 144,000 end of x3

20x4 CI 238,032 240,000 20x4
Pr 11,232
end of x4 399,600 384,000 end of x4

20x5 CI 127,920 156,000 20x5
Pr 12,480
540,000 540,000 540,000 540,000
where: CI - cost incurred each year

Pr - profit
b. Input Measure – Cost Recovery Method

Current Asset:
20x3 20x4 20x5
Accounts receivable………………………. P 24,000 P 36,000 P -
Raw materials Inventory…………………… P 6,000
Current Liability:
Payables (“Payments on Account”)
Progress billings……………………………… P 137,280 P384,000
Less: Construction In Progress……………. _144,000 _364,080
Gross amount due to customers………… P 6,720 P 19,920
Construction In Progress Progress Billings
20x3 CI 126,048 144,000 20x3

Pr 0
end of x3 126,048 144,000 end of x3

20x4 CI 238,032 240,000 20x4
Pr 0
end of x4 364,080 384,000 end of x4

20x5 CI 127,920 156,000 20x5
Pr 48,000
540,000 540,000 540,000 540,000
where: CI - cost incurred each year

Pr - profit
3. Gross Profit
a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed
computation)
20x3 20x4 20x5
Revenue……………………………………… P 137,280 P 262,320 P 140,400
Less: Costs / Expenses……………………... _126,048 _238,032 _127,920
Gross Profit……………………………………. P 11,232 P 24,288 P 12,480
b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
20x3 20x4 20x5
Revenue……………………………………… P 126,048 P 238,032 P 175,920
Less: Costs / Expenses……………………... _126,048 _238,032 _127,920
Gross Profit……………………………………. P 0 P 0 P 48,000
Problem IV
1. Anticipated/Gross Loss
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Contract price P2,500,000
Actual cost to date P1,500,000
Estimated costs to complete 1,200,000
Total estimated project costs 2,700,000
Estimated loss, recognized in 2008 P (200,000)
2009:
Contract price P 2,500,000
Costs incurred: In 2008 P1,500,000
In 2008 1,300,000 a. Input
Total cost 2,800,000 Measure –
Total loss P (300,000) Cost
Recognized in 2008 (200,000) Recovery
Recognized in 2009 P (100,000) Method
Loss in 20x4 P( 200,000)

Loss in 20x5 P (100,000)
2. Journal Entries
a. Input Measure – Percentage of Completion (Cost-to-Cost Method)
2008:
Construction in progress 1,500,000
Various credits 1,500,000
Accounts receivable 1,200,000

Billings on construction contract 1,200,000
Cash 1,000,000
Cost of construction 1,588,889

Construction in progress (loss) 200,000
Revenue from long-term contracts* 1,388,889
2009:
Various credits 1,300,000

Cash 1,500,000
Cost of construction 1,211,111

Construction in progress (loss) 100,000
Revenue from long-term contracts** 1,111,111

*P2,500,000 (P1,500,000/P2,700,000)
** P2,500,000 1,388,889
Problem V
Item to compute Answer
Total revenue recognized during 2009 (w): P50 million
CIP contains cost + gross profit = revenue, so w = P50 P 15 million
Gross profit recognized during 2009 (x): P50 – P35 = P15
Billings on construction (y) : P14 + P 46 = P60 P60million
Net billings in excess of construction in progress (z): Billings of P60 – CIP of P10 million
P50
Calculate the percentage of PAC that was completed during 2009:
50/150 = 33.33% 333.33%
Problem VI
Item to compute Answer
Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R) P65 million
Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22 P44 million
gross pofit)
At 12/31/2009, the estimated remaining costs to complete Cincy One P156 million
(44/{44 + x})(300 – {44 + x}) = 22; x = 156
The percentage of Cincy One that wa completed during 2009 100 x (44/ 22%
{44 + 156})
Problem VII
1.
Progress billings on construction contract P562,000
Less accounts receivable 150,500
Cash collected in 20x4 P411,500
2.
Gross profit from construction contract + Construction in progress = Revenue for 20x4
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12% Percentage completed in 20x4
P301,000/.12 = P2,508,333 Estimated income on construction contract
Problem VIII
1. Percentage of Completion Method (Cost-to-cost Approach)
20x4 20x5 20x6
Contract price ................... P250,000 P250,000 P250,000
Current year costs ............... 110,000 120,000 15,000
Costs to date .................... 110,000 230,000 245,000
Estimated cost to complete ....... 100,000 20,000 0
Estimated total cost ............. 210,000 245,000 240,000
Estimated total gross profit ..... 40,000 5,000 5,000
Percent complete ................. 52% 94% 100%
Revenue to date .................. P130,000 P230,000 P250,000
To Date Previous Current

at Dec. 31 Years Year
20x4: Revenue P130,000 P130,000
Costs (110/210 x 210) 110,000 110,000
Gross profit P 20,000 P 20,000
20x5: Revenue P235,000 P130,000 P105,000
Costs (230/245 x 245) 230,000 110,000 120,000
Gross profit (loss) P 5,000 P 20,000 P(15,000)
20x6: Revenue P250,000 P235,000 P 15,000

Costs 245,000 230,000 15,000
Gross profit P 5,000 P 5,000 P 0
20x4 20x5 20x6

1. Revenue recognized during
the year P130,000 P100,000 P15,000
2. Gross profit recognized during
the year 20,000 (15,000) 0
3. Balance in the construction in
progress account at Dec. 31 . 130,000 235,000 0
4. Balance in the progress
billings account at Dec. 31 . 125,000 250,000 0
5. Net (3-4) or (4-3) – due from (due to) 5,000 (15,000) 0
2. Cost Recovery Method

20x4 20x5 20x6
1. Revenue recognized during
the year P110,000 P120,000 P20,000
the year 0 0 5,000
progress account at Dec. 31 . 110,000 230,000 0
5. Net (3-4) or (4-3) – due from (due to) (15,000) (20,000) 0
Problem IX
1. Percentage of Completion Method (Cost-to-cost Approach)
2005 2006 2007

Contract price P250,000 P250,000 P250,000
Current year costs 150,000 100,000 15,000
Costs to date 150,000 250,000 265,000
Estimated cost to complete 90,000 20,000 0
Estimated total cost 240,000 270,000 265,000
Estimated total gross profit 10,000 (20,000) (15,000)
Percent complete 63% 93% 100%
Revenue to date P157,500 P232,500 P250,000
To Date Previous Current

at Dec. 31 Years Year
2005: Revenue ............ P157,500 P157,500
Costs (150/240 x 240) 150,000 150,000
Gross profit ............ P 7,500 P 7,500
2006: Revenue ............ P232,500 P157,500 P 75,000

Costs ............ 252,500 150,000 102,500
Gross profit (loss) ............ P(20,000) P 7,500 P(27,500)
2007: Revenue ............ P250,000 P232,500 P 17,500

Costs ............ 265,000 252,500 12,500
Gross profit (loss) ............ P(15,000) $(20,000) P 5,000
20x4 20x5 20x6

1. Construction costs (expense)
recognized during the year P150,000 P102,500 P12,500
the year 7,500 (27,500) 5,000
progress account at Dec. 31
(after closing entries) 157,500 230,000* 0
5. NNet (3-4) or (4-3) – due from (due to) 47,500 0 0
Balance in accounts receivable

at Dec. 31 (after closing entries) 10,000 10,000 0
*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss
2. Cost Recovery Method

20x4 20x5 20x6
1. Construction costs (expense)
recognized during the year P150,000 P 80,000* P20,000**
the year 0 (20,000) 5,000
progress account at Dec. 31
(after closing entries) 150,000 ***230,000 0
5. NNet (3-4) or (4-3) – due from (due to) 40,000 0 0
Balance in accounts receivable

at Dec. 31 (after closing entries) 10,000 10,000 0
*P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5
** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5
***P150,000 + P100,000 – P20,000

1. a
Costs incurred each year
(2.5 M + 2.0 M + 1 M* + .5 M) P 6M
Add: Cost incurred in prior years 0
Costs incurred to date P 6M
Add: Estimated cost to complete
Total estimated costs P 18 M
Percentage of completion 6 M / 18M
Administrative cost as long as reimbursable is included in the construction costs.
Marketing costs are considered as expenses.
Depreciation of idle equipment is charged to expenses.
2. b
P7,200,000
——————————— x (P15,000,000 – P12,000,000) = P1,800,000.
P7,200,000 + $4,800,000
3. c
P1,170,000
—————- x (P3,300,000 – P1,950,000) = P810,000
P1,950,000
(P3,300,000 – P2,010,000) – P810,000 = P480,000.
4. d
Under the percentage of completion method, the Construction-In-Progress account is used for cost
incurred during the year and any realized gross profit (loss). The following T-account is prepared:
Construction-In-Progress
CI in 2004 210,000
RGP in 20x4 (?) 34,000
End of 20x4 244,000
CI in 20x5 384,000
RGP in 20x5 (?) 100,000
End of 20x5 728,000
5. b P1,200,000
————— x (P7,200,000 – P4,800,000) = P600,000.
P4,800,000
6. c P7,200,000 – P4,875,000 =P2,325,000.
7. a
20x4
Contract Price P4,800,000
x: Percentage-of-completion _______75%
Recognized Revenue to date P3,600,000
Less: Costs incurred to date P3,400,000
Gross Profit to date P 200,000
Less: GP in prior year _______-0-
Gross profit in current year P 200,000
8. a P3,600,000
————— x (P8,400,000 – P6,000,000) = P1,440,000.
P6,000,000
9. b P8,400,000 – P5,600,000 = P2,800,000.

Items 10 and 11
No number requirement identified, if percentage-of-completion then the answer would (a)
a [P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000
(P5,500,000 – P3,350,000) – P1,350,000 = P800,000.
10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000.
11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross profit should be
realized.
12. c P600,000
—————————— x (P1,500,000 – P1,000,000) = P300,000
P600,000 + P400,000
(P1,500,000 – P1,050,000) – P300,000 = P150,000.

13. a
Less: Total Estimated Costs
Costs Incurred-1/10/x4 to 12/31/x5 P3,600,000
Add: Estimated costs to complete 1,200,000 4,800,000
Less: Costs incurred to date P1,200,000
Multiplied by: % of completion ___3.6/4.8
Gross Profit to date P 900,000
Less: GP in prior year (given) ___600,000
Gross profit in current year P 300,000
14. b
20x4: Cost to date – P7,500,000 x 20% P1,500,000
20x5: Cost to date – P8,000,000 x 60% 4,800,000
Cost incurred during 20x5 P3,300,000
15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000.
16. b
Costs Incurred 50,000
Contract price………………………………………. P260,000
Cost incurred each year………………………….. P 50,000
Add: Cost incurred in prior year…………………. -0-
Costs incurred to date…………………………….. P 50,000
Add: Estimated costs to complete……………… 150,000
Total estimated costs………………………………. P200,000
Estimated gross profit (loss)………….……………. P60,000)
Multiplied by: percentage of completion……….. __50/200 15,000
Construction In Progress account 65,000
Less: Progress billings 30,000
Construction In Progress account (net) or Due from customers 35,000
17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery
method must be used).
18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000.
19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.
20. d
21. d
Recognized gross profit (loss) to date………….. P( 100,000)
Less: Recognized gross profit in prior years……. ____20,000
Recognized gross profit each year…………….. P (120,000)
22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000.
23. c
Prior year Current year
Contract price………………………………………. P7,000,000 P7,000,000
Cost incurred each year…………………………..
Add: Cost incurred in prior year………………….
Costs incurred to date…………………………….. P5,000,000
Add: Estimated costs to complete……………… 2,800,000
Total estimated costs………………………………. P7,800,000
Estimated gross profit (loss)………….……………. (P 800,000)
Multiplied by: percentage of completion……….. _____100%
Recognized gross profit (loss) to date………….. P600,000 (P 800,000)
Less: Recognized gross profit in prior years……. ___600,000
Recognized gross profit each year…………….. (P1,400,000)
24. c P7,440,000 × .30 = P2,232,000.
25. d (P7,200,000 × .75) – (P7,100,000 × .30) = P3,270,000.
26. b (P7,440,000 × .75) – (P620,000 × 8) = P620,000 debit.
27. c P7,440,000 × .25 = P1,860,000

P7,500,000 – (P7,200,000 × .75) = P2,100,000.
28. b (P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000.
29. c P3,795,000 + P345,000 = P4,140,000.
30. d P3,500,000 –P1,350,000 – P1,525,000 = P625,000.
31. b P240,000 – P100,000 = P140,000.
32. d P300,000 – P60,000 = P240,000
P240,000
————————— x (P2,400,000 – Total estimated cost) = P60,000
Total estimated cost
Total estimated cost = P1,920,000

P2,400,000 – P1,920,000 =P480,000.
33. c (P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.
34. a (P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.

P6,325,000 + P575,000 = P6,900.000.
35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zero-profit
approach) of construction accounting, revenue is recognized up to the extent of costs incurred as
long as it is probable will be recoverable.
36. b - 20x5: P12,000,000 > P11,870,000, No loss;

20x6: P12,000,000 – P12,400,000 = P400,000 loss.
37. a - Revenue recognized to the extent of costs incurred
38. c P3,200,000 – P2,150,000 = P1,050,000.
39. c P1,500,000 – P820,000 = P680,000.
40. a
Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 – P150,000,
loss) – P1,900,000, billings = P200,000 is classified as due from customers.
Under the US FASB, the excess of P200,00 is considered as an inventory account.
41. c
Costs of construction 1,200,000
Construction in progress 800,000
Revenue for long-term contracts 2,000,000
Percentage complete = P1,200,000 / (P1,200,000 +P600,000) = 2/3
Revenue recognized = 2/3 P3,000,000 = P2,000,000
Cost recognized = P1,200,000
Gross profit recognized = P2,000,000 P1,200,000 = P800,000
42. a
Costs of construction P1,200,000
Profit 800,000
Construction In Progress P2,000,000
Less: Progress billings 1,500,000
Excess (Due from customers) P 500,000
43. b
Costs of construction 600,000
Construction in progress 400,000
Total revenue P3,000,000 revenue previously recognized P2,000,000 = Revenue to
recognize this year P1,000,000.
Cost recognized = P600,000
Gross profit recognized = P1,000,000 P600,000 = P400,000
44. d
Costs of construction 1,200,000
Under cost recovery method, revenue should be recognized up to the extent of costs incurred.
45. b
Costs of construction P1,200,000
Profit 0
Construction In Progress P1,200,000
Less: Progress billings 1,500,000
Excess (Due to customers) P( 300,000)
46. d
Costs of construction 600,000
Under the cost recovery method, record equal amounts of revenue and cost until cost recovered,
and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000, so record
remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5.
47. a
20x4 20x5
Contract price P 9,600,000 P10,080,000
Costs incurred to date P 4,920,000 P 8,640,000
Add: Estimated cost to complete 4,920,000 2,160,000
Total estimated costs P 9,840,000 P 10,800,000
Estimated Gross Profit (loss) P(240,000) P (720,000)
Multiply by: % of completion 100% 100%
Recognized Gross Profit (Loss) to date P (240,000) P (720,000)
Less: Gross Profit (Loss) in prior year _________ (240,000)
Recognized Gross Profit (Loss) in current year P (240,000) P (480,000)
% of Completion / Cost Recovery Method:

Construction in Progress Progress Billings
CI 4,920,000 240,000 loss 5,280,000
4,680,000 5,280,000
CI 3,720,000 480,000 loss 3,420,000
7,920,000 8,700,000
due to customers
P780,000
Note: If there is an anticipated loss, the Construction-in-Progress for both methods will exactly be
the same in the year the loss was incurred.
48. d
Percentage of Completion: Project 6 Project 7 Project 8
Contract price………………………….. P500,000 P700,000 P250,000
Cost incurred each year………………. P375,000 P100,000 P100,000
Add: Cost incurred in prior year……… _________ ________ ________
Costs incurred to date………………… P375,000 P100,000 P100,000
Add: Estimated costs to compute……. ________ 400,000 100,000
Total estimated costs…………………. P375,000 P500,000 P200,000
Estimated gross profit………………… P125,000 P200,000 P 50,000
Multiply by: percentage of completion. 100% 20% 50%
Recognized gross profit to date……… P125,000 P 40,000 P 25,000
Less: Recognized gross profit in prior years _________ _________ _________
Recognized gross profit each year…. P125,000 P 40,000 P 25,000
Cost Recovery Method of Construction Accounting:

Project 6 Project 7 Project 8
Recognized Revenue………..……….. P500,000* P100,000 P100,000
Less: Costs of long-term construction
contract…………………………….. 375,000 100,000 100,000
Recognized gross profit each year…. P125,000 P 0 P 0
* Since the contract is completed then the full amount of P500,000 contract price should be recognized as
revenue.
Percentage of Completion Cost Recovery Method of Construction

Construction in Progress Construction in Progress
Pr. 6 - Cl. 375,000 500,000 Pr. 6 Pr. 6 - Cl. 375,000 500,000 Pr. 6
Pr. 125,000 Pr. 125,000
Pr. 7 – Cl. 100,000 Pr. 7 – CI 100,000
Pr. 40,000 Pr. 8 – CI 100,000
Pr. 8. Cl 100,000 700,000 500,000
Pr. 100,000 12/31 200,000 (d)
765,000 500,000
12/31 265,000 (d)
49. a
Input Measures: Efforts-Expended Method - using timbers laid
Year 2 Year 3
Timers laid Each Year 300 500
Add: Timbers laid in Prior Years 150 450
Timbers laid to date 450 950
Add: Additional support timbers to be laid 520 -0-
Total Estimated Timbers 970 950
Percentage-of-Completion 45/97 100%
x: CONTRACT PRICE P 800,000 P 800,000
Recognized Revenue to Date P 371,134 P 800,000
Recognized Revenue in Prior Years 371,134
Recognized Revenue in Current Yr. P 428,866
Output Measures – Number of trail feet

Year 2 Year 3
Trail feet Each Year 7,500 8,000
Add: Trail fees in Prior Years 3,000 10,500
Trail feet to date 10,500 18,500
Add: Additional trail feet to be constructed 8,200 ___-0-
Total Estimated Trail feet 18,700 18,500
Percentage-of-Completion 105/187 100%
x: CONTRACT PRICE P 800,000 P 800,000
Recognized Revenue to Date P 449,198 P 800,000
Recognized Revenue in Prior Years 449,198
Recognized Revenue in Current Yr. P 350,802
50. b
2006 2007 2008
Contract price………………………….. P5,000,000 P5,000,000 P5,000,000
Cost incurred each year………………. P2,050,000
Add: Cost incurred in prior year……… 900,000 2,550,000
Costs incurred to date………………… P 900,000 P2,550,000 P4,600,000
Add: Estimated costs to complete 1,700,000 -0-
Total estimated costs…………………. P4,250,000 P4,600,000
Estimated gross profit………………… P 750,000 P 400,000
Multiply by: percentage of completion. 60% 100%
Recognized gross profit to date……… P 100,000 P 450,000 P 400,000
Less: Recognized gross profit in prior years -0- 100,000 450,000
Recognized gross profit each year…. P 100,000 P 350,000 P( 50,000)
52. c
Contract Price……………………………………………… P60,000,000
Less: Total Estimated Costs
Cost Incurred to Date……………………………… P26,000,000
Add: Estimated Costs to Complete……………… 25,000,000 51,000,000
Estimated Gross Profit……………………………………. P 9,000,000
Multiplied by: % of completion…………………………. 30%
Recognized gross profit to date……………………….. P 2,700,000
Less: RGP in prior years…………………………………… _________0
Recognized gross profit in current year……………… P 2,700,000
Construction-in-progress Account:
Costs incurred to date………………………………….. P 26,000,000
GP in the current year…………………………………… 2,700,000
P 28,700,000
Less: Progress billings…………………………………….. 5,000,000
Due from customer (net)………………………………. P 23,700,000
53. c
Multiplied by: Gross Profit Rate _________25%
Estimated Gross Profit of the entire contract P 25,000,000
Multiplied by: Percentage of Completion for first year _________50%
Gross Profit realized for current year P 12,500,000
54. c
x: Mobilization Fee 10%
Collection in 20x4 P 12,000,000
Note: Billings for 20x4 will be collected in January 20x5.
55. a
Mobilization Fee: 5% x P10M P 5.0 M
Collection on Billings:
Contract price P 100 M
x: Progress billings, net of 10% and 8% (50% - 10% - 8%) 32%
Progress billings P 32 M
x: Collections net of contract retention of 10% 90% 28.8 M
Collections in 20x4 P 33.8 M
56. b – cost recovery method is used.

At the end of 20x4 the contractor must recognized only to the extent of recoverable contract costs
incurred (i.e., P5,000 contract revenue and P5,000 construction costs/expenses).
Quiz- VIII
1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000
P1,000,000 – P900,000 = P100,000.
2. P150,000
Costs incurred to date 1,350,000
Add: Estimated cost to complete _2,700,000
Total estimated costs 4,050,000
Estimated Gross Profit (loss) 450,000
Multiply by: % of completion 1,350/4,050
Recognized Gross Profit (Loss) to date 150,000
Less: Gross Profit (Loss) in prior year ____-0-
Recognized Gross Profit (Loss) in current year 150,000
3. P150,000
20x5 20x6
Contract price 3,000,000 3,000,000
Costs incurred to date 1,800,000
Add: Estimated cost to complete _600,000
Total estimated costs 2,250,000 2,400,000
Estimated Gross Profit (loss) 750,000 600,000
Multiplied by: % of completion 1,800/2,400
Recognized Gross Profit (Loss) to date 300,000 450,000
Less: Gross Profit (Loss) in prior year _300,000
4. P80,000
20x5
Costs incurred to date 240,000
Add: Estimated cost to complete _960,000
Multiplied by: % of completion 240/1,200
Less: Gross Profit (Loss) in prior year ______0
5. P20,000
20x5 20x6
Contract price 1,400,000 1,400,000
Costs incurred each year 400,000 400,000
Add: Cost incurred in prior years _____-0- 400,000
Costs incurred to date 400,000 800,000
Add: Estimated cost to complete _400,000 200,000
Total estimated costs 800,000 1,000,000
Multiplied by: % of completion 400/800 800/1,000
Less: Gross Profit (Loss) in prior year ______0 300.000
Recognized Gross Profit (Loss) in current year 300,000 20,000
6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost
recovered, and then record gross profit
7.P240,000 Profit
20x5
Costs incurred each year 960,000
Add: Cost incurred in prior years _______0
Multiplied by: % of completion 960/3,200
Less: Gross Profit (Loss) in prior year _______0
8. P102,000
20x5
Contract price 850,000
Add: Estimated cost to complete 357,000
Total estimated costs 595,000
Multiplied by: % of completion 238/595
9. P990,000
20x5 20x6
Contract price 3,000,000 3,000,000
Add: Cost incurred in prior years 450,000
Costs incurred to date* 450,000 1,440,000
Multiplied by: % of completion ____20% _____60%
Less: Gross Profit (Loss) in prior year ______0 150.000
Recognized Gross Profit (Loss) in current year 150,000 210,000
* total estimated costs x % of completion
10. P50,000
20x5
Add: Estimated cost to complete 1,085,000
Estimated Gross Profit (loss) ( 50,000)
Multiplied by: % of completion 100%
Recognized Gross Profit (Loss) to date ( 50,000)
Recognized Gross Profit (Loss) in current year ( 50,000)
11. P625,000
20x5 20x6
Contract price 3,500,000 3,500,000
Costs incurred each year 1,350,000 1,525,000
Add: Cost incurred in prior years -0- 1,350,000
Costs incurred to date 1,350,000 2,875,000
Add: Estimated cost to complete 1,350,000 _______0
Multiplied by: % of completion - ___100%
Less: Gross Profit (Loss) in prior year -0- _______0
Recognized Gross Profit (Loss) in current year -0- 625,000
12. P550
Costs Incurred………………………………………………………………………. 400
Contract price………………………………………. P2,750
Cost incurred each year………………………….. P 400
Add: Cost incurred in prior year…………………. ___-0-
Costs incurred to date…………………………….. P 400
Add: Estimated costs to complete……………… _1,600
Estimated gross profit (loss)………….……………. P 750
Multiplied by: percentage of completion……….. 400/2,000 150
Construction In Progress account – inventory account…………………… 550
13. P1,200,000
The term “completed” should be “cost recovery”
Contract price………………………………………. P2,000,000
Add: Cost incurred in prior year…………………. ______-0-
Costs incurred to date…………………………….. P 700,000
Add: Estimated costs to complete……………… __800,000
Total estimated costs………………………………. P1,500,000
Estimated gross profit (loss)………….……………. P 500,000
Multiplied by: percentage of completion……….. ________0 _______0
Construction In Progress account – inventory account 700,000
20x5
Costs incurred 600,000
Contract price………………………………………. P2,000,000
Add: Cost incurred in prior year…………………. _700,000
Costs incurred to date…………………………….. P1,300,000)
Add: Estimated costs to complete……………… __800,000
Total estimated costs………………………………. P(2,100,000)
Estimated gross profit (loss)………….……………. P (100,000)
Multiplied by: percentage of completion……….. ________0 _(100,000)
Construction In Progress account – inventory account 1,200,000
14. P32,000 = P47,000 – P15,000

15. P782,000
20x5
Contract price………………………………………. P850,000
Cost incurred each year………………………….. P238,000
Add: Cost incurred in prior year…………………. ______-0-
Costs incurred to date…………………………….. P238,000
Estimated gross profit (loss)………….……………. P255,000
Multiplied by: percentage of completion……….. _238/595 102,000
20x6
Costs incurred 319,600
Contract price………………………………………. P850,000
Cost incurred each year………………………….. P319,600
Add: Cost incurred in prior year…………………. _238,000
Costs incurred to date…………………………….. P557,600
Estimated gross profit (loss)………….……………. P153,000
Multiplied by: percentage of completion……….. _557.6/697 _122,400
Less: Progress billings (P260,000 + P210,000) 470,000
Construction In Progress account (net) – Due from
customers 312,000
16. P312,000
17. same with no.16 – P312,000
18. (P9,000,000 – P8,250,000) × (P3,795,000 ÷ P8,250,000) = P345,000.
19.P3,795,000 + P345,000 = P4,140,000.
20. P2,750,000
P1,650,000
————— × P5,000,000 = P2,750,000
P3,000,000
21. Accounts Receivable ................................................................................ 1,650,000

Billings on Construction in Process ........................................... 1,650,000
22. Construction Expenses .............................................................................. 1,650,000

Construction in Process ............................................................................. 1,100,000
Revenue from Long-Term Contracts ........................................ 2,750,000
23. P875,000
Revenue P5,000,000
Costs 3,025,000
Total gross profit 1,975,000
Recognized in 20x5 (1,100,000)
Recognized in 20x6 P 875,000
Or
Total revenue P5,000,000
Recognized in 20x5 (2,750,000)
Recognized in 20x6 2,250,000
Costs in 20x6 (1,375,000)
Gross profit in 20x6 P 875,000
Percentage-of-Completion Completed-Contract
Gross Profit Gross Profit
24. 20x5 P750,000a 20x5 —
25. 20x6 P210,000b 20x6 —
26. 20x7 P440,000c 20x7 P1,400,000d
aP1,500,000
————— × P2,000,000 = P750,000

P4,000,000
bP2,640,000
————— × P1,600,000 = P960,000

P4,400,000
Less 20x5 gross profit (750,000)

20x6 gross profit P210,000
cTotal revenue P6,000,000

Total costs 4,600,000
Total gross profit 1,400,000
Recognized to date (960,000)
20x7 gross profit P 440,000
dTotal revenue P6,000,000

Total costs 4,600,000
Total gross profit P1,400,000
27. P312,500
Revenue = [P250,000/(P250,000 + P750,000)] 
P1,250,000
= P312,500
Gross profit = P312,500  P250,000 = P62,500
Construction in progress = P250,000 + P62,500 = P312,500
28. P125,000
(2) Current Assets
Inventories
Construction in progress* P1,000,000
Less: Partial billings** (875,000)
Costs and recognized profit not P 125,000
yet billed
*Revenue to date = (P250,000 +
P600,000)/(P250,000 + P600,000 +
P212,500)  1,250,000 = P1,000,000
Construction in progress = P250,000 +
P600,000 + P150,000 = P1,000,000
**Partial billings = P375,000 + P500,000 =
P875,000
29. P60,00
Revenue to date P1,250,000
Revenue from previous periods _1,000,000
Revenue for 20x7 P 250,000
Costs incurred in 20x7 _ 190,000
Gross profit for 20x7 P 60,000
THEORIES
1. False 6. False 11. False 16. True 21. True 26. True 31. False
2. True 7. False 12. True 17. False 22. False 27. True 32. False
3. True 8. False 13. False 18. True 23. False 28. False 33. True
4. False 9. True 14. True 19. False 24. False 29. False 34. False
5. False 10, False 15, False 20. True 25. False 30. True 35. True
36. False
37. True
38. True
39. False
40. False
41. b 46. a 51. c 56. d 61. d 66. c

42. c 47. d 52. b 57. b 62. b 67. b
43. b 48. c 53. c 58. c 63. a 68. a
44. c 49. c 54. b 59. c 64. c 69. d
45. b 50. a 55. a 60. c 65. d 70. C
Chapter 9
Problem I
1. Jollibee has substantially performed all material services, the refund period has expired, and the
collectibility of the note is reasonably assured. Jollibee recognizes revenue as follows:
Cash……….. 240,000
Notes receivable……………. 600,000
Franchise revenue…………………….. 840,000
2. The refund period has expired and the collectibility of the note is reasonably assured, but
Jollibee has not substantially performed all material services. Jollibee does not recognize
revenue, but instead recognizes a liability as follows:
Cash……….. 240,000
Unearned franchise revenue…………………….. 840,000
Franchisor will recognize the unearned franchise fees as revenue when it has performed all
material services, the adjusting entry to record the revenue then would be:
Unearned franchise revenue……………………... 840,000

Franchise revenue….……. 840,000
3. Jollibee has substantially performed all services and the collectibility of the note is reasonably
assured, but the refund period has not expired. Jollibee does not recognize revenue, but
instead recognizes a liability as follows:
Cash……….. 240,000
The franchisor will recognize the unearned franchise fees as revenue when the refund period
expires, the adjusting entry to record the revenue then would be:

Franchise revenue….……………………………….. 840,000
4. Jollibee has substantially performed all services and the refund period has expired, but the
collectibility of the note is not reasonably assured. Jollibee recognizes revenue by the installment
or cost recovery method. If we assume that Jollibee uses the installment method, it recognizes
revenue of P240,000 as follows:
Cash……….. 240,000
Unearned franchise revenue…………… 600,000
The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of
franchise, the entry would be as follows:
Unearned franchise revenue…………… 120,000
This revenue recognition may be true only in the event there is no cost of franchise at all. On the
other hand, it may be somewhat misleading since under the installment sales method; gross profit
is earned or realized thru collections.
5. The refund period has expired, but Jollibee has not substantially performed all services and
there is no basis for estimating the collectibility of the note. Jollibee does not recognize the note
as an asset. Instead, it uses a form ·of the deposit method. For example, suppose Jollibee has
developed an entirely new product whose success is uncertain and the franchisee will pay
the note from the cash flows from the sale of the product, if any. Jollibee records the initial
transaction as follows:
Cash……….. 240,000
The franchisor may recognize the unearned franchise fees as revenue under the accrual
method in the normal manner at the completion of the services to be performed (if
collectibility is reasonably assured), the adjusting entry to record the revenue then would be:

Alternatively, it may recognize revenue under the installment method if it has no basis for
estimating the collectibility of the note.
6. Now assume that Jollibee has earned only P360,000 from providing initial services, with the
balance being a down payment for continuing services. If the refund period has expired and
the collectibility of the note is reasonably assured, Jollibee recognizes revenue of P360,000 as
follows:
Cash……….. 240,000
Unearned franchise revenue………….. 480,000
The franchisor recognizes the unearned franchise revenue of P480,000 as revenue when it
performs the continuing services, the adjusting entry to record the revenue then would be:

In all these cases except the fifth, the franchisor accounts for the collection of interest and
principal on the note receivable in the usual manner. In the fifth situation, it does not recognize
the note and revenue until a future event occurs. In addition, the franchisor accounts for its costs
in the same way as its revenue recognition. That is, if it defers revenue, then it defers the related
cost of goods sold. Then, when it recognizes revenue, it matches the cost of goods sold against
the revenues. The franchisee accounts for its payments as an intangible asset.
Sometimes the franchisor collects the initial franchise fee far in advance of performing its
services. At other times collection of part of the initial franchise fee is deferred until the franchise
is operating successfully.
Problem II
1.
Cash ......................................... 75,000
Unearned Franchise Fee ..................... 75,000
2.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 166,119
[P{75,000 + (P30,000 x 3.0373)] = P116,119

(Table IV n = 4, i = 12%)
3.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 75,000
Unearned Franchise Fee ..................... 91,119
Problem III
1. If there is a reasonable expectation that the down payment may be refunded and substantial future
services remain to be performed by Pizza, Inc., the entry should be:
Cash……….. 120,000.00
Notes receivable……………. 480,000.00
Unearned interest income (or Discount on notes receivable) 80,583.20
Unearned franchise revenue…………………….. 419,416,80
2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services
to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and
substantial performance has occurred, the entry should be:
Cash……….. 120,000.00
Franchise revenue…………………….. 503,300.16
3. If the initial down payment is not refundable, represents a fair measure of the services already
provided, with a significant amount of services still to be performed by the franchisor in future
periods, and collectibility of the note is reasonably assured, the entry should be:
Cash……….. 120,000.00
Unearned franchise revenue 383,300.16
4. If the initial down payment is not refundable and no future services are required by the franchisor,
but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the
entry should be:
Cash……….. 120,000.00
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by
means of cash collection using the cost recovery method.
5. If the initial down payment is refundable or substantial services are yet to be performed, but
collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the
entry should be:
Cash……….. 120,000
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by
means of cash collection using the cost recovery method.
Problem IV
1. If the down payment is refundable, and no services have been rendered at the time the
arrangement is made, and collection on the note is reasonably certain, the entry should be:
Cash……….. 120,000.00
Unearned franchise revenue…………………….. 262,645.50
2. Initial services are determined to be substantially performed, the refund period has expired and the
collection of the note is reasonably assured, the full accrual method would be used. Assume that
substantial performance of the initial services costs P52,529.1 the entry should be:
Cash……….. 120,000.00
Cost of franchise revenue 52,529.10

Cash, etc…………… 52,529.10
Few months after, the collectibility of the note becomes doubtful or no reasonable assurance, the
installment sales method could be used as a general rule. In addition to the entries above, following
entries would be required:
a. To set-up cost of franchise:

No entry required, already set-up previously.
b. To defer gross profit on franchise:

Franchise revenue 262,645.50
Cost of franchise revenue 52,529.10
Deferred gross profit on franchise 210,116.40
c. Adjustments to recognize gross profit on franchise:

Deferred gross profit on franchise 96,000.00
Realized gross profit on franchise 96,000.00
Franchise revenue……….. 262,645.5

Less: Cost of franchise revenue 52,529.1
Gross profit……….. 210,116.4
Gross profit rate (210,116.4/262,645.5) 80%
Collections as to principal……. P120,000.00

Multiplied by: Gross profit rate……. 80%
Realized gross profit on franchise….. P 96,000.00
Problem V
If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and the permits
on February 1, 20x5, and operations commence at that time, the following journal entries would be
appropriate:
July 1, 20x4:
Cash……….. 120,000
Deferral of revenue recognition is required when “substantial performance" of franchisor services has
not been completed. It would call for deferral of revenue recognition until evidence of service
performance was available. The best evidence, of course, would be the commencement of
operations of the franchise outlet and at this point in time, revenue is recognized.
During 20x4:
Deferred cost of franchise revenue…. 360,000
Cash…………..……….. 360,000
December 31, 20x4:

Interest receivable (P480,000 x 14% x 6/12)………….. 33,600
Cash…………..……….. 33,600
February 1, 20x5:
Cost of franchise revenue…………………….. 360,000

Deferred cost of franchise revenue…………………….. 360,000
Problem VI
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash………….. 1,500,000 1,500,000
Notes receivable……. 4,500,000 4,500,000
Unearned franchise revenue……. 6,000,000 6,000,000
Receipt of initial franchise fee.
Conditions to be met: Cash Notes Cash Notes

Services No No No No
Period of refund Yes Yes Yes Yes
Reasonably No
assured reasonable
Collectibility assurance
1/1/20x4 Balance 1,500,000 4,500,000 1,500,000 4,500,000
Status Liability Liability Liability Liability
December 31, 20x4

Cash………….. 1,575,000 1,575,000
Interest income (P3,750,000 x 10%) 450,000 450,000
Annual collection.
Deferred cost of franchise 1,800,000 1,800,000

Cash………………… 1,800,000 1,800,000
To defer cost of franchise since substantial
services had not been performed.

Cash………………… 120,000 120,000
To record expenses.
Adjustments:
Cost of franchise 1,800,000
Deferred cost of franchise 1,800,000
To recognize cost of franchise.
Unearned franchise revenue……. 6,000,000

Franchise revenue 6,000,000
To recognize franchise revenue based on the

following analysis
:
Conditions to be met: Cash Notes
Services Yes Yes
Period of refund Yes Yes
Reasonably
Collectibility assured
1/1/20x4 Balance………………….. 1,500,000 4,500,000
12/31/20x4: Collection as to principal 1,125,000 (1,125,000)
12/31/20x4 Balance 2,625,000 2,625,000
Status Revenue Revenue
Adjustments (Installment sales method)

No entry*
b. To set-up deferred gross profit

Unearned franchise revenue 6,000,000
Deferred cost of franchise revenue 1,800,000
Deferred gross profit 4,200,000
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to
set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-6 for
alternative treatment to set-up cost of franchise.
Conditions to be met: Cash Notes

Services Yes Yes
Period of refund Yes Yes
No
reasonabe
1/1/20x4 Balance………………….. 1,500,000 4,500,000
12/31/20x4: Collection as to principal 1,125,000 (1,125,000)
12/31/20x4 Balance 2,625,000 2,625,000
Status Revenue – Liability
I/S Method
. To recognize realized gross profit on

franchise:
Deferred gross profit 1,837,500
Realized gross profit on franchise 1,837,500
Collections – principal x gross profit rate

P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500
2.
No reasonable
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)* P6,000,000 P 0
Less: Cost of franchise (accrual method)* 1,800,000 0
Gross profit on regular franchise
(accrual)* P4,200,000 P 0
Add: Gross profit on franchise (installment
sales method) -0- *1,837,500
Gross profit on franchise P4,200,000 P1,837,500
Less: Operating expenses 120,000 120,000
P4,080,000 P1,717,500
Add: Interest income…………….. 450,000 450,000
Net income……………. P4,530,000 P2,167,500
Problem VII
1.
No reasonable
January 1, 20x4
Cash………….. 1,440,000 1,440,000
Unearned interest income* 796,896 796,896
Unearned franchise revenue……. 4,483,104 4,483,104
Receipt of initial franchise fee.
Conditions to be met: Cash Notes (PV) Cash Notes (PV)
Services** No No No No
Period of refund – until date of
Opening No No No No
Reasonably No
assured reasonable
1/1/20x4 Balance 1,440,000 3,043,104*** 1,440,000 3,043,104***
Status Liability Liability Liability Liability
*Unearned interest income or discount on notes receivable: P3,840,000 – P3,043,104 = P796,896.

* *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred and
subsequent direct cost of franchise should also be deferred.
***P960,000 x 3.1699 = P2,535,920
February 2, 20x4:
Deferred cost of franchise 144,931.20 144,931.20
Cash………………… 144,931.20 144,931.20
June 13, 20x4:

General expenses 60,000 60,000
Cash………………… 60,000 60,000
To record expenses.
August 8, 20x4:
Deferred cost of franchise 360,000 360,000
Cash………………… 360,000 360,000
November 2, 20x4:
Deferred cost of franchise 840,000 840,000
Cash………………… 840,000 840,000
November 2, 20x4:
Substantial completion of services.
December 31, 20x4:

Cash………….. 960,000 960,000
Notes receivable………………… 960,000 960,000
Annual collections.
Adjustments:
Unearned interest income 304,310.40 304,310.40
Interest income 304,310.40 304,310.40
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.
Cost of franchise 1,344,931.20

Deferred cost of franchise 1,344,931.20
To recognize cost of franchise.
Unearned franchise revenue……. 4,438,1040
Franchise revenue 4,438,1040
To recognize franchise revenue based on the

following analysis:
Conditions to be met: Cash Notes (PV)

Services** Yes Yes
Period of refund – outlet already
opened. Yes Yes
Reasonably
Collectibility assured
1/1/20x4 Balance 1,440,000 4,438,104
12/31/20x4:
Collection……………..... . P960,000
Less: Interest collection… 304,310.40
Collection – Principal…….P655,689.60 655,689.60 ( 655,689.60)
2,095,689.60 2,387,414.40
Adjustments (Installment sales method)

Cost of franchise revenue….. 1,344,931.20
Deferred cost of franchise revenue 1,344,931.20
b. To set-up deferred gross profit:

Unearned franchise revenue 3,483,104
Cost of franchise revenue 1,344,931.20
Deferred gross profit 2,138,172.80
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to
set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-5 for
alternative treatment to set-up cost of franchise.
Conditions to be met: Cash Notes (PV)

Services** Yes Yes
Period of refund – outlet already
opened. Yes Yes
No
reasonable
1/1/20x4 Balance 1,440,000 304,104
12/31/20x4:
Collection……………..... . P960,000
Less: Interest collection… 304,310.40
Collection – Principal…….P655,689.60 655,689.60 ( 655,689.60)
2,095,689.60 2,387,414.4
Status Revenue – Liability
I/S Method
. To recognize realized gross profit on

franchise:
Deferred gross profit 1,466,983.20
Realized gross profit on franchise 1,466,983.20
Collections – principal x gross profit rate

P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20
2.
No reasonable
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)* P 4,471,1040 P 0
Less: Cost of franchise (accrual method)* 1,344,931.20 0
Gross profit on regular franchise
(accrual)* P3,138,172.8 P 0
Add: Gross profit on franchise (installment
sales method) -0- *1,466,983.20
Gross profit on franchise P3,138,172.8 P1,466,983.20
Less: Operating expenses 60,000 60,000
P3,078,172.8 P1,406,983.20
Add: Interest income…………….. 304,310.40 304,310.40

Net income……………. P3,382,483.20 P1,771,293.60
*Note: This item represents regular franchise sales-type transaction. If the collectibility of the fee (note
receivable) is reasonably assured, the permissible method to be applied should be the accrual method.
It should be observed that in the event, there is cost of franchise and the installment sales method is
used, the concept of revenue recognition does literally apply to franchise revenue but to the
recognition of realized gross profit on franchise thru collections as to principal multiplied by gross profit
rate.
Alternatively, computation of interest and principal collections are as follows:

Interest (10% of
Date Collection Unpaid Balance) Principal Unpaid Balance
1/03/20x4 4,483,104
1/03/20x4 1,440,000 -0- 1,440,000 3,043,104
12/31/20x4 960,000 304,310.40 655,689.60 2,387,414.40
Total 2,400,000 304,310.40 2,095,689.60
Problem VIII
1. The fee is earned for providing continuing services:

Cash or Accounts receivable………… 108,000
Franchise revenue – continuing franchise fee 108,000
2. If P10,000 of the fee is for national advertising:

Cash or Accounts receivable………… 108,000
Unearned franchise revenue – continuing franchise fee…… 12,000
The franchisor recognizes the unearned franchise fees as revenue when it performs the advertising
services and also records the costs as expenses, the entries should be:
Advertising expenses………… xxx

Cash, etc……………….. xxx
Unearned franchise revenue – continuing franchise fee…… 12,000

Problem IX
March 20:
Cash 5,000
Notes receivable 20,000
Unearned franchise fee 25,000
June 15:
Unearned franchise revenue 25,000
Franchise revenue 25,000
July 15:
Cash 500
Service revenue 500
Problem X
Cash or Accounts receivable… 117,600

Franchise revenue – supplies sales…………….. 117,600
Cost of franchise – supplies sales……… 90,000

Supplies inventory………. 90,000
Problem XI
Cash……………. 21,600
Notes receivable (P108,000 – P21,600) 86,400
Unearned interest income (P86,400 – P69,978) 16,422
Franchise revenue (P21,600 + 69,978 – P4,800*) 86,778
Unearned franchise revenue – equipment sale* 4,800
All the criteria to recognize initial franchise fee as revenue was met, except that an amount of P4,800
equivalent to indicated profit (P24,000, selling price less P19,200 option price) will be deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows:
Cash or Accounts receivable… 19,200

Unearned franchise revenue – equipment sale 4,800
Franchise revenue – equipment sale…………….. 24,000
Cost of franchise - equipment sale………. 19,200

Equipment inventory………. 19,200
Problem XII
April 1, 20x4:
Cash……………. 288,000
Notes receivable………… 192,000
Franchise revenue (P21,600 + P86,400 – P4,800*) 480,000
December 31, 20x4:

Franchise revenue – initial franchise fee 480,000
Interest income (P192,000 x 8% x 9/12) 11,520
Cash (P153,600 – P11,520)…………. 142,080
Notes receivable…………… 192,000
Gain or revenue from repossessed franchise…………… 134,400
Problem XIII
Cash 72,000
Notes receivable………… 360,000
Deferred franchise purchase option liability……. 432,000
Deferred cost of franchise revenue…………… 288,000

Cash, etc……… 288,000
Investment………………………….. 120,000
Deferred franchise purchase option liability……. 432,000
Deferred cost of franchise revenue…………… 288,000
Cash, etc……… 264,000
1. a – following conditions should be observed to recognize revenue:

Services – none
Period of Refund – expired
Collectibility of the note – reasonably assured
There was failure on one condition; therefore, no revenue should be recognized.
5. a
Cash 6,000
6. b
Franchise fee revenue 36,000
7. a
Cash 6,000
Franchise fee revenue 36,000
9. b
In this problem, since there is doubtful of collection, it is safely assumed to used installment method.
Therefore, the realized gross profit would be:
Collections in 20x4……………………………………………………………..P 200,000
x: Gross profit rate [100% - (P150,000/P500,000)]…………………………. 70%
Realized gross profit in 20x4…………………………………………………. P 140,000
Revenue Analysis:
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
Collectibility No Reas.
Assured
200,000 300,000
Status Rev – I/S Method Liability
10. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee:
Cash Notes Receivable
Services Yes Yes
Collectibility Reasonably Assured
P20,000 P80,000
Substantial performance of services has been rendered because commencement of operations

by the franchisee shall be presumed to be the earliest point of which substantial performance has
occurred, unless it can be demonstrated that substantial performance of all obligations, including
services rendered voluntarily, has occurred before that time.
Period of refunding the initial franchise fee and collectibility of the notes is not anymore a
problem (they depend on the profitability of its first year of operations) because the result of
operations in the first year is profitable. Therefore, the initial franchise fee of P100,000 (P20,000 + P
P80,000) is considered as revenue, and a continuing franchise fee of P5,000 (1% x P500,000)
should be also be recognized as revenue – continuing fanchise.
Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus P5,000
continuing).
11. a
Initial franchisee revenue (since all services had been performed
and assumed that period of refunding already expired)………………………….. P100,000
Add: Continuing franchise revenue (5% x P800,000)…………………………………… 40,000
Total Revenue from franchise………………………………………………………………. P140,000
12. d
There is already substantial performance of services rendered since, the franchise outlet started
operations and it is assumed that period of refund has expired.
The continuing franchise fee is recognized also as revenue since it is earned at the time it was
received.
The net income would be:

Franchise Revenue:
Initial Franchise Fee:
Down payment…………………………………………… P 30,000
PV of installment (P10,000 x 1.7355)……………………. 17,355 P47,355
Continuing Franchise Fee (5% x P500,000) 25,000
Total Franchise Revenue………………………………………………………………… P72,355
Add: Interest Income (10% x P17,355)………………………………………………… 1,735
Total Revenue/Net Income……………………………………………………………… P74,090
13. a
All conditions that initial franchise fee be recognized as revenue had been met as follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
(note)
Collectibility Reas. Assured
200,000 300,000
The Net Income then would be as follows:
Franchise Revenue………………………………………………………………..P 500,000
Less: Cost of Franchise…………………………………………………………… 150,000
Net Income…………………………………………………………………………P 350,000
14. d
In this problem, full accrual method is used to recognized the initial franchise fee of P100,000
analyze as follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
(note)
Collectibility Reas. Assured
20,000 80,000
Note: Period of refunding the initial franchise fee was presumed to have been expired since the
business operates profitably in its first year of operation.
Continuing Franchise Fee: Considered revenue the moment continuing services had been
rendered amounted to P5,000 (1% x P500,000).
Initial Franchise Fee…………………………………………………………P 100,000

Continuing franchise fee…………………………………………………. 5,000
Total…………………………………………………………………………… P 105,000
Less: Indirect cost of franchise…………………………………………… 15,000
Net income……………………………………………………………………P 90,000
15. d
Revenue = P400,000
Interest income = P160,000 × 8% ×9/12 =
P9,600
Cash = P128,000 – P9,600 = P118,400
Repossession revenue: P240,000 – P128,000 = P112,000.
16. c
Cash = P560,000 + P48,000 = P608,000
Franchise Fee Revenue = P560,000
Unearned Franchise Fees = P48,000 × 20% =
P9,600
Revenue from Continuing Franchise Fees = P48,000 – P9,600 = P38,400.
17. b - P200,000 + P545,872 – P24,000 = P721,872.
18. b
Franchisee frequently purchases all of the equipment, products, and supplies from the franchisor. The
franchisor would account for these sales as if, it would be a product sales. Sometimes, however, the
franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies
after the initial franchise fee is paid. If the bargain price is lower that the normal selling price of the same
product or it does not provide the franchisor the reasonable profit, then, a portion of the initial franchise fee
should be deferred. The deferred portion would be accounted for as adjustment of the selling price when
the franchisee subsequently purchases the equipment or supplies. Therefore, the amount of revenue would
be P90,234 computed as follows:
Cash Notes Receivable

Services Yes Yes
Collectibility Reasonably Assured
P25,000 P68,234
Status Revenue Revenue except
P3,000 reasonable
profit on sale of
equipment
The revenue from franchise would be:
Cash……………………………………………………………………………………………… P 25,000
PV of Note…………………………………………………………………………..P68,234
Less: Reasonable profit on sale of
Equipment P15,000 – P12,000)………………………………………….… 3,000 65,234
P 90,234
Incidentally, the entries would be:
Upon receipt of IFF:
Cash………………………………………………………………………… 25,000
Notes Receivable………………………………………………………… 90,000
Unearned Interest Income (P90,000 – P68,234)…………. 21,766
Franchise Revenue……………………………………………. 90,234
Unearned Franchise Revenue………………………………. 3,000
If equipment was sold:

Cash or Accounts Receivable………………………………………… 12,000
Unearned Franchise Revenue………………………………………… 3,000
Franchise Revenue – Equipment…………………………… 15,000
Cost of Sales – equipment……………………………………………… 12,000

Equipment Inventory………………………………………….. 12,000
Chapter 10
Problem I
1. The journal entries shown below would be made on the consignor’s and consignee’s books (assume
the use of perpetual inventory):
Entries on Consignor’s Books Entries on Consignee’s Books

Transactions (Herbalife Supplier) (Conrado Enterprises)
Shipment of goods on Inventory on No entry
consignment. Consigment…… 60,000 (memorandum
Finished Goods entry only)
Inventory*.... 60,000
2. Payment of
expenses by Inventory on No entry
consignor. Consignment….. 600
Cash…….. 600
3. Payment of Consignor
expenses Inventory on Receivable
by consignee. Consignment…… 2,400 2,400
Consignee Cash……………. 2,400
Payable……… 2,400
Advances by Cash……… 3,360 Advances to
Consignor Advances from Consignor 3,360
Consignee….. 3,360 Cash 3,360
Cash
Sale of merchandise No entry. Consignor 48,000
payable 48,000
Consignor
Payable..
Commission Commission
6. Notification of sale expense
to consignor and Advances from Revenue……..
payment of cash due. Consignee…… 4,800 Consignor 48,000
Commission: Cash……. Receivable
10% x P48,000 = Consignee 3,360 ….. 4,800
P4,800 Payable 37,440 Cash………
Consignment 2,400 Advances 2,400
Sales from 37,440
Revenue.. 48,000
Consignee…… 3,360
7. To record cost of Cost of goods

goods sold and sold** 31,500
related costs. Inventory on
** (P60,000 + P600 + Consignment 31,500
P2,400) x ½ =
P31,500
*if periodic method is used, the credit should be “consignment shipments” account treated as
reduction in the Costs of goods available for sale to arrive at Cost of Goods Sold Available for Regular
Sale.
2. The remittance amounting to P37,440 can be determined by preparing the Account Sales as follows:
Sold for the Account of:
Jingka Juice
Sales (60 sachets of herbal goods) P48,000
Charges:
Finishing costs…………………….. P 2,400
Commission (P48,000 x 10%)……………….. 4,800 7200
Due to Consignor……………………………. P40,800
Less: Advances………………. 3,360
Balance………………………… P37,440
Remittance Enclosed……………… 37,440
Balance Due…………… P 0
Items on Hand (50 sachets of herbal goods): P60,000 x
50% P30,000
Problem II
1. The account sales:
Sold for the Account of:
AA Company
Sales (8 sets @ P24,000)……………… P 192,000
Charges:
Freight-in…………… P 6,000
Advertising expense………… 2,400
Deliveries and installation expenses 9,600
Repairs expense – on units sold.. 4,800
Commissions, 25% of sales 48,000 70,800
Due to Consignor……………………………. P121,200
Less: Advances………………. 0
Balance………………………… P121,200
Remittance Enclosed……………… 30,000
Balance Due…………… P 91,200
Items on Hand………… 15 sets
Items Returned (defective)….……. 2 sets
2. The inventory on consignment amounted to P189,000 computed as:

Charge Analysis
Sales Inventory Total
(8 sets) (15 sets) (25 sets)
Charges by consignor:
Cost of consigned goods
(@P12,000/set) P 96,000 P180,000 P 300,000
Freight-out (P9,000/25 sets = P360 per set) 3,600* 5,400 9,000
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set) 2,400* 3,600 6,000
Advertising expense………….. 2,400 0 2,400
Delivery and installation 9,600 0 9,600
Repairs expense…………… 4,800 0 4,800
Commissions [25% of sales (8 sets x
P24,000 per set] 48,000 0 ___48,000
Total P166,800 P189,000 P379,800
* Freight on sets returned is charged against sales of the period.
** Normally, the term “freight-out” is synonymous to “delivery expense” which is classified as selling
expenses if we are dealing with a third party. But, for consignment accounting where the transfer
of merchandise if from consignor to consignee, the usage of the term “freight-out” does not
construed to be a selling expense but still an inventoriable cost (which is part of freight-in).
The consignment net income amounted to P25,200 computed as:

Consignment Sales (8 sets x P24,000 per set) P 192,000
Less: Costs and expenses:
Charges by Consignor:
Cost of consigned goods @P12,000/set) P 96,000
Freight-out (P9,000/25 sets = P360 per set) 3,600* 99,600
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set) P 2,400*
Advertising expense………….. 2,400
Delivery and installation 9,600
Repairs expense…………… 4,800
Commissions [25% of sales (8 sets x P24,000 per set] 48,000 67,200
Net Income P 25,200
Problem III
Summit Electronics Company

Inventory on Consignment (800 @ P570) 456,000
Finished Goods Inventory 456,000
Consignment Expense (P368,000 x 30%) 110,400

Accounts Receivable--Consignee Sales 257,600
Sales Revenue—Consignment (P920 x 400) 368,000
Cost of Consigned Goods Sold (P570 x 400) 228,000

Inventory on Consignment 228,000
Cash [(P920 x 70%) x 380] 244,720

Accounts Receivable--Consignee Sales 244,720
Farley Hardware
No entry upon receipt of consigned merchandise.
Cash (P920 x 400) 368,000

Consignor Payable 257,600
Commission Revenue 110,400
Consignor Payable 244,720

Cash 244,720
Multiple Choice Problem
1. c – P1,200
Commission = 25% x Sales price

P400 = 25% x Sales price
Sales price = P400 ÷ 25% = P1,600
Number of units sold = Selling price = __P1,600__ = 8 tapes

Price per tape P200 per tape
Sales ……………………………………………………………….. P1,600

Less Commission of consignee………………………………... 400
Amount remitted by Beta View Store………………………...P1,200
2. a – P 370
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(25) (8) (15)
Consignor’s charges:
Cost P2,500 P800 P1,500
Freight-out 75 30 45
Consignee’s charge - Commission __400__ __400__ _______
Total P2,975 1,230 _P1,545_
Sales price _1,600_
Consignment profit _P370_
3. a – P1,545 (refer to No. 2 for computation)
4. b
Sales (P2,250 / 15%) P15,000
Divided by: Selling price per unit P 1,000
Number of units sold 15 units
5. c
Sales P15,000
Less Charges:
Commission P 2,250
Advertising 1,500
Delivery expense ___750 __4,500
Due to Consignor P10,500
Less: Advances
Value of note – sight draft: (100 beds x P600 per bed) x 60% P36,000
Multiplied by: Proportional number of beds sold 15/100 __5,400
Amount remitted P 5,100
6. d – P1,500
Sales P15,000
Less Charges:
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds) 9,000
Consignee’s charges:
Commission P2,250
Advertising 1,500
Delivery expense ___750 __4,500
Consignment net income P1,500
7. a – no items were sold in November;

Sales (unknown) P x
Less Charges:
Commission 15% x
Remittance P 27,200
x – 15%x = P27,200
85%x = P27,200
x = P32,000
8. c – P16,800
Sales (unknown) x
Less Charges:
Advertising P500
Delivery and installation charges 100
Commission (unknown) 20%x _______
Remittance P 12,840
x – (P500 + P100 + 20%x) = P 12,840

x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800
9. b- P6,080
Cost (P150 per unit x 40 units) P6,000
Freight on shipment (P200 x 40/100) 80
Cost of inventory on consignment P6,080
10. c - 6
Sales (unknown) x
Less Charges:
Commission (unknown) 20%x
Advertising P1,000
Delivery and installation 600
Cartage on consigned goods 500
Remittance P21,900
x – (20%x + P1,000 + P600 + P500) = P21,900

x – 20%x = P21,900 + P2,100
80%x = P24,000
x = P30,000
Number of units sold = _P30,000_ =6

P5,000 per set
11. b – P2,300
Charges Related to
(10) (6) (3)
Cost P30,000 P18,000 P9,000
Freight-out 2,500 1,750 750
Commission (20% x P30,000) 6,000 6,000
Advertising 1,000 1,000
Delivery and installation 600 600
Cartage __500__ __350__ __150__
Total P40,600 27,700 _P9,900_
Sales price _30,000_
Profit on Consignment __P2,300__
12. d – None of the above (P9,900) – refer to No. 11 for computation.
13. No answer available - P17,625

Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.
14. a (P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.
AA Sales - Nos. 15 to 17:

15. a
Gross collection (P15,000 x 70% x 80%) P 8,400
Less: Cash discount taken by customer (P8,400 x 2%) __168
Net collection P 8,232
Less Charges:
Expenses P 800
Commission (P8,400 x 15%) _1,260 __2,060
Due to Consignor P 6,172
Less: Advances _6,000
Amount remitted P 172
16. b
Charges Related to
(100%) (70%) (30%)
Cost P10,000 P 7,000 P 3,000
Freight 120 84 36
Expenses 800 800
Commission (15% x P10,500) 1,575 1,575
Cash discount (P10,500 x 80% x 2%) 168 168
Total P12,663 P 9,627 _P3,036_
Sales price (70% x P15,000) _10,500_
Profit on Consignment P 873
RR Products Company – Nos. 19 to 21

19. c
Collection made pertaining to:
May sale
Down payment (3 x P50) P 150
Monthly payment thereafter (3 x P10) 30 P 180
June sale
Down payment (1 x P50) ___50
Total P 230
Less: Commission (P230 x 20%) ___46
Amount remitted P 184
20. d – P140
Charges Related to
(5) (4) (1
Cost P 775 P 620 P 155
Freight 50 40 10
Commission 200 200 ____
Total P1,025 P 860 P165
Sales price (4 units x P250/unit) _ 1,000
Profit on Consignment P 140
22. b
Collection made:
Cash sale (P1,500 x 2) P 3,000
Credit sale (P1,800 x 25%) ___450
Total P3,450
Less: Charges
Freight P 320
Commission [(P3,000 + P1,800) x 15%] __720 __1,040
Amount remitted P 2,410
23. a
Charges Related to
(5) (3) (2)
Cost P4,000 P 2,400 P 1,600
Freight 200 120 80
Freight 320 192 128
Commission 720 720 ______
Total P5,240 P 3,432 P1,808
Sales price 4,800
Profit on Consignment P 1,368
24. b – P1,808 – refer to No. 23 for computation
25. d – 244,600
Sales on credit (14,000 per unit x 12 units) + (13,000 x 10) P298,000
Less: Sales allowance granted P 2,000
Bad debts 7,000
Commission [2% x (P298,000 – P2,000)] _44,400 __53,400
Amount still due from BB, Inc P 244,600
26. d – P67,280
Charges Related to
(30) (22) (8)
Cost P240,000 P176,000 P64,000
Freight-out 1,800 1,320 480
Sales allowance 2,000 2,000
Bad debts 7,000 7,000
Commission
[15% x (P298,000 – P2,000)] 44,400 44,400
Total P295,200 P230,720 _P64,480_
Sales price [P14,000 per unit x 12 units)
+ (P13,000 per unit x 10 units)] 298,000
Consignment profit P 67,280
27. d – refer to No. 26 for computation

28. b – 395
Sales (unknown) x
Less Charges:
Commission (unknown)
( )
__x__ P10
P100
Delivery expense __P45__ ________
Remittance P35,505
x- [( _x__ ) P10 + P45 ] = P35,505

100
x – _P10x_ = P35,550
P100
P100x – P10x = P3,555,000
P90x = P3,555,000
x = P39,500
Number of ballpens sold = _P39,500_ = P395

P100 per unit
29. b
Consignment
Regular Sales Sales Total
Sales P120,000 P30,000 P150,000
Cost of sales 84,000 19,500* 103,500
Gross profit P 36,000 P10,500 P 46,500
Operating expenses:
Commission (P30,000 x 5%) P 1,500 P 1,500
Freight-in (P260 x P19,500*/P26,000) 1,950 1,950
Others
Regular (P15,150 x P19,500/P26,000) 12,120
Consignment
(P15,150 x P30,000/P150,000) _______ 3,030 3,030
Total P 12,120 P 4,725 _P16,845_
Net profit P 23,880 P 5,775 P29,655
*P26,000 – P6,500 = P19,500
30. d – P5,775 (refer to No. 29 for computation)
31. a – (P18,000 + P900) = P18,900

Chapter 11
Problem III
1.
• Contributions of cash by the operators
Cash 360,000
KK Company 180,000
Cerise Company 180,000
Contribution by joint operators.
• Use of cash and loan to buy machinery & equipment and raw materials
Cash 60,000
Loans payable – machinery and equipment 36,000
Contribution by joint operators.
Materials 78,000
Acquisition of materials.
• Labor incurrence
Payroll 86,400
Cash 84,000
Accrued payroll 2,400
Annual labor.
• Loans from the bank

Cash 72,000
Bank loans payable 72,000
Amount borrowed.
• Repayment of loan – machinery and equipment and other factory expenses

Loan payable – machinery and equipment 12,000
Cash 12,000
Partial payment of loan.

Cash 50,400
Payment of trade creditors.
Factory overhead control – heat, light and power 156,000

Cash 156,000
Payment of manufacturing expenses such as heat, light
and power.
• Depreciation of machinery and equipment

Factory overhead control – depreciation 9,600
Depreciation of equipment.
• Transfer of materials, labor and overhead to Work-in-Process

Work-in-process 309,600
Payroll 86,400
Materials 57,600
Factory overhead control – heat, light and power 156,000
Factory overhead control – depreciation 9,600
Allocation of costs to work-in-process
• Transfer of Work-in-Process to Finished Goods Inventory.

Finished goods 216,000
Work-in-process 216,000
Allocation to finished goods
• Transfer of Finished Goods Inventory to Joint Operators throughout the year

KK Company 96,000
DD Company 96,000
Finished goods 192,000
Delivery of output to joint operators.
2.
Cash
Contribution – Drei 180,000 60,000 Machinery and equipment
Contribution – Cerise 180,000 84,000 Labor
Bank loan 60,000 12,000 Machinery and equipment
50,400 Accounts payable
156,000 Factory overhead control
Balance, 12/31/x4 57,600
Work-in-Process
Labor 86,400 216,000 to Finished Goods
Materials 57,600
Factory Overhead – heat, etc. 156,000
Factory Overhead – depreciation 9,600
Balance, 12/31/x4 93,600
3.
a. Total assets, P282,000
b. KK’s investment, P84,000
c. DD’s investment, P84,000
December 31, 20x4
Assets
Current Assets
Cash P 57,600
Finished goods inventory 24,000
Work-in-Process inventory 93,600
Materials inventory 20,400
Total current assets P 195,600
Non-current Assets
Equipment P 96,000
Less: Accumulated depreciation 9,600 86,400
Total Assets P282,000
Liabilities and Net Assets
Current Liabilities
Accrued payroll P 2,400
Accounts payable 27,600 P 30,000
Non-current Liabilities
Bank loan payable P 60,000
Loan payable – machinery and equipment 24,000 __84,000
Net Assets 168,000
Total Liabilities and Net Assets P282,000
Joint Operator’s Equity

KK Company: Contributions – January 1, 20x4 P 180,000
Cost of inventory distributed ( 96,000) P 84,000
DD Company: Contributions – January 1, 20x4 P 180,000

Cost of inventory distributed ( 96,000) P 84,000
Total Joint Operator’s Equity P168,000
Problem VI
The joint operator, Entity K account for their interests in the joint operation as follows:
January 1, 20x4 (P12,000,000 / 5 = P2,400,000)

Property, plant and equipment (interest in an aircraft) 2,400,000
Cash 2,400,000
To recognize the purchase of an ownership-interest in a
jointly controlled aircraft.
In 20x4
Cash 12,000
Profit or loss (rental income) 12,000
To recognize income earned in renting to others the use of
the aircraft in 20x4.
Profit or loss (aircraft operating expenses) 180,000

Cash 180,000
To recognize the costs of running an aircraft in 20x4.
Profit or loss (depreciation expense) 120,000

Accumulated depreciation (interest in an aircraft 120,000
To recognize depreciation of an ownership-interest in a
jointly controlled aircraft in 20x4: P12,000,000/20 years =
P600,000/5 operators = P120,000
share for each joint operator.
Problem VII
1. The following are the summaries of the above transactions for a joint operation in the form of
a partnership:
Investment in
Event Joint Operation AA BB CC
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
a. P 12,000 P12,000
b. 120,000 120,000
6,000 P 6,000
c. 180,000 120,000 P60,000
d. P588,000 P204,000 P312,000 P72,000
e. 3,600 3,600 3,600 10,800
6,000 6,000
f. * ________ ___3,000 ___3,000 ________ ________ ______ _______ _______
P318,000 P597,000 P210,600 P252,000 P315,600 P 60,000 P81,600 P 16,800
NI** _297,000 ________ ________ __112,200 ________ _147,000 _______ 31,800
P597,000 P597,000 P210,600 P364,200 P315,600 P195,000 P81,600 P48,600
Cash***
Settlement _______ ________ _153,600 ________ ________ _120,600 _______ _33,000
Totals P597,000 P597,000 P364,200 P364,200 P315,600 P315,600 P81,600 P81,600
* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000.
**NI – Net Income Allocation

AA BB CC Total
Allowance for cleaning-up operations P 3,000 P 3,000
Commission:
Aljon: 40% of P204,000 P81,600 81,600
Elerie: 40% of P312,000 P124,800 124,800
Mac: 40% of P72,000 28,800 28,800
Balance (75%: 25%) 30,600 10,200 _______ 40,800
Total P112,200 P135,000 P31,800 P279,000
**Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.
2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as
follows:
AA, capital 153,600
BB, capital 120,600
CC, capital 33,000
Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint
operations.
Problem VIII
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4

Cost of investment
Consideration transferred P2,016,000
Less: Book value of stockholders’ equity of Son:
Common stock (P3,600,000 x 30%) P 1,080,000
Retained earnings (P1,080,000 x 30%) 324,000 1,404,000
Allocated excess (excess of cost over book value) P 612,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P240,000 x 30%) P 72,000
Increase in land (P960,000 x 30%) 288,000
Increase in building (P600,000 x 30%) 180,000
Decrease in equipment (P840,000 x 30%) ( 252,000)
Increase in bonds payable (P120,000 x 30%) ( 360,000) 252,000
Positive excess: Goodwill (excess of cost over fair value) P 360,000
The over/under valuation of assets and liabilities are summarized as follows:

Anton Co. Anton Co. (Over) Under
Book value Fair value Valuation
Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000
Land 1,080,000 2,040,000 960,000
Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 600,000
Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000)
Bonds payable (due January 1, 20x9) ( 1,200,000) (1,320,000) ( 120,000)
Net P4,320,000 P5,160,000 P 840,000
A summary or depreciation and amortization adjustments is as follows:
Over/ 30% Current

Account Adjustments to be amortized Under thereof Life Year(20x4)
Inventories (sold in 20x4) P 240,000 P 72,000 1 P 72,000
Land 960,000 288,000 - -
Buildings – net ( 10 year remaining life) 600,000 180,000 10 18,000
Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) 7 (36,000)
Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) 5 ( 7,200)
Net P 840,000 P 252,000 P 46,800
The following are entries recorded by the parent in 20x4 in relation to its investment in joint
venture:
January 1, 20x4:
(1) Investment in DD Company 2,016,000
Cash 2,016,000
Acquired 30% joint control in DD Company.
January 1, 20x4 – December 31, 20x4:

(2) Cash 216,000
Investment in DD Company (P720,000 x 30%) 216,000
Record dividends from DD Company.
December 31, 20x4:
(3) Investment in DD Company 432,000
Investment income (P1,440,000 x 30%) 432,000
Record share in net income of DD Company.
December 31, 20x4:

(4) Investment income 46,800
Investment in DD Company……………………. 46,800
Record amortization of allocated excess of inventory,
equipment, buildings and bonds payable.
Thus, the investment balance and investment income in the books of TT Company is as follows:
Investment in Joint Venture (DD Company)

Cost, 1/1/x4 2,016,000 216,000 Dividends – Son (720,000x 80%)
NI of Anton 46,800 Amortization
(1,440,000 x 30%) 432,000
Balance, 12/31/x4 2,185,200
Investment Income
Amortization 46,800 NI of Son
432,000 (P1,440,000 x 30%)
385,200 Balance, 12/31/x4
To check the balance of Investment in Joint Venture (DD Company):

DD Company’s Stockholders’ Equity, 12/31/20x4:
Common stock P3,600,000
Retained earnings
Retained earnings,1/1/20x4 P 1,080,000
Net income – 20x4 1,440,000
Dividends – 20x4 ( 720,000) 1,800,000
Book value of stockholders’ equity of DD Company,12/31/20x4 P5,400,000
Multiplied by: Interest in Joint Venture 30%
Book value of Interest in Joint Venture P1,620,000
Add: Unamortized allocated excess – 30% thereof
P252,000 – P46,800, amortization) 205,200
Goodwill 360,000
Investment in Joint Venture (DD Company) – equity method P2,185,200
30. a
Books of X
Inv. in JO X, capital Journal entry for settlement should be:
Z, capital……………………….. 6,500
4,000 6,500 2,500 X, capital…………………… 2,500
2,500 Y, capital…………………… 4,000
Books of Y
Inv. in JO Y. capital
2,500 6,500 4,000

4,000
Books of Z
Inv. in JO Z, capital
2,500 6,500
4,000
6,500
31.
Total credits - Investment in Joint Operations…………………………………P 25,810
Total debits - Investment in Joint Operations…………………………………. 19,750
Net income or total gain (credit balance)…………………………………….P 6,060
32. d
Jose, capital
8,500 investment
1,212 share in net income (P6,060 x 2/10)
9,712
33. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40
per share)
34. b
Jose, capital
20,000 shares at P40/share P800,000 P 198,000 (4,500 x P44) – Sales
Expenses 3,000 125,000 (5,000 x P25)
4,700 13,600* (13,600 x P1) - Cash dividend
168,000 (6,000 x P28) - Sales
266,000 (7,600 x P35)
P807,700 P 770,600
Joint operation loss P 37,100
*
9/30 Shares issued (6,000 + 10,000 + 4,000) 20,000
10/20 Sold (4,500)
11/ 1 Stock dividend (20,000 – 4,500) x 20% 3,100
11/15 Sold (5,000)
Balance of shares outstanding before cash dividend 13,600
Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares)

35. c
Investment in Joint Operations
Share in net loss P400,000 Investment (10,000 shares x P40)
P37,100 x (10,000/20,000) P18,550
P381,450
36. b
Unrealized loss due to decline in the value of shares at the time of investment
(P62 – P40) x 4,000 shares P68,000
Share in joint operation (P37,100 x 4/20) __7,420
Reduction of loss by cash dividend (P13,600 x 4/20) P98,140
37. a
before net income or loss 15,000 25,000 ending inventory
10,000 net income
38. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%)
39. a
Joint Operations Anson, Capital
Purchases 20,000 77,000 Sales (?) Unsold merchandise 600 20,000
Contr/Invest 20,000 18,600 Profit(50%)
Expenses 800
1,800 600 38,600
42,600 77,000 38,000 to Alas

34,400 (P16,000 + P18,400)
2,800 (P600 + P2,200)
Unsold merchandise
37,200 Net profit
40. c – refer to No. 39 computation.
41. a
Investment in Joint Operations Santo, capital
Purchases 10,000 7,200 sales 10,000 Contribution/Invest
Freight-in 240 5,120 unsold 910 Share in NI
Freight-out 260 (P10,000 + P240) x 1/2
10,500 12,320 10,910
1,820
42. a – refer to No. 41 for computation
43. c
before sale 6,500 3,500 Sales
Net loss 3,000
N, capital O, capital
1,100 14,500 1,100 6,500
13,400 5,400
Distribution of Loss:
M N O Total
Salary P 300 P - P - P 300
Balance, equally (1,100) (1,100) (1,100) (3,300)
P ( 900) P(1,100) P(1,100) P(3,000)
44. a – refer to No. 43 for computation
45. b
Revenues
Total cash receipts (P78,920 + P65,245) P144,345
Less: Cash investments (P30,000 + P20,000) 50,000
Cash sales P 94,345
Add: Proceeds from sale of remaining assets 60,000
Total Revenue P154,345
Less: Expenses (P62,275 + P70,695) 132,970
Net income P 21,375
46. c
Benin, capital Sucat, capital
Receipts 78,920 30,000 Contribution Receipts 65,425 20,000 Contribution
62,275 Disbursement 70,695 Disbursement
12,825 Share in NI (3/5) 8,550 Share in NI (2/5)
78,920 105,100 65,425 99,245
26,180 33,820
47. d
N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should
receive net cash of P2,000:
O, capital 3,000
Cash 2,000
P, capital 5,000
O’s books: it shows P5,000 receivable from P, and P2,000 payable to N; thus, O should
receive net cash of P3,000:
N, capital 2,000
Cash 3,000
P, capital 5,000
P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P
should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively:
N, capital 2,000
O, capital 3,000
Cash 5,000
50. b – refer to No. 25 for further discussion.

The Income from Investment in Basket Co. on December 31 is as follows:
Share in net income (P90,000 x 40%] P 36,000
Amortization of allocated excess ( 16,400)
Income from Investment on December 31 P 19,600
51. d
The joint arrangement is a joint venture because it needs unanimous consent to all parties
involved. The parties recognize their rights to the net assets of Harrison Company as
investments and account for them using the equity method.
The Investment in Goldman Co. as of December 31, 2015 is as follows:

Acquisition cost, January 1, 2013 P 600,000
Add (deduct):
Share in net income [(P140,000 x 3 years) x 40%] 168,000
Share in dividends [(P50,000 x 3 years) x 40%] (60,000)
Amortization of allocated excess ( 0)
Investment balance on December 31 P 708,000
Cost of investment P 600,000

Less: Book value of interest acquired (40% x P1,200,000) 480,000
Allocated excessP 120,000
Less: Over/undervaluation of assets and liabilities 0
Goodwill P 120,000
There is no indication as to impairment of goodwill.
52. d
To determine whether a contractual arrangement gives parties control of an arrangement
collectively, it is necessary first to identify the relevant activities of that arrangement. That is,
what are the activities that significantly affect the returns of the arrangement?
When identifying the relevant activities, consideration should be given to the purpose and
design of the arrangement. In particular, consideration should be given to the risks to which
the joint arrangement was designed to be exposed, the risks the joint arrangement was
designed to pass on to the parties involved with the joint arrangement, and whether the
parties are exposed to some or all of those risks.
In many cases, directing the strategic operating and financial policies of the arrangement
will be the activity that most significantly affects returns. Often, the arrangement requires the
parties to agree on both of these policies. However, in some cases, unanimous consent may
be required to direct the operating policies, but not the financial policies (or vice versa). In
such cases, since the activities are directed by different parties, the parties would need to
assess which of those two activities (operating or financing) most significantly affects returns,
and whether there is joint control over that activity. This would be the case whenever there is
more than one activity that significantly affects returns of the arrangements, and those
activities are directed by different parties.
Based on the ownership structure, even though Wallace can block any decision, Wallace
does not control the arrangement, because Wallace needs Zimmerman to agree —
therefore joint control between Wallace and Zimmerman (since their votes and only their
votes, together meet the requirement). Because they are the only combination of parties
that collectively control the arrangement, it is clear that Wallace and Zimmerman must
unanimously agree.
The appropriate method for the joint venture is the equity method. The Income from
Investment in Gold Co. on December 31, 2015 is as follows:
Share in net income (P140,000 x 40%) P 56,000
Amortization of allocated excess ( 0)
Income from Investment on December 31, 2015 P 56,000

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Advanced Accounting Solution Manual

Total agreed capital (P480,000 + P600,000)….P 1,080,000

Revaluation (Goodwill) Approach:

Assets (or goodwill or intangible asset)…………………………………... 120,000

1. Bonus Method 2. Goodwill Method (Revaluation of Asset)

Cash 100,000 Equipment 110,000

Equipment 110,000 Goodwill 90,000

Note Payable 30,000 Note Payable 30,000

John, Capital 60,000 John, Capital 90,000

Jeff, Capital 60,000 Jeff, Capital 90,000

Jane, Capital 60,000 Jane, Capital 90,000

Accounts Receivable 8,000

Office Supplies 2,000

Office Equipment 30,000

Accounts Payable 2,000

Tom, Capital 51,000

Accounts Receivable 6,000

Office Supplies 800

Accounts Payable 5,000

Mortgage Payable 18,800

Julie, Capital 25,000

(b) Tom, Drawing 15,000

Julie, Drawing 12,000

(c) Income Summary 50,000

Tom, Capital P50,000 (P51,000/P76,000) 33,553

Julie, Capital P50,000 (P25,000/P76,000) 16,447

Tom, Capital 15,000

Julie, Capital 12,000

Tom, Drawing 15,000

2. TOM AND JULIE PARTNERSHIP

Tom Julie Total

Capital balances, Jan. 1 P 0 P0 P 0

Balance Sheet Yes

* Books of H; Partnership books

1. Books of Sole Proprietor (H):

b. Interest receivable or accrued interest income…………………. 3,600

e. Prepaid expenses………………………………………………………... 2,400

Initial investment computed as follows:

2. The balance sheet for both cases presented above is as follows:

Accounts receivables P 48,000

Less: Allowance for doubtful accounts………........... 4,800 43,200

Interest receivable……………….................................. 3,600

Merchandise Inventory................................................ 21,000

Prepaid expenses………….......................................... 2,400

Equipment (net)…………............................................. P 72,000

Less: Accumulated depreciation………………........ 10,800 61,200

Accrued expenses…….. ....................................... P 7,200

Accounts payable................................................... 12,000

Notes payable…………........................................... 60,000

Total Liabilities................................................................ P 79,200

Total Capital.................................................................. P 348,300

Total Liabilities and Capital.......................................... P 427,500

Sole Proprietor versus Sole Proprietor

Closing entries (real accounts) Yes Yes

Balance Sheet Yes

b. To close the books:

2. New Set of Books -

Accounts receivable………………………………………….. 216,000

Merchandise inventory……………………………………….. 180,000

Office supplies………………………………………………….. 24,000

Equipment (net)………………………………………………... 60,000

Rent Receivable……………………………………………….. 12,000

Allowance for doubtful accounts……………………. 12,000