BASIC ACCOUNTING CONCEPT

During the year you started a business of selling personalized mugs and t-shirts. You opened a separate bank
account for the business and deposited your initial investment of ₱250,000 to this account. Separated Entity
Concept

The business acquired a printing machine. The regular selling price is ₱100,000 however, you were able to
acquire it at a discounted price of ₱90,000, you will record the machine at its acquisition cost of ₱90,000, rather
than at the regular selling price of ₱100,000. Historical Cost Concept

The business acquired initial inventory of mugs and t-shirts for a total cost of ₱50,000. You will record the cost
as an asset (inventory) rather than an expense. Materiality Concept

All the inventory was sold on credit for ₱300,00 and you will the record the credit sale immediately as accounts
receivable rather than wait for them to be collected. Accrual Basis

Also, you will now record the ₱50,000 cost of inventory as an expense. Matching Principle

You collected ₱290,000 out of the ₱300,000 total credit sales. You will deposit the collection into the bank
account of the business rather than deposit it into your personal account. Separated Entity Concept

The debtor for the remaining ₱10,000 is in financially difficulty and this raised doubt on whether he can still pay
his account. You will immediately recognize the doubtful account as an expense. Prudence or Conservatism

You withdrew cash of ₱80,000 from the business for your personal use. You will record this transaction as
withdrawal of your investment rather than as a business expense. Separated Entity Concept

At the end of the year, you prepared financial statements of your business to determine, among others,
whether the business has earned profit. Time Period

When preparing the financial statements, you discovered that the business has $10 (dollars). You will translate
this to Philippine peso using the current exchange rate. The amount you will report is the translated amount. Stable
Monetary Unit

Also, you found out that the regular selling price of new printing machine has increased from ₱100,000 to
₱120,000. You will ignore this information Stable Monetary Unit

and report the machine as its acquisition cost of ₱90,000 in the financial statements. Historical Cost Concept

This is because you do not intend or expect to close your business in the foreseeable future. Going Concern

During the year, the business bought a trash bin for ₱80. You expect to use this over several years. However,
because you deemed the cost as immaterial, you will record this as an expense rather than as an asset. Materiality
Concept

Moreover, when you prepared the financial statements, you decided to include the cost of the trash bin in a
miscellaneous expense account together with other immaterial expense. You do not expect the users of the
financial statement to benefit from reporting the immaterial cost separately. Cost Benefit

You will make a brief description of the miscellaneous expenses account in the notes to financial statements,
sufficient for users to understand the nature of this account. Full Disclosure Principle

You then adopted an accounting policy of expensing outright all acquisitions equipment costing ₱5,000 and
below. You will apply this policy consistently in the future periods. Consistency Concept
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 ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS

1. Inventory refers to the goods that a merchandising business has purchased with the main intention of reselling
them. TRUE
2. The periodic inventory system is commonly used for inventories that are normally interchangeable, have
relatively low value and have a fast turnover rate. TRUE
3. Under the perpetual inventory system, increases and decreases in inventory are recorded through the
purchases, freight-in, purchase returns and purchase discounts accounts. FALSE
4. Under the perpetual inventory system, cost of goods sold is debited when inventory is sold and credited when
there is a sales return. TRUE
5. Purchase returns & discounts are deducted from gross purchase when computing for net purchases. TRUE
6. Ending inventory is added to total goods available for sale when computing for cost of goods sold. FALSE
7. Under the perpetual inventory system, the business does not maintain records that show the running balances
of inventory on hand and cost of goods sold as at any given point of time. FALSE
8. Under the periodic inventory system, all increases and decreases in inventory, such as purchases, freight-in,
purchase returns, purchase discounts, cost of goods sold, and sales returns are recorded in the inventory
account. FALSE
9. Beginning inventory – net purchases – ending inventory = cost of goods sold. FALSE
10. No entry is made to recognize cost of goods sold when inventory is sold under periodic inventory system. TRUE

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 PARTNERSHIP OPERATIONS

The partnership agreement A, B and C stipulates the following:

 Partners A and C shall receive annual salaries of ₱12,000 and ₱8,000, respectively.
 A bonus of 10% of profit after salaries but before deduction of bonus shall be given to partner A, the
managing partner.
 Each partner shall receive 10% interest on average capital investments.
 Any remaining profit or loss shall be shared as follows: 40% to A, 30% each to B and C.

Average capital investments

A ₱100,000
B ₱60,000
C ₱120,000

Case #1: the partnership earns a profit of ₱100,000.

Requirement: Compute for the respective shares of the partners on the partnership profit.

Case #2: the partnership earns a profit of ₱10,000.

Requirement: Compute for the respective shares of the partners on the partnership profit.

Case #3: the partnership incurs loss of ₱20,000.

Requirement: Compute for the respective shares of the partners on the partnership loss.

Solution:

Case #1: the partnership earns a profit of ₱100,000.

A B C Total
Amount being allocated 100,000
Allocation:
Salaries 12,000 8,000 20,000
Bonus 8,000 8,000
Interest on Capital 10,000 6,000 12,000 28,000
Allocation of remaining profit 17,600 13,200 13,200 44,000
As allocated 47,600 19,200 33,200 100,000

Bonus: 100,000 – 20,000 = 80,000 x 10% = 8,000 only for A.

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Case #2: the partnership earns a profit of ₱10,000.

A B C Total
Amount being allocated 10,000
Allocation:
Salaries 12,000 8,000 20,000
Bonus
Interest on Capital 10,000 6,000 12,000 28,000
Allocation of remaining profit (15,200) (11,400) (11,400) (38,000)
As allocated 6,800 (5,400) 8,600 10,000

Case #3: the partnership incurs loss of ₱20,000.

A B C Total
Amount being allocated (20,000)
Allocation:
Salaries 12,000 8,000 20,000
Bonus
Interest on Capital 10,000 6,000 12,000 28,000
Allocation of remaining profit (27,200) (20,400) (20,400) (68,000)
As allocated (5,200) (14,400) (400) (20,000)

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 PARTNERSHIP DISSOLUTION AND LIQUIDATION

Conrado Collado joins the partnership of Alex Alejandro and Beatrice Berango. Before the admission of Collado,
the partnership statement of financial position shows the following:

Amount Adjustments
Cash 30,000
Accounts Receivable 140,000 120,000
Inventory 200,000 160,000
Equipment 500,000 450,000
Total Assets 870,000 760,000

Accounts Payable 80,000 100,000

Alejandro, capital (60%) 515,000 437,000
Berango, capital (40%) 275,000 223,000
Total Liabilities and Equity 870,000 760,000
(870,000 – 760,000 + 20,000 = 130,000)

The following adjustments are determined:

 The recoverable amount of the account receivable is 120,000.

 The inventory has a net realizable value is 160,000.
 The equipment has a fair value of 450,000.
 Unrecorded liabilities amount of 20,000.

Case #1: Conrado Collado acquires half of Berango’s interest for 800,000.

a. Entry to record the admission of Collado.

b. Balances of the partners’ capital accounts after the admission of Collado.
c. Profit or loss sharing ratio of the partners after the admission of Collado.

Case #2: Collado invests 165,000 cash to the partnership in exchange for a 20% interest. Collado’s capital accounts is
credited for the fair value of the 20% interest he acquired.

a. Journal entry to record the admission of Collado.

b. Capital balances of the partners following the admission of Collado.
c. Profit or loss sharing ratio of the partners after the admission of Collado.

Case #3: If Collado is to invest sufficient cash to obtain 2/5 interest in the partnership, how much should Collado
contribute to the new partnership?

Solution:

Case #1: Conrado Collado acquires half of Berango’s interest for 800,000.

a. Berango, capital 111,500

Collado, capital 111,500
To record the admission of Collado to the partnership.
b. Capital Balances:
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 Alejandro, capital 437,000
Berango, capital 111,500
Collado, capital 111,500

c. Ratio:
Alejandro, capital 60%
Berango, capital 20%
Collado, capital 20%

Case #2: Collado invests 165,000 cash to the partnership in exchange for a 20% interest. Collado’s capital accounts is
credited for the fair value of the 20% interest he acquired.

a. Cash 165,000
Collado, capital 165,000
To record the admission of Collado to the partnership.

b. Capital Balances:
Alejandro, capital 437,000
Berango, capital 223,000
Collado, capital 165,000

c. Ratio:
Alejandro, capital 48% [(100 – 20)x.60]
Berango, capital 32% [(100 – 20)x.40]
Collado, capital 20%

Case #3: If Collado is to invest sufficient cash to obtain 2/5 interest in the partnership, how much should Collado
contribute to the new partnership?

Alejandro, capital 437,000

Berango, capital 223,000
Total capital of existing partnership 660,000
Divide by: (100%-40%) 60%
Total capital of new partnership 1,100,000
Multiply: 40% - interest of Collado 40%
Investment of Collado 440,000

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 Alex Abundo and Bert Bato decided to liquidate their partnership. The partnership’s records show the following
information:

Amount
Cash
Non-cash assets 80,000
Total Assets 80,000

Liabilities 15,000
Loan payable to partner Alex 10,000
Loan payable to partner Bert 17,000
Abundo, capital (80%) 20,000
Bato, capital (20%) 18,000
Total Liabilities and Equity 80,000

Case #1: Lump-sum liquidation – all the non-cash assets are sold for 50,000

a. The amounts distributable to Abundo and Bato in the liquidation

Solution: (80k – 50k = 30k)

Abundo (80%) Bato (20%) Totals

Capital balances 20,000 18,000 38,000
Payable to A & B 10,000 17,000 27,000
Total 30,000 35,000 65,000
Allocation of loss
[30k x (80% & 20%)] (24,000) (6,000) (30,000)
Amounts received by partners 6,000 29,000 35,000

Case #2: Installment liquidation – the non-cash assets are sold in installments. Settlements of partners’ claims shall be
made in installments as cash becomes available. In the first sale, ¾ of the non-cash assets are sold for 45,000.

a. The amounts distributable to Abundo and Bato after the first installment sale.

Solution: 80k – 45k = 35k

Abundo (80%) Bato (20%) Totals

Capital balances 20,000 18,000 38,000
Payable to A & B 10,000 17,000 27,000
Total 30,000 35,000 65,000
Allocation of loss
[35k x (80% & 20%)] (28,000) (7,000) (35,000)
Amounts received by partners 2,000 28,000 30,000

INVENTORIES

1. Which of the following is added to the cost of inventories?

a. Storage costs of part finished goods
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 b. Trade discounts
c. Refundable purchase taxes
d. Administrative costs

2. Which of the following costs are included in the cost of inventories?

a. Transport costs for raw materials
b. Abnormal material usage
c. Storage costs relating to finished goods
d. Administrative and general overhead

3. How should trade discounts be dealt with when valuing inventories at the lower of cost and net realizable value
(NRV) according to PAS 2?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deduced from cost

4. The cost of inventory should not include

I. Purchase price
II. Important duties and other taxes
III. Abnormal amounts of wasted materials
IV. Administrative overhead
V. Fixed and variable and production overhead
VI. Selling costs

5. The coronet company has a cost card in relation to an item of goods manufactured as follows:
Materials 70
Storage costs of finished goods 18
Delivery to customers (freight-out) 4
Non-recoverable purchase taxes 6

According to PAS 2, at what figure should the item be values in inventory?

a. 88
b. 76
c. 98
d. 94

6. Inventories are measured at

a. Lower of cost and fair value
b. Lower of cost and net realizable value
c. Lower of cost and nominal value
d. Lower of cost and net selling price

7. Which of the following costs of conversion cannot be included in cost of inventory?

a. Cost of direct labor
b. Factory rent and utilities
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 c. Salaries of sales staff (sales department shares the building with factory supervisor)
d. Factory overheads based on normal capacity

Entity A, a trading entity, buys and sell product Z. Movements in the inventory of Product Z during the period are as
follows.

Date Transaction Units Unit cost Total cost

February 1 Beginning inventory 100 15 1,500
February 7 Purchase 300 18 5,400
February 12 Sale 320
February 21 Purchase 200 21 4,200

8. How much is the ending inventory under the FIFO cost formula?

Date Units Unit cost Total cost

February 21 200 21 4,200
February 7 80 18 1,440
Total 5,640

9. How much is the ending inventory under the weighted average cost formula? (the average is calculated on a
periodic basis.)

Date Units Unit cost Total cost

February 1 100 15 1,500
February 7 300 18 5,400
February 21 200 21 4,200
Total 600 11,100

WAC = 11,100 ÷ 600 = 18.5 / 320 (18.5) = 5,920

11,100 – 5,920 = 5,180

10. How much is the ending inventory under the weighted average cost formula? (the average is calculated as each
additional purchase is made.)

Date Units Unit cost Total cost

February 1 100 15 1,500
February 7 300 18 5,400
Total 400 6,900

WAC = 6,900 ÷ 400 = 17.25 / 400 – 320 = 80

Units Unit cost Total cost

80 17.25 1,380
200 21 4,200
280 5,580

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ACCTG & LAW – CA
 DISTINCTION BETWEEN A PARTNERSHIP AND A CORPORATION
Point of Comparison Partnership
Manner of creation By mere agreement of the parties.
Number of parties By a minimum of 2 persons.
Commencement of Juridical Generally, from the moment of
Personality execution of the contract.
Powers May exercise powers authorized by
partners provided the same are not
contrary to law, morals, good
custom, public policy, or public order.
Management When it is not agreed upon, each
partner is an agent of the
partnership.
it is Right of succession No right of succession.
Extent of liability to third Partners (except limited partners) are
persons liable personally and subsidiarity for
partnership debts to third persons.
Transferability of interest A partner cannot transfer interest so
as to make a partner without the
consent of all other existing partners.
Term of existence May be established for any period of
time stipulated by the partners.
Firm name A limited partnership is required to
add the word “Ltd” to its name.
Dissolution May be dissolved at any time by the
will of any or all partners.
Governing laws Civil code
Corporation
By law or operation of law.
Requires at least 5 incorporators.
From the date of the issuance of the
certificate of incorporation of the
SEC.
Can exercise only the powers
expressly granted by law or incident
to its existence.
It is vested in the board of directors
or trustees.
Possesses right of succession.
Stockholders are liable only to extent
of their investments as represented
by the shares subscribed by them.
A stockholder has the right to
transfer his shares without the prior
consent of the other stockholders.
May not be formed for a term in
excess of 50 years extendible not
more than 50 years.
A corporation may adopt a firm name
provided it is not identical or
deceptively similar to any registered
firm name or contrary to existing
laws.
May only be dissolved with the
consent of the state.
Corporation code
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