ACCOUNTING FOR SPECIAL TRANSACTIONS

Definition:  Non-Trading Partnership

- A contract whereby 2 or more persons bind themselves
to contribute money, property, or industry into a - As to object
common fund with the intention of dividing profits  Universal Partnership (present property and of all
among themselves. profit)
Characteristics:  Particular Partnership – specific asset that is owned by
 Con-ownership of contributed capital each partner
 Income Tax – In the eyes of the law, partnership and
corporation are taxed the same - As liability
 Limited Life  General Partnership
 Legal entity  Limited Partnership
 Mutual Agency
 Mutual participation of Profit - As to duration
 Unlimited Liability  Partnership At Will
 Partnership with Fixed Term
Advantages: - As to representation to Others
 Easy to organize than corporation  Ordinary Partnership
 Reliable from the POV of the creditor  Partnership by Estoppel
 More capital than sole proprietor
 Closer supervision - As to Legality of Existence
Disadvantages:  De Facto
 Unlimited Liability  De Jure
 Less stable/ easily to be dissolved
 Divided authority - As to Publicity
 Difficulty of disposing interest  Secret Partnership
 Likelihood of dissension and disagreement  Open Partnership

Types of Partnership
- Activity
 Trading Partnership
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Types of Partners
- As to contribution
 Capitalist Accounting for initial investment
 Industrial  Net investment method – partner’s capital is credited
 Capitalist Industrial for the amount of the net asset
  Bonus method – partner’s capital is credited based on
- As to Management the agreed ratio which may be different from the
 Managing Partner contribution ratio
 Silent Partner

Other Classifications
 Liquidating Partner
 Nominal Partner – exist only for the third person
 Ostensible Partner – active and known
 Secret Partner – active but not known
 Dormant Partner – not active and not known

Articles of Co-Partnership
- A written agreement which governs the formation,
operation, and dissolution of the partnership.

Includes the following:


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Operation
Special problems:
 Closing entries (same with the other forms of org.)
 Distribution of P/L
 Preparation of Worksheet
 Preparation of FS (BS, IS, SCE, SCF, Notes)

Factors to consider in distributing JUST and FAIR P/L

1-8 – self-correcting errors
- Salaries
Problem 1-11
- Interest on Capital – Beginning, Ending or Average
Flores –
(Interest is annual salaries)
Gil –
- Bonus (rewarding employee’s performance)
Han – 15,229.17
2. Net loss
Dividing P/L
Flores – + 1729.17
(For capitalist partner)
Gil – 23
 In accordance with agreement Han - + 1729.17
 Use the division of profit ratio (For losses) Problem 12
 Absence of no.1, capital contribution 1, Evan – 60k; Pitch - 74k
Golf- 116k
(For Industrial) 3. Golt –
 In accordance with agreement Problem 13
 In absence of no. 1, no profit (But must demand just 1. 231k
and equitable share) X -36,750
 No share in partnership loss if no stipulation for such Y -214920
Z – 20670
Correction of Errors 2. X -412,750; z = 77330
- Incorrect net income/ loss due to possible errors Problem 14
Harries = 320166.67 ;Ivan = 245k
1-15: Nolan = 58k for 150k
Cleary = 28,450; Nolan =78040
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1-16
290k
1-18
Net income= 221,250
Ed = 81,500; Glen=69k; =70750
1-19 = ?
1-20
Net income = 45k
C = 22,680
2,. Net income =234,222.22

Problem 22:
Net income = 91,00
Pearson = 47,400
Xpecter = 43,600
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Dissolution: o Continuing partners – same approach to

- Change in the relationship of the partners caused by any purchase
partner ceasing to be associated in the carrying out of o To partnership – asset Reval. Or Bonus method
the business. TERMINATION of the life of the existing 3. Death, incapacity, bankruptcy – interest of deceased settled
partnership. New partnership is created. in accordance with the last will testament, otherwise,
family, if both absent, relatives, if there is still no relatives
Changes in the ownership structure: nor family, to the government.
 Existing assets of original partnership should be 4. Incorporation
revalued
 Bonus to or from old partners.
Assignment of interest does not result to dissolution
It does not change the relationship among partners
Assignee will be just entitled to receive interest on
partnership’s profits and assets in the event of liquidation.
Assignee does not obtain right to management of partnership.

Reasons of partnership dissolution:

1. Admission of new partner – with the consent of all partners
Can be admitted by:
 Purchase – old capital = new capital
 Investment –old capital < > new capital
AC – new capital set by partners
CC – investment of all partners
 Asset revaluation method
(TAC ≠ TCC)
 Bonus Method
(AC = CC)
IF PROBLEM IS
SILENT
2. Retirement/ withdrawal – legal dissolution of partnership
o Sold to outsider – consent, no gain or loss
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Partnership Liquidation – winding up of affairs. Restricted interest:

Partnership’s assets are sold, creditors are paid and the - Remaining unsold assets
remaining amount are distributed to the partners. - Newly discovered unrecorded liabilities
- Cash withheld for possible expenses
Reasons: - accomplishment of the purpose
- Debit balances in capital
- Termination of the period covered by the partnership w/
the fixed term.
Schedule of safe payments – determine which partner
- Bankruptcy of the partnership.
should be the first to receive the available cash
- Mutual agreement among partners
-
- Court decree
Cash priority program - determine which partner should be
Two concepts in liquidation:
the first to receive the available cash.
- Marshalling of assets – The order of creditor’s right in
- of the all the partner’s loss absorption capacity is equal,
the partnership. Assets are set aside for the payment to
the available cash is distributed on the basis of P&L
the creditor. Remaining will be distributed to partners
ratio.
- Right of offset

Lumpsum liquidation – cash distribution to partners is made

based on partners’ capital balances.
- Capital deficiency, if partner is solvent, additional
investment, if insolvent, charged to other partners.
- If the problem is silent, in regards to capital deficiency,
the partner is insolvent.

Installment Liquidation – piece-meal basis as the cash becomes

available.

worst-case scenarios:
- All remaining non-cash assets are assumed to be
worthless (hypothetical loss).
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Corporate Liquidation
Reasons:
1. bankruptcy
2. court decree

Statement of Affairs – SFP from a “quitting concern” point of

view.
- Assets are listed based on pledging
o A
- Reported at their
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Accounting for Home office, Branch & Agency
PART 1 (transferring merchandise at cost)
Agency vs Branch
Agency – are not allowed to sell directly to customers
- Not self-contained
- Separate entity from Home-office
- Allowed only to take customer orders
- Do not stock merchandise
- Not allowed to pass on customer credits
- Given only samples of merchandise to display
- Not required to have a complete accounting system
- Records only cash receipts and disbursements
Branch – self-contained entity
- Can stock merchandise
- Purchase merchandise from outside suppliers
- Make sale to customers
- Pass customer credits
- Collect receivable
- Separate entity
- Separate book
- Prepares fs and submit to Home-office
Normal debit balance:
- Investment in Branch/ Branch
- Shipment from Home-Office
Normal credit balance:
Reconciliation:
- Home-office and branch accounts are reciprocal
account
Most common reconciliation items:
o Shipment by HO in transit
o Merchandise returned by branch not yet
received by HO
o Collections by HO for the account of the branch
o Collections by the branch for the account of the
HO
o Expenses allocation of the HO to Branch
o Payment of Branch/ HO by HO/Branch
o Remittance by the branch still in transit
Consolidation – HO and branch are considered as a single
entity.
Procedures:
o Combine the like items of HO and Branch:
 Assets
 Liabilities
 Equity
 Revenue
 Expenses
o Eliminate inter-company transactions:
 Eliminate HO and branch account
 Eliminate merchandise shipment acc.
 Eliminate allowance for overvaluation of
inventory
 Eliminate intercompany sales and
purchases
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 Eliminate intercompany A/P and A/R

Part 2: Billed price
Billed price is either:
- Based on sales (gross profit)
- Based on cost (mark-up rate)

Inter-branch transfer of merchandise with excess freight:

- Any expense should be absorbed by the HO as
operating expense
- Any savings should be treated as Operating Income

Expenses usually recorded in the books of HO in determining

the NI of Agency
Expenses:
- Expenses – working fund
- Expenses paid by the HO
- Impairment Loss
- Depreciation Expenses
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Revenue from Contract with Customer: PFRS 15
Objective: To establish the principles that an entity shall apply
to report useful information to users of FS about the nature,
amount, timing, and uncertainty of revenue and cash flow
arising from a contract with a customer.
Exceptions:
o Lease contracts (PAS 16)
o Insurance Contracts (PFRS 4 Insurance)
o Financial instruments & other contractual rights
or obligations within the scope of PFRS 9, 10,
11, 27, 28.
o Non-monetary exchanges between entities in the
same line of business to facilitate sales to
customers or potential customers.
- 5 step model
1. identify the Contract with a customer
2. identify the separate performance Obligation
3. determine the Transaction price
4. Allocate the transaction price to the separate
performance obligation
5. Recognize revenue when the entity satisfies a
performance obligation.
Step 1: For a contract to be enforceable – it must be in written.
Following factors for contract:
o Parties approved the contract
o Rights and obligations are identifiable
o Payment terms and conditions for the goods or
services to be transferred can be identified
o The contract has a commercial substance
o Collection of an amount of consideration is
probable
Step 2: identify performance obligation in the
contract
- Performance obligation – a promised good or service
the is distinct
- Distinct:
o Customer can be benefited from the good or
service either on its own or together with other
readily available resources.
o Good or service is separately identifiable from
other goods or services in the contract.
Step 3: determine the transaction price
Transaction price – amount of consideration which an
entity expects to be entitled in the exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of 3rd parties.
Variable consideration
Step 4: allocate the transaction price to PO
Using the stand-alone selling price
Methods of the stand-alone prices:
1. Adjusted market assessment approach
2. Expected cost-plus-a-margin approach
3. Residual approach
Step 5: Recognize revenue as entity satisfies PO
 Transfer of control
 Customer obtains control
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Satisfaction of performance obligation:

Satisfied over time – customer simultaneously receives
and consumes the benefits provided by the entity
- does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment
for performance completed to date

Satisfied at a point in time – right for payment for the

asset
- customer has legal title of the asset
- entity has transferred physical possession of the asset
- customer has the significant risks and rewards of
ownership
- customer has accepted the asset
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Consignment of Sales - When goods are returned by the consignee, the

inventoriable cost allocated to these units is charged to
Consignment- an arrangement whereby the owner or seller the units sold (period cost)
(consignor) delivers or transfers merchandise to another party
(consignee) who acts as a consignee. Proforma Entries:

Common Practices:
- No revenue is recognized by the consignor until the
goods are sold by the consignee to outside or third
parties.
- Upon shipment of merchandise, a special inventory
account is established on the consignor’s books.
- Consignment expenses paid by the consignor are added
to inventory cost:
o Freight
o Insurance of goods shipped
o Handling and cartage fee (delivering a land)
- When consignee paid the above on behalf of the
consignor, reimbursement is deducted from the cash
remittance.
- Reimbursable expenses paid by consignee are
considered as selling expenses: Notes:
o Advertising costs  Amount assigned to unsold units in the hand of the
o Delivery and installation consignee represents the original cost of the inventory +
inventoriable cost
- When sale is made, the consignor recognized the
revenue only upon notification of sale accompanied by  The amount of cost and expenses assigned to sold units
the remittance of the cash due supported by an account represents the cogs, inventoriable cost, expenses
sale. incurred in the return of goods to consignor.
- Commission on units sold is also treated as deduction  Freight paid by the consignee representing delivery
from sales revenue in determining the net income from charges for goods delivered to customers is treated as
the shipment. selling costs (period costs)
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Consignment Income (Loss)