advance accounting book 1
TRANSCRIPT
Partnership – Basic Considerations and Formation 1
CHAPTER 1
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
1-1: aJose's capital should be credited for the market value of the computer contributed by him.
1-2: b (40,000 + 80,000) 2/3 = 180,000 x 1/3 = 60,000 . 1-2: c
1-3: aCash P100,000Land 300,000Mortgage payable ( 50,000 )
Net assets (Julio, capital) P350,000
1-4: bTotal Capital (P300,000/60%) P500,000Perla's interest ______40%
Perla's capital P200,000Less:Non-cash asset contributed at market value
Land P 70,000Building 90,000Mortgage Payable ( 40,000 ) _120,000
Cash contribution P 80,000
1-5: d - Zero, because under the bonus method, a transfer of capital is only required.
1-6: bReyes Santos
Cash P200,000 P300,000Inventory – 150,000Building – 400,000Equipment 150,000Mortgage payable ________ ( 100,000 )
Net asset (capital) P350,000 P750,000
1-7: cAA BB CC
Cash P 50,000Property at Market Value P 80,000Mortgage payable ( 35,000)Equipment at Market Value _______ _______ P55,000
Capital P 50,000 P 45,000 P55,000
2 Chapter 1
1-8: aPP RR SS
Cash P 50,000 P 80,000 P 25,000Computer at Market Value __25,000 _______ __60,000
Capital P 75,000 P 80,000 P 85,000 1-9: c
Maria Nora
Cash P 30,000Merchandise inventory P 90,000Computer equipment 160,000Liability ( 60,000)Furniture and Fixtures 200,000 ________
Total contribution P230,000 P190,000
Total agreed capital (P230,000/40%) P575,000Nora's interest ______60%
Nora's agreed capital P345,000Less: investment 190,000
Cash to be invested P155,000
1-10: d Roy Sam Tim
Cash P140,000 – –Office Equipment – P220,000 –Note payable ________ _( 60,000 ) ______
Net asset invested P140,000 P160,000 P –
Agreed capitals, equally (P300,000/3) = P100,000
1-11: aLara Mitra
Cash P130,000 P200,000Computer equipment – 50,000Note payable ________ _( 10,000 )
Net asset invested P130,000 P240,000
Goodwill (P240,000 - P130,000) = P110,000
1-12: aPerez Reyes
Cash P 50,000 P 70,000Office Equipment 30,000 –Merchandise – 110,000Furniture 100,000Notes payable _______ ( 50,000 )
Net asset invested P 80,000 P230,000Partnership – Basic Considerations and Formation 3
Bonus Method:Total capital (net asset invested) P310,000
Goodwill Method:Net assets invested P310,000Add: Goodwill (P230,000-P80,000) _150,000
Net capital P460,000
1-13: bRequired capital of each partner (P300,000/2) P150,000Contributed capital of Ruiz:
Total assets P105,000Less Liabilities __15,000 __90,000
Cash to be contributed by Ruiz P 60,000
1-14: dTotal assets:
Cash P 70,000Machinery 75,000Building _225,000 P370,000
Less: Liabilities (Mortgage payable) __90,000
Net assets (equal to Ferrer's capital account) P280,000Divide by Ferrer's P & L share percentage ____70%
Total partnership capital P400,000
Required capital of Cruz (P400,000 X 30%) P120,000Less Assets already contributed:
Cash P 30,000Machinery and equipment 25,000Furniture and fixtures __10,000 __65,000
Cash to be invested by Cruz P 55,000
1-15: dAdjusted assets of C Borja
Cash P 2,500Accounts Receivable (P10,000-P500) 9,500Merchandise inventory (P15,000-P3,000) 12,000Fixtures __20,000 P 44,000
Asset contributed by D. Arce:Cash P 20,000Merchandise __10,000 __30,000
Total assets of the partnership P 74,000
4 Chapter 1
1-16: aCash to be invested by Mendez:
Adjusted capital of Lopez (2/3)Unadjusted capital P158,400Adjustments:
Prepaid expenses 17,500Accrued expenses ( 5,000)Allowance for bad debts (5% X P100,000) _( 5,000 )
Adjusted capital P165,900
Total partnership capital (P165,900/2/3) P248,850Multiply by Mendez's interest ⅓
Mendez's capital P 82,950Less Merchandise contributed __50,000
Cash to be invested by Mendez P 32,950
Total Capital:Adjusted capital of Lopez P165,900Contributed capital of Mendez __82,950
Total capital P248,850 1-17: d
Moran, capital (40%)Cash P 15,000Furniture and Fixtures _100,000 P115,000
Divide by Moran's P & L share percentage ______40%
Total partnership capital P287,500Multiply by Nakar's P & L share percentage ______60%
Required capital of credit of Nakar: P172,500Contributed capital of Nakar:
Merchandise inventory P 45,000Land 15,000Building __65,000
Total assets P125,000Less Liabilities __30,000 P 95,000
Required cash investment by Nakar P 77,500
1-18: cGarcia's adjusted capital (see schedule 1) P40,500Divide by Garcia's P & L share percentage ______40%
Total partnership capital P101,250Flores' P & L share percentage ______60%
Flores' capital credit P 60,750
Flores' contributed capital (see schedule 2) __43,500
Additional cash to be invested by Flores P 17,250Partnership – Basic Considerations and Formation 5
Schedule 1:Garcia, capital:
Unadjusted balance P 49,500Adjustments:
Accumulated depreciation ( 4,500)Allowance for doubtful account ( 4,500 )
Adjusted balance P 40,500
Schedule 2:Flores capital:
Unadjusted balance P 57,000Adjustments:
Accumulated depreciation ( 1,500)Allowance for doubtful accounts ( 12,000 )
Adjusted balance P 43,500 1-19: d
Ortiz Ponce 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 5,000Accrued expenses _( 2,400 ) ( 1,600 ) ( 4,000 )
Adjusted capital balances P130,900 P106,000 P237,500
Total capital before the formation of the new partnership (see above) P237,500Divide by the total percentage share of Ortiz and Ponce (50% + 30%) ______80%
Total capital of the partnership before the admission of Roxas P296,875Multiply by Roxas' interest ______20%
Cash to be invested by Roxas P 59,375
1-20: dMerchandise to be invested by Gomez:
Total partnership capital (P180,000/60%) P300,000
Gomez's capital (P300,000 X 40%) P120,000Less Cash investment __30,000
Merchandise to be invested by Gomez P 90,000
Cash to be invested by Jocson:Adjusted capital of Jocson:
Total assets (at agreed valuations) P180,000Less Accounts payable __48,000 P132,000
Required capital of Jocson _180,000
Cash to be invested by Jocson P 48,000
6 Chapter 1
1-21: bUnadjusted Ell, capital (P75,000 – P5,000) P 70,000Allowance for doubtful accounts ( 1,000)Accounts payable ( 4,000 )
Adjusted Ell, capital P 65,000
1-22: cTotal partnership capital (P113,640/1/3) P340,920Less David's capital _113,640
Cortez's capital after adjustments P227,280Adjustments made:
Allowance for doubtful account (2% X P96,000) 1,920Merchandise inventory ( 16,000)Prepaid expenses ( 5,200)Accrued expenses ___3,200
Cortez's capital before adjustments P211,2001-23: a
Total assets at fair value P4,625,000Liabilities (1,125,000)Capital balance of Flor P3,500,000
1-24: cTotal capital of the partnership (P3,500,000 ÷ 70%) P5,000,000Eden agreed profit & loss ratio 30% Eden agreed capital 1,500,000Eden contributed capital at fair value 812,000Allocated cash to be invested by Eden P 688,000
1-25: c __Rey __Sam_ __Tim __Total_Contributed capital (assets-liabilities)P471,000 P291,000 P195,000 P957,000Agreed capital (profit and loss ratio) 382,800 382,800 191,400 957,000Capital transfer (Bonus) P 88,200 P(91,800) P 3,600 -
1-26: dTotal agreed capital (P90,000 ÷ 40%) P225,000Contributed capital of Candy (P126,000+P36,000-P12,000) 150,000Total agreed capital (P90,000 ÷ 40%) 225,000Candy, agreed capital interest 60%Agreed capital of Candy 135,000Contributed capital of Candy 150,000Withdrawal P 15,000
Partnership – Basic Considerations and Formation 7
1-27: aTotal agreed capital (210,000 ÷ 70%) P300,000Nora’s interest 30%Agreed capital of Nora P 90,000Cash invested 42,000Cash to be invested by Nora P 48,000
1-28: aContributed capital of May (P194,000 - P56,000) P138,000Agreed capital of May (P300,000 x 70%) 210,000Cash to be invested by May P 72,000
1-29: c__Alex_ _Carlos_ __Total__
Contributed capital P100,000 P84,000 P184,000Agreed capital 92,000 92,000 184,000 Capital invested P( 8,000) P 8,000 -
8 Chapter 1
SOLUTIONS TO PROBLEMS
Problem 1 – 1
1. a. Books of Pedro Castro will be retained by the partnership
To adjust the assets and liabilities of Pedro Castro.
1. Pedro Castro, Capital............................................................. 600Merchandise Inventory...................................................... 600
2. Pedro Castro, Capital............................................................. 200Allowance for Bad Debts.................................................. 200
3. Accrued Interest Receivable.................................................. 35Pedro Castro, Capital......................................................... 35
Computation:P1,000 x 6% x 3/12 = P15P2,000 x 6% x 2/12 = _20
Total................................P35
4. Pedro Castro, Capital............................................................. 100Accrued Interest Payable................................................... 100
(P4,000 x 5% x 6/12 = P100)
5. Pedro Castro, Capital............................................................. 800Accumulated Depreciation – Furniture and Fixtures........ 800
6. Office Supplies....................................................................... 400Pedro Castro, Capital......................................................... 400
To record the investment of Jose Bunag.
Cash. ............................................................................................ 15,067.50Jose Bunag, Capital................................................................ 15,067.50
Computation: Pedro Castro, Capital
(1) P600 P31,400(2) 200 35 (3)(4) 100 400 (6)(5) ___800
P1,700 P31,835
P30,135
Jose Bunag, Capital : 1/2 x P30,135 = P15,067.50
Partnership – Basic Considerations and Formation 9
b. A new set of books will be used
Books of Pedro Castro
To adjust the assets and liabilities.
See Requirement (a).
To close the books.
Notes Payable............................................................................... 4,000Accounts Payable......................................................................... 10,000Accrued Interest Payable.............................................................. 100Allowance for Bad Debts............................................................. 1,200Accumulated Depreciation – Furniture and Fixtures................... 1,400Pedro Castro, Capital.................................................................... 30,135
Cash........................................................................................ 6,000Notes Receivable................................................................... 3,000Accounts Receivable.............................................................. 24,000Accrued Interest Receivable.................................................. 35Merchandise Inventory.......................................................... 7,400Office Supplies....................................................................... 400Furniture and Fixtures............................................................ 6,000
New Partnership Books
To record the investment of Pedro Castro.
Cash ........................................................................................... 6,000Notes Receivable.......................................................................... 3,000Accounts Receivable.................................................................... 24,000Accrued Interest Receivable......................................................... 35Merchandise Inventory................................................................. 7,400Office Supplies............................................................................. 400Furniture and Fixtures.................................................................. 6,000
Notes Payable......................................................................... 4,000Accounts Payable................................................................... 10,000Accrued Interest Payable....................................................... 100Allowance for Bad Debts....................................................... 1,200Accumulated Depreciation – Furniture and Fixtures............. 1,400Pedro Castro, Capital............................................................. 30,135
To record the investment of Jose Bunag.
Cash. ............................................................................................ 15,067.50Jose Bunag, Capital................................................................ 15,067.50
10 Chapter 1
2. Castro and Bunag PartnershipBalance Sheet
October 1, 2008
A s s e t s
Cash ........................................................................................................... P21,067.50Notes receivable........................................................................................... 3,000.00Accounts receivable..................................................................................... P 24,000Less Allowance for bad debts...................................................................... ___1,200 22,800.00Accrued interest receivable.......................................................................... 35.00Merchandise inventory................................................................................ 7,400.00Office supplies ........................................................................................... 400.00Furniture and fixtures.................................................................................. 6,000Less Accumulated depreciation................................................................... ___1,400 __4,600.00
Total Assets......................................................................................... P59,302.50
Liabilities and Capital
Notes payable ........................................................................................... P 4,000.00Accounts payable......................................................................................... 10,000.00Accrued interest payable.............................................................................. 100.00Pedro Castro, Capital................................................................................... 30,135.00Jose Bunag, Capital..................................................................................... _15,067.50
Total Liabilities and Capital................................................................ P59,302.50
Problem 1 – 2Contributed Capitals:
Jose: Capital before adjustment...................................................... P 85,000Notes Payable......................................................................... 62,000Undervaluation of inventory.................................................. 13,000Underdepreciation.................................................................. ( 25,000) P 135,000
Pedro: Cash........................................................................................ 28,000Pablo: Cash........................................................................................ 11,000
Marketable securities............................................................. _57,500 ___68,500
Total contributed capital.............................................................................. P 231,500
Agreed Capitals:Bonus Method:
Jose (P231,500 x 50%)................................................................. P115,750
Pedro (P231,500 x 25%).............................................................. 57,875Pablo (P231,500 x 25%)............................................................... __57,875
Total. ............................................................................................ P231,500
Partnership – Basic Considerations and Formation 11
Goodwill Method. To have a goodwill, the only possible base is the capital of Pablo. The computation is:
Contributed AgreedCapital Capital Goodwill
Jose P135,000 P137,000 (50%) 2,000Pedro 28,000 68,500 (25%) 40,500Pablo __68,500 __68,500 (25%) _____–
Total P231,500 274,000 42,500
Total agreed capital (P68,500 25%) = 274,000
Jose, Pedro and Pablo PartnershipBalance SheetJune 30, 2008
Bonus Method Goodwill MethodAssets:
Cash P 49,000 P 49,000Accounts receivable (net) 48,000 48,000Marketable securities 57,500 57,500Inventory 85,000 85,000Equipment (net) 45,000 45,000Goodwill ______– __42,500
Total P284,500 P327,000
Liabilities and Capital:
Accounts payable P 53,000 P 53,000Jose, capital (50%) 115,750 137,000Pedro, capital (25%) 57,875 68,500Pablo, capital (25%) __57,875 __68,500
Total P284,500 P327,000
Problem 1 – 3
1. Books of Pepe Basco
To adjust the assets.
a. Pepe Basco, Capital...................................................................... 3,200
Estimated Uncollectible Account.......................................... 3,200
b. Pepe Basco, Capital...................................................................... 500Accumulated Depreciation – Furniture and Fixtures............. 500
12 Chapter 1
To close the books.
Estimated Uncollectible Account....................................................... 4,800Accumulated Depreciation – Furniture and Fixtures.......................... 1,500Accounts Payable................................................................................ 3,600Pepe Basco, Capital............................................................................ 31,500
Cash. ............................................................................................ 400Accounts Receivable.................................................................... 16,000Merchandise Inventory................................................................. 20,000Furniture and Fixtures.................................................................. 5,000
2. Books of the Partnership
To record the investment of Pepe Basco.
Cash.................................................................................................... 400Accounts Receivable........................................................................... 16,000Merchandise Inventory....................................................................... 20,000Furniture and Fixtures......................................................................... 5,000
Estimated Uncollectible account.................................................. 4,800Accumulated Depreciation – Furniture and Fixtures................... 1,500Accounts Payable......................................................................... 3,600Pepe Basco, Capital...................................................................... 31,500
To record the investment of Carlo Torre.
Cash.................................................................................................... 47,250Carlo Torre, Capital...................................................................... 47,250
Computation:Pepe Basco, capital (Base)........................................................... P31,500Divide by Pepe Basco's P & L ratio............................................. ___40%
Total agreed capital...................................................................... P78,750Multiply by Carlo Torre's P & L ratio.......................................... ___60%
Cash to be invested by Carlo Torre.............................................. P47,250
Problem 1 – 4
a. Roces' books will be used by the partnership
Books of Sales1. Adjusting Entries
(a) Sales, Capital.......................................................................... 3,200Accumulated Depreciation – Fixtures............................... 3,200
(b) Goodwill................................................................................ 32,000Sales, Capital..................................................................... 32,000
Partnership – Basic Considerations and Formation 13
2. Closing Entry
Allowance for Bad Debts............................................................. 12,800Accumulated Depreciation – Delivery Equipment....................... 8,000Accumulated Depreciation – Fixtures.......................................... 91,200Accounts Payable......................................................................... 64,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 8,000Sales, Capital................................................................................ 224,000
Cash........................................................................................ 4,800Accounts Inventory................................................................ 72,000Merchandise Inventory.......................................................... 192,000Prepaid Insurance................................................................... 3,200Delivery Equipment............................................................... 48,000Fixtures.................................................................................. 96,000Goodwill................................................................................ 32,000
Books of Roces (Books of the Partnership)
1. Adjusting Entries
(a) Roces, Capital............................................................................... 1,600Allowance for Bad Debts....................................................... 1,600
(b) Accumulated Depreciation – Fixtures.......................................... 16,000Roces, Capital........................................................................ 16,000
(c) Merchandise Inventory................................................................. 8,000Roces, Capital........................................................................ 8,000
(d) Goodwill....................................................................................... 40,000Roces, Capital........................................................................ 40,000
2. To record the investment of Sales.
Cash.................................................................................................... 4,800Accounts Receivable........................................................................... 72,000Merchandise Inventory....................................................................... 192,000Prepaid Insurance................................................................................ 3,200Delivery Equipment............................................................................ 48,000Fixtures............................................................................................... 96,000Goodwill. ............................................................................................ 32,000
Allowance for Bad Debts............................................................. 12,800Accumulated Depreciation – Delivery Equipment....................... 8,000
Accumulated Depreciation – Fixtures.......................................... 91,200Accounts Payable......................................................................... 64,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 8,000Sales, Capital................................................................................ 224,000
14 Chapter 1
b. Sales' books will be used by the partnership
Books of Roces
1. Adjusting Entries
See Requirement (a).
2. Closing Entry
Allowance for Bad Debts............................................................. 1,600Accumulated Depreciation – Delivery Equipment....................... 12,800Accumulated Depreciation – Fixtures.......................................... 64,000Accounts Payable......................................................................... 104,000Accrued Taxes.............................................................................. 6,400Roces, Capital............................................................................... 224,000
Cash........................................................................................ 14,400Accounts Receivable.............................................................. 57,600Merchandise Inventory.......................................................... 132,800Prepaid Insurance................................................................... 4,800Delivery Equipment............................................................... 19,200Fixtures.................................................................................. 144,000Goodwill................................................................................ 40,000
Books of Sales (Books of the Partnership)
1. Adjusting Entries
See Requirement (a).
2. To record the investment of Roces.
Cash.................................................................................................... 14,400Accounts Receivable........................................................................... 57,600Merchandise Inventory....................................................................... 132,800Prepaid Insurance................................................................................ 4,800Delivery Equipment............................................................................ 19,200Fixtures............................................................................................... 144,000Goodwill. ............................................................................................ 40,000
Allowance for Bad Debts............................................................. 1,600Accumulated Depreciation – Delivery Equipment....................... 12,800Accumulated Depreciation – Fixtures.......................................... 64,000Accounts Payable......................................................................... 104,000
Accrued Taxes.............................................................................. 6,400Roces, Capital............................................................................... 224,000
Partnership – Basic Considerations and Formation 15
c. A new set of books will be opened by the partnership
Books of Roces
1. Adjusting Entries
See Requirement (a).
2. Closing Entry
See Requirement (b).
Books of Sales
1. Adjusting Entries
See Requirement (a).
2. Closing Entry
See Requirement (a).
New Partnership Books
To record the investment of Roces and Sales.
Cash.................................................................................................... 19,200Accounts Receivable........................................................................... 129,600Merchandise Inventory....................................................................... 324,800Prepaid Insurance................................................................................ 8,000Delivery Equipment (net)................................................................... 46,400Fixtures (net)....................................................................................... 84,800Goodwill ........................................................................................... 72,000
Allowance for Bad Debts............................................................. 14,400Accounts Payable......................................................................... 168,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 14,000Roces, Capital............................................................................... 224,000Sales, Capital................................................................................ 224,000
16 Chapter 1
Problem 1 – 5
1. To close Magno's books.
Allowance for Bad Debts.................................................................... 1,000Accounts Payable................................................................................ 6,000Notes Payable...................................................................................... 10,000Accrued Interest Payable.................................................................... 300R. Magno, Capital............................................................................... 24,700
Cash. ............................................................................................ 5,000Accounts Receivable.................................................................... 13,000Merchandise Inventory................................................................. 12,000Equipment.................................................................................... 3,000Other Assets................................................................................. 9,000
2. To adjust the books of Lagman.
Goodwill. ............................................................................................ 8,000Allowance for Bad Debts............................................................. 210J. Lagman, Capital........................................................................ 7,790
3. To record the investment of Magno.
Cash.................................................................................................... 5,000Accounts Receivable........................................................................... 13,000Merchandise Inventory....................................................................... 12,000Equipment........................................................................................... 3,000Other Assets........................................................................................ 9,000
Allowance for Bad Debts............................................................. 1,000Accounts Payable......................................................................... 6,000Notes Payable............................................................................... 10,000Accrued Interest Payable.............................................................. 300R. Magno, Capital........................................................................ 24,700
To adjust the investments of the partners.
Cash.................................................................................................... 10,300R. Magno, Capital........................................................................ 10,300
(P35,000 – P24,700 = P10,300)
J. Lagman, Capital.............................................................................. 35,790Cash. ............................................................................................ 23,300Accounts Payable to J. Lagman.................................................... 12,490
(P63,000 + P7,790 = P70,790 – P35,000 = P35,790)
Partnership – Basic Considerations and Formation 17
4. Lagman and MagnoBalance Sheet
December 31, 2008
A s s e t s
Cash.................................................................................................... P –Accounts receivable............................................................................ P34,000Less Allowance for bad debts............................................................. 1,210 32,790Merchandise inventory........................................................................ 21,000Equipment........................................................................................... 8,000Other assets......................................................................................... 46,000Goodwill ........................................................................................... ___8,000
Total Assets.................................................................................. P115,790
Liabilities and Capital
Accounts payable................................................................................ P 18,000Notes payable...................................................................................... 15,000Accrued interest payable..................................................................... 300Accounts payable to J. Lagman.......................................................... 12,490J. Lagman, capital............................................................................... 35,000R. Magno, capital................................................................................ __35,000
Total Liabilities and Capital......................................................... P115,790
Problem 1 – 6
1. Books of Toledo
Toledo, Capital............................................................................. 4,800Allowance for Bad Debts (15% x P32,000)........................... 4,800
Books of Ureta
Ureta, Capital................................................................................ 2,400Allowance for Bad Debts (10% x P24,000)........................... 2,400
Cash (90% x P12,000).................................................................. 10,800Loss from Sale of Office Equipment............................................ 1,200
Office Equipment................................................................... 12,000
Toledo, Capital (1/4 x P1,200)..................................................... 300Ureta, Capital................................................................................ 900
Loss from Sale of Office Equipment..................................... 1,200
18 Chapter 1
2. New Partnership Books
Cash. ............................................................................................ 3,200Accounts Receivable.................................................................... 32,000Merchandise................................................................................. 40,000Office Equipment......................................................................... 10,000
Allowance for Bad Debts....................................................... 4,800Accounts Payable................................................................... 10,000Notes Payable......................................................................... 2,000Toledo, Capital....................................................................... 68,400
To record the investment of Toledo.
Cash. ............................................................................................ 22,800Accounts Receivable.................................................................... 24,000Merchandise................................................................................. 36,000Toledo, Capital............................................................................. 300
Allowable for Bad Debts....................................................... 2,400Accounts Payable................................................................... 16,000Ureta, Capital......................................................................... 64,700
To record the investment of Ureta.
3. Cash.................................................................................................... 3,400Ureta, Capital................................................................................ 3,400
To record Ureta's cash contribution.
Computation:Toledo, capital (P68,400 – P300)................................................. P 68,100Divide by Toledo's profit share percentage.................................. ____50%
Total agreed capital of the partnership......................................... P136,200Multiply by Ureta's profit share percentage................................. ____50%
Agreed capital of Ureta................................................................ P 68,100Ureta, capital................................................................................. __64,700
Cash contribution of Ureta........................................................... P 3,400 or
Toledo, capital (P68,400 – P300)................................................. P 68,100Less Ureta, capital........................................................................ __64,700
Cash contribution of Ureta........................................................... P 3,400
Partnership – Basic Considerations and Formation 19
4. Toledo and Ureta PartnershipBalance SheetJuly 1, 2008
A s s e t s
Cash.................................................................................................... P 29,400Accounts receivable............................................................................ P56,000Less Allowance for bad debts............................................................. __7,200 48,800Merchandise........................................................................................ 76,000Office equipment................................................................................ __10,000
Total Assets.................................................................................. P164,200
Liabilities and Capital
Accounts payable................................................................................ P 26,000Notes payable...................................................................................... 2,000Toledo, capital..................................................................................... 68,100Ureta, capital....................................................................................... __68,100
Total Liabilities and Capital......................................................... P164,200
20 Chapter 2
CHAPTER 2
MULTIPLE CHOICE ANSWERS AND SOLUTIONS2-1: d
Jordan Pippen Total
Annual salary P120,000 P80,000P200,000Balance, equally ( 10,000 ) ( 10,000 )( 20,000 )
Total P110,000 P 70,000P180,000
2-2: aJJ KK LL Total
Bonus (.20 X P90,000) P18,000 – –P 18,000Interest
JJ (.15 X P100,000) P15,000 – –)KK (.15 X P200,000) P 30,000 –)LL (.15 X P300,000) P45,000)
90,000Balance, equally ( 6,000 ) ( 6,000 ) ( 6,000 )( 18,000 )
Total profit share P27,000 P 24,000 P39,000P 90,000
2-3: a
2-4: aAllan Michael Total
InterestAllan - .10 X (P40,000 + 60,000 /2) P 5,000 )Michael - .10 X (P60,000 + 70,000/2) P 6,500)
P 11,500Balance, equally _14,000 _14,000__28,000
Total P 19,000 P20,500 P 28, 000
2-5: aFred Greg Henry Total
Interest (.10 of average capital) P12,000 P 6,000 P 4,000P 22,000Salaries 30,000 20,00050,000Balance, equally ( 35,000 ) ( 35,000 ) ( 35,000 ) (105,000)
Total P 7,000 ( P29,000 ) (P11,000 ) (P 3 3,000)
2-6: bAverage Capital
Capital Months PesoDate Balance Unchanged Months
January 1 140,000 6 P 840,000July 1 180,000 1 180,000August 1 165,000 5 __825,000
12 P1,845,000
Average capital - P1,845,000/12 = P153,750
Interest (P153,750 X 10%) = P 15,375 Partnership Operations 21
2-7: cCapital Months Peso
Date Balance Unchanged Months
January 1 P16,000 3 P 48,000April 1 17,600 2 35,200June 1 19,200 3 57,600September 1 15,200 4 __60,800
12 P201,600
Average Capital(P201,600/12) = P16,800
2-8: aNet profit before bonus P 24,000Net profit after bonus (P24,000/120%) __20,000
Bonus to RJ 4,000Balance (P24,000-P4,000)X3/5 __12,000
Total profit share P 16,000
2-9: aLT AM Total
Interest P3,200 P 3,600 P 6,800Salaries 15,000 7,500 22,500Balance, 3:2 (11,580) ( 7,720) ( 19,300)
Total P 6,620 P 3,380 P 10,000
2-10: b
Net income after salary, interest and bonus P467,500Add back: Salary (P10,000 X 12) P120,000
Interest (P250,000 X .05) __12,500 _132,500
Net income after bonus (80%) P600,000Net income before bonus (P600,000/80%) _750,000
Paul's bonus P150,000
2-11: bCC DD EE Total
Salary P 14,000 P 14,000
Balance P14,000 P 8,400 5,60028,000Additional profit to DD ( 1,500 ) __2,100 ( 600 ) ______–
Total P12,500 P10,500 P 19,000 P 42, 000
Net incomeFees Earned P90,000Expenses _48,000
Net Income P42,000
22 Chapter 2
2-12: cLL MM NN Total
Interest P 2,000 P 1,250 P 750 P 4,000
Annual Salary 8,500 – –8,500Additional profit to give LL, P20,000 9,500 5,700 3,80019,000*Additional profit to give MM, P14,000 _____– __7,050 _____–__7,050
Total P20,000 P14,000 P 4,550 P 38, 550
*(P9,500/50%) = P19,000
2-13: aRR SS TT Total
Excess (Deficiency)RR (P80,000 - P95,000) P15,000 – –)SS (P50,000 - P40,000) – (P10,000) –)
P 5,000Balance 4:3:1 _47,500 _35,625 _11,875__95,000
Total P62,500 P25,625 P11,875P100,000
Net Income (200,000 - 100,000) = P100,000
2-14: b AA BB CC TotalAA - 100,000 X 10% P 10,000 )
150,000 X 20% 30,000 )P 40,000Remainder, 210,000
BB (60,000 X .05) P 3,000 )CC (60,000 X .05) P 3,000
6,000Balance, equally __68,000 _68,000 _68,000_204,000
Total P108,000 P71,000 P71,000P250,000
2-15: aAJ BJ CJ Total
Bonus to CJNet profit before bonus P44,000Net profit after bonus (P44,000/110%)P40,000 – – P4,000
P4,000Interest to BJ – P1,000 –1,000Salaries P 10,000 – 12,00022,000Balance, 4:4:2 __6,800 _6,800 __3,400_17,000
Total P 16,800 P7,800 P19,400P44,000
2-16: cTotal profit share of Pedro P200,000Less: Salary to Pedro P 50,000
Interest __20,000 __70,000
Share in the balance (40%) P130,000
Net profit after salary and interest (130,000/40%) P325,000Add: Total Salaries P150,000
Total Interest __70,000 _220,000
Total Partnership Income P545,000Partnership Operations 23
2-17: cNet income before extraordinary gain and bonus (69,600-12,000) P 57,600Net income after bonus (57,600/120%) _48,000
Bonus to RR P 9,600
Distribution of Net Income:JJ RR Total
Bonus – P 9,600 P 9,600Balance, equally P 24,000 24,000 48,000
Net profit before extraordinary gain P 24,000 P 33,600 P 57,600Extraordinary gain __4,800 __7,200 _12,000
Total P 28,800 P 40,800 P 69,600 2-18: a
Mel Jay Total
Interest P 20,000 P 12,000 P 32,000Annual Salary 36,000 – 36,000Remainder 60:40 __60,000 _40,000 _100,000
Total P116,000 P 52,000 P168,000
2-19: aDV JE FR Total
Interest on excess (Deficiency) P 15,000 P 3,750 (P 7,500)P 11,250Remainder 5:3:2 ( 36,875 ) ( 22,125 ) ( 14,750 ) ( 73,750)
Total (P 21,875 ) (P 18,375 ) (P 22,250 ) (P 6 2,500)
2-20: cCorrection of 1998 profit:
Net income per books P 19,500Understatement of depreciation ( 2,100)Overstatement of inventory, December 31 ( 11,400 )
Adjusted net income P 6,000
Pete Rico TotalDistribution of net income per book:
Equally P 9,750 P 9,750 P 19,500
Distribution of adjusted net incomeEqually ( 3,000 ) ( 3,000 ) ( 6,
000)
Required Decrease P 6,750 P 6,750 P 13,500
2-21: aTiger Woods Total
Salaries P 64,000 P100,000P164,000Interest 24,000 30,00054,000Bonus (P360,000-P54,000)X.25 76,500 –76,500
Remainder, 30:70 __19,650 __45,850__65,500
Total P184,150 P175,850P360,000
24 Chapter 2
2-22: aHolly Field Total
Salaries P 20,000 – P 20,000Commission – P 25,000 25,000Interest 32,000 33,600 65,600Bonus, schedule 1 30,000 – 30,000Remainder, 60:40 __35,640 _23,760 __59,400
Total P117,640 P 82,360 P200,000
Schedule 1Net income before salary, commission,
interest and bonus P200,000Less: salaries __20,000
Net income before bonus P180,000Net income after bonus (P180,000/120%) _150,000
Bonus P 30,000 2-23: a
Mike Tyson Total
Capital balance, beginning P600,000 P400,000P1,000,000Additional investment 100,000 200,000300,000Capital withdrawal -200,000 ( 100,000 ) _-
300,000Capital balance before profit and loss distribution P500,000 P500,000P1,000,000
Net income:Salary P200,000 P300,000 P 50
0,000Balance, 3:2 __60,000 __40,000
__100,000
Total P260,000 P340,000 P 60 0,000
Total P760,000 P840,000P1,600,000Drawings ( 200,000 ) ( 300,000 ) ( 5
00,000)
Capital balance, end P560,000 P540,000P1,100,000
Average Capital - King:
Capital Months PesoDate Balance Unchanged Months
January 1 P40,000 3 P120,000April 1 55,000 9 _495,000
12 P615,000Average capital – P615,000/12 = P51,250
Average Capital - Queen:Capital Months Peso
Date Balance Unchanged Months
January 1 P100,000 7 P700,000April 1 130,000 5 __650,000
12 P1,350,000
Average capital - P1,350,000 / 12 =P112,500Partnership Operations 25
2-24: dDistribution of Net Income - Schedule 1
King Queen Total
Interest P 5,125 P11,250 P16,375Bonus, Schedule 2 12,725 – 12,725Salaries 25,000 30,000 55,000Residual, 50:50 ( 2,050 ) _(2,050) _(4,100)
Total P40,800 P39,200 P80,000
Schedule 2
Net income before allocation P80,000Less: Interest _16,375
Net income before bonus P63,625Net income after bonus (P63,625/125%) _50,900
Bonus P12,725
Capital Balance December 31:King Queen Total
Capital balance, January 1 P40,000 P100,000 P140,000Additional investment _15,000 __30,000 __45,000Capital balance before profit and
loss distribution P55,000 P130,000 P185,000Net income (Schedule 2) 40,800 39,000 80,000Drawings (P400 X 52) ( 20,80 0) ( 20,800 ) ( 41,600 )
Capital balance, December 31 P75,000 P148,400 P223,400
2-25: dTotal receipts (P1,500,000 + P1,625,000) P3,125,000Expenses ( 1,080,000 )
Net income P2,045,000
Distribution to PartnersRed – P1,500,000/P3,125,000 X P2,045,000 = P 981,600 (1)Blue – P1,625,000/P3,125,000 X P2,045,000 = _1,063,400
P2,045,000
Capital balance of Blue Dec. 31Capital Balance, Jan. 1 P 374,000Additional investment ___22,000Capital balance before profit and
loss distribution P 396,000Profit share 1,063,400Drawings ( 750,000 )
Capital balance, Dec. 31 P 709,400 (2)
26 Chapter 2
2-26: a
Ray Sam Total
Capital balances, March 1 P150,000 P180,000P330,000
Additional investment, Nov. 1 _______ __60,000__60,000
Capital balances before salaries, profit and Drawings 150,000 240,000390,000
Profit share:Interest 15,000 20,000
35,000Balance, 60:40 51,000 34,000
85,000
Total 66,000 54,000120,000
Total 216,000 294,000510,000
Salaries _18,000 _24,000_42,000
Total 234,000 318,000552,000
Drawings (18,000) (24,000)(42,000)
Capital balances, Feb. 28 P216,000 P294,000P510,000
2-27: aSusan Tanny Total
Capital balances, 1/1 P150,000 P30,000P180,000
Additional investment, 4/1 8,0008,000
Capital withdrawals, 7/1 _______ (6,000)_(6,000)
Balances before profit distribution 158,000 24,000182,000
Profit distribution:Interest 23,400 4,050
27,450Bonus (20% x P30,000) 6,000
6,000Balance, equally (1,725) (1,725)
(3,450)
Total 21,675 _8,32530,000
Total 179,675 32,325212,000
Drawings (12,000) (12,000)(24,000)
Capital balances, 12/31 P167,675 P20,325 P188,000
Partnership Operations 27
2-28: a Sin Tan Uy Total
Capital balances, beg. 1st year P110,000 P80,000 P110,000P300,000
Loss distribution, 1st year:Salaries 20,000 10,000
30,000Interest 11,000 8,000 11,000
30,000Balance, 5:3:2 (40,000) (16,000) (24,000)
(80,000)
Total ( 9,000 ) ( 8,000 ) ( 3,000 )
(20,000)
Total 101,000 72,000 107,000280,000
Drawings (10,000) (10,000) (10,000)(30,000)
Capital balances, beg. 2nd year 91,000 62,000 97,000250,000
Profit distribution, 2nd year:Salaries 20,000 10,000
30,000Interest 9,100 6,200 9,700
25,000Balance, 5:3:2 ( 7,500 ) ( 4,500 ) ( 3,000 )
(15,000)
Total 21,600 _1,700 16,70040,000
Total 112,600 63,700 113,700290,000
Drawings _(10,000) (10,000) _(10,000)_(30,000)
Capital balances, end of 2nd year P102,600 P53,700 P103,700P260,000
2-29: cJay Kay Loi Total
Capital balances, 1/1/06 P30,000 P30,000 P30,000P90,000
Additional investment, 2006 5,000 5,000Capital withdrawal, 2006 _(5,000) _(4,000) ______
_(9,000)
Capital balances 25,000 26,000 35,00086,000
Profit distribution, 2006:Interest 3,000 3,000 3,000 9,000Salary 7,000 7,000Balance, equally _1,000 _1,000 _1,000
__3,000
Capital balances, 1/1/07 36,000 30,000 39,000105,000
Additional investment, 2007 5,000 5,000Capital withdrawal, 2002 ______ _(3,000) _(8,000)
(11,000)
Capital balances 41,000 27,000 31,00099,000
Profit distribution, 2007:Interest 3,600 3,000 3,900
10,500Salary 7,000 7,000Balance, equally _1,500 _1,500 _1,500
__4,500
Capital balances, 1/1/08 53,100 31,500 36,400121,000
Additional investment, 2008 6,000 6,000
Capital withdrawal, 2008 ______ _(4,000) _(2,000)_(6,000)
Capital balances 53,100 27,500 40,400121,000
Profit distribution, 2008:Interest 5,310 3,150 3,640
12,100Salary 7,000 7,000Balance, equally __3,300 __3,300 __3,300
___9,900
Capital balances, 12/31/08 per books P68,710 P33,950 P47,340P150,000
Understatement of depreciation (2,000) (2,000) (2,000)(6,000)
Adjusted capital balances, 12/31/08 P66,710 P31,950 P45,340P144,000
28 Chapter 2
2-30: a
Ken Len Mon Total
Capital balances, 1/1/07 P100,000 P100,000 P100,000P300,000
Additional investment, 2007 40,00040,000
Capital withdrawal, 2007 ( 20,000 ) _______ _______( 20,000 )
Balances 80,000 140,000 100,000320,000
Profit distribution, 2007 (Schedule 1)Salary 60,000
60,000Balance, beg. Capital ratio 20,000 20,000 20,000
60,000
Capital balances, 1/1/08 100,000 160,000 180,000440,000
Capital withdrawal, 2008 ( 20,000 ) ( 40,000 ) _______( 60,000 )
Balances 80,000 120,000 180,000380,000
Profit distribution, 2008:Salary 60,000
60,000Balance, beg. capital ratio __13,636 __21,818 __24,546
__60,000
Capital balances, 12/31/08 P 93,636 P141,818 P264,546P500,000
Schedule 1 – Computation of net profit:Total capital, 2008 (P647,500 – P147,500) P500,000Total capital, 2007 (P300,000 + P40,000 – P80,000) _260,000
Total profit for 2 years P240,000
Net profit per year (P240,000 / 2) P120,000
2-31: d_Nardo_ __Orly __Pedro_ _Total_
Capital balance, 1/1/08 P280,000 P300,000 P170,000 P750,000Additional investment 96,000 60,000 - 156,000
Withdrawals ( 90,000 ) ( 72,000 ) (162,000) Cap. bal. before P/L dist. 376,000 270,000 98,000 744,000 NP: Salary (16,500 x 12) - 198,000 - 198,000
Interest on EC (15%) 42,000 45,000 25,500 112,500 Balance 25:30:45 ( 19,875 ) ( 23,850 ) ( 35,775 ) (79,500 )
Total 22,125 219,150 ( 10,275 ) 231,000 Capital balance 12/31/08 P398,125 P 489,150 P 87,72 P975,000
2-32: d
Sam capital, beginning P120,000Additional investment (Land) 60,000Drawings ( 80,000 )Capital balance before net profit (loss) 100,000Capital balance, end 150,000Profit share (40%) 50,000Net profit (P50,000 ÷ 40%) P125,000
Partnership Operations 29
2-33: a__Joe__ __Tom__ __Total__
Capital balance, 1/2/07 P 80,000 P 40,000 P120,000 Net loss- 2007:
Annual salary 96,000 48,000 144,00010% interest on beg. capital 8,000 4,000 12,000Bal. beg. cap. ratio: 8:4 ( 108,000) ( 54,000) ( 162,000) Total ( 4,000) ( 2,000) ( 6,000)
Capital balance 76,000 38,000 114,000Drawings ( 4,000) ( 4,000) ( 8,000) Capital balance, 12/31/07 72,000 34,000 106,000 Net profit- 2008:
Annual salary 96,000 48,000 144,00010% interest on BC 7,200 3,400 10,600Bonus to Joe–NPBB – P 22000
NPAB (22000/110%)20000 2,000 2,000Balance equally ( 67,300) ( 67,300) ( 134,600) Total 37,900 ( 15,900) 22,000
Total 109,900 18,100 128,000Drawings ( 4,000) ( 4,000) ( 8,000)
Capital balance, 12/31/08 105,900 14,100 120,000
2-34: aDecrease in capital P 60,000Drawings ( 130,000)Contribution 25,000Profit share 45,000Net income (45,000 ÷ 30) P150,000
30 Chapter 2
SOLUTIONS TO PROBLEMS
Problem 2 – 1
1. Castro : (P26,000/P42,500) x P23,800 = P14,560Diaz : (P16,500/P42,500) x P23,800 = __9,240
P23,800
2. Castro : (P31,250/P50,000) x P23,800 = P14,875Diaz : (P18,750/P50,000) x P23,800 = __8,925
P23,800
Computation of Average Capitals:Castro: Capital Months Peso
Date Balances Unchanged Months
1/1...................................... P26,000 3 P 78,0004/10.................................... 29,000 1 29,0005/1...................................... 36,000 3 108,0008/1...................................... 32,000 5 _160,000
12 P375,000
Average capital = P375,000 12 months = P31,250
Diaz: Capital Months PesoDate Balances Unchanged Months1/1...................................... P16,500 5 P 82,5006/1...................................... 21,500 3 64,5009/1...................................... 19,500 4 __78,000
12 P225,000
Average capital = P225,000 – 12 months = P18,750
3. Castro Diaz Total
Interest......................................................... P 7,500 P4,500 P12,000Salaries......................................................... 36,000 24,000 60,000Balance, equally........................................... ( 24,100 ) (24,100) ( 48,200 )
Total............................................................. P19,400 P 4,400 P23,800
4. Castro Diaz Total
Bonus (a)..................................................... P 4,760 P – P 4,760Interest (b).................................................... 1,100 – 1,100Balance, 3:2................................................. _10,764 _7,176 _17,940
Total............................................................. P16,624 P7,176 P23,800
Partnership Operations 31
Computations:a. Net profit before bonus................................................. P23,800
Net profit after bonus (P23,800 125%)...................... _19,040
Bonus............................................................................. P 4,760
b. Average capital of Castro [(P26,000 + P32,000) 2]............................. P29,000Average of Diaz [(P16,500 + P18,500) 2].......................................... _18,000
Castro's excess........................................................................................ P11,000Multiply by............................................................................................. ___10%
Interest.................................................................................................... P 1,100
5. Castro : (P3,000/P5,000) x P23,800 = P14,280Diaz : (P2,000/P5,000) x P23,800 = __9,520
P23,800
Problem 2 – 2
a. Average Capital:Robin: Date Balances Months Peso
Unchanged Months
Jan. 1 P135,000 2 P270,000Feb. 28 95,000 2 190,000Apr. 30 175,000 5 875,000Sept. 30 195,000 3 __585,000
12 P1,920,000
Ave. Capital (P1,920,000 12) = P160,000
Hood: Date Balances Months PesoUnchanged Months
Jan. 1 P140,000 3 P420,000Mar. 31 200,000 3 600,000June 30 150,000 2 300,000Aug. 31 220,000 2 440,000Oct. 31 200,000 2 __400,000
12 P2,160,000
Ave. Capital (P2,160,000 12) = P180,000
Profit Distribution:Robin : P160,000 P340,000 x P510,000 = P240,000Hood : P180,000 P340,000 x P510,000 = _270,000
P510,000
32 Chapter 2
b. Robin Hood Total
Interest on ave. capital.......................................... P 14,400 P 16,200 P 30,600Salaries................................................................. 60,000 100,000 160,000Bonus (P510,000 – 30,600 – 160,000) x 25%).... 78,850 – 79,850Balance, equally................................................... _119,775 _119,775 _239,550
Totals.................................................................... P274,025 P235,975 P510,000
c. Robin Hood TotalsInterest:
Robin (P195,000 – P135,000) 10%............. P 6,000Hood (P200,000 – P140,000) 10%.............. P 6,000 P 12,000
Balance, equally................................................... 249,000 249,000 498,000
Totals.................................................................... 255,000 255,000 510,000
d. Robin Hood Total
Salaries................................................................. P 80,000 P120,000 P200,000Bonus (see computations below).......................... 62,000 62,000Balance, equally................................................... _124,000 _124,000 _248,000
Totals.................................................................... P266,000 P244,000 P510,000Bonus Computations:
Net income before salaries and bonus...................................................... P510,000Less Salaries............................................................................................. 200,000
Net income before bonus.......................................................................... 310,000Net income after bonus (P310,000 125%) .............................._248,000
Bonus........................................................................................................ P 62,000
Problem 2 – 3
a. De Villa De Vera Total
Salaries................................................................. P 30,000 – P 30,000Commission (2% x P1,000,000)........................... P 20,000 20,000Interest of 8% on average capital......................... 32,800 31,200 64,000Bonus (see computations below).......................... 9,818 9,818 19,636Balance, equally................................................... __44,182 __44,182 __88,364
Total..................................................................... P116,800 P105,200 P222,000Bonus Computations:
Income before salary, commissions, interest & bonus.............................. P222,000Salary and commission (P30,000 + P20,000)........................................... ( 50,000)Interest...................................................................................................... ( 64,000 )
Income before bonus................................................................................. 108,000Income after bonus (P108,000 110%).................................................... _98,182
Bonus........................................................................................................ P 9,818
b. Income Summary................................................. P 222,000De Villa, capital........................................... 116,800De Vera, capital........................................... 105,200
Partnership Operations 33
Problem 2 – 4
a. East North West Total
Salaries................................................ P15,000 P20,000 P18,000 P53,000Bonus (see computation below).......... 3,760 3,760Interest (see computation below)........ 2,800 4,000 4,800 11,600Balance, 3:3:4..................................... __3,180 __3,180 __4,240 _10,600
Total.................................................... P24,740 P27,180 P27,040 P78,960
Bonus computations:Net income before bonus........................................................................... P78,960Net income after bonus (P78,960 105%)................................................. _75,200
Bonus......................................................................................................... P 3,760 Interest computations:
East (10% x P28,000)................................................................................ P 2,800North (10% x P40,000)............................................................................. 4,000West (10% x P48,000).............................................................................. __4,800
Total.......................................................................................................... P11,600
b. East North West Total
Interest (see computations below)...... P 3,133 P 3,633 P 5,200 P11,966Salaries................................................ 24,000 21,000 25,000 70,000Bonus (see computations below)........ 4,280 4,280Balance, equally.................................. ( 6,056 ) ( 6,055 ) ( 6,055 ) ( 18,166 )
Total.................................................... P 21,077 P 22,858 P 24,145 P 68,080
Interest computations:Average capitals:
East: Months PesosDate Balances Unchanged Months
1/1 P30,000 4 P120,0005/1 36,000 4 144,0009/1 28,000 4 _112,000
12 P376,000
Average capital (P376,000 12) ........................................... P 31,333
North: Months PesosDate Balances Unchanged Months
1/1 P40,000 2 P80,0003/1 31,000 4 124,0007/1 36,000 2 72,0009/1 40,000 4 _160,000
12 P436,000
Average capital (P436,000 12)............................................ P 36,333 34 Chapter 2
West: Months PesosDate Balances Unchanged Months
1/1 P50,000 3 P150,0004/1 57,000 2 114,0006/1 60,000 2 120,0008/1 48,000 5 _240,000
12 P624,000
Ave. capital (P624,000 12)..................................... P 52,000
Interest Computations:East (10% x P31,333)............................................................ P 3,133North (10% x P36,333).......................................................... 3,633West (10% x P52,000)........................................................... __5,200
Total...................................................................................... P 11,966
Bonus Computations:Net income............................................................................. P 68,000Less Salary............................................................................. _21,000
Net income before bonus....................................................... 47,080Net income after bonus (P47,080 110%)............................ _42,800
Bonus to North....................................................................... P 4,280 * To Total
c. East North West Total
Bonus (see comp. below).................... P 8,990 P 8,990Salaries ........................................... P21,000 P 18,000 – 39,000Interest on beginning capital............... 3,000 4,000 5,000 12,000Remainder, 8:7:5................................. _13,180 _11,532.50 __8,237.50 _32,950
Total................................................... P37,180 P33,532.50 P22,227.50 P92,940
Bonus Computations:Net income before salaries & bonus.......................................................... P92,940Less Salaries (P21,000 + P18,000)............................................................ _39,000
Net income before bonus........................................................................... P53,940Net income after bonus (P53,940 120%)................................................. _44,950
Bonus to West........................................................................................... P 8,990
Problem 2 – 5
a. Schedule of Income Distribution:Maria Clara Rita Total
Salaries............................................... P12,000 P10,000 P 8,000 P30,000Interest (see computation on p. 30)..... 7,200 9,600 13,800 30,600Balance, equally.................................. __3,133 __3,133 __3,134 __9,410
Total................................................... P22,333 P22,733 P24,934 P70,000Partnership Operations 35
Interest on Average Capital:Maria:
P80,000 x 8% x 6 months....................... P 3,200P100,000 x 5% x 6 months..................... __4,000 P 7,200
Clara:P120,000 x 8%........................................ 9,600
Rita:P180,000 x 8% x 9 Mos.. . ...................... P10,800P150,000 x 8% x 3 Mos.. . ...................... __3,000 _13,800
Total................................................................ P30,600
b. Statement of Partners Capital:Maria Clara Rita Total
Balances, Jan. 1................................... P 80,000 P120,000 P180,000 P380,000Additional Investment......................... 20,000 – – 20,000Capital Withdrawal............................. – – ( 30,000) ( 30,000)Net Income.......................................... 22,333 22,733 24,934 70,000Drawings ........................................... ( 10,000 ) ( 10,000 ) ( 10,000 ) ( 30,000 )
Balance, Dec. 31................................. P112,333 P132,733 P164,934 P410,000
Problem 2 – 6
1. Allocation of net loss for 2008:
Alvin Benny Celia Total
Salary to Alvin.................................... P 20,000 P20,000Interests on average capital:
Alvin (P120,000 x 10%)............. 12,000Benny (P200,000 x 10%)........... 20,000Celia (P220,000 x 10%)............. 22,000 54,000
Balance, 30:30:40............................... (29,400) _(29,400 ) _(39,200 ) _(98,000 )
Total................................................... P 2,600 P( 9,400 ) P(17,200 ) P(24,000 )
2. Statement of Partnership CapitalYear Ended December 31, 2008
Alvin Benny Celia Total
Capitals, January 1, 2008.................... P120,000 P180,000 P220,000 P520,000Additional investments....................... 60,000 40,000 100,000Capital withdrawals............................ _______ ________ _(20,000) _(20,000)
Balances.............................................. 120,000 240,000 240,000 600,000Net loss (see above)............................ __2,600 __(9,400) _(17,200) _(24,000)
Balances.............................................. 122,600 230,600 222,800 576,000Drawings. ........................................... _(16,000) _______ _______ _(16,000)
Capitals, December 31, 2008.............. P106,600 P230,600 P222,800 P560,00036 Chapter 2
3. Correcting entry:
Celia capital........................................ 2,400Alvin capital............................... 2,200Benny capital.............................. 200
To correct capital accounts for error in loss allocation computed as follows:
Alvin Benny Celia
Correct loss allocation......................... P2,600 P(9,400) P(17,200)Actual loss allocation.......................... __(400) __9,600 __14,800
Adjustment.......................................... P2,200 P 200 P ( 2,400 )
Problem 2 – 7
Dino Nelson Oscar Total
Capital balances, 1/2/06............................... P45,000 P45,000 P45,000 P135,000Additional investment, 2006........................ _15,000 _15,000 __6,000 __36,000
Balances....................................................... 60,000 60,000 51,000 171,000Net income (Loss) - 2006, equally.............. (1,800) ( 1,800) ( 1,800) ( 5,400)Withdrawals, 2006....................................... (17,000) ( 7,000 ) ( 3,200 ) ( 27,200)
Capital balances, 12/31/06........................... 41,200 51,200 46,000 138,400Additional investment, 2007........................ _____– _____– __6,000 ___6,000
Balances....................................................... 41,200 51,200 52,000 144,400Net income - 2007, 40: 30: 30..................... 10,800 8,100 8,100 27,000Withdrawals, 2007....................................... (17,000) ( 7,000 ) ( 3,200 ) ( 27,200 )
Capital Balances, 12/31/07.......................... 35,000 52,300 56,900 144,200Additional investment, 2008........................ ______– ______– ___6,000 ___6,000
Balances....................................................... 35,000 52,300 62,900 150,200Net income, 2008 (schedule 1).................... 56,365 42,272 20,363 120,000Withdrawals, 2008....................................... (19,000) ( 9,000) ( 3,200 ) ( 31,200 )
Capital balances, 12/31/08........................... P72,365 P86,572 P80,063 P239,000
Schedule 1:Dino Nelson Oscar Total
Annual salaries.................................... P48,000 P24,000 P12,000 P84,000Bonus (see computations below)........ – 10,909 – 10,909Interest................................................. 3,600 3,600 3,600 10,800Balance, equally.................................. _* 4,765 __4,763 __4,763 __14,291
Totals................................................... P56,365 P43,272 P20,363 P120,000
Bonus computations:Net income before bonus....................................................................... P120,000Net income after bonus (P120,000 110%) ..........................._109,091
Bonus to Nelson.................................................................................... P 10,909
* To TotalPartnership Operations 37
Problem 2 – 8Red, White & Blue PartnershipStatement of Partners' Capital
For Year Ended December 31, 2008
Red White Blue Green Total
Balances, beginning of year 40,200 20,200 40,600 P101,000Add: 20% of fees billed to personal clients 8,800 4,800 4,400 18,000
Green's share of fees (Exhibit A) 3,200 3,200Remaining net income (Exhibit A) _22,800 _22,800 _11,400 ______ _57,000
Subtotals _71,800 _47,800 _56,400 __3,200 179,200
Less: Withdrawals 10,400 8,800 11,600 5,000 35,800Uncollectible accounts identified
with clients of each partner 2,400 900 3,300Excess rent charged to Blue 1,800 1,800
Total deductions P12,800 P 9,700 P13,400 P 5,000 P 40,900
Balances, end of year P59,000 P38,100 P43,000 P (1,800) P138,300
Red, White & Blue PartnershipExhibit A – Computation and Division of Net income
For Year Ended December 31, 2008
Total revenue from fees P120,000
Expenses, excluding depreciation and doubtfulaccounts expense P38,700Less: Excess rent charged to N ($300 x 6) __1,800
Subtotal 36,900Add: Depreciation, computed as follows:
$26,000 x 0.10 2,600$10,000 x 0.10 x 1/2 ____500
Total expenses, excluding doubtful accounts expense P40,000Add: Doubtful accounts expense ($3,000 x 0.60) __1,800Total expenses 41,800 ________
Net income for year ended Dec. 31, Year 1 P 78,200
Division of net income:Fees billed to personal clients:
Red P44,000 x 20% P 8,800White P24,000 x 2% 48,000Blue, P22,000 x 20% 4,400 P18,000
Green's share of fees:Gross fees from new clients after April 1, Year 1 24,000Less: Allocated expenses ($40,000 x $24,000/
$120,000) __8,000
Net income from new clients P16,000Green's share (P16,000 x 20%) P 3,200
Total divided pursuant to special agreement __21,200
Balance, divided in income-sharing ratio as follows: P 57,000 To Red, 40% P22,800To White, 40% 22,800To Blue, 20% _11,400
Total P57,00038 Chapter 2
Problem 2 – 9
Allan, Eman and Gino PartnershipStatement of Profit DistributionYear Ended December 31, 2008
Allan Eman Gino Total
Interest P 4,000 P 750 P 250 P 5,000Commission (P16,120 – P5,000) x 10% – 1,112 1,112 2,224Balance, equally __5,926 _5,925 _5,925 _17,776
Total P 9,926 P7,787 P7,287 P25,000Adjustments (50% of P25,000 to Allan) __2,574 (1,287 ) (1,287) _____–
Total P12,500 P6,500 P6,000 P25,000
Problem 2 – 10
Gary, Sonny, and Letty Partnership
Statement of Partners' Capital AccountsYear Ended December 31, 2008
Gary Sonny Letty Total
Capital balances, 1/1/08 P210,000 P180,000 P 90,000 P480,000Additional investments ___9,100 _______ _______ __9,100
Total _219,100 _180,000 _90,000 489,100Profit distribution:
Salaries 13,680 11,520 10,640 35,840Interest 25,920 21,600 10,800 58,320Bonus to Gary and Sonny (Schedule 1) – – –Balance, equally __(9,720) _(9,720) _(9,720) (29,160)
Total __29,880 _23,400 _11,720 _65,000
Total 248,980 203,400 101,720 554,100Drawings _(21,000) (18,000) __(9,000)
_(48,000)
Capital balances, 12/31/08 P227,980 P185,400 P 92,720 P506,100
Schedule 1: Computation of the bonus.
Net profit before interest, salaries and bonus P 65,000Less:Salaries P35,840
Interest _58,320 __94,160
Net profit (loss) before bonus P(29,160 )
Therefore no bonus is to be given to Gary and Sonny.Partnership Operations 39
Problem 2 – 11
a. Entries to record the formation of the partnership and the events that occurred during 2008:
Cash 1,100,000Inventory 800,000Land 1,300,000Equipment 1,000,000
Mortgage payable 500,000
Installment note payable 200,000Kobe, capital (P600,000 + P800,000
+ P1,000,000 – P200,000) 2,200,000Lebron, capital (P500,000 + P1,300,000
- P500,000) 1,300,000
(1) Inventory 300,000Cash 240,000Accounts payable 60,000
(2) Mortgage payable 50,000
Interest expense 20,000Cash 70,000
(3) Installment note payable 35,000Interest expense 20,000
Cash 55,000
(4) Accounts receivable 210,000Cash 1,340,000
Sales 1,550,000
(5) Selling and general expenses 340,000Cash 278,000Accrued expenses payable 62,000
(6) Depreciation expense 60,000Accumulated depreciation 60,000
(7) Kobe, drawing 104,000Lebron, drawing 104,000
Cash 208,000
(8) Sales 1,550,000Income summary 1,550,000
(9) Cost of goods sold 900,000Inventory 900,000P900,000 = P800,000 beginning inventory
+ 300,000 purchases- 200,000 ending inventory
40 Chapter 2
Income summary 1,340,000Cost of good sold 900,000Selling and general expenses 340,000Depreciation expense 60,000Interest expense 40,000
Income summary 210,000Kobe, capital 105,000Lebron, capital 105,000
Kobe, capital 104,000Lebron, capital 104,000
Kobe, drawing 104,000Lebron, drawing 104,000
Schedule to allocate partnership net income for 2008:
Kobe Lebron Total
Profit percentage 60% 40% 100%Beginning capital balance P2,200,000 P1,300,000P3,500,000Net income (P1,550,000 revenue
- P 1,340,000 expenses) 210,000Interest on beginning capital
balances (3%) 66,000 39,000 (105,000 )
P105,000Salaries 120,000 120,000
(240,000 )
P(135,000)Residual deficit (81,000) (54,000)
(135,000 )Total P105,000 P105,000 -0 -
b. Kobe-Lebron PartnershipIncome Statement
For the Year Ended December 31, 2008
SalesP1,550,000Less: Cost of goods sold:
Inventory, January 1 P800,000Purchases 300,000 Goods available for sale P1,100,000
Less: Inventory, December 31 (200,000 ) (900,000 )
Gross profit P650,000Less: Selling and general expenses 340,000
Depreciation expenses 60,000 400,000 Operating income P250,000Nonoperating expense- interest (40,000 )Net income P210,000
Partnership Operations 41
c. Kobe-Lebron PartnershipBalance Sheet
At December 31, 2008
AssetsCash P1,589,000Accounts receivable 210,000Inventory 200,000Land 1,300,000Equipment (net) 940,000 Total assets P4,239,000
Liabilities and CapitalLiabilities:
Accounts payable P60,000Accrued expenses payable 62,000Installment note payable 165,000Mortgage payable 450,000
Total liabilities P737,000Capital:
Kobe, capital P2,201,000Lebron, capital 1,301,000
Total capital 3,502,000 Total liabilities and capital P4239,000
42 Chapter 3
CHAPTER 3
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
3-1: cImplied capital of the partnership (P90,000/20%)P450,000Actual value of the partnership( 420,000 )
Goodwill P 30,000
AQUINO LOCSIN DAVIDHIZON
Capital balances before Goodwill P252,000 P126,000 P42,000 –Goodwill to old partners __18,000 ___9,000 __3,000_____–
Total P270,000 P135,000 P45,000 –Purchase by Hizon (20%) ( 54,000 ) ( 27,000 ) ( 9,000 )_90,000
Capital balances after admission P216,000 P108,000 P36,000P 90,000
3-2: bAQUINO LOCSIN DAVID
HIZON
Capital balances before admission P252,000 P126,000 P42,000 –Purchase by Hizon (20%) ( 50,400 ) ( 25,200 ) ( 8,400 )_84,000
Capital balances after admission P201,600 P100,800 P33,600P 84,000
3-3: dAQUINO LOCSIN DAVID
TOTAL
Capital transferred P 50,400 P 25,200 P 8,400P 84,000Excess divided using profit and loss ratio __3,600 __1,800 ___600__6,000
Cash distribution P 54,000 P 27,000 P 9,000 P 90,000
3-4: b
Selling price P132,000Interest sold (444,000X1/5) ( 88,800 )
Combine gain P 43,200
3-5: b
Implied value of the partnership (P40,000/1/4)P160,000Actual value( 140,000 )
Goodwill P 20,000
BERNAL CUEVASDIAZ
Cash balances P 80,000 P40,000P 20,000Goodwill, Profit and Loss ratio __12,000 __6,000__2,000
Total P 92,000 P46,000 P 22,000
Capital Transfer (1/4) ( 23,000 ) ( 11,500 )( 5,500 )
Capital balances after admission P 69,000 P34,500P 16,500
Partnership Dissolution – Changes in Ownership 43
3-6: b
BANZON CORTEZTOTAL
Capital Transfer (20%) P 16,000 P 4,000P20,000Excess, Profit and Loss ratio __6,000 __4,000_10,000
Cash distribution P 22,000 P 8,000 P30,000
3-7: dPEREZ CADIZ
TOTAL
Capital balances beginning P 24,000 P 48,000P 72,000Net profit, 1:2 5,430 10,86016,290Drawings ( 5,050 ) ( 8,000 ) ( 13
,050)
Capital balances before admission P 24,380 P 50,860P 75,240Capital transfer (squeeze) ( 5,570 ) ( 13,240 )(18,810) (1/4)
Capital balances after admission 1:2 P 18,810 P 37,620 P 56,430
Capital transfer P 5,570 P 13,240P18,810Excess, 1:2 __3,730 __7,460_11,190
Cash P 9,300 P 20,700 P30,000
3-8: a
Total agreed capital (P150,000/5/6) P180,000Diana's Interest 1/6
Cash distribution P 30,000
3-9: a
Total agreed capital (P36,000/1/5) P180,000Total contributed capital (80,000+40,000+36,000) ( 156,000 )
Unrecognized Goodwill P 24,000
3-10: b Contributed Agreed IncreaseCapital Capital (Dec.)
Old partners P110,000 P100,000 (P 10,000)New partner __40,000 __50,000 _10,000
Total P150,000 P150,000 P –
Ben, capital balance before admission P 60,000Bonus share to new partner (10,000X60%) ( 6,000 )
Ben, capital after admission P 54,000
3-11: c
Total agreed capital (P40,000+20,000+17,000) P 77,000Pete's interest 1 /5
Pete's agreed capital balance P 15,400 44 Chapter 3
3-12: b Contributed Agreed IncreaseCapital Capital (Dec.)
Old partner P 65,000 P60,000 (P 5,000)New partner 25,000 (1/3) 30,000 _5,000
Total P 90,000 P90,000 P –
FRED RAUL LORY
Capital balances before admission P 35,000 P30,000 –Investment by Lory – – 25,000Bonus to Lory ( 3,500 ) ( 1,500 ) __5,000
Capital balances after admission P 31,500 P28,500 P 30,000
3-13: c
Total agreed capital (90,000+60,000+70,000) P220,000Augusts' interest _____1/4Agreed capital P 55,000Contributed capital __70,000
Bonus to June & July P 15,000
JUNE JULY
Capital balances before admission P90,000 P 60,000Bonus from August, equally __7,500 __7,500
Capital balances after admission P97,500 P 67,500
3-14: a
Total agreed capital (52,000 + 88,000)/80%) P175,000Total capital of Mira & Nina after admission ( 140,000 )
Cash paid by Elma P 35,000
3-15: a
Total agreed capital (P41,600/2/3) P 62,400Total contributed capital (P23,000+18,600+16,000) ( 57,600 )
Goodwill to new partner, Ang P 4,800
LIM ONG ANG
Capital balances before admission P23,000 P 18,600 –Investment by Ang – – 16,000Goodwill to August _____– ______– __4,800
Capital balances after admission P23,000 P 18,600 P20,800
Partnership Dissolution – Changes in Ownership 45
3-16: a
ANG BENG CHING DONG TOTALCapital balances before
admission P600,000 P 400,000 P 300,000 –P1,300,000
Admission by Dong:By Purchase (1/2) ( 300,000) – – 300,000 –By Investment _______– _______– _______– _300,000___300,000
Capital balances beforeGoodwill and Bonus P300,000 P 400,000 P 300,000 P600,000P1,600,000Goodwill to Old Partners (sch. 1) 150,000 150,000 100,000 – 400,000Bonus to Old Partners (sch. 1) __37,500 __37,500 __25,000 ( 100,000 )________–
Capital balances afteradmission P487,500 P 587,500 P 425,000 P500,000P2,000,000
Schedule 1: CC AC Inc. (Dec.)Old Partners P 1,000,000 P1,500,000 P500,000New Partner 600,000 (25%) __500,000 ( 100,000 ) Bonus
Total P 1,600,000 P2,000,000 P400,000 GW
3-17: bMONA LIZA ALMA LORNA TOTAL
Capital balances beforeadmission of Alma P150,000 P 50,000 – –P 200,000
Admission of Alma:Investment – – 80,000 – 80,000Goodwill to old partner,
70:30 (sch. 1) __28,000 ___12,000 _______– ______–___40,000Capital balances before
admission of Lorna P178,000 P 62,000 P 80,000 –P 320,000
Admission of Lorna:Goodwill Written off, 5:3:2 (P 20,000) (P 12,000) ( P8,000) –( P40,000)Investment – – – 75,000 75,000Goodwill to old partners,
5:3:2 (sch. 2) __10,000 ____6,000 ____4,000 ______–___20,000
Capital balances afteradmission P168,000 P 56,000 P 76,000 P 75,000 P 375,000
Schedule 1:Total agreed capital (80,000/25%)P 320,000Total capital contributed (200,000+80,000)( 280,000)
Goodwill to old partners, 70:30 P 40,000
Schedule 2:Total agreed capital (75,000/20%)P 375,000Total contributed capital (280,000+75,000)( 355,000)
Goodwill to old partners, 5:3:2 P 20,000
46 Chapter 3
3-18: cRED WHITE BLUE
TOTAL
Unadjusted capital balances P175,000 P100,000 P 45,000P320,000
Overvaluation of Marketable Securities ( 12,500) ( 7,500) ( 5,000)
( 25,000)Allowance for Bad Debts ( 12,500 ) ( 7,500 ) ( 5,000 )
( 25,000 )
Adjusted capital balances before admission P150,000 P 85,000 P 35,000 P270,000
Total agreed capital (270,000/2/3) P405,000Green's interest 1/3
Investment P135,000
3-19: bXX YY ZZ WW
TOTALCapital balances before
admission P360,000 P225,000 P135,000 –P720,000
Capital transferto WW (1/6) ( 60,000 ) ( 37,500 ) ( 22,500 ) _120,000______–
Balances P300,000 P187,500 P112,500 P120,000P720,000
Equalization of capital ( 100,000 ) __12,500 __87,500 ______–______–
Balances P200,000 P200,000 P200,000 P120,000P720,000
Net profit, equally 3,150 3,150 3,150 3,15012,600
Drawings (2 months) _( 1,500 ) _( 2,000 ) _( 1,500 ) _( 2,000 )_( 7,000 )
Capital balances beforeWWs Investment P201,650 P201,150 P201,650 P121,150P725,600
Total agreed capital (201,650+201,150+201,650)/2/3 P906,675WW's interest 1 /3
Agreed capital of WW P302,225Contributed capital (see above) _121,150
Cash to be invested P181,075 3-20: a
A B C
Capital balances P 20,750 P 19,250P 45,000Understatement of assets, P12,000 __3,000 __3,000__6,000
Balances before settlement to A P 23,750 P 22,250 P 51,000
Settlement to A P 30,250A's interest (23,750+5,000) _28,750
Partial Goodwill to A P 1,500
Therefore:1. Under partial Goodwill method the capital balances of B is P 22,2502. Under Bonus method the capital balances of B would be:
B, capital balances before settlement to A P 22,250Bonus to A (1,500X25/75) _( 500 )
B, capital after retirement of A P 21,750 Partnership Dissolution – Changes in Ownership 47
3-21: aPerez Reyes
Suarez
Capital balances P 100,000 P 150,000P 200,000Net income, P140,000 70,000 42,00028,000Undervaluation of inventory, P20,000 ___10,000 ____6,000____4,000
Capital balances before settlement to Perez P 180,000 P 198,000P 232,000Settlement to Perez ( 195,000) – –Bonus to Perez ___15,000 _( 9,000 )_( 6,000 )
Capital balances after retirement P – P 189,000 P 226,000
3-22: cELY FLOR
GLOR
Capital balances P 320,000 P 192,000P 128,000Settlement to Ely ( 360,000) – –Total Goodwill (P40,000/50%)P80,000 __40,000 ___24,000___16,000
Capital balances after retirement of Ely P – P 216,000 P 144,000
3-23: c _Alma_ _Betty_ _Total_
Capital balance 3/1/07 480,000 240,000 720,000 Net loss-2007:
Salary (10 months) 480,000 240,000 720,000Interest (10 months) 40,000 20,000 60,000Bal. beg. cap. ratio: 48:24 ( 544,000) ( 272,000) ( 816,000)Total ( 24,000) ( 12,000) ( 36,000)
Capital balance 456,000 228,000 684,000Drawings ( 24,000) ( 24,000) ( 48,000)Capital balance, 12/31/07 432,000 204,000 636,000
Net profit- 2008:Salary 576,000 288,000 864,000Interest 43,200 20,400 63,600Balance, equally ( 397,800) ( 397,800) ( 795,600)Total 221,400 ( 89,400) 132,000
Capital balance 653,400 114,600 768,000Drawings ( 24,000) ( 24,000) ( 48,000)Capital balance 12/31/08 629,400 90,600 720,000
Total contributed capital (720,000 + 400,000) 1,120,000Cora’s interest 40%Cora’s agreed capital 448,000Cora’s contributed capital 400,000Bonus to Cora, from Alma and Betty 4:2 48,000Therefore entry (c) is correct.
48 Chapter 3
3-24: a_Pete_ _Carlos_ _Total_
Capital balance, beg. 2007 P80,000 P30,000 P110,000 2007 net profit (90,000 – 59,000):
Interest 8,000 3,000 11,000Compensation 5,000 20,000 25,000Balance, 4:6 ( 2,000) ( 3,000) ( 5,000)Total 11,000 20,000 31,000
Balance 91,000 50,000 141,000Withdrawal ( 8,000) ( 11,000) (19,000)Repairs (charge to Pete) ( 5,000) - ( 5,000) Capital balance, 12/31/07 78,000 39,000 117,000
1/1/08: Admission of SammyTotal agreed capital (P117,000 +43,000) P160,000Sammy’s interest 20%Sammy’s agreed capital 32,000Sammy’s contributed capital 43,000Bonus to Pete & Carlos, 4:6 11,000
Therefore entry (a) is correct.
Partnership Dissolution – Changes in Ownership 49
SOLUTIONS TO PROBLEMS
Problem 3 – 1(a) 1. Goodwill Method:
Total agreed capital (P75,000 25%)......................................P300,000Total contributed capital......................................................... ._275,000
Goodwill to old partners, P/L ratio..........................................P 25,000
EntryGoodwill............................................................................ 25,000Cash................................................................................... 75,000
Red, capital.................................................................... 5,000White, capital................................................................ 10,000Blue, capital................................................................... 10,000Green, capital................................................................ 75,000
2. Bonus Method:Contributed capital of Green.....................................................P 75,000Agreed capital of Green (P275,000 x 25%)..............................._68,750
Bonus to old partners, P/L ratio................................................P 6,250
Entry:Cash................................................................................... 75,000
Green, capital................................................................ 68,750Red, capital.................................................................... 1,250White, capital................................................................ 2,500Blue, capital................................................................... 2,500
(b) 1. Implicit Goodwill Method:Total Implied Capital (P75,000 25).......................................P300,000Total existing capital............................................................... ._200,000
Implied Goodwill to old partners.............................................P100,000
Entries:Goodwill............................................................................ 100,000
Red, capital.................................................................... 20,000White, capital................................................................ 40,000Blue, capital................................................................... 40,000
Red, capital (25% x P80,000)............................................ 20,000White, capital (25% x p120,000)....................................... 30,000Blue, capital (25% x P100,000)......................................... 25,000
Green, capital................................................................ 75,000
2. Red, capital (25% x P10,000)....................................................... 15,000White, capital (25% x P80,000)................................................... 20,000Blue, capital (25% x P60,000)...................................................... 15,000
Green, capital......................................................................... 50,00050 Chapter 3
Problem 3 – 2a. (1) Bonus Method:
Contributed capital of Tomas............................................................................. P140,000Agreed capital of Tomas (P640,000 x 20%)...................................................... _128,000
Bonus to old partners, P/L ratio.......................................................................... P 12,000
BRUNO MARIO TOMAS TOTAL
Balances before admission..................... P200,000 P300,000 – P500,000Admission of Tomas............................... ___9,000 ___3,000 _128,000 _140,000
Balances after admission........................ P209,000 P303,000 P128,000 P640,000
(2) Goodwill Method:Total agreed capital (P140,000 20%)........................................... P700,000Total contributed capital................................................................. _640,000
Goodwill to old partners, P/L ratio................................................. P 60,000
BRUNO MARIO TOMAS TOTAL
Balances before admission..................... P200,000 P300,000 P – P500,000Admission of Tomas............................... __45,000 __15,000 _140,000 _200,000
Balances after admission........................ P245,000 P315,000 P140,000 P700,000
(3) Goodwill with subsequent write-off.BRUNO MARIO TOMAS TOTAL
Balances from A-2.................................. P245,000 P315,000 P140,000 P700,000Goodwill written off, 6:2:2..................... ( 36,000 ) ( 12,000 ) ( 12,000 ) ( 60,000 )
Balances.................................................. P209,000 P303,000 P128,000 P640,000
b. BRUNO MARIO TOMAS TOTAL
Balances from A-2.................................. P245,000 P315,000 P140,000 P700,000Goodwill written off, 4:4:2..................... ( 24,000 ) ( 24,000 ) ( 12,000 ) ( 60,000 )
Balances.................................................. P221,000 P291,000 P128,000 P640,000
Problem 3 – 3
a. Total capital after admission (P76,000 + P104,000)........................................................ P180,000Total capital before admission (P60,000 + P80,000)........................................................ _140,000
Goodwill recorded............................................................................................................ P 40,000
Total capital of the partnership (P180,000 75%)............................................................ P240,000Less: Total capital of old partners plus Goodwill (P140,000 + 40,000)........................... _180,000
Cash payment by Barry..................................................................................................... P 60,000
b. Total capital after admission (P52,000 + P68,000).......................................................... P120,000Total capital before admission.......................................................................................... _140,000
Bonus to Barry.................................................................................................................. P 20,000
Agreed capital of Barry (P120,000 75%) x 25%............................................................ P 40,000Less: Bonus ................................................................................................................... __20,000
Cash payment by Barry..................................................................................................... P 20,000 Partnership Dissolution – Changes in Ownership 51
Problem 3 – 4
a. Total agreed capital (P60,000 20%)...................................................P300,000Total contributed capital (P100,000 + P40,000 + P60,000)................ ._200,000
Goodwill to old partners, P/L ratio.......................................................P100,000
Entry:Cash. ............................................................................................ 60,000Goodwill....................................................................................... 100,000
Gene, capital.......................................................................... 80,000Nancy, capital........................................................................ 20,000Ellen, capital.......................................................................... 60,000
b. Cash.................................................................................................... 60,000Ellen, capital................................................................................. 60,000
No Goodwill, no bonus because the total agreed capital is equal to the total contributed capital.
c. Gene, capital ....................................................................................... 20,000Nancy, capital..................................................................................... 8,000
Ellen, capital................................................................................. 28,000
d. Cash.................................................................................................... 32,000Ellen, capital................................................................................. 32,000
Since the total agreed capital (P172,000) is equal to the total contributed capital (P172,000),
then no Goodwill or bonus is to be recorded.
e. Total agreed capital (P140,000 80%).................................................P175,000Total contributed capital (P140,000 + P32,000).................................. ._172,000
Goodwill to new partner.......................................................................P 3,000
Entry:Cash. ............................................................................................ 32,000Goodwill....................................................................................... 3,000
Ellen, capital.......................................................................... 35,000
Problem 3 – 5
a. Cash.................................................................................................... 40,000Cherry capital............................................................................... 40,000
b. Total agreed capital (P120,000 + P50,000)..........................................P170,000Cherry's interest....................................................................................____25%
Cherry's agreed capital..............................................................................42,500Contributed capital............................................................................... .__50,000
Bonus to old partners, 70:30.................................................................P 7,500 52 Chapter 3
Entry:Cash. ............................................................................................ 50,000
Cherry, capital........................................................................ 42,500Helen, capital......................................................................... 5,250Cathy, capital......................................................................... 2,250
c. Total agreed capital (P120,000 + P25,000)..........................................P145,000Cherry's interest....................................................................................____25%
Agreed capital of Cherry...........................................................................36,250Contributed capital............................................................................... .__25,000
Bonus to new partner............................................................................P 11,250
Entry:Cash. ............................................................................................ 25,000Helen, capital................................................................................ 7,875Cathy, capital................................................................................ 3,375
Cherry, capital........................................................................ 36,250
d. Total agreed capital (P50,000 25%)...................................................P200,000Total contributed capital (P120,000 + 50,000).......................................170,000
Goodwill to old partners, 70:30............................................................P 30,000
Entry:Cash ....................................................................................... 50,000Goodwill....................................................................................... 30,000
Cherry, capital........................................................................ 50,000Helen, capital......................................................................... 21,000Cathy, capital......................................................................... 9,000
e. Total agreed capital (P120,000 75%).................................................P160,000Total contributed capital (P120,000 + P25,000).................................. ._145,000
Goodwill to new partner.......................................................................P 15,000
Entry:Cash ....................................................................................... 25,000Goodwill....................................................................................... 15,000
Cherry, capital........................................................................ 40,000
Problem 3 – 6
a. Total agreed capital (P600,000 3/4).................................................................. P800,000Santos interest...................................................................................................... _____1/4
Contribution of Santos......................................................................................... P200,000
b. Total agreed capital (P630,000 3/4).................................................................. P840,000Santos' interest..................................................................................................... _____1/4
Contribution of Santos......................................................................................... P210,000Partnership Dissolution – Changes in Ownership 53
c. Total agreed capital (P624,000 3/4)............................................................................................... P832,000Less: Contributed capital of old partners......................................................................................... _600,000
Contributed capital of Santos........................................................................................................... P232,000
d. Total agreed capital (P600,000 3/4)............................................................................................... P800,000Less: Goodwill ............................................................................................................................... __10,000
Contributed capital........................................................................................................................... 790,000Contributed capital of old partners................................................................................................... _600,000
Contributed capital of Santos........................................................................................................... P190,000
e. Total agreed capital (Contributed)................................................................................................... P820,000Less: Contributed capital of old partners......................................................................................... _600,000
Contributed capital of Santos........................................................................................................... P220,000Problem 3 – 7
a. Tony, capital .......................................................................................................... 40,000Noel, capital........................................................................................................ 40,000
b. Cash .......................................................................................................... 90,000Noel, capital........................................................................................................ 90,000
(P180,000 2/3) x 1/3 = P90,000.
c. Cash............................................................................................................................ 56,000Goodwill .................................................................................................................... 4,000
Noel, capital........................................................................................................ 60,000
Total agreed capital (P180,000 3/4)................................................................................P240,000Total contributed capital (P180,000 + P56,000)..............................................................._236,000
Goodwill to new partner....................................................................................................P 4,000
d. Subas, capital……………………………………………………………… ...... 14,400 Tony, capital………………………………………………………………… . . 9,600
Inventory………………………………………………………………............. 24,000
Cash............................................................................................................................ 52,000Noel, capital........................................................................................................ 52,000
Total agreed capital (P52,000 1/4)..................................................................................P208,000Total capital before inventory write-down (180,000 + 52,000).......................................(232,000)
Write-down to old partners capital...................................................................................( 24,000) e. Land……………………………………………………………………………………….. 92,000
Subas, capital…………………………………………………………………… 55,200Tony, capital……………………………………………………………………. 36,800
Subas, capital (P155,200 x 1/4)................................................................................... 38,800Tony, capital (P116,800 x 1/4).................................................................................... 29,200
Noel, capital........................................................................................................ 68,000Total resulting capital (P68,000 1/4)..............................................................................P272,000Total capital of old partner (net assets)............................................................................._180,000Increase in value of land....................................................................................................P 92,000Capital of old partner after revaluation of land:
Subas (P100,000 + P55,200).....................................................................................P155,200Tony (P80,000 + P36,800)..........................................................................................116,800
54 Chapter 3
f. Cash.................................................................................................... 40,000Subas, capital...................................................................................... 2,400Tony, capital ....................................................................................... 1,600
Noel, capital.................................................................................. 44,000
Agreed capital of Noel (P220,000 x 1/5)...............................................P 44,000Contributed capital of Noel....................................................................._40,000
Bonus to Noel........................................................................................P 4,000
g. Cash.................................................................................................... P60,000Goodwill. ............................................................................................ 60,000
Noel, capital.................................................................................. P 60,000Subas, capital (P60,000 x 3/5)...................................................... 36,000Tony, capital (P60,000 x 2/5)....................................................... 24,000
Total agreed capital (P60,000 1/5).....................................................P300,000Total contributed capital (P180,000 + P60,000).................................. ._240,000
Goodwill to old partner, 3:2..................................................................P 60,000
Problem 3 – 8
a. Conny, capital..................................................................................... 40,000Andy, capital (P8,000 x 3/4)............................................................... 6,000Benny, capital (P8,000 x 1/4)............................................................. 2,000
Cash. ............................................................................................ 48,000
b. Goodwill. ............................................................................................ 10,000Conny, capital..................................................................................... 40,000
Cash. ............................................................................................ 50,000
c. Goodwill (P5,000 1/5)...................................................................... 25,000Conny, capital..................................................................................... 40,000
Andy, capital (P25,000 x 3/5)...................................................... 15,000Benny, capital (P25,000 x 1/5)..................................................... 5,000Cash ....................................................................................... 45,000
Problem 3 – 9
a. Spade, capital...................................................................................... 120,000Jack, capital.................................................................................. 120,000
b. Goodwill (P30,000 50%).................................................................. 60,000Ace, capital................................................................................... 12,000Jack, capital.................................................................................. 18,000Spade, capital................................................................................ 30,000
Spade, capital (P120,000 + P30,000).................................................. 150,000Jack, capital.................................................................................. 150,000
Partnership Dissolution – Changes in Ownership 55
Problem 3-9 (Continued)
c. Spade, capital...................................................................................... 180,000Cash. ............................................................................................ 180,000
Ace, capital (P60,000 x 2/5)............................................................... 24,000Jack, capital (P60,000 x 3/5)............................................................... 36,000
Spade, capital................................................................................ 60,000
d. Land................................................................................................... 20,000Ace, capital (20%)........................................................................ 4,000Jack, capital (30%)....................................................................... 6,000Spade, capital (50%)..................................................................... 10,000
Spade, capital...................................................................................... 130,000Ace, capital (P50,000 x .40)................................................................ 20,000Jack, capital (P50,000 x .60)............................................................... 30,000
Cash. ............................................................................................ 60,000Land. ............................................................................................ 120,000
e. Goodwill. ............................................................................................ 30,000Spade, capital...................................................................................... 120,000
Cash. ............................................................................................ 150,000
f. Goodwill (P30,000 50%).................................................................. 60,000Spade, capital...................................................................................... 120,000
Ace, capital (P60,000 x 20%)....................................................... 12,000Jack, capital (P60,000 x 30%)...................................................... 18,000Cash. ............................................................................................ 150,000
g. Land................................................................................................... P40,000Ace, capital (20%)........................................................................ 8,000Jack, capital (30%)....................................................................... 12,000Spade, capital (50%)..................................................................... 20,000
Spade, capital (P120,000 x P20,000).................................................. 140,000Ace, capital (P10,000 x 40%)............................................................. 4,000Jack, capital (P10,000 x 60%)............................................................. 6,000
Land. ............................................................................................ 100,000Note payable................................................................................. 50,000
56 Chapter 3
Problem 3 – 10
Case 1: Bonus of P10,000 to Eddy:Eddy, capital................................................................................. 70,000Charly, capital (P10,000 x 3/5).................................................... 6,000Danny, capital (P10,000 x 2/5)..................................................... 4,000
Cash ....................................................................................... 80,000
Case 2: Partial Goodwill to Eddy:Goodwill....................................................................................... 4,000Eddy, capital................................................................................. 70,000
Cash ....................................................................................... 74,000
Case 3: Bonus of P5,000 to remaining partner:Eddy, capital................................................................................. 70,000
Charly, capital (P5,000 x 3/5)................................................ 3,000Danny, capital (P5,000 x 2/5)................................................ 2,000Cash ....................................................................................... 65,000
Case 4: Total Implied Goodwill of P24,000:Goodwill....................................................................................... 24,000Eddy, capital................................................................................. 70,000
Charly, capital (P24,000 x 3/6).............................................. 12,000
Danny, capital (P24,000 x 2/6).............................................. 8,000Cash ....................................................................................... 74,000
Case 5: Other assets disbursed:Eddy, capital................................................................................. 70,000Other assets................................................................................... 20,000
Charly, capital (P60,000 x 3/6).............................................. 30,000Danny, capital (P60,000 x 2/6).............................................. 20,000Cash ....................................................................................... 40,000
Case 6: Danny purchases Eddy's capital interest:Eddy, capital................................................................................. 70,000
Danny, capital........................................................................ 70,000
Partnership Dissolution – Changes in Ownership 57
Problem 3 – 11
a. 1/1/06 Building................................................................ 52,000Equipment............................................................ 16,000Cash ..................................................................... 12,000
Santos capital............................................... 40,000To record initial investment.
12/31/06 Reyes capital......................................................... 22,000Santos capital............................................... 12,000Income summary......................................... 10,000
To record distribution of loss as follows: Santos Reyes Total
Interest.................................................................. P 8,000 P – P 8,000Additional profit................................................... 4,000 4,000Balance to Reyes.................................................. ______ (22,000) (22,000)
Total..................................................................... P12,000 P(22,000) (P10,000)
1/1/07 Cash ..................................................................... 15,000Santos capital (15%)............................................. 300Reyes capital (85%).............................................. 1,700
Cruz capital.................................................. 17,000
(new investment by Cruz brings total capital to P85,000 after 2006 loss [80,000 –
10,000 + 15,000]. Cruz's 20% interest is P17,000 [85,000 x 20%] with the extra P2,000 coming from the two original partners [allocated between them according to their profit and loss ratio].)
12/31/07 Santos capital........................................................ 10,340Reyes capital......................................................... 5,000Cruz capital........................................................... 5,000
Santos drawings........................................... 10,340Reyes drawings............................................ 5,000Cruz drawings.............................................. 5,000
To close drawings accounts for the year based on distributing 20%. Of each partner's beginning capital balances [after adjustment for Cruz's investment] or P5,000 whichever is greater. Santos's capital Is P51,700 [40,000 + 12,000 – 300].)
12/31/07 Income summary.................................................. 44,000Santos capital............................................... 16,940Reyes capital................................................ 16,236Cruz capital.................................................. 10,824
To allocate P44,000 income figure as computed below:Santos Reyes Cruz
Interest (20% of P51,700).................................... P10,34015% of P44,000 income....................................... 6,600Balance, 60:40...................................................... ______ P16,236 P10,824
Total..................................................................... P16,940 P16,236 P10,82458 Chapter 3
Capital balances as of December 31, 2008Santos Reyes Cruz
Initial investment, 2007........................................ P40,000 P40,0002007 profit............................................................ 12,000 (22,000)Cruz investment.................................................... (300) (1,700) P17,0002007 drawings...................................................... (10,340) (5,000) (5,000)2007 profit............................................................ _16,940 _16,236 _10,824
Capital, 12/31/07.................................................. P58,300 P27,536 P22,824
1/1/08 Cruz capital........................................................... 22,824Diaz capital.................................................. 22,824
To transfer capital purchase from Cruz to Diaz
12/31/08 Santos capital........................................................ 11,660Reyes capital......................................................... 5,507Diaz capital........................................................... 5,000
Santos drawings........................................... 11,660Reyes drawings............................................ 5,507Diaz drawings.............................................. 5,000
To close drawings accounts based on 20% of beginning capital Balances (above) or P5,0000 (whichever is greater).
12/31/08 Income summary.................................................. 61,000Santos capital............................................... 20,810Reyes capital................................................ 24,114Diaz capital.................................................. 16,076
To distribute profit for 2008 computed as follows:Santos Reyes Diaz
Interest (20% of P58,300).................................... P11,66015% of P61,000 profit.......................................... 9,150Balance, P40,190, 60:40....................................... ______ P24,114 P16,076
Total..................................................................... P20,810 P24,114 P16,076
1/1/09 Diaz capital........................................................... 33,900Santos capital (15%)............................................. 509Reyes capital (85%).............................................. 2,881
Cash............................................................. 37,290Diaz capital is [33,900 (P22,824 – P5,000 + P16,076)]. Extra 10% is deducted from the two remaining partners' capital accounts.
b. 1/1/06 Building................................................................ 52,000Equipment............................................................ 16,000Cash ..................................................................... 12,000Goodwill............................................................... 80,000
Santos capital............................................... 80,000Reyes capital................................................ 80,000
To record initial investments. Reyes is credited with goodwill of P80,000 to match Santos investment.
Partnership Dissolution – Changes in Ownership 59
12/31/06 Reyes capital............................................................... 30,000Santos capital............................................... 20,000Income summary......................................... 10,000
Interest of P16,000 is credited to Santos (P80,000 x 20%) along with a base of P4,000. The remaining profit is now a P30,000 loss which is attributed entirely to Reyes.
1/1/07 Cash ..................................................................... 15,000Goodwill............................................................... 22,500
Cruz capital.................................................. 37,500Cash and goodwill contributed by Cruz are recorded. Goodwill is Computed algebraically as follows:
P15,000 + goodwill = 20% (current capital + P15,000 + goodwill)P15,000 + goodwill = 20% (P150,000 + P15,000 + goodwill)P15,000 + goodwill = P33,000 + .20 goodwill.80 goodwill = P18,000
goodwill = P22,500
12/31/07 Santos capital........................................................ 20,000Reyes capital......................................................... 10,000
Cruz capital........................................................... 7,500Santos drawings........................................... 20,000Reyes drawings............................................ 10,000Cruz drawings.............................................. 7,500
To close drawings accounts based on 20% of beginning capitalBalances: Santos, p100,000; Reyes, P50,000; and Cruz, P37,500.
12/31/07 Income summary.................................................. 44,000Santos capital............................................... 26,600Reyes capital................................................ 10,400Cruz capital.................................................. 6,960
To allocate P44,000 profit as follows:Santos Reyes Cruz
Interest (20% of P100,000).................................. P20,00015% of P44,000 profit.......................................... 6,600Balance of P17,400, 60:40.................................... ______ P10,440 P 6,960
Total..................................................................... P26,600 P10,440 P 6,960
Capital balances as of December 31, 2004:Santos Reyes Cruz
Initial investment, 2006........................................ P80,000 P80,0002006 profit allocation........................................... 20,000 (30,000)Additional investment.......................................... P37,5002007 drawings...................................................... (20,000) (10,000) (7,500)2007profit allocation............................................ __26,600 _10,440 __6,960
Capitals, 12/31/07................................................. P106,600 P50,440 P36,96060 Chapter 3
1/1/08 Goodwill....................................................................... 26,588Santos capital...................................................... 3,988Reyes capital....................................................... 13,560Cruz capital......................................................... 9,040
To record goodwill implied of Cruz's interest. In effect, the profit Sharing ratio is 15% to Santos, 51% to Reyes (60% of 85% remaining after Santos's income), and 34% to Cruz (40% of the 85% remaining after Santos' income). Diaz is paying P46,000, P9,040 in excess of Cruz's capital (P36,960). The additional payment for this 34% income Interest indicates total goodwill of P26,588 (P9,040/34%).
1/1/08 Cruz capital.................................................................. 46,000Diaz capital......................................................... 46,000
To transfer of capital purchase.
12/31/08 Santos capital................................................................ 22,118Reyes capital................................................................ 12,800Diaz capital................................................................... 9,200
Santos drawings.................................................. 22,118Reyes drawings................................................... 12,800Diaz drawings..................................................... 9,200
To close drawings accounts based on 20% of beginning capitals.
12/31/08 Income summary.......................................................... 61,000
Santos capital...................................................... 31,268Reyes capital....................................................... 12,800Diaz capital......................................................... 9,200
To allocate profit for 2008 as follows:Santos Reyes Diaz
Interest (20% of P110,588).......................................... P22,11815% of P61,000............................................................ 9,150Balance of P29,732, 60:40........................................... ______ P17,839 P11,893
Totals............................................................................ P31,268 P17,839 P11,893
Capital balances as of December 31, 2008:Santos Reyes Diaz
12/31/07 balances......................................................... P106,600 P50,440Goodwill....................................................................... 3,988 13,560Capital purchased......................................................... P46,000Drawings...................................................................... (22,118) (12,800) (9,200)Profit allocation............................................................ __31,268 _17,839 _11,893
12/31/08 balances......................................................... P119,738 P69,039 P48,693
1/1/09 Goodwill....................................................................... 14,321Santos capital...................................................... 2,148Reyes capital....................................................... 7,304Diaz capital......................................................... 4,869
To record implied goodwill. Diaz will be paid P53,562 (110% of the capital balance for his interest. This amount is P4,869 in excess of the capital account. Since Diaz is only entitled to a 34% share of profits and losses, the additional P4,869 must indicate that the partnership as a whole is undervalued by P14,321 (P4,869/34%) which is treated as goodwill.
1/1/09 Diaz capital................................................................... 53,562Cash.................................................................... 53,562
To record settlement to Diaz.Partnership Dissolution – Changes in Ownership 61
Problem 3 – 12Partnership Books Continued as Books of Corporation
Entries in the Books of the Corporation
(1) Inventories............................................................................................ 26,000Land .................................................................................................... 40,000Building. .............................................................................................. 20,000Accumulated depreciation – bldg......................................................... 20,000Accumulated depreciation – equipment................................................ 30,000
Equipment.................................................................................... 20,000Jack capital.................................................................................. 58,000Jill capital.................................................................................... 34,800Jun capital.................................................................................... 23,200
To adjust assets and liabilities of the partnershipto their current fair values.
(2) Cash .................................................................................................... 4,000Jack capital.......................................................................................... 18,000
Jill capital.................................................................................... 20,200
Jun capital.................................................................................... 1,800To adjust capital accounts of the partners to 4:3:3 ratio.
(3) Jack capital.......................................................................................... 100,000Jill capital............................................................................................ 75,000Jun capital............................................................................................ 75,000
Capital stock................................................................................ 250,000To record issuance of stock to the partners.
New Books Opened for the New Corporation
Entries in the Books of the Partnership
(1) Inventories............................................................................................ 26,000Land .................................................................................................... 40,000Building. .............................................................................................. 20,000Accumulated depreciation – bldg......................................................... 20,000Accumulated depreciation – equipment................................................ 30,000
Equipment.................................................................................... 20,000Jack capital.................................................................................. 58,000Jill capital.................................................................................... 34,800Jun capital.................................................................................... 23,200
To adjust assets and liabilities of the partnership.
(2) Cash .................................................................................................... 4,000Jack capital.......................................................................................... 18,000
Jill capital.................................................................................... 20,200Jun capital.................................................................................... 1,800
To adjust capital accounts of the partners.62 Chapter 3
(3) Stock of JJJ Corporation...................................................................... 250,000Accounts payable.................................................................................. 30,000Loans payable – Jill.............................................................................. 40,000
Cash in bank................................................................................ 44,000Accounts payable......................................................................... 26,000Inventories.................................................................................... 60,000Land............................................................................................. 60,000Building. ...................................................................................... 70,000Equipment.................................................................................... 60,000
To record transfer of assets and liabilities toThe corporation and the receipt of capital stock
(4) Jack capital.......................................................................................... 100,000Jill capital............................................................................................ 75,000Jun capital............................................................................................ 75,000
Stock of JJJ Corporation............................................................. 250,000To record issuance of stock to the partners.
Entries in the Books of the Corporation
(1) To record the acquisition of assets and liabilities from the partnership:
Cash in bank. ....................................................................................... 44,000Accounts receivable.............................................................................. 26,000Inventories............................................................................................ 60,000Land .................................................................................................... 60,000Building (net). ...................................................................................... 70,000Equipment (net).................................................................................... 60,000
Accounts payable......................................................................... 30,000Loans payable.............................................................................. 40,000Capital stock................................................................................ 250,000
Problem 3 – 13a. 1/1/06 Building 1,040,000
Equipment 320,000Cash 240,000
Lim, capital 800,000Sy, capital 800,000
(To record initial investment. Assets recorded at market value with two equal capital balances.
12/31/06 Sy, capital 440,000Lim, capital 240,000Income summary 200,000
(The allocation plan specifies that Lim will receive 20% in interest [or 160,000 based on P800,000 capital balance] plus P80,000 more [since that amount is
Partnership Dissolution – Changes in Ownership 63
greater than 15% of the profits from the period]. The remaining P440,000 loss is assigned to Sy.)
1/1/07 Cash 300,000Lim, capital (15%) 6,000Sy, capital (85%) 34,000
Tan, capital 340,000(New investment by Tan brings total capital to P1,700,000 after 2006 loss [P1,600,000 – P200,000 + P300,000]. Tan’s 20% interest is P340,000 [P1,700,000 x 20%] with the extra P40,000 coming from the two original partners [allocated between them according to their profit and loss ratio].)
12/31/07 Lim, capital 206,800Sy, capital 100,000Tan, capital 100,000
Lim, drawings 206,800Sy, drawings 100,000Tan, drawings 100,000
(To close out drawings accounts for the year based on distributing 20% of each partner’s beginning capital balances [after adjustment for Tan’s investment] or P100,000 whichever is greater. Lim’s capital is P1,034,000 [P800,000 + P240,000 – P6,000])
12/31/07 Income summary 880,000Lim, capital 338,800Sy, capital 324,720Tan, capital 216,480
(To allocate P880,000 income figure for 2007 as determined below.)
Lim Sy TanInterest (20% of P1,034,000
beginning capital balance) P206,80015% of P880,000 income 132,00060:40 split of remaining P541,200 income - 324,720 216,480Total P338,800 P524,720 P216,480
Capital balances as of December 31, 2007: Lim Sy Tan
Initial 2006 investment P800,000 P800,0002006 profit allocation 240,000 440,000Tan’s investment (6,000) (34,000) P340,0002007 drawings (206,800) (100,000) (100,000)2007 profit allocation 338,800 324,720 216,48012/31/07 balances P1,166,000 P550,720 P456,480
1/1/08 Tan, capital 456,480Ang, capital 456,480
(To reclassify balance to reflect acquisition of Tan’s interest.)
64 Chapter 3
12/31/08 Lim, capital 233,200Sy, capital 110,140Ang, capital 100,000
Lim, drawings 233,200Sy, drawings 110,140Ang, drawings 100,000
(To close out drawings accounts for the year based on 20% of beginning capital balances [above] or P100,000 [whichever is greater].)
12/31/08 Income summary 1,220,000
Lim, capital 416,200Sy, capital 482,280Ang, capital 321,520
(To allocate profit for 2008 determined as follows) Lim Sy Ang
Interest (20% of P1,166,000 beg. capital) P233,20015% of P1,220,000 income 183,000
60:40 split of remaining P803,800 - 482,280 321,520Totals P416,200 P482,280 P321,520
1/1/09 Ang, capital 678,000Lim, capital (15%) 10,180Sy, capital 85%) 57,620
Cash 745,800(Ang’s capital is P678,000 [P456,480 – P100,000 + P321,520]. Extra 10% payment is deducted from the two remaining partners’ capital accounts.)
b. 1/1/06 Building 1,040,000Equipment 320,000Cash 240,000Goodwill 1,600,000
Lim, capital 1,600,000Sy, capital 1,600,000
(To record initial capital investments. Sy is credited with goodwill of P1,600,000 to match Lim’s investment.)
12/31/06 Sy, capital 600,000Lim, capital 400,000Income summary 200,000
(Interest of P320,000 is credited to Lim [P1,600,000 x 20%] along with a base of P80,000. The remaining amount is now a P600,000 loss that is attributed entirely to Sy.)
1/1/07 Cash 300,000Goodwill 450,000
Tan, capital 750,000(Cash and goodwill being contributed by Tan are recorded. Goodwill must be calculated algebraically.)
Partnership Dissolution – Changes in Ownership 65
P300,000 + Goodwill = 20% (Current capital + P300,000 + Goodwill)P300,000 + Goodwill = 20% (P3,000,000 + P300,000 + Goodwill)P300,000 + Goodwill = P660,000 + .2 Goodwill
.8 Goodwill = P360,000 Goodwill = P450,000
12/31/07 Lim, capital 400,000Sy, capital 200,000Tan, capital 150,000
Lim, drawings 400,000Sy, drawings 200,000Tan, drawings 150,000
(To close out drawings accounts for the year based on 20% of beginning capital balances: Lim- P2,000,000, Sy- P100,000, and Tan- P750,000.)
12/31/07 Income summary 880,000Lim, capital 532,000
Sy, capital 208,800Tan, capital 139,200
(To allocate P880,000 income figure as follows)
Lim Sy TanInterest (20% of P2,000,000)
beginning capital balance) P400,00015% of P880,000 income 132,00060:40 split of remaining P348,000 - P208,800 P139,200
Totals P532,000 P208,800 P139,200
Capital balances as of December 31, 2007: Lim Sy Tan
Initial 2006 investment P1,600,000 P1,600,0002006 profit allocation 400,000 (600,000)Additional investment P750,0002007 drawings (400,000) (200,000) (150,000)2007 profit allocation 532,000 208,800 139,20012/31/07 balances P2,132,000 P1,008,800 P739,200
1/1/08 Goodwill 531,760Lim, capital (15%) 79,760Sy, capital (51%) 271,200Tan, capital (34%) 180,800
(To record goodwill indicated by purchase of Tan’s interest.)
In effect, profits are shared 15% to Lim, 51% to Sy – (60% of the 85% remaining after Lim’s income), and 34% to Tan (50% of the 85% remaining after Lim’s income). Ang is paying P920,000, an amount P180,800 in excess of Tan’s capital (P739,200). The additional payment for this 34% income interest indicates total goodwill of P531,760 (P180,800/34%). Since Tan is entitled to 34% of the profits but only holds 19% of the total capital, an implied value for the
66 Chapter 3
company as a whole cannot be determined directly from the payment of P920,000. Thus,goodwill can only be computed based on the excess payment.
1/1/08 Tan, capital 920,000Ang, capital 920,000
(To reclassify capital balance to new partner.)
12/31/08 Lim, capital 442,360Sy, capital 256,000Ang, capital 184,000
Lim, drawings 442,360Sy, drawings 256,000Ang, drawings 184,000
(To close out drawings accounts for the year based on 20% of beginning capital balances [after adjustment for goodwill].)
12/31/08 Income summary 1,220,000Lim, capital 625,360Sy, capital 356,780Ang, capital 237,860
To allocate profit for 2008 as follows: Lim Sy Ang
Interest (20% of P2,211,760 beginning capital balance) P442,360
15% of P1,220,000 income 183,00060:40 split of remaining P594,640 - 356,780 237,860
Totals P625,360 P356,780 P237,860
Capital balances as of December 31, 2008: Lim Sy Ang
12/31/07 balances P2,132,000 P1,008,00 P739,200Adjustment for goodwill 79,760 271,200 180,800Drawings (442,360) ( 256,000) (184,000)Profit allocation 625,360 356,780 237,86012/31/08 balances P2,394,760 P1,380,780 P973,860
Ang will be paid P1,071,240 (110% of the capital balance) for her interest. This amount is P97,380 in excess of the capital account. Since Ang is only entitled to a 34% share of profits and losses, the additional P97,380 must indicate that the partnership as a whole is undervalued by P286,420 (P97,380/34%). Only in that circumstance would the extra payment to Ang be justified:
1/1/09 Goodwill 286,420Lim, capital (15%) 42,960Sy, capital (51%) 146,080Ang, capital (34%) 97,380
(To recognize implied goodwill.)
Partnership Dissolution – Changes in Ownership 67
1/1/09 Ang, capital 1,071,240Cash 1,071,240
(To record final distribution to Ang.
68 Chapter 4
CHAPTER 4
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
4-1: aPAR BOOGIE BIRDIE
Capital balances before realization P 20,000 P 16,000 P 10,000Loss on liquidation, P40,000 ( 20,000 ) ( 12,000 ) ( 8,000 )
Cash distribution P – P 4,000 P 2,000
4-2: cPING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000Gain of P10,000 (150,000-140,000) __6,000 __2,000 __2,000
Cash distribution P 56,000 P 52,000 P 12,000
4-3: bPING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000Loss of P40,000 (P140,000-P100,000) ( 24,000 ) ( 8,000 ) ( 8,000 )
Cash distribution P 26,000 P 42,000 P 2,000
4-4: aPING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000Loss of P70,000 (P140,000-P70,000) ( 42,000 ) ( 14,000 ) ( 14,000 )
Balances P8,000 P 36,000 ( 4,000)Absorption of Pong's deficiency, 6:2 ( 3,000 ) ( 1,000 ) __4,000
Cash distribution P 5,000 P 35,000 –
4-5: bCOLT MARK CLOCK
Capital balances before liquidation (net of loans)P290,000 P200,000 P220,000Loss of P130,000, 4:3:3 ( 52,000 ) ( 39,000 ) ( 39,000 )
Cash distribution P238,000 P161,000 P181,000
4-6: cJONAS CARLOS TOMAS
Capital balances before liquidation P160,000 P 45,000 P 55,000Loss of P60,000, 40:50:10 ( 24,000 ) ( 20,000 ) ( 6,000 )
Cash distribution P136,000 P 25,000 P 49,000
Partnership Liquidation 69
4-7: aARIEL BERT CESAR
Capital balances before liquidation P40,000 P180,000 P 30,000Loss of P100,000, 4:3:3 ( 40,000 ) ( 30,000 ) ( 30,000 )
Cash distribution P – P150,000 P –
4-8: bNORY OSCAR
Capital balances before realization P23,000 P 13,500Additional investment by Nory for
the unpaid liabilities (33,000-18,000) 15,000 –Loss on realization (schedule 1) ( 30,900 ) ( 20,600 )
Payment by Oscar to Nory P 7,100 ( P7,100 )Schedule 1
Total capital before liquidation P 36,500
Unpaid liabilities 15,000
Total loss on realization P 51,500
4-9: dBLACK WHITE GREEN
Capital balances before liquidation (net) P99,000 P 91,500 P138,000Loss on realization (schedule 1) P27,500 ( 13,750 ) ( 27,500 ) _( 5,500 )
Balances, cash distribution P85,250 P 64,000 P132,500
Schedule 1:Capital balances of white (net) P 91,500Cash received by White _83,250
White's share of total loss (30%) P 8,250
Total loss on realization (P8,250/39%) P 27,500
4-10: cANA EVA NORA
Capital balances before liquidation (net) P27,000 P 43,000 P 10,000Loss on realization, P63,600 ( 25,320 ) ( 25,320 ) ( 12,660 )
Balances P 1,680 P 17,680 ( 2,660)Unrecorded liabilities, P500 ( 200 ) ( 200 ) ( 100 )
Balances P 1,480 P 17,480 ( 2,760)Elimination of Nora's deficiency ( 1,380 ) ( 1,380 ) __2,760
Payment to partners P 100 P 16,100 P –
4-11: dARIES LEO TAURUS
Capital balances before liquidation (net) P33,500 P 49,000 P 36,500Loss on realization (schedule 1) P45,000 ( 22,500 ) ( 13,500 ) ( 9,000 )
Payment to partners P11,000 P 35,500 P 27,500 70 Chapter 4
Schedule 1:Taurus capital (net) P36,500Payment to Taurus ( 27,500)
Share of total loss (20%) P 9,000
Total loss on realization (9,000/20%) P45,000
4-12: cTOTAL MONA NORA
OLGA
Capital balances, June 11 P32,700 P15,000 P13,500P 4,200Net loss from operation (squeeze) ( 9,800 ) ( 4,200 ) ( 2,800 )( 2,800 )
Capital balances, August 30 beforeliquidation (48,500-25,600) P22,900 P10,800 P10,700
P 1,400Loss on realization (47,500-30,000) ( 17,500 ) ( 7,500 ) ( 5,000 )( 5,000 )
Balances P 5,400 P 3,300 P 5,700 ( 3,600)
Additional investment by Olga _1,500 _____– _____–_1,500
Balances P 6,900 P 3,300 P 5,700 ( 2,100)
Elimination of Olga's deficiency ______ ( 1,260 ) ( 840 ) _2,100
Payment to partners P 6,900 P 2,040 P 4,860 P –
4-13: bRITA SARA TITA
Capital balances before liquidation P49,000 P18,000 P10,000Operating loss, P21,000 ( 3,500) ( 7,000) ( 10,500)Drawings ( 10,000) ( 15,000) ( 20,000)Loans – 8,000 25,000Loss on realization, P12,000 ( 2,000 ) ( 4,000 ) ( 6,000 )
Balances P33,500 P – ( 1,500)Absorption of Tita's deficiency __1,500 _____– _1,500
Payment to Nora P32,000 P – P –
4-14: aCLARO PEDRO
ANDRO
Capital balances before liquidation P45,000 P27,000P50,000Loss on realization
Accounts Receivable (P50,000 X 40%) P20,000Investment (P30,000 - P20,000) 10,000Equipment (P60,000-P30,000) _30,000
Total P60,000 ( 24,000 ) ( 24,000 ) ( 12, 000)
Payment to partners P21,000 P 3,000 P38,000
4-15: cTOTAL MONA LISA
Capital balances before liquidation (inclusive loans) P47,500 P28,500P19,000Loss on realization, (squeeze) ( 38,500 ) ( 23,100 )( 15,400 )
Capital balances - cash distribution P 9,000 P 5,400 P
3,600Partnership Liquidation 71
Cash after realization P 37,500Less Liabilities (P36,000-P7,500) ( 28,500 )
Total capital after realization P 9,000
4-16: a
FF capital before distribution of net loss P100,000Add: share of net loss (P10,000 X 40%) _( 4,000 )FF capital before liquidation 96,000Cash settlement to FF ( 80,000 )
FF share of total loss on realization (40%) P 16,000
Total loss on realization (P16,000/40%) P 40,000
Total capital before liquidation (P260,000-P10,000) P250,000Add: Liabilities _100,000
Total assets P350,000Cash before liquidation ( 50,000 )
Non-cash assets P300,000Loss on realization ( 40,000 )
Cash to be realized P260,000
4-17: dTOTAL CC DD EE
Capital balances before realization (net) P100,000 P 15,000 P22,500P62,500Loss on realization (squeeze) ( 125,000 ) ( 62,500 ) ( 37,500 )( 25,000 )Capital balances after realization
(liabilities-unpaid) (P 25,000) ( 47,500) ( 15,000)P37,500
Elimination of CC's deficiency _______– __47,500 ( 28,500 )( 19,000 )
Balances (P 25,000) – (P43,500)P18,500Investment by DD __43,500 ______– _43,500_____–
Payment to EE P 18,500 P – P – P18,500
4-18: d
Total capital before liquidation P 30,000Liabilities __1,500
Total assets P 31,500
Less: Cash balance before realizationCash after payment of liabilities P 11,100payment of liabilities 1,500Cash realized ( 11,600 ) __1,000
Non-cash asset P 30,500Less: cash realized _11,600
Loss on realization P 18,900
72 Chapter 4
4-19: dLL MM NN
TOTAL
Capital balances P 50,000 P 20,000 P 10,000P 80,000Salary of LL (P600 X 8 months) __4,800 _______ __________4,800
Capital balances before liquidation P 54,800 P 20,000 P 10,000P 84,800 Loss on realization ( 44,880 ) ( 14,960 ) ( 14,960 )
Balances P 9,920 P 5,040 (P 4,960)Additional investment by NN ______– _____– __4,960
Payment to partners P 9,920 P 5,040 P –
4-20: b
KK's total interest (P60,000-P10,000) P 50,000Less: Cash to be paid to KK __10,000
Share of total loss (1/3) P 40,000
Total loss on realization (P40,000/1/3) P120,000
Total assets:Total interest of the partners before liquidation:
JJ (P70,000+P30,000+P10,000) P110,000KK (P60,000-P10,000) 50,000LL (P30,000+P10,000) __40,000 P200,000
Divide by ______50%
Total P400,000Loss on realization _120,000
Cash to be realized P280,000
4-21: aTOTAL NN OO PP
Capital balances, July 1 P 75,000 P 25,000 P 25,000P 25,000
Advances to NN, August 1 ( 10,000) ( 10,000) – –OO Loan, September 1 20,000 – 20,000 –Interest, December 31 (6%)
NN (5 mos.) ( 250) ( 250)OO (4 mos.) 400 400
Compensation to PP __2,500 _______ __________2,500
Capital balances before liquidation P 87,650 P 14,750 P 45,400P 27,500Loss on realization (squeeze) _56,250 ( 17,550 ) ( 17,550 )( 17,550 )
Cash distribution P 35,000 ( 2,800 ) P 27,850 P 9,950
NN should pay P2,800 and this is to be divided to OO & PP equally or P1,400 each.
Partnership Liquidation 73
4-22: aTOTAL PG JR AS
Capital balances before realization P 950,000 P350,000 P250,000P350,000Loss on realization (squeeze) ( 1,000,000 ) __20,000 ( 200,000 )_500,000Capital balances after realization
(unpaid liabilities) (P 50,000) P 50,000 P 50,000( 150,000)Elimination of AS's deficiency _______– ( 90,000 ) ( 60,000 )P150,000
Cash to be absorbed P – (P 40,000 ) (P 10,000 ) P –
4-23: aRM ST
Capital balances before realization (net) P500,000 P825,000Loss on realization, P1,225,000 ( 490,000 ) ( 735,000 )
Payment to Partners P 10,000 P 90,000
4-24: aTOTAL LT AM ZP
Capital balances before realization (net) P 27,500 P 20,000 P 5,000P 2,500Gain on realization (squeeze) __37,500 _18,750 __-9,375__9,375
Capital balances after realization P 65,000 P 38,750 P 14,375 P 11,875
4-25: cAG BM CP DJ
Capital balances before realization (net) P 420,000 P375,000 P205,000P150,000Loss on realization, P1,000,000 ( 300,000 ) ( 300,000 ) (200,000)(200,000)
Balances P 120,000 P 75,000 P 5,000 P(50,000)Additional investment by DJ
50,000
4-26: aSettlement to Uy P351,500Uy capital before liquidation (net):
Uy capital P553,500Receivable from Uy ( 132,000) 421,500
Loss of Uy (50%) P 70,000
Total loss on realization (P70,000 ÷ 50%) P140,000
__Uy__ __Vi__ __Wi__ __Total__CB before liquidation 553,500 452,500 486,000 1,492,000Receivable from Uy (132,000) (132,000)Loan to Wi ( 40,500) (40,500)Salary payable to Vi 135,000 135,000 Interest before realization 421,500 587,500 445,500 1,454,500Loss on realization ( 70,000) ( 42,000) ( 28,000) ( 140,000) Settlement to partners 351,500 545,500 417,500 1,314,500
74 Chapter 4
SOLUTIONS TO PROBLEMS
Problem 4 – 1
Case 1Rivas and BrionesStatement of LiquidationDecember 31, 2008
Partners'Capitals
Assets Rivas, Briones, RivasBriones
Cash Others Liabilities Loan Loan (90%)(10%)
Balances before liquidation.... P 20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000
P10,000Realization of assets and
distribution of loss........... _134,000 ( 200,000 ) _______ _______ _______ ( 59,400 )( 6,600 )
Balances................................. 154,000 – 132,000 18,000 20,000 ( 19,400)3,400
Payment of liabilities............. ( 132,000 ) ______– ( 132,000 ) ______ _______ _____________
Balances................................. 22,000 – – 18,000 20,000 ( 19,400)3,400
Offset Rivas' loan against hiscapital deficiency............. _______ _______ _______ ( 18,000 ) _______ _18,000______
Balances................................. 22,000 – – – 20,000 ( 1,400)3,400
Additional loss to Briones...... _______ _______ _______ _______ _______ __1,400( 1,400 )
Balances................................. 22,000 – – – 20,000 –2,000
Payment to partner................. P(22,000 ) – – – P(20,000 ) – P(2,000)
Case 2Rivas and BrionesStatement of LiquidationDecember 31, 2008
Partners'Capitals
Assets Rivas, Briones, RivasBriones
Cash Others Liabilities Loan Loan (70%)(30%)
Balances before liquidation.... P20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000P10,000
Realization of assets anddistribution of loss........... 134,000 ( 200,000 ) _______ ______ _______ ( 46,200)( 19,800)
Balances................................. 154,000 – 132,000 18,000 20,000 ( 6,200)9,800
Payment of liabilities............. ( 132,000 ) _______ ( 132,000 ) ______ _______ _____________
Balances................................. 22,000 – – 18,000 20,000 ( 6,200)9,800
Offset loan against capitaldeficiency........................ ________ _______ _______ ( 6,200 ) ( 9,800 ) __6,200__9,800
Balances................................. 22,000 – – 11,800 10,200 – –
Payment to partner................. P(22,000 ) – – P(11,800 ) P(10,200 ) – –
Partnership Liquidation 75
Case 3
Rivas and BrionesStatement of LiquidationDecember 31, 2008
Partners'Capitals
Assets Rivas, Briones, RivasBriones
Cash Others Liabilities Loan Loan (50%)(50%)
Balances before liquidation........ P 20,000 P200,000 P132,000 P 18,000 P20,000 P40,000P10,000
Realization of assets anddistribution of loss............... _134,000 ( 200,000 ) _______ _______ ______ ( 33,000 )( 33,000 )
Balances...................................... 154,000 – 132,000 18,000 20,000 ( 7,000) ( 23,000)Payment of liabilities.................. ( 132,000 ) _______ ( 132,000 ) __ _ _______
Balances...................................... 22,000 – – 18,000 20,000 ( 7,000) ( 23,000)Offset Briones'' loan against
his capital deficiency........... _______ _______ _______ _______ ( 20,000 ) _______20,000
Balances...................................... 22,000 – – 18,000 – 7,000 ( 3,000)Additional loss to Rivas.............. _______ _______ _______ _______ _______ ( 3,000 )
__3,000
Balances...................................... 22,000 – – 18,000 – 4,000 –Payment to partner...................... P(22,000 ) – – P(18,000 ) – P( 4,000 ) –
Journal Entries
Case 1:Cash.............................................................................................................. 134,000Rivas, Capital................................................................................................. 59,400Briones, Capital.............................................................................................. 6,600
Other Assets............................................................................................ 200,000Liabilities. ..................................................................................................... 132,000
Cash........................................................................................................ 132,000Rivas, Loan.................................................................................................... 18,000
Rivas, Capital.......................................................................................... 18,000Briones, Capital.............................................................................................. 1,400
Rivas, Capital.......................................................................................... 1,400Briones, Loan................................................................................................. 20,000Briones, Capital.............................................................................................. 2,000
Cash .................................................................................................... 22,000Case 2:
Cash.............................................................................................................. 134,000Rivas, Capital................................................................................................. 46,200Briones, Capital.............................................................................................. 19,800
Other Assets............................................................................................ 200,000Liabilities. ..................................................................................................... 132,000
Cash........................................................................................................ 132,000Rivas, Loan.................................................................................................... 6,200Briones, Loan................................................................................................. 9,800
Rivas, Capital.......................................................................................... 6,200Briones, Capital...................................................................................... 9,800
Rivas, Loan.................................................................................................... 11,800Briones, Loan................................................................................................. 10,200
Cash........................................................................................................ 22,00076 Chapter 4
Case 3:Cash.................................................................................................... 134,000Rivas, Capital...................................................................................... 33,000Briones, Capital................................................................................... 33,000
Other Assets................................................................................. 200,000Liabilities............................................................................................ 132,000
Cash. ............................................................................................ 132,000Briones, Loan...................................................................................... 20,000
Briones, Capital............................................................................ 20,000Rivas, Capital...................................................................................... 3,000
Briones, Capital............................................................................ 3,000Rivas, Loan......................................................................................... 18,000Rivas, Capital...................................................................................... 4,000
Cash. ............................................................................................ 22,000
Problem 4 – 2
Blando and CastroStatement of LiquidationApril 30, 2008
Partners'Capitals
A s s e t s Accounts Blando, BlandoCastro
Cash Receivables Inventory Others Payable Loan (60%)(40%)
Balances beforeliquidation..................... P 18,000 P75,000 P90,000 P84,000 P42,000 P 24,000 P102,000P99,000
Collection of
receivables anddistribution of loss........ _37,500 ( 75,000 ) _______ _______ _______ _______ ( 22,500 ) ( 15,000 )
Balances............................. 55,500 – 90,000 84,000 42,000 24,000 79,50084,000
Realization ofinventory anddistribution ofloss................................ _30,000 _______ ( 90,000 ) _______ _______ _______ ( 36,000 ) ( 24
,000)
Balances............................. 85,500 – – 84,000 42,000 24,000 43,50060,000
Realization of otherassets and distributionof loss............................ _40,000 _______ _______ ( 84,000 ) _______ _______ ( 26,400 ) ( 17,600 )
Balances............................. 125,500 – – – 42,000 24,000 17,10042,400
Payment of accountspayable.......................... ( 42,000 ) _______ _______ _______ ( 42,000 ) _______ ______________
Balances............................. 83,500 – – – – 24,000 17,10042,400
Payments to partners….. … P(83,500) – – – – P(24,000) P( 17,100) P(42,400)
Partnership Liquidation 77 Problem 4 – 3
a. Electric Company Statement of Partnership Realization and Liquidation June 30, 2008
Capital BalancesAmp. Noncash Liabil- Volt, Amp Volt Watt
Cash Loan Assets ities Loan 50% 30% 20%
Balances 20,000 15,000 135,000 30,000 10,000 80,000 36,00014,000
Sale ofassets at a loss _95,000 ______ (135,000) ______ ______ (20,000) (12,000)
( 8,000 )
115,000 15,000 -0- 30,000 10,000 60,000 24,0006,000
Payment tocreditors _(30,000) ______ _______ (30,000) ______ _______ ______
______
85,000 15,000 -0- -0- 10,000 60,000 24,0006,000
Offset Amp,receivable (15,000) (15,000)Payments to partners:
Loan (10,000) (10,000)Capitals _(75,000) ______ _______ _______ ______ (45,000) (24,000) ( 6
,000)
Balances -0 - -0- -0- -0- -0 - -0 - -0 - -0- b. (1) Cash 95,000
Amp, Capital 20,000Volt, Capital 12,000Watt, Capital 8,000
Noncash Assets 135,000Sell noncash assets at a loss of P40,000.
(2) Liabilities 30,000Cash 30,000
Pay creditors.
(3) Amp, Capital 15,000Amp, Loan 15,000
Offset receivable from Amp against his capital credit.
(4) Volt, Loan 10,000Amp, Capital 45,000Volt, Capital 24,000Watt, Capital 6,000
Cash 85,000Final lump-sum distribution to partners.
Note: All partners permitted Amp to offset his receivable against his capital credit. Alternatively, Amp could be required to pay the partnership the P15,000 receivable; the partnership would then pay him an additional P15,000 for his capital credit. In this case, an offset of the receivable against the capital credit is reasonable, provided the receivable is not interest-bearing, Amp has a sufficient capital credit, Amp is personally solvent, and the note is not secured against specific assts of Amp. The offset is not automatic, but must be determined by the terms of the initial note, and by the partners.
78 Chapter 4
Problem 4 – 4
a. Bina, capital before liquidation......................................................................................... P320,000Payment to Bina................................................................................................................ _128,000
Loss absorbed by Bina (40%)........................................................................................... P192,000
Loss on realization (P192,000 40%).............................................................................. P480,000
b. AIDA, BINA & CELIAStatement of Partnership Liquidation
January 1, 2008
Capital
Cash Other Assets Aida Bina Celia(5) (4) (1)
Balances before liquidation. P80,000 P720,000 P320,000 P320,000 P160,000Realization & dist. of loss. . . 240,000 ( 720,000 ) ( 240,000 ) ( 192,000 ) ( 48,000 )
Balances............................. 320,000 – 80,000 128,000 112,000Settlement to partners.......... (320,000 ) _______ ( 80,000 ) ( 128,000 ) ( 112,000 )
Problem 4 – 5
a. LL, capital before liquidation........................................................................................... P 70,000Settlement to LL............................................................................................................... __98,000
Gain realized by LL (20%)............................................................................................... P 28,000
Total gain on realization (P28,000 20%)........................................................................ P140,000Other assets sold............................................................................................................... _500,000
Selling price ................................................................................................................... P640,000
b. JJ, KK & LL Statement of Liquidation
Other CapitalCash Assets Liabilities JJ (4) KK(4) (LL(2)
Balances before liquidation.... P50,000 P500,000 P60,000 P180,000 P240,000 P70,000Realization & Dist. of gain.... 640,000 ( 520,000 ) _______ __56,000 __56,000 _28,000
Balances................................ 690,000 – 60,000 236,000 296,000 98,000Payment of liabilities............. ( 60,000) ( 60,000)Payment to Partners............... (630,000 ) _______ _______ ( 236,000 ) ( 296,000 ) ( 98,000)
Partnership Liquidation 79
Problem 4 – 6
a. BB.................................................... P160,000CC.................................................... P20,000DD................................................... P60,000EE.................................................... P –0–
b. BB, CC, DD, & EE Statement of Liquidation
C a p i t a lCash Liabilities BB (30%) CC (10%)DD (20%) EE (40%)
Balances before liquidation.... P 0 P60,000 P160,000 P80,000 (P120,000)
P(180,000)Advances by BB to pay liabilities ( 60,000) 60,000Deposit by DD....................... 60,000 ______ _______ _______ __60,000
________
Balances................................ 60,000 – 220,000 80,000 ( 60,000) ( 180,000)
Elimination of EE's deficiency ( 90,000) ( 30,000) ( 60,000) 180,000Elimination of DD's deficiency ______ __( 90,000 ) ( 30,000 ) 120,000 –
Payment to partners................ 60,000 – 40,000 20,000 – –
Problem 4 – 7
Sayson and CompanyStatement of Liquidation–Date–
Liabilities P a r t n e r s' C a p i t a l s Assets Accounts Notes Peña Sayson Zobel Ayala
PeñaCash Noncash Payable Payable Loan (45%) (30%) (15%)
(10%)
Balances before liquidation. . . P 15,000 P155,250 P11,250 P9,000 P 1,500 P 75,345 P 86,498 P(14,993)P1,650
Realization of assets anddistribution of gain........... 185,000 ( 155,250 ) _______ ______ ______ 17,850 11,900 ____________
Balances................................. 200,000 - 11,250 9,000 1,500 93,195 98,398 ( 14,993)1,650
Payment of liabilities............. ( 20,250 ) ________ ( 11,250 ) ( 9,000 ) ______ ______ ______ _____________
Balances................................. 179,750 - - - 1,500 93,195 98,398 ( 14,993)1,650
Additional loss to Sayson,Zobel and Peña;45:30:10........................... _______ ________ ________ ______ ______ ( 7,937 ) ( 5,292 ) 14,993 (
1,764)
Balances................................. 179,750 - - - 1,500 85,258 93,106 -(114)
Offset Peña's loan againsthis capital deficiency........ _______ ________ ________ ______ ( 114 ) ______ ______ _______114
Balances................................. 179,750 - - - 1,386 85,258 93,106 -
Payments to partners.............. P(179,750 ) P(1,386 ) P(85,258 ) P(93,106 )
80 Chapter 4
Problem 4 – 8
a. Art, Bea and Cid PartnershipStatement of LiquidationJune 4, 2008
Assets Partners' CapitalCash Other Liabilities Art (40%) Bea (40%) Cid
(20%)
Balances before liquidation(including Bea loan, P4,000)...... P 6,000 P94,000 P20,000 P27,000 P43,000
P10,000Realization of assets
at a loss of P63,300................... 30,000 ( 94,000) (25,320) (25,320) (12,660)Unrecorded accounts payable.......... 500 (200) (200)(100)Payment to creditors........................ (20,500) ______ (20,500) ______ ____________
Balances......................................... 16,200 - - 1,480 17,480(2,760)Eliminate Cid's deficit..................... ______ ______ ______ (1,380) (1,380)_2,760
Balances......................................... 16,200 - - 100 16,100 Payment to Partners......................... (16,200 ) - - _( 100 ) ( 16,100 )
-
b.2008July 5 Cash ............................................................................................. 30,700
Art capital (P63,300 x 40%)........................................................... 25,320Bea capital (P63,300 x 40%).......................................................... 25,320Cid capital (P63,300 x 20%)........................................................... 12,660
Other assets........................................................................... 94,000To record realization of other assets at a loss of P63,300.
Art capital (P500 x 40%)................................................................ 200Bea capital (P500 x 40%)............................................................... 200Cid capital (P500 x 20%)................................................................ 100
Liabilities.............................................................................. 500To record trade accounts payable.
Liabilities. ...................................................................................... 20,500Cash. ..................................................................................... 20,500
To record payment of liabilities.
Art capital....................................................................................... 1,380Bea capital...................................................................................... 1,380
Cid capital............................................................................. 2,760To eliminate Cid's capital deficit.
Art capital....................................................................................... 100Bea capital...................................................................................... 4,000Cid capital. ..................................................................................... 12,100
Cash. ..................................................................................... 16,200To record payments to partners to complete liquidation.
c. Cid's loss must be limited to P5,000, or P25,000 for the partnership (P5,000 / 20% = P25,000). Because the liquidation of liabilities results in a loss of P500, only P24,500 may be lost on the realization of other assets. This requires that other assets realize P69,500 (P94,000 – 24,500) to enable Cid to receive P5,000 from the partnership to pay personal creditors in full.
Problem 4 –9
KGB PartnershipStatement of Realization and LiquidationLump-sum Liquidation on June 30, 2008
- Capital Balances - Noncash G K G B Cash Assets Liabilities Loan 20 % 40% 40% - Preliquidation balances 50,000 950,000 (480,000) (60,000) (240,000) (100,000) (120,000)Sale of assets and distribution of 430,000 loss 520,000 950,000 - - 86,000 172,000 172,000
570,000 -0- (480,000) (60,000) (154,000) 72,000 52,000Cash contributed by B 50,000 - - - - - 50,000 620,000 -0- (480,000) (60,000) (154,000) 72,000 2,000
Distribution of deficit of insolvent partner: (2,000) 20/60 (P2,000) 666 40/60 (P2,000) - - - - - 1,334 - 620,000 -0- (480,000) (60,000) (153,334) 73,334 -0-Offset deficit with loan - - - 60,000 - (60,000) - 620,000 -0- (480,000) -0- (153,334) 13,334 -0-Contribution by G 13,334 - (13,334) - 633,334 -0- (480,000) -0- (153,334) -0- -0-Payment of creditors (480,000) - 480,000 - - - - 153,334 -0- -0- -0- (153,334) -0- -0-Distribution to K (153,334) - - 153,334 - - Postliquidation balances -0- -0- -0- -0- -0- -0- -0- -
82 Chapter 4
KGB PartnershipSchedule of Distribution of Personal Assets
June 30, 2008
. K G BPersonal assets, excluding partnership capital and loan interests 500,000 600,000 700,000Personal liabilities (460,000) (480,000) (650,000)Personal net worth, excluding partnership capital and loan interests 40,000 120,000 50,000Contribution to partnership (13,334)Distribution from partnership 153,334 -0- - -0- - Personal capacity 193,334 106,666 -0- -
Partnership Liquidation by Installment 83
CHAPTER 5
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
5-1: bRJ SJ TJ
Capital balances before liquidation P22,000 P30,000 P 8,000Loan balances _10,000 ______– ______–
Total interest 32,000 30,000 8,000Possible loss (40,000+10,000) ( 25,000 ) ( 15,000 ) ( 10,000 )
Balances 7,000 15,000 ( 2,000)Additional loss to RJ & SJ, 5:3 ( 1,250 ) ( 750 ) __2,000
Cash distribution P 5,750 P14,250 P –
5-2: aAR BR CR DR
Capital balances P 5,500 P 5,150 P 6,850P 4,500Loan balances _1,000 _____– _____–_____–
Total interest 6,500 5,150 6,850 4,500Possible loss (23,000-6,000) ( 6,800 ) ( 5,100 ) ( 3,400 ) ( 1,700 )
Balances ( 300) 50 3,450 2,800Additional loss to BR, CR, DR, 3:2:1 ___300 ( 150 ) ( 100 )( 50 )
Balances – ( 100) 3,350 2,750Additional loss to CR & DR, 2:1 _____– ___100 _( 67 )_( 33 )
Payment to partners P – P – P 3,283 P 2,717
Total liabilities P 1,000Total Capital _22,000
Total Assets P23,000
5-3: cB A L A N C E S
DD EE FF GG
Capital balances P40,000 P30,000 P15,000P25,000Loan balances 5,000 10,000 – –Advances _____– _____– ( 4,500 ) ( 2,
500)
Total interest 45,000 40,000 10,50022,500Divided by P/L Ratio ____50% ____30% ____10%____10%
Loss Absorption balances 90,000 133,333 105,000225,000PI - TO GG – _____– _____– ( 91,667 ) __ __–
Balances 90,000 133,333 105,000133,333PII - TO EE & GG, 30:10 _____– ( 28,333 ) _____–( 28,333 )
Balances 90,000 105,000 105,00010,500PIII - TO EE, FF, GG, 3:1:1 _____– (15,000) ( 15,000 )( 15,000 )
Balances P90,000 P90,000 P90,000P90,000PIV - P/L Ratio
84 Chapter 5
CASH PAYMENT
DD EE FF GG
PI - To GG – – –P 9,167PII - To EE (28,833 X 30%) – P 8,433 – –
GG (28,833 X 10%) – – – 2,833PIII –To EE (15,000 X 30%) – 4,500 – –
FF (15,000 X 10%) – – 1,500 – GG (15,000 X 10%) _____– _____– _____–__1,500
Total – P12,933 P 1,500 P13,500PIV - P/L Ratio
DD EE FF GGDistribution of P18,000PI - TO GG – – –P 9,167PII - TO EE & GG, 3:1, P8,833 _____– _6,625 _____–__2,208
Cash distribution – P 6,625 – P11,375
5-4: aTAN LIM WAN
Capital balances before liquidation P40,000 P65,000 P48,000Loss on realization, P40,000 ( 16,000 ) ( 16,000 ) ( 8,000 )
Capital balances before cash distribution 24,000 49,000 40,000Possible loss, P90,000 ( 36,000 ) ( 36,000 ) ( 18,000 )
Balances ( 12,000) 13,000 22,000Additional loss to Lim & Wan, 4:2 _12,000 ( 8,000 ) ( 4,000 )
Cash distribution P – P 5,000 P18,000
5-5: bTAN LIM WAN
Capital balances before cash distribution P24,000 P49,000 P40,000Possible loss (90,000+3,000) ( 37,200 ) ( 18,600 ) ( 18,600 )
Balances ( 13,200) 30,400 21,400Additional loss to Lim & Wan, 4:2 _13,200 ( 8,800 ) _( 4,400 )
Cash distribution P – P21,600 P17,000
5-6: dTan (14,000 X 40%) P5,600Lim (14,000 X 40%) P5,600Wan (14,000 X 20%) P2,800
5-7: aCARPIO LOBO
Capital balances before liquidation P72,000 P54,000Goodwill written-off ( 5,000 ) ( 5,000 )
Cash balance 67,000 49,000Possible loss (100,000+10,000), 110,000 ( 55,000 ) ( 55,000 )
Capital balances before liquidation 12,000 ( 6,000)Additional loss to Carpio ( 6,000 ) __6,000
Cash distribution P 6,000 P – Partnership Liquidation by Installment 85
5-8: dJACOB SANTOS
HERVAS
Capital balances before liquidation P40,000 P72,000P 7,000Loss on realization (120,000-90,000) ( 15,000) ( 9,000)( 6,000)Liquidation expenses, P2,000 ( 1,000 ) ( 600)( 400)
Capital balances before cash distribution 24,000 62,40063,600Loan balances __8,000 _____–_____–
Total interest 32,000 62,40063,600Possible Loss (210,000-120,000) ( 45,000 ) 27,000( 18,000 )
Balances ( 13,000) 35,40045,600Additional loss to Santos & Hervas _13,000 ( 7,800 )( 5,200 )
Cash distribution P – P27,600P40,400
5-9: dA B C D
Capital balances before liquidation P16,200 P12,000 P37,700P17,700
Salary payable– _____– ___160 ___240_______
Balances 16,200 12,000 37,860 ( 17,940)
Loss on realization (P2,400) ( 600 ) ( 600 ) ( 600 )( 600 )
Balances 15,600 11,400 37,26017,340Liquidation expenses (P600) ( 150 ) ( 150 ) ( 150 )( 150 )
Balances 15,450 11,250 37,11017,190Loan balances 12,000 14,400 _____–__9,600
Total interest 27,450 25,650 37,11026,790Possible Loss (126,000-18,000) ( 27,000 ) ( 27,000 ) ( 27,000 )( 27,000 )
Balances 450 ( 1,350) 10,110 ( 210)
Additional loss to A & C ( 780 ) __1,350 ( 780 )____210
Balances ( 330) – 9,330 –Additional loss to C ___330 _____– ( 330 )_____–
Cash distribution P – P – P 9,000 P –
5-10: aBALANCES
DY SY LEE
Total interest P22,000 P15,500 P14,000Profit and Loss ratio 2/4 1/4 1/4Loan absorption balances 44,000 62,000 56,000Priority I - to Sy _____– ( 6,000 ) _____–
Balances 44,000 56,000 56,000Priority II - to Sy & Less _____– ( 12,000 ) ( 12,000 )
Total P44,000 P44,000 P44,000
CASH PAYMENTS
DY SY LEE
Priority I - to Sy (6,000 X 1/4) – 1,500 –Priority II - to Sy (12,000 X 1/4) – 3,000 –
to Lee (12,000 X 1/4) _____– _____– _3,000
Total P – P 4,500 P 3,000 86 Chapter 5
Further cash distribution, profit and loss ratioCash distribution to Dy P 6,250Divided by Dy's Profit and Loss ratio 2 /4
Amount in excess of P7,560 12,500
Total payment under priority I & II __7,500
Total cash distribution to partner P20,000
5-11: d
Cash before liquidation P12,000Cash realized _32,000
Total 44,000Less: Payment of liquidation expense P 1,000
Payment of liability 5,400Payment to partners (Q 5-10) 20,000 _26,400
Cash withheld P17,600
5-12: c
Loss absorption balances:Cena (18,000/50%) P36,000Batista (27,000/30%) 90,000
Excess of Batista 54,000Multiply by Batista's Profit & Loss ratio ____30%
Priority I to Batista P16,200
5-13: c BALANCES
AA BB CC
Capital balances P15,000 P30,000 P10,000Loan balances 10,000 _5,000 10,000
Total interest 25,000 35,000 20,000
Divided by Profit and Loss Ratio 2/5 2/5 1/5
Loss Absorption balances 62,500 87,520 100,000Priority I to CC _____– _____– ( 12,500 )
Balances 62,500 87,520 100,000Priority II to BB & CC, 2:1 _____– ( 25,000 ) ( 25,000 )
Total interest P62,500 P62,500 P62,500
CASH PAYMENTS
AA BB CC
Priority I to CC (12,500 X 1/5) – – 2,500Priority II to BB (25,000 X 2/5) – 10,000 –
to CC (25,000 X 1/5) ____– _____– _5,000
Total P – P10,000 P 7,500 Priority III – P/L RatioCash distribution to CC:
Priority I P2,500
Priority II (12,000-2,500) X 1/3 3,167
Total cash paid to CC P5,667Partnership Liquidation by Installment 87
5-14: cBALANCES
JJ KK LL MM
Capital balances P 60,000 P 64,500 P 54,000P 30,000Loan balances _18,000 _30,000 ______–______–
Total interest _78,000 _94,500 _54,000_30,000
Divided by Profit and Loss Ratio ____40% _____35% _____15%_____10%
Loss Absorption balances 195,000 270,000 360,000300,000Priority I to LL ______– ______– ( 60,000 )______–
Balances 195,000 270,000 300,000300,000Priority II to LL, MM, 15:10 ______– ______– ( 30,000 )( 30,000 )
Balances 195,000 270,000 270,000270,000Priority II to KK, LL, MM, 35:15:10 ______– ( 75,000 ) ( 75,000 )( 75,000 )
Total P195,000 P195,000 P195,000P195,000
CASH PAYMENT
JJ KK LL MM
Priority I to LL (30,000 X 15%) – – 9,000 –Priority II to LL (30,000 X 15%) – – 4,500 –
to MM (30,000 X 10%) – – – 3,000Priority II to KK (75,000 X 35%) – 1,750 – –
to LL (75,000 X 15%) – – 11,250 –to MM (75,000 X 10%) ______– ______– ______–
___7,500
Total P – P 1,750 P 24,750 P 10,500
Further cash distribution, Profit and Loss ratio
Cash distribution to Partners (P38,100-9,000), P29,100
JJ KK LL MM TOTAL
Priority I to LL – – P 9,000 –P 9,000Priority II to LL, MM, 15:10 – – 4,500 3,000 7,500Priority II to KK, LL, MM, 35:15:10
(29,100-16,500), 12,600 _____– __7,350 ___3,150 __2,100__12,600
Cash distribution P – P 7,350 P 16,650 P 5,100 P 29,100
5-15: aBALANCES
ARCE BELLO CRUZ
Capital balances P 20,000 P 24,900 P 15,000Loan balances _10,000 ______– ______–
Total interest _32,000 _24,900 _15,000
Divided by Profit and Loss Ratio _____50% _____30% _____20%
Loss Absorption balances 64,000 83,000 75,000Priority I to Bello ______– ( 8,000 ) ______–
Balances 64,000 75,000 75,000Priority II to Bello & cruz, 3:2 ______– ( 11,000 ) ( 11,000 )
Total P 64,000 P 64,000 P 64,000
88 Chapter 5
CASH PAYMENTS
ARCE BELLO CRUZ
P - I to Bello (8,000 X 30%) – 2,400 –P - II to Bello (11,000 X 30%) – 3,300 –
to Cruz (11,000 X 20%) _____– _____– _2,200
Total P – P 5,700 P2,200
Further Cash distribution, Profit and Loss ratioBased on the above cash priority program, the P2,000 is only a partial payment to Bello who
is entitled to a maximum of P2,400 under Priority I. Only after satisfying Priority I, Cruz will receive payment and only after P7,900 has been distributed to Bello and Cruz will Arce receive payment. Therefore no payments are made to Arce and Cruz.
5-16: a
Cash paid to Arce P2,000Divide by Profit & Loss ratio _____5%
Amount in excess of P7,900 40,000Add: cash paid under PI and PII _7,900
Total cash distribution to partners 47,900Cash paid to Creditor (30,000-10,000) 20,000
Total 67,900Less cash before realization _6,000
Cash realized from sale of asset P61,900
5-17: b
Cash distribution to Cruz P 6,200Divide by profit and loss ratio 2 /5
Cash distribution under Priority II 15,500Multiply by Bello's Profit and Loss ratio 3 /5
Cash distribution to Bello under Priority II 9,300Cash distribution to Bello under Priority I __2,400
Total cash distribution to Bello P11,700
5-18: bBALANCES CASH PAYMENT
MONZON NIEVA MONZONNIEVA
Total Interest P22,500 P17,500
Profit and Loss ratio _____60% _____40%
Loss absorption balances 37,500 43,750Priority I - to Nieka ______– ( 6,250 ) _____– _2,500
Total P37,500 P37,500 P – P2,500
Further cash distribution - Profit and Loss ratio
All the P2,000 should be paid Nieva, since she is entitled to P2,500 under Priority IPartnership Liquidation by Installment 89
5-19: bCASH MONZON NIEVA
Cash distribution P12,500 – –PI to Nieva (2,500-2,000) ( 500) – 500Balances, 6:40 _12,000 __7,200 _4,800
Cash distribution P – P 7,200 P5,300
5-20: a
Cash before liquidation P 5,000June: Cash realized 18,000
Payment to creditor ( 20,000)Payment to Partners __2,000
Cash balances, June 30 1,000July: Cash realized 12,000
Payment of liquidation expense ( 500)Payment to Partners ( 12,500 )
Cash balances, July 31 –Aug: Cash realized _22,500Cash distribution for August,
Profit and Loss ratio P22,500
Distribution to Partners - AugustMonzon (22,500 X 60%) P13,500
Nieva (22,500 x 40%) P 9,000
90 Chapter 5
SOLUTIONS TO PROBLEMS
Problem 5 – 1
Suarez, Tulio and UmaliStatement of LiquidationJanuary 1 to april 31, 2008
Assets Tulio, Umali, Partners' CapitalsCash Others Liabilities Loan Loan Suarez (40%) tulio (35%)
Umali (25%)
Balances before liquidation. P 2,000.00 P46,000.00 P6,000.00 P5,000.00 P2,500.00 P14,450.00 P12,550.00P7,500.00
January Installment:Realization of assets and
distribution of loss.... 10,500 .00 ( 12,000 .00 ) _______ _______ ______ ( 600 .00 ) ( 525 .00 )( 375.00 )
Balances......................... 12,500.00 34,000.00 6,000.00 5,000.00 2,500.00 13,850.00 12,025.007,125.00Payment of expenses ofrealization and distributionto partners....................... ( 500 .00) _______ _______ _______ _______ ( 200 .00 ) ( 175 .00 )( 125.00 )
Balances......................... 12,000.00 34,000.00 6,000.00 5,000.00 2,500.00 13,650.00 11,850.007,000.00Payment of liabilities..... ( 6,000 .00 ) _______ ( 6,000 .00 ) _______ _______ _______ ________
_______
Balances......................... 6,000.00 34,000.00 – 5,000.00 2,500.00 13,650.00 11,850.007,000.00Payments to partners
(Schedule 1).............. ( 4,000 .00 ) _______ _______ ( 3,812 .50 ) ( 187 .50 ) _______ _______ _______
Balances......................... 2,000.00 34,000.00 – 1,187.50 2,312.50 13,650.00 11,850.007,000.00
February Installment:Realization of assets and
distribution of loss.... 6,000 .00 ( 7,000 .00 ) _______ _______ _______ __(400 .00 ) ( 350 .00 )( 250.00 )
Balances......................... 8,000.00 27,000.00 – 1,187.50 2,312.50 13,250.00 11,500.00
6,750.00Payment of expenses ofrealization and distributionto partners....................... ( 750 .00 ) _______ ______ _______ _______ ( 300 .00 ) ( 262 .50 )( 187.50 )
Balances......................... 7,250.00 27,000.00 – 1,187.50 2,312.50 12,950.00 11,237.506,562.50Payments to partners
(Schedule 2).............. ( 6,000 .00 ) _______ ______ ( 1,187 .50 ) ( 1,812 .50 ) ( 1,650 .00 ) ( 1,350 .00 ) _______
Balances......................... 1,250.00 27,000.00 – – 500.00 11,300.00 9,887.506,562.50
March Installment:Realization of assets and
distribution of loss.... 10,000 .00 ( 15,000 .00 )______ ______ ______ ( 2,000 .00 ) ( 1,750 .00 )( 1,250.00 )
Balances......................... 11,250.00 12,000.00 – – 500.00 9,300.00 8,137.505,312.50Payment of expenses ofrealization and distributionto partners....................... ( 600 .00) _______ ______ ______ _______ ( 240 .00 ) ( 210 .00 )( 150.00 )
Balances......................... 10,650.00 12,000.00 – – 500.00 9,060.00 7,927.505,162.50Payments to partners,
P & L ratio................( 10,150 .00 ) ______ ______ ______ ( 500 .00 ) ( 4,060 .00) ( 3,552 .50 )( 2,037.50 )
Balances......................... 500.00 12,000.00 – – – 5,000.00 4,375.003,125.00
April Installment:Realization of assets and
distribution of loss.... 4,000 .00 ( 12,000 .00 )______ ______ ______ ( 3,200 .00) ( 2,800 .00 )( 2,000.00 )
Balances......................... 4,500.00 – – – – 1,800.00 1,575.001,125.00Payment of expenses ofrealization and distributionto partners....................... _(400 .00 ) ______ ______ ______ ______ ___(160 .00 ) ( 140 .00 )( 100.00 )
Balances......................... 4,100.00 – – – – 1,640.00 1,435.001,025.00 Final Payments to partnersP(41,100 .00 )_____– _____– _____– _____– P( 1,640 .00) P( 1,435 .00) P(1,025.00)
Partnership Liquidation by Installment 91
Schedule 1
Suarez (40%) Tulio (35%) Umali (25%)
Capital balances....................................... P13,650.00 P11,850.00 P7,000.00Loan balances.......................................... _____ _– __5,000 .00 _2,500 .00
Total interests.......................................... 13,650.00 16,850.00 9,500.00Possible loss (P2,000 + P34,000)........... ( 14,400 .00 ) ( 12,600 .00 ) ( 9,000 .00
Balances................................................... ( 750.00) 4,250.00 500.00Additional loss to Tulio and Umali 35:25 ___750 .00 ( 437 .50 ) ( 312 .50
Payments to partners............................... – P 3,812.50 P 187.50
Apply to loan........................................... __ __ – P 3,812 .50 P 187 .50
Schedule 2
Suarez (40%) Tulio (35%) Umali (25%)
Capital balances....................................... P12,950.00 P11,237.50 P6,562.50Loan balances.......................................... – __1,187 .50 _2,312 .50
Total......................................................... 12,950.00 12,425.00 8,875.00Possible loss (P1,250 + P27,000)........... ( 11,300 .00 ) ( 9,887 .50 ) ( 7,062 .50
Payments to partners............................... P 1,650.00 P 2,537.50 P1,812.50Apply to loan........................................... – _1,187 .50 _1,812 .50
Apply to capital....................................... P 1,650 .00 P 1,350 .00 P –
92 Chapter 5
Problem 5 – 2
Miller and Bell PartnershipStatement of Partnership Realization and Liquidation
CapitalInven- Accounts Bell Miller Bell
Cash tory Payable Loan 80% 20%
Balances 25,000 120,000 15,000 60,000 65,000 5,000
Sale of inventory 40,000 ( 60,000) (16,000) (4,000)Payment to creditors (10,000) ______ (10,000) ______ ______ ______
55,000 60,000 5,000 60,000 49,000 1,000Payments to partners
(Schedule 1) (50,000) ______ ______ (49,000) _(1,000) ______
5,000 60,000 5,000 11,000 48,000 1,000Sale of inventory 30,000 ( 60,000) (24,000) 6,000)Payment to
creditors ( 5,000 ) ______ ( 5,000 ) ______ ______ ______
30,000 –0– –0– 11,000 24,000 (5,000)Offset deficit
with loan ______ ______ ______ ( 5,000 ) ______ (5,000)
30,000 –0– –0– 6,000 24,000 –0–Payments to
partners:Loan ( 6,000) ( 6,000)Capitals (24,000) ______ ______ ______ (24,000) ______
Balances –0– –0– –0– –0– –0– –0–
Schedule 1:Miller and Bell PartnershipSchedule of Safe Payments to Partners
Miller Bell80% 20%
Capital and loan balances 49,000 61,000Possible loss of 60,000 on remaining inventory (48,000) (12,000)
Safe payment 1,000 49,000
Partnership Liquidation by Installment 93
Problem 5 – 3HORIZON PARTNERSHIPStatement of realization and LiquidationMay – July, 2008
Partners CapitalAssets SS TT PP
Cash Other Liabilities (1/3) (1/3) (1/3)
Balances before liquidation 20,000 280,000 80,000 60,000 70,000
90,000May – sale of assets at a loss of P30,000 75,000 (105,000) ______ (10,000) (10,000)
(10,000)
Balances 95,000 175,000 80,000 50,000 60,00080,000
Payment to creditors (80,000) ______ (80,000) ______ ______ ______
Balances 15,000 175,000 50,000 60,00080,000
Payments to PP (Exhibit A) (15,000) ______ ______ ______ ______(15,000)
Balances –0– 175,000 50,000 60,00065,000
June – sale of assets at a loss of P36,000 25,000 (61,000) ______ (12,000) (12,000 ) (12,000)
Balances 25,000 114,000 38,000 48,00053,000
Payment to partners (Exhibit A) (25,000) ______ ______ ______ (10,000)(15,000)
Balances –0– 114,000 38,000 38,00038,000
July – sale of remaining assets at a loss ofP33,000 81,000 (114,000 ) (11,000) (11,000)(11,000)
Balances 81,000 27,000 27,00027,000
Payment to partners (81,000 ) (27,000 ) (27,000 ) (27,000)
Exhibit A – Cash distributions to partners during liquidation:SS TT PP
Capital account balances before liquidation 60,000 70,00090,000
Income sharing ratio 1 1 1Loss absorption balances 60,000 70,000
90,000Required reduction to bring
capital account balance for PPto equal the next highest balance for TT – PI. ______ ______(20,000)
Balances 60,000 70,00070,000
Required reduction to bring the balances forTT and PP to equal the balance for SS – PII. ______ (10,000)(10,000)
Balances 60,000 60,00060,000
Summary of cash distribution program:To creditors before partners receive anything 80,000To partners:(1) First distribution to PP 20,00020,000(2) Second distribution to TT and PP equally 20,000 10,00010,000(3) Any amount in excess of $120,000
to the three partners in income-
sharing ratio 1/3 1/3 1/3
b. After the cash distribution in June, the partners capital accounts had balances corresponding to the income-sharing ratio (38,000 each). From this point on any cash payments to partners may be made in the income-sharing ratio or equally in this problem. In other words, after the creditors are paid and TT and PP receive 10,000 and 30,000, respective, any additional cash that becomes available may be paid to the three partners equally.
94 Chapter 5
Problem 5 – 4
1. X, Y and Z Cash Priority Program January 1, 2008
B a l a n c e s C a s h P a y m e n t sX Y Z X (50%) Y (30%) Z (20%)
Total
Capital balances................................... P60,000 P45,000 P20,000Loan balances...................................... 22,5000 15,000 6,500
Total interests...................................... P82,500 P60,000 P26,500
Loss absorption balances..................... P165,000 P200,000 P132,500Priority I – to Y................................... (35,000 ) – P10,500 –.............................................................P10,500
Balances.............................................. 165,000 165,000 132,500Priority II – to X and Y....................... (32,500 ) (32,500 ) ________ P16,250 9,750 – .............................................................26,000
Total.................................................... P132,500 P132,500 P132,500 P16,250 P20,250 – .............................................................P36,500
Any amount in excess of P36,500....... 50 % 30 % 20% ............................................................. 100%
2. January
Cash X Y Z
Available for distribution............................... P 7,500Priority I – to Y.............................................. ( 7,500 ) P 7,500
Payment to partner......................................... – P 7,500 – February....................................................... Cash X Y Z
Available for distribution............................... P20,000Priority I – to Y (P10,500 – P7,500)............. ( 3,000) P 3,000Priority II – to X and Y; 5:3........................... ( 17,000 ) P10,625 6,375 _____
Payments to partners...................................... P10,625 P 9,375 –
March............................................................ Cash X Y Z
Available for distribution............................... P45,000Priority II – to X and Y; 5:3
(P26,000 – P17,000)................................. ( 9,000) P 5,625 P 3,375Excess; 5:3:2.................................................. ( 36,000 ) 18,000 10,800 P7,200
Payments to partners...................................... P23,625 P14,175 P7,200
April.............................................................. Cash X Y Z
Available for distribution............................... P15,000Excess; 5:3:2.................................................. ( 15,000 ) P 7,500 P 4,500 P3,000
Payments to partners...................................... P 7,500 P 4,500 P3,000
Partnership Liquidation by Installment 95
Problem 5 – 5AB, CD & EF PartnershipStatement of Partnership Realization and Liquidation
Capital Able Other Accounts CD AB CD EF
Cash Loan Assets Payable Loan 50% 30%20%
Balances before liquidation 18,000 30,000 307,000 53,000 20,000 118,000 90,00074,000
January transactions:1. Collection of accounts
receivable at lossof 15,000 51,000 ( 66,000) ( 7,500) ( 4,500)
( 3,000)2. Sale of inventory at
loss of 14,000 38,000 ( 52,000) ( 7,000) ( 4,200)( 2,800)
3. Liquidation expenses paid ( 2,000) ( 1,000) ( 600)( 400)
4. Share of credit memorandum ( 3,000) 1,500 900600
5. Payments to creditors ( 50,000 ) _____ ______ (50,000) _____ ______ ___________
55,000 30,000 189,000 -0- 20,000 104,000 81,60068,400
Sale payments to partners(Schedule 1 ( 45,000 ) ______ _____ ______ (20,000) ______ ( 6,600 )(18,400)
10,000 30,000 189,000 -0- -0- 104,000 75,00050,000
February transactions:6. Liquidation expenses paid ( 4,000 ) ______ ______ ______ ______ ( 2,000 ) ( 1,200 )
( 800 )
6,000 30,000 189,000 -0- -0- 102,000 73,80049,200
Safe payments to partners(Schedule 2) -0 - _____ ______ ______ ___ –0 – –0–
–0–
6,000 30,000 189,000 -0- -0- 102,000 73,80049,200
March transactions:8. Sale of mac. & equip. at a
loss of 43,000 146,000 (189,000) ( 21,500) (12,900)( 8,600)
9. Liquidation expenses paid ( 5,000 ) ______ _______ ______ ______ ( 2,500 ) ( 1,500 )( 1,000 )
147,000 30,000 -0- -0- -0- 78,000 59,40039,600
10.Offset AB's loanreceivable against capital (30,000) ( 30,000)
Payments to partners (147,000) ______ _______ ______ ______ ( 48,000 ) (59,400)(39,600)
Balances at end of liquidation –0– –0– –0– –0– –0– –0– –0– –0–
96 Chapter 5
PartnershipSchedules of Safe Payments to Partners
AB CD EFSchedule 1: January 50% 30% 20%
Capital and loan balancesa P74,000 P101,600 P68,400Possible loss:
Other assets (189,000) and possible liquidationcosts (10,000) ( 99,500 ) ( 59,700 ) ( 39,800 )
Balances ( 25,500) 41,900 28,600Absorption of AB's potential deficit balance 25,500
CD : (25,500 x 3/5 = 15,300) ( 15,300)EF : (25,500 x 2/5 = 10,200) ______ _______ ( 10,200 )
Safe payment P -0 - P 26,600 P 18,400
a = (104,000) capital less 30,000 loan receivable= (81,600) capital plus 20,000 loan payable= (68,400) capital
Schedule 2: February
Capital and loan balancesb 72,000 73,800 49,200Possible loss:
Other assets (189,000) and possible liquidationcosts (6,000) ( 97,500 ) ( 58,500 ) ( 39,000 )
( 25,500) 15,300 10,200Absorption of AB's potential deficit balance 25,500
CD : (25,500 x 3/5 = 15,300) ( 15,300)EF : (25,500 x 2/5 = 10,200) _______ ________ ( 10,200 )
Safe payment –0– –0– –0–b = (102,000) capital less 30,000 loan receivable
= (73,800) capital= (49,200) capital
Partnership Liquidation by Installment 97
Problem 5 – 6
1. M, N, O and P Cash Priority Program January 1, 2008
B a l a n c e s C a s h P a y m e n t sM N O P M (3/8) N (3/8) O (1/8) P (1/8)
Total
Capital balances. .P 70,000 P 70,000 P 30,000 P 20,000Loan balances. . . 20,000 5,000 25,000 15,000
Total interests......P 90,000 P 75,000 P 55,000 P 35,000
Loss absorptionbalances..........P240,000 P200,000 P440,000 P280,000
Priority I – to O..._______ _______ ( 160,000 ) ________ – – P20,000 –P20,000
Balances.............. 240,000 200,000 280,000 280,000Priority II – to O
and P..............._______ _______ ( 40,000 ) ( 40,000 ) – – 5,000 P5,000
10,000
Balances.............. 240,000 200,000 240,000 240,000Priority III – to
M, O and P.....( 40,000 ) _______ ( 40,000 ) ( 40,000 )P15,000 – 5,000 5,000 25,000
Total....................P200,000 P200,000 P200,000 P200,000P15,000 – P30,000 P10,000P55,000
Any amount in excess of P55,000 3/8 3/8 1/8 1/88/8
2.Schedule 1
Cash M N O P
Available for distribution..................... P25,000Priority I – to O.................................... ( 20,000) P20,000Priority II – to O and P; 1:1.................. ( 5,000 ) ________ _______ 2,500 P2,500
Payments to partners............................ – – P22,500 2,500Apply to loan........................................ ( 22,500 ) ( 2,500 )Apply to capital.................................... – – – –
Schedule 2
Cash M N O P
Available for distribution..................... P40,000Priority II – to O and P; 1:1.................. ( 5,000 P 2,500 P2,500Priority III – to M, O and P; 3:1:1........ ( 25,000) P15,000 5,000 5,000Excess, 3:3:1:1..................................... ( 10,000 ) 3,750 P3,750 1,250 .............................................................. 1,250
Payments to partners............................ 18,750 P3,750 8,750 8,750Apply to loan........................................ ( 18,750 ) ( 3,750 ) ( 2,500 ) ( 8,750 )Apply to capital – – P 6,250 –
98 Chapter 5
Problem 5 – 7
Bronze, Gold & SilverCash Distribution PlanJune 30, 2008
Loss Absorption Balances Capital and Loan AccountsBronze Gold Silver Bronze Gold Silver
Profit and loss ratio 50 % 30 % 20 %
Pre-liquidation capital andloan balances P55,000 P45,000P24,000
Loss absorption balances(Capital and loanbalances/P& L ratio) P110,000 P150,000 P120,000
Decrease highest LABto next highest:
Gold: (30,000 x .30) _______ ( 30,000 ) _______ ______ ( 9,000 )______
110,000 120,000 120,000 55,000 36,00024,000
Decrease LAB'sto next highest:
Gold: (10,000 x .30) ( 10,000) ( 3,000)Silver: (10,000 x .20) _______ ________ ( 10,000 ) _______ _______
_( 2,000 )
P110,000 P110,000 P110,000 P 55,000 P 33,000 P 22,000
Summary of Cash Distribution(If Offer of P100,000 is Accepted)
Accounts Bronze Gold SilverPayable 50% 30% 20%
Cash available P106,000First ( 17,000) P 17,000Next ( 9,000) P 9,000Next ( 5,000) 3,000 P 2,000Additional paid in P&L ratio ( 75,000 ) _______ P37,500 22,500 15,000
P -0 - P 17,000 P37,500 P34,500P17,000
Partnership Liquidation by Installment 99
Problem 5 – 8
Part A
Balances Cash Payments
North South East West North South East West
Total Interest (capital and loanbalances P120,000 P 88,000 P109,000 P 60,000
Divided by P/L ratio 30 % 10 % 20 % 40 %
Loss absorption potential P400,000 P880,000 P545,000 P150,000Priority II – To South (335,000) ________ 33,500
Balances 400,000 545,000 545,000 150,000Priority II – To South and East, 10:20 (145,000) (145,000) 14,500 29,000
Balances 400,000 400,000 400,000 150,000Priority III – To North, South, and
east 30:10:20 (250,000) (250,000) (250,000) ______ 75,000 25,000 50,000_____
Total 150,000 150,000 150,000 150,000 75,000 73,000 79,000 –
Further cash distribution – P/L ratio
Part B(1) Cash 65,600
North capital (30% of P16,400 loss) 4,920South capital (10%) 1,640East capital (20%) 3,280West capital (40%) 6,560
Accounts receivable 82,000To records collection of receivables with losses allocated to partners.
(2) Cash 150,000North capital (30% x P103,000) 30,900South capital (10%) 10,300East capital (20%) 20,600West capital (40%) 41,200
Property and equipment 253,000To record sale of property and equipment.
(3) North capital 31,800South capital 58,600East capital 35,000West capital 15,200
Cash 140,600To record cash installment to partners of P230,600 based on the cash distribution plan in Part A.
First P90,000 is held to pay liabilities (P74,000) and estimated liquidation expenses of P16,000.Next P33,500 goes entirely to South.Next P43,500 is split between to South (P14,500) and East (P29,000).Remaining P63,600 is allocated to North (P31,800), South (P10,600) and East (P21,200)
(4) Liabilities 74,000Cash 74,000
To record payment of liabilities.
100
Chapter 5
(5) Cash 71,000North capital (30% of P30,000 loss) 9,000South capital (10%) 3,000East capital (20%) 6,000West capital (40%) 12,000
Inventory 101,000To record inventory sold.
(6) North capital 35,500South capital 11,833East capital 23,667
Cash 71,000To record distribution of cash according to cash distribution plan. Although P87,000 cash is being held, P16,000 must be retained to pay liquidation expenses. The Remaining P71,000 is divided among North, South, and East on a 30:20 basis.
(7) North capital (30% of expenses) 3,300South capital (10%) 1,100East capital (20%) 2,200West capital (40%) 4,400
Cash 11,000To record liquidation expenses paid.
(8) North capital (30/60 of deficit) 2,080South capital (10/60) 693East capital (10/60) 1,387
West capital 4,160To eliminate capital deficiency of West as computed below:
North South East West Capital balances, beginning P120,000 P88,000 P109,000 P60,000Loss on accounts receivable (4,920) ( 1,640) ( 3,280) ( 6,560)Loss on property and equipment (30,900) (10,300) (20,600) (41,200)Cash distribution (31,800) (58,600) (50,200) –0–Liquidation expenses ( 3,300 ) ( 1,100 ) ( 2,200 ) ( 4,400 )
Subtotal 4,580 1,527 3,053 ( 4,160)Elimination of West deficiency ( 2,090 ) ( 693 ) ( 1,666 ) 4,160
Capital balances P 2,500 P 834 P 1,666 P –0–
(9) North capital 2,500South capital 834East capital 1,666
Cash 5,000To record final cash distribution.
Partnership Liquidation by Installment 101
Problem 5 – 9
DR CompanySchedule of Safe Payments to Partners
Dan Red Ben (40%) (30%) (30%)
Capital and loan balances, August 1, 2008 (42,000) (45,000) (17,000)Write-off of P24,000 in goodwill 9,600 7,200 7,200Write-off of P12,000 of receivables 4,800 3,600 3,600Gain of P6,000 on sale of P32,000 of inventory (one-half of P64,000 book value) (2,400) (1,800) (1,800)Capital and loan balances, August 31, 2008 (30,000) (36,000) (8,000)Possible loss of P16,000 for remaining receivables and P32,000 for remaining inventory 19,200 14,400 14,400Possible liquidation costs of P4,000 1,600 1,200 1,200Balances (* = deficit) (9,200) (20,400) 7,600*Distribute Ben’s potential deficit (7,600) To Dan: P7,600 x 40/70 4,343 To Red: P7,600 x 30/70 3,257 - Safe payments to partners (4,857) (17,143) -0- -
Of the P84,000 in cash at the end of August, P58,000 will be required to liquidate the debts to outside creditors, and P4,000 must be held in reserve to pay possible liquidation costs. Thus, a total of P22,000 in cash can be safely distributed to partners as of August 31, 2008.
Problem 5 – 10
(1) Journal entry to record Jenny’s contribution:
Cash 40,000Equipment 60,000
Jenny, capital 100,000
Journal entry to record Kenny’s contribution:
Cash 60,000Inventory 10,000Equipment 180,000
Notes payable 50,000Kenny, capital 200,000
102 Chapter 5
(2) Capital balances of Jenny and Kenny before admission of Lenny:
Jenny KennyBeginning capital balance P100,000 P200,000Interest on beginning capital balance 10,000 20,000Annual salary 15,000 20,000Remainder 48,000 72,000Ending capital balance P173,000 P312,000
Explanation:Each partner receives 10% on beginning capital balance. Each partner receives
her respective income (P15,000 to Jenny and P20,000 to Kenny). The amount distributed thus far is P65,000. The remainder to be distributed is P120,000 (P185,000 – 30,000 – 35,000). Two-fifths of this remainder of P129,000 (48,000) is allocated to Jenny; 3/5 x P120,000 (72,000) is allocated to Kenny. The total income allocated to Jenny and Kenny is P73,000 and P112,000 respectively.The admission of Lenny can now be recorded by the following entry:
Cash 175,000Lenny, capital 110,000Jenny, capital 26,000Kenny, capital 39,000
Explanation:The book value of the partnership after the income distribution in 2006 was
P485,000 (P173,000 + P312,000). After Lenny’s contribution, the value of the partnership is P485,000 + P175,000 = P660,000. A one-sixth interest in the partnership is P660,000 x 1/6 = P110,000. Using the bonus method, we compute a bonus of P175,000 – P110,000 = P65,000. Using the 2:3 profit sharing ratio, the amount allocated to Jenny is P26,000 (2/5 x P65,000) and the amount allocated to Kenny is P39,000 (3/5 x P65,000).
(3) Schedule of Safe Payments Jenny Kenny Lenny
Capital balances P200,000 P400,000 P200,000Partner’s loan (50,000)Gain on realization 9,000 15,000 6,000Possible loss (156,000) (260,000) (104,000 )Safe payments to partners P 53,000 P105,000 P102,000
Explanation:The sale of assets realized a gain of P30,000 (P210,000 – P180,000) which is
distributed to the partners on the new profit sharing ratio: 30% to Jenny, 50% to Kenny, and 20% to Lenny. Liabilities are paid. A possible loss on the unsold assets (P520,000) is distributed to partners in their profit and loss ratio of 30:50:20 to Jenny, Kenny and Lenny respectively.
Joint Venture 103
CHAPTER 6
SOLUTIONS TO MULTIPLE CHOICES
6-1: aAssets per Jessica Company- balance sheet P3,550,000Jessica’s proportionate interest in assets of JV (50%) 1,000,000Total assets of Jessica P4550,000
6-2: a Total liabilities only of Jenny Co.
6-3: b
6-4: bInvestment of Heart P80,000Profit share:
Sales 150,800Cost of sales (150,800 ÷ 125%) 120,640Gross profit 30,160Expenses 10,000Net Profit 20,160Profit/loss ratio x 40% 8,064
Balance of investment in JV P88,064
6-5: aCash P190,000Merchandise inventory 29,360Accounts receivable 150,800Total assets 370,160Sweet Co’s, proportionate interest x 60%Sweet Company’s share in total asset P222,096
6-6: aSales 7,200Cost of sales
Purchases P10,000Merchandise inventory, end (50% of P10,000) __5,000 _5,000
Gross profit 2,200Expenses ___500
Net profit P 1,700
104
Chapter 6
6-7: bOriginal investment (cash) P10,000Profit share (P1,700 / 2) ___850
Balance of Investment account P10,850
6-8: aJoint venture account before profit distribution (credit balance) P 9,000Unsold merchandise __2,500
Joint venture profit before fee to Salas P11,500
Joint venture profit after fee to Salas (P11,500 / 115%) P10,000
6-9: bFee of Salas (P10,000 x 15%) P 1,500Profit share of Salas (P10,000 x 25%) _2,500
Total P 4,000
6-10: bSalas Salve
Balance before profit distribution P 500 (dr) P 2,000 (cr)Profit share:Sabas (P10,000 x 40%) 4,000
Salve (P10,000 x 35%) ______ _3,500
Balance P 3,500 (cr) P 5,500 (cr)
6-11: dJoint venture account balance before profit distribution (debit) P 6,000Joint venture profit (P4,500 x 3) _13,500
Cost of unsold merchandise (inventory) taken by Dante P19,500
6-12: bEdwin Capital:
Debits: Balance before profit distribution P14,000Credits: Profit share __4,500
Due from Edwin (debit balance) P 9,500
Joint Venture 105
Settlement to Ferdie (Balance of capital account)Debits: P –0–Credits:Balance before profit distribution P16,000
Profit share __4,500 _20,500
Due to Ferdie (credit balance) P20,500
Settlement to Dante (balance of JV Cash account)Debits: Balance before cash settlement P30,000
Due from Edwin __9,500 P39,500Credits:Due to Ferdie _20,500
Balance P19,000
6-13: aJV account balance before profit distribution (cr) P 4,600Unsold merchandise (required dr balance after profit distribution) __2,000
Joint venture profit before fee to Jerry P 6,600Joint venture profit after fee (P6,600 / 110%) __6,000Fee to Jerry P 600
6-14: d Harry Capital Isaac Capital
Balances before profit distribution (P 200) P 1,800Profit distribution:
Harry P6,000 x 50%) 3,000Isaac (P6,000 x 20%) 1,200
Cash settlements P 2,800 P 3,000
6-15: bSales P14,000Cost of sales:
Merchandise inventory, beg (contributions) P14,000Freight 300Purchases __4,000
Goods available for sale P18,300Merchandise inventory, end (P8,300/2) __4,150 14,150
Gross profit (loss) (150)Expenses (P400 + P200) __600
Net profit (loss) P( 750 ) 6-16: c
Contributions to the Joint Venture (P5,000 + P8,000) P13,000Loss share (P750 x 50%) ( 375)Unsold merchandise taken (withdrawal) ( 4,150 )
Final settlement to jack P 8,475
106 Chapter 6
SOLUTIONS TO PROBLEMS
Problem 6 – 1
Books of Blanco (Manager) Books of Ablan
JV Cash 100,000 Investment in JV 90,000Joint Venture 90,000 Merchandise inventory 90,000
Cash 100,000Ablan Capital 90,000
Joint Venture 60,000JV cash 60,000
Joint Venture 20,000JV cash 20,000
JV cash 200,000Joint Venture 200,000
Computation of JV Profit
Total debit to JV P170,000Total credit to JV P200,000
Credit balance (Profit) P 30,000
DistributionJoint Venture 30,000 Investment in JV 15,000
Profit from JV 15,000 Profit from JV 15,000Ablan capital 15,000
Ablan capital 105,000 Cash 105,000JV cash 105,000 Investment in JV 105,000
Cash 155,000JV cash 155,000
Joint Venture 107
Problem 6 – 2
Books of the Joint Venture
1. Computer equipment 105,000Ella capital 60,000Fabia capital 45,000
2. Purchases 80,000Supplies 2,000
Diaz capital 82,000
3. Expenses 9,000Diaz capital 9,000
4. Cash 150,000Sales 150,000
5. Expenses 30,000Cash 30,000
6. Merchandise inventory 20,000Ella capital 20,000
7. Fabia capital 10,000Cash 10,000
8. Adjusting and closing entries:
(a) Expenses 500Supplies 500
(b) Sales 150,000Income summary 150,000
Income summary 77,500Merchandise inventory 2,500
Purchases 80,000
Income summary 39,500Expenses 39,500
Distribution of profit:Income summary 33,000
Diaz capital 11,000Ella capital 11,000Fabia capital 11,000
108 Chapter 6
Books of Diaz
(1) Investment in Joint Venture 82,000Cash 82,000
(2) Investment in Joint Venture 9,000Cash 9,000
(3) To record profit share:
Investment in Joint Venture 11,000Profit from Joint Venture 11,000
Books of Ella:
(1) Investment in Joint Venture 60,000Computer equipment 60,000
(2) Investment in Joint Venture 20,000Merchandise inventory 20,000
(3) To record profit share:
Investment in Joint Venture 11,000Profit from Joint Venture 11,000
Books of Fabia:
(1) Investment in Joint Venture 45,000Computer equipment 45,000
(2) Cash 10,000Investment in Joint Venture 10,000
(3) To record profit share:
Investment in Joint Venture 11,000Profit from Joint Venture 11,000
Joint Venture 109
Problem 6 – 3
(1) No Separate Set of Joint Venture Books is Used
Books of Duran (Manager)
May 1: Joint Venture 12,500Castro capital 12,000Cash 500
7: JV cash 10,000Bueno capital 10,000
26: Joint Venture 9,500JV cash 9,500
30: JV accounts receivable 16,000Joint Venture 16,000
June 30: JV cash 15,000JV accounts receivable 15,000
27: JV cash 9,000Joint Venture 9,000
30: To record unsold merchandise taken by Duran:
Merchandise inventory 3,000Joint Venture 3,000
To record profit distribution:
Joint Venture 6,000Profit from JV 2,000Bueno capital 2,000Castro capital 2,000
To record settlements:
Bueno capital 12,000Castro capital 14,000
JV cash 24,500Cash 1,500
Accounts receivable 1,000
JV accounts receivable 1,000
110 Chapter 6
Books of Bueno
May 7: Investment in Joint Venture 10,000Cash 10,000
June 30: Investment in Joint Venture 2,000Profit from Joint Venture 2,000
Cash 12,000Investment in Joint Venture 12,000
Books of Castro
May 1: Investment in Joint Venture 12,000Merchandise inventory 12,000
June 30: Investment in Joint Venture 2,000Profit from Joint Venture 2,000
Cash 14,000Investment in Joint Venture 14,000
(2) A Separate Set of Books is used:
Books of the Joint Venture
May 1: Merchandise inventory 12,500Castro capital 12,000Duran capital 500
7: Cash 10,000Bueno capital 10,000
26: Purchases 9,500Cash 9,500
30: Accounts receivable 16,000Sales 16,000
June 20: Cash 15,000Accounts receivable 15,000
27: Cash 9,000Sales 9,000
Joint Venture 111
June 30: Closing entries:
Sales 25,000Income summary 25,000
Income summary 19,000Merchandise inventory, end 3,000
Merchandise inventory 12,500Purchases 9,500
Distribution of profit:
Income summary 6,000Bueno capital 2,000Castro capital 2,000Duran capital 2,000
Settlements to Venturers:
Bueno capital 12,000Castro capital 14,000Duran capital 2,500
Merchandise inventory 3,000Accounts receivable 1,000Cash 24,500
Books of Duran (Manager/Operator)
May 1: Investment in Joint Venture 500Cash 500
June 30: Investment in Joint Venture 2,000Profit from Joint Venture 2,000
Cash 2,500Investment in Joint Venture 2,500
Books of Bueno and Castro (Same as in No. 1 requirement)
112 Chapter 6
Problem 6 – 4
(1) Books of Seiko (Manager/Operator)
April1: JV Cash 102,000Notes payable – PNB 34,000Roles capital 34,000Timex capital 34,000
May: Joint venture 64,100Cash 16,300Rolex capital 7,800
June: Rolex capital 30,000JV cash 30,000
Joint venture 111,400Cash 37,400Rolex capital 64,700Timex capital 9,300
July: Cash 40,000Rolex capital 15,000Timex capital 10,000
JV cash 65,000
Joint venture 55,770Cash 13,970Rolex capital 31,240Timex capital 10,560
August: Cash 45,000Rolex capital 67,000Timex capital 13,500
JV cash 125,500
Joint venture 30,600Cash 9,730Rolex capital 16,560Timex capital 4,310
To record sales:
JV cash (P421,000 x 96%) 404,160
Joint venture 404,160
Joint Venture 113
To record payment of loan to PNB:
Notes payable – PNB 34,000Rolex capital 34,000Timex capital 34,000Joint venture (Interest expense) 8,000
JV cash 110,000
To record distribution of profit:
Joint venture 134,290Gain from JV (30%) 40,287Rolex capital (60%) 80,574Timex capital (10%) 13,429
Computed as follows:
Total debits tot he JV account P269,870Total credits to the JV account _404,160
Gain (credit balance) P134,290
To record settlement:
Cash 32,687Rolex capital 128,874Times capital 14,099
JV cash 175,660
Computations:
Settlement to Rolex - Balance of capital account:
Debits: June P30,000July 15,000August 67,000Payment of note payable _34,000 P146,000
Credits:April 1 P34,000May 47,800June 64,700July 31,240August 16,560Profit share _80,574 __274,874
Credit balance P 128,874
114 Chapter 6
Settlement to timex – Balance of capital account
Debits: July P 10,000August 13,500Payment of loan __34,000 P 57,500
Credits:April 1 P 34,000June 9,300July 10,560August 4,310Profit share __13,429 _71,599
Credit balance P 14,099
Settlement to Seiko – Balance of JV cash account
Debits: April 1 P102,000Loan proceeds _404,160 P506,160
Credits: June P 30,000July 65,000August 125,500Payment of loan _110,000 _330,500
Balance of JV cash 175,660Less:Settlement to Rolex P128,874
Settlement to Timex __14,099 _142,973
Settlement to Seiko P 32,687
(2) Partial Balance SheetJune 30, 2008
Books of Seiko (Manager/operator)
Current assets:Investment in joint Venture:
Joint Venture assets:Cash P 72,000Joint Venture _175,500 P247,500
Less:Equity of other venturers(P116,500 + P43,300) _159,800 87,700
Current liabilities:
Notes payable – PNB 34,000
Joint Venture 115
Computation of balances as of June 30, 2008:
JV Cash Joint Venture
April 1 P102,000 P30,000 June May P 64,100Balance P 72,000 June _111,400
Balance P175,500
Notes Payable Rolex capital
P34,000 April June P 30,000 P 34,000 April 147,800 May
_______ __64,700 June
P 30,000 P146,500
P116,500
Timex capital
P34,000 April__9,000 June
P43,300
Problem 6 – 5
Consolidated Balance Sheet
Cash P 61,000Receivables 122,000Inventory 102,500Other assets __40,500
Total assets P326,000
Accounts payable P 61,000Other liabilities 96,500Capital stock 50,000Retained earnings _118,500
Total liabilities and stockholders' equity P326,000
Consolidated Income Statement
Sales P246,750
Cost of sales _124,750
Gross profit 122,000Operating expenses __58,250
Consolidated net income P 63,750
116 Chapter 6
Problem 6 –6
(a) Journal entries on venture books
June 15: Cash 1,000,000MacDo 1,000,000
Initial contribution at 6%
July 1: Land 2,400,000Mortgage payable 1,650,000Cash 750,000
Purchased land for cash and 6% mortgage.
Aug 1: Cash 1,100,000MacDo 1,100,000
Additional contribution at 6%.
Land 950,000Cash 950,000
Paid for improvements.
Sept 30: Mortgage payable 250,000Interest expense- Mortgage 3,750
Cash 253,750Reduced mortgage and paid interest.
Oct 31: Mortgage payable 400,000Interest expense- Mortgage 8,000
Cash 408,000Reduced mortgage and paid interest.
Nov 30: Mortgage payable 300,000Interest expense- Mortgage 7,500
Cash 307,500Reduced mortgage and paid interest.
Dec 31: Mortgage payable 200,000Interest expense- Mortgage 21,000
Cash 221,000Reduced mortgage and make semi-annual interest payment.
Joint Venture 117
31: Cash 2,600,000Sales 2,600,000
Sales to date.
31: Commissions 130,000Cash 130,000
P2,600,000 x 5%
31: Expenses 628,100Cash 628,100
Paid expenses
31: Interest expense- Venturer 60,000MacDo 60,000
6% on P1,000,000 from June 15 to December 31, and on P1,100,000from August 1 to December 31.
31: Sales 2,600,000Land (cost of land sold) 1,145,000Expenses 628,100Commissions 130,000Interest expense- mortgage 40,250Interest- venturer 60,000Income summary 596,650
To close income and expense accounts.
31: Income summary 596,650MacDo 596,650MacEn 238,660
To divide gain, 60:40.
31: MacDo 801,650Cash 801,650
Payment on account.
(b) Journal entries on MacDo’s books:
June 15: Investment in Joint Venture 1,000,000Cash 1,000,000
Initial contribution.
Aug 1: Investment in Joint Venture 1,100,000Cash 1,100,000
Additional contribution.
118 Chapter 6
Dec 31: Investment in Joint Venture 60,000Interest income 60,000
Interest earned on cash advanced.
31: Investment in Joint Venture 357,990Gain on Joint Venture 357,990
60% of gain on venture.
31: Cash 801,650Investment in Joint Venture 801,650
Repayment in part of advances.
(c) MacDo and MacEn Joint VentureIncome StatementFor the period from June 15 to December 31, 2008
Sales P2,600,000Cost of land sold:
Land P2,400,000Improvements 950,000Total P3,350,000Unsold land 2,205,000 1,145,000
Gross profit 1,455,000Expenses:
Advertising and office expenses P 628,100Interest on mortgage 40,250Interest on advances 60,000Commissions 130,000 858,350
Net gain P 596,650
Distributions:MacDo (P596,650 x 60%) P 357,990MacEn (P596,650 x 40%) 238,660
Mac Do and MacEn Joint VentureBalance SheetDecember 31, 2008
AssetsCash P 250,000
Land 2,205,000Total Assets P2,455,000
Liabilities and equity:Mortgage payable P 500,000MacDo 1,716,340MacEn 238,660Total liabilities and equity P2,455,000
Joint Venture 119
Venturers equity (interest)MacDo MacEn Total
Invested P2,100,000 P2,100,000 Shares:
Gain P 357,990 P238,660 P 596,650Interest on advances 60,000 60,000Commissions 130,000 130,000
Total 417,990 368,660 786,650 Balances 2,517,990 368,660 2,886,650Withdrawn (801,650) (130,000) (931,650 )Equity (interests) P1,716,340 P238,660 P1,955,000
120 Chapter 7
CHAPTER 7
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
7-1: c
Amount realized secured by inventory P 30,000Unsecured claim (P10,000 x 25%) __2,500
Total amount received P 32,500
7-2: dAmount realized secured by inventory P120,000Unsecured claim (P88,000 x 75%) __66,000
Total amount received P186,000
7-3: d (P15,000,000 + P200,000)
7-4: a Realizable value:
Current assets P 50,000Land and building P240,000Less mortgage payable _200,000 __40,000
Total 90,000Less accounts payable _160,000
Estimated deficiency to unsecured creditors P 70,000
7-5: cTotal realizable value to unsecured creditors (P90,000)/total unsecuredClaims (P160,000) = 56.25%
7-6: aFree assets:
Current assets P 33,000Buildings and equipment _110,000
Total P143,000
Liabilities with priority:Administrative expenses P 20,000Salary payable 6,000Income taxes __8,000
Total P 34,000
Corporation in Financial Difficulty – Liquidation 121
Free assets after payment of liabilities with priority:(P143,000 – P34,000) P109,000
Unsecured liabilitiesNotes payable P 30,000Accounts payable 83,000Bonds payable __70,000
Total P183,000
Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60%
Payment of notes payable:Value of security (land) P 90,00060% of remaining P30,000 __18,000
Total collected P108,000
7-7: cFree assets:
Other assets P 80,000Excess from assets pledged with secured
Creditors (P116,000 – P70,000) __46,000
Total P126,000
Liabilities with priority P 42,000 Free assets after payment of liabilities with priority
(P126,000 – P42,000) P 84,000 Unsecured liabilities:
Excess of partially secured liabilities over pledgeAssets (P130,000 – P50,000) P 80,000
Unsecured creditors _200,000
Total P280,000
Recovery percentage: P84,000 / P280,000 = 30%
Payment of partially secured debt:Value of pledged assets P 50,00030% of remaining P80,000 __24,000
Total collected P 74,000
122 Chapter 7
7-8: aThe holder of Debt Two will receive P100,000 from the sale of the pledged asset. Since the holder wants to receive P142,000 out of the total debt of P170,000, the company must be able to generate enough cash to pay off 60% of the unsecured liabilities (P42,000/P70,000) after paying 100% of the liabilities with priority (P110,000).
Unsecured liabilities:Unsecured creditors P230,000Excess liability of Debt One in excess of pledged
Asset (P210,000 – P180,000) 30,000Excess liability of Debt Two in excess of pledged
Asset (P170,000 – P100,000) __70,000
Total unsecured liabilities P330,000Necessary percentage ____60%
Cash needed for these liabilities P198,000
In order for the holder of Debt Two to received exactly P142,000, the other free assets must be sold for P308,000. With that much money, the liabilities with priority (P110,000) can be paid with the remaining P198,000 going to the unsecured debts of P330,000. This 60% figure would insure that the holder of Debt Two would get P100,000 from the pledged asset and P42,000 (P70,000 x 60%) from the free assets.
7-9: cEstate equity, beg. (P100,000 – P85,000) P 15,000Loss on realization (P100,000 – P75,000) ( 25,000)Unrecorded liabilities:
Interest expense P 250 Administrative expense 4,000 ( 4,250)
Estate deficit P( 14,250 )
7-10: cTotal assets at net realizable value P 75,000Fully secured liabilities (40,000)Estimated administrative expense _( 4,000)
Estimated amount available P 31,000Unsecured claims (P45,000 + P250) (45,250)
Estimated deficiency to unsecured creditors P 14,250
Corporation in Financial Difficulty – Liquidation 123
7-11: bAssets pledged with fully secured creditors P185,000Fully secured creditors _130,000 55,000Free assets_160,000
Total free assets 215,000Less: Liabilities with priority __35,000
Available to unsecured non-priority claims P180,000
7-12: bMachinery P 10,000Recoveries of unsecured claims (50,000 - 10,000) X .50 __20,000
Amount to be realized P 30,000
7-13: bNotes Payable P 23,940Less: Inventories _ 19,200
Unsecured Liabilities 4,740% of recovery ____78%
Recovery 3,697Add: Inventories _19,200
Amount to be received by Wood P 22,897
7-14: a - P7,000 7-15: a - P30,000 7-16: b - P57,200 [52,000 + (8,000 X .65)] 7-17: d - P72,800 (112,000 X .65)
7-18: dEstimated loss:
Account Receivable P 8,160Inventories (28,000 - 18,500) 9,500Building (59,000 - 22,000) 3 7,000Equipment (5,600 - 2,000) 3,600Goodwill 5,650
Prepaid expenses ___430 P 64,340Less: Stockholder's equity
Common stock P 72,000Deficit ( 16,660 ) _55,340
Estimated deficiency P 9,000
124 Chapter 7
7-19: dAccounts Receivable (39,350 - 16, 110) P 23,240Notes Receivable (18,500 - 12,500) 600Inventories (87,850 - 45,100) 42,750Prepaid expenses 950Equipment (48,800 - 9,000) __39,800
Total estimated loss P112,740
7-20: b P33,750 (95,000 - 61,250) on Land and Building
7-21: dTotal Free Assets:
Balance of Assets Pledged toFully Secured Creditor (95,000 - 90,000) P 5,000
Free Assets:Cash P 2,700Accounts Receivable 16,110Inventories 45,100Equipment __9,000 __72,910
Total 77,910Less: Unsecured liabilities with priority (1,850 + 4,650) ___6,500
Net Free Assets P 71,410Divide by Unsecured creditors:
Balance of Partially Secured CreditorNotes Payable - PNB P 15,000Notes Receivable __12,500 2,500
Accounts Payable 52,500Notes Payable __51,250 103,750 ÷ P106,250
Estimated recovery % 67%
7-22: dFully secured (Notes Payable) P 90,000Partially secured:
Notes Payable - PNB P12,500Add (2,500 X 67%) __1,675 14,175
Unsecured Creditor with Priority 6,500Unsecured Creditor without Priority (103,750 X 67%) __69,513
Total P180,188
Corporation in Financial Difficulty – Liquidation 125
7-23: aUnsecured creditors without priority P1,102,500Estimated deficiency to unsecured creditors:
Loss on realization 551,250Estimated liquidation expenses 55,125Total 606,375Stockholders’ equity 441,000 165,375
Net free assets 937,125Liabilities with priority 122,500Free assets P 1,059,625
7-24: aEstimated net gain (loss) on realization:
Gain on realization 78,750Loss on realization (336,700) (257,950)
Estimated claims ( 43,750)Total (301,700)Stockholders equity 295,750Estimated deficiency P( 5,950)
7-25: bNotes payable (175,000 – 140,000) P 35,000Unsecured liabilities (420,000 – 52,500) 367,500Total 402,500Free assets (157,500 + 210,000) 367,500Estimated deficiency 35,000
7-26: aOld receivable (net) P 38,000Marketable securities 12,000Old inventory 60,000Depreciable assets- net 96,000Total assets to be realized P206,000
7-27: aOld receivable P 21,000New receivable 47,000Marketable securities 10,500Sales of inventory 75,000Total asset realized P153,500
7-28: aGain on sale of inventory (P75,000 – 60,000) 15,000Loss on realization:
Marketable securities (12,000 – 10,500) 1,500Trustee’s expenses 4,300Depreciation 16,000 (21,800)
Net loss P( 6,800)
126 Chapter 7 SOLUTIONS TO PROBLEMS
Problem 7 – 1(A) Laguna Company
Statement of AffairsOctober 31, 2008
Book EstimatedValue Assets Realizable Value Free Assets
Assets pledge for fully secured creditors: P107,000 .... Plant assets................................................... P67,400
Less; Fully secured liabilities......................_ 50,400 P17,000Assets pledged for partially secured creditors:
39,000. .... Inventories................................................... P18,000
Free Assets: 4,000. ..... Cash............................................................. P 4,000 46,000. ..... Accounts, receivable.................................... 46,000 2,000. ..... Supplies........................................................ __1,500 _51,500
Total free assets................................................ P68,500Less: Unsecured liabilities with priority.......... __7,000
Net Free Assets................................................ P61,500 Estimated deficiency to unsecured creditors (to balance) _20,500
P198,000 P82,000Book Creditors' Unsecured
Value Liabilities & Stockholders' Equity Claim LiabilitiesFully secured liabilities:
P50,400....... Mortgage payable (including interest, P400) P50,400Partially secured liabilities:
21,000. . ..... Notes payable............................................... P21,000Less: Inventory............................................ _18,000 P 3,000
Unsecured creditors with priority: 5,800. . ..... Wages payable P 5,800 1,200. . ..... Property taxes payable................................. _1,200
Total............................................................. P 7,000
Unsecured creditors without priority: 60,000. . ..... Accounts payable......................................... 60,000 19,000. . ..... Notes payable............................................... 19,000 Stockholders' Equity........................................ _____–
P198,000 P82,000(B) Creditor Group Amount of Amount to
PercentageClaim be Paid to be
paid
Unsecured liabilities with priority..................................... P7,000 P7,000 100.0%Fully secured creditors...................................................... 50,400 50,400 100.0%Partially secured creditors................................................. 21,000 20,250 * 96.4%Unsecured creditors without priority................................. 79,000 59,250 75.0%
* P18,000 + (P3,000 X 0.75) = P20,250(C) See statement of affairs in requirement (A)
Corporation in Financial Difficulty – Liquidation 127
Problem 7 – 2VC CorporationStatement of Realization and LiquidationMonth Ended January 31, 2008
Assets to be realized: Assets realized:Land........................ P10,000 land.............................. P 0Building.................. 43,000 Building....................... 0Equipment............... 28,000 Equipment................... 8,800Patents..................... __4,400 P85,400 Patents......................... _12,000P20,800
Assets Acquired............... 0 Assets not realized:Land............................ P10,000Building....................... 43,000Equipment................... _13,000
66,000
Liabilities Liquidated: Liabilities to be Liquidated:Account payable..... P14,000 Accounts payable........ P80,000Loans payable......... __7,000 21,000 Loans payable............. _40,000120,000
Liabilities not Liquidated:Accounts payable.... 66,000Loans payable......... 33,000 99,000
Gain on realization......................... ___7,600 Loss on realization.....................___6,200
Total............................................... P213,000 Total...........................................P213,000
VC CorporationBalance SheetJanuary 31, 2008
Cash ................................................ P 6,700 Accounts payable..........................P 66,000
Land ................................................ 10,000 Loans payable...............................33,000
Building.......................................... 43,000 Estate deficit.................................( 26,300 )
Equipment....................................... _13,000
Total................................................ P 72,700 P 72,7 00
VC CorporationEstate DeficitJanuary 31, 2008
Gain on realization..................................................................... P 7,600Loss in realization ..................................................................... ( 6,200)Trustee's expenses ..................................................................... ( 1,300 )
Net gain on realization............................................................... P 100Estate deficit, January 1, 2008................................................... ( 26,400 )
Estate deficit, January 31, 2008................................................. P(26,300 )
128 Chapter 7 Problem 7 – 3
Rizal CorporationStatement of Affairs
Book Estimated FreeValues A s s e t s Realizable Value Assets
Assets pledged to fully secured creditors:P 80,000........... Land and building............................................... P102,000
Less: Mortgage payable...................................... 43,000 P 59,000
50,000........... Finished Goods................................................... P 55,000Less: Loan payable............................................. 50,000 5,000
Assets pledged to partially secured creditors:32,000........... Accounts receivable (80% x 30,000).................. 24,00012,000........... Trucks................................................................. 3,500
Totals.................................................................. 27,500
Free Assets:4,000........... Cash.................................................................... 4,0008,000........... AR (20% x 30,000)............................................. 6,000
36,000........... Inventory – Materials.......................................... 27,0001,000........... Prepaid expense.................................................. 08,000........... Trucks................................................................. 2,500
45,000........... Equipment........................................................... 25,00016,000........... Intangible............................................................_______ 64,500
Total Free Assets..................................................... P128,500Less: Unsecured liability with priority (12,000 + 8,000) 20,000
Net free assets.......................................................... 108,500________ Estimated deficiency to unsecured creditors (to Balance) 81,000
P 292,000 ...........Total unsecured liabilities........................................ P189,500
Book Creditors' UnsecuredValues Liabilities and Equity Claim Liabilities
Fully secured creditors:P 43,000........... Mortgage payable............................................... 94,000
50,000........... Loans payable..................................................... 50,000
Total.................................................................... 144,000
Partially secured creditors':25,000........... Bank Loan........................................................... 25,000
Less: Receivable (80% x 30,000)........................ 24,000 P 1,000
5,000........... Truck Loan.......................................................... 5,000Less: trucks......................................................... 3,500 1,500
Unsecured creditors with Priority:12,000........... Wages payable.................................................... 12,0008,000........... Taxes payable..................................................... 8,000
Totals.................................................................. 20,000
Unsecured creditors:77,000........... Accounts payable................................................ 77,000
110,000........... Stockholder Loan................................................ 110,000 187,000 ( 38,000 )...........Stockholder Equity.................................................. –
P 292,000 Total......................................................................... P189,500Corporation in Financial Difficulty – Liquidation 129
Problem 7 – 4
Mapayapa CorporationStatement of AffairsNovember 1
Book Estimated FreeValue Assets Realizable Value Assets
Assets pledged to fully secured creditors:P60,000........ Investments.................................................. P 69,000180,000........ Accounts receivable..................................... 171,000
Total............................................................. 240,000Less: Note payable....................................... 210,000 P 30,000
Free assets:66,000........ Cash............................................................. P 66,000
248,000........ Accounts receivable..................................... 193,500291,000........ Merchandise inventory................................ 180,000870,000........ Plant & equipment....................................... 330,000114,000........ Notes receivable........................................... 108,300
–........ Patent........................................................... __12,000 _889,800
Total free assets........................................... 919,800Less: Unsecured liabilities with priority.......... __13,800
Net free asset................................................ 906,000_________ Estimated deficiency (to balance).................... 60,300
P1,839,000 Total................................................................. P966,300
Book Creditor's UnsecuredValue Liabilities & Equity Claim Liabilities
Fully secured creditors:P 210,000........ Notes payable............................................... P210,000
Unsecured creditor with priority:Accrued wages............................................. P 7,200Accrued property tax................................... ___6,600
Total............................................................. P 13,800
Unsecured creditor:960,000........ Account payable.......................................... P960,000
Accrued expenses........................................ 6,300300,000........Capital stock
__369,000........Retained earnings............................................. _______
P1,839,000 Total................................................................. P966,300
130 Chapter 7
Problem 7 – 5
a. Total fair value of assets (estimated proceeds).......................... P471,000Less:Fully and partially secured creditors claim:
Notes payable, interest (secured by receivable andinventory).................................................................... 125,000
Bonds payable (secured by land & building).................... 231,000 356,000
Available to unsecured creditors................................................ 115,000Less:Unsecured creditors with priority:
Wages payable...................................................................P 9,500Taxes payable....................................................................__14,000 __23,500
Amount available to unsecured creditors................................... P 91,500
b. Unsecured portion of notes payable and interests (P195-P125) P 70,000Accounts payable....................................................................... __95,000
Total claims of unsecured creditors........................................... P165,000
P91,500––––––– = 55.45%
P165,000
c. Distribution of P471,000:
Percent TotalCreditors Amount Realized Payment
Accounts payable P 95,000.... 55.45% P 52,678Wages payable 9,500..... 100% 9,500Taxes payable 14,000..... 100% 14,000Notes payable & interests 125,000..... 100% 125,000
70,000 55.45% 38,815Bonds payable & interests 231,000..... 100% _231,000
Total estimated payment......................................... P470,993
Corporation in Financial Difficulty – Liquidation 131
Problem 7 – 61. Evergreen Company
Statement of AffairsJune 30, 2008
Estimated Available for Book Realizable Unsecured Values ASSETS Values Creditors
Pledged with fully secured creditors:P460,000 Land and building...................................... P340,000
Less: Mortgage payable (including accrued interest) (330,000) P 10,000Free Assets:
80,000 Cash .......................................................... P 80,000140,000 Accounts receivable – net.......................... 126,000100,000 Inventories................................................. 84,000120,000 Machinery – net......................................... 40,000100,000 Goodwill.................................................... _ _____0_ 330,000
Total free assets............................................................ 340,000Less: liabilities with priority......................................... _140,000
Net free assets.............................................................. 200,000Estimated deficiency (Squeeze figure)......................... _130,000
P1,000,000 P330,000
LIABILITIES AND STOCKHOLDERS' EQUITY Secured & Unsecured Priority Non-priority Claims Liabilities
Liabilities with priorityP120,000 Wages payable........................................... P120,000
20,000 Property taxes payable............................... __20,000
Total.......................................................... P140,000Fully secured creditors
300,000 Mortgage payable...................................... 300,00030,000 Interest on mortgage payable..................... __30,000
Total.......................................................... P330,000Unsecured creditors
220,000 Accounts payable.......................................................... P220,000100,000 Note payable-unsecured............................................... 100,00010,000 Interest payable-unsecured........................................... 10,000
Stockholders' Equity400,000 Capital stock.............................................. ___
(200,000 ) Retained earnings (deficit)........................................... P330,000
P1,000,000
2. Settlement per peso of unsecured creditors is P.6250 (P200,000/P320,000). No payment is made for the P10,000 unsecured interest claim.
132 ____ Chapter 7
Problem 7 – 7
1. Entries on trustee's books.2008March 1: Cash........................................................P8,000
Accounts receivable – net.......................16,000Inventories..............................................72,000Land........................................................40,000Buildings – net......................................200,000Intangible assets......................................52,000
Accounts payable........................................ P100,000Note payable............................................... 80,000Deferred revenue......................................... 2,000Wages payable............................................ 6,000Mortgage payable........................................ 160,000Estate equity................................................ 40,000
To record custody of Kimerald Corporation.
March 1 to 31:Cash........................................................15,200
Estate equity................................................800Accounts receivable-net.............................. 16,000
To record collection of receivables and recognize loss.
Cash........................................................38,800Estate equity...........................................33,200
Inventories................................................... 72,000To record sale of inventories at a loss.
Cash......................................................180,000Estate equity...........................................60,000
Land............................................................ 40,000Buildings-net............................................... 200,000
To record sale of land and buildings at a loss.
Estate equity...........................................52,000Intangible assets.......................................... 52,000
To write off intangible assets.
Estate equity...................................................16,400Administrative expenses payable....................... 16,400
To accrue trustee expenses.
Corporation in Financial Difficulty – Liquidation 133
2. Financial StatementsKimerald Corporation in TrusteeshipBalance SheetMarch 31, 2008
AssetsCash .......................................................................................... P242,000
Liabilities and DeficitAccounts payable....................................................................... P100,000Note payable-unsecured............................................................ 80,000Revenue received in advance.................................................... 2,000Wages payable........................................................................... 6,000Mortgage payable. ..................................................................... 160,000Administrative expense payable-new........................................ __16,400
Total liabilities........................................................................... P364,400Less: Estate deficit..................................................................... _122,400
Total liabilities net of deficit..................................................... P242,000
Kimerald Corporation in TrusteeshipStatement of Cash Receipts and DisbursementsMarch 1 to 31, 2008
Cash balance, March 1, 2008..................................................... P 8,000Add: Cash receipts
Collections of receivables...................................P 15,200Sale of inventories..................................................38,800Sale of land and buildings....................................180,000 _234,000
Total.......................................................................................... 242,000Less: Cash disbursements.......................................................... ____–0–
Cash balance, March 31, 2008................................................... P242,000
Kimerald Corporation in TrusteeshipStatement of Changes in Estate EquityMarch 1 to 31, 2008
Estate equity, March 1............................................................... P 40,000Less:Loss on uncollectible receivables.........................P 800
Loss on sale of inventories.....................................33,200Loss on sale of land and buildings.........................60,000Loss on write off of intangibles.............................52,000Administrative expenses......................................_16,400 _162,400
Estate deficit, March 31............................................................. P122,400
134 Chapter 7
3. Entries on trustee's books:
2008April: Mortgage payable............................................160,000
Cash..................................................................... 160,000To record payment of secured creditors from proceeds from sale of Land and buildings.
Administrative expenses payable-new..............16,400Deferred revenue.................................................2,000Wages payable.....................................................6,000
Cash..................................................................... 24,400To record payment of priority liabilities.
Accounts payable...............................................32,000Note payable-unsecured....................................25,600
Cash..................................................................... 57,600To record payment of P.32 per peso to unsecured
creditors (available Cash of P57,600 divided by unsecured claims of P180,000).
Accounts payable...............................................68,000Note payable-unsecured....................................54,400
Estate equity......................................................... 122,400To write-off remaining liabilities and close trustee's records.
Reorganization and Troubled Debt Restructuring 135
CHAPTER 8
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
8-1: aTrade accounts payable (P52,000 + P62,700)P114,70012% preferred stock (5,000 x P1) P 5,000Paid in capital in excess of par (5,000 x P9) 45,000Cash (P62,700 x P0.80) _50,160_100,160
Gain from discharge of indebtedness P 14,540
8-2: c
8-3: c
8-4: bCarrying value of the note payable:
Principal P600,000Interest
__60,000 P660,000Restructured value:
Principal P400,000Interest
_110,000 _510,000
Gain on debt restructuringP150,000
8-5: dOther income:
Fair value of landP450,000
Books value of land_360,000
Other income P 90,000
Extraordinary gain:Book value of note payable
Principal P500,000Interest __60,000
P560,000Fair value of land
_450,000
Extraordinary gainP110,000
8-6: aBook value of bonds payableP500,000Par value of preferred stock (5,000 shares x P100)_500,000
No gain no loss P –0–
136 Chapter 8
8-7: a
Book value of notes payable:
Principal P 2,500Interest
___500 P 3,000Par value of common stock issued (200 shares x P5)__1,000
Additional paid in capitalP 2,000Add gain on payment of accounts payable:
Book value P 10,000Payment __8,000
__2,000
Total gain on debt dischargeP 4,000
8-8: aCarrying value of debt:
Note payable P100,000Interest payable __12,000
P112,000Fair value machinery_(36,000)
Balance of debt P 76,000
Restructured debt:Note payable P 50,000Interest (P50,000 x .08 x 2) ___8,000
__58,000
Restructuring difference (gain)P 18,000
8-9: dPrincipalP300,000Interest payable (300,000 x 10%)__30,000
Carrying valueP330,000
8-10: cShould be P310,600Restructured principal of note payableP260,000Interest payable:
On book value (P300,000 x 10% 30%) P 9,000On restructured (P260,000 x 8% x 2) _41,600
__50,600
Future cash flows to liquidate the debtP310,600
8-11: d
8-12: dLoss on transfer of land:
Original cost P290,000Market value _270,000
P 20,000
Gain on restructuring of debt:Carrying value of debt P300,000Market value of land _270,000
P 30,000 Reorganization and Troubled Debt Restructuring 137
8-13: aTransfer gain (loss):Carrying amount of equipment P80,000Fair value of equipment 75,000Transfer loss P(5,000)
Restructuring gain:Carrying amount of the debt P100,000Fair value of equipment transferred 75,000Restructuring gain P 25,000
8-14: dCarrying amount of real estate transferred P100,000Fair value of real estate 90, 000Loss on restructuring of payables P(10,000)
8-15: dCarrying amount of liability P150,000Fair value of real estate transferred 90,000Restructuring gain P 60,000
8-16: cGain on revaluation of land (120,000 – 85,000) P 35,000Gain on the extinguishment of debt (185,000 – 120,000) 65,000Total gain P100,000
8-17: aCarrying value of debt (P800,000 + 80,000) P880,000Total future payments (P700,000 + 80,000) 780,000Restructuring gain P100,000
8-18: aFirst determine the expected future cash flows as follows:
70,000 x .79719 = P55,8035,600 x 1.69005 = 9,464
Present value of future cash flow P65,267
The interest revenue can be computed using the effective interest methodas follows:
Present value at 12/31/06 P65,267Interest income at 12/31/07 (65,267 x 12%) 7,832Interest receivable at 12/31/07 (70,000 x 8%) 5,600 2,232Present value at 12/31/07 P67,499
Interest income at 12/31/08 (67,499 x 12%) P 8,100
138 Chapter 8
SOLUTIONS TO PROBLEMS
Problem 8 – 1
Journal entries for company emerging from bankruptcy using fresh start accounting:– Receivables........................................................................................10,000
Inventory. ..........................................................................................10,000Building............... 100,000Reorganization value in excess of amount
Allocable to tangible assets..........................................................60,000Additional paid in capital....................................................... 180,000
To adjust accounts to market value as part of fresh start accounting. Since the company has a reorganization value of P760,000 but the assets have a market value of only P700,000 (P90,000 + P210,000 + P400,000), and account entitled Reorganization Value in Excess of Amount Allocable to Tangible Assets must be recorded for P60,000.
Liabilities............. 300,000Common stock (P330,000 x 80%)............................................... 264,000Gain on debt discharge................................................................. 36,000
To record settlement of liabilities.
Problem 8 – 2
2008July 14: Costs of reorganization.................................................................50,000
Cash with escrow agent......................................................... 50,000
Common stock 580,000Common stock (60,000 x P1)................................................ 60,000Additional paid in capital....................................................... 520,000
Note payable – 10% 120,000
Interest payable (P120,000 x 10% x 3/12)................................... 3,000Note payable – 12%............................................................... 123,000
Trade accounts payable 100,000Cash P100,000 x 0.80)........................................................... 80,000Gain on debt discharge........................................................... 20,000
Additional paid in capital 290,000Gain on debt discharge 20,000
Retained earnings................................................................... 260,000Costs of reorganization.......................................................... 50,000
Reorganization and Troubled Debt Restructuring 139
Problem 8 – 3
Jade CorporationBalance SheetDecember 31, 2008
ASSETSCurrent assets:Cash .................................................................................... P 23,000Inventory.............................................................................. __45,000 P 68,000Property and equipment:Land .................................................................................... 140,000Buildings.............................................................................. 220,000Equipment............................................................................ _154,000 _514,000
Total assets........................................................................... P582,000
LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities not subject to compromiseCurrent liabilities:Accounts payable.................................................................. P 60,000Long-term liabilities:Note payable (2006)...... P100,000Note payable (2003)...... _100,000. ._ 200,000 P260,000Liabilities subject of compromiseAccounts payable.................................................................. 123,000Accrued expenses.. ............................................................... 30,000Income taxes payable............................................................ 22,000Note payable (due 2008)........................................................ _170,000 _345,000
Total liabilities. .................................................................... 605,000
Stockholders' EquityCommon stock. .................................................................... 200,000Retained earnings (deficit)..................................................... (223,000) _(23,000)
Total liabilities and stockholders' equity (deficit).................. P582,000
Problem 8 – 4
Preliminary computations:Book values prior to reorganization:
Total assets (P100,000 + P112,000 + P420,000 + P78,000).............. P710,000Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 +
P185,000 + P200,000).................................................................. P800,000Common stock (given)........................................................................ P240,000Deficit (given) .............................................................................. P330,000
140 Chapter 8
Book values after reorganization:Total assets (reorganization value)................................................................ P780,000Total liabilities (P5,000 + P4,000 + P100,000 + P50,000 +
P71,000 + P110,000).............................................................................. P340,000Common stock (returned shares are reissued)............................................... P240,000Deficit (eliminated) ...................................................................................... –0–Additional paid in capital (squeeze).............................................................. P200,000
Since the company will have 30,000 shares outstanding after the reorganization, the additional paid in capital equals P6.66 per share.Because the company has a reorganization value of P780,000 but the assets have a market value of only P735,000, an account entitled Reorganization Value in Excess of Amount allocable to Tangible Assets must be recognized for P45,000.
JOURNAL ENTRIES:1. Land and buildings ......................................................................................80,000
Reorganization Value in excess of amountallocable to tangible assets......................................................................45,000
Accounts receivable......................................................................... 20,000Inventory ...................................................................................... 22,000Equipment ...................................................................................... 13,000Additional paid in capital................................................................ 70,000
To adjust accounts to market value as part of fresh start accounting.
2. Common stock...............................................................................................144,000Additional paid in capital........................................................................ 144,000
To record shares turned in to the company by the owners as part of the reorganization plan. 18,000 shares at P8 par value.
3. Accounts payable........................................................................................... 80,000Note payable........................................................................................... 5,000Common stock, P8 par value.................................................................. 8,000Additional paid in capital (P6.66 per share)........................................... 6,666Gain on debt discharge........................................................................... 60,334
To record settlement of accounts payable.
4. Accrued expenses..........................................................................................35,000
Note payable........................................................................................... 4,000Gain on debt discharge........................................................................... 31,000
To record settlement of accrued expenses.
5. Note payable............ 200,000Note payable........................................................................................... 50,000Common stock, P8 par value.................................................................. 80,000Additional paid in capital (P6.66 per share)........................................... 66,667Gain on debt discharge........................................................................... 3,333
To record settlement of note payable due in 2007
6. Note payable............ 185,000Note payable........................................................................................... 71,000Common stock, P8 par value.................................................................. 56,000Additional paid in capital, P6.66 per share............................................. 46,667Gain on debt discharge........................................................................... 11,333
To record settlement of note payable due in 2008Reorganization and Troubled Debt Restructuring 141
Problem 8 – 5
7. Note payable. .....................................................................................200,000Note payable. ............................................................................... 110,000Gain on debt discharge................................................................. 90,000
To record settlement of note payable due in 2009
8. Additional paid in capital (P334,000 – P200,000)..............................134,000Gain on debt discharge........................................................................196,000
Retained earnings (deficit)........................................................... 330,000To adjust additional paid in capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.
Since the Company has a reorganization value of P800,000 but only P653,000 can be assigned to specific assets based on market value, the remaining P147,000 is reported as a Reorganization Value in Excess of Amount Allocable to Identifiable Assets.
Sun CorporationBalance Sheet – Fresh Start AccountingDecember 31, 2008
ASSETSCurrent assetsAccounts receivable.................................................................................... P 18,000Inventory.................................................................................................... _111,000 P129,000Property and equipmentLand and buildings. .................................................................................... 278,000Machinery.................................................................................................. _121,000 399,000Intangible assetsPatents .................................................................................................... 125,000Reorganization value in excess of amount allocable To identifiable assets _147,000 _272,000
Total assets................................................................................................. P800,000
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable........................................................................................ P 97,000Long-term liabilitiesNote payable (due in 2 years)...................................................................... P 35,000Note payable (due in 5 years)...................................................................... 50,000Note payable (due in 8 years)...................................................................... _100,000 _185,000
Total liabilities. .......................................................................................... P282,000
Stockholders' Equity:Common stock. .......................................................................................... P500,000Additional paid in capital (squeeze)............................................................ __18,000 _518,000
Total liabilities and stockholders' equity................................................................. P800,000142 Chapter 9
CHAPTER 9
MULTIPLE CHOICE ANSWERS AND SOLUTIONS 9-1: d
Deferred gross profit, Dec. 31 (before adjustment) P1,050,000Less: Deferred gross profit, Dec. 31 (after adjustment)
Installment accounts receivable, Dec. 31 P1,500,000Gross profit rate ____ 25% __375,000
Realized gross profit, 2008 P 675,000 OR
Installment Sales (P1,050,000 25%) P4,200,000Less: Installment account receivable, Dec. 31 __1,500,00
Collection P2,700,000Gross profit rate ___X 25%
Realized gross profit, 2008 P 675,000
9-2: a2006 2007 2008
Deferred gross profit, before adjustment P7,230 P 60,750 P 120,150Deferred gross profit, end
2006 (6,000 X 35%) 2,1002007 (61,500 X 33%) 20,2952008 (195,000 X 30%) ___58,500
Realized gross profit, December 31, 2008 P5,130 P 40,455 P 61,650 (Total – P107,235)
9-3: c
Deferred gross profit balance, end P 202,000
Divide by Gross profit rate based on sales (25% 125%) ____ 20% Installment Accounts Receivable, end P1,010,000Collection ___440,000
Installment Sales P1,450,000
9-4: bSales P1,000,000Cost of installment sales __700,000
Deferred gross profit P 300,000 Less: Deferred gross profit, end
Installment accounts receivables, 12/31(1,000,000-400,000) P 600,000
Gross profit rate (300,000 1,000,000) ___X 30% __180,000
Realized gross profit P 120,000Operating expenses ___80,000
Operating income 40,000Interest and financing charges __100,000
Net income P 140,000 Installment Sales 143
9-5: aMarket value of repossessed merchandise P 30,000
(before reconditioning cost)Less: unrecovered cost
Unpaid balance (80,000-30,000) P 50,000Less: Deferred gross profit (50,000X20%) ___10,000 __40,000
Loss on repossession (P 10,000)
9-6: aInstallment sales P1,000,000Less: collection on installment sales __200,000
Installment account receivables, 12/31/08 800,000Gross profit rate (500,000 1,000,000) ___X 50%
Deferred gross profit, 12/31/08 P 400,000
OR
Deferred gross profit (1,000,000-500,000) P500,000Less: Realized Gross Profit (200,000 X 50%) _100,000
Deferred gross profit, 12/31/08 P400,000
9-7: dFair value of repossessed merchandise P120,000Less: unrecovered cost
Unpaid balance P 200,000Less: Deferred gross profit (200,000 X 32.5%) ___65,000 _135,000
Loss on repossession (P 15,000)
9-8: bRealized gross profit:Collections:
Downpayment P 35,000
Installment received (205,000-200,000) ___5,000
Total 40,000Gross Profit Rate (150,000 240,000) _X 62.5%
Realized gross profit P 25,000
Gain (loss) on repossession:Appraised value of repossessed merchandise P165,000Less:unrecovered cost
unpaid balance P 200,000less: deferred gross profit (200,000 X 62.5%) __125,000 __75,000
Gain on repossession P 90,000
144 Chapter 9
9-9: bSch.1
Applying Applying Balanceto to of
Date Collection Interest principal principal
Apr-1 P7,000.00Apr-1 750 750.00 6,250.00May-1 625 125.00 500.00 5,750.00Jun-1 625 115.00 510.00 5,240.00Jul-1 625 104.80 520.20 4,719.80Aug-1 625 __94.40 ___530.60 4,189.00
P439.20 P2,810.80
Gain (loss) on repossession:Market value of repossessed merchandise P 1,875Less:unrecovered cost
unpaid balance of principal (sch. 1) P 4,189less: deferred gross profit (4,189 X 35%) __1,466 ___2,723
Loss on repossession (rounded) (P 848)
Realized gross profit:Collection applying to principal (sch. 1) P2,810.80Gross profit rate __X 35%
Realized gross profit P 983.78
9-10: c Year of Sales
2007 2008Deferred gross profit (Sales X Gross Profit Rate)
2007 (P300,000 X 30%) P 90,0002008 (P450,000 X 40%) P 180,000
2007: Accounts written-off (P25,000 X 30%) ( 7,500)Realized gross profit (P100,000 X 30%) ( 30,000)
2008: Accounts written-off, 2007 (P75,000 X 30%) ( 22,500)Accounts written-off, 2008 (P50,000 X 40%) ( 60,000)Realized gross profit, 2007 (P50,000 X 30%) ( 15,000)Realized gross profit, 2008 (P150,000 X 40%) ________ ( 60,000 )
Deferred gross profit, 12/31/08 (P75,000) P 15,000 P 60,000
9-11: aDeferred gross profit, 2007 (P1,050,000 - 735,000) P 315,000Realized gross profit, 2007 (P150,000 X 30%) ( 45,000 )
Deferred gross profit, 12/31/07 270,000Realized gross profit, 2008 (P390,000-90,000) X 30% ( 90,000)
Deferred gross profit, 12/31/08 P 180,000
Installment Sales 145
9-12: a 2007 2008
Deferred gross profit (Sales - Cost of Installment Sales) P 480,000 P450,000Realized gross profit, 2007 (P630,000 X 40%) ( 252,000)Realized gross profit, 2007 (P450,000 X 40%) ( 180,000)Realized gross profit, 2008 (P900,000 X 30%) _______ ( 270,000 )
Deferred gross profit, 12/31/08 (P228,000) P 48,000 P180,000
9-13: cTrade-in value P 30,000Less: Actual value
Estimated selling price P 25,000Less:reconditioning cost P 1,250
normal gross profit (25,000 X 15%) __3,750 ___5,000 __20,000
Overallowance P 10,000 Realized gross profit:Collection:
Downpayment P 5,000Actual value of merchandise-Trade In 20,000Installment collected (5,000 X 3) _15,000 P 40,000
Gross Profit Rate:Sales P 85,000Overallowance ( 10,000 )
Net Sales P 75,000Cost of Installment Sales _60,000
Gross Profit P 15,000Gross Profit Rate (15,000 75,000) _X 20 %
Realized Gross Profit P 8,000
9-14: c
Collection excluding interest (P900,000-P300,000) P 600,000Gross profit rate (P1,200,000 P3,600,000) X 33 1/3%
Realized Gross Profit, December 31, 2008 200,000Add Interests __300,000
Total Revenue P 500,000
9-15: aWholesale value of repossessed merchandise P 4,000Less: unrecovered cost
Unpaid balance:Sales, 10/1/07 P 24,000Collection, 2007 (6,000 2,000) ( 8,000)Collection, 2008 (1,000 X 7) ( 7,000 ) P 9,000
Deferred gross profit (9,000 X 25%) __2,250 ___6,750
Loss on repossession (P 2,750 ) 146 Chapter 9
9-16: aTrade-in Value (P300 X 6) P 1,800Less: Actual value
Estimated selling price (P315 X 6) P 1,890Less:Reconditioning cost (P25 X 6) P150
Gross Profit (P1,890 X 10%) _189 ___339 ___1,551
Over-allowance P 249
9-17: aDeferred gross profit, before adjustment P 76,000Deferred gross profit, end
2007: P32,500 X (30% 130%) P 7,5002008: P180,000 X (33 1/3% 133 1/3%) _45,000 __52,500
Realized gross profit on installment sales P 23,500
9-18: dUnpaid balance (P27,000 - P16,000) P 11,000Multiply by gross profit rate (P734,400 P2,160,000) ___X 34%
Deferred gross profit to be cancelled on repossession P 3,740
9-19: bCollection:
2007 Downpayment P 600,0002008 Installment collection 600,000
Interest __540,000
Total P1,740,000
Cost to be recovered P4,000,000
Since cost is not yet fully recovered, then no gross profit is to be recognized in 2008.
9-20: dRegular Sales P 187,500Cost of regular sales __112,500
Gross profit on regular sales P 75,000Add: Realized gross profit on installment sales
2007 (25,000 X 50%) P12,5002008 (62,500 X 55%) _34,375 __46,875
Total realized gross profit 121,875Operating expenses ___31,250
Net income, 12/31/08 P 90,625
Installment Sales 147
9-21: aInstallment sales – 2007 P785,000Collections:
Down payment (20% x 785,000) P157,000Installment (40% x 628,000) 251,200 408,200
Installment accounts receivable 2007, 12/31/07 376,800Gross profit rate on sales 35/135Deferred gross profit- 2007, 12/31/07 P 97,689
9-22: aRegular sales P1,575,000Cost of regular sales 1,050,000Gross profit on regular sales 525,000Realized gross profit on installment sales:
Installment sales (1,093,750 x 240%) 2,625,000Installment accounts receivable-12/31/08 1,575,000Collections 1,050,000Gross profit on rate on sales 140/240 612,500
Total realized gross profit 1,137,500Operating expenses (1,137,500 x 70%) 796,250
Net income P 341,250
9-23: aRegular sales P375,000Cost of regular sales 215,000Gross profit on regular sales 160,000Realized gross profit on installment sales:
Collections excluding Interest (312,000 – 24,000)288,000Gross profit rate (270,000/900,000) 30% 86,400
Total realized gross profit 246,400Loss on repossession
Fair value of repossessed merchandise 54,000Less: Unrecovered cost (100,000 x 70%) 70,000 ( 16,000)Total realized GP after loss on repossession 230,400
Less: Operating expenses 72,000 Installment accounts written-off (44,000 x .70) 30,800 102,800
Net operating income 127,600Interest income 24,000Net income P151,600
148_ Chapter 9
SOLUTIONS TO PROBLEMS
Problem 9 – 1
Journal Entries:2006 2007 2008
Installment A/R–2006................ 104,000 – –Installment A/R–2007................ – 116,000 –Installment A/R–2008................ – – 121,000
Installment Sales.................. 104,000 116,000 121,000
Cost of Installment Sales............ 64,480 68,440 73,810Inventory.............................. 64,480 68,440 73,810
Cash............................................ 66,980 125,520 145,460Installment A/R–2006 57,200 29,120 15,000Installment A/R–2007.......... – 71,920 26,680Installment A/R–2008.......... - _ 76,230Interest Revenue.................. 9,780 24,480 27,550
Installment Sales........................ 104,000 116,000 121,000Cost of Installment Sales..... 64,480 68,440 73,810Deferred Gross Profit–2006. 39,520 – –Deferred Gross Profit–2007. – 47,560 –Deferred Gross Profit–2008. – – 47,190
Deferred Gross Profit–2006....... 21,736 11,066 5,700Deferred Gross Profit–2007....... – 29,487 10,939
Deferred Gross Profit–2008....... – – 29,730Realized Gross Profit........... 21,736 40,553 46,369
Computations:2006: P57,200 X .38 = P21,736
2007: P29,120 X .38 = P11,066P71,920 X .41 = 29,987
Total RGP P40,553
2008: P15,000 X .38 = P 5,700P26,680 X .41 = 10,939P76,230 X .39 = 29,730
Total RGP P46,369
Installment Sales 149
Problem 9 – 22007: Inventory.................................................................................................45,200
Cash................................................................................................. 45,200
Notes Receivable 2007 (P32,000 + P62,000 + 3,600)............................97,600Unearned Interest Revenue (P7,167 + P3,600)............................... 10,767Installment Sales.............................................................................. 86,833
Cost of Installment Sales (P45,200 – P2,000 inventory increase)..........43,200Inventory.......................................................................................... 43,200
Cash........................................................................................................35,600Notes Receivable 2007.................................................................... 35,600
Unearned Interest Revenue 2007............................................................3,600Interest Revenue.............................................................................. 3,600
Installment Sales.....................................................................................86,833Cost of Installment Sales................................................................. 43,200Deferred Gross Profit on Installment Sales–2007........................... 43,633
Deferred Gross Profit on Installment Sales–2007..................................16,080*Realized Gross Profit on Installment Sales..................................... 16,080
*Gross profit percentage: 50.25% (P43,633 P86,833).5025 x 32,000 = P16,080
2008: Inventory.................................................................................................52,020Cash................................................................................................. 52,020
Notes Receivable–2008..........................................................................89,5001
Unearned Interest Revenue.............................................................. 11,9552
Installment Sales.............................................................................. 77,545
160,000 + (P50,000 + P5,500) – P26,000* = 89,500*2007 Notes receivable collected in 20082Interest revenue from 2007 notes: P7,167 – P5,579 = P1,588Interest revenue from 2008 notes: P5,500 – P1,588 = P3,912
Discount on notes receivable at end of 2008..........................................P 8,043Interest revenue from 2008 notes (see above)........................................ 3,912
Total discount at time of sale..................................................................P11,955
Cost of Installment Sales (P52,020 – P8,000)........................................44,020Inventory.......................................................................................... 44,020
Cash........................................................................................................55,500Notes Receivable–2007 (P62,000 – P36,000)................................. 26,000Notes Receivable–2008................................................................... 29,500*
* P89,500 – P60,000 = P29,500
Discount on Notes Receivable–2007......................................................1,588Discount on Notes Receivable–2008......................................................3,912
Interest Revenue.............................................................................. 5,500
Installment Sales.....................................................................................77,545Cost of Installment Sales................................................................. 44,020Deferred Gross Profit on Installment Sales–2008........................... 33,525
Deferred Gross Profit on Installment Sales–2007 (P26,000– P1,538 = P24,412; P24,412 x .5025)...................................................12,267Deferred Gross Profit on Installment Sales–2008..................................11,062*
Realized Gross Profit on Installment Sales..................................... 23,329 profit percentage: 43.23% (P33,525 ¸ P77,545)
.4323 x (P29,500 – P3,912) = P11,062150 Chapter 9
Problem 9 – 3
Deferred gross profit, 1/1 P24,0001. 2006: Gross profit rate = ––––––––––––––––––––– = ––––––– = 40%
Install. contracts rec'l, 1/1 P60,000
Deferred gross profit, 1/1 P24,0002007: Gross profit rate = ––––––––––––––––––––– = ––––––– = 42%
Install. contracts rec'l, 1/1 P140,000
Gross profit P86,0002008: Gross profit rate =––––––––––––– = ––––––––––= 43%
Installment sales P200,0002. Journal Entries:
Accounts Receivable...................................................................................... 600,000Sales....................................................................................................... 600,000
Installment Contracts Receivable – 2008...................................................... 200,000Installment Sales..................................................................................... 200,000
Cost of Installment Sales............................................................................... 114,000Shipments on Installment Sales.............................................................. 114,000
Purchases....................................................................................................... 476,000Cash........................................................................................................ 476,000
Selling Expenses............................................................................................ 210,000Cash........................................................................................................ 210,000
Cash.............................................................................................................. 790,000Accounts Receivable.............................................................................. 560,000Installment Contracts Receivable – 2006............................................... 40,000Installment Contracts Receivable – 2007............................................... 80,000Installment Contracts Receivable – 2008............................................... 110,000
Adjusting Entries:
Installment Sales............................................................................................ 200,000Cost of Installment Sales........................................................................ 114,000
Deferred Gross Profit on Installment sales – 2008................................. 86,000
Deferred Gross Profit – 2006 (P40,000 x 40%)............................................. 16,000Deferred Gross Profit – 2007 (P80,000 x 42%)............................................. 33,600Deferred Gross Profit – 2008 (P110,000 x 43%)........................................... 47,300
Realized Gross Profit.............................................................................. 96,900
Doubtful Accounts Expense (1/4 x 1% x P600,000)..................................... 1,500Allowance for Doubtful Accounts.......................................................... 1,500
Closing Entries:Sales............................................................................................................. 600,000Merchandise Inventory, December 31........................................................... 260,000Shipments on Installment Sales..................................................................... 114,000
Merchandise Inventory, January 1.......................................................... 240,000Purchases................................................................................................ 476,000Selling Expenses..................................................................................... 210,000Doubtful Accounts Expense................................................................... 1,500Income Summary.................................................................................... 46,500
Realized Gross profit..................................................................................... 96,900Income Summary.................................................................................... 96,900
Income Summary........................................................................................... 143,400Retained Earnings................................................................................... 143,400
Installment Sales 1513. Good Buy Mart
Income StatementYear Ended December 31, 2008
Sales............................................................................................................. P600,000Cost of sales:
Merchandise inventory, January 1.......................................................... P240,000Purchases................................................................................................ 476,000
Cost of goods available for sale.............................................................. 716,000Less Shipments on installment sales....................................................... 114,000
Cost of goods available for regular sales................................................ 602,000Less Merchandise inventory, December 31............................................ 260,000 342,000
Gross profit on regular sales.......................................................................... 258,000Add Realized gross profit on installment sales (Schedule 1)........................ 96,900
Total realized gross profit.............................................................................. 354,900Operating expenses:
Selling expenses...................................................................................... 210,000Doubtful accounts expense..................................................................... 1,500 211,500
Net income .................................................................................................... P143,400
Schedule 1 Years of Installment Sales
2006 2007 2008 Total
Collections ........................................... P40,000 P80,000 P110,000Multiply by Gross profit rate................ 40% 42% 43%
Realized gross profit............................. P16,000 P33,600 P 47,300 P 96,900
4. Good Buy MartBalance SheetDecember 31, 2008A s s e t s
Cash.............................................................................................................. P144,000Merchandise inventory................................................................................... 260,000Accounts receivable....................................................................................... P 62,000Allowance for doubtful accounts................................................................... 3,500 58,500Installment contracts receivable – 2006......................................................... 20,000Installment contracts receivable – 2007......................................................... 60,000Installment contracts receivable – 2008......................................................... 90,000Other assets.................................................................................................... 200,000
Total Assets............................................................................................ P832,500
Liabilities and Equity
Liabilities:Accounts payable.................................................................................... P 60,000Deferred gross profit on installment sales – 2006.................................. 8,000Deferred gross profit on installment sales – 2007.................................. 25,200Deferred gross profit on installment sales – 2008.................................. 38,700
Total Liabilities....................................................................................... 131,900Equity:
Capital stock........................................................................................... P406,000Retained earnings.................................................................................... 294,600
700,600
Total Liabilities and Equity.................................................................... P832,500152 Chapter 9
Problem 9 – 4
Deferred gross profit, 1/1 = P21,600 + P1,200 = P22,8001. 2007: GP rate = ––––––––––––––––––––– = –––––––––––––––– = ––––––– =
30%Install. contracts rec'l, 1/1 P24,000 + P52,000 P76,000
Gross profit P150,000 – P97,500 P52,5002008: GP rate = –––––––––––––– = –––––––––––––––– = –––––––– =35%
Installment sales P150,000 P150,000
2. Installment Sales............................................................................................ 150,000Cost of Installment Sales........................................................................ 97,500Deferred Gross Profit, 2008.................................................................... 52,500
Deferred Gross profit, 2007........................................................................... 14,400Deferred Gross Profit, 2008........................................................................... 25,900
Realized Gross Profit.............................................................................. 40,300
Computation:2007 2008Sales Sales Total
Installment contracts receivable, 1/1..................... P76,000 P150,000Less Installment contracts receivable, 12/31........ 24,000 76,000
Total credit for the period..................................... 52,000 74,000Less Credit representing repossession.................. 4,000 –
Credit representing collections.............................. P48,000 P 74,000Multiply by Gross profit rate................................ 30% 35%
Realized gross profit............................................. P14,400 P 25,900 P 40,300
Sales............................................................................................................. 212,000Realized Gross Profit..................................................................................... 40,300
Loss on Repossession............................................................................. 400Cost of Sales........................................................................................... 165,000Selling and Administrative Expenses..................................................... 66,000Income Summary.................................................................................... 20,900
Income Summary........................................................................................... 20,900Retained Earnings................................................................................... 20,900
3. Apple CompanyIncome StatementYear Ended December 31, 2008
Sales................................................................................................................................ P212,000Cost of sales....................................................................................................... 165,000
Gross profit on regular sales............................................................................................. 47,000Add Realized gross profit on installment sales (Schedule 1)............................ 40,300
Total realized gross profit................................................................................................. 87,300Less Loss on repossession............................................................................. 400
Total realized gross profit after adjustment for loss on repossession............................... 86,900Selling and administrative expenses................................................................... 66,000
Net income ....................................................................................................................... P 20,900 Installment Sales 153
Problem 9 – 4
Schedule 1
2007 2008Sales Sales Total
Installment contracts receivable, 1/1........................ P76 000 P150,000Less Installment contracts receivable, 12/31............ 24,000 76,000
Total credit for the period......................................... 52,000 74,000Less Credit representing repossession...................... 4,000 –
Credit representing collections................................. P48,000 P 74,000Multiply by Gross profit rate.................................... 30% 35%
Realized gross profit................................................. P14,400 P 25,900 P40,300
Problem 9 – 5
1. Cost of Installment Sales.................................................................... 54,400Shipments on Installment Sales.................................................... 54,400
Installment Sales................................................................................. 80,000Cost of Installment Sales.............................................................. 54,400Deferred Gross Profit, 2008......................................................... 25,600
Gross profit = P25,600 P80,000 = 32%
Deferred Gross Profit, 2007................................................................ 14,000Deferred Gross Profit, 2008................................................................ 8,000
Realized Gross Profit.................................................................... 22,000
Computation:2007 2008Sales Sales Total
Installment contracts receivable, 1/1.............. P82,000 P 80,000Less Installment contracts receivable, 12/31. _ 36,000 _55,000
Total credit for the period.............................. 46,000 25,000Less Credit representing repossession........... __6,000 ___ –
Credit representing collections...................... P40,000 P 25,000Multiply by Gross profit rate......................... __35%* ___32%
Realized gross profit...................................... P14,000 P 8,000 P 22,000
DGP, 1/1 P28,700 (26,600 + 2,100)*2007 Gross profit rate= ––––––– = ––––––– = 35%
ICR, 1/1 P82,000 (36,000 + 40,000 + 6,000)
154 Chapter 9
Sales................................................................................................... 200,000Merchandise Inventory, December 31................................................ 52,000Shipments on Installment Sales.......................................................... 54,400
Merchandise Inventory, January 1............................................... 60,000Purchases...................................................................................... 180,000Repossessed Merchandise............................................................ 3,000Loss on Repossession................................................................... 900Operating Expenses...................................................................... 53,000Income Summary......................................................................... 9,500
Realized Gross Profit.......................................................................... 22,000Income Summary......................................................................... 22,000
Income Summary................................................................................ 31,500Retained Earnings......................................................................... 31,500
2. PPG Discount Center, Inc.Income StatementYear Ended December 31, 2008
Regular Installment Total
Sales............................................................ P200,000 P80,000 P280,000Cost of sales:
Inventory, January 1.............................. P 60,000Purchases............................................... 180,000Repossessed merchandise..................... __3,000
Cost of goods available for sale............ 243,000Less Shipments on installment sales..... _54,400
Cost of goods available for regular sales 188,600Less Inventory, December 31............... _52,000 _136,600 54,400 191,000
Gross profit.................................................. P 63,400 25,600 89,000Less Deferred gross profit on installment
sales, 2008............................................. 17,600 17,600
Realized gross profit, 2008.......................... 8,000 71,400Add Realized gross profit on 2007
installment sales.................................... 14,000 14,000
Total realized gross profit............................ 22,000 85,400Less Loss on repossession........................... ___900 __900
Total realized gross profit after adjustmentfor loss on repossession......................... P21,100 84,500
Operating expenses...................................... _53,000
Net income................................................... P31,500
Installment Sales 155Problem 9 – 6
1. London ProductsSchedule of Cost of Goods SoldYear Ended December 31, 2008
Merchandise inventory, January 1.................................................................................... P 48,000Purchases ....................................................................................................................... 238,000Freight-in ....................................................................................................................... 12,000Repossessed merchandise.................................................................................. 14,000
Cost of goods available for sale........................................................................................ 312,000Less Merchandise inventory, December 31......................................................... 52,000
Cost of goods sold............................................................................................................. P260,000
2. London ProductsSchedule of Allocation of Cost of Goods SoldYear Ended December 31, 2008
On Cash Ratio to AllocatedAmount Price Basis Total Cost
Cash sales ................... P60,000 P 60,000 60/400 P 39,000Charge sales.................. 120,000 120% 100,000 100/400 65,000Installment sales........... 300,000 125% 240,000 240/400 156,000
P 400,000 P260,000
3. London ProductsIncome StatementYear Ended December 31, 2008
Installment Charge CashTotal Sales Sales Sales
Sales................................................. P480,000 P 300,000 P120,000 P 60,000Cost of goods sold.............................. 260,000 156,000 65,000 39,000
Gross profit........................................ P 220,000 P 144,000 P 55,000 P 21,000 Less Unrealized gross profit:
On installment contractsreceivable,12/31 (192,000 x 144/300) 92,160 92,160
Realized gross profit.......................... 127,840 51,840Add Realized gross profit on
prior years' sales (Schedule 1):2006..................................... 19,2002007..................................... 14,700 33,900 33,900
Total realized gross profit.................. 161,740 85,740Less Loss on repossession
(Schedule 2)................................ 10,200 10,200 Total realized gross profit after
adjustment for loss onrepossession................................ 151,540 P 75,540
Less Operating expenses.................... 93,000
Net income ........................................ P 58,540
156 Chapter 9
Schedule 1
2006 2007Installment contracts receivable, January 1:
2006 – P32,000 40%.................................................................. P80,0002007 – P56,000 35%.................................................................. P160,000
Less Installment contracts receivable, December 31.......................... _22,000 __90,000
Total credits........................................................................................ 58,000 70,000Less Credit representing repossession................................................ _10,000 28,000
Total collections.................................................................................. P48,000 P 42,000Multiply by Gross profit rate.............................................................. ___40% ___35%
Realized gross profit........................................................................... P19,200 P 14,700
Schedule 2
2006 2007 Total
Fair market value of repossessed merchandise.... P 2,000 P12,000 P 14,000
Less Unrecovered cost:Unpaid balance............................................... 10,000 28,000 38,000Less Unrealized profit –
2006 – P10,000 x40%............................. 4,0002007 – P28,000 x35%............................. 9,800 13,800
Balances ............................................................. __6,000 18,200 __24,200
Gain (loss) on repossession.................................. P(4,000 ) P( 6,200 ) P( 10,200 )
Problem 9 – 7
1. 2007 20082007
2007 installment sales (P400,000 x 42%*)..................................P 168,0002008:
2007 installment sales (P173,000 x 42%).................................... P 72,6602008 installment sales (P560,000 x 38.5%*)............................... ________ __215,600
Deferred gross profit...........................................................................P 168,000 P 288,260
*Computation of Gross profit percentages (see next page)2007 2008
Installment sales..................................................................................P2,210,000 P3,100,000Less Trade-in allowances (P226,000 – P158,000).............................. _______– ____68,000
Adjusted installment sales................................................................... 2,210,000 _3,032,000
Cost of sales:Inventories, January 1 (new)........................................................ – 420,000Purchases (new)............................................................................ 1,701,800 1,767,000Repossessed merchandise............................................................. – _83,000*
Cost of goods available for sale................................................... 1,701,800 2,270,000
Installment Sales 157
Less: Inventories, December 31 –New merchandise................................................................... 420,000 358,820Repossessed merchandise...................................................... _______– ____46,500
Total....................................................................................... 420,000 405,320
Cost of sales.................................................................................. 1,281,800 _1,864,680
Gross profit......................................................................................... P 928,200 P1,167,320
Gross profit percentages..................................................................... 42% 38.5%*2007 : P195,000 x 20% =P39,000 2008 : P110,000 x 40% =_44,000
P83,000
Uncollectible installment contracts expense, per books. P 99,000Correct Uncollectible installment contracts expense:
Fair market value of repossessed merchandise –2007 sales (P195,000 x 20%)............................ P 39,0002008 sales (P110,000 x 40%)............................ __44,000 P 83,000
Unrecovered cost –2007 sales [P105,000 x (100% – 42%)]............ 60,9002008 sales [P82,000 x (100% – 38.5%)]........... __50,430 __111,330 __28,330
Adjustment to Uncollectible installment contracts expense P 70,670
Fortune Sales CorporationIncome StatementYear Ended December 31, 2008
Cash Installment TotalSales Sales Sales
Sales ...................................................................... P205,000 P3,032,000 P3,237,000Cost of sales................................................................... _158,000 _1,864,680 _2,022,680
Gross profit..................................................................... P 47,000 1,167,320 1,214,320Less Unrealized gross profit on 2005 installment
sales (Schedule 1).................................................... __247,170 __247,170
Realized gross profit on 2008 sales................................ 920,150 967,150Add Realized gross profit on 2007 installment
sales (Schedule 2).................................................... ___51,240 ___51,240
Total realized gross profit.............................................. 971,390 1,018,390Less Uncollectible installment contracts expense.......... ___28,330 ___28,330
Total realized gross profit after adjustment.................... P 943,060 990,060Operating expenses........................................................ __592,960
Net income..................................................................... P 397,100
158 Chapter 9
Schedule 1
Installment contracts receivable 2008, December 31..................... P 560,000Installment contracts receivable 2008 defaulted............................ ___82,000
Total............................................................................................... P 642,000Multiply by 2008 gross profit percentage...................................... ___38.5%
Unrealized gross profit on 2008 installment sales.......................... P 247,170
Schedule 2
Installment contracts receivable 2007, January 1............................... P 400,000Less Installment contracts receivable 2007, December 31................. __173,000
Total credits for the period.................................................................. 227,000Less Installment contracts receivable 2007 defaulted........................ __105,000
Total collections.................................................................................. P 122,000Multiply by 2007 gross profit percentage........................................... _____42%
Realized gross profit on 2007 installment sales.................................. P 51,240
1. Apportionment of cost (P600,000) to Lots 1, 2 and 3:
Lot 1 :2/3 x P360,000.................................... P 240,000Lot 2 :2/3 x P240,000.................................... 160,000Lot 3 :1/3....................................................... P120,000
1/3 x P240,000......................................... __80,000 __200,000
Total cost........................................................ P 600,000
Journal Entries for 2007March 31
Cash................................................................................................ 36,000.00Notes Receivable (Lot 2)................................................................ 364,000.00
Lot 2 ....................................................................................... 160,000.00Deferred gain on Sale of Land................................................. 240,000.00
June 30Cash................................................................................................ 120,000.00Notes Receivable (Lot 3)................................................................ 720,000.00
Lot 3......................................................................................... 200,000.00Deferred Gain on Sale of Land................................................ 640,000.00
Cash................................................................................................ 16,000.00Interest Income (P364,000 x 12% x 3/12)................................ 10,920.00Notes Receivable (Lot 2)......................................................... 5,080.00
September 30Cash................................................................................................ 16,000.00
Interest Income (P358,920 x 12% x 3/12)................................ 10,767.60Notes Receivable (Lot 2)......................................................... 5,232.40
Installment Sales 159
October 31Cash................................................................................................ 72,000.00Notes Receivable (Lot 1)................................................................ 288,000.00
Lot 1......................................................................................... 240,000.00Deferred Gain on Sale of Land................................................ 120,000.00
December 31Cash................................................................................................ 78,000.00
Notes Receivable (Lot 1)......................................................... 6,240.00Notes Receivable (Lot 2)......................................................... 5,389.37Notes Receivable (Lot 3)......................................................... 6,800.00Interest Income......................................................................... 59,570.63
Computation:Total Lot 1 Lot 2 Lot 3
Collections....................................... P78,000.00 P12,000.00 P16,000.00 P50,000.00Apply to interest:
Lot 1 – P288,000.00 x 12% x 2/12 5,760.00Lot 2 – P353,687.60 x 12% x 3/12 59,570.63 10,610.63Lot 3 – P720,000.00 x 12% x 6/12 _________ _________ _________ _43,200.00
Apply to principal............................ P18,429.37 P 6,240.00 P 5,389.37 P 6,800.00
2. Deferred Gain on Sale of Land (Lot 1)............................................... 26,080.00Deferred Gain on Sale of Land (Lot 2)............................................... 31,021.06Deferred Gain on Sale of Land (Lot 3)............................................... 96,368.00
Realized Gain on Sale of Land..................................................... 153,469.06
Computation:Lot 1 Lot 2 Lot 3
Collections applied to principal....... P78,240.00 P51,701.77P126,800.00
Multiply by Gross profit rates:Lot 1 – P120,000 P360,000...... 33.33%Lot 2 – P240,000 P400,000...... 60%Lot 3 – P640,000 P840,000...... _________ _________ _____76%
Realized gain................................... P26,080.00 P31,021.06 P96,368.00
3. Lot 3 (80% x P200,000)......................................................................160,000.00Deferred Gain on Sale of Land (Lot 3) (P640,000 – P96,368)..........543,632.00Loss on Repossession......................................................................... 9,568.00
Notes Receivable (Lot 3) (P720,000 – P6,800)........................... 713,200.00
160 Chapter 9
Problem 9 – 9
Galaxy Investment CompanyIncome StatementYear Ended December 31, 2008
Sales Schedule 1) .................................................................................................... P 8,060,000Cost of sales (Schedule 2)........................................................................................ 1,612,000
Gross profit............................................................................................................ 6,448,000Less Sales commissions.......................................................................................... 221,000
Gross profit............................................................................................................ 6,227,000Less Deferred gross profit
Installment Notes Balance P5,370,000––––––––––––––––––––– =–––––––––– =67% x P6,227,000 4,172,090Installment Sales P8,060,000
Realized gross profit................................................................................................ 2,054,910Expenses:
Advertising and promotion............................................................................ P 730,000Sales manager's salary................................................................................... 120,000General office expenses (1/4 x P236,000)..................................................... 59,000 909,000
Net profit ............................................................................................................... P 1,145,910
Schedule 1Total Cash Installment
Sales Price Received Notes Balance
A lots : 26 @ P150,000................................................ P3,900,000 P1,650,000 P 2,250,000B lots : 32 @ P100,000................................................ 3,200,000 800,000 2,400,000C lots : 12 @ P80,000.................................................. 960,000 240,000 720,000
......................................................... P8,060,000 P2,690,000 P 5,370,000
Schedule 2Number of Unit Total
Class Lots Price Sales Value
A........................................................................ 80 P150,000 P12,000,000B........................................................................ 100 100,000 10,000,000C........................................................................ 120 80,000 9,600,000
Total............................................................ 300 P31,600,000
Cost of tract:Cost of land.................................................................................................... P 4,800,000Legal fees, etc................................................................................................ 600,000Grading contract............................................................................................. 225,000Water and sewerage system contract............................................................. 184,900Paving contract............................................................................................... 266,300General office expenses (3/4 x P236,000)..................................................... 177,000
Total............................................................................................................. P 6,253,200
P6,253,200Cost rate : –––––––––––– = 20% (rounded off)
P31,600,000Cost of sales (P8,060,000 x 20%)........................................................................... P 1,612,000 Installment Sales 161
Problem 9 – 10
Rizal CompanyIncome StatementYear Ended December 31, 2008
Installment sales [(P14,300 x 7) + (P725 x 4)]........................................... P103,000Cost of goods sold on installment (schedule 1)........................................... __79,310
Gross profit. ................................................................................................ 23,690Less Deferred gross profit on 19x8 sales
(P103,000 – P21,000 = P82,000 x 23%*).......................................... __18,860
Realized gross profit on 2008 sales............................................................. 4,830Add Realized gross profit on prior years' sales –
2006 : P60,000 x 33-1/3*.................................................................... P20,0002007 : P115,000 x 35%*..................................................................... _40,250 __60,250
Total realized gross profit............................................................................ 65,080Less Loss on repossession (Schedule 4)...................................................... __33,100
Total realized gross profit after adjustment................................................. 31,980General and administrative expenses........................................................... __50,000
Net income (loss)......................................................................................... P(18,020)
*See Schedule 3
Schedule 1
Purchases (P10,500 x 8).............................................................................. P 84,000Repossessed merchandise............................................................................ ___2,520
Cost of goods available for sale................................................................... 86,520Less Inventory, December 31 –
Number of units on hand..................................................................... 1Multiply by average unit cost (Schedule 2)........................................ P 7,210 ___7,210
Cost of goods sold on installment................................................................ P 79,310
Schedule 2
Purchases during 2008 (P10,500 x 8).......................................................... P 84,000Add Repossessed merchandise.................................................................... ___2,520
Total........................................................................................................... P 86,520divide by Number of units (8 + 4)............................................................... _____12
Average unit cost......................................................................................... P 7,210
162 Chapter 9
Schedule 3
........................................................ 2006 2007 2008Sales –
2006 : P15,000 x 10....................................... P150,0002007 : P14,000 x 20....................................... P280,0002008 : P14,300 x 7......................................... 100,100
P725 x 4.............................................. _______ _______ __2,900
Sales ........................................................ 150,000 280,000 103,000
Cost of goods sold:Inventory, January 1......................................... – 20,000 –Purchases ........................................................ 120,000 162,000 84,000Repossessed merchandise................................ _____– _____– _2,520
Cost of goods available for sale....................... 120,000 182,000 86,520Less Inventory, December 31.......................... _20,000 _____– _7,210
Cost of goods sold............................................ 100,000 182,000 79,310
Gross profit. ............................................................. P 50,000 P 98,000 P23,690
Gross profit rates....................................................... 33-1/3% 35% 23%
Schedule 4
Fair market value of repossessed merchandise............................................ P 2,520
Less Unrecovered cost –Unpaid balance:
Original sales amount (P14,000 x 4)............................................ P 56,000Collections prior to repossession.................................................. __1,200
Total. ............................................................................................ 54,800Less Unrealized profit (P54,800 x 35%)............................................. _19,180 _35,620
Loss on repossession.................................................................................... P33,100
Long-Term Construction Contracts 163
CHAPTER 10
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
10-1: aPercentage of Completion Method:
Contract Price P1,000,000Less:Total estimated cost
Cost incurred P 200,000Estimated remaining cost _400,000 __600,000
Gross profit estimated 400,000% of completion (200,000/600,000) __33 1/3%
Gross profit to be recognized P 133,333
Zero Profit Method: 0
10-2: a P100,0002007 2008
Contract Price P9,000,000 P9,000,000Less: Total estimated cost _7,800,000 _8,100,000
Estimated gross profit 1,200,000 900,000% of completion:
2007 (3,900,000/7,800,000) 50%2008(6,300,000/8,100,000) _________ ______78%
Gross profit earned to date 600,000 700,000Less: Gross profit earned in prior year ________– ___600,000
Gross profit earned each year P 600,000 P 100,000
10-3: aContract Price P6,000,000Less: Total estimated cost (3,600,000 + 1,200,000) _4,800,000
Estimated gross profit 1,200,000% of completion (3,600,000/4,800,000) _____75%
Gross profit earned to date 900,000Less: Gross profit earned in 2007 __600,000
Gross profit earned in 2008 P 300,000
10-4: bContract Price P3,000,000Less: Total estimated cost (930,000 + 2,170,000) _3,100,000
Loss (P 100,000 )
164 Chapter 10
10-5: bTotal cost to date, 2008 (4,800,000 X 60%) P2,880,000Less: Cost incurred in 2007 (4,500,000 X 20%) __900,000
Cost incurred in 2008 P1,980,000
10-6: aPercentage of Completion Method:
Contract Price P3,000,000Less: Total estimated cost (900,000/1,800,000) _2,700,000
Estimated gross profit 300,000% of completion (900,000/2,700,000) ___33.33%
Gross profit recognized, 2007 100,000Add: Cost Incurred ___900,000
Construction in Progress - 2007 P 1,000,000
Zero Profit Method:Cost incurred to Construction in Progress - 2007 P 900,000
10-7: a2007 2008
Contract Price P4,200,000 P4,200,000Less: Total estimated cost _3,000,000 _3,750,000
Estimated gross profit 1,200,000 450,000% of completion _____20% ____100%
Gross Profit earned to date 240,000 450,000Gross Profit earned in prior year _______– __240,000
Gross Profit earned this year P 240,000 P 210,000
10-8: bCollections:
Contract Billings P 47,000Less: Accounts receivable ___15,000
Collections P 32,000
Initial Gross Profit:Contract Price P 800,000Gross Profit rate:
Income recognized 10,000
Divide by Construction in Progress 50,000 =_____20%
Initial Gross Profit P 160,000
Long-Term Construction Contracts 165
10-9: a
Gross profit (loss) earned in 2008 (P 20,000)Gross profit earned in prior years _180,000
Gross profit earned to date - 2008 160,000Divide by percentage of completion - 2008 ___100%
Estimated gross profit - 2008 160,000Less: Contract price 2,000,000
Total estimated cost 1,840,000Less: Cost incurred - 2008 _820,000
Cost incurred to date - 2007 1,020,000Less: Cost incurred - 2006 __360,000
Cost incurred in 2007 P 660,000
10-10: b
Gross profit earned to date - 2007 (P40,000 + P140,000) P 180,000Divide by estimated gross profit - 2007:
Contract price P2,000,000Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15% __300,000
Percentage of completion - 2007 60%
10-11: a, Refer to Q 10-10 solutions.
10-12: d
Contract price P2,000,000Estimated gross profit - 2007 (Refer to Q 10-10) __300,000
Total estimated cost 1,700,000Less: Cost incurred to date - 2007 (refer to Q 10-9) 1,020,000
Estimated cost to complete - 2007 P 680,000
10-13: d
2007: Construction in progress P 244,000Less: Construction costs __210,000
Gross profit recognized - 2007 P 34,000
2008: Construction in progress (P728,000-P244,000) P 484,000Less: Construction costs __384,000
Gross profit recognized - 2008 P 100,000
166 Chapter 10
10-14: dProject 1
Project 2Percentage of Completion Method:Contract price P 420,000 P 300,000 Less: Total estimated cost
Cost incurred to date - 2008 P 240,000P 280,000
Estimated cost to complete __120,000___70,000
Total __360,000__350,000
Estimated gross profit (Loss) 60,000(50,000)Percentage of completion __66.67%_______–
Profit (loss) to be recognized P 40,000 (P 50,000)
Total is (P10,000)
Zero Profit Method - The loss (P50,000) for project 2 only.
10-15: a2006 2007 2008
Contract price (cost X 120%) P3,744,000 P3,744,000P3,744,000Less: Total estimated costs
(1) Cost incurred to date 546,000 1,544,4003,120,000
Estimated cost to complete _2,054,000 _1,315,000________–
(2) Total _2,600,000 _2,860,000_3,120,000
Estimated gross profit 1,144,000 884,000624,000Percentage of completion (1 2) _____20% _____54%____100%
Gross profit earned to date 240,240 477,360624,000Gross profit earned in prior years _______– __240,240__477,360
Gross profit earned this year P 240,240 P 237,120 P 146,640
10-16: d2007 2008
Contract price P6,300,000P6,300,000Less: Total estimated cost
Cost incurred to date 1,425,0003,040,000
Estimated cost to complete _4,075,000_1,960,000
Total P5,500,000P5,000,000
Estimated gross profit 800,0001,300,000Percentage of completion:
2007 (1,425,000 - 50,000) 5,500,000 25%2008 (3,040,000 - 50,000) 5,000,000 ________–
__59.80%
Profit earned to date 200,000777,400Less: Gross profit earned in prior year ________–__200,000
Gross profit earned this year P 200,000 P 577,400
Long-Term Construction Contracts 167
10-17: a
Cash collections:Progress billings P1,500,000Less: Accounts receivable, end __500,000
Collection P1,000,000
Cost incurred to date:Construction in Progress P1,600,000Less: Gross profit earned __200,000
Cost incurred to date P1,400,000
10-18: d
Percentage of Completion Method:Apartment A Apartment B
2007 2008 2007 2008
Contract price 1,620,000 1,620,000 2,520,0002,520,000
Less: Total Estimated Costs(1) Cost incurred to date P 600,000 P1,200,000 P1,560,000P2,310,000
Estimated cost to complete 840,000 240,000 690,000 –
(2) Total estimated cost 1,440,000 1,440,000 2,250,0002,310,000
Estimated Gross Profit 180,000 180,000 270,000210,000
Percentage of completion (1 2) _41.67% _83.33% _69.33%_100.00%
Gross profit earned to date 75,000 150,000 187,200210,000
Less: Gross profit earned in Prior years _______– ___75,000 _______–__187,200
Gross Profit earned this year P 75,000 P 75,000 P 187,000 P 22,800
Total Gross Profit 20 (P75,000 + P22,800) P97,800
Zero Profit Method - P210,000 gross profit earned in 2008 for Apartment B.
10-19: d2007 2008
Contract price:2007 P6,000,000
2008 (P6,000,000-P50,000) _________P5,950,000Less: Total estimated costs
(1) Cost incurred to date 2,340,0002,650,000
Estimated cost to complete 260,000 –
(2) Total estimated cost 2,600,0002,650,000
Estimated Gross Profit 3,400,0003,300,000Percentage of completion (1 2) ____90%___100%
Gross profit earned to date 3,060,0003,300,000Less: Gross profit earned in Prior year _______–3,060,000
Gross Profit earned this year P3,060,000 P 240,000168 Chapter 10
10-20: a2006 2007 2008
(1)Cost incurred to date P3,400,000 P5,950,000P6,150,000(2)Estimated cost to complete 1,600,000 150,000 –
(3)Total Estimated Costs 5,000,000 6,100,000 6,150,000
Percentage of completion (1 3) 68% 98% 100%
Contract price P6,000,000 P6,000,000P6,000,000
Less: Total estimated cost 5,000,000 6,100,000 6,150,000
Estimated Gross Profit 1,000,000 (100,000)(150,000)
Percentage of completion 68% 100% 100%
Gross profit earned (loss) to date 680,000 (100,000)(150,000)
Add: Cost incurred to date 3,400,000 5,950,000 6,150,000
Construction in Progress 4,080,000 5,850,0006,000,000
Less: Contract billings 3,200,000 5,200,000 6,000,000
Balance P 880,000 P 650,000 –
10-21: cConstruction in Progress:
Cost incurred to date, 2007 P2,625,000
Gross profit earned, 2007 (Schedule 1) 100,000 P2,725,000Less: Contract billings, 2006 (P3,250,000 x 75%)2,437,500
Excess of Construction in Progress over Contract Billings (CA)P 287,500
Schedule 1 – Computation of gross profit earned, 20062006 2007
Contract price P3,250,000P3,250,000Total estimated cost:
Cost to date 1,075,0002,625,000
Estimated cost to complete 1,612,500 750,000
Total 2,687,500 3,375,000
Estimated gross profit (loss) 562,500(125,000)% of completion 40% –
Gross profit (loss) to date 225,000(125,000)Gross profit earned in prior years –
225,000
Gross profit earned this year P 225,000 P 100,000
10-22: a2005 2006 2007
Contract price P2,800,000 P2,800,000 P2,800,000
Estimated cost:Cost to date 1,300,000 1,960,000
2,440,000Estimated costs to complete 1,360,000 780,000
380,000
Total 2,660,000 2,740,000 2,820,000
Estimated gross profit 140,000 60,000 (20,000)
% of completion 48 .87% 71.53% – Long-Term Construction Contracts 169
10-23: b2007 Project A Project B Project
C Contract price P2,900,000 P3,400,000P 1,700,000 Estimated costs:
Cost to date 1,680,000 1,440,000 320,000
Estimated cost to complete 1,120,000 1,760,000 960,000
Total 2,800,000 3,200,000 1,280,000
Estimated gross profit 100,000 200,000 420,000% of completion 60% 45% 25%
Gross profit earned this year (P255,000) P 60,000 P 90,000 P 105,000
2008 Project A Project B Project C Project D
Contract price P2,900,000 P3,400,000 P1,700,000P 2,000,000 Estimated costs
Cost to date2,640,000 2,120,000 1,183,000 560,000Estimated costs to complete –0 – 1,360,000 117,000
1,040,000
Total 2,640,000 3,480,000 1,300,000 1,600,000
Estimated gross profit (loss) 260,000 (80,000) 400,000 400,000% of completion 100 % – 91% 35%
Gross profit (loss) to date 260,000 (80,000) 364,000 140,000Gross profit earned in prior year 60,000 90,000 105,000 –0 –
Gross profit earned this year(P609,000) P 200,000 P 10,000 P 259,000 P 140,000
2007 2008 Gross profit earned P 255,000P 609,000General and administrative expenses 120,000 120,000
Net income P 135,000 P 489,000
10-24: cContract priceP10,000,000Gross profit earned to date, 2008 (P900,000 – P100,000) 800,000
Total cost to date, 2008 9,200,000Less: cost incurred in 2008
4,100,000
Cost to date, 2007P 5,100,000
Gross profit earned to date P 900,000
Divided by % of completion:(P5,100,000 + P900,000) / P10,000,000 60%
Estimated gross profit, 2007P 1,500,000
10-25: dConstruction in progress:
Cost incurred to dateP 440,000
Gross profit earned to date (P2,500,000 – P2,000,000) 110,000
Total 550,000Less: Contract billings (P2,500,000 x 30%) 750,000
Excess of contract billings over construction in progress (CL)P( 200,000)
170 Chapter 10
10-26: aContract price P120,000,000Total estimated cost:
Cost incurred to date:Site labor cost 10,000,000Cost of construction materials 30,000,000Depreciation of special plant & equip 5,000,000Total 45,000,000
Estimated cost to complete 55,000,000 100,000,000Estimated gross profit 20,000,000Percentage of completion (45/100) 45% Gross profit to be recognized P 9,000,000
10-27: aCost incurred to date- 2007
Total estimated cost (8,000,000 / 40%) 20,000,000Estimated cost to complete 8,000,000 P12,000,000
Cost incurred in 2007 3,700,000
3,700,000Cost incurred in 2006 8,300,000Estimated cost at completion- 2006 12,450,000Total estimated cost- 2006 P20,750,000
Percentage of completion- 2006 (8,300,000/ 20,750,000) = 40%
10-28: a 2007
Contract 1 Contract 2 CIP-2007Contract price P600,000 P450,000Total estimated cost:
Cost incurred to date 150,000 87,500 P237,500Estimated cost to complete 150,000 162,500Total estimated cost 300,000 250,000
Estimated gross profit 300,000 200,000
Percentage of completion 50% 35%Gross profit recognized P150,000 P70,000 P220,000
2008Contract 1 Contract 2 Contract 3
Contract price 600,000 450,000 900,000Total estimated cost 350,000 300,000 500,000Estimated gross profit 250,000 150,000 400,000Percentage of completion 80% 60% 36%Gross profit earned to date 200,000 90,000 144,000Gross profit earned in 2007 150,000 70,000 -Gross profit earned this year 50,000 20,000 144,000
Long-Term Construction Contracts 171
10-29: a Bicol Davao Aklan Total
Contract price P875,000 P1,225,000 P437,500Total estimated cost
Cost incurred 656,250 175,000 175,000 1,006,250Est. cost to complete - 700,000 175,000Total estimated cost 656,250 875,000 350,000
Estimated gross profit 218,750 350,000 87,500Percentage of completion 100% 20% 50%Gross profit earned P218,750 P 70,000 P43,750 332,500
Percentage of completion Zero ProfitTotal cost incurred 1,006,250 1,006,250Total gross profit earned 332,500 218,750Construction in progress 1,338,750 1,225,000Less: Billings 1,312,500 1,312,500Due from (to) 26,250 (87,500)
10-30: aContract price P40,825,000Total estimated cost:
Cost incurred 8,475,000Estimated cost to complete 28,400,000 36,875,000
Estimated gross profit 3,950,000Percentage of completion 22.983%Gross profit recognized P 907,830
172 Chapter 10
SOLUTIONS TO PROBLEMS
Problem 10 – 1(a) 2007 2008
Contract Price P 450,000 P 450,000 Less: Total estimated cost
(1) Cost incurred to date 200,000 320,000Estimated costs to complete __100,000
_______–
(2) Total __300,000_320,000
Estimated gross profit 150,000 130,000Percentage of completion (1 2) ______2/3___100%
Estimated gross profit to date 100,000 130,000Less: Gross profit earned in prior year _______–__100,000
Gross profit earned this year P 100,000 P 30,000
(b) Contract PriceP 450,000Less: Total cost incurred__320,000
Gross profitP 130,000
(c) 2007: Construction in Progress 100,000Cost of construction 200,000
Construction Revenue 300,000
2008: Construction in Progress 30,000Cost of Construction 320,000
Construction Revenue 350,000Problem 10 – 2
(a) Construction RevenueP1,250,000Less: Cost incurred_1,250,000
Gross profit – 2008 P – 0 –
Construction in Progress (cost incurred)P1,250,000Less: Contract billings (P5,800,000 x 30%)_1,740,000
Billings in excess of related costsP(490,000)
(b) Contract priceP5,800,000Less: Total estimated costs
Cost incurred to date P1,250,000Estimated costs to complete 3,740,000
5,000,000
Estimated gross profit 800,000Percentage of Completion (P1,250,000 500,000)_____25%
Gross profitP 200,000
Construction on Progress (P1,250,000 + P200,000)P1,450,000Less: Contract billings_1,740,000
Billings in excess of related costsP(290,000)
Long-Term Construction Contracts 173
Problem 10 – 3(a) 2005 2006 2007 2008
Contract Price P55,000,000 P55,000,000 P55,000,000P55,000,000Less: Total estimated costs
(1) Cost incurred to date 15,000,000 25,000,000 35,000,00050,000,000
Estimated costs to complete _35,000,000 25,000,000 15,000,000________–
(2) Total _50,000,000 50,000,000 50,000,000
50,000,000
Estimated gross profit 5,000,000 5,000,000 5,000,0005,120,000Percentage of completion (1 2) ______30% _____50% _____70%____100%
Gross profit earned to date 1,500,000 2,500,000 3,500,0005,000,000Gross profit earned in prior yr(s) ________– _1,500,000 _2,500,000_3,500,000
Gross profit earned the year P 1,500,000 P 1,000,000 P 1,000,000 P 1,500,000
(b) 2007 2008
(1) Construction in Progress 15,000,000 15,000,000Cash or Payable 15,000,000
15,000,000
(2) Accounts Receivable 15,000,000 20,000,000Contract Billings 15,000,000
20,000,000
(3) Cash 12,000,000 25,000,000Accounts Receivable 12,000,000
25,000,000
(4) Construction in Progress 1,000,000 1,500,000Cost of Construction 15,000,000 15,000,000
Construction Revenue 16,000,00016,500,000
Problem 10 – 4
(a) 2006 2007 2008
Cost incurred to date P 1,000,000 P 5,500,000 P10,000,000
Divide by total estimated cost P 9,000,000 P11,000,000_12,000,000
Percentage of Completion 11.11% 50% 83.33%
2006 2007 2008
(b) Contract Price P15,000,000 P15,000,000P15,000,000Less: Total Estimated Cost
Cost incurred to date 1,000,000 5,500,00010,000,000
Estimated costs to complete __8,000,000 __5,500,000__2,000,000
Total __9,000,000 _11,000,000_12,000,000
Estimated gross profit 6,000,000 4,000,0003,000,000Percentage of completion ___11.11% ______50%___83.33%
Gross profit earned to date 666,600 2000,0009,500,000Less: Gross profit earned in prior yrs. ________– ___666,600_2,000,000
Gross profit earned this year P 666,600 P 1,333,400 P 500,000
174 Chapter 10
(c) (1) Construction in progress (cost incurred) 1,000,000Cash
1,000,000
(2) Accounts Receivable 1,325,000Contract Billings
1,325,000
(3) Cash 1,200,000Accounts Receivable
1,200,000
(4) Construction in progress (gross profit) 666,600Cost of construction 1,000,000
Construction Revenue1,666,600
Problem 10 – 5
(1) 2005 2006 2007 2008
Contract Price P14,000,000 P14,000,000 P14,000,000P14,000,000Less: Total Estimated Cost
Cost incurred to date 6,500,000 9,800,000 12,200,00013,900,000
Estimated cost to complete __6,800,000 _3,900,000 _1,900,000________–
Total _13,300,000 13,700,000 14,100,00013,900,000
Estimated gross profit 700,000 300,000 ( 100,000) 100,000Percentage of completion ___48.87% ___71.53% _____100%____100%
Gross profit (loss) to date 342,090 214,590 ( 100,000) 100,000Less: Gross profit (loss) in prior yrs. ________– ___342,090 ___214,590( 100,000)
Gross profit (loss) this year P 342,090 P( 127,500) P( 314,590) P 200,000
(2) 2005 2006 2007 2008Cost of construction 6,500,000 3,300,000 2,400,000 1,700,000Construction in progress 342,090 127,500 314,590 200,000
Construction Revenue 6,842,090 3,172,500 2,085,4101,900,000
Problem 10 – 6
(1) 2005 2006 2007
Contract Price P 6,000,000 P 6,000,000 P 6,000,000 Less: Total estimated costs
Cost incurred to date 3,400,000 5,950,000 6,150,000
Estimated costs to complete _2,100,000 ___150,000 ________–
Total _5,500,000 _6,100,000 _6,150,000
Estimated gross profit 500,000 ( 100,000) ( 150,000)Percentage of completion ___61.82% _______– ________–
Gross profit (loss) to date 309,100 ( 100,000) ( 150,000)Gross profit (loss) in prior yrs. ________– __309,100 ( 100,000 )
Gross profit (loss) this year P 309,100 P 409,100 P 50,000 Long-Term Construction Contracts 175
(2) 2005 2006 2007
Cost of construction 3,400,000 2,550,000 200,000Construction in progress 309,100 409,10050,000
Construction Revenue 3,709,100 2,140,900150,000
(3) Cash 400,000Accounts Receivable 400,000
Contract Billings 6,000,000Construction in progress 6,000,000
Problem 10 – 7
(1) 2006 2007 2008
Contract Price P16,000,000 P16,000,000 P16,000,000Less:Total Estimated Cost
Cost incurred to date 4,600,000 9,100,000 14,350,000Estimated costs to complete __9,640,000 __5,100,000 _________–
Total _14,240,000 _14,200,000 _14,350,000
Estimated gross profit 1,760,000 1,800,000 1,650,000Engineer's estimate of comp. ______31% ______58% _____100%
Gross profit to date 545,600 1,044,000 1,650,000Less: Gross profit earned in prior yrs. ________– __545,600 _1,044,000
Gross profit earned this yr. P 545,600 P 498,410 P 606,000
(2) 2006 2007 2008(a) Construction on progress 4,600,000 4,500,000 5,250,000
Cash 4,600,000 4,500,0005,250,000
(b) Accounts receivable 5,000,000 6,000,000 5,000,000Contract billings 5,000,000 6,000,000
5,000,000
(c) Cash 4,500,000 5,400,000 6,100,000Accounts receivable 4,500,000 5,400,000
6,100,000
(d) Cost of constructions 4,600,000 4,500,000 5,250,000Construction in progress 545,600 498,400 606,000
Construction revenue 5,145,600 4,998,4005,856,000(e) Contract billings 16,000,000
Construction on progress16,000,000
(3) Zero Profit Method: 2008 Entres(a) Construction in progress 5,250,000
Cash / accounts payable 5,250,000
(b) Accounts receivable 5,000,000Contract billings 5,000,000
176 Chapter 10
(c) Cash 6,100,000Accounts receivable 6,100,000
(d) Cost of construction 5,250,000Construction in progress 1,650,000
Construction revenue 6,900,000
(e) Contract billings 16,000,000Construction in progress 16,000,000
(4) The following entry would be the only one different from (2).
2006 2007 2008* Cost of construction 4,414,400 3,821,600 6,114,000
Construction in progress 545,600 498,400 606,000Construction revenue 4,960,000 4,320,000
6,720,000
* Total estimated costs x estimated percentage of completion.
Problem 10 – 8
(1) 2006 2007 2008
Contract Price P6,500,000 P6,500,000P6,500,000Less:Total Estimated Costs
Cost incurred to date 2,150,000 5,250,0006,850,000
Estimated costs to complete _3,850,000 _1,500,000________–
Total _6,000,000 _6,750,000_6,850,000
Estimated gross profit (loss) 500,000 (250,000)(350,000)Less: Gross profit (loss) in prior yrs. ________– ___520,000_(250,000)
Gross profit (loss) this years P 520,000 P( 250,000) P( 600,000)
(2) In 2008 when the project is completed.
Franchise Accounting 177
CHAPTER 11
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
11-1: bNo revenue is to be reported. Because the franchisor fails to render substantial services to the franchisee as of December 31, 2008.
11-2: cInitial franchise fee P5,000,000Less: Cost of franchise ____50,000
Net income P4,950,000
11-3: aThe total initial franchise fee of P500,000 is to be recognized as earned because the collectibility of the note for the balance is reasonably assured.
11-4: bCash downpayment P 100,000Collection of note applying to principal __200,000
Revenue from initial franchise fee P 300,000
11-5: aCash downpayment, January 2, 2008 P2,000,000Collection applying to principal, December 31, 2008 _1,000,000
Total Collection 3,000,000Gross profit rate [(5,000,000-500,000) 5,000,000] _____90%
Realized gross profit, December 31, 2008 P2,700,000
11-6: bFace value of the note (P1,200,000 - P400,000) P 800,000Present value of the note (P200,000 X 2.91) __582,000
Unearned interest income, July 1, 2008 P 218,000
11-7: dInitial franchise fee P1,200,000Less: unearned interest income __218,000
Deferred revenue from franchise fee P 982,000
11-8: dInitial franchise fee P 500,000Continuing franchise fee (P400,000 X .05) ___20,000
Total revenue 520,000Cost ___10,000
Net income P 510,000
178 Chapter 11
11-9: bDeferred Revenue from franchise fee:
Downpayment P6,000,000Present value of the note (P1,000,000 X 2.91) 2,910,000
P8,910,000Less: Cost of franchise fee_2,000,000
Deferred gross profitP6,910,000
Gross profit rate (6,910,000 8,910,000) 77.55%
Downpayment (collection during 2008)P6,000,000Gross profit rate___77.55%
Realized gross profit from initial franchise feeP4,653,000Add: Continuing franchise fee (5,000,000 X .05)__250,000
TotalP4,903,000Less: Franchise expense___50,000
Operating incomeP4,853,000Interest income, 12/31/05 (P2,910,000 X 14%) X 6/12__203,700
Net incomeP5,056,700
11-10: bFace value of the note receivableP1,800,000Present value of the note receivable
1,263,900
Unearned interest income P 536,100
Initial franchise feeP3,000,000Less: Unearned interest income __
536,100
Deferred revenue from franchise feeP2,463,900
11-11: aRevenues from:
Initial franchise feeP1,000,000
Continuing franchise fee (P2,000,000 X .05) 100,000
Total revenue from franchise feesP1,100,000
11-12: dRealized gross profit from initial franchise fee [(350,000 + 90,000) x 37%]P 162,800Continuing franchise fee (P121,000 + P147,500) x 5%___13,425
Total revenue 176,225Expenses___42,900
Net operating profit 133,325Interest income (P900,000 x 15%) x 6/12___67,500
Net incomeP 200,825
Franchise Accounting 179
11-13: cCash down-payment P
95,000Present of the note (P40,000 x 3.0374)__121,496
Total P 216, 496
11-14: aInitial franchise feeP 50,000Continuing franchise fee (P400,000 x 5%)__20,000
Total revenueP 70,000
11-15: cShould be P80,000Initial franchise fee – down-payment (P100,000 / 5)P 20,000Continuing franchise fee (P500,000 x 12%)__60,000
Total earned franchise feeP 80,000
11-16: aThe unearned interest credited is the difference between the face value and the present value of the notes receivable (900,000 – 720000).
The down payment of P600,000 is recognized as revenue since it is a fair measure of the services already performed by the franchisor.
11-17: bCora (P100,000 + P500,000) P 600,000Dora (P100,000 + P500,000) 600,000Total P1,200,000
11-18:Down payment (3,125,000 x 40%) P1,250,000Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 1,425,000Adjusted sales value of initial franchise fee 2,675,000Direct cost of services 802,500Gross profit 1,872,500
Gross profit rate (1,872,500 ÷ 2,675,000) 70%
180 Chapter 11
Date Collection Interest Principal Balance of PV of NR1/1 P1,425,0006/30 468,750 171,000 297,750 1,127,25012/30 468,750 135,270 333,480 793,770Total collection applying to principal 631,230Down payment 1,250,000Total collection 1,881,230Gross profit rate 70%Realized gross profit on
initial franchise fee 1,316,861
11-19: c
Franchise Accounting 181
SOLUTIONS TO PROBLEMS
Problem 11 – 1
a. The collectibility of the note is reasonably assured.
Jan. 2: Cash....................................................................................12,000,000 Notes receivable................................................................. 8,000,000
Deferred Revenue from IFF......................................... 20,000,000
July 31: Deferred cost of Franchises................................................ 2,000,000 Cash............................................................................... 2,000,000
Nov. 30: Cash/AR............................................................................ 29,000 Revenue from continuing franchise fee (CFF).............. 29,000
Dec. 31: Cash / AR.......................................................................... 36,000 Revenue from CFF........................................................ 36,000
Cash................................................................................... 2,800,000 Notes receivable............................................................ 2,000,000 Interest income (P8,000,000 x 10%)............................. 800,000
Adjusting Entries:(1) Cost of franchise revenue............................................ 2,000,000
Deferred cost of franchises................................... 2,000,000
(2) Deferred revenue from IFF.........................................20,000,000 Revenue from IFF................................................... 20,000,000
To recognize revenue from the initial franchise fee.
b. The collectibility of the note is not reasonably assured.
Jan. 2 to Dec. 31 = Refer to assumption a.
Adjusting entry: to recognized revenue from the initial franchise fee (installment method)
(1) To defer gross profit:Deferred Revenue from IFF........................................20,000,000
Cost of Franchise Revenue................................... 2,000,000Deferred gross profit – Franchises....................... 18,000,000
GPR = P18,000 P20,000,000 = 90%
(2) To recognize gross profit:Deferred gross profit – Franchises..............................12,600,000
Realized gross profit............................................. 12,600,000(P14,000,000 X 90%)
182 Chapter 11
Problem 11 – 2a. Collection of the note is reasonably assured.
Jan. 5: Cash. ..................................................................................... 600,000Notes Receivable................................................................... 1,000,000
Unearned interest income.................................................. 401,880Deferred revenue from F.F................................................ 1,198,120
Face value of NR............................................................................. 1,000,000Present value (P200,000 x P2,9906)................................................ __598,120
Unearned interest............................................................................. 401,880
Nov. 25: Deferred cost of Franchise................................................. 179,718 Cash............................................................................... 179,718
Dec. 31: Cash / AR.......................................................................... 4,000 Revenue from CFF........................................................ 4,000
(P80,000 X 5%)
Cash................................................................................... 200,000 Notes Receivable........................................................... 200,000
Adjusting Entries:
1) Unearned interest income.................................................. 119,624Interest income............................................................ 119,624
P598,120 x 20%
2) Cost of Franchise............................................................... 179,718Deferred cost of Franchise.......................................... 179,718
3) Deferred revenue from FF................................................. 1,198,120Revenue from FF........................................................ 1,198,120
b. Collection of the note is not reasonably assured.Jan. 5 to Dec. 31 before adjusting entries – Refer to Assumption a.
Dec. 31: Adjusting Entries: 1) Unearned interest income.................................................. 119,624
Interest income............................................................ 119,624
2) Cost of franchise................................................................ 179,718Deferred cost of franchise........................................... 179,718
3) Deferred revenue from FF................................................. 1,198,120Cost of Franchise........................................................ 179,718Deferred gross profit – Franchise............................... 1,018,402
GPR = 1,018,402 1,198,120 = 85%)
4) Deferred gross profit – Franchise......................................578,319.60Realized gross profit – Franchise................................ 578,319.60
(P600,000 + P200,000- P119,624) x 85%
Franchise Accounting 183
Problem 11 – 3
2007
July 1: Cash. ........................................................................................... 120,000Notes Receivable.......................................................................... 320,000
Unearned interest income...................................................... 66,408Deferred revenue from FF..................................................... 373,592
Face value of NR.......................................................................... P320,000Present value (P80,000 x 3.1699)................................................. _253,592
Unearned interest income............................................................. P 66,408
Sept. 1 toNov. 15: Deferred cost of franchise............................................................ 80,000
Cash. ..................................................................................... 80,000(P50,000 + P30,000)
Dec. 31: Adjusting Entry:Unearned interest income............................................................. 12,680
Interest income....................................................................... 12,680(P253,592 x 10% x 1/2)
2008
Jan. 10: Deferred cost of franchise............................................................ 50,000Cash. ..................................................................................... 50,000
July 1: Cash. ........................................................................................... 80,000Note receivable...................................................................... 80,000
Dec. 31: Adjusting Entries:(1) Cost of franchise.................................................................... 130,000
Deferred cost of franchise................................................. 130,000
(2) Deferred revenue from FF..................................................... 373,592Revenue from FF............................................................... 373,592
(3) Unearned interest income...................................................... 25,360Interest income.................................................................. 25,360
184 Chapter 11
Problem 11 – 42008
Jan. 10: Cash. ........................................................................................... 6,000,000Deferred revenue from FF..................................................... 6,000,000
Jan. 10 toJuly 15: Franchise expense......................................................................... 2,250,000
Cash. ..................................................................................... 2,250,000
Deferred revenue from FF............................................................ 4,000,000Revenue from FF................................................................... 4,000,000
Initial Franchise fee.....................................................................P6,000,000Deficiency
Market value of costs (P180,000 90%) x 10 yrs..................( 2,000,000 )
Adjusted initial fee (revenue)........................................................P4,000,000
July 15: (a) Continuing expenses.............................................................. 180,000Cash / Accounts payable................................................... 180,000
(b) Deferred revenue from FF..................................................... 200,000Revenue from CFF............................................................ 200,000
(P180,000 90%)Problem 11 – 5
a) Adjusted initial franchise fee:Total initial F.F............................................................................. P4,500,000Less: Face Market value of kitchen equipment............................ _1,800,000
Adjusted initial FF........................................................................ P2,700,000Revenues:
Initial FF. ..................................................................................... P2,700,000Sale of kitchen equipment............................................................ 1,800,000Continuing F.F. (P2,000,000 x 2%)............................................. ___40,000
Total. ........................................................................................... 4,540,000Expenses:
Initial expenses.............................................................................P 500,000Cost of kitchen equipment............................................................ 1,500,000 _2,000,000
Net income......................................................................................... P2,540,000
b) Journal Entries:Jan. 2: Cash. ..................................................................................... 1,500,000
Notes receivable..................................................................... 3,000,000Deferred revenue from FF (adjusted SV).......................... 2,700,000Revenue from FF (Market value of equipment)................ 1,800,000
Cost of kitchen equipment..................................................... 1,500,000Kitchen equipment............................................................. 1,500,000
Franchise Accounting 185
Jan. 18: Franchise expense......................................................................... 500,000Cash................................................................................... 500,000
April 1: Cash ..........................................................................................2,000,000Notes receivable................................................................ 2,000,000
Dec. 31: Cash ..........................................................................................1,000,000Notes receivable................................................................ 1,000,000
Cash / Account receivable............................................................ 40,000Revenue from continuing FF............................................. 40,000
Deferred revenue from FF............................................................ 2,700,000Revenue from FF............................................................... 2,700,000
Problem 11 – 6
Recognition of initial franchise fee (IFF) (6 mos. after opening)
Revenue from initial FF:Total initial FF....................................................................................P2,500,000Less: Deficiency in continuing FF (Sch. 1)........................................ 160,000 2,340,000
Expense (costs of initial services)................................................................ __700,000
Net income................................................................................................. P1,640,000
Schedule 1 – Estimated deficiency in CFF(1) (2)
Yr. of Estimated Market Value (Excess of 2 over 1)Contract Continuing FF of Continuing Services Deficiency
1 P220,000 P250,000 P 30,0002 220,000 250,000 30,0003 220,000 250,000 30,0004 220,000 125,000 –5 220,000 125,000 –6 150,000 125,000 –7 150,000 125,000 –8 150,000 125,000 –9 90,000 125,000 35,000
10 90,000 125,000 __35,000
P160,000
Recognition of revenue from CFF and costs:
Years 1-3 Years 4-5 Years 6-8 Years 9-10
Revenue from CFF......................... P250,000 P220,000 P150,000 P125,000Expenses........................................ _200,000 _100,000 _100,000 _100,000
Net income..................................... P 50,000 P120,000 P 50,000 P 25,000
186 Chapter 11
Problem 11 – 7
1/12/2008 6/1/2008 7/1/2008 6/30/2009Revenues:
Initial FF (Sch. 1) – – 287,200 –Interest income – – – 45,490*Continuing FF – – – 48,000Others 62,500 80,000 – –
Expenses:Initial expenses – – ( 70,000) –Continuing expense – – – ( 36,000)Others ( 50,000 ) ( 68,000 ) – –
Net Income P 12,500 P 12,000 P217,200 P 57,490
* P454,900 x 10% = P45,490
Schedule 1: Computation of initial FF to the recognized:Total initial fee ........................................................................................................... P750,000Less: Interest unearned on the note......................................................................... ( 145,100)A
Market value of inventory.............................................................................. ( 80,000)B
Market value of equipment............................................................................ ( 62,500B
Deficiency in continuing costs....................................................................... ( 175,200 )C
Adjusted initial FF....................................................................................................... P287,200
A. Unearned Interest:Face value of the note........................................................................................... P600,000Present value (120,000 x 3.7908).......................................................................... 454,900
rounded
Unearned interest.................................................................................................. P145,100
B. Market value of equipment and inventory:Equipment (P50,000 80%)................................................................................. P 62,500Inventory.............................................................................................................. 80,000
Income from Sales:Equipment Inventory Total
Sales Price. .................................................. P62,500 P80,000 P142,500Cost............................................................. 50,000 68,000
118,000
Net income .................................................. P12,500 P12,000 P 24,500
C. Analysis of Continuing costs:Market value of costs is P4,000/Mo. or P48,000 / yr.Continuing Fees:
Years 1-4 Years 5-16 Years 17-20
Gross revenues ........................................... P330,000/mo. P450,000/mo. P500,000/mo.Gross fees per month................................... P 2,475/mo. P 3,375/mo. P 3,750/mo.
Gross fees per year...................................... P 29,700 P 40,500 P 45,000Market value of continuing costs................ ( 48,000 ) ( 48,000 ) ( 48,000)
Deficiency per year...................................... ( 18,300) ( 7,500) ( 3,000)Number of years.......................................... x 4 x 12 x 4
Deficiency ........................................... P( 73,200) P( 90,000) P( 12,000)
Total deficiency for 20 years is P175,200Franchise Accounting 187
Dates of Revenue Recognition:....................................................... Types of Revenue
January 12, 2008.............................................................. Sale of equipmentJune 1, 2008..................................................................... Sale of inventoryJuly 1, 2008..................................................................... Initial FF (as adjusted0June 30, 2009................................................................... Interest income and
continuing revenue.