advanced accounting2 final

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EXECUTIVE SUMMARY

The knowledge gained from within the bounds of a four-walled classroom may be

enough to sustain a student’s survival in a school setting. However, not all things could

be learned from lessons in school hence this study is conducted to evaluate the

differences in the accounting methods and principles used by different entities from the

theories and illustrations shown in the book, specifically the differences and similarities

of recording transactions by different entities in terms of profit and expense recognition.

In this connection, this study was conducted to five business entities which were

chosen by the proponents which are as follows: Sion Travel and Tours (Partnership

Liquidation), Quality Appliance Plaza-Valencia (Installment Sales), Da Dailo Architect

(Long-Term Construction Contract), Bukidnon Investment and Finance Corporation

(Home Office and Branch Accounting), and GTY Trading-Malaybalay (Consignment).

The data were gathered through personal interview addressed to respective personnel

in each of the entities and interview through phone calls were also used to acquire

additional data.

From the study, the proponents concluded that there were no great deviations

with respect to the methods employed in the actual environment and what are illustrated

in the book. Almost all standards were followed except in the recording of expenses and

revenue as in the case of consignment and installment sales since it is not applicable

and the entities are not allowed to take account for it.

This study was of great help to the proponents; it made them aware and know

the things happening in the real practice

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CHAPTER I

INTRODUCTION

Background of the Study

Accounting plays an important role in every business entity. Accounting

information is critical in planning and decision-making processes that are made by the

firm’s management for the business thrive over the long run. Hence, the accounting

information provided must be accurate, relevant and faithfully presented given the

weight of its influence over every business decision. Entities avail the services of

accountants in handling transactions and every economic event with honesty, diligence

and with their full capabilities as professionals to the business’ advantage.

From this, the value of an accountant’s talent and responsibility in every business

entity as well as to the economy as a whole can be deduced. Before the accountants

became the professionals that they are, they were made to go through rigid training in

school to acquire a degree in accounting and pass the competent CPA Board

Examination to become eligible licensed professionals.

Knowledge about the basic and core concepts, principles, from fundamentals to

every specialized accounting area, as well as an understanding of the most basic

treatment of an account to its many specificities and details, recording transactions and

preparing financial reports is being taught to every undergraduate accountancy student

in school. However, there are deviations between the actual circumstances involving the

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work of an accountant from the theoretical exemplifications written in textbooks.

Reasons can be enumerated for such differences as uniqueness of transactions,

convenience, automation, and outdated knowledge regarding the treatment of an

economic transaction or lack of knowledge even. Not to mention that accounting

standards are constantly being changed to address the needs of the entity as

businesses evolve with complexities. It is to the advantage of the students to be able to

look into these differences and understand why such departures from the theoretical

models are made and understand why such departures from the theoretical models are

made and be able to have a glimpse of what really happens in the environment outside.

As soon-to-be professionals in the accounting parlance, the students will need all the

knowledge they can acquire to prepare themselves for their future.

The thrust behind this research is for compliance of the requirement under

Accy55 entitled Advanced Accounting II. The subject introduced topics of which some

were already known to the students. The topics include partnership liquidation,

installment sales, long-term construction contract, home-branch accounting and

consignment accounting which are the focus of this study as given by the subject

instructor.

Five topics are given instead of only one so that the knowledge of the students

may not be concentrated only on one particular topic which will be an advantage to their

part.

This study will serve as an immersion of the students to the actual business

environment to which they will eventually be headed for. An experience in the real

environment of a firm will be a form of strategy in gaining a better understanding of the

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theoretical concepts and its practical applications in actual as well as further knowledge

that may not be written in books.

Statement of the Problem

In general, this study seeks to assess and evaluate the accounting methods used

in every entity in actual practice from the theoretical methods as illustrated in the book.

Specifically this study seeks to answer the following questions:

1. What is the demographic profile of each entity under study?

2. How do the following entities record transactions in terms of:

A. Partnership

a) liquidation process?

B. Installment Sales

a) cash sales and installment credit sales?

b) recognition of gross profit?

c) repossessed merchandise?

d) trade-ins?

C. Long Term Construction Contracts

a) contract costs incurred in progress?

b) subcontractor costs?

c) purchase of materials in advance?

d) progress billings to the customers?

e) revenue recognition?

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D. Home Office and Branch Accounting

a) normal operating transactions between Home office and its

Branches?

b) revenue recognition?

E. Consignment

a) receipt of merchandise to be consigned?

b) distribution of inventory to consignees?

c) remittances from the consignees?

d) profit recognition?

Assumptions of the Study

The proponents of the study are assuming that all of the prospective entities to

be chosen follow the procedures as illustrated through the textbooks:

Partnership Liquidation:

Assets are sold either on a lump-sum or on an installment basis

There is either a gain or loss on the realization of the non-cash assets

There are liabilities that must be paid to outside creditors

There are liquidation expenses incurred

Home Office and Branch Accounting

The Home Office and the Branch maintains their own books of accounts

The recording procedures for transactions are similar to the procedures as per

illustration from the book

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The Investment in Branch account and the Home Office account are assumed to

have the same balance at the end of the period

The balance in the Income Summary account is closed to the Home Office

account

Consignment

The law of agency governs the determination of rights and obligations of

the parties

There is a written contract prepared expressing the nature of the

relationship and covering matters such as payment terms of the sales

price that are to be granted by the consignee to buyers, expenses made

by the consignee that are to be reimbursed by the consignor

The transactions are recorded on the books of the consignee and

consignor

Whether the entity is a consignor or consignee, in the determination of

profits, the entity uses either the following:

o Separately determined

o Not separately determined

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Significance of the Study

Without an On-the-Job Training provided for in the current curriculum enrolled in

by the students, they are placed at the disadvantage of not being able to see the

actuality of the accounting practice outside the walls of the institution. Given the

circumstances, the students are likely alienated from the practical applications of their

field of study and tend to be too attached to school taught matters. It is important for the

students to be exposed to the actual work environment, even if only through a research

study, to acquaint themselves to the applications of the concepts illustrated in

textbooks. This will help them adjust the knowledge they have acquired within the

classroom setting to its several departures in the reality of the circumstances in actual

practice. Thus, this research will more likely be an equivalent of an OJT for the

students.

This study will be a valuable contribution for the students’ preparations in

becoming future professionals in the competent world of business. Thus, this study is

specifically significant to the students studying accounting for their better understanding

and to expose them to the actuality of the work outside the school.

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CHAPTER II

REVIEW OF RELATED LITERATURE

PARTNERSHIP LIQUIDATION

Definition and Characteristics of Partnership Liquidation

Article 1767 of the partnership law states that, “By the contract of partnership two

or more persons bind themselves to contribute money, property, or industry to a

common fund, with the intention of dividing the profits among themselves.”

Liquidation of a partnership means winding up the business usually by selling the

assets, paying the liabilities, and distributing the remaining cash to the partners. A

business is in the process of realization, the process of converting its assets into cash;

and making settlement with creditors is said to be in liquidation.

There are certain rules that should be followed in the liquidation of partnership,

namely:

1. Always allocate and close gain or losses to the partners’ capital account prior

to distributing any cash to the partners.

2. When the business is liquidated, the partner is entitled to an amount

depending upon his capital contribution, his drawing, his share in the net

income or loss from operations before liquidation, gains and losses on

realization, and the balance of his loan account, if any.

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As a general rule the order of payment of partnership liabilities are as follows:

a. Those owing to creditors other than partners.

b. Those owing to the partners other that for capital and profits.

c. Those owing the partners in respect of capital.

d. Those owing to partners in respect of profits.

Methods of Partnership Liquidation

LUMP-SUM METHOD is one which all assets are converted into cash

within a very short time, outside creditors are paid, and a single, lump-sum

payment is made to the partners for their total interest.

INSTALLMENT METHOD is one in which the realization of non-cash

assets is accomplished over an extended period. When cash is available,

creditors may be partially or fully paid. Any excess may be distributed to

the partners in accordance with the program of safe payment or cash

priority program, whichever method of distributing excess cash is

employed by. This process persists until all the non-cash assets are sold.

INSTALLMENT SALES

Definition and Characteristics of Installment Sales

An Installment Sale is the exchange of an asset for a series of payments that

occurs over a specific period of time. It is generally a “disposition of property where at

least one payment is to be received after the close of the taxable year in which the

disposition occurs. Installment Sales are valuable tool to help sellers defer tax. As with

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any other seller financing, however, the seller is generally at risk with respect to the

buyer’s creditworthiness or ability to manage the asset. The seller may often retain a

lien against the property to secure payment of the installment obligation, which itself

may or may not be evidenced by note.

Revenue Recognition for Installment Sales

There are different methods governing revenue recognition under installment

sales it could be installment sales method, cost recovery method or deposit method.

The installment method was developed to account for sales contracts allowing

buyers to make payments over several years. As the payment period becomes longer,

the risk of loss resulting from uncollectible accounts increase; consequently,

circumstances surrounding a receivable may lead to considerable uncertainty as to

whether payments will actually be received. Under these circumstances, the uncertainty

of cash collections dictates that revenue recognition should be deferred until the actual

receipt of cash.

The installment method can be used in sales transactions for which payment is to

be made through periodic installments over an extended period of time and the

collectability of the sales price cannot be reasonably estimated. Installment method

revenue recognition is not in accordance with the accrual accounting because revenue

recognition is not normally based upon cash collection.

When a seller uses the installment method, both revenue and cost of sales are

recognized at the point of sale, but the related gross margin is deferred to those periods

during which cash will be collected. As receivables are collected, a portion of the

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deferred gross profit equal to the gross profit rate times the cash collected is recognized

as income. When this method is used, the seller must compute each year’s gross profit

rate and also must maintain records of installment accounts receivables and deferred

revenue that are separately indentified by the year of sale.

The Cost-recovery method is used when the uncertainty of collection of the sales

price is so great that even is of the installment method cannot be justified. It is the most

conservative of all revenue recognition methods. Under the cost recovery method, both

revenues and cost of all sales are recognized at the point of sale, but the related gross

profit is deferred until all costs of sales have been recovered. Each installment must

also be divided between principal and interest, but unlike the installment method where

a portion of the principal recovers the costs of sales and the remainder is recognized as

gross profit, all of the principal is first applied to recover the cost of the assets sold. After

all costs of sales have been recovered, any subsequent cash receipts are realized as

gross profit.

Under the Deposit Method, seller reports the cash received from the buyer as a

deposit on the contract and classifies it on the balance sheet as a liability. The seller

does not recognize revenue or income until the sale is complete.

LONG-TERM CONSTRUCTION CONTRACT

Definition and Characteristics of Long-term Construction Contracts

PAS 11 defines construction contract as contract specifically negotiated for the

construction of an asset or a combination of assets that are closely interrelated or

interdependent in terms of design, technology or their ultimate purpose or use.

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There are two classifications of construction contract, the fixed price contract and

the cost-plus contract. Fixed price contract is a construction contract in which the

contactor agrees to a fixed contract price, or a fixed rate per unit of output, which in

some cases is subject to cost escalation clauses and cost-plus contract is a

construction contract in which the contractor reimburse for allowable or otherwise

defined cost, plus a percentage of this cost or a fixed fee.

Contract cost are cost that relate directly to the specific contract; are attributable

to contract activity in general and can be allocated to the contract; and are specifically

chargeable to the customer under terms of the contract. It can be broken down into

cost incurred to date and estimated cost to complete. Cost incurred to date includes

pre-contract cost and cost incurred after contract acceptance. Estimated costs to

complete are anticipated cost of materials, labor, subcontracting cost, and indirect cost

required to complete a project at a scheduled time.

Subcontractor cost is the amount billed to the principal contractor for work done

by the subcontractor.

For accounting purposes, contracts are combined or segmented. A group of

contracts may be combined if they are closely related that they are, in substance, part of

a single project with an overall profit margin. Segmenting a contract is a process of

breaking up a larger unit into smaller units.

There are different methods governing revenue recognition under long-term

construction contract it could be percentage-of-completion method or zero profit

method.

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Percentage-of-completion method is to be used when the outcome of the

construction contract can be estimated reliably, that is, the estimate of cost to complete

and the extent of progress toward the completion of long term contracts are reasonably

dependable. Under this method, gross profit is recognized as construction progresses.

Zero profit method recognizes revenue in an amount exactly equal to cost

incurred until reasonable objective estimates of the completion are available. This

method indicates to financial statement users the volume of the company’s business

while deferring the recognition of gross profit until more reliable estimates if the degree-

of-completion can be made.

HOME-BRANCH ACCOUNTING

Definition and Characteristics of Home-Branch Accounting

Companies may increase sales volume through the establishment of sales outlet

in various areas. Such sales outlets may be a branch or an agency. In our study, we

only focused on the home and the branch.

When a company operates a branch, it must maintain accounting records to

facilitate its reporting responsibility to the home office. (Guerrero, 2009)

Uses of the Reciprocal Accounts

Transactions between the home office and a branch are recorded in

intracompany accounts. These accounts are reciprocal accounts between the home

office and the branch. In recording inter-office transactions, two reciprocal accounts are

used, namely, the Investment in Branch or Branch Current account used by the home

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office which is classified as an asset; and the Home Office or Home Office Current

account used by the branch which is classified as liability.

Establishing of Branch

When establishing a branch, the transfer of assets to the branch is recorded by

the home office in the Investment in Branch account, and the branch records the

transfer with an entry to Home Office account. (Guerrero, 2009)

Branch Income or Loss Definition

Each branch computed income periodically. Home office and branches are

separate legal entities, so they computed income taxes for the company as a whole.

Branches’ revenue and expenses accounts are closed to its Income Summary account.

Income Summary accounts balance is closed to home Office account. When the branch

reported its income or loss to the home office, an entry is made on the book of home

office.

Merchandise Shipments to Branch

Home office may ship merchandise inventory to be sold by its branch. The

branch may also purchase merchandise from outside suppliers. Merchandise

transferred from home office to branch should be recorded by both home and branch.

Apportionment of Expenses

Home office may allocate expenses to a branch. Expenses might be of several

types such as when expenses incurred by the branch paid by the home office,

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expenses that are incurred by the home office on behalf of the branch and allocation of

expenses incurred by the home office. (Guerrero, et. al., 2011)

Preparation of Combined Financial Statements

The Statement of Financial Position and Income Statement of the home office

and the branch must be combined for some external purposes. Reciprocal or

intercompany account balances must be eliminated. Working papers usually prepare to

eliminate accounts affected in recording intercompany transactions. Working paper

elimination procedures are as follows:

1. Eliminate reciprocal accounts.

2. Eliminate intercompany transfer accounts.

a. Shipments to branch from Home Office accounts.

b. Allowance for Overvaluation of Branch Inventory.

3. Eliminate the overvaluation in branch beginning inventory.

4. Eliminate the overvaluation in branch ending inventory.

Combined Statement of Financial Position

The reciprocal accounts “Investment in Branch” and “Home Office” accounts are

not presented as well as the Allowance for Overvaluation accounts.

Combined Income Statement

The merchandise inventories, beginning and ending inventories are presented at

cost. The Shipment to Branch and Shipment from Home Office are not presented.

(Guerrero, 2009).

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CHAPTER III

METHODOLOGY

PARTNERSHIP LIQUIDATION ACCOUNTING

Place and Time

The interview was conducted in Poblacion, Banisilan, North Cotabato on

September 1, 2012.

About the Entity

The entity’s name is Sion Travel and Tours, owned by Annalie Lagat and Min Ju

Choi. It was established on November 2007 and was liquidated on May 2009. The entity

is a service concern business that offers domestic and international ticketing, hotel

accommodation, day tours and immigration assistance. Their major markets are Korean

businesspersons, tourists and students.

Gathering of Data

Data for this certain topic was gathered through an interview. The interviewee

was one of partners of the entity. Phone call interview was also done for additional

information. The questions asked during the interview were as follows:

1. What is the name of the liquidated partnership and who are the partners?

2. Was the partnership registered to SEC?

3. What is the nature of the business?

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4. How does it operate?

5. Who are your major markets?

6. How much is your contributed capital?

7. How did you divide the profit or loss?

8. What are the reasons for liquidation?

9. What have you done to the non-cash assets?

10.What was the liquidation expenses paid?

11.Are there any loan payables or receivables to/from partners?

12.Did you follow the Article of partnership in regards to liquidation?

13. Is there any action to inform the SEC that the partnership was liquidated?

INSTALLMENT SALES ACCOUNTING

Place and Time

The interview was conducted at Quality Appliance located in Valencia City on

September 14 and 21, 2011.

About the Entity

The entity’s name is Quality Appliance, a sole proprietorship owned by Mr.

Tomas Yap. Quality Appliance is a merchandising business which derives its revenues

from the sale of various home appliances. The entity has already 29 branches all over

the Philippine with its main office located in Cagayan de Oro City.

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Gathering of Data

Data for this particular topic was gathered through the means of an interview with

Quality Appliance-Valencia Branch’s Branch Accounting Supervisor, Mrs. Marites

Masongsong. The questions asked during the interview were as follows:

1. Who is the proprietor of the entity?

2. Where does the major portion of sales come from? Is it from cash sales or

installment sales?

3. What is the required percentage for down payments in case of sales on credit

or installment?

4. How long do you require your customers to pay off their account balances?

5. How do you value repossessions?

6. What are the grounds for repossession?

7. What are the expenses related to reconditioning repossessed inventory?

8. Do you allow trade-ins?

9. How do you realize gross profit?

10.How often do you realize gross profit?

11.What are the entries for the following transactions?

a. Sales

b. Repossession

c. Deferral and realization of Gross Profit

d. Installment payments

12.Can you give us an example of an amortization table even with just assumed

amounts?

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LONG-TERM CONSTRUCTION CONTRACTS ACCOUNTING

Place and Time

The interview was conducted in DA Dailo Architect, Valencia City on September

14 and 25, 2012.

About the Entity

The name of the entity is DA Dailo Architect owned and managed by Cris

Rommel S. Dailo, uap. The nature of the entity is a service concern engaged in

planning, designing and construction.

Gathering of Data

Data was gathered through interview method. The interviewee was the owner of

the entity. Questions were prepared as follows:

1. How do you determine the price of the contract?

2. How do you determine the cost incurred by the contract?

3. Is there any instance that you hired a subcontractor?

4. Did you purchase materials in advance of their use?

5. Is there any instance that you segmented or combined some of your projects?

6. How do you recognize revenue?

7. How does the entity measure the progress of the construction?

8. When do you issue the progress billing to your customers?

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9. Have you encountered any losses? If any, how did you treat it?

10. Is there any contract retention?

Have you encountered paying any damages due to delays or having an incentive for the

early completion of the contract?

HOME OFFICE AND BRANCH ACCOUNTING

Place and Time

The home office is located at Valencia City, Bukidnon. Its branches are located at

Don Carlos, Bukidnon and Cagayan de Oro City. For discussion purposes, it is

assumed that transactions illustrated are in between the Home Office and Don Carlos

branch.

About the Entity

The trade and legal name of the entity is Bukidnon Investment and Finance

Corporation. It was incorporated on June 30, 1989. The nature of the business is

service concern through financing.

Gathering of Data

The method employed in the gathering and accumulation of data was through

interview. The interviewee was the accountant in the person of Ms. Cyndi Rose P.

Miranda. Questions were prepared for the interview. The questions were as follows:

1. Are there separate books maintained by the home office and branch?

2. Does the main office prepare consolidated financial statements?

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3. How does the home office and the branch record initial transfer of cash?

4. How does the home office and the branch record when loans are granted by the

branch but through the home office and the related payment to home office?

5. What are the entries in both books when cash is remitted from the branch to the

home office?

6. Does the home office allocate certain expenses to the branch? What are the

entries in both books to record such allocations?

7. Does the branch report Income/Loss to the home office? If so, what are the

necessary entries?

8. Is there an elimination of intracompany accounts when preparing combined

financial statements at the end of the reporting period?

9. Does the home office and branch compute income taxes separately?

CONSIGNMENT ACCOUNTING

Place and Time of the Study

The study was conducted at GTY Trading, Malaybalay City on September 14,

2011.

About the Entity

GTY Trading (Consignor) is a business entity engaged in merchandising goods

through consignment. GTY Trading is owned by a Chinese entrepreneur Gertrudes

Tejones Yngente. GTY Trading Malaybalay Branch was formed on December 15, 2008.

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Gathering of Data

The method used in conducting this study is through interview. The interviewee is

in the person of Mrs. Liza C. Meniolas, the GTY Malaybalay Branch-OIC. The questions

addressed to the consignor during the interview were as follows:

1. Where did you acquire the goods to be consigned?

2. How frequent is the delivery of goods by the supplier?

3. Is there any written agreement between you and the consignee in the distribution

of goods?

4. What is the allowable rate of commission given to the consignee?

5. What are the policies and regulations that should be followed by the consignee?

6. What is your treatment in recording consignment sales?

7. How do you account expenses related to the consignment?

8. What will be your treatment for any unsold merchandise returned by the

consignee?

9. How frequent do the consignees make their remittances?

10.How do you take account or recognized profit& loss for the period?

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CHAPTER IV

PRESENTATION AND ANALYSIS OF DATA

PARTNERSHIP LIQUIDATION ACCOUNTING

Business Model

Type of business: Service Concern

Trade name: Sion Travel and Tours

Entity address: 2nd floor Strata 2000 building, Ortigas Avenue, Pasig City

Product or Services: Domestic and international ticketing, hotel accommodation, day

tours and immigration assistance

Key Accounts: Korean businesspersons, tourists and students

Background of the Entity

The liquidated partnership is Sion Travel and Tours, and the partners are Annalie

Lagat, a managing partner;and Min Ju Choi, a capitalist partner. The partnership was

formed on the month of November of the year 2007 and liquidated on the month of May

of the year 2009.

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Formation of Partnership

The partnership was registered to the Securities and Exchange Commission with

an initial cash investment of Php50,000 from both partners and non-cash assets worth

Php80, 000 by Min Ju Choi.

Operation and Reason of Liquidation

The division of profit or loss was Php25,000 salary to Ms. Annalie Lagat and the

remainder was basedon their contributed capital. The entity gained profit all throughout

its existence. However, the partners reached a decision to liquidate as one of them

have found operating the business tiring and decided to quit for other personal reasons.

Process of Liquidation

Prior to the liquidation, as usual the partnerswithdraw their profit for the period.

The non-cash assets were not sold but merely taken back by the partner who invested

the assets. Thus no gain or loss on realization was recognized since he takes it back at

book value of the non-cash assets. In this caseall of the non-cash assets transferred to

Mr. Min Ju Choi’s call center business. Thus when the partnership was liquidated the

partners only pulled out their investments from the firm, since there were no drawings,

additional investments made by the partners and Liability to outside creditors. No other

expenses were incurred relating to the partnership’s liquidation.

The only entries necessary when the partners liquidated were:

Choi, Capital 130, 000

Lagat, Capital 50, 000

Cash 115, 000

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Non-cash Assets (net of depreciation) 65, 000

(All amounts reflected are assumed as given by the interviewee.)

INSTALLMENT SALES ACCOUNTING

Business Model

Type of business: Merchandising

Trade name: Quality Appliance

Entity address: Valencia City

Product or Services: Home appliances

Key Accounts: General public

Background of Sales Transaction:

Revenue of Quality Appliance Valencia Branch may come in two forms it could

be through a cash transaction or installment credit where majority of their sales comes

from. Terms of payment could be 6 months, 12-18 months or 24 months depending

upon the choice of the customer and type of inventory with 20% down payment. Interest

rate applied may be 20%, 15% or 24% depending on brand and product. Failure to pay

on time would include 5% penalty of interest which form part of their other income.

Inventory System:

The inventory system applied by the entity is Periodic Inventory system. Their

costing system is specific identification.

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Repossession of Merchandise Inventory:

Inventory sold through installment credit shall be repossessed from the customer

upon the presence of any of the following circumstances:

1. Three (3) months overdue accounts

2. When such inventory with outstanding balance is pawned.

3. When the inventory is brought outside the purchaser’s town.

Cost assigned to the repossessed merchandise is equal to half of its acquisition

price. Any defects found shall be repaired and thus constitute its reconditioning

expense. As part of the entity’s policy, trade-in as a down payment is not allowed.

Deferral and realization of gross profit:

The responsibility of setting up deferrals and recognizing the realized gross profit

base on sales is not laid upon its branches the duty resides upon the main branch. The

authority given to the branches is bounded only to sales, repossession and collection of

accounts.

Table (Sample amortization table of a sale on installment with list price of 7679Php

subject to 6 months installment payment with annual interest rate of 24%)

7679 x 20%= 1536Php (required down payment)

7679-1536= 6143 Php (balance in notes)

Date Payment Interest Amortization Principal

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(6143Php)

1st collection 1097Php 123 974 5169

2nd collection 1097Php 103 994 4175

3rd collection 1097Php 84 1014 3161

4th collection 1097Php 63 1034 2127



Recording of Transactions

Transactions Actual Theoretical

Sale of

merchandise on

credit

Cash 1536

Installment Receivable 6143

InstallmetSales 7239

Unearned Interest 440

Cash 1536


Inst.Sales 7239


Cost of Installment Sales 5067

Inventory 5067

Collection of First

Installment

payment

Cash 1097

Notes Receivable 1097


Interest Income 123

Cash 1097

Notes Receivable 1097


Interest Income 123

Deferral of Gross

Profit ( 30%

Not Applicable Installment Sales 7239

Deferred Gross Profit 2172

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above cost) Cost of Installment Sales 5067

Realization of

Gross Profit

Not Applicable Deferred Gross Profit 790

Realized Gross Profit 790

Repossession of

merchandise

( Assuming after

payment of third

installment)

Sales 3161


MdseInvty- Repo. 2533

Deferred Gross Profit 948


Gain on Repossession 420

LONG-TERM CONSTRUCTION CONTRACTS ACCOUNTING

Business Model

Type of Business: Service Concern

Trade Name: DA Dailo Architect

Product or Services: Planning, Designing, and Constructing

Year of formation: 2003

The entity follows the fixed price contract. The price of the contract is determined

by the following percentages:

Design 10% Build:

Build 90% Cost of Material and labor 65%

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TOTAL COST 100% Overhead Contingency and miscellaneous 25%

Safety Factor 10%

Total cost 65% TOTAL COST TO BUILD 100%

Mark up 35%

CONTRACT PRICE 100%

The entity compiled every paper evidences payments made for a specific project,

this determine the cost incurred in a specific project. The owner/ customer is required to

pay 50% of the total contract price as down payment upon signing the contract. The

50% down payment is used to purchase direct materials in advance of their use. This is

to avoid the risk of any price increase in the future. The entity doesn’t experience any

instances wherein they hire another contractor or so called subcontractor. Also, the

entity doesn’t experience any segmented or combined projects because the projects

entered are simple contracts to be handle by the entity.

Revenue is recognized by using percentage of completion method – output

measure. The architect estimates the percentage of completion that was stimulated in

the contract. After 50% of completion the mobilization fee will serve as payment. When

the project is 90% completed, another progress billing is issued. Upon completion and

transfer to the owner, a final progress billing will be issued. No retention fee is applied.

No loss has been incurred since there is a safety allowance in every contract.

There are no incentives for the early completion of the contract, however the contractor

must pay an amount of Php10,000 every calendar day of delay of completion.

Journal Entries:

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ACTUAL THEORITICAL

Contract signed:

Cash xxx

Mobilization Fee xxx

Cash xxx


Cost Incurred:

Construction in Progress xxx

Cash xxx


Cash xxx

50% Completion- Progress billings:


Contract Billings xxx



Revenue Recognition:


Cost of Construction xxx

Construction Revenue xxx




90% completion- Progress Billings:

Account Receivable xxx


Account Receivable xxx


Billing Collection:

Cash xxx Cash xxx

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Account Receivable xxx Account Receivable xxx

Revenue Recognition:







HOME OFFICE AND BRANCH ACCOUNTING

Business Model

Type of business: Service Concern

Trade name: Bukidnon Investment and Finance Corporation

Entity address: Valencia City, Bukidnon

Product or Services: Financing

Key Accounts: Businessmen and Farmers

The stockholders of the entity decided to branch out for many reasons. Several

of these are: (1) to increase and expand credit extension to stratified areas, (2) to

establish a name and build a reputation in the industry, (3) to increase income such as

interest levied on loans.

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The entity uses advanced technology for operations in both home office and

branch. They employ computerized accounting to record all its business transactions.

Here are the answers of the questions we prepared in our interview to our

subject entity regarding their way of recording transactions:

Question:

1. Are there separate books maintained by the home office and branch?

2. Does the main office prepare consolidated financial statements?

Answers:

The home office and the branch maintain separate books as if they were

separate legal entities. They also make consolidated financial statements for purposes

of computing income taxes.

Transfer of Cash

Question:

How does the home office and the branch record initial transfer of cash?

Answer:

Due to the nature of business of the entity, instead of recording transfer of

merchandise inventory, cash is transferred from the home office to the branch. The

home office just deposit it through a bank account credited directly to the branch’s bank

account. They record it as follows:

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(Head Office-Valencia)

Due from Head Office-Don Carlos 100,000

Cash on Hand 100,000

Theoretical:

Investment in Branch 100,000

Cash 100,000

(BIFC-Don Carlos)

Cash in Bank 100,000

Due to Head Office-Don Carlos 100,000

Theoretical:

Cash 100,000

Home Office 100,000

The account Due from Head Office-Don Carlos is used instead of Investment in

Branch account and is to be presented as a receivable in the head office’s Statement of

Financial Position in the Noncurrent Asset section. While the account Due to Head

Office-Don Carlos is used by the branch instead of Home Office account and this

determines the extent of investment of the head office in the branch and the same shall

be presented in the branch’s Statement of Financial Position as a component of equity.

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Granting of Loan by Branch but through Home Office

Question:

How does the home office and the branch record when loans are granted by the branch

but through the home office and the related payment to home office?

Answer:

When loans are granted by either home office or branch, it is recorded in the

usual manner such as a debit to the appropriate receivable account and a credit to

cash. The problem arises with the granting of loan by the branch but through the main

office and vice-versa, due to the convenience that is offered when doing so. In this

case, the investment of the head office from the branch increases (Due from Head

Office-Don Carlos), so as the equity of the head office in the branch (Due to Head

Office-Don Carlos). When this occurs, they record it as follows:



Service Charge 2,000

Cash in Bank 98,000

Theoretical:


Service Charge 2,000

Cash in Bank 98,000

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(BIFC-Don Carlos)

Other Loans Receivable 100,000


Theoretical:


Home Office 100,000

Payment of Loan

Upon payment of the loan, the payor has the option to whom shall he pay, it is

either to the home office or to the branch, whichever will be convenient to him. For

discussion purposes, it is assumed that the payment was made to the branch.

(BIFC-Don Carlos)

Cash 110,000


Interest Income 10,000

Theoretical:

Cash 110,000


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Remittance of Cash

The remittance of cash by the branch to the home office depends upon the

discretion of the management to do so. When there is a transfer of cash to the home

office, this would constitute a decrease in the investment or receivable of the home

office from the branch. Reciprocally, the equity of the home office in the branch

decreases. The entries would be:


Cash on Hand 100,000


Theoretical:

Cash 100,000


(BIFC-Don Carlos)


Cash 100,000

Theoretical:

Home Office 100,000

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Cash 100,000

Allocation of Expenses

Question:

Does the home office allocate certain expenses to the branch? What are the entries in

both books to record such allocations?

Answers:

Expenses incurred and paid by the branch are recorded directly on the books of

the branch in the usual manner. However, the home office may allocate expenses to a

branch in accordance with the matching principle and to avoid overstatements and

understatements of net income in both books, respectively. Assuming certain expenses

was incurred by the Head Office in relation to the Advertising and Promotions of the

entity as a whole:


Advertising Expense 50,000

Cash 50,000

Theoretical:


Cash 50,000

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The head office may apportion part of the total Advertising Expense to its branch

because the branch has benefited the said expenditure and it is proper to match

revenue of the branch with its expenses for financial information to be faithfully

represented and relevant to the decision of its users.




Theoretical:


Advertising Expenses 25,000

(BIFC-Don Carlos)



Theoretical:

Advertising Expenses 25,000

Home Office 25,000

Closing Entries

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Question:

Does the branch report Income/Loss to the home office? If so, what are the necessary

entries?

Answers:

No. The branch’s Net Income/Loss is not forwarded to the head office and does

not affect balance of the Intracompany accounts unlike in the theoretical practice. The

branch only closes the balance in its Income and Expense Summary to its own

Retained Earnings account.

(BIFC-Don Carlos)


Operating Expenses 20,000

Income and Expense Summary 30,000

Theoretical:


Operating Expenses 20,000


To close the balance in the Income and Expense Summary: (BIFC-Don Carlos)


Retained Earnings 30,000

Theoretical:

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Home Office 30,000

Question:

1. Is there an elimination of intracompany accounts when preparing combined

financial statements at the end of the reporting period?

2. Does the home office and branch compute income taxes separately?

Answer:

When preparing financial statements at the end of the month, there is no

elimination of intracompany accounts of the entity. The accountant just combines all the

financial statements of its branches for consolidation.

No. The head office and the branch do not compute Income Taxes separately;

the head office is the one computing income taxes for the entity as a whole. Therefore,

no income taxes appear on the branch’s financial statements.

CONSIGNMENT ACCOUNTING

Business Model

Type of business: Merchandising

Trade name: GTY Trading

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Entity address: San Isidro Street Valencia City

Product or Services: Garments and RTW

Key Accounts: General public

Receipt of Merchandise from the Main Branch

Consigned goods by GTY Trading were received from the Accounting Office

located at Ilo-ilo according to the Main Office Management’s decisions which are based

on the sales reported weekly to them by this branch.

Distribution of Goods through Written Agreement

The goods are distributed by the consignor to several consignees through the

execution of a written agreement. This written agreement is through signing of the

Registration Form by the consignee provided that he can comply with the necessary

requirements (Biodata and 2X2 picture). Upon the first distribution of goods to the

consignee, he is only allowed to consign goods not exceeding Php. 2,500.00.

Frequency of Remittance by the Consignee and Treatment of Overdue Balances

Under the entity’s old policy, the consignee has an allowable commission of 25%

of their total sales. The remittance should be done weekly and every overdue balance is

charged to 10% penalty. But under their new policy which is being adopted at present,

the consignee is not anymore subjected to 25% allowable commission, instead they are

authorized to put mark-up in every specific consigned goods which will serve as his

commission. Overdue balances are not subjected to 10% penalty, instead as a

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consequence the consignees are being suspended for one month to acquire goods from

the consignor.

Treatment of expenses

The consignor has no more obligation to reimburse expenses borne by the

consignee. Consignors doesn’t account for expenses related to the consignment like

delivery expense, etc. since it’s the responsibility of the consignees to get the goods

from the consignor.

Return of Unsold Merchandise

Consignees are also allowed to return unsold goods to the consignor provided

that the goods were good as new and it must not have been fitted.

Policies and Regulations

The entity imposed policies and regulations which should be followed by the

consignee, enumerated as follows:

1. No Account Balances

2. No Overdue

3. No Sponsoring of Stocks

4. Stock Charges

5. Stock Management

6. No Fitting of Stocks

7. Transactions of Exchanging Stocks are Not Accepted

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8. Consignment Transactions will be done only personally by the consignee

Recognition of Profit

Profit is recognized every end of the month which is equal to the gross profit.

Journal Entries (assumed amounts only)

CONSIGNOR’S BOOK

ACTUAL THEORETICAL

Receipt of merchandise from main office:

Inventory 59,915.48

Due to Main Office 59,915.48

Inventory 59,915.48

Due to Main Office 59,915.48

Release of merchandise to the consignee:

Memo Entry Memo Entry

Payment of Expenses:

Not Applicable

Freight Out(Specific Expense Account)500

Cash 500

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Remittance by the Consignee:

Cash 14970

Sales 14970

Cost of Goods Sold 11983

Inventory 11983

Cash 11830

Commission Expense 2990

Cartage 150

Sales 14970

Merchandise on consignment 11330

Income & Expense Summary 11330

CHAPTER V

CONCLUSION AND RECOMMENDATIONS

Partnership Liquidation Accounting

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Sion Travel & Tours is a service concern type of business which engaged in

domestic and international ticketing, hotel accommodation, day tours and immigration

assistance. This entity was studied under partnership liquidation process. After

considering all the information gathered, this entity used lump sum method in liquidating

its entity which is in accordance with what is illustrated in the book.

In details, in Sion Travel & Tours liquidation, there was no realization of non-cash

assets happened but merely reacquisition of it by the one of the partners. And since no

liability and change in capital took place, there was repayment of investment happened.

Hence it can be said that the liquidation process of Sion Travel & Tours conforms what

is in the accounting standards. The process is only too simplified in such a way that

there was only mere return of partners’ investments as compared to the illustrations

from the book.

As from data gathered, the reacquisition of noncash assets at book value is

justified, however if such assets were sold it would only be right and customary to

consider fair value. It only shows that examples reflected in the books are limited in

terms of illustrating treatments to be employed in cases such as that of Sion Travel &

Tours.

Installment Sales Accounting

In studying installment sales accounting in real practice, the proponents chose

Quality Appliance Plaza-Valencia Branch. This entity merchandised home appliances in

cash sales or in installment credit sales in general public.

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After taking considerations upon the information gathered from Quality Appliance

Plaza Valencia Branch, the inventory system used by the entity and the treatment of the

repossessed inventories are in conformity with the standards which are written and

illustrated in the book. In addition, the entity does not allow trade-ins as part of the down

payment. But there are some methods that we cannot directly conclude that the said

entity conformed or violated some provisions or methods written in the book, as in the

case of recognition of gross profit wherein the entity is not authorized to take account for

it, the recognition of gross profit is only accounted and shown in the books of the Main

Branch.

Moreover, Quality Appliance Plaza is currently using a computerized based

accounting system in recording their transactions. This system is more convenient and

advanced in accounting their sales.

The researchers recommend that there should be a separate recognition of gross

profit for each branch to measure their efficiency and to better match revenue and

expenses.

Long-term Construction Contracts Accounting

Da Dailo Architect is a service concern type of business entity engaged in

planning, designing and construction. This entity was studied to gather essential

information about the accounting methods used in long term construction contracts.

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Based on the data gathered, DA Dailo Architect used the same actual recording

of data of the costs incurred and revenue recognition with that of the theories illustrated

and discussed in the book. The entity also followed fixed price contract which is

determined through the use of predetermined percentages by the contractor. Upon the

signing of the contract the owner/customer is required to have 50% down payment

which is used for the advance purchase of direct material.

Moreover, Da Dailo Architect does not account any subcontract cost and there

were no project segmentation or aggregation since this entity handles construction

efficiently. Progress billings are issued when the project is 90% completed and the final

issuance of progress billings is upon the completion and transfer to the owner of the

constructed building wherein no retention fee is applied. In the determination of

revenue, the entity used percentage of completion method, based on output measures

since it conforms to the matching principle.

After considering all observations and information gathered, it can be concluded

that Da Dailo Architect’s methods employed in accounting their transactions were in

conformity with that of what is illustrated and discussed in the book.

Home-Branch Accounting

Bukidnon Investment and Finance Corporation (BIFC) is a service concern entity

engaged in financing primarily businessmen and farmer. This entity is the Home Office

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located at Valencia City, Bukidnon with two branches located at Don Carlos, Bukidnon

and Cagayan de Oro, City. BIFC was chosen by the proponents wherein they

conducted their study in Home Office and Branch Accounting.

Based on the data gathered, it can be inferred that Bukidnon Investment and

Finance Corporation employs almost but not all of the principles learned and discussed

in accounting books with respect to the recording of all business transactions in both

home office and branch books. Aside from the difference in their usage of certain

accounts title, the most apparent departure from the standards followed in the

theoretical accounting for Home Office and Branch accounting are; (1) the treatment of

a branch’s Income/Loss. Concerning the reporting and forwarding of a branch’s

Income/Loss to the head office, the branch does not report Income/Loss to the head

office and the same is closed in its own Retained Earnings account. Hence, the

intracompany accounts are not affected whether the branch operated income or

incurred losses in the duration of the entity’s operations, which is contrary to what is

discussed and learned in the books. And (2) is the elimination of intracompany accounts

during preparing consolidated financial statements, which is according to the accountant

of the entity, there is no elimination of intracompany accounts during consolidation.

They just prepare and combine financial statements of its branches with the head office

and compute Income Taxes as a whole, which is again a departure from the standards

followed.

Also, the entity’s income and equity really prosper through the establishment of

branches throughout the region for already 23 years. They also disclosed that they have

49

never been into financial difficulty and they have no liabilities from outside creditors

except from taxes.

Presently, the entity is rapidly growing and is potentially to spread throughout the

whole region and might as well in the whole country. We are thus encouraging them to

branch out more in certain areas wherein financial institutions are scarce to increase

more their return on investment. Thus, branching out is one of the most efficient ways to

expand business operations.

Consignment Accounting

The entity studied under consignment was GTY Trading- Malaybalay Branch

located at San Isidro St. Malaybalay City. This entity is a merchandise type of business,

engaged in merchandising garments and RTWs through consignment. GTY Trading is a

consignor entity which distributes goods to several consignees through the execution of

a written agreement.

Through this study, we were able to compare the accounting methods used in

the actual scenario and what have been taught to us in classroom discussions

regarding consignment. Results states that accounting employed in GTY Trading

Malaybalay Branch is in accordance with PFRS regarding their sales transactions

regarding to the receipt of merchandise, distribution of goods to the consignees,

remittances made by the consignees and profit recognition. The provision of PFRS

regarding “Profit Not separately determined” is hereby followed so far as revenue

recognition is concerned. However the provision of PFRS regarding expense

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recognition and allocation to inventories couldn’t be applied due to limited transactions

of such entity.

A written contract is therefore an integral document in this kind of entity. It

contains all the policies and regulations regarding allowable commissions, treatment of

overdue balances and remittances including the responsibilities of the consignees.

Remittance by the consignee should be done weekly and every overdue balance will

lead to the suspension of acquisition of goods by the consignee from the consignor.

There were no allowable commission employed for the consignees but they are in the

position to put mark-ups in every goods they consigned.

Through the information we’ve gathered we recommend to the entity for wise

selection of consignee to control and minimize overdue remittances and non-delivery of

cash by the consignee. As much as possible their agents must be within some specified

area close to the entity’s domicile. As to the forthcoming researchers, we recommend

that they should choose a main branch as the subject of their study to acquire more

information and wider concept of accounting employed.

REFERENCES

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Ballada, W. & Ballada, S. (2010). Partnership and Corporation Accounting.

Dayag, A.J. (2011). Practical Accounting 2.

Guerrero, P.P. & Peralta, J.F. (2011). Advanced Accounting. Vol. 1.

Soriano, F.R. (2009). Partnership and Corporations Law and Applications.

APPENDIX

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A B

C D

GTY TRADING ( (A) Registration Form, (B) Record of the merchandise received

from the Main Office, (C) Interviewee:Mrs Liza Meniolas, (D) Record of Consigned

goods to the consignees)

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(A )Da Dailo Architect

(B) Proponents on their Immersion

advanced accounting2 final

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