CRC-ACE REVIEW SCHOOL, INC.

7358901/7359031 PRACTICAL ACCOUNTING 2 B. N. CASTUCIANO/R. E. HERMOSILLA ******************************************************************************************* INSTALLMENT ACCOUNTING THE REVENUE RECOGNITION PRINCIPLE The revenue recognition principle dictates that revenue be recognized when the earning process is complete or virtually complete and an exchanged transactions has taken place. Revenue is therefore typically recognized when the firm delivers goods, performs services, or as time passes (as in the case of interest revenue or rent revenue). There are other points in the operating cycle where revenue could be recognized. Revenue could be recognized as production takes place, when production is completed, or as cash is collected from the customer. The following exhibit shows these possibilities. Although the revenue recognition principle sets the general rule, there are circumstances where revenue is recognized prior to or after delivery. These exceptional situations are depicted as follows: EXHIBIT - REVENUE RECOGNITION TIME LINE Production Production Sale Price Begins Complete Delivery Collected PRODUCTION PERIOD INVENTORY PERIOD COLLECTION PERIOD I-----------------------------------------------------------------------------------------------------------------I Percentage of Completed Accretion Revenue Instalment Sales Completion Contract Basis Recognition Method and Method Method Principle Cost Recovery Revenue Recognition (General Rule) Method for Special Products with Immediate Marketability Full

RECOGNITION OF REVENUE AFTER DELIVERY Revenue is generally recognized when goods are delivered or services performed at the point of the sale. In some circumstances, recognition of revenue at the point of sale would be premature because collection of the account receivable is highly uncertain and a reasonable estimate of uncollectibles cannot be made. The instalment sales or cost recovery method is used to determine when revenue is recognized from such sales. It should be noted that there are few situations where both of the above mentioned criteria are met. Generally, a firm will refuse credit to those who are unlikely to pay and past experience will provide a means of estimating uncollectibles. A. The instalment sales method may be used when collectibility is uncertain and it is impossible to estimate bad debt loss. The instalment sales method recognizes gross profit on sales as cash is collected. The method is acceptable for financial accounting purposes when collection is highly uncertain and estimation of bad debts is not possible. Under certain circumstances real estate sales firms and franchise operations are required to use this method. While the instalment method has limited applicability for financial reporting purposes it is used frequently for taxes. 1. Under the instalment sales method proportionate amounts of gross profit are recognized as cash is collected. Credit sales are recorded in the usual way, but adjusting entries at the end of each period defer gross profit to the extent that cash is yet to be collected. The gross profit is recognized as the cash is collected. The steps in using the instalment method are summarized below. Step One: Record credit sale in usual manner debiting Instalment Accounts Receivable and crediting Instalment Sales. Each periods instalment sales will be kept in a separate account. Step Two: Cash collections are recorded in the usual manner debiting Cash and crediting Instalment Accounts Receivable. Step Three: At the end of each period, the cost of goods sold on instalment is removed from the books. The gross profit on the instalment sales is set up as a deferred gross profit

account. The deferred gross profit is recognized as cash is collected. The entry to defer gross profit on instalment sales for the period is Instalment Sales xxx Cost of Instalment Sales xxx Deferred Gross Profit xxx The Deferred Gross Profit account should be reported as a contra accounts receivable account on the balance sheet. In practice, however, it is generally shown as unearned revenue and appears in the liability section of the balance sheet. Step Four: Compute the gross profit percentage for the years instalment sales. Instalment Sales Cost of Instalment Sales Gross Profit Percentage = ----------------------------------------------------Instalment Sales This percentage is calculated every year that instalment sales are made. Step Five: Apply the gross profit percentage for each years instalment sales to cash collected from accounts relating to that year to determine the amount of realized gross profit to be recognized. Gross Profit Recognized For Year 20xx = Gross Profit Percentage For Year X Cash Collected From Instalment Accounts Receivable From Year xx The entry to recognize gross profit earned debits Deferred Gross Profit for Year xx and credits Realized Gross Profit on instalment sales. 2. The seller can generally repossess merchandise sold on instalment, if payments are stopped. Repossession signals uncollectibility of the related account. The account receivable and related deferred gross profit must be written off. The repossessed merchandise should be recorded at it resale or fair market value. There may be a gain or loss on repossession. 3. Interest included in instalment payments should be separated from repayment of the account when interest is charged. Deferred gross profit is realized only on the portion of each payment that is a repayment of the principal amount. Any interest included in the cash collections must be accounted for separately. Interest should be accounted for under the effective interest method.

B. The cost recovery method recognizes no gross profit until the full cost of goods sold has been recovered. The cost recovery method is used when there is a very high degree of uncertainty about collectibility of the account. No gross profit is recognized on the sale until the full cost of goods sold has been recovered. Thereafter, all cash received is reported as gross profit. The cost recovery system is rarely used for financial statement purposes and is not allowed for income taxes. PROBLEMS I. The following trial balance was prepared for the DR Sales Corporation on December 31, 20x8. Cash 25,000 Installment accounts receivable, 20x8 80,000 Installment accounts receivable, 20x7 20,000 Installment accounts receivable, 20x6 5,000 Accounts receivable 40,000 Inventory, December 31, 20x7 30,000 Other assets 52,000 Accounts payable 75,000 Deferred gross profit, 20x7 96,000 Deferred gross profit, 20x6 22,500 Capital stock 100,000 Retained earnings 44,500 Sales 192,000 Installment sales 500,000 Purchases 455,000 Repossessed merchandise 10,000 Cost of installment sales 310,000 Shipments on installment sales 310,000 Loss on repossessions 13,000

300,000 . 1,340,000 1,340,000 The following balances were found in the post-closing trial balance prepared at the beginning of 20x8: Installment accounts receivable, 20x7 P240,000 Installment accounts receivable, 20x6 50,000 Deferred gross profit, 20x7 96,000 Deferred gross profit, 20x6 22,500 The inventory of new and repossessed merchandise on Dec. 31, 20x8 was P35,000. At the end of December, before preparing the trial balance, the bookkeeper made the following incomplete entry: Repossessed merchandise 10,000 Loss on repossessions 13,000 Installment accounts receivable, 20x8 5,000 Installment accounts receivable, 20x7 10,000 Installment accounts receivable, 20x6 8,000 Required: Reconstruct the entries recorded in the books of DR Sales Company and prepare the necessary adjusting entries and closing entries at the end of the year. II. On January 1, 20x8, the S Realty Company sold property carried in inventory at a cost of P750,000 for P1,200,000 to be paid 10% down and the balance in annual installments over a 10-year period at 12% interest. Installment payments are to be made at the end of each year. S uses the installment method of accounting revenue. Prepare the necessary journal entries to record the above transaction in the books for the year 20x8 and 20x9 using two methods. III. On August 31, 20x2, E Motor Company, which maintains a perpetual inventory sold a new car to O Corporation for P800,000. The car cost the seller, P610,000. O Corporation paid P200,000 down and received a P80,000 allowance on an old car traded, the balance being payable in twelve equal monthly installments beginning on September 30, 20x2 inclusive of 12% interest. The used car traded-in had an estimated value of P110,000 after reconditioning cost of P20,000. After collecting, six monthly installments O Corporation defaulted and the car was repossessed. When reacquired, the car was appraised as being worth P300,000. To improve its salability, the company expended P50,000 for reconditioning. Prepare the necessary entries on the books of E Motor to record the above transactions. IV. Love Corporation has been using the cash method to account for income since its first year of operations in 20x6. All sales are made on credit with notes receivable given by customers. The income statements for 20x6 and 20x7 included the following amounts: 20x6 20x7 Revenues - collection on principal P32,000 P50,000 Revenues - interest 3,600 5,500 Cost of goods purchased* 45,200 52,020 *Includes increase in inventory of goods on hand of P2,000 in 20x6 and P8,000 in 20x7 The balances due on the notes at the end of each year were as follows: 20x6 20x7 Notes receivable - 20x6 P62,000 P36,000 Notes receivable - 20x7 60,000 Unearned interest revenue - 20x6 7,167 5,579 Unearned interest revenue - 20x7 8,043 Under the installment method, calculate the realized gross profit in 20x6 and 20x7. V. The following account balances appear on the books of MP Company as of December 31, 20x3: Cash P 60,000 Capital stock P200,000 Accounts receivable 320,000 Retained earnings 19,500 Merchandise inventory 30,000 Sales 500,000 Accounts payable 12,000 Purchases 256,000 Unrealized gross profit, 20x2 104,500 Expenses 170,000 The accounts receivable account is a controlling account for three subsidiary ledgers, which show the following totals: 20x2 installment contracts P 60,000 20x3 installment contracts 240,000 Charge accounts (terms, 30 days net) 20,000 The gross profit on installment contracts for 20x2 was 55% of sales price; on installment contracts for 20x3, 50%, with the gross profit on regular charge sales being somewhat below 50%.

Operating expenses

Collections on installment contracts for 20x2 total P120,000 for the year just closed; on installment contracts for 20x3, P160,000; on charge accounts, P96,000. The charge accounts on the books at the beginning of the year amounted to P16,000. Repossession for the year were on installment contracts for 20x2, on which the uncollected balances at the time of repossession amounted to P10,000. Merchandise repossessed was charged to Purchases at the amount of the uncollected balance. Appraisal reports show that this repossessed merchandise actually was worth P8,000 at the time of repossession. The final inventory of merchandise valued at cost amounted to P26,000, including the repossessed merchandise at P8,000. Calculate: (1) the total realized gross profit before gain or loss on repossession in 20x3, (2) the total deferred gross profit as of December 31, 20x3, and (3) the gain (loss) on repossession. VI. GD Corporation sells farm machinery on the installment plan. On July 1, 20x8, GD entered into an installment sale contract with GT Inc. for a 10-year period. Equal annual payments under the installment sale of P100,000 and are due on July 1. The first payment was made on July 1, 20x8. Additional Information: 1. The amount that would be realized on an outright sale of similar farm machinery is P676,000. 2. The cost of the farm machinery sold to GT Inc. is P500,000. 3. The finance charges relating to the installment period are P324,000 based on a stated interest rate of 10%, which is appropriate. 4. Circumstances h that the collection of the installments due under the contract is reasonably assured. What income or loss before income taxes should GD records for the year ended December 31, 20x8, as a result of the transaction above? VII. VV Company, on January 2, 20x8, entered into a contract with a manufacturing company to purchase room-size air conditioners and to sell the units on an installment plan with collections over approximately 30 months with no carrying charge. For income tax purposes VV Company elected to report income from its ales of air conditioners according to the installment method. Purchases and sales of new units were as follows: Units Purchased Units Sold Year Quantity Price Each Quantity Price Each 20x8 1,400 P13,000 1,100 P20,000 20x9 1,200 11,200 1,500 17,000 20x10 900 13,600 800 18,200 Collections on installment sales were as follows: 20x8 20x9 20x10 20x8 sales P4,200,000 P8,800,000 P 8,000,000 20x9 sales 5,100,000 10,000,000 20x10 sales 3,460,000 In 20x10, 50 units from the 20x9 sales were repossessed and sold for P8,000 each on the installment plan. At the time of repossessions, P144,000 had been collected from the original purchasers and the units had a fair value of P300,000. General and administrative expenses for 20x10 were P6,000,000. No charge has been made against current income for the applicable insurance expense from a 3-year policy expiring June 30, 20x11 costing P720,000 and for an advance payment of P1,200,000 on a new contract to purchase air conditioners beginning January 2, 20x11. Required: Assuming that the weighted-average method is used for determining the inventory cost, including repossessed merchandise; prepare schedules computing for 20x8, 20x9, and 20x10: (a) 1. The cost of goods sold on installments. 2. The average unit cost of goods sold on installments for each year. (b) The gross profit percentages for 20x8, 20x9, and 20x10. (c) The gain or loss on repossessions in 20x10. (d) The net income from installment sales for 20x10 (ignore income taxes) MULTIPLE CHOICE Items 1 and 2 are based on the following: Virgo Corp. reported the following accounts for the year just ended: Collections from installment sales of 1999 P 210,000 Collections from installment sales of 1998 560,000 Deferred gross profit, 1998 350,000

Deferred gross profit, 1999 840,000 Regular sales 1,400,000 Cost of regular sales 1,050,000 The gross profit rate on installment sales was 10% higher than regular sales. For 1999, the gross profit on installment sales was 3% lower than in 1998. In computing the realized gross profit from collections of 1998 installment sales, 1. The applicable gross profit rate was a. 28% b. 38% c. 35% d. 25% 2. Total realized gross profit for 1999 is a. P252,700 b. P286,300 c. P602,700 d. P636,300

3. Gemini Co. reported the following data for 1999: In thousand Pesos 1998 1999 Installment sales 1,600 1,800 Cost of installment sales 960 1,200 Collections 1998 installment sales 500 600 1999 installment sales 0 720 The total realized gross profit in 1999 on collections of 1998 and 1999 installment sales was: a. P528,000 b. P300,000 c. P480,000 d. P240,000 4. Scorpio started operations on January 1, 1998 selling home appliances and furniture on installment basis. For 1998 and 1999, the following represented operational details: In thousand Pesos 1998 1999 Installment sales 1,200 1,500 Cost of installment sales 720 1,050 Collections 1998 installment sales 630 450 1999 installment sales 900 On January 7, 2000 an installment sale account in 1998 defaulted and the merchandise with a market value of P15,000 was repossessed. The related installment receivable balance as of date of default and repossession was P24,000. The balance of the unrealized gross profit as of the end 1999: a. P228,000 b. P360,000 c. P192,000 d. P275,000 Items 5 through 8 are based on the following: White Company sold to Red Company a property on Oct. 1, 1998 for 500,000 which carried in its books for P250,000. The company received P100,000 on the date of the sale and a mortgage note for P400,000 payable in twenty (20) semi-annual installments of P20,000 plus interest on the unpaid balance principal at 16% per annum. White has an accounting period ending December 31. 5. The realized gross profit to be recognized by White in 1998 if gross profit is recognized periodically in proportion to collections would be a. P50,000 b. P250,000 c. P20,000 d. Zero 6. The realized gross profit to be recognized by White in 1999 if gross profit is recognized periodically proportional to collections would be a. P20,000 b. P10,000 c. Zero d. P40,000 7. Assuming that the mode payment is 20 semi-annual equal installment inclusive of 16% interest, the amount of installment Red should pay is a. P20,000 b. P40,741 c. P84,000 d. P50,926 8. The gross profit to be recognized by White in 1999 if gross profit is recognized in the period of sale would be a. P20,000 b. P10,000 c. P40,000 d. Zero Items 9 and 10 are based on the following:

DARLING Trading accounts for installment sales by recognizing the related income in the proportion of collection made to the selling price. At the end of 2000, the companys records reflected the following: Installment Accounts Receivable Deferred Gross Profit 1998 P240,000 1998 P180,000 1999 300,000 1999 420,000 2000 460,000 2000 540,000 Gross profit rates on installment sales were 30%, 35%, and 40%, respectively, and there were no defaults or write-offs in 2000. 9. How much realized gross profit should be reported in the 2000 statement? a. P341,000 b. P691,000 c. P376,000 d. P779,000 10. How much was collected in 2000 on 1999 installment accounts receivable? a. P80,000 b. P315,000 c. P164,000 d.P376,000 Items 11 to 14 are based on the following: EVERLASTING Marketing Co. started operations in 1999, selling exclusively on installment basis. Data for the first two years follows: 1999 2000 Installment sales P400,000 P500,000 Cost of installment sales 240,000 350,000 Collection on 1999 accounts 210,000 150,000 Collection on 2000 accounts 300,000 Defaulted account balances 15,000 The default related to a 1999 sale, and the appliance which the company estimated to have a resale value of P10,000 after reconditioning at a cost of P300 was repossessed. 11. 12. 13. The deferred gross profit at the end of 1999 was: a. P70,000 b. P76,000 c. P114,000 The deferred gross profit at the end of 2000 was: a. P45,000 b. P60,000 c. P70,000 The realized gross profit during the year 2000 was: a. P60,000 b. P90,000 c. P150,000 d. P130,000 d. P114,000 d. P200,000 d. P2,300 loss

14. The default and related repossession resulted in a: a. No gain/loss b. P700 gain c. P2,000 loss

Items 15 and 16 are based on the following: FREEVERSE Co. sells a new car, which cost P240,000, for P360,000. A used car is accepted as down payment, and P150,000 is allowed on the trade in. The company expects to sell the used car for P140,000, after reconditioning cost P15,000. Used car sales are priced to yield a 25% gross profit. 15. 16. At the time of sale, the used car would be booked at: a. P75,000 b. P90,000 c. P125,000 If installment of P28,000 are collected, then realized gross profit is a. P5,600 b. P9,333 c. P23,600 d. P150,000 d. P39,333

Items 17 to 19 are based on the following: The following information is taken from the unadjusted trial balance as of December 31, 2000 for GLISK Corporation: Cash P 15,000 Accounts receivable 60,000 Installment receivable 1998 15,000 Installment receivable 1999 45,000 Installment receivable 2000 240,000 Merchandise inventory 52,600 Repossessed goods 15,000 Purchases 493,000

Operating expenses 76,300 Repossession loss 24,000 Cash sales P 90,000 Charged sales 180,000 Installment sales 446,400 Other revenue 8,840 Deferred gross profit 1998 22,200 Deferred gross profit 1999 39,360 The rates of gross profit on installment sales were: 30% in 1998 and 32% in 1999. During 2000, the installment sales price exceeded the cash price be 24%, while the charge sales price exceeded the cash sales price by 20%. The repossession in 2000 related to 1998 account balances of P14,000 and 1999 account balances of P25,000. The inventory of new and repossessed merchandise at December 31, 2000 amounted to P77,000. 17. 18. 19. Total realized gross profit on installment sales in 2000 amounted to: a. P102,700 b. P156,240 c. P179,260 d. P232,800 The repossession loss was: a. P9,000 b. P11,800 The net income for 2000 was: a. P100,000 b. P115,000 c. P23,200 c. P179,260 d. P24,000 d. P195,000

Items 20 and 21 are based on the following: On September 30, 2000, HONEY Corp. sold equipment for P300,000, with a down payment of 20% and the balance in twelve equal monthly installments, starting on October 31, 2000, plus interest at 18% per annum. The equipment cost P225,000. 20. 21. Assuming use of long-end method, interest revenue in 2000 would be: a..P1,800 b. P9,900 c. P10,800 d. P13,500 Assuming use of short-end method, interest revenue in 2000 would be: a. P1,800 b. P9,900 c. P10,800 d. P13,500

Items 22 to 24 are based on the following: INHA Ventures began operations in 2000. All sales are on credit, with customers giving notes receivable. The statements of income for the years 2000 and 2001 included, among others, the following: 2000 2001 Revenue principal collections P480,000 P750,000 Revenue interest collections 54,000 82,500 Cost of installment sales 900,000 924,000 Operating expenses 112,500 157,500 The balances due on the customers promissory notes, at the end of 2000 and 2001, were as follows: 2000 2001 Notes receivable, 2000 P810,000 P540,000 Notes receivable, 2001 ---900,000 Discount on 2000 notes receivable 90,000 66,000 Discount on 2001 notes receivable 84,000 22. The gross profit realized in 2000 was: a. P96,000 b. P120,000 c. P132,000 23. The gross profit realized in 2001 on 2000 sales was: a. P61,500 b. P96,000 c. P151,200 24. The gross profit realized in 2001 on 2001 sales was: a. P96,000 b. P132,000 c. P151,200 d. P144,000 d. P162,500 d. P167,500

25. The Gums Company uses the installment method of reporting for accounting purposes. The following data were obtained for the years 1998 to 2000. 1998 1999 2000

Installment sales P600,000 P810,000 P990,000 Cost of installment sales 420,000 486,000 643,500 Gross profit P180,000 P324,000 P346,500 Installment contracts receivable balances, December 31: 1998 1999 2000 1998 sales P360,000 P270,000 P120,000 1999 sales 600,000 390,000 2000 sales 780,000 In 2000, one of the customers defaulted in his payment and the company repossessed the merchandise with an estimated market value of P30,000. The sales were in 1998 and the unpaid balance on the date of repossession was P45,000. Compute for 2000 (1) The gain or (loss) on repossession; (2) Total realized gross profit, and (3) The deferred gross profit a. (1) P(1,500); (2) P189,000; (3) c. (1) (1,500); (2) 189,000; (3) P451,500 465,000 b. (1) 750; (2) 129,000; (3) d. (1) 1,500; (2) 73,500; (3) 465,000 273,000 Items 26 and 27 are based on the following: The Kat Store accounts for its sales on the installment basis. As the beginning of 1999, ledger accounts include the following balances: Installment contracts receivable, 1997 P30,000 Installment contracts receivable, 1998 96,000 Deferred gross profit, 1997 12,600 Deferred gross profit, 1998 36,000 At the end of 1999 account balances before adjustment for realized gross profit on installment sales are: Installment contracts receivable, 1997 P --0-Installment contracts receivable, 1998 24,000 Installment contracts receivable, 1999 130,000 Deferred gross profit, 1997 12,600 Deferred gross profit, 1998 34,350 Deferred gross profit, 1999 60,000 Installment sales in 1999 are made at 25% above the cost of merchandise sold. During 1999 upon default in payment by the customer, the company repossessed the merchandise with an estimated market value of P2,000. The sales was in 1998 for P10,800, and P6,400 had been collected prior to repossession. 26. Compute the gain or (loss) on repossession assuming that: Profit is Recognized when the sale is made Profit is Recognized in proportion to Periodic (Point of Sale) Collections (I/Sales M) a. P(2,400) P(1,520) b. 750 ( 750) c. 0-(1,520) d. (2,400) ( 750) 27. The realized gross profit on December 31, 1999 is: a. P73,600 b. 71,950 c. P34,000 d. 70,000

28. Yanni Corporation, which began business on January 1, 1998, appropriately uses the installment method of accounting. The following data were obtained for the years 1998 and 1999. 1998 1999 Installment sales P700,000 P840,000 Cost of installment sales 560,000 630,000 General and Administrative expenses 70,000 84,000 Cash collections on sale of 1998 300,000 250,000 Cash collection on sales of 1999 400,000 Compute: (1) The balance of DGP, 1998 on Dec. 31, 1998; (2) The balance of DGP, 1998 on December 31, 1999, and (3) DGP, 1999 on December 31, 1999. a. (1) P80,000; (2) P30,000; (3) P -- 0 c. (1) 80,000; (2) 40,000; (3) 120,000 b. (1) 80,000; (2) 30,000; (3) 47,500 d. (1) 80,000; (2) 30,000; (3) 110,000

29.

Den Machinery sold goods to Fer Co. on Jan. 1, 1999. The cash selling price would have been P379,100 but since the sales was made on installment, annual payments of P100,000 were required starting Dec. 31, 1999 including interest at 10% over 5 years. What amount of interest revenue should be included on Dec. 31, 2001? a. P24,180 b. P24,871 c. P37,910 d. P50,000 e. answer not given On Jan. 2, 1999, Bee Co. sold a used machine to Coo Inc. for P900,000 resulting in a gain of P270,000. On that date, Coo paid P150,000 cash and signed a P750,000 10% note for the balance. The note was payable in three annual installments of P250,000 beginning Dec. 31, 2000. Bee appropriately accounted for the sale under the installment method. Coo made a timely payment of the first installment including accrued interest. What amount of deferred gross profit should Bee report on Dec. 31, 2000? a. P150,000 b. P172,500 c. P180,000 d. P225,000 e. answer not given

30.

31. The Ben Furniture Co. appropriately used the installment sales method in accounting for the following installment sales. During 1999 Ben sold furniture to an individual for P3,000 at a gross profit of P1,200. On June 1, 1999 this installment account receivable had a balance of P2,200 and it was determined that no further collections would be made. Ben therefore repossessed the merchandise. When reacquired the merchandise was appraised as being worth only P1,000. In order to improve its salability, Ben incurred costs of P100 for reconditioning. What should be the loss on repossessions attributable to this merchandise? a. P220 b. P320 c. P880 d. P1,100 Items 32 to 35 are based on the following: Mr. Mer Te is a dealer in appliance, which he sells on an installment basis. A refrigerator which originally cost P924.00 was sold by him for P1,650.00 to Jo San who made a down payment of P220.00 but defaulted in subsequent payments. Mr. Mer repossessed the refrigerator at an appraised value of P460.00. To improve its salability he expended P60.00 for reconditioning. He was able to sell the refrigerator to Pet Rey for P1,000 at a down payment of the first installment of P250. 32. The realized gross profit on the first installment (Jo San) is: a. P26.40 b. P96.80 c. P120.00 d. P230.40 33. The realized gross profit on the second installment (Pet Rey) is: a. P80.00 b. P95.80 c. P105.80 d. P120.00 34. The loss on repossession of the first installment is: a. P340.80 b. P970.00 c. P629.20 d. P319.44 35. The deferred gross profit on the second installment is: a. P120.00 b. P230.40 c. P319.44 d. 480.00 Items 36 and 37 are based on the following: On October 31, 2003, India Co. sold for P750,000 property that had a cost of P600,000. India received P200,000 down, the balance is payable in monthly installments, with the first payment due at the end of November. India decides to report the profit on the sale under the installment basis. 36. Assuming the monthly payments are sums consisting of P6,000 to apply against the principal, plus interest on the unpaid balance of 12%. How much is the realized gross profit for 2003? a. P42,400 b. P44,588 c. P2,400 d. P40,201 37. Assuming the monthly payments are equal amounts of P6,000 that includes interest at 12% on the unpaid amount of the obligation, with any excess reducing the principal, how much is the realized gross profit in 2003? a. P42,400 b. P40,201 c. P40,200 d. P40,000 **** Thought is creative, Fear attracts like energy, Love is all there is **** **** THE END ****

CRC-ACE REVIEW SCHOOL, INC.

7358901/7359031

PRACTICAL ACCOUNTING 2

B. N. CASTUCIANO/R. E. HERMOSILLA LONG-TERM CONSTRUCTION CONTRACTS

THE REVENUE RECOGNITION PRINCIPLE The revenue recognition principle dictates that revenue be recognized when the earning process is complete or virtually complete and an exchanged transaction has taken place. Revenue is therefore typically recognized when the firm delivers goods, performs services, or as time passes (as in the case of interest revenue or rent revenue). There are other points in the operating cycle where revenue could be recognized. Revenue could be recognized as production takes place, when production is completed, or as cash is collected from the customer. The following exhibit shows these possibilities. Although the revenue recognition principle sets the general rule, there are circumstances where revenue is recognized prior to or after delivery. These exceptional situations are depicted as follows: EXHIBIT - REVENUE RECOGNITION TIME LINE Production Production Sale Price Begins Complete Delivery Collected PRODUCTION PERIOD INVENTORY PERIOD COLLECTION PERIOD I-----------------------------------------------------------------------------------------------------------------I Percentage of Completed Accretion Revenue Instalment Sales Completion Contract Basis Recognition Method and Method Method Principle Cost Recovery Revenue Recognition (General Rule) Method for Special Products with Immediate Marketability REVENUE RECOGNITION PRIOR TO DELIVERY Full

Firms may justify recognizing revenue prior to delivery when the selling price of the product has been reasonably assured, the firm has a reasonable basis for knowing or estimating the cost of the product, and there is good reason to expect that the price will be collected. Revenue from long-term construction products may be recognized as production takes place (percentage of completion method) or when production is completed (completedcontract method). Revenue is often recognized upon completion of production for special products with immediate marketability (gold, certain agricultural crops). Some accountants argue that revenue should be recognized as products requiring long aging period such as wine, increase in value while in the inventory (accretion basis). Revenue earned on long-term construction projects may be recognized under the percentage of completion or completed-contract methods.
Revenue is recognized prior to delivery for many long-term construction products. A signed contract sets the price for the product, the construction company generally has good estimates of the cost of construction, and there should normally be reasonable assurance that the contract price will be collected. There are two methods in use for recognizing revenue from long-term construction contracts - the percentage of completion method and the completed contract method. The general use is the percentage of completion method. 1. Under the percentage of completion method, revenue is recognized as production takes place. At the end of each accounting period, the construction company will determine the percentage of completion of the product based upon costs to date and estimated total costs. An estimate of final gross profit (contract price minus estimated total construction costs) is made. Gross profit recognized for the period is the difference between total gross profit earned to date and gross profit already recognized in previous periods. Construction costs to date plus the part of the total gross profit earned to date are accumulated in the inventory account called Construction in Process/Progress. The steps in using the percentage of completion method are described below. *Step One. Actual construction costs are accumulated in the inventory account, Construction in Process/Progress.

*Step Two. Accounts Receivable is debited and Billings on Contracts is credited when the firm bills the customer for progress payments. The billing account is a contra construction in process account and is subtracted from that account when reporting construction in process in excess of billings on the balance sheet. *Step Three. Cash collected is credited to Accounts Receivable and debited to Cash. *Step Four. At the end of each period the cumulative amount of gross profit earned to date on the contract is estimated. Costs incurred to Date Percentage of Completion = -------------------------------Estimated Total Costs Gross profit Earned To Date = Percentage of completion X (Contract Price - Estimated Total Costs) *Step Five. Gross profit to be recognized for the accounting period equals to gross profit earned to date minus gross profit recognized in previous periods. The gross profit for the period is debited to Construction in Process/Progress and credited to Contract Revenue. The balance in Construction in Process/Progress equal to total construction costs to date plus recognized profit earned to date. The current period construction costs are recognized as expenses. Contract revenue equals current period construction costs plus gross profit recognized for the period. *Step Six. When the contract is completed and fully billed, the debit balance in Construction in Process/Progress will be identical to the credit balance in Billings on Contracts. The entry to close out the project debits the billings account and credit the construction in process/progress account 2. The completed contract method recognizes all revenue when construction is completed. The completed contract method is similar to recognizing revenue at the point of sale because when a contract exists there should be a very limited holding period after construction is completed. Under the completed contract method, no revenue is recognized until construction is completed. The Construction in Process/Progress account will contain costs to date. It will not contain gross profit earned to date. Gross profit earned over the life of the contract will be the same as under the percentage of completion method. 3. The percentage of completion method is the preferable method for accounting for long term contracts. The accounting profession considers the percentage of completion method to be preferable when reasonable cost estimates are available. The completed contract method is used when such estimates cannot be made. The percentage of completion method is considered at present by the profession as GAAP. 4. Estimated losses on long-term contracts must always be recognized fully in the accounting period when the loss estimate is made. This is true under both the percentage of completion and completed contract methods. Any gross profit previously recognized under the percentage of completion method must be removed from the Construction in Process/Progress account. PROBLEMS: I. The F. Cruz Construction receives a contract to build a building over a period of 3 years for a price of P7,000,000. Information relating to the performance of the contract is summarized as follows: 20x4 20x5 20x6 Construction costs incurred during the year P1,500,000 P2,420,000 P1,680,000 Estimated costs to complete 3,500,000 1,680,000 Billings during the year 1,200,000 2,600,000 3,200,000 Collections during the year 1,000,000 2,700,000 3,300,000 Required: Prepare the entries under the percentage of completion. II. The Consunji Company signed a contract to build a dam over a period of 3 years for a price of P20,000,000. Information relating to the performance of the contract is summarized as follows: 20x4 20x5 20x6 Construction costs incurred during the year P 4,000,000 P 8,000,000 P12,000,000 Estimated costs to complete 12,000,000 12,000,000 -

Billings during the year 3,000,000 7,000,000 10,000,000 Collections during the year 2,600,000 7,200,000 10,200,000 Required: Prepare the entries under the percentage of completion. III. Edward is a contractor for the construction of large office buildings. At the beginning of 19x2, 3 buildings were in progress. The following data described the status of these buildings at the beginning of the year: Bldg. 1 Bldg. 2 Bldg. 3 Contract price P4,000,000 P9,000,000 P13,150,000 Cost incurred to 1/1/x2 2,070,000 6,318,000 3,000,000 Estimated cost to complete 1,380,000 1,782,000 9,000,000 Cost incurred during 19x2 930,000 1,800,000 7,400,000 Estimated cost to complete as of 12/31/x2 750,000 -02,800,000 During 19x2 Building 4 was started and incurred a total costs of P800,000, contract price, P2,500,000, estimated cost to complete as of 12/31/x2, P1,200,000. Required: Compute the gross profit recognized in 19x2 using the cost-to-cost percentage-ofcompletion method. IV. The Tesia Construction had two projects for which it reported the following as of the end of 19x3. Bulacan Pampanga Contract Price P 4,800,000 P 860,000 19x2: Costs incurred 3,400,000 Percent completed 75% 19x3: Costs incurred 1,240,000 140,000 Percent completed in 19x3 25% 15% The company used the percentage of completion method of accounting revenue. Required: Compute the income from construction for 19x2 and 19x3. V. The Pampanga Tower Construction Co. enters into a contract on January 1, 20x8, to construct a 20story office building for P400,000,000. During the construction period, many change orders are made to the original contract. The following schedule summarizes these changes made in 20x8. Cost incurred Estimated Cost 20x8 to Complete Contract Price Basic contract P80,000,000 P280,000,000 P400,000,000 Change Order #1 500,000 500,000 1,250,000 Change Order #2 500,000 -0Change Order #3 1,000,000 1,000,000 Still to be negotiated at least cost Change Order #4 1,250,000 -01,000,000 Compute the gross profit on construction to be recognized during the year under the cost to cost percentage of completion method must be: MULTIPLE CHOICE Items 1 and 2 are based on the following: Gelli Builders, Inc. entered into a P 10,000,000 contract to build a multi-purpose recreational facility. The company estimated a total cost of P 8,000,000 to complete the project in about thirty (30) months, from July 1, 1999. Gelli uses the percentage- of- completion method of revenues recognition. On January 2, 2000, because of changes made in the original design the contract price was reduced to P 9,500,000. Gellis records disclosed the following information on this project: Yea Current Years Actual Estimated Cost To Progress Billings r Costs Complete 199 P 2,000,000 P 6,000,000 P 2,250,000 9 200 4,150,000 2,050,000 4,750,000 0 200 2,100,000 ----0---2,500,000 1 1. What was the estimated gross profit recognized for the year ending December 31, 2000? a. P 475,000 b. P 500,000 c. P 850,000 d. P 975,000 2. What was the estimated gross profit recognized for the year ending December 31, 2001?

a. P 275,000

b. P300,000

c. P 325,000

d. P 400,000

Items 3 to 5 are based on the following:

Bruce uses the cost-to-cost percentage completion in reporting earnings. Ram assumed leadership of the firm after his fathers retirement and in reviewing the firms records, finds the following information on a recently completed project with a contract price of P 5,000,000.
1999 2000 2001 Cost incurred to-date P 900,000 P 2,550,000 P ? Gross profit ( loss ) 100,000 350,000 ( 50,000 ) Mr. Ram wants to know how effectively the company operated during the past three years on the project and since he finds that the information is incomplete, has asked you to help by answering the following: 3. What percent of the project was completed by the end of 2000? a. 40% b. 50% c. 60% d. 70% 4. How much was the total estimated cost to complete the project as at the end of 2000? a. P1,500,000 b. P1,600,000 c. P1,700,000 d. P1,800,000 5. What was the amount of the actual cost incurred during the year 2001? a. P1,750,000 b. P1,900,000 c. P2,050,000 d. P2,200,000 Items 6 to 8 are based on the following: Chestnut Enterprises reports income for tax purposes on a completed contract basis and income for financial accounting purpose on a percentage of completion basis. The companys construction activities for the year 1999 and 2000 are summarized below: 1999 2000 Actual Cost Estimated Cost Actual Cost Estimated Cost Project Incurred To Complete Incurred To Complete A P910,000 P390,000 P440,000 P-0B 900,000 -0-0-0C -0-0640,000 160,000 D -0-0725,000 -0Contract prices are: A, P1,750,000; B, P1,250,000; C, P1,150,000 and D, P950,000. 6. 7. 8. For income tax purposes, the gross profit reported in 1999 was: a. P 0 b. P350,000 c. P450,000 For accounting purposes, the gross profit reported in 1999 was: a. P315,000 b. P350,000 c. P450,000 For accounting purposes, the gross profit reported in 2000 was: a. P450,000 b. P505,000 c. P525,000 d. P800,000 d. P665,000 d. P590,000

9. Vincent Ventures is a contractor for the fabrication of motor service centers. At the end of 1999, the following projects were in progress: Contract Price Cost Incurred Estd. Cost to Complete Project 1 P 3,800,000 P 2,070,000 P 1,380,000 Project 2 9,000,000 5,670,000 2,430,000 Project 3 13,250,000 1,800,000 10,200,000 During the year 2000, the following costs were incurred: Project 1 - P1,030,000 (estimated cost to complete, P775,000). Project 2 - P2,580,000 (project completed) Project 3 - P5,700,000 (estd cost to complete, P5,000,000). Project 4 - P1,500,000 (contract price, P7,200,000; estd cost to complete, P4,500,000). Using the percentage-of-completion method, the total gross profit to be reported in 2000 would be: a. P397,500 b. P562,500 c. P607,500 d. P682,500 10. The following data relating to a construction job started by Mokong Company during 1999: Total contract price P100,000

Actual cost during 1999 Estimated remaining costs Billed to customer during 1999 Received from customer during 1999

20,000 40,000 30,000 10,000

Under the percentage-of-completion method, how much should Mokong recognize as gross profit for 1999? a. P 0 b. P13,333 c. P26,667 d. P33,333 11. Ms. D Builders Inc. has consistently used the percentage-of-completion method accounting for construction type contracts. During 1999, Ms. D started work on a P9,000,000 fixed-price construction contract that was completed in 2001. Ms. D accounting records disclosed the following: December 31 1999 2000 Cumulative contract costs incurred P3,900,000 P6,300,000 Estimated total costs at completion 7,800,000 8,100,000 How much income would Ms. D have recognized on this contract for the year ended Dec. 31, 2000? a. P100,000 b. P300,000 c. P600,000 d. P700,000 Garfield Construction Company has consistently used the percentage- of- completion method. On January 10, 1999, Garfield began on a P6,000,000 construction contract. At the inception date, the estimated cost of construction was P4,500,000 the following data relate to the progress of the contract: Income recognized at 12/31/99 P 600,000 Cost incurred 1/10/99 through 12/31/2000 3,600,000 Estimated cost to complete at 12/31/2000 1,200,000 How much income should Garfield recognized for the year ended December 31, 2000? a. P300,000 b. P525,000 c. P600,000 d. P900,000 Grumpy Construction, Inc. has consistently used the percentage of completion method of recognizing income. In 1999 Grumpy started work on a P9,000,000 construction contract which was completed in 2000. The accounting records disclosed the following data for 1999: Progress billings P3,300,000 Costs incurred 2,700,000 Collections 2,100,000 Estimated cost to complete 5,400,000 How much income should Grumpy have recognized in 1999? a. P300,000 b. P450,000 c. P600,000 d. P700,000 Happy Construction, Inc. has consistently used the percentage- of- completion method of recognizing income. During 1999, Happy started work on a P3,000,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31,1999: Cost incurred P 930,000 Estimated cost to complete 2,170,000 Progress billings 1,100,000 Collections 700,000 How much loss should Happy have recognized in 1999? a. P230,000 b. P100,000 c. P30,000 d. P 0 Doc Construction Company has consistently used the percentage-of-completion method of recognizing income. During 1999 Doc started work on a P7,500,000 fixed-price construction contract which was completed in 2002. The accounting records disclosed the following data: Cumulative contract costs Estimated costs at incurred completion At 12/31/1999 P 500,000 P5,000,000 At 12/31/2000 2,750,000 5,500,000 At 12/31/2001 5,000,000 6,000,000 How much income should Doc have recognized on this contract for the year ended Dec. 31, 2001? a. P250,000 b. P416,667 c. P500,000 d. P562,500

12.

13.

14.

15.

16.

Sneezy Construction Company has consistently used the percentage-of-completion method of recognizing income. During 1999 Sneezy started work on a P3,000,000 construction contract which was completed in 2000. The accounting records provided the following data: 1999 2000 Progress billings P1,100,000 P1,900,000 Cost incurred 900,000 1,800,000 Collections 700,000 2,300,000 Estimated cost to complete 1,800,000 --How much income should Sneezy have recognized in 1999? a. P100,000 b. P110,000 c. P150,000 d. P200,000 Dopey Construction Company uses the percentage- of- completion method of accounting. During 1999, Dopey contracted to build an apartment house for Rose for P10,000,000. Dopey estimated that total costs would amount to P8,000,000 over the period of construction. In connection with this contract, Dopey incurred P1,000,000 of construction costs during 1999. Dopey billed and collected P1,500,000 from Rose in 1999. How much gross profit should Dopey recognize in 1999? a. P300,000 b. P250,000 c. P187,500 d. P125,000 On April 1, 1999 Bashful Construction Company entered into a fixed-price contract to construct an apartment building for P6,000,000. Bashful appropriately accounts this contract under the percentageof- completion method. Information relating to the contract is as follows: 1999 2000 Percentage of Completion 20% 60% Estimated costs at completion P4,500,000 P4,800,000 Income recognizing (cumulative) 300,000 720,000 What is the amount of contract costs incurred during the year ended December 31, 2000? a. P1,200,000 b. P1,980,000 c. P1,920,000 d. P2,880,000

17.

18.

19.

Peter Pan Construction Company has consistently used the percentage-ofcompletion method of recognizing income. In 1999, it began a construction project on a building for P3,000,000. The project was completed during 2000. Under this method, the accounting records disclosed the following: 1999 2000 Progress billings during the year P1,100,000 P1,900,000 Cost incurred during the year 900,000 1,800,000 Collections on billings during the year 700,000 2,300,000 Estimated cost to complete 1,800,000 --What amount of income should Peter Pan Construction Company recognized in 1999? a. P300,000 b. P150,000 c. P100,000 d. P200,000 Wendy Construction Company began work on a contract in 1999 and completed the contract in 2000. The total contract price was P4,200,000. Information concerning the contract for 1999 and 2000 is as follows: 1999 2000 Costs incurred during year P 600,000 P3,150,000 Estimated costs to complete at end of year 2,400,000 -0 Billings during year 720,000 3,280,000 Collections during year 400,000 3,000,000 Under the percentage of completion method, what amount of the P4,200,000 contract price is to be recognized as income in 1999 and 2000? 1999 2000 1999 2000 a. P240,000 P210,000 c. P360,000 P 90,000 b. P240,000 P810,000 d. P360,000 P690,000

20.

Items 21 and 22 are based on the following: Elmo Construction Corp. began construction work under a three year contract. The contract price was P800,000. Elmo uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at Dec. 31, 1999, follow:

Balance Sheet:

Accounting receivable construction billings P 15,000 Construction in progress P50,000 Less contract billings 47,000 Cost of uncompleted contract in excess of billings 3,000

Income Statement:
Income (before tax) on the contract recognized in 1999 21. 22. How much cash was collected in 1999 on this contract? a. P62,000 b. P32,000 c. P30,000 P10,000 d. P47,000

What was the initial estimated total income before income tax on this contract? a. P750,000 b. P160,000 c. P60,000 d. P790,000 Leslie Contractors entered into a construction agreement in 2004 for the rip- rapping of the North Harbor. The original contract price was P9,000,000 but a change order was issued in 2005 increasing the contract price by P480,000. Leslie uses the percentage of completion method of revenue recognition on long- term construction contracts. The ff. information are obtained on the project for 2004 and 2005: 2004 Costs incurred to date P4,920,000 Estimated costs to 4,920,000 complete Billings made 5,280,000 Cash collections 4,380,000 What is the gross profit (loss) of Leslie on the project for 2005? a. (P960,000) b. (P480,000) c. (P1,080,000) 2005 P8,640,000 2,160,000 8,520,000 7,500,000 d. (P840,000)

23.

24. In x3, Toti Construction Company was contracted to do private road network of Haybol Corporation for P100 million. The project was estimated to be complete in two years. The construction contract provided among other things the following: a. 5% mobilization fee (to be deducted from the last billing) payable within 15 days after the signing of the contract; b. Retention provision of 10% on all billings; c. Progress billings on construction are payable within seven days from date of acceptance. Toti estimated its gross margin on the project at 25% and used the percentage of completion method of accounting. By the end of the year, Toti presented progress billings corresponding to 50% completion. Haybol Corp. accepted all the bills presented except the last one for 10% which was accepted on 10 January . With the exception of the last billing of 8% accepted in x3, which was due on 3 January x4 all accepted billings were settled in x3. The gross profit recognized by Toti Construction Company for x3 is: a. P50 million b. P25 million c. P12.5 million d. Not determinable

**** Thought is creative, Fear attracts like energy, Love is all there is **** **** THE END GOOD LUCK **** CRC-ACE REVIEW SCHOOL, INC.
7358901/7359031 PRACTICAL ACCOUNTING 2 B. N. CASTUCIANO/R. E. HERMOSILLA ************************************************************************************* HOME & BRANCH ACCOUNTING I. Accounting for branches Branches are identifiable locations within a business entity for which separate accounting records are maintained. Branches are extensions of home office. Branches are separate accounting entities, but they are not separate legal entities , and their financial statements are used only for internal reporting purposes. Financial statements for the business entity are prepared

by combining the financial statements of the branches with those of the central reporting unit of the business. Branch operations stocks merchandise, makes sales to customers, passes on customer credit, collects receivables, incurs expenses, and performs other functions normally associated with the operations of a separate business enterprise. Such activities are accounted for through separate branch accounting systems that parallel the systems of independent businesses except in the manner of accounting for ownership equities and in recording transactions between branches and the main office of the enterprise. 2. Home and branch transactions Transactions of the home office with external entities are recorded in the home office accounting records in the usual manner. Similarly, transactions between a branch and unrelated entities are recorded on the branch books in accordance with established accounting procedures. Thus, the unique feature of home office and branch accounting lies in the manner of recording transactions between the home office and its branches. Therefore, home and branch accounting is basically accounting inter-office transactions. 3. Reciprocal branch and home office account The branch account on the home office books is an asset account representing the investment of the home office in branch net assets. The home office account in the branch books is an equity account that represents the equity of the home office in the branch net assets. Thus, the branch and home office accounts are reciprocal, each representing the net assets of the branch. This reciprocal relationship between home office and branch accounts is a continuous relationship. Whenever the home office increases (debits) its branch account, the branch should increase (credit) its home office account. Similarly, any decrease (debit) in the home office account on the branch book should be accompanied by a decrease (credit) in the branch account on the home office books. The only reasons that differences between home office and branch accounts occur are time lags (timing difference) in recording information on the two sets of books and home office or branch errors. 4. Merchandise shipment in excess of cost Home office transfers prices in excess of cost for internal shipments to their branches. Sometimes home office set transfer prices at sales prices, or set standard mark-ups. Reasons commonly cited for internal transfer of merchandise above cost include equitable allocation of income between the various units of the enterprise, efficiency in pricing inventories, and concealment of the true profit margins from branch personnel. When the home office ships merchandise to its branches at transfer prices in excess of cost, the accounting records of the home office are adjusted to permit measurement of actual cost of merchandise transferred. This is usually done through an inventory loading or unrealised profit account, which is normally recorded at the end of the accounting period. The adjustment is made to reflect the correct net income of the branch on the home office books. The other term used to describe the loading or unrealised account is allowance for overvaluation in branch inventory account. Entries to record transfer of merchandise at prices in excess of cost do not change the reciprocal relationship between the home office and branch accounts, but they do affect the relationship between home office and branch shipment accounts, because the shipments to branch account is credited at cost and the shipments from home office account is debited at the transfer price. The difference between the shipments account lies in the mark-up that is reflected in the loading in branch inventories account. This loading account is frequently designated unrealised profit in branch inventories. When a branch receives merchandise at transfer prices that include a loading factor and sells that merchandise, its cost of goods sold is overstated and its income is understated. The home office increases its branch account and records branch profit or loss on the basis of income reported by the branch, so any branch profit recorded by the home office is similarly understated. As mentioned above, this understatement of branch profit on home office books is corrected by a year-end adjusting entry that reduces the loading account to reflect amounts realized during the period through branch sales to outside entities. This method is illustrated below in no. 10. 5. Shipments to Branch Recorded at Billing Prices Sometimes home office ships to their branches at billing prices and adjust the loading account at the end of the accounting period. When this approach is used, the balance of the loading account during an accounting period will reflect unrealised profit in branch beginning inventories, and the

shipments to branch account will include the loading factor on shipments for the current period. The shipments to branch account (home office books) and the shipments from home office account (branch books) are reciprocals under this method. Under this method, adjustment of shipments to branch account is made at the end of the accounting period to reflect the branch loading on inventories and the loading account will be adjusted to record the realized profit on shipments sold. To further explain the above discussion, we will use the information given in no. 10 below.

Home Office Books a) Entry to record the shipments during the year. Cebu branch 50,000 Shipments to Cebu branch 50,000

Cebu Branch Books

Shipments from home office 50,000 50,000 Home office

The above shipments account on home office and branch books are recorded both at billed prices. b) Entry to adjust the loading - branch inventory account and the Cebu branch profit. Shipments to Cebu branch 10,000 Loading branch inventory 600 Cebu branch profit

10,600

The shipments to Cebu branch account decreased by P10,000 to adjust the amount of shipments to its correct cost of P40,000. The loading branch inventory account decreased by P600, because the beginning balance on the home books shows P1,600 but the correct ending balance per branch ending inventory from home office should only be P1,000 (P10,000 x x 25%/12%). 6. Freight costs on shipments Freight costs on merchandise shipped between home office and branch locations should be included in branch inventory and cost goods sold measurements. Merchandise cost should not include excessive freight charges from the transfer of merchandise between a home office and its branches or between branch locations. If the branch returns half the merchandise received from the home office because it is defective, or because of a shortage of inventory at the home office location, the home office cost of the merchandise should not include the freight charges to or from the branch. Total unnecessary freight charges on the merchandise are charged to a home office loss on excessive freight charges account because the freight charges represent management mistakes or inefficiencies. Therefore, they are not considered normal operating or freight expenses. The same is true for errors committed by the home office in transferring merchandise to branches. The difference between the correct freight directly from the home office to the branch and the actual freight incurred from home office to the branch must be chargeable to the home office and considered by the home office as loss on excessive freight charges. 7. Home office Branch expenses allocation The allocation of expenses among home office and branch operations is frequently necessary to provide an accurate measurement of income for the separate units of the enterprise. Advertising expense, for example, may relate to sales efforts of the home office and one or more branches. If such advertising is paid by the home office, that part related to branch sales should be allocated to the branches. Pension costs paid by the home office and home office general and administrative expenses may also be allocated to branch operations in order to provide complete profit information for each business unit. Another situation that requires expense allocation of complete profit information arises when plant asset records are centralized in the home office accounting system. The home office normally will record the entire depreciation for all plant assets and just allocate the depreciation to branches for those that pertain to branch plant assets. 8. Reconciliation of home office and branch accounts Reciprocity between home office and branch accounts will not exist at year-end if errors have been made in recording reciprocal transactions either on the home office or the branch books, or if transactions have been recorded on one set of books but not on the other. The approach for reconciling

home office and branch account at year-end is similar to the approach used for bank reconciliations. Only, the most commonly used method is the approach of bringing the two reciprocal accounts to their adjusted balances. Errors committed by the home office or branch office require adjusting entry(s) on their corresponding books, whereas timing differences does not require adjustments. 9. Sales agencies Sales agencies are established to display merchandise and to take customers orders, but they do not stock merchandise to fill customers orders or pass on customer credit. The sales agency is not a separate accounting or business entity. Ordinarily, the only account records required for sales agencies are for cash receipts and disbursements, which are handled in essentially the same manner as petty cash systems. The central accounting system of the business maintains records of sales made through agency operations and related cost of sales and other expenses. 10. ILLUSTRATION OF HOME OFFICE AND BRANCH ACCOUNTING Bert Corporation of Manila has operated a sales branch in Cebu, for a number of years. All merchandise shipped to the Cebu branch is transferred at normal sales prices, which are 125% of home office cost. The Cebu branch also purchases merchandise from outside suppliers. This merchandise is sold by Cebu at a 25% markup based on invoice cost. Balance sheets for Danny Corporations home office and its Cebu branch at December 31, 20x1 are as follows:

BERT CORPORATION HOME OFFICE AND CEBU BRANCH BALANCE SHEETS AT DECEMBER 31, Home office Assets Cash P 25,000 Accounts receivable net 42,000 Inventory 20,000 Plant assets net 70,000 Cebu branch 43,000 Total assets P200,000 Liabilities and Equity Accounts payable Other liabilities Loading branch inventory Home office Capital stock Retained earnings Total liabilities and equity

20X1 Branch P11,000 23,000 16,000 . P50,000

P 14,000

P 5,000 10,000 2,000 1,600 43,000 150,000 24,400 . P200,000 P50,000

All plant asset records for Berts home office and Cebu branch are maintained on the home office books. Half of the P16,000 branch inventory at December 31, 20x1 was received from local suppliers, and the remaining P8,000 was received from the home office at established transfer prices. A summary of the transactions of Berts home office and Cebu branch for 20x2 follows: 1. Berts sales for 20x2 were P281,750, of which P200,000 were home office sales and P81,750 were sales made by the Cebu branch. All sales were on account. 2. Home office and branch purchases on account for 20x2 were P205,000 and P20,000, respectively. The home office shipped P40,000 of merchandise to Cebu branch at a transfer price of P50,000. 3. The home office collected P195,000 on account during 20x2, and Cebu branch collected P79,750. 4. The Cebu branch transferred P55,000 cash to the home office during 20x2. 5. Payments on account were home office, P210,000; Cebu branch, P21,000.

6. During 20x2, the home office paid operating expenses of P20,000, and Cebu branch paid operating expenses of P2,000. Of the operating expenses paid by the home office, P1,000 was allocated to Cebu branch. 7. Total depreciation for the year was P8,000, of which P1,500 was allocated to branch operations. Year-end inventories are P25,000 for the home office, and P10,000 for Cebu branch, with half of the branch inventory consisting of merchandise acquired from the home office. Required: 1. Prepare the journal entries for the year 20x2 on the books of the home office and branch office. 2. Prepare the adjusting and closing entries on the home office books and the closing entry on the books of the branch. 3. Prepare the unadjusted trial balance of the home office and the branch for the year 20x2. 4. Prepare the individual financial statements of the home office and the branch. 5. Prepare the combined financial statements of Bert Corporation for the year 20x2. Bert CORPORATION HOME OFFICE AND CEBU BRANCH JOURNAL ENTRIES FOR THE YEAR 20X2 Number Home Office Books 1 Accounts receivable 200,000 Sales 200,000 To record sales on account. 2 Purchases 205,000 Accounts payable 205,000 To record purchases on account. account. Cebu branch 50,000 Shipments to Cebu branch 40,000 Loading branch inventory merchandise To transfer merchandise to Cebu Branch at 125% of cost. 3 Cash 195,000 Accounts receivable 195,000 To record collection on accounts receivable. Cash 55,000 Cebu branch 55,000 To record receipt of cash from Cebu branch. Cebu Branch Books Accounts receivable 81,750 Sales 81,750 To record sales on account. Purchases Accounts payable 20,000 20,000 To record purchases on

Shipments from home office 50,000 Home office 50,000 10,000 To record receipt of from home office. Cash 79,750 Accounts receivable 79,750 To record collection on accounts receivable. Home office 55,000 Cash 55,000 To record cash remittance to home office. Accounts payable Cash 21,000 21,000 To record payments on 2,000 2,000 To record payment of

Accounts payable 210,000 Cash 210,000 To record payments on account. account. 6 Operating expenses 20,000 Cash 20,000 To record payment of expenses. expenses. Cebu branch 1,000 Operating expenses 1,000 To record allocation of expenses to Cebu branch. 7 Cebu branch 1,500

Operating expenses Cash

Operating expenses 1,000 Home office 1,000 To record expenses allocated from home office. Operating expenses 1,500

Operating expenses 6,500 Accumulated depreciation 8,000 To record depreciation and allocation to Cebu branch.

Home office 1,500 To record allocation of depreciation from home office.

BERT CORPORATION HOME OFFICE AND CEBU BRANCH ADJUSTING & CLOSING JOURNAL ENTRIES DECEMBER 31, 20X2 Home Office Books Cebu Branch Books Adjusting Entries Closing Entry (1) To record branch reported net income. To close the nominal accounts and to Cebu branch 1,250 record the net income. Cebu branch profit 1,250 Sales 81,750 Inventory, December 31, 20x2 10,000 (2) To adjust the net income of the branch Inventory, January 1, 20x2 16,000 and to record the realized loading. Purchases 20,000 Loading in branch inventory 10,600 Shipments from home office 50,000 Cebu branch profit 10,600 Operating expenses 4,500 Unrealized profit per books of P11,600, less Home office 1,250 P1,000 unrealized profit in branch ending Inventory = P10,600 adjustment. Closing Entry To close the nominal accounts and to record the combined net income. Sales 200,000 Inventory, December 31, 20x2 25,000 Shipments to Cebu branch 40,000 Cebu branch profit 11,850 Inventory, January 1, 20x2 20,000 Purchases 205,000 Operating expenses 25,500 Retained earnings 26,350

Branch profit = 11,850 Home office profit = 14,500

BERT CORPORATION HOME OFFICE AND CEBU BRANCH UNADJUSTED TRIAL BALANCE FOR THE YEAR ENDED, DECEMBER 31, 20X2 Home Office Cebu Branch Debit Credit Debit Credit Cash Accounts receivable net Inventories Plant assets net Cebu branch Accounts payable Other liabilities Loading - branch inventory Home office Capital stock Retained earnings Sales Purchases Shipments from home office Shipments to Cebu branch Operating expenses Total P 45,000 47,000 20,000 62,000 40,500 P 12,750 25,000 16,000 -

9,000 10,000 11,600 150,000 24,400 200,000

4,000 2,000 40,500 81,750

205,000

20,000 50,000

40,000 25,500 4,500 . P445,000 P445,000 P128,250 P128,250

BERT CORPORATION HOME OFFICE INCOME STATEMENT FOR THE YEAR ENDED, DECEMBER 31, 20X2 Sales Cost of sales: Inventory, January 1, 20x2 Add: Purchases Available for sale P200,000 P 20,000 205,000 P225,000 Less: Shipments to branch ( 25,000)

( 40,000) 160,000 P 40,000 25,500 14,500 11,850 P 26,350

Inventory, December 31, 20x2 Gross profit Less: Operating expenses Income from own operations Add: Cebu branch profit Combined net income

BERT CORPORATION HOME OFFICE BALANCE SHEET AS OF DECEMBER 31, 20X2 Assets Cash Accounts receivable net Inventories Plant assets net Cebu branch Total Liabilities and Equity Accounts payable P 9,000 Other liabilities 10,000 Loading in branch inventory 1,000 Capital stock 150,000 Retained earnings 50,750 Total P220,750

P 45,000 47,000 25,000 62,000 41,750 P220,750

BERT CORPORATION CEBU BRANCH INCOME STATEMENT FOR THE YEAR ENDED, DECEMBER 31, 20X2 Sales Cost of sales: Inventory, January 1, 20x2 Add: Purchases Shipments from home office Available for sale Less: Inventory, December 31, 20x2 Gross profit Less: Operating expenses Net income P81,750 P16,000 20,000 P86,000 ( 10,000) 50,000 76,000 P 5,750 4,500 P 1,250

BERT CORPORATION CEBU BRANCH BALANCE SHEET AS OF DECEMBER 31, 20X2 Assets Cash Accounts receivable net Inventories Total Liabilities and Equity Accounts payable P 4,000 Other liabilities 2,000 Home office 41,750 Total P47,750

P12,750 25,000 10,000 P47,750

BERT CORPORATION COMBINED INCOME STATEMENT FOR THE YEAR ENDED, DECEMBER 31, 20X2

Sales Cost of sales: Inventory, January 1, 20x2 Add: Purchases Available for sale Less: Inventory, December 31, 20x2 Gross profit Less: Operating expenses Combined net income

P281,750 P 34,400 225,000 P259,400 ( 34,000)

225,400 P 56,350 30,000 P 26,350

Assets Cash Accounts receivable net Inventories Plant assets net Total

BERT CORPORATION COMBINED BALANCE SHEET AS OF DECEMBER 31, 20X2 Liabilities and Equity P 57,750 Accounts payable P 13,000 72,000 Other liabilities 12,000 34,000 Capital stock 150,000 62,000 Retained earnings 50,750 P225,750 Total P225,750

PROBLEMS I. The after-closing balances of N Corp.s home office and its branch at Jan. 1, 20x1 were as follows: Home office Branch Cash P 7,000 P 2,000 Accounts receivable - net 10,000 3,500 Inventory 15,000 5,500 Plant assets - net 45,000 20,000 Branch 28,000 Total assets P105,000 P31,000 Accounts payable P 4,500 P 2,500 Other liabilities 3,000 500 Unrealized profit - branch inventory 500 Home office 28,000 Capital stock 80,000 Retained earnings 17,000 Total equities P105,000 P31,000 A summary of the operations of the home office and branch for 20x4 follows: 1. Home office sales: P100,000, including P33,000 to the branch. A standard 10% mark-up on cost applies to all sales to the branch. Branch sales to its customers totalled P50,000. 2. Purchases from outside entities: home office, P50,000; branch, P7,000. 3. Collections from sales: home office, P98,000 (including P30,000 from branch); branch collections, P51,000. 4. Payments on account: home office, P51,500; branch, P4,000. 5. Operating expenses paid: home office, P20,000; branch, P6,000. 6. Depreciation on plant assets: home office, P4,000; branch, P1,000. 7. Home office operating expenses allocated to the branch, P2,000. 8. At December 31, 20x1, the home office inventory is P11,000 and the branch inventory is P6,000 of which P1,050 was acquired from outside suppliers. Required: 1. Prepare journal entries to reflect the foregoing on the books of the home office and branch. 2. Prepare the trial balance of home office and the branch. 3. Prepare the individual financial statements of home office and branch. 4. Prepare the combined home office and branch financial statements. 5. Prepare closing entries for the branch and adjusting and closing entries for the home office. II. Trial balances for H Corporation and its two branches at December 31, 20x4 are as follows: Home Office Branch I Branch 2 Debits Cash P 18,000 P 5,000 P 15,000 Accounts receivables 30,000 12,000 26,000

Inventories, January 1, 20x4 Other assets Branch 1 Branch 2 Shipments from home office Purchases Expenses Credits Accounts payable Capital stock Retained earnings Home office Shipments to Branch 1 Shipments to Branch 2 Loading branch inventories Sales

36,000 200,000 50,000 68,000 120,000 78,000 P600,000 P 40,000 200,000 41,900

7,200 42,800 30,000 35,000 P132,000 P 10,000 42,000 36,000 30,000 2,100

5,400 47,600 27,000 40,000 P161,000 P 30,000 61,000

Additional Information: 1. Ending inventories are P32,000, P8,400, and P4,800 for the home office, the branch 1, and the branch 2, respectively. Ending inventories of the branches exclude goods in transit. 2. Cash in transit from home office to Branch 1 for operating expenses at December 31, 20x4 is P2,000. Cash in transit from Branch 2 to home office amounts to P4,000. 3. Loading branch inventories represents unrealized profit in beginning inventories of Branch 1 and Branch 2. Determine following:
1. The adjusted balance of reciprocal accounts that will appear on their individual financial statements.

250,000 P600,000

80,000 P132,000

70,000 P161,000

2. The correct net income of Branch 1 and Branch 2. 3. The adjusted balance of loading branch inventories account at December 31, 20x4.
4.

The cost of sales that must appear on the published financial statements of H Corp. at December 31, 20x4.

III. The following were found in your examination of the interplant accounts between the Home Office and the Makati Branch: a. Transfer of fixed assets from Home Office amount to P53,960 was not booked by the branch. b. P10,000 covering marketing expense of another branch was charged by the Home Office to Makati branch. c. Makati branch recorded a debit note on inventory transfers from Home Office of P75,000 twice. d. Home Office recorded cash transfer of P65,600 from Makati branch as coming from Quezon City branch. e. Makati branch reversed a previous debit memo from Pasig branch amounting to P10,500. Home office decided that this charge is appropriately Quezon City branchs cost. f. Makati recorded a debit memo from Home Office of P4,650 as P4,560. Before the above discrepancies were given effect, the balance in the Home Office books of its Makati Branch Current account was a debit balance of P165,920. Determine the adjusted reciprocal balances before branch net income. IV. The following information came from the books and records of Philip Corporation and its branch. The balances are as of December 31, 20x4, the fourth year of the corporations existence. Home Office Branch Dr. (Cr.) Dr. (Cr.) Sales P(320,000) Shipments to branch P(80,000) Shipments from home office 120,000 Purchases 50,000 Expenses 80,000 Inventory, January 1, x4 36,000 Unrealized profit in branch inventory (50,000) There are no shipments in transit between the home office and the branch. Both shipments accounts are properly recorded. The closing inventory at billed prices includes merchandise acquired from the home office in the amount of P21,000 and P9,000 acquired from vendors for a total of P30,000. Required: Determine the following:

1. Beginning inventory acquired from outsiders. 4. Correct net income of branch. 2. Correct cost of beginning inventory. 5. Correct ending inventory. 3. Realized profit from inventory shipments. 6. Allowance balance at the end. V. The following are the account balances appearing on the books of accounts of O Trading Company as of December 31, 1999: Home office Branch Cash P 9,500 P 9,600 Accounts receivable, net 38,600 14,400 Inventory 24,600 12,700 Prepaid expenses 2,500 900 Property and equipment, net 35,800 29,400 Branch current 63,000 Cost of sales 160,000 95,000 Operating expenses 29,600 15,400 Accounts payable ( 15,900) ( 10,300) Home office current ( 39,400) Capital stock ( 50,000) Retained earnings ( 17,700) Sales ( 280,000) ( 127,700) Shipments to branch were billed at 120% and 125% of cost in 1998 and 1999, respectively, and were credited to sales. An analysis of the inventories of the branch shows the following breakdown: December 31 P 12,000 P 8,000 (based on shipments received) From other suppliers 3,000 4,700 During the year, branch purchases from other suppliers amounted to P27,700. Home office books show shipments to branch (at cost) of P64,000. Some shipments were still in transit as of December 31st. A branch remittance of P8,600 was made on December 28, 1999 and has not yet been received by the home office as of December 31st. Required: 1. Determine the following: a. Correct net income of the branch. c. Adjusted balance of unrealised profit. b. Adjusted balance of reciprocal accounts. d. Correct cost of sales of branch. 2. Prepare the combined financial statements of home office and branch. 3. Prepare the necessary adjusting entries to correct the books of the home office. Assume the books were not yet closed. VI. The M Company maintains branches that market the products that it produces. Merchandise is billed to the branches at 25% above costs, with the branches paying freight charges from the home office to the branch. On November 15, Branch No. 1 ships part of its stock to Branch No. 5 upon authorization by the home office. Originally Branch No. 1 had been billed for this merchandise at P160,000 and had paid freight charges of P35,000 on the shipment from the home office. Branch No. 5, upon receiving the merchandise, pays freight charges of P25,000 on the shipment from Branch No. 1. If the shipment had been made from the home office directly to branch No. 5, the freight cost to Branch No. 5 would have been P40,000. Required: Prepare the journal entries necessary to record the above information on the books of Branch No. 1, Branch No. 5 and Home Office. VII. The preclosing general ledger trial balances at December 31, 19x7 for the Ochie Company and its Cagayan de Oro branch office are shown below: Home office Branch office Dr. (Cr.) Dr. (Cr.) Cash P 360,000 P 80,000 Accounts receivable 350,000 120,000 Inventory 700,000 150,000 Property, plant and equipment (net) 900,000 Investment in branch 200,000 Accounts payable ( 360,000) (135,000) Accrued expenses ( 140,000) ( 25,000) January 1 From home office (billed value)

Home office equity Common stock (P10 par) Retained earnings Sales Purchases Expenses Purchases from home office

( 90,000) ( 500,000) ( 450,000) ( 4,400,000) 2,900,000 440,000 (950,000) 240,000 160,000 450,000 P 0

P 0 An audit disclosed the following data: a. On December 23 the branch office manager purchased P40,000 of furniture and fixtures but failed to notify the home office. The bookkeeper, knowing that all plant assets are carried on the home office books, recorded the proper entry on the branch books. It is the company policy not to take any depreciation on assets acquired in the last half of a year. b. On December 27 a branch customer erroneously sent a P20,000 account payment to the home
office. The bookkeeper made the correct entry on the home office books but did not notify the branch.

c. On December 30 the branch remitted cash of P50,000, which was received by the home office in January, 19x8. d. On December 31 the branch erroneously recorded the December allocated expenses from the home office as P5,000 instead of P15,000. e. On December 31 the home office shipped merchandise billed at P30,000 to the branch, which was received in January, 19x8. f. The entire beginning inventory of the branch had been purchased from the home office. Home office 19x7 shipments to the branch were purchased by the home office in 19x7. The physical inventories at December 31, 19x7, excluding the shipment in transit are: Home office - P550,000 (at cost) Branch -P200,000 (consisting of P180,000 from home office and P20,000 from outsiders) g. The home office consistently bills shipments to the branch at 20% above cost. The sales account is credited for the invoice price. Compute: 1). The adjusted reciprocal accounts before branch net income, 2). The correct branch net income. 3). The combined net income of home office and branch. 4). Prepare the financial statements of the company as of December 31, 19x7. HOME AND BRANCH/AGENCY QUIZZER 1. Jose Inc. shipped to its Pampanga branch merchandise billed at P165,000. Additional shipments were made during the period and billed at P66,000. Pampanga branch however returned some defective merchandise worth P4,620 (at billed price). At the end of the period, the branch reported an ending inventory of P92,400 and a net loss of P14,300. If Joses shipments to its Pampanga branch are billed at 120% of cost, what is the correct net income or net loss of the branch? a. P8,030 b. P22,330 c. P12,496 d. P23,430 2. Pablo Company sells its product directly and also through a branch opened at the beginning of the year. The income statement of the company shows total sales of P2,840,000; cost of sales of P1,988,000 and expenses of P576,500. The account with the branch was treated as an ordinary account receivable. For example, shipments to the branch, billed at selling price, which is 20% above cost, were charged to Accounts Receivable and credited to Sales. When the branch made a sale, a duplicate sales invoice was forwarded to the home office, which took up the receivable on its books, giving the branch credit for it, and then made the collection itself. A petty cash fund of P5,000 was kept at the branch, and its closing inventory was P192,000. No other assets or liabilities were kept on the branch books. The correct net income of Pablo Company must be: a. P275,500 b. P243,500 c. P238,500 d. P83,500 3. F Electronics routinely transfers inventory to its branch operation located in another city. In 20x6, Fs home office sold inventory costing P240,000 to its branch for P300,000. The branch sold 45 percent of the inventory in 20x6 for P180,000 and the remaining 55 percent in 20x7 for P295,000. In 20x7, F Electronics transferred P150,000 inventory to its branch for P225,000. The branch sold one-third of the inventory in 20x7 for P140,000 and two-thirds in 20x8 for P280,000. By how much will the net income of the branch be adjusted by the home office in 20x7? a. P33,000 b. P25,000 c. P58,000 d. P50,000

4. Home office bills its Branch at 40% above cost for all merchandise sent to the branch. During the month, the merchandise delivered was at a billed price of P21,364. The branch reported inventories for the month as follows: beginning, P11,620; ending, P7,840. The branch reported a net income of P18,000. The adjusted branch net income in the Home Office books must be: a. P20,240 b. P9,700 c. P25,184 d. P7,184 5. At the beginning of 20x1, Phillip Video established a Manila Branch and a Cebu Branch in order to provide wider distribution of its merchandise. Merchandise is transferred to the branches at a price 30% above cost. All branch merchandise is acquired from the home office. At the end of 20x1, the Manila Branch and the Cebu Branch reported net income and ending inventory balances as follows: Net income Ending inventory Manila Branch P45,500 P65,000 Cebu Branch 52,000 78,000 The year-end balances in the home office accounts allowance for unrealised gross margin in branch inventory are P48,750 for Manila Branch and P58,500 for the Cebu Branch. How much must be the correct income from branches that the home office must recognized in its books for the year 20x1? a. P97,500 b. P130,500 c. P171,750 d. P74,250 6. The home office of Danilo Company purchases blenders from a supplier at a cost of P13 a unit, and retails these same units at P25 in both its home office and branch retail outlets. During 20x1, the home office purchased 10,000 units, of which 6,000 were sold at the home office outlet and 3,000 where shipped to the branch. During 20x2, the home office purchased 12,000 units, of which 7,500 were sold at the home office outlets and 4,000 were shipped to the branch. The branch sold 2,500 units in 20x1 and 3,900 units in 20x2. Both the home office and the branch office use a periodic inventory system. Beginning inventories were as follows (in units): 1/1/x1 1/1/x2 1/1/x3 Home office -01,000 1,500 Branch -0500 600 All purchases and sales are on account. Inventory is billed to the branch at a mark-up of 25% above cost. Operating expenses incurred are as follows: 20x1 20x2 Home office P62,000 P83,400 Branch 13,500 18,900 How much is the combined net income of the home office and branch in 20x2? a. P34,500 b. P26,500 c. P61,000 d. P79,000 7. Tasio Corporations shipments to and from its Olongapo City branch are billed at 120% of cost. On December 31, Olongapo branch reported the following data, at billed price: inventory, January 1, of P33,600; shipments returned of P48,000; and inventory, December 31, of P36,000. The home office records showed shipments to branch account of P720,000. What is the correct cost of sales of Olongapo City branch? a. P678,000 b. P558,000 c. P669,600 d. P813,600 8. The home office sells merchandise to its branch at 120% of cost. The branch was established several years ago with policy that all its merchandise would be acquired from the home office. The branch reported inventory beginning of P3,600 and inventory ending of P6,000. The home office showed in its trial balance an unrealized profit on inventory account balance of P4,600. The cost of merchandise sold by the branch that came from the home office is: a. P21,600 b. P18,000 c. P21,000 d. Cannot be determined. 9. Takyo Corp. opened a branch in Guagua and ships merchandise thereto at 140% of cost and the branch in turn sells these merchandise at 150% of billed price. For 20x9, Guagua branch submitted the following data: Sales for 20x9 P325,000 Merchandise received from Home office 175,000 Merchandise purchased from other sources 140,000 Inventory end, (of which P10,000 are from other sources) 45,000

No beginning inventory How much is the correct cost of sales of branch? a. P270,000 b. P230,000 c. P100,000 d. P315,000

10. The Recto branch of Bukas Store is billed by home office for merchandise shipments at 40% over cost. The following information relates to Rectos operations for calendar year 19x6: Sales P4,500,000 Local purchases 1,000,000 Shipments from home office 2,450,000 Recto reports an ending inventory of P700,000, of which P175,000 is identified to come from local purchases. Per home offices reckoning, by how much is Rectos cost of sales overstated? a. P550,000 b. P150,000 c. P375,000 d. P700,000 11. Presented here is selected information from the separate financial statements of the home office and the branch at the end of the fiscal year, December 31, 20x1. The home office bills merchandise to the branch at cost plus 15% of cost. The branch was established during the year and buys all its merchandise from the home office. Home office Branch Allowance for unrealised gross margin in branch inventory P 900 Income from branch 5,000 Cost of goods sold P23,000 Merchandise inventory, December 31, 20x1 6,900 Home office, preclosing 50,000 Net income 2,000 How much must be the total shipments to the branch during the year at cost? a. P26,000 b. P20,000 c. P23,000 d. P29,900 12. The Kulas Sporting Goods, Inc. located in Manila, established a branch in Cebu on January 1, 20x7. The home office transferred P30,000 of cash and P120,000 of merchandise (cost) to the branch of which 15% were still in transit. During the year, the branch sold 65% of the merchandise received from the home office on account for P90,000. The branch collected cash of P65,000 from accounts receivable during the year and allowed P3,250 in sales discounts. The branch paid P12,000 of operating expenses incurred for the year and remitted cash of P20,000 to the home office. Ending inventory reported by the branch as of December 31, 20x7, was P44,625. The home office charged the branch 125% of cost on inventory transfers. The ending balance of Home Office account on the branch books adjusted must be: a. P180,000 b. P160,000 c. P151,875 d. P156,750 On December 31, 19x5, the Branch account on the home office books had a balance of P75,000. Investigation showed: a. Merchandise sent to branch P7,000 on Dec. 31 has been received by the branch on Jan. 10, 19x6. b. The branch collected a home office note receivable of P5,000 but the credit memo from the branch has not been received by the home office. c. A check of P18,000 mailed to the branch was not yet received on December 31. d. The December profit of the branch, P21,000 was recorded by the home office as P12,000. e. Merchandise returned by branch to home office, P6,000 was recorded by the bookkeeper as purchases and credited to accounts payable. The unadjusted balance of Home office account in the branch books should show: a. P58,000 b. P70,000 c. P40,000 d. P52,000 London Inc. and its branch in Pasay maintain their respective books of accounts. By the end of the year 19x3, the branch account on the home office books and the home office account on the branch books did not reconcile due to the following: a. Merchandise billed at P61,500 was shipped by the home office to the branch on Dec. 29. The goods were in
transit as of end of the year and the branch did not recognized the transfer in its books.

13.

14.

b. The branch collected a home office account receivable of P250,000 but such transaction was not known to the home office. c. The home office recorded in error the branch net income at P112,500. It should have been P121,500.

d. The home office was charged P64,000 by the branch due to returned merchandise to home office on 28 Dec. which was in transit as of Dec. 31. The home office was unaware of the transfer. The following reconciling items when recorded would result in a net adjustment on the branch account on the home office books of a. P205,000 additional credits. c. P195,000 additional charges. b. P133,500 additional charges d. P259,000 additional charges. 15. Manong Corp., operates a number of branches in Metro Manila. On June 30, 19x6, its Sta. Cruz branch showed a Home Office account balance of P20,150 and the Home Office books showed a Sta.Cruz branch account balance of P25,550. The following information may help in reconciling both accounts: 1) A P12,000 shipment, charged by Home Office to Sta. Cruz branch was actually sent to and retained by Sta. Ana branch. 2) A P15,000 shipment intended and charged to San Juan branch was shipped instead to Sta.Cruz branch and retained by the latter. 3) A P2,000 emergency cash transfer from Sta. Ana branch to San Juan branch was not taken up in the Home Office books. 4) Home Office collects a Sta. Cruz branch account receivable of P3,600 and fails to notify the branch. 5) Home Office was charged for P1,200 for merchandise returned by Sta. Cruz branch on June 29. The merchandise is in transit. 6) Home Office erroneously recorded Sta. Cruz net income for May, 19x6 at P16,275. The branch reported a net income of P12,675. What is the reconciled amount of the Home Office and Sta. Cruz branch reciprocal accounts? a. P20,150 b. P21,750 c. P23,750 d. P27,350 16. Tondo Branch of Toti Company was billed for mechandise shipments at 125% of cost. At the end of its first month of operations, Tondo branch submitted the following information: Merchandise shipments from Home office (at billed price) P150,000 Merchandise purchased locally by Tondo branch 40,000 Closing inventory - from home office 75,000 - from local purchases 20,000 Net sales 180,000 What is the correct closing branch inventory at cost? a. P75,000 b. P80,000 c. P95,000 d. P125,000

17.

Ompong Company sells merchandise to its branch at a mark-up approximating 25% of billed prices. A periodic inventory system is used. Certain account balances are given below. Ending inventory, branch (at billed price) P 80,000 Shipments to branch 300,000 Unrealized profits in shipments to branch 125,000 How much is the beginning inventory of the branch at cost? a. P125,000 b. P100,000 c. P75,000 d. P64,000 18. On December 31, 20x2, the books of Terio Corporation home office reported shipments to branch of P240,000 and unrealized profit in branch inventory of P74,000. The branchs books reported sales of P500,000 and expenses of P150,000. The branch purchases all of its merchandise from the home office. The home office ships this merchandise at 125 percent of its cost. The ending inventory of the branch is P60,000 at billed price. There are no shipments in transit between the home office and the branch. The beginning inventory of the branch at billed price must be: a. P64,000 b. P70,000 c. P60,000 d. P56,000 19. In relation to the above data, the net income as reflected on the books of the branch is: a. P40,000 b. P102,000 c. P50,000 d. P62,000 20. On the average, the sales mix of branch sales is 3:1 for shipments from home office and purchases from others. The home office bills the branch at 40% above cost of delivered merchandise and the branch sells its merchandise at 30% above the cost to it. At the end of the period the following data were verified: Branch net income after commission of branch manager, P80,000; Branch managers commission is 20% of income before commission; Sales, P1,164,800. The cost of sales per branch income statement is a. P815,360 b. P896,000 c. P704,000 d. Not given 21. The actual cost of outside merchandise sold is a. P219,200 b. P224,000 c. P236,000 d. Not given

22. The actual cost of the Home Office merchandise sold is a. P480,000 b. P672,000 c. P873,600 23. The branch expenses excluding commission are a. P168,800 b. P188,800 c. P168,000 24.

d. Not given d. Not given

The following information came from the books and records of Mang Phil Corporation and its branch. The balances as of December 31, 20x3, the third year of the corporations existence are: Home office Branch Dr. (Cr.) Dr. (Cr.) Sales P(1,500,000) Expenses 500,000 Shipments from home office 840,000 Unrealized profit in branch P(160,000) The branch purchases all of its merchandise from the home office. The inventories of the branch at billed prices are as follows: January 1, 20x3........................ P120,000 December 31, 20x3................... 168,000

There are no shipments in transit between the home office and the branch. The percentage of billed price on cost that the home office uses to ship merchandise to the branch is: a. 120% b. 123.53% c. 20% d. 25% 25. In relation to the above data, the true net profit of the branch is: a. P340,000 b. P208,000 c. P334,400 d. P336,000 Questions 26 through 28 are based on the following: The following information came from the books and records of Naldo Corporation and its branch. The balances are as of December 31, 20x2. Home Office: Loading in branch inventory P50,000 Branch: Sales P500,000 Expenses 200,000 Shipments from home office 220,000 The branch purchases all of its merchandise from the home office. The inventories of the branch at billed prices are as follows: January 1, 20x2, P30,000 December 31, 20x2, P25,000.

There are no shipments in transit between the home office and the branch. 26. Compute the percentage of profit on billed price that the home office uses to ship merchandise to the branch? a. 25% b. 20% c. 22.73% d. 29.41% 27. Compute the balance in the Shipment to Branch account before closing entries are posted. a. P220,000 b. P270,000 c. P176,000 d. P245,000 28. Compute the true profit of the branch. a. P80,000 b. P75,000 c. P120,000 d. P45,000 Questions 29 through 31 are based on the following: The following information came from the books and records of Pogi Corporation and its branch. The balances are as of December 31, 20x9, the fourth year of the corporations existence. Home office Branch Dr. (Cr. ) Dr. (Cr.) Sales P(850,000) Shipments to branch P(240,000) Shipments from home office 360,000 Purchases 180,000 Expenses 160,000 Inventory, January 1, 19x9 72,000

Unrealized profit in branch inventory

(136,000)

There are no shipments in transit between the home office and the branch. Both Shipments accounts are properly recorded. The closing inventory at billed prices includes merchandise acquired from the home office in the amount of P54,000 and P30,000 acquired from vendors for a total of P84,000. 29. How much of the beginning inventory of the branch was acquired from outsiders? a. P24,000 b. P40,000 c. P56,000 d. P32,000 30. How much is the correct net income of the branch? a. P162,000 b. P280,000 c. P274,000 d. P160,000 31. What is the entry to adjust the net income of the branch on the home office books? a. Branch 162,000 c. Unrealized profit on BI 118,000 Branch P/L 162,000 Branch 118,000 b. Unrealized profit on BI 118,000 d. Unrealized profit on BI 162,000 Branch P/L 118,000 Branch P/L 162,000 Use the following information in answering questions 32 through 34: Essa Corporation retails merchandise through its home office store and through a branch store in a distant town. Separate ledgers are maintained by the home office and the branch. The branch store purchases merchandise from the home office, as well as from outside suppliers. The home office has been consistent in its billed price to the branch. Selected information from the December 31, 20x7 trial balances of the home office and branch is as follows: Home Office Branch Sales P1,200,000 P600,000 Shipments to branch 160,000 Purchases 700,000 110,000 Inventory, January 1, 20x7 400,000 300,000 Shipments from home office 192,000 Expenses 280,000 120,000 Unrealized profit in branch inventory 72,000 Additional information: December 31, 20x7 inventories are P400,000 and P200,000 for the home office and the branch, respectively. (Note: The branch purchased 16% of its ending inventory from outside suppliers). 32. The beginning inventory of the branch that came from outside suppliers must be: a. P100,000 b. P60,000 c. P80,000 d. none 33. The cost of sales of Essa Corporation must be: a. P910,000 b. P870,000 c. P898,000 d. P358,000 34. The correct net income of the branch must be: a. P78,000 b. P122,000 c. P166,000 d. P282,000 The following data pertain to items 35 and 36: Home Office bills the branch for merchandise shipped at 40% above cost and the Branch sells the merchandise at 30% above billed price. On March 1, a portion of the branch merchandise was destroyed by fire. The undamaged merchandise has a selling price of P21,840. The branch books showed: Merchandise from home office Jan. 1 (at billed price) Shipments from home office, January and February Sales, January and February Sales returns Sales allowances 35. The sales price of the merchandise destroyed by fire is a. P32,760 b. P25,200 c. P26,600 36. The cost of the merchandise destroyed by fire is a. P18,000 b. P13,840 c. P14,620 37. P 42,000 280,000 367,640 3,640 1,400 d. not given d. not given

The Beech Corporation has two branches Branch X and Branch Y. The home office shipped P5,000 of merchandise to Branch X and prepaid the freight charges of P30. A short time thereafter, Branch X was instructed to reship this merchandise to Branch Y at a prepaid freight cost of P50. Freight charges for this merchandise normally cost P60 when shipped from the home office directly to Branch Y.

(Reciprocal accounts between branches are not permitted.) The accounting of the above interoffice inventory transfer will include. a. Credit to Home Office account of P5,080 on Branch X books. b. Debit to Shipment from Home Office account of P5,050 on Branch Y books. c. Credit to Branch Y account of P5,060 on Home office books. d. Debit to Excess Freight-Interoffice transfer account P20 on Home Office books. 38. When a home office ships merchandise to Branch A which is later shipped to Branch B by Branch A, the ending inventory of such merchandise at Branch B should include the following charges: a. Freight from home office to Branch A only. b. Freight from home office to Branch A and from Branch A to Branch B. c. Freight from Branch A and Branch B only. d. Normal freight for such shipments from home office to Branch B. **** Thought is creative, Fear attracts like energy, Love is all there is **** ***** THE END *****

CRC-ACE REVIEW SCHOOL

The Professional CPA Review School
735-9031 / 735-8901

PRACTICAL ACCOUNTING 2 RE HERMOSILLA / BN CASTUCIANO PARTNERSHIP LIQUIDATION Partnership Liquidation A liquidation is the winding up of the partnership business. That is, it sells all of its noncash assets called realization, pays its liabilities, and makes a final liquidating distribution to the remaining partners. There are four basic steps to a partnerships liquidation. 1. Any operating income or loss up to the date of the liquidation should be computed and allocated to the partners capital accounts on the basis of their P&L ratio. 2. All noncash assets are sold and converted to cash. The gain (loss) realized on the sale of such assets is allocated to the partners capital account on the basis of their P&L ratio. 3. Any creditors claims, including liquidation expenses or anticipated future claims, are satisfied through the payment or reserve of cash. 4. The remaining unreserved cash is distributed to the remaining partners in accordance with the balance in their capital accounts. Note that this is not necessarily the P&L ratio. Two factors that may complicate the liquidation process are the existence of loans or advances between the partnership and one or more of the partners, or the creation of a deficit in a partners capital account because of the allocation of a loss. When loans exist between the partnership and a partner, the capital account and the loan(s) are combined to give a net amount. This is often referred to as the right of offset. When a deficit exists, the amount of the deficit is allocated to the remaining solvent partners capital accounts on the basis of their relative P&L ratio. Note here that if the partner with capital deficit is personally solvent, he has a liability to the remaining partners for the amount of the deficit. There are two topics that appear with regularity on the CPA examination in regard to the liquidation of a partnership. They are the statement of partnership liquidation and the determination a safe payment in an installment liquidation.

a. Statement of Partnership Liquidation The statement of partnership liquidation shows in detail all of the transactions associated with the liquidation of the partnership. It should be noted here that the liquidation of a partnership can take one of two forms: simple (lump-sum) or installment. A simple liquidation (illustrated below) is one in which all of the assets are sold in bulk and all of the creditors claims are satisfied before a single liquidating distribution is made to the partners. Because the assets are sold in bulk there is a tendency to realize greater losses than if the assets are sold over a period time. As a result, many partnership liquidate on an installment basis. In an installment liquidation the assets are sold over a period of time and the cash is distributed to the partners as it becomes available. Example: Statement of Partnership Liquidation - Simple Liquidation Assume the following: The capital balances are as given below. The P&L ratio is 5:3:2 for A, B, and C, respectively. Statement of Partnership Liquidation Cash Other Assets Liabilities A B C Balances P 50,000 P750,000 P450,000 P120,000 P170,000 P60,000 Sale of assets 400,000 ( 600,000) (100,000) ( 60,000) (40,000) 450,000 150,000 20,000 110,000 20,000 Payment of liabilities (450,000) (450,000) 0 0 Sale of assets 100,000 ( 150,000) ( 25,000) ( 15,000) (10,000) 0 ( 5,000) 95,000 10,000 Distribution of As deficit 5,000 ( 3,000) ( 2,000) 0 92,000 8,000 Final distribution of cash ( 100,000) ( 92,000) ( 8,000) Notice that after the noncash assets have been sold and the creditors satisfied, a P5,000 deficit remains in As capital account. The deficit is allocated to the remaining solvent partners on the basis of their relative P&L ratios, in this case, 3:2. A is liable to the partnership for the P5,000. If A is personally solvent and repays the P5,000, then P3,000 will go to B and P2,000 will go to C. If in the above example there had been liquidation expense or loans between the partnership and partners these would have to be recognized in the statement prior to any distribution to partners. b. Installment Method of Cash Distribution There are two keys to preparing a statement of partnership liquidation under the installment method: the determination of the available cash balance at any given point in time and the determination of which partner(s) is(are) to receive the payment of that cash. The reason that the cash is not distributed in accordance with the P&L ratio is twofold: first the final cash distribution is based upon the balance in each

partners capital account, not the P&L ratio, and second, there will be situations, as illustrated in the previous example, where one or more partners will have deficit balances in their capital accounts. If this is the case, they should never receive a cash distribution, even if the deficit does not arise until late in the liquidation process. The determination of the available cash balance is generally very straightforward. The beginning cash balance (cash on hand at the start of the liquidation process) is adjusted for the cash receipts from receivables, sale of noncash assets, payment to creditors, and liquidation expenses incurred. A situation may occur where a certain amount of cash is to be reserved for payment of future liabilities that may arise. If this is the case, this cash should be treated as noncash asset which makes it unavailable for current distribution to the partners. The determination of which partner(s) is(are) to receive the available cash is somewhat more difficult. There are a number of ways to make this computation, all of which are equally correct in the eyes of the examiners. This determination can be made at the beginning of the liquidation process or at the time of each payment. In making this determination there are two key assumptions that must be made: (1) the individual partners are assumed to be personally insolvent, and (2) the remaining noncash assets are deemed to be worthless (thus creating a maximum possible amount of loss). One method of determining the amount of the safe payment is the use of an Installment Cash Distribution Schedule. This schedule is prepared by determining the amount of loss required to eliminate each partners capital account. As noted above, all of the remaining noncash assets are to be considered worthless at the time a safe payment is determined. Thus if we determine the amount of loss required to eliminate each partners capital balance, we can determine the order in which the partners should receive the cash payments. When preparing this schedule it is important to make sure that the proper capital balance is used. The capital balance used must be inclusive of any loans or advances between the partnership and partners. Thus, the capital balance at the beginning of the liquidation process is increased by any amount owed to the partner by the partnership, and decreased by any amount owed to the partnership by the partner. Example: Schedule of Possible Losses and Installment Cash Distribution Assume the same data as used for the previous example. A, capital B, capital C, capital Total Capital balances P120,000 P170,000 P60,000 P350,000 Loss to eliminate A (120,000) ( 72,000) (48,000) 240,000 0 98,000 12,000 Additional loss to eliminate C ( 18,000) (12,000) 30,000 80,000 0 Additional loss to eliminate B ( 80,000) 80,000 0 P350,000 The total capital balance of P350,000 indicates that if the noncash assets are sold for P350,000 less than their book value, then none of the partners will receive a cash distribution. The purpose of this schedule is to determine how much of a loss each partners capital account can withstand based on that partners P&L ratio. In this example As capital would be eliminated if the partnership incurred a P240,000 (P120,000/50%) loss, Bs would be eliminated by a P566,667 (P170,000/30%) loss, and Cs by a P300,000 (P60,000/20%) loss. A is assumed to be eliminated first because it would take the smallest amount of loss to eliminate his account Once A is eliminated as a partner, the P&L ratios change to reflect the relative P&L ratio of the

remaining partners, in this case B and C. Based on the remaining capital balances and the relative P&L ratio, it would take a P163,333 (P98,000/60%) loss to eliminate B and a P30,000 (P12,000/40%) loss to eliminate C. Now that C is eliminated, B will share all of the profits and losses as a sole partner (i.e., 100%). It will now take an P80,000 loss to eliminate Bs capital. The resulting installment cash distribution schedule would appear as follows (this schedule assumes that all creditors have already received full payment; thus, the cash amount represents available cash): Installment Cash Distribution Schedule Partner A B C First P 80,000 100% Next 30,000 60% 40% Next 240,000 50% 30% 20% Any other 50% 30% 20% While the example shown in the previous page was not an installment liquidation, the Installment Cash Distribution Schedule shown above could still be used to determine how the available cash of P100,000 is to be distributed. This is illustrated below. Partner A B C First P 80,000 P80,000 Next 20,000 12,000 P8,000 P100,000 P92,000 P8,000 The above amounts can also be determined by simply computing the loss absorption capacity of each partner. The loss absorption capacity pertain to the amount of loss a partners capital can absorbed. As already explained above, As capital can only absorb P240,000 loss (P120,000/50%), whereas, Bs capital can absorb P566,667 loss (P170,000/30%) and Cs capital can absorb up to P300,000 loss (P60,000/20%). In this case, Bs capital has the highest loss absorption capacity in which the amount of cash to be paid to B before other partners can share should be P80,000 (P566,667 - P300,000) x 30%, known as priority 1 or allocation 1. After giving P80,000 to B his capital balance will have a loss absorption capacity equal that of C P300,000, (P170,000 - P80,000 = P90,000/30%). The next available cash to be distributed known as priority 2 or allocation 2 can be determined by simply getting the difference between the loss absorption capacity of B or C and that of A multiply by B and Cs P&L ratio. In this case, Bs share under priority 2 is P18,000 (P300,000 P240,000) x 30% and Cs share is P12,000 (P300,000 - P240,000) x 20%. After giving P18,000 to B and P12,000 to C, their capital balances will be P72,000 for B (P90,000 P18,000) and P48,000 for C (P60,000 - P12,000). The partners capital balances after priority 2 will have the same amount of loss absorption capacity in which case any additional cash distributed can be made based on the partners P&L ratio, in this case, 50%;30%;20%. ILLUSTRATIONS: 1. Partners A, B, and C decided to liquidate their partnership. A balance sheet was prepared on this date as follows: ABC Partnership Balance Sheet As of March 1, 2006 Cash P 20,000 Accounts Payable P 25,000 Other Assets 180,000 Loan Payable, B 5,000 A, Capital 50,000
ADDITIONAL

Profits and losses are were sold for P68,000.

Balances before liquidation Sale of assets at a loss Balances after sale Payment of liabilities Balances after payment Right of offset Balances after right of offset Deficiency balance of B absorbed by A&C Balances Payments to partners

45,000 _______ 75,000 P200,000 P200,000 divided in the ratio of 2:3:1, respectively. The non- cash assets All the partners are solvent, except for B. ABC Partnership Statement of Partnership Liquidation March 1, 2006 CAPITAL BALANCES Other Loan Cash Assets Liabiliti Due to A B C es B (2/6) (3/6) (1/6) P20,0 P180,0 P P5,00 P50,0 P45,0 P75,0 00 00 25,000 0 00 00 00 68,0 (180,0 (37,33 (56,00 (18,66 00 00) 3) 0) 7) 88,00 -25,000 5,000 12,66 (11,00 56,33 0 7 0) 3 (25,00 (25,0 0) 00) 63,00 --5,000 12,66 (11,00 56,33 0 7 0) 3 (5,000 5,000 ) 63,00 0 ---12,66 7 (4,000 ) P8,66 7 (8,667 ) (6,000 ) 6,000 -56,33 3 (2,000 ) P54,3 33 (54,33 3)

B, Capital C, Capital

P63,0 00 (63,00 0)

--

--

--

Since Bs share in the loss on realization is greater than his capital balance, a capital deficiency results. The loan payable to B is not sufficient to absorb the deficiency, and since he is insolvent, the other partners absorb the deficiency balance as a loss. This will decrease the payment to be received by partners A and C. 2. On December 31, 2006, the balance sheet of XX, YY, and ZZ is as follows: XYZ Partnership Balance Sheet December 31, 2006 Cash P 15,000 Liabilities P 50,000 Non- cash Assets 265,000 Loan Payable, YY 20,000 Loan Payable, ZZ 10,000 XX, Capital 48,000 YY, Capital 72,000 ________ ZZ, Capital 80,000 P280,000 P280,000

Profits and losses were shared as follows: XX, 30%; YY, 30%; and ZZ, 40%. It was decided to liquidate the business. The following is a summary of the realization and liquidation: Book Value Of Asset Cash Expenses Liabilities _Realized_ Collected _Paid__ Paid__ P 50,000 P 20,000 P 1,000 P 24,000 80,000 60,000 3,000 --75,000 50,000 4,000 26,000 60,000 30,000 2,000 ---

__Month_ January February March April

Required: Prepare a Statement of Partnership Liquidation. When necessary, this statement should be supplemented by supporting schedules. In the general ledger, the loan accounts are not to be closed into the capital account. CASH PRIORITY PROGRAM BALANCES XX Total Interests Divide by: P/L ratio Loss Absorption Bal. 1st Priority YY Balances 2nd Priority YY, ZZ Balances P160,0 00 P160,0 00 48,000 30 % 160,00 0 YY 92,000 30% 306,66 7 (81,66 7) P225,0 00 (65,00 0) P160,0 00 P225,0 00 (65,00 0) P160,0 00 -30% 19,50 0 30% 26,00 0 40% 45,50 0 ZZ 90,000 40% 225,00 0 -P24,5 00 -P24,5 00 XX PAYMENTS YY ZZ TOTAL

CASH ZZ,CAP. Balances P 15,000 P72,000 P80,000 JANUARY Sale at a loss 19,000 ( 9,300) (12,400) Balances P34,000 P62,700 P 67,600 Payment of liabilities ( 24,000)

XYZ PARTNERSHIP Statement of Partnership Liquidation January 1 to April 30, 2006 NON-CASH LIAB. L/P- YY L/P- ZZ XX,CAP. P 265,000 (50,000) P 215,000 ________ P50,000 ______ P20,000 _______ P10,000

YY,CAP. P48,000

_______

( 9,300) P38,700

P50,000 P 20,000

P10,000

(24,000) _______ _______ _______

______ _______ Balances P10,000 P62,700 P 67,600

P 215,000

P26,000 P 20,000

P10,000

P38,700

FEBRUARY Sale at a loss 57,000 ( 80,000) _______ _______ _______ ( 6,900) ( 6,900) ( 9,200) Balances P67,000 P 135,000 P26,000 P 20,000 P10,000 P31,800 P55,800 P 58,400 Distribution to partners (41,000) _______ _______ (20,000) ( 9,429) _______ (11,571) _______ Balances P26,000 P 135,000 P26,000 --P 571 P31,800 P44,229 P 58,400 MARCH Sale at a loss 46,000 ( 75,000) _______ _______ _______ ( 8,700) ( 8,700) (11,600) Balances P72,000 P 60,000 P26,000 --P 571 P23,100 P35,529 P 46,800 Payment of Liabilities (26,000) ________ (P26,000) --_______ _______ _______ _______ Balances P 46,000 P 60,000 ----P 571 P23,100 P35,529 P46,800 Distribution to Partners (46,000) ________ ________ _______ ( 571) ( 5,100) (17,529) (22,800) Balances --P60,000 ------P18,000 P8,000 P24,000 APRIL Sale at a loss 28,000 ( 60,000) ________ _______ _______ ( 9,600) ( 9,600) (12,800) Balances P 28,000 ------P 8,400 P 8,400 P11,200 Payments to Partners ( 28,000) --------( 8,400) ( 8,400) (11,200) SCHEDULE OF CASH DISTRIBUTION Total XX, Cap. YY, Loan Loan ZZ, Cap. FEBRUARY Payment to partners P41,000 st 1 priority (full) ( 24,500) 2nd priority (partial) ( 16,500) 9,429 Cash distribution in February P 9,429 MARCH Payment to partners P46,000 2nd priority (balance) (29,000) YY, Cap. ZZ,

P 20,000 P 20,000

P 4,500 7,071

P 11,571

P 12,429

571 P 16,000 rd 3 priority (17,000) P 5,100 5,100 6,800 Cash distribution in March P 5,100 P 17,529 P 571 P 22,800 The supporting computation in the preceding example is the Cash Priority Program, which can be prepared before the start of the liquidation process. It is then, supported by the Schedule of Cash Distribution for a clearer presentation of how the distribution to the partners were arrived at. Another supporting computation that may be used is the Schedule of Safe Payments. This schedule is done on a monthly basis with the same purpose in mind. And that is to determine the proper distribution of cash among the partners. Using the same example, we are now going to prepare a Schedule of Safe Payments: SCHEDULE OF SAFE PAYMENTS FEBRUARY XX YY ZZ__ Total Interests* P31,800 P75,800 P68,400 Less: Possible Loss** ( 40,500) ( 40,500) ( 54,000) Balances P( 8,700) P35,300 P14,400 Absorption of Deficit 8,700 ( 3,729) ( 4,971) Payments P31,571 P 9,429 MARCH Total Interests P23,100 P35,529 P47,371 Less: Possible Loss ( 18,000) ( 18,000) ( 24,000) Payments P 5,100 P17,529 P23,371
* TOTAL INTERESTS = CAPITAL + PAYABLE TO PARTNER -- RECEIVABLE FROM PARTNER. ** POSSIBLE LOSS = NON- CASH ASSET BALANCE + CASH WITHHELD FOR FUTURE EXPENSES.

Short cut technique of determining the amount of cash available to a partner or all partners will be discussed inside the classroom. These are the common questions asked in the CPA board exam. Examinees are no longer required to prepare in good form a statement of liquidation or a safe payment schedule. The questions normally focuses on distribution of available cash to partners as to how much will be their share and determination of the total liquidation loss. Hence, an examinee should give his/her answer within the time limit required. PROBLEMS: 1. The ABC partnership is being dissolved. All liabilities have been liquidated. The balance of assets on hand is being realized gradually. The following are details of partners accounts: Capital account Current account Loans to P/L (Original (Undistributed Earnings Net Partners Ratio investment) Drawings) hip Al P200,000 P15,000 (Cr.) P150,00 4 0 Bet 250,000 20,000 (Dr.) 4 Cris 100,000 10,000 (Cr.) 50,000 2 Show how cash available to partners be distributed to partners. 2. A, B, and C are partners sharing profits in the ratio of 5:3:2, respectively. A balance sheet prepared just prior to partnership liquidation shows the following:

A B C Capital Balances P122,000 P 72,000 P 47,000 Loan Balances 43,000 48,000 6,000 Assets are sold and cash is distributed to partners in monthly installments during the course of liquidation as follows: January P20,000 February 50,000 March 80,000 April (final distribution) 20,000 Required: a. Prepare a program to show how cash is to be distributed during the entire course of liquidation. b. Using the program developed above, prepare a schedule summarizing the payments to be made to partners at the end of each month. 3. D, E and F are partners sharing profits in the ratio of 40:35:25, respectively. On December 31, 2006, they agree to liquidate. A balance sheet prepared on this date follows: STO Partnership Balance Sheet As of December 31, 2006 Cash P 2,000 Liabilities P 6,000 Other Assets 46,000 E, Loan 5,000 F, Loan 2,500 D, Capital 14,450 E, Capital 12,550 _ F, Capital 7,500 P48,000 P48,000 The results of liquidation are summarized below: Realizati ons January February March April Book Value Cash Realize d Expenses of Realizatio n P500 750 600 400 Cash W/held at end of month for estd. Future exps. P2,000 1,250 500 --Liability paid

P12,00 P10,500 0 7,000 15,000 12,000 6,000 10,000 4,000

P4,00 0 2,000 -----

All cash available, except the amount withheld for future expenses, is distributed at the end of each month. Required: Determine the share of each partner every month of distribution. 4. G, H, and I, who share profits in the ratio of 4:1:5, respectively, have the following capital balances of P20,000, P20,000, and P60,000, respectively. On this date, when the partnership has liabilities of P16,000, they decided to liquidate. a. If G gets P35,000 upon final liquidation, what is the realization gain or loss? b. If H receives P15,500, how much does G receive?

c.

If G receives only P6,000 upon final liquidation, how much is the realization loss?

5. The balance sheet of J, K and L Partnership shows the following information as of December 31, 2006: Cash P 2,000 Liabilities P 5,000 Other Assets 28,000 J, Loan 2,500 J, Capital 12,500 K, Capital 7,000 L, Capital 3,000 P30,000 P30,000 Profit and loss ratio is 3:2:1,respectively, for J, K, and L. Other assets were realized as follows: Date Cash Received Book Value January, 2006 P 8,000 P 9,000 February, 2006 3,500 7,700 March, 2006 12,500 11,300 Cash a. b. c. is distributed as assets are realized. How much is the total loss to J? How much is the total cash received by K? How much cash does L receive in January?

6. Partners M, N, O and P, who share profits 5:3:1:1, respectively, decide to dissolve. Capital balances at this time are P120,000, P80,000, P60,000 and P20,000, respectively. Before selling the firms assets, the partners agree to the following: a. Partnership furniture and fixtures, with a book value of P24,000, is to be taken over by partner M at a price of P30,000. b. Partnership claims of P40,000 are to be paid off and the balance of cash on hand, P60,000, is to be divided in a manner that will avoid the need for any possible recovery of cash from a partner. Questions: a. How much is the total liquidation loss? b. How much should all partners received in the final settlement? 7. Q and R share profits and losses 40% and 60% respectively. After the sale of all firm assets, ledger accounts show the balances reported below. Both partners are personally insolvent and unable to contribute to the partnership. Cash P200,000 Salary, payable to Q P5,000 Receivable from R 15,000 Q, capital 95,000 Loss from liquidation 245,000 R, capital 180,000 P280,000 P280,000 How would the P20,000 be distributed between Q and R? 8. Partners S, T, U and V share profits 50%, 30%, 10% and 10%, respectively. Accounts maintained with partners just prior to liquidation follows: S T U V Advances (Dr. Balance) P9,000 P5,000 Loans (Cr. Balances) P10,000 P20,000 Capital (Cr. Balances) 80,000 60,000 30,000 50,000 At this point, cash of P36,000 is available for distribution to the partners. How much each partner received? 9. Balance sheet data for the firm of W, X, and Y as of January 1, 2006, follow:

675,000 200,000 200,000 ___200,000 P1,225,000 Partners share profits equally after the allowance of a salary to Y, the managing partner, of P7,500 monthly. As a result of operation losses sustained at the beginning of 2006, W advanced P150,000 to the firm on April 1; it was agreed that he would be allowed interest at 6%. With continued losses, the members decided to liquidate. Y agreed to take over partnership equipment in part settlement of his interest, the transfer being made at an agreed value of P40,000. On November 1, P200,000 cash was available for distribution to partners after sale of remaining assets and payment of partnership obligations to outsiders. Y had withdrawn his salary for January and February but had not received his salary for the period March 1 to November 1; no other cash payments had been made to partners. Available cash was distributed on November 1 and the firm was declared dissolved. How much cash should W received in the distribution of P200,000 cash available? 10. Z, Y, and X form a form a partnership on January 1, 2006, investing P150,000, P100,000 and P100,000, respectively. Profits and losses are to be shared in the ratio 2:1:1, respectively. It is agreed that 6% (1/2 of 1% per month) is to be charged on withdrawals that decrease capital below the original investments. On March 1, Z withdraws P50,000. Business is unsatisfactory and it is decided to dissolve partnership. Partnership assets realized P50,000 and the accountant distributes this cash to the proper parties on November 1, 2006. All parties are solvent, and proper settlement is made among partners the same day. Questions: a. How much is the total liquidation loss? b. Show the final cash settlement among partners. 11. The partnership of R, O and Y was dissolved on October 30, 2006, and the account balances after all noncash assets are converted to cash on November 1, 2006, along with residual profit and loss sharing ratios, are: Cash P 50,000 Accounts payable P120,000 R, capital (30%) 90,000 O, capital (30%) (60,000) Y, capital (40%) (100,000) Personal assets and liabilities of the partners at November 1, 2006 are: Personal assets Personal liabilities R P 80,000 P 90,000 O 100,000 61,000 Y 100,000 80,000 If Y contributed P70,000 to the partnership to provide cash to pay the creditors, what amount of Rs P90,000 partnership equity would appear to be recoverable? 12. Partners A, C, and E have capital balances of P112,000, P130,000 and P50,000, respectively and share profits in the ratio of 4:2:1. Questions: a. How much must the partnership realize on the sale of its assets if A is to receive P100,000 as final settlement?

Assets

P1,225,000 Liabilities W, capital _________ X, capital P1,225,000 Y, capital

b. If A receives a total of P32,000 in cash , how much E have received at this point? c. If A is personally insolvent and C received a total of P36,000 in final liquidation of the firm, what was the partnership loss on liquidation? 13. ARLENE, CECILLE, and EVELYN formed a partnership in 2005, agreeing to divide profits 2:1:1, respectively. In the middle of 2006, with operations going unfavorably, the partners decided to dissolve the relationship. The ff. facts are a summary of partners capital balances that indicates what happen. ARLENE CECILLE EVELYN Value of net assets contributed P100,00 P45,000 P40,000 0 Partnership net income, 2005, P60,000 30,000 15,000 15,000 divided 2:1:1 Drawings, 2005 30,000 20,000 20,000 Net assets at time of dissolution valued at P130,000, distributed to partners 2:1:1 65,000 32,500 32,500 Show what should be done in the final settlement? MULTIPLE CHOICE Items 1 and 2 are based on the following: The partnership of Daniel, Keith, and Ross is to be liquidated as soon as possible after December 31, 2002, and all cash on hand except for P20,000 contingency balance is to be distributed at the end of each month until the liquidation is complete. Profits and losses are shared 50%, 30%, and 20% to Daniel, Keith, and Ross, respectively. A balance sheet of the partnership at December 31, 2002 contains the following accounts and balances:
Cash Accounts Receivable Loan to Ross Inventories Land Equipment (net) Goodwill P 240,000 280,000 40,000 400,000 100,000 300,000 40,000 P1,400,000 Accounts Payable Notes Payable Loan from Keith Daniel, Capital Keith, Capital Ross, Capital P 300,000 200,000 20,000 340,000 340,000 200,000

P1,400,000

In January, 2003, the loan to Ross was offset against his capital balance and the goodwill is written off. P200,000 is collected on account, inventory items that cost P160,000 are sold for P200,000, and cash is distributed. 1. If available cash is distributed on January 31, 2003, Daniel, Keith, and Ross, respectively, should receive: a. P0; P132,000; and P6,000. c. P 0; P100,000; and P 0. b. P0; P120,000; and P 0. d. P 0; P120,000; and P8,000.

2. If a cash distribution plan is developed as of January 1, 2003, the vulnerability ranks (1 is most vulnerable) for Daniel, Keith, and Ross is: a. 1, 2, and 3, respectively. c. 2, 1, and 3, respectively. b. 1, 3, and 2, respectively. d. 2, 3, and 1, respectively.

3. After all partnership assets were converted into cash and all available cash were distributed to creditors, the following were determined:

Ledger Balances Liabilities Accounts Payable Rose, Capital (30%) 45,000 Sol, Capital (30%) Taz, Capital (40%) 40,000 P 20,000 10,000

Personal Assets P 50,000

Personal P 40,000

60,000 50,000 (90,000) 100,000

The partnership creditors proceed against Taz for recovery of their claims, and the partners settle their claims against each other. The amount recovered by Sol from Taz is: a. P55,000 b. P45,000 c. P40,000 d. P60,000 4. The partnership of Jill, Bill, and Will presented the following data prior to its liquidation. The profit and loss ratio was 2:2:1. Non- cash assets P561,900 Liabilities P110,580 Jill, capital 204,960 Bill, capital 99,780 Will, capital 146,580 P561,900 P561,900 During the first month, assets carried at P111,000 were sold for P90,000 and the cash was distributed. During the second month, assets carried at P134,400 were sold for P108,000. At that time, Bill was anxious to get his money out of the partnership in order to get started in another business. He offered to take P60,000 from the second realization as his final payment, releasing all other partners from all other claims. The other partners agreed. All cash was distributed. During the next three months, the remaining assets were sold for P210,000. How much did Jill gain or lose by accepting Bills proposal? a. P13,881 gain b. P14,520 loss c. P26,520 gain d. P25,479 loss 5. After paying all their liabilities, Mark, Lark, and Park had the following balances: Partner Capital Loans P & L ratio Mark P102,960 P90,000 12/25 Lark 89,040 30,000 8/25 Park 68,100 39,900 5/25 Cash available for distribution amounts to P37,800, remaining assets of P382,200 will be realized piecemeal in the next month. How much of the P37,800 cash should Park receive? a. P30,600 b. P7,200 c. P7,560 d. Zero 6. The condensed balance sheet and profit and loss ratios of the partnership of Bean, Dean, and Jean are as follows: Cash P 1,125,000 Liabilities P 2,625,000 Rec. from Bean 375,000 Payable to Jean 500,000 Other assets 10,250,000 Bean, capital (40%) 3,750,000 Dean, capital (30%) 2,500,000 Jean, capital (30%) 2,375,000 Partners agree to liquidate and all non- cash assets were sold for P7,500,000. How much of the available cash will go to Bean? a. P3,750,000 b. P2,275,000 c. P2,650,000 d. P2,125,000 Items 7 and 8 are based on the following:

Dick, Hick, Kick, and Lick were partners who decided to liquidate the affairs of the partnership. Prior to dissolution, the condensed balance sheet together with the profit and loss sharing ratio was derived as follows: Cash P 100,000 Liabilities P 750,000 Other assets 1,800,000 Hick, loan 60,000 Lick, loan 50,000 Dick, capital (30%) 420,000 Hick, capital (30%) 315,000 Kick, capital (20%) 205,000 Lick, capital (20%) 100,000 P1,900,000 P1,900,000 The other assets were sold for P1,200,000. Payments were made to creditors and final distributions of cash were made to partners. 7. The partner who got paid the most was: a. Hick, for loan of P60,000 and capital of c. Dick, for capital of P240,000. P270,000. d. Dick, for capital of P420,000. b. Hick, for loan of P60,000 and capital of P315,000. 8. The cash received by Lick will be applied: a. First to loan and then to capital. c. To capital only and none to loan. b. To loan only and none to capital. d. To capital first and next to loan. Items 9 to 11 are based on the following: The balance sheet for Coney, Honey, and Money partnership shows the following information as of December 31, 2001: Cash P 40,000 Liabilities P100,000 Other assets 560,000 Coney, loan 50,000 Coney, capital 250,000 Honey, capital 140,000 Money, capital 60,000 P600,000 P600,000 Profit and loss ratio is 3:2:1 for Coney, Honey, and Money, respectively. Other assets were realized as follows: Date Cash Received January 2002 P120,000 February 2002 70,000 March 2002 250,000 Cash is distributed as assets are realized. 9. The total loss to Coney is: a. P60,000 b. P40,000 c. P20,000 10. The total cash received by Honey is: a. P40,000 b. Zero c. P100,000 11. a. P4,000 Cash received by Money in January 2002 is: b. P20,000 c. P10,000 Book Value P180,000 154,000 226,000 d. None d. P30,000 d. Zero

12. Dolly, Folly, and Golly have capital balances of P800,000; P1,000,000; and P360,000, respectively and profit sharing ratios of 4:2:1, respectively. If Dolly received P160,000 upon liquidation of the partnership, the total amount received by all the partners was: a. P2,160,000 b. P1,120,000 c. P1,040,000 d. P480,000

13. Assume the same facts in No. 12, except that Dolly received P520,000 as a result of the liquidation. Golly received as part of the liquidation: a. P520,000 b. P290,000 c. P360,000 d. P280,000 14. On January 1, 2002, the partners of Max, Sax, and Tax, who share profits and losses in the ratio of 5:3:2, respectively, decided to liquidate their partnership. On this date, the partnerships condensed balance sheet was as follows: Cash P150,000 Liabilities P180,000 Other assets 750,000 Max, capital 240,000 Sax, capital 270,000 Tax, capital 210,000 P900,000 P900,000 On January 15, 2002, the first cash sale of other assets with a carrying amount of P450,000 realized P360,000. Safe installments to the partners were made the same day. How much cash should be distributed to Max, Sax, and Tax, respectively? a. P45,000; P153,000; and P132,000. c. P165,000; P99,000; and P66,000. b. P120,000; P135,000; and P105,000. d. P180,000; P108,000; and P72,000 Items 15 and 16 are based on the following: The following condensed balance sheet is presented for the partnership of Nick, Pick, and Rick, who share profits and losses in the ratio of 4:3:3, respectively: Cash P 45,000 Accounts payable P105,000 Other assets 415,000 Rick, loan 15,000 Nick, loan 10,000 Nick, capital 155,000 Pick, capital 100,000 Rick, capital 95,000 P470,000 P470,000 15. Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit Tick as a partner, with a 20% interest. No goodwill or bonus is to be recorded. How much should Tick contribute in cash or other assets? a. P70,000 b. P71,000 c. P87,500 d. P88,750 16. Assume that instead of admitting a new partner, the partners decide to liquidate the partnership. If the other assets are sold for P350,000, how much cash should be distributed to Nick? a. P115,000 b. P119,000 c. P129,000 d. P155,000 Items 17 and 18 are based on the following: Benny, Jenny, and Kenny are partners in a trading business. They participate in the profits and losses equally. As of December 31, 2002, the partners capital and drawing accounts are as follows: Benny Jenny Kenny Total Capital P200,000 P160,000 P600,000 P960,000 Drawing 120,000 80,000 40,000 240,000 The partners decided to liquidate the partnership. The operating profit for the year 2002 amounted to P144,000, which was all exhausted including partnership assets. As of December 31, 2002, unpaid liabilities still amounted to P168,000. Benny is personally insolvent, but both Jenny and Kenny have substantial private resources. 17. The total loss on realization was: a. P720,000 b. P888,000 c. P960,000 d. P1,032,000 18. The amount received by Kenny in final cash distribution was:

a. P156,000

b. P168,000

c. P216,000

d. P324,000

The following data pertains to items 19 and 20: The following balance sheet is for the AdGenDa partnership. The partners, Ad, Gen and Da, share profits and losses in the ratio of 5:3:2, respectively. Cash P30,000 Liabilities P70,000 Other assets 270,000 Ad, capital 140,000 Gen, capital 80,000 Da, capital 10,000 19. The assets and liabilities are fairly valued on the above balance sheet and the partnership wishes to admit Melvin as a partner with a one-fifth interest without recording goodwill or bonus. How much should Melvin contribute in cash or other assets? a. P36,800 b. P46,000 c. P57,500 d. P60,000 20. Assume that the original partners have agreed to liquidate the partnership by selling the other assets. How much each of the partners receives if the other assets are sold for P200,000? a. Ad, P102,500; Gen, P57,500; Da, P0 c. Ad, P105,000; Gen, P80,000; Da, b. Ad, P103,000; Gen, P57,000; Da, P0 P10,000 d. Ad, P105,000; Gen, P59,000; Da, P0 **** Thought is creative, Fear attracts like energy, Love is all there is **** **********THE END************