Professional Documents
Culture Documents
FOR
SPECIAL
TRANSACTIONS
(Advanced Accounting 1)
2018 Edition
BASED ON
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)
ISBN 978-621-8029-12-5
_______________________________________
Published by:
BANDOLIN ENTERPRISE
(Publishing and Printing)
#66 BAKAKENG CENTRAL, MARCOS HIGHWAY, BAGUIO CITY
CONTACT NOS.
Bandolin Enterprise - Globe: (0917) 813 6037;
Smart: (0928) 374 7571; Landline (074) 442 6764
Author - (0917) 870 6962
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Dear Reader,
This book is intended for students taking up the CHED-
required subject “Accounting for Special Transactions” (formerly
Advanced Accounting 1).
This book is based on current Philippine Financial
Reporting Standards (PFRSs). It is a labor of love and it is
dedicated to you, my reader. I have written this book with the
following goals in mind: completeness, conciseness, simplicity,
fun to learn and practical application. Complex accounting
concepts are not eliminated simply because they are too difficult
to comprehend but rather they are simplified to the highest
possible extent.
Your thoughts about this book are important to me. If later
on you have queries, comments, or suggestions on how I can
improve my work, I would be glad if you inform me. Here are my
contact details: zeusvernonmillan@gmail.com and (0917) 870 6962.
Good luck in your learning and best wishes in your
journey through life…...thank you for making me a part of it.
Sincerely,
Acknowledgements
I would like to extend my sincere gratitude to my family and
relatives for their support all throughout the writing of this book;
to my wife Eureka, my son Devin Joshua, and my daughter
Athena for their sacrifices; to my Dad and Mom for the source of
inspiration; to my in-laws Engr. John L. Socalo, Sr. and Dominga
S. Socalo for the assistance and trust; to my sister Donna Pamela
for the extra help; to my college instructors who have taught me
most of the techniques I have incorporated in this book; to Mr.
Darrell Joe Asuncion, Dean Renante D. Balocating, Mr. Rex B.
Banggawan, Mr. Christopher U. Ismael, Mr. John Carlo G.
Bandolin, and Mr. Einroul Aljohnza A. Bandolin for the much
needed encouragement and support; to my fellow instructors at
NCPAR; colleagues in the profession; previous clients; previous
students; to the staff of the Bandolin Enterprise; and friends who
in one way or another have contributed, directly or indirectly, to
the completion of this book.
TABLE OF CONTENTS
CHAPTER 1
PARTNERSHIP FORMATION ....................................................................... 1
CHARACTERISTICS OF A PARTNERSHIP .................................................................. 1
ACCOUNTING FOR PARTNERSHIPS ....................................................................... 4
FORMATION .................................................................................................. 4
Valuation of contributions of partners .................................................. 5
PARTNERS’ LEDGER ACCOUNTS .......................................................................... 6
BONUS ON INITIAL INVESTMENTS ..................................................................... 10
Variations to the bonus method .......................................................... 12
CHAPTER 1: SUMMARY .................................................................................. 14
PROBLEMS ............................................................................................... 15
CHAPTER 2
PARTNERSHIP OPERATIONS ..................................................................... 31
DIVISION OF PROFITS AND LOSSES..................................................................... 31
CHAPTER 2: SUMMARY .................................................................................. 52
PROBLEMS ............................................................................................... 52
CHAPTER 3
PARTNERSHIP DISSOLUTION .................................................................... 65
DISSOLUTION ............................................................................................... 65
ADMISSION OF PARTNER ................................................................................ 66
Purchase of interest ............................................................................. 66
Revaluation of assets ....................................................................... 68
Investment in the partnership ............................................................. 70
WITHDRAWAL, RETIREMENT OR DEATH OF A PARTNER.......................................... 78
INCORPORATION OF A PARTNERSHIP ................................................................. 89
CHAPTER 3: SUMMARY .................................................................................. 94
PROBLEMS ............................................................................................... 95
CHAPTER 4
PARTNERSHIP LIQUIDATION .................................................................. 113
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CHAPTER 5
CORPORATE LIQUIDATION & REORGANIZATION ................................... 172
MEASUREMENT BASIS .................................................................................. 173
FINANCIAL REPORTS..................................................................................... 173
Statement of affairs ........................................................................... 173
Statement of realization and liquidation ........................................... 183
REORGANIZATION ....................................................................................... 205
Types of corporate reorganization .................................................... 206
CHAPTER 5: SUMMARY ................................................................................ 207
PROBLEMS: ............................................................................................ 211
CHAPTER 6
JOINT ARRANGEMENTS ......................................................................... 224
JOINT ARRANGEMENT .................................................................................. 224
Contractual arrangement .................................................................. 224
Joint control ....................................................................................... 225
TYPES OF JOINT ARRANGEMENT ..................................................................... 228
Rights and obligations arising from the arrangement ....................... 229
Assessment of rights and obligations ................................................ 230
JOINT OPERATIONS ...................................................................................... 233
ACCOUNTING FOR JOINT OPERATION TRANSACTIONS .......................................... 235
No separate records are maintained ................................................. 235
Separate records are maintained ...................................................... 243
ADDITIONAL ILLUSTRATIONS: ......................................................................... 248
INTEREST IN JOINT OPERATIONS WHOSE ACTIVITY CONSTITUTES A BUSINESS ........... 261
JOINT VENTURES ......................................................................................... 266
Presentation in statement of financial position ................................ 267
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CHAPTER 7
CONSTRUCTION CONTRACTS ................................................................. 296
DEFINITION OF CONSTRUCTION CONTRACT ...................................................... 298
APPLICATION OF THE BASIC PRINCIPLES OF PFRS 15 ......................................... 299
Step 1: Identify the contract with the customer ............................... 299
Combination of contracts .............................................................. 300
Step 2: Identify the performance obligations in the contract ........... 300
Satisfaction of performance obligations ....................................... 303
Step 3: Determine the transaction price ........................................... 310
Step 4: Allocate the transaction price to the performance obligations
........................................................................................................... 313
Step 5: Recognize revenue when (or as) a performance obligation is
satisfied .............................................................................................. 313
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME ........................................... 314
METHODS FOR MEASURING PROGRESS ............................................................ 314
INPUT METHODS ......................................................................................... 314
Cost-to-cost ....................................................................................... 314
Efforts-expended (labor hours-based) method ................................. 318
CONTRACT COSTS........................................................................................ 320
ADJUSTMENTS TO THE MEASURE OF PROGRESS UNDER THE INPUT METHOD ............ 326
PRESENTATION ........................................................................................... 330
ACCOUNTING FOR CONSTRUCTION CONTRACTS ................................................ 335
OUTPUT METHODS ...................................................................................... 349
CHANGES IN THE MEASURE OF PROGRESS......................................................... 352
REASONABLE MEASURES OF PROGRESS ............................................................ 354
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CHAPTER 8
ACCOUNTING FOR FRANCHISE OPERATIONS – FRANCHISOR ................. 441
LICENSING ................................................................................................. 443
FRANCHISE ................................................................................................ 443
APPLICATION OF THE PRINCIPLES OF PFRS 15 .................................................. 444
STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER ...................................... 444
STEP 2: IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT ................... 446
General principles: ............................................................................. 446
Specific principles: (‘Licensing’ section) ............................................. 448
Right to access ............................................................................... 450
Right to use .................................................................................... 451
STEP 3: DETERMINE THE TRANSACTION PRICE ................................................... 459
Franchise fees .................................................................................... 460
STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS .... 462
STEP 5: RECOGNIZE REVENUE WHEN (OR AS) A PERFORMANCE OBLIGATION IS SATISFIED
............................................................................................................... 466
EXISTENCE OF A SIGNIFICANT FINANCING COMPONENT IN THE CONTRACT ............... 472
JOURNAL ENTRIES .................................................................................. 475
CONTRACT COSTS........................................................................................ 488
UNCERTAINTY IN THE COLLECTABILITY OF CONTRACT REVENUE ............................. 495
CHAPTER 8: SUMMARY ................................................................................ 502
PROBLEMS ............................................................................................. 503
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CHAPTER 9
CONSIGNMENT SALES ............................................................................ 519
CONSIGNMENT ARRANGEMENTS .................................................................... 519
PRINCIPAL VERSUS AGENT CONSIDERATIONS..................................................... 522
CHAPTER 9: SUMMARY ................................................................................ 527
PROBLEMS: ............................................................................................ 528
CHAPTER 10
INSTALLMENT SALES METHOD............................................................... 537
INSTALLMENT SALES METHOD ........................................................................ 537
Applicability ....................................................................................... 537
Brief history ....................................................................................... 538
ACCOUNTING PROCEDURES ........................................................................... 538
PRESENT VALUE .......................................................................................... 551
REPOSSESSION ........................................................................................... 559
TRADE-INS ................................................................................................. 567
ALLOCATION OF COST OF GOODS SOLD ............................................................ 574
COST RECOVERY METHOD ............................................................................. 578
CHAPTER 10: SUMMARY .............................................................................. 581
PROBLEMS ............................................................................................. 584
CHAPTER 11
HOME OFFICE, BRANCH AND AGENCY ACCOUNTING ............................. 602
BRANCH AND AGENCY DISTINGUISHED ............................................................ 602
ACCOUNTING FOR AN AGENCY ....................................................................... 604
ACCOUNTING FOR BRANCH OPERATIONS .......................................................... 605
RECIPROCAL ACCOUNTS (INTEROFFICE OR INTRA-COMPANY ACCOUNTS) ................ 606
INDIVIDUAL FINANCIAL STATEMENTS ............................................................... 613
COMBINED FINANCIAL STATEMENTS................................................................ 616
RECONCILIATION OF RECIPROCAL ACCOUNTS .................................................... 621
Home office with several branches ................................................... 628
SPECIAL PROBLEMS IN ACCOUNTING FOR BRANCH OPERATIONS ............................ 639
Shipments to branch billed at a price above cost .............................. 639
ADDITIONAL ILLUSTRATIONS: ............................................................ 648
Inter-branch transactions .................................................................. 675
Inter-branch transfers of cash ....................................................... 675
Inter-branch transfers of merchandise ......................................... 676
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CHAPTER 12
INSURANCE CONTRACTS ........................................................................ 695
INSURANCE CONTRACT ................................................................................. 696
Essential elements in the definition of an insurance contract .......... 696
Significant insurance risk (Uncertain future event) ....................... 697
Indemnification against loss .......................................................... 698
LEGAL PRINCIPLES OF INSURANCE ................................................................... 700
TYPES OF INSURERS ..................................................................................... 704
TYPES OF INSURANCE CONTRACTS .................................................................. 704
SEPARATING COMPONENTS FROM AN INSURANCE CONTRACT............................... 706
LEVEL OF AGGREGATION OF INSURANCE CONTRACTS .......................................... 706
RECOGNITION ............................................................................................ 706
INITIAL MEASUREMENT ................................................................................ 707
Fulfillment cash flows ........................................................................ 707
Contractual service margin ................................................................ 707
SUBSEQUENT MEASUREMENT ....................................................................... 708
ONEROUS CONTRACTS ................................................................................. 709
PREMIUM ALLOCATION APPROACH ................................................................ 710
REINSURANCE CONTRACTS HELD .................................................................... 711
INVESTMENT CONTRACTS WITH DISCRETIONARY PARTICIPATION FEATURES.............. 713
MODIFICATION OF AN INSURANCE CONTRACT ................................................... 714
DERECOGNITION ......................................................................................... 714
PRESENTATION ........................................................................................... 715
CHAPTER 12: SUMMARY .............................................................................. 716
CHAPTER 13
ACCOUNTING FOR BUILD-OPERATE-TRANSFER (BOT) ............................ 722
FEATURES OF BOT ARRANGEMENTS ............................................................... 724
SCOPE ...................................................................................................... 724
ACCOUNTING ISSUES ................................................................................... 725
Treatment of the operator’s rights over the infrastructure .............. 726
Recognition and measurement of arrangement consideration ........ 726
Construction or upgrade services ...................................................... 727
Consideration given by the grantor to the operator ..................... 727
Financial asset ........................................................................... 727
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