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Partnership – Basic Considerations and Formation 1

CHAPTER 1

MULTIPLE CHOICE ANSWERS AND SOLUTIONs

1-1: a
Jose's capital should be credited for the market value of the computer contributed by
him.
1-2: b (40,000 + 80,000) ÷ 2/3 = 180,000 x 1/3 = 60,000.
1-2: c

1-3: a
Cash P100,000
Land 300,000
Mortgage payable ( 50,000)
Net assets (Julio, capital) P350,000

1-4: b
Total Capital (P300,000/60%) P500,000
Perla's interest ______40%
Perla's capital P200,000
Less:Non-cash asset contributed at market value
Land P 70,000
Building 90,000
Mortgage Payable ( 40,000) _120,000
Cash contribution P 80,000

1-5: d - Zero, because under the bonus method, a transfer of capital is only required.

1-6: b
Reyes Santos
Cash P200,000 P300,000
Inventory – 150,000
Building – 400,000
Equipment 150,000
Mortgage payable ________ ( 100,000)
Net asset (capital) P350,000 P750,000

1-7: c
AA BB CC
Cash P 50,000
Property at Market Value P 80,000
Mortgage payable ( 35,000)
Equipment at Market Value _______ _______ P55,000
Capital P 50,000 P 45,000 P55,000
2
Chapter 1

1-8: a
PP RR SS
Cash P 50,000 P 80,000 P 25,000
Computer at Market Value __25,000 _______ __60,000
Capital P 75,000 P 80,000 P 85,000
1-9: c
Maria Nora
Cash P 30,000
Merchandise inventory P 90,000
Computer equipment 160,000
Liability ( 60,000)
Furniture and Fixtures 200,000 ________
Total contribution P230,000 P190,000

Total agreed capital (P230,000/40%) P575,000


Nora's interest ______60%
Nora's agreed capital P345,000
Less: investment 190,000
Cash to be invested P155,000

1-10: d
Roy Sam Tim
Cash P140,000 – –
Office Equipment – P220,000 –
Note payable ________ _( 60,000) ______
Net asset invested P140,000 P160,000 P –

Agreed capitals, equally (P300,000/3) = P100,000

1-11: a
Lara Mitra
Cash P130,000 P200,000
Computer equipment – 50,000
Note payable ________ _( 10,000)
Net asset invested P130,000 P240,000

Goodwill (P240,000 - P130,000) = P110,000

1-12: a
Perez Reyes
Cash P 50,000 P 70,000
Office Equipment 30,000 –
Merchandise – 110,000
Furniture 100,000
Notes payable _______ ( 50,000)
Net asset invested P 80,000 P230,000
Partnership – Basic Considerations and Formation 3

Bonus Method:
Total capital (net asset invested) P310,000

Goodwill Method:
Net assets invested P310,000
Add: Goodwill (P230,000-P80,000) _150,000
Net capital P460,000

1-13: b
Required capital of each partner (P300,000/2) P150,000
Contributed capital of Ruiz:
Total assets P105,000
Less Liabilities __15,000 __90,000
Cash to be contributed by Ruiz P 60,000

1-14: d
Total assets:
Cash P 70,000
Machinery 75,000
Building _225,000 P370,000
Less: Liabilities (Mortgage payable) __90,000
Net assets (equal to Ferrer's capital account) P280,000
Divide by Ferrer's P & L share percentage ____70%
Total partnership capital P400,000

Required capital of Cruz (P400,000 X 30%) P120,000


Less Assets already contributed:
Cash P 30,000
Machinery and equipment 25,000
Furniture and fixtures __10,000 __65,000
Cash to be invested by Cruz P 55,000

1-15: d
Adjusted assets of C Borja
Cash P 2,500
Accounts Receivable (P10,000-P500) 9,500
Merchandise inventory (P15,000-P3,000) 12,000
Fixtures __20,000 P 44,000
Asset contributed by D. Arce:
Cash P 20,000
Merchandise __10,000 __30,000
Total assets of the partnership P 74,000
4
Chapter 1

1-16: a
Cash to be invested by Mendez:
Adjusted capital of Lopez (2/3)
Unadjusted capital P158,400
Adjustments:
Prepaid expenses 17,500
Accrued expenses ( 5,000)
Allowance for bad debts (5% X P100,000) _( 5,000)
Adjusted capital P165,900

Total partnership capital (P165,900/2/3) P248,850


Multiply by Mendez's interest ⅓
Mendez's capital P 82,950
Less Merchandise contributed __50,000
Cash to be invested by Mendez P 32,950

Total Capital:
Adjusted capital of Lopez P165,900
Contributed capital of Mendez __82,950
Total capital P248,850
1-17: d
Moran, capital (40%)
Cash P 15,000
Furniture and Fixtures _100,000 P115,000
Divide by Moran's P & L share percentage ______40%
Total partnership capital P287,500
Multiply by Nakar's P & L share percentage ______60%
Required capital of credit of Nakar: P172,500
Contributed capital of Nakar:
Merchandise inventory P 45,000
Land 15,000
Building __65,000
Total assets P125,000
Less Liabilities __30,000 P 95,000
Required cash investment by Nakar P 77,500

1-18: c
Garcia's adjusted capital (see schedule 1) P40,500
Divide by Garcia's P & L share percentage ______40%
Total partnership capital P101,250
Flores' P & L share percentage ______60%
Flores' capital credit P 60,750
Flores' contributed capital (see schedule 2) __43,500
Additional cash to be invested by Flores P 17,250
Partnership – Basic Considerations and Formation 5

Schedule 1:
Garcia, capital:
Unadjusted balance P 49,500
Adjustments:
Accumulated depreciation ( 4,500)
Allowance for doubtful account ( 4,500)
Adjusted balance P 40,500

Schedule 2:
Flores capital:
Unadjusted balance P 57,000
Adjustments:
Accumulated depreciation ( 1,500)
Allowance for doubtful accounts ( 12,000)
Adjusted balance P 43,500
1-19: d
Ortiz Ponce Total
( 60%) ( 40%)
Unadjusted capital balances P133,000 P108,000 P241,000
Adjustments:
Allowance for bad debts ( 2,700) ( 1,800) ( 4,500)
Inventories 3,000 2,000 5,000
Accrued expenses _( 2,400) ( 1,600) ( 4,000)
Adjusted capital balances P130,900 P106,000 P237,500

Total capital before the formation of the new partnership (see above) P237,500
Divide by the total percentage share of Ortiz and Ponce (50% + 30%) ______80%
Total capital of the partnership before the admission of Roxas P296,875
Multiply by Roxas' interest ______20%
Cash to be invested by Roxas P 59,375

1-20: d
Merchandise to be invested by Gomez:
Total partnership capital (P180,000/60%) P300,000

Gomez's capital (P300,000 X 40%) P120,000


Less Cash investment __30,000
Merchandise to be invested by Gomez P 90,000

Cash to be invested by Jocson:


Adjusted capital of Jocson:
Total assets (at agreed valuations) P180,000
Less Accounts payable __48,000 P132,000
Required capital of Jocson _180,000
Cash to be invested by Jocson P 48,000

6
Chapter 1

1-21: b
Unadjusted Ell, capital (P75,000 – P5,000) P 70,000
Allowance for doubtful accounts ( 1,000)
Accounts payable ( 4,000)
Adjusted Ell, capital P 65,000

1-22: c
Total partnership capital (P113,640/1/3) P340,920
Less David's capital _113,640
Cortez's capital after adjustments P227,280
Adjustments made:
Allowance for doubtful account (2% X P96,000) 1,920
Merchandise inventory ( 16,000)
Prepaid expenses ( 5,200)
Accrued expenses ___3,200
Cortez's capital before adjustments P211,200
1-23: a
Total assets at fair value P4,625,000
Liabilities (1,125,000)
Capital balance of Flor P3,500,000

1-24: c
Total capital of the partnership (P3,500,000 ÷ 70%) P5,000,000
Eden agreed profit & loss ratio 30%
Eden agreed capital 1,500,000
Eden contributed capital at fair value 812,000
Allocated cash to be invested by Eden P 688,000

1-25: c
__Rey __Sam_ __Tim __Total_
Contributed capital (assets-liabilities)P471,000 P291,000 P195,000 P957,000
Agreed capital (profit and loss ratio) 382,800 382,800 191,400 957,000
Capital transfer (Bonus) P 88,200 P(91,800) P 3,600 -

1-26: d
Total agreed capital (P90,000 ÷ 40%) P225,000
Contributed capital of Candy (P126,000+P36,000-P12,000) 150,000
Total agreed capital (P90,000 ÷ 40%) 225,000
Candy, agreed capital interest 60%
Agreed capital of Candy 135,000
Contributed capital of Candy 150,000
Withdrawal P 15,000
Partnership – Basic Considerations and Formation 7

1-27: a
Total agreed capital (210,000 ÷ 70%) P300,000
Nora’s interest 30%
Agreed capital of Nora P 90,000
Cash invested 42,000
Cash to be invested by Nora P 48,000

1-28: a
Contributed capital of May (P194,000 - P56,000) P138,000
Agreed capital of May (P300,000 x 70%) 210,000
Cash to be invested by May P 72,000

1-29: c
__Alex_ _Carlos_ __Total__
Contributed capital P100,000 P84,000 P184,000
Agreed capital 92,000 92,000 184,000
Capital invested P( 8,000) P 8,000 -
8
Chapter 1

SOLUTIONS TO PROBLEMS

Problem 1 – 1

1. a. Books of Pedro Castro will be retained by the partnership

To adjust the assets and liabilities of Pedro Castro.

1. Pedro Castro, Capital............................................................ 600


Merchandise Inventory..................................................... 600

2. Pedro Castro, Capital............................................................ 200


Allowance for Bad Debts................................................. 200

3. Accrued Interest Receivable................................................. 35


Pedro Castro, Capital........................................................ 35

Computation:
P1,000 x 6% x 3/12 = P15
P2,000 x 6% x 2/12 = _20
Total................................P35

4. Pedro Castro, Capital............................................................ 100


Accrued Interest Payable.................................................. 100
(P4,000 x 5% x 6/12 = P100)

5. Pedro Castro, Capital............................................................ 800


Accumulated Depreciation – Furniture and Fixtures........ 800

6. Office Supplies..................................................................... 400


Pedro Castro, Capital........................................................ 400

To record the investment of Jose Bunag.

Cash. ........................................................................................... 15,067.50


Jose Bunag, Capital.............................................................. 15,067.50

Computation:
Pedro Castro, Capital
(1) P600 P31,400
(2) 200 35 (3)
(4) 100 400 (6)
(5) ___800
P1,700 P31,835
P30,135
Jose Bunag, Capital : 1/2 x P30,135 = P15,067.50

Partnership – Basic Considerations and Formation 9

b. A new set of books will be used

Books of Pedro Castro

To adjust the assets and liabilities.

See Requirement (a).

To close the books.

Notes Payable.............................................................................. 4,000


Accounts Payable........................................................................ 10,000
Accrued Interest Payable............................................................. 100
Allowance for Bad Debts............................................................ 1,200
Accumulated Depreciation – Furniture and Fixtures................... 1,400
Pedro Castro, Capital................................................................... 30,135
Cash...................................................................................... 6,000
Notes Receivable.................................................................. 3,000
Accounts Receivable............................................................. 24,000
Accrued Interest Receivable................................................. 35
Merchandise Inventory......................................................... 7,400
Office Supplies..................................................................... 400
Furniture and Fixtures........................................................... 6,000

New Partnership Books

To record the investment of Pedro Castro.

Cash .......................................................................................... 6,000


Notes Receivable......................................................................... 3,000
Accounts Receivable................................................................... 24,000
Accrued Interest Receivable........................................................ 35
Merchandise Inventory................................................................ 7,400
Office Supplies............................................................................ 400
Furniture and Fixtures................................................................. 6,000
Notes Payable....................................................................... 4,000
Accounts Payable.................................................................. 10,000
Accrued Interest Payable...................................................... 100
Allowance for Bad Debts...................................................... 1,200
Accumulated Depreciation – Furniture and Fixtures............. 1,400
Pedro Castro, Capital............................................................ 30,135

To record the investment of Jose Bunag.


Cash. ........................................................................................... 15,067.50
Jose Bunag, Capital.............................................................. 15,067.50

10
Chapter 1

2. Castro and Bunag Partnership


Balance Sheet
October 1, 2008
Assets

Cash .......................................................................................................... P21,067.50


Notes receivable......................................................................................... 3,000.00
Accounts receivable................................................................................... P 24,000
Less Allowance for bad debts..................................................................... ___1,200 22,800.00
Accrued interest receivable........................................................................ 35.00
Merchandise inventory............................................................................... 7,400.00
Office supplies .......................................................................................... 400.00
Furniture and fixtures................................................................................. 6,000
Less Accumulated depreciation.................................................................. ___1,400 __4,600.00
Total Assets....................................................................................... P59,302.50

Liabilities and Capital

Notes payable .......................................................................................... P 4,000.00


Accounts payable....................................................................................... 10,000.00
Accrued interest payable............................................................................ 100.00
Pedro Castro, Capital.................................................................................. 30,135.00
Jose Bunag, Capital.................................................................................... _15,067.50
Total Liabilities and Capital.............................................................. P59,302.50

Problem 1 – 2
Contributed Capitals:

Jose: Capital before adjustment..................................................... P 85,000


Notes Payable....................................................................... 62,000
Undervaluation of inventory................................................. 13,000
Underdepreciation................................................................. ( 25,000) P 135,000
Pedro: Cash...................................................................................... 28,000
Pablo: Cash...................................................................................... 11,000
Marketable securities............................................................ _57,500 ___68,500
Total contributed capital............................................................................. P 231,500

Agreed Capitals:
Bonus Method:
Jose (P231,500 x 50%)................................................................ P115,750
Pedro (P231,500 x 25%)............................................................. 57,875
Pablo (P231,500 x 25%).............................................................. __57,875
Total. ........................................................................................... P231,500

Partnership – Basic Considerations and Formation 11

Goodwill Method. To have a goodwill, the only possible base is the capital of Pablo. The
computation is:

Contributed Agreed
Capital Capital Goodwill
Jose P135,000 P137,000 (50%) 2,000
Pedro 28,000 68,500 (25%) 40,500
Pablo __68,500 __68,500 (25%) _____–
Total P231,500 274,000 42,500

Total agreed capital (P68,500 ÷ 25%) = 274,000

Jose, Pedro and Pablo Partnership


Balance Sheet
June 30, 2008

Bonus Method Goodwill Method


Assets:
Cash P 49,000 P 49,000
Accounts receivable (net) 48,000 48,000
Marketable securities 57,500 57,500
Inventory 85,000 85,000
Equipment (net) 45,000 45,000
Goodwill ______– __42,500
Total P284,500 P327,000

Liabilities and Capital:

Accounts payable P 53,000 P 53,000


Jose, capital (50%) 115,750 137,000
Pedro, capital (25%) 57,875 68,500
Pablo, capital (25%) __57,875 __68,500
Total P284,500 P327,000

Problem 1 – 3

1. Books of Pepe Basco

To adjust the assets.

a. Pepe Basco, Capital..................................................................... 3,200


Estimated Uncollectible Account.......................................... 3,200

b. Pepe Basco, Capital..................................................................... 500


Accumulated Depreciation – Furniture and Fixtures............. 500
12
Chapter 1

To close the books.

Estimated Uncollectible Account...................................................... 4,800


Accumulated Depreciation – Furniture and Fixtures......................... 1,500
Accounts Payable.............................................................................. 3,600
Pepe Basco, Capital........................................................................... 31,500
Cash. ........................................................................................... 400
Accounts Receivable................................................................... 16,000
Merchandise Inventory................................................................ 20,000
Furniture and Fixtures................................................................. 5,000

2. Books of the Partnership

To record the investment of Pepe Basco.

Cash................................................................................................... 400
Accounts Receivable......................................................................... 16,000
Merchandise Inventory...................................................................... 20,000
Furniture and Fixtures........................................................................ 5,000
Estimated Uncollectible account................................................. 4,800
Accumulated Depreciation – Furniture and Fixtures................... 1,500
Accounts Payable........................................................................ 3,600
Pepe Basco, Capital..................................................................... 31,500

To record the investment of Carlo Torre.

Cash................................................................................................... 47,250
Carlo Torre, Capital.................................................................... 47,250

Computation:
Pepe Basco, capital (Base).......................................................... P31,500
Divide by Pepe Basco's P & L ratio............................................ ___40%
Total agreed capital..................................................................... P78,750
Multiply by Carlo Torre's P & L ratio......................................... ___60%
Cash to be invested by Carlo Torre............................................. P47,250

Problem 1 – 4

a. Roces' books will be used by the partnership

Books of Sales
1. Adjusting Entries
(a) Sales, Capital........................................................................ 3,200
Accumulated Depreciation – Fixtures.............................. 3,200

(b) Goodwill............................................................................... 32,000


Sales, Capital.................................................................... 32,000
Partnership – Basic Considerations and Formation 13

2. Closing Entry

Allowance for Bad Debts............................................................ 12,800


Accumulated Depreciation – Delivery Equipment...................... 8,000
Accumulated Depreciation – Fixtures......................................... 91,200
Accounts Payable........................................................................ 64,000
Notes Payable.............................................................................. 40,000
Accrued Taxes............................................................................. 8,000
Sales, Capital............................................................................... 224,000
Cash...................................................................................... 4,800
Accounts Inventory............................................................... 72,000
Merchandise Inventory......................................................... 192,000
Prepaid Insurance.................................................................. 3,200
Delivery Equipment.............................................................. 48,000
Fixtures................................................................................. 96,000
Goodwill............................................................................... 32,000

Books of Roces (Books of the Partnership)

1. Adjusting Entries

(a) Roces, Capital............................................................................. 1,600


Allowance for Bad Debts...................................................... 1,600

(b) Accumulated Depreciation – Fixtures......................................... 16,000


Roces, Capital....................................................................... 16,000

(c) Merchandise Inventory................................................................ 8,000


Roces, Capital....................................................................... 8,000

(d) Goodwill..................................................................................... 40,000


Roces, Capital....................................................................... 40,000

2. To record the investment of Sales.

Cash................................................................................................... 4,800
Accounts Receivable......................................................................... 72,000
Merchandise Inventory...................................................................... 192,000
Prepaid Insurance.............................................................................. 3,200
Delivery Equipment........................................................................... 48,000
Fixtures.............................................................................................. 96,000
Goodwill............................................................................................ 32,000
Allowance for Bad Debts............................................................ 12,800
Accumulated Depreciation – Delivery Equipment...................... 8,000
Accumulated Depreciation – Fixtures......................................... 91,200
Accounts Payable........................................................................ 64,000
Notes Payable.............................................................................. 40,000
Accrued Taxes............................................................................. 8,000
Sales, Capital............................................................................... 224,000
14
Chapter 1

b. Sales' books will be used by the partnership

Books of Roces

1. Adjusting Entries

See Requirement (a).

2. Closing Entry

Allowance for Bad Debts............................................................ 1,600


Accumulated Depreciation – Delivery Equipment...................... 12,800
Accumulated Depreciation – Fixtures......................................... 64,000
Accounts Payable........................................................................ 104,000
Accrued Taxes............................................................................. 6,400
Roces, Capital............................................................................. 224,000
Cash...................................................................................... 14,400
Accounts Receivable............................................................. 57,600
Merchandise Inventory......................................................... 132,800
Prepaid Insurance.................................................................. 4,800
Delivery Equipment.............................................................. 19,200
Fixtures................................................................................. 144,000
Goodwill............................................................................... 40,000

Books of Sales (Books of the Partnership)

1. Adjusting Entries

See Requirement (a).

2. To record the investment of Roces.

Cash................................................................................................... 14,400
Accounts Receivable......................................................................... 57,600
Merchandise Inventory...................................................................... 132,800
Prepaid Insurance.............................................................................. 4,800
Delivery Equipment........................................................................... 19,200
Fixtures.............................................................................................. 144,000
Goodwill............................................................................................ 40,000
Allowance for Bad Debts............................................................ 1,600
Accumulated Depreciation – Delivery Equipment...................... 12,800
Accumulated Depreciation – Fixtures......................................... 64,000
Accounts Payable........................................................................ 104,000
Accrued Taxes............................................................................. 6,400
Roces, Capital............................................................................. 224,000

Partnership – Basic Considerations and Formation 15

c. A new set of books will be opened by the partnership

Books of Roces

1. Adjusting Entries

See Requirement (a).

2. Closing Entry

See Requirement (b).

Books of Sales

1. Adjusting Entries

See Requirement (a).

2. Closing Entry

See Requirement (a).

New Partnership Books

To record the investment of Roces and Sales.

Cash................................................................................................... 19,200
Accounts Receivable......................................................................... 129,600
Merchandise Inventory...................................................................... 324,800
Prepaid Insurance.............................................................................. 8,000
Delivery Equipment (net).................................................................. 46,400
Fixtures (net)..................................................................................... 84,800
Goodwill .......................................................................................... 72,000
Allowance for Bad Debts............................................................ 14,400
Accounts Payable........................................................................ 168,000
Notes Payable.............................................................................. 40,000
Accrued Taxes............................................................................. 14,000
Roces, Capital............................................................................. 224,000
Sales, Capital............................................................................... 224,000
16
Chapter 1

Problem 1 – 5

1. To close Magno's books.

Allowance for Bad Debts................................................................... 1,000


Accounts Payable.............................................................................. 6,000
Notes Payable.................................................................................... 10,000
Accrued Interest Payable................................................................... 300
R. Magno, Capital.............................................................................. 24,700
Cash. ........................................................................................... 5,000
Accounts Receivable................................................................... 13,000
Merchandise Inventory................................................................ 12,000
Equipment................................................................................... 3,000
Other Assets................................................................................ 9,000

2. To adjust the books of Lagman.

Goodwill............................................................................................ 8,000
Allowance for Bad Debts............................................................ 210
J. Lagman, Capital....................................................................... 7,790

3. To record the investment of Magno.

Cash................................................................................................... 5,000
Accounts Receivable......................................................................... 13,000
Merchandise Inventory...................................................................... 12,000
Equipment......................................................................................... 3,000
Other Assets...................................................................................... 9,000
Allowance for Bad Debts............................................................ 1,000
Accounts Payable........................................................................ 6,000
Notes Payable.............................................................................. 10,000
Accrued Interest Payable............................................................. 300
R. Magno, Capital....................................................................... 24,700

To adjust the investments of the partners.

Cash................................................................................................... 10,300
R. Magno, Capital....................................................................... 10,300
(P35,000 – P24,700 = P10,300)
J. Lagman, Capital............................................................................. 35,790
Cash. ........................................................................................... 23,300
Accounts Payable to J. Lagman................................................... 12,490
(P63,000 + P7,790 = P70,790 – P35,000 = P35,790)

Partnership – Basic Considerations and Formation 17

4. Lagman and Magno


Balance Sheet
December 31, 2008

Assets

Cash................................................................................................... P –
Accounts receivable........................................................................... P34,000
Less Allowance for bad debts............................................................ 1,210 32,790
Merchandise inventory...................................................................... 21,000
Equipment......................................................................................... 8,000
Other assets........................................................................................ 46,000
Goodwill .......................................................................................... ___8,000
Total Assets................................................................................. P115,790

Liabilities and Capital

Accounts payable............................................................................... P 18,000


Notes payable.................................................................................... 15,000
Accrued interest payable.................................................................... 300
Accounts payable to J. Lagman......................................................... 12,490
J. Lagman, capital.............................................................................. 35,000
R. Magno, capital.............................................................................. __35,000
Total Liabilities and Capital........................................................ P115,790

Problem 1 – 6

1. Books of Toledo

Toledo, Capital............................................................................ 4,800


Allowance for Bad Debts (15% x P32,000).......................... 4,800

Books of Ureta

Ureta, Capital.............................................................................. 2,400


Allowance for Bad Debts (10% x P24,000).......................... 2,400

Cash (90% x P12,000)................................................................. 10,800


Loss from Sale of Office Equipment........................................... 1,200
Office Equipment.................................................................. 12,000
Toledo, Capital (1/4 x P1,200).................................................... 300
Ureta, Capital.............................................................................. 900
Loss from Sale of Office Equipment..................................... 1,200

18
Chapter 1

2. New Partnership Books

Cash. ........................................................................................... 3,200


Accounts Receivable................................................................... 32,000
Merchandise................................................................................ 40,000
Office Equipment........................................................................ 10,000
Allowance for Bad Debts...................................................... 4,800
Accounts Payable.................................................................. 10,000
Notes Payable....................................................................... 2,000
Toledo, Capital..................................................................... 68,400
To record the investment of Toledo.

Cash. ........................................................................................... 22,800


Accounts Receivable................................................................... 24,000
Merchandise................................................................................ 36,000
Toledo, Capital............................................................................ 300
Allowable for Bad Debts...................................................... 2,400
Accounts Payable.................................................................. 16,000
Ureta, Capital........................................................................ 64,700
To record the investment of Ureta.

3. Cash................................................................................................... 3,400
Ureta, Capital.............................................................................. 3,400
To record Ureta's cash contribution.

Computation:
Toledo, capital (P68,400 – P300)................................................ P 68,100
Divide by Toledo's profit share percentage................................. ____50%
Total agreed capital of the partnership........................................ P136,200
Multiply by Ureta's profit share percentage................................. ____50%
Agreed capital of Ureta............................................................... P 68,100
Ureta, capital............................................................................... __64,700
Cash contribution of Ureta.......................................................... P 3,400
or
Toledo, capital (P68,400 – P300)................................................ P 68,100
Less Ureta, capital....................................................................... __64,700
Cash contribution of Ureta.......................................................... P 3,400
Partnership – Basic Considerations and Formation 19

4. Toledo and Ureta Partnership


Balance Sheet
July 1, 2008

Assets

Cash................................................................................................... P 29,400
Accounts receivable........................................................................... P56,000
Less Allowance for bad debts............................................................ __7,200 48,800
Merchandise...................................................................................... 76,000
Office equipment............................................................................... __10,000
Total Assets................................................................................. P164,200

Liabilities and Capital

Accounts payable............................................................................... P 26,000


Notes payable.................................................................................... 2,000
Toledo, capital................................................................................... 68,100
Ureta, capital..................................................................................... __68,100
Total Liabilities and Capital........................................................ P164,200
20
Chapter 2

CHAPTER 2

MULTIPLE CHOICE ANSWERS AND SOLUTIONS


2-1: d
Jordan Pippen
Total
Annual salary P120,000 P80,000
P200,000
Balance, equally ( 10,000) ( 10,000)
( 20,000)
Total P110,000 P 70,000
P180,000

2-2: a
JJ KK LL
Total
Bonus (.20 X P90,000) P18,000 – –
P 18,000
Interest
JJ (.15 X P100,000) P15,000 – –)
KK (.15 X P200,000) P 30,000 –)
LL (.15 X P300,000) P45,000)
90,000
Balance, equally ( 6,000) ( 6,000) ( 6,000)
( 18,000)
Total profit share P27,000 P 24,000 P39,000
P 90,000
2-3: a

2-4: a
Allan Michael
Total
Interest
Allan - .10 X (P40,000 + 60,000 /2) P 5,000 )
Michael - .10 X (P60,000 + 70,000/2) P 6,500)
P 11,500
Balance, equally _14,000 _14,000
__28,000
Total P 19,000 P20,500 P 28
,000
2-5: a
Fred Greg Henry
Total
Interest (.10 of average capital) P12,000 P 6,000 P 4,000
P 22,000
Salaries 30,000 20,000
50,000
Balance, equally ( 35,000) ( 35,000) ( 35,000)
(105,000)
Total P 7,000 ( P29,000) (P11,000) (P 3
3,000)

2-6: b
Average Capital
Capital Months Peso
Date Balance Unchanged Months
January 1 140,000 6 P 840,000
July 1 180,000 1 180,000
August 1 165,000 5 __825,000
12 P1,845,000

Average capital - P1,845,000/12 = P153,750

Interest (P153,750 X 10%) = P 15,375


Partnership Operations 21

2-7: c
Capital Months Peso
Date Balance Unchanged Months
January 1 P16,000 3 P 48,000
April 1 17,600 2 35,200
June 1 19,200 3 57,600
September 1 15,200 4 __60,800
12 P201,600

Average Capital(P201,600/12) = P16,800

2-8: a
Net profit before bonus P 24,000
Net profit after bonus (P24,000/120%) __20,000
Bonus to RJ 4,000
Balance (P24,000-P4,000)X3/5 __12,000
Total profit share P 16,000

2-9: a
LT AM Total
Interest P3,200 P 3,600 P 6,800
Salaries 15,000 7,500 22,500
Balance, 3:2 (11,580) ( 7,720) ( 19,300)
Total P 6,620 P 3,380 P 10,000

2-10: b
Net income after salary, interest and bonus P467,500
Add back: Salary (P10,000 X 12) P120,000
Interest (P250,000 X .05) __12,500 _132,500
Net income after bonus (80%) P600,000
Net income before bonus (P600,000/80%) _750,000
Paul's bonus P150,000

2-11: b
CC DD EE Total
Salary P 14,000 P 14,
000
Balance P14,000 P 8,400 5,600
28,000
Additional profit to DD ( 1,500) __2,100 ( 600)
______–
Total P12,500 P10,500 P 19,000 P 42
,000

Net income
Fees Earned P90,000
Expenses _48,000
Net Income P42,000

22
Chapter 2

2-12: c
LL MM NN Total
Interest P 2,000 P 1,250 P 750 P 4,
000
Annual Salary 8,500 – –
8,500
Additional profit to give LL, P20,000 9,500 5,700 3,800
19,000*
Additional profit to give MM, P14,000 _____– __7,050 _____–
__7,050
Total P20,000 P14,000 P 4,550 P 38,
550
*(P9,500/50%) = P19,000

2-13: a
RR SS TT Total
Excess (Deficiency)
RR (P80,000 - P95,000) P15,000 – –)
SS (P50,000 - P40,000) – (P10,000) –)
P 5,000
Balance 4:3:1 _47,500 _35,625 _11,875
__95,000
Total P62,500 P25,625 P11,875
P100,000

Net Income (200,000 - 100,000) = P100,000

2-14: b AA BB CC Total
AA - 100,000 X 10% P 10,000 )
150,000 X 20% 30,000 )
P 40,000
Remainder, 210,000
BB (60,000 X .05) P 3,000 )
CC (60,000 X .05) P 3,000
6,000
Balance, equally __68,000 _68,000 _68,000
_204,000
Total P108,000 P71,000 P71,000
P250,000
2-15: a
AJ BJ CJ Total
Bonus to CJ
Net profit before bonus P44,000
Net profit after bonus (P44,000/110%)P40,000 – – P4,000
P4,000
Interest to BJ – P1,000 –
1,000
Salaries P 10,000 – 12,000
22,000
Balance, 4:4:2 __6,800 _6,800 __3,400
_17,000
Total P 16,800 P7,800 P19,400
P44,000

2-16: c
Total profit share of Pedro P200,000
Less: Salary to Pedro P 50,000
Interest __20,000 __70,000
Share in the balance (40%) P130,000

Net profit after salary and interest (130,000/40%) P325,000


Add: Total Salaries P150,000
Total Interest __70,000 _220,000
Total Partnership Income P545,000
Partnership Operations 23

2-17: c
Net income before extraordinary gain and bonus (69,600-12,000) P 57,600
Net income after bonus (57,600/120%) _48,000
Bonus to RR P 9,600

Distribution of Net Income:


JJ RR Total
Bonus – P 9,600 P 9,600
Balance, equally P 24,000 24,000 48,000
Net profit before extraordinary gain P 24,000 P 33,600 P 57,600
Extraordinary gain __4,800 __7,200 _12,000
Total P 28,800 P 40,800 P 69,600
2-18: a
Mel Jay Total
Interest P 20,000 P 12,000 P 32,000
Annual Salary 36,000 – 36,000
Remainder 60:40 __60,000 _40,000 _100,000
Total P116,000 P 52,000 P168,000

2-19: a
DV JE FR Total
Interest on excess (Deficiency) P 15,000 P 3,750 (P 7,500)
P 11,250
Remainder 5:3:2 ( 36,875) ( 22,125) ( 14,750)
( 73,750)
Total (P 21,875) (P 18,375) (P 22,250) (P 6
2,500)

2-20: c
Correction of 1998 profit:
Net income per books P 19,500
Understatement of depreciation ( 2,100)
Overstatement of inventory, December 31 ( 11,400)
Adjusted net income P 6,000

Pete Rico Total


Distribution of net income per book:
Equally P 9,750 P 9,750 P 19,
500
Distribution of adjusted net income
Equally ( 3,000) ( 3,000)( 6,
000)
Required Decrease P 6,750 P 6,750
P 13,500

2-21: a
Tiger Woods Total
Salaries P 64,000 P100,000
P164,000
Interest 24,000 30,000
54,000
Bonus (P360,000-P54,000)X.25 76,500 –
76,500
Remainder, 30:70 __19,650 __45,850
__65,500
Total P184,150 P175,850
P360,000
24
Chapter 2

2-22: a
Holly Field Total
Salaries P 20,000 – P 20,000
Commission – P 25,000 25,000
Interest 32,000 33,600 65,600
Bonus, schedule 1 30,000 – 30,000
Remainder, 60:40 __35,640 _23,760 __59,400
Total P117,640 P 82,360 P200,000

Schedule 1
Net income before salary, commission,
interest and bonus P200,000
Less: salaries __20,000
Net income before bonus P180,000
Net income after bonus (P180,000/120%) _150,000
Bonus P 30,000
2-23: a
Mike Tyson
Total
Capital balance, beginning P600,000 P400,000
P1,000,000
Additional investment 100,000 200,000
300,000
Capital withdrawal -200,000 ( 100,000) _-
300,000
Capital balance before profit and loss distribution P500,000 P500,000
P1,000,000

Net income:
Salary P200,000 P300,000 P 50
0,000
Balance, 3:2 __60,000 __40,000
__100,000
Total P260,000 P340,000 P 60
0,000
Total P760,000 P840,000
P1,600,000
Drawings ( 200,000) ( 300,000) ( 5
00,000)
Capital balance, end P560,000 P540,000
P1,100,000

Average Capital - King:


Capital Months Peso
Date Balance Unchanged Months
January 1 P40,000 3 P120,000
April 1 55,000 9 _495,000
12 P615,000
Average capital – P615,000/12 = P51,250

Average Capital - Queen:


Capital Months Peso
Date Balance Unchanged Months
January 1 P100,000 7 P700,000
April 1 130,000 5 __650,000
12 P1,350,000
Average capital - P1,350,000 / 12 =P112,500
Partnership Operations 25

2-24: d
Distribution of Net Income - Schedule 1

King Queen Total


Interest P 5,125 P11,250 P16,375
Bonus, Schedule 2 12,725 – 12,725
Salaries 25,000 30,000 55,000
Residual, 50:50 ( 2,050) _(2,050) _(4,100)
Total P40,800 P39,200 P80,000

Schedule 2

Net income before allocation P80,000


Less: Interest _16,375
Net income before bonus P63,625
Net income after bonus (P63,625/125%) _50,900
Bonus P12,725

Capital Balance December 31:


King Queen Total
Capital balance, January 1 P40,000 P100,000 P140,000
Additional investment _15,000 __30,000 __45,000
Capital balance before profit and
loss distribution P55,000 P130,000 P185,000
Net income (Schedule 2) 40,800 39,000 80,000
Drawings (P400 X 52) ( 20,800) ( 20,800) ( 41,600)
Capital balance, December 31 P75,000 P148,400 P223,400
2-25: d
Total receipts (P1,500,000 + P1,625,000) P3,125,000
Expenses ( 1,080,000)
Net income P2,045,000

Distribution to Partners
Red – P1,500,000/P3,125,000 X P2,045,000 = P 981,600 (1)
Blue – P1,625,000/P3,125,000 X P2,045,000 = _1,063,400
P2,045,000

Capital balance of Blue Dec. 31


Capital Balance, Jan. 1 P 374,000
Additional investment ___22,000
Capital balance before profit and
loss distribution P 396,000
Profit share 1,063,400
Drawings ( 750,000)
Capital balance, Dec. 31 P 709,400 (2)

26
Chapter 2

2-26: a
Ray Sam
Total
Capital balances, March 1 P150,000 P180,000
P330,000
Additional investment, Nov. 1 _______ __60,000
__60,000
Capital balances before salaries, profit and Drawings 150,000 240,000
390,000
Profit share:
Interest 15,000 20,000
35,000
Balance, 60:40 51,000 34,000
85,000
Total 66,000 54,000
120,000
Total 216,000 294,000
510,000
Salaries _18,000 _24,000
_42,000
Total 234,000 318,000
552,000
Drawings (18,000) (24,000)
(42,000)
Capital balances, Feb. 28 P216,000 P294,000
P510,000

2-27: a
Susan Tanny
Total
Capital balances, 1/1 P150,000 P30,000
P180,000
Additional investment, 4/1 8,000
8,000
Capital withdrawals, 7/1 _______ (6,000)
_(6,000)
Balances before profit distribution 158,000 24,000
182,000
Profit distribution:
Interest 23,400 4,050
27,450
Bonus (20% x P30,000) 6,000
6,000
Balance, equally (1,725) (1,725)
(3,450)
Total 21,675 _8,325
30,000
Total 179,675 32,325
212,000
Drawings (12,000) (12,000)
(24,000)
Capital balances, 12/31 P167,675 P20,325
P188,000

Partnership Operations 27

2-28: a
Sin Tan Uy Total
Capital balances, beg. 1st year P110,000 P80,000 P110,000
P300,000
Loss distribution, 1st year:
Salaries 20,000 10,000
30,000
Interest 11,000 8,000 11,000
30,000
Balance, 5:3:2 (40,000) (16,000) (24,000)
(80,000)
Total ( 9,000) ( 8,000) ( 3,000)
(20,000)
Total 101,000 72,000 107,000
280,000
Drawings (10,000) (10,000) (10,000)
(30,000)
Capital balances, beg. 2nd year 91,000 62,000 97,000
250,000
Profit distribution, 2nd year:
Salaries 20,000 10,000
30,000
Interest 9,100 6,200 9,700
25,000
Balance, 5:3:2 ( 7,500) ( 4,500) ( 3,000)
(15,000)
Total 21,600 _1,700 16,700
40,000
Total 112,600 63,700 113,700
290,000
Drawings _(10,000) (10,000) _(10,000)
_(30,000)
Capital balances, end of 2nd year P102,600 P53,700 P103,700
P260,000

2-29: c
Jay Kay Loi Total
Capital balances, 1/1/06 P30,000 P30,000 P30,000
P90,000
Additional investment, 2006 5,000 5,000
Capital withdrawal, 2006 _(5,000) _(4,000) ______
_(9,000)
Capital balances 25,000 26,000 35,000
86,000
Profit distribution, 2006:
Interest 3,000 3,000 3,000 9,000
Salary 7,000 7,000
Balance, equally _1,000 _1,000 _1,000
__3,000
Capital balances, 1/1/07 36,000 30,000 39,000
105,000
Additional investment, 2007 5,000 5,000
Capital withdrawal, 2002 ______ _(3,000) _(8,000)
(11,000)
Capital balances 41,000 27,000 31,000
99,000
Profit distribution, 2007:
Interest 3,600 3,000 3,900
10,500
Salary 7,000 7,000
Balance, equally _1,500 _1,500 _1,500
__4,500
Capital balances, 1/1/08 53,100 31,500 36,400
121,000
Additional investment, 2008 6,000 6,000
Capital withdrawal, 2008 ______ _(4,000) _(2,000)
_(6,000)
Capital balances 53,100 27,500 40,400
121,000
Profit distribution, 2008:
Interest 5,310 3,150 3,640
12,100
Salary 7,000 7,000
Balance, equally __3,300 __3,300 __3,300
___9,900
Capital balances, 12/31/08 per books P68,710 P33,950 P47,340
P150,000
Understatement of depreciation (2,000) (2,000) (2,000)
(6,000)
Adjusted capital balances, 12/31/08 P66,710 P31,950 P45,340
P144,000

28
Chapter 2

2-30: a

Ken Len Mon


Total
Capital balances, 1/1/07 P100,000 P100,000 P100,000
P300,000
Additional investment, 2007 40,000
40,000
Capital withdrawal, 2007 ( 20,000) _______ _______
( 20,000)
Balances 80,000 140,000 100,000
320,000
Profit distribution, 2007 (Schedule 1)
Salary 60,000
60,000
Balance, beg. Capital ratio 20,000 20,000 20,000
60,000
Capital balances, 1/1/08 100,000 160,000 180,000
440,000
Capital withdrawal, 2008 ( 20,000) ( 40,000) _______
( 60,000)
Balances 80,000 120,000 180,000
380,000
Profit distribution, 2008:
Salary 60,000
60,000
Balance, beg. capital ratio __13,636 __21,818 __24,546
__60,000
Capital balances, 12/31/08 P 93,636 P141,818 P264,546
P500,000

Schedule 1 – Computation of net profit:


Total capital, 2008 (P647,500 – P147,500) P500,000
Total capital, 2007 (P300,000 + P40,000 – P80,000) _260,000
Total profit for 2 years P240,000

Net profit per year (P240,000 / 2) P120,000

2-31: d
_Nardo_ __Orly __Pedro_ _Total_
Capital balance, 1/1/08 P280,000 P300,000 P170,000 P750,000
Additional investment 96,000 60,000 - 156,000
Withdrawals ( 90,000 ) ( 72,000 ) (162,000)
Cap. bal. before P/L dist. 376,000 270,000 98,000 744,000
NP: Salary (16,500 x 12) - 198,000 - 198,000
Interest on EC (15%) 42,000 45,000 25,500 112,500
Balance 25:30:45 ( 19,875 ) ( 23,850 ) ( 35,775 ) (79,500 )
Total 22,125 219,150 ( 10,275 ) 231,000
Capital balance 12/31/08 P398,125 P 489,150 P 87,72 P975,000

2-32: d
Sam capital, beginning P120,000
Additional investment (Land) 60,000
Drawings ( 80,000 )
Capital balance before net profit (loss) 100,000
Capital balance, end 150,000
Profit share (40%) 50,000
Net profit (P50,000 ÷ 40%) P125,000
Partnership Operations 29

2-33: a
__Joe__ __Tom__ __Total__
Capital balance, 1/2/07 P 80,000 P 40,000 P120,000
Net loss- 2007:
Annual salary 96,000 48,000 144,000
10% interest on beg. capital 8,000 4,000 12,000
Bal. beg. cap. ratio: 8:4 ( 108,000) ( 54,000) ( 162,000)
Total ( 4,000) ( 2,000) ( 6,000)
Capital balance 76,000 38,000 114,000
Drawings ( 4,000) ( 4,000) ( 8,000)
Capital balance, 12/31/07 72,000 34,000 106,000
Net profit- 2008:
Annual salary 96,000 48,000 144,000
10% interest on BC 7,200 3,400 10,600
Bonus to Joe–NPBB – P 22000
NPAB (22000/110%)20000 2,000 2,000
Balance equally ( 67,300) ( 67,300) ( 134,600)
Total 37,900 ( 15,900) 22,000
Total 109,900 18,100 128,000
Drawings ( 4,000) ( 4,000) ( 8,000)

Capital balance, 12/31/08 105,900 14,100 120,000

2-34: a
Decrease in capital P 60,000
Drawings ( 130,000)
Contribution 25,000
Profit share 45,000
Net income (45,000 ÷ 30) P150,000

30 Chapter 2

SOLUTIONS TO PROBLEMS

Problem 2 – 1

1. Castro : (P26,000/P42,500) x P23,800 = P14,560


Diaz : (P16,500/P42,500) x P23,800 = __9,240
P23,800
2. Castro : (P31,250/P50,000) x P23,800 = P14,875
Diaz : (P18,750/P50,000) x P23,800 = __8,925
P23,800

Computation of Average Capitals:


Castro: Capital Months Peso
Date Balances Unchanged Months
1/1..................................... P26,000 3 P 78,000
4/10................................... 29,000 1 29,000
5/1..................................... 36,000 3 108,000
8/1..................................... 32,000 5 _160,000
12 P375,000

Average capital = P375,000 ÷ 12 months = P31,250

Diaz: Capital Months Peso


Date Balances Unchanged Months
1/1..................................... P16,500 5 P 82,500
6/1..................................... 21,500 3 64,500
9/1..................................... 19,500 4 __78,000
12 P225,000

Average capital = P225,000 – 12 months = P18,750

3. Castro Diaz Total


Interest........................................................ P 7,500 P4,500 P12,000
Salaries........................................................ 36,000 24,000 60,000
Balance, equally.......................................... ( 24,100) (24,100) ( 48,200)
Total............................................................ P19,400 P 4,400 P23,800

4. Castro Diaz Total


Bonus (a).................................................... P 4,760 P – P 4,760
Interest (b)................................................... 1,100 – 1,100
Balance, 3:2................................................ _10,764 _7,176 _17,940
Total............................................................ P16,624 P7,176 P23,800

Partnership Operations 31

Computations:
a. Net profit before bonus................................................ P23,800
Net profit after bonus (P23,800 ÷ 125%).................... _19,040
Bonus........................................................................... P 4,760

b. Average capital of Castro [(P26,000 + P32,000) ÷ 2].......................... P29,000


Average of Diaz [(P16,500 + P18,500) ÷ 2]........................................ _18,000
Castro's excess....................................................................................... P11,000
Multiply by............................................................................................ ___10%
Interest................................................................................................... P 1,100

5. Castro : (P3,000/P5,000) x P23,800 = P14,280


Diaz : (P2,000/P5,000) x P23,800 = __9,520
P23,800

Problem 2 – 2

a. Average Capital:
Robin: Date Balances Months Peso
Unchanged Months
Jan. 1 P135,000 2 P270,000
Feb. 28 95,000 2 190,000
Apr. 30 175,000 5 875,000
Sept. 30 195,000 3 __585,000
12 P1,920,000

Ave. Capital (P1,920,000 ÷ 12) = P160,000

Hood: Date Balances Months Peso


Unchanged Months
Jan. 1 P140,000 3 P420,000
Mar. 31 200,000 3 600,000
June 30 150,000 2 300,000
Aug. 31 220,000 2 440,000
Oct. 31 200,000 2 __400,000
12 P2,160,000

Ave. Capital (P2,160,000 ÷ 12) = P180,000

Profit Distribution:
Robin : P160,000 ÷ P340,000 x P510,000 = P240,000
Hood : P180,000 ÷ P340,000 x P510,000 = _270,000
P510,000

32 Chapter 2

b. Robin Hood Total


Interest on ave. capital......................................... P 14,400 P 16,200 P 30,600
Salaries................................................................ 60,000 100,000 160,000
Bonus (P510,000 – 30,600 – 160,000) x 25%).... 78,850 – 79,850
Balance, equally.................................................. _119,775 _119,775 _239,550
Totals................................................................... P274,025 P235,975 P510,000

c. Robin Hood Totals


Interest:
Robin (P195,000 – P135,000) 10%............. P 6,000
Hood (P200,000 – P140,000) 10%.............. P 6,000 P 12,000
Balance, equally.................................................. 249,000 249,000 498,000
Totals................................................................... 255,000 255,000 510,000

d. Robin Hood Total


Salaries................................................................ P 80,000 P120,000 P200,000
Bonus (see computations below)......................... 62,000 62,000
Balance, equally.................................................. _124,000 _124,000 _248,000
Totals................................................................... P266,000 P244,000 P510,000
Bonus Computations:
Net income before salaries and bonus..................................................... P510,000
Less Salaries........................................................................................... 200,000
Net income before bonus........................................................................ 310,000
Net income after bonus (P310,000 ÷ 125%)........................................... _248,000
Bonus...................................................................................................... P 62,000

Problem 2 – 3

a. De Villa De Vera Total


Salaries................................................................ P 30,000 – P 30,000
Commission (2% x P1,000,000).......................... P 20,000 20,000
Interest of 8% on average capital......................... 32,800 31,200 64,000
Bonus (see computations below)......................... 9,818 9,818 19,636
Balance, equally.................................................. __44,182 __44,182 __88,364
Total.................................................................... P116,800 P105,200 P222,000
Bonus Computations:
Income before salary, commissions, interest & bonus............................. P222,000
Salary and commission (P30,000 + P20,000).......................................... ( 50,000)
Interest.................................................................................................... ( 64,000)
Income before bonus............................................................................... 108,000
Income after bonus (P108,000 ÷ 110%)................................................. _98,182
Bonus...................................................................................................... P 9,818

b. Income Summary................................................. P 222,000


De Villa, capital.......................................... 116,800
De Vera, capital.......................................... 105,200
Partnership Operations 33

Problem 2 – 4

a. East North West Total


Salaries............................................... P15,000 P20,000 P18,000 P53,000
Bonus (see computation below).......... 3,760 3,760
Interest (see computation below)........ 2,800 4,000 4,800 11,600
Balance, 3:3:4..................................... __3,180 __3,180 __4,240 _10,600
Total................................................... P24,740 P27,180 P27,040 P78,960

Bonus computations:
Net income before bonus.......................................................................... P78,960
Net income after bonus (P78,960 ÷ 105%)............................................... _75,200
Bonus........................................................................................................ P 3,760
Interest computations:
East (10% x P28,000)............................................................................... P 2,800
North (10% x P40,000)............................................................................. 4,000
West (10% x P48,000).............................................................................. __4,800
Total.......................................................................................................... P11,600

b. East North West Total


Interest (see computations below)...... P 3,133 P 3,633 P 5,200 P11,966
Salaries............................................... 24,000 21,000 25,000 70,000
Bonus (see computations below)........ 4,280 4,280
Balance, equally................................. ( 6,056) ( 6,055) ( 6,055) ( 18,166)
Total................................................... P 21,077 P 22,858 P 24,145 P 68,080

Interest computations:
Average capitals:
East: Months Pesos
Date Balances Unchanged Months
1/1 P30,000 4 P120,000
5/1 36,000 4 144,000
9/1 28,000 4 _112,000
12 P376,000

Average capital (P376,000 ÷ 12) ........................................ P 31,333

North: Months Pesos


Date Balances Unchanged Months
1/1 P40,000 2 P80,000
3/1 31,000 4 124,000
7/1 36,000 2 72,000
9/1 40,000 4 _160,000
12 P436,000

Average capital (P436,000 ÷ 12)......................................... P 36,333


34 Chapter 2

West: Months Pesos


Date Balances Unchanged Months
1/1 P50,000 3 P150,000
4/1 57,000 2 114,000
6/1 60,000 2 120,000
8/1 48,000 5 _240,000
12 P624,000

Ave. capital (P624,000 ÷ 12).................................. P 52,000


Interest Computations:
East (10% x P31,333)........................................................... P 3,133
North (10% x P36,333)......................................................... 3,633
West (10% x P52,000).......................................................... __5,200
Total..................................................................................... P 11,966

Bonus Computations:
Net income........................................................................... P 68,000
Less Salary........................................................................... _21,000
Net income before bonus...................................................... 47,080
Net income after bonus (P47,080 ÷ 110%).......................... _42,800
Bonus to North..................................................................... P 4,280
* To Total

c. East North West Total


Bonus (see comp. below).................... P 8,990 P 8,990
Salaries .......................................... P21,000 P 18,000 – 39,000
Interest on beginning capital............... 3,000 4,000 5,000 12,000
Remainder, 8:7:5................................ _13,180 _11,532.50 __8,237.50 _32,950
Total.................................................. P37,180 P33,532.50 P22,227.50 P92,940

Bonus Computations:
Net income before salaries & bonus.......................................................... P92,940
Less Salaries (P21,000 + P18,000)............................................................ _39,000
Net income before bonus.......................................................................... P53,940
Net income after bonus (P53,940 ÷ 120%)............................................... _44,950
Bonus to West........................................................................................... P 8,990

Problem 2 – 5

a. Schedule of Income Distribution:


Maria Clara Rita Total
Salaries.............................................. P12,000 P10,000 P 8,000 P30,000
Interest (see computation on p. 30)..... 7,200 9,600 13,800 30,600
Balance, equally................................. __3,133 __3,133 __3,134 __9,410
Total.................................................. P22,333 P22,733 P24,934 P70,000
Partnership Operations 35

Interest on Average Capital:


Maria:
P80,000 x 8% x 6 months....................... P 3,200
P100,000 x 5% x 6 months..................... __4,000 P 7,200
Clara:
P120,000 x 8%....................................... 9,600
Rita:
P180,000 x 8% x 9 Mos.. . ...................... P10,800
P150,000 x 8% x 3 Mos.. . ...................... __3,000 _13,800
Total............................................................... P30,600

b. Statement of Partners Capital:


Maria Clara Rita Total
Balances, Jan. 1.................................. P 80,000 P120,000 P180,000 P380,000
Additional Investment........................ 20,000 – – 20,000
Capital Withdrawal............................. – – ( 30,000) ( 30,000)
Net Income......................................... 22,333 22,733 24,934 70,000
Drawings .......................................... ( 10,000) ( 10,000) ( 10,000) ( 30,000)
Balance, Dec. 31................................. P112,333 P132,733 P164,934 P410,000

Problem 2 – 6

1. Allocation of net loss for 2008:


Alvin Benny Celia Total
Salary to Alvin................................... P 20,000 P20,000
Interests on average capital:
Alvin (P120,000 x 10%)............ 12,000
Benny (P200,000 x 10%)........... 20,000
Celia (P220,000 x 10%)............. 22,000 54,000
Balance, 30:30:40............................... (29,400) _(29,400) _(39,200) _(98,000)
Total.................................................. P 2,600 P( 9,400) P(17,200) P(24,000)

2. Statement of Partnership Capital


Year Ended December 31, 2008
Alvin Benny Celia Total
Capitals, January 1, 2008.................... P120,000 P180,000 P220,000 P520,000
Additional investments....................... 60,000 40,000 100,000
Capital withdrawals............................ _______ ________ _(20,000) _(20,000)
Balances. ........................................... 120,000 240,000 240,000 600,000
Net loss (see above)............................ __2,600 __(9,400) _(17,200) _(24,000)
Balances. ........................................... 122,600 230,600 222,800 576,000
Drawings. .......................................... _(16,000) _______ _______ _(16,000)
Capitals, December 31, 2008.............. P106,600 P230,600 P222,800 P560,000
36 Chapter 2

3. Correcting entry:

Celia capital........................................ 2,400


Alvin capital............................... 2,200
Benny capital............................. 200
To correct capital accounts for error in loss allocation computed as follows:
Alvin Benny Celia
Correct loss allocation........................ P2,600 P(9,400) P(17,200)
Actual loss allocation......................... __(400) __9,600 __14,800
Adjustment......................................... P2,200 P 200 P ( 2,400)
Problem 2 – 7

Dino Nelson Oscar Total


Capital balances, 1/2/06.............................. P45,000 P45,000 P45,000 P135,000
Additional investment, 2006....................... _15,000 _15,000 __6,000 __36,000
Balances. .................................................... 60,000 60,000 51,000 171,000
Net income (Loss) - 2006, equally.............. (1,800) ( 1,800) ( 1,800) ( 5,400)
Withdrawals, 2006...................................... (17,000) ( 7,000) ( 3,200) ( 27,200)
Capital balances, 12/31/06.......................... 41,200 51,200 46,000 138,400
Additional investment, 2007....................... _____– _____– __6,000 ___6,000
Balances. .................................................... 41,200 51,200 52,000 144,400
Net income - 2007, 40: 30: 30..................... 10,800 8,100 8,100 27,000
Withdrawals, 2007...................................... (17,000) ( 7,000) ( 3,200) ( 27,200)
Capital Balances, 12/31/07.......................... 35,000 52,300 56,900 144,200
Additional investment, 2008....................... ______– ______– ___6,000 ___6,000
Balances. .................................................... 35,000 52,300 62,900 150,200
Net income, 2008 (schedule 1).................... 56,365 42,272 20,363 120,000
Withdrawals, 2008...................................... (19,000) ( 9,000) ( 3,200) ( 31,200)
Capital balances, 12/31/08.......................... P72,365 P86,572 P80,063 P239,000

Schedule 1:
Dino Nelson Oscar Total
Annual salaries................................... P48,000 P24,000 P12,000 P84,000
Bonus (see computations below)........ – 10,909 – 10,909
Interest................................................ 3,600 3,600 3,600 10,800
Balance, equally................................. _* 4,765 __4,763 __4,763 __14,291
Totals.................................................. P56,365 P43,272 P20,363 P120,000

Bonus computations:
Net income before bonus...................................................................... P120,000
Net income after bonus (P120,000 ÷ 110%)......................................... _109,091
Bonus to Nelson.................................................................................... P 10,909

* To Total
Partnership Operations 37
Problem 2 – 8
Red, White & Blue Partnership
Statement of Partners' Capital
For Year Ended December 31, 2008

Red White Blue Green Total


Balances, beginning of year 40,200 20,200 40,600 P101,000
Add: 20% of fees billed to personal clients 8,800 4,800 4,400 18,000
Green's share of fees (Exhibit A) 3,200 3,200
Remaining net income (Exhibit A) _22,800 _22,800 _11,400 ______ _57,000
Subtotals _71,800 _47,800 _56,400 __3,200 179,200
Less: Withdrawals 10,400 8,800 11,600 5,000 35,800
Uncollectible accounts identified
with clients of each partner 2,400 900 3,300
Excess rent charged to Blue 1,800 1,800
Total deductions P12,800 P 9,700 P13,400 P 5,000 P 40,900
Balances, end of year P59,000 P38,100 P43,000 P (1,800) P138,300

Red, White & Blue Partnership


Exhibit A – Computation and Division of Net income
For Year Ended December 31, 2008

Total revenue from fees P120,000


Expenses, excluding depreciation and doubtful
accounts expense P38,700
Less: Excess rent charged to N ($300 x 6) __1,800
Subtotal 36,900
Add: Depreciation, computed as follows:
$26,000 x 0.10 2,600
$10,000 x 0.10 x 1/2 ____500
Total expenses, excluding doubtful accounts expense P40,000
Add: Doubtful accounts expense ($3,000 x 0.60) __1,800
Total expenses 41,800 ________
Net income for year ended Dec. 31, Year 1 P 78,200

Division of net income:


Fees billed to personal clients:
Red P44,000 x 20% P 8,800
White P24,000 x 2% 48,000
Blue, P22,000 x 20% 4,400 P18,000
Green's share of fees:
Gross fees from new clients after April 1, Year 1 24,000
Less: Allocated expenses ($40,000 x $24,000/
$120,000) __8,000
Net income from new clients P16,000
Green's share (P16,000 x 20%) P 3,200
Total divided pursuant to special agreement __21,200
Balance, divided in income-sharing ratio as follows: P 57,000
To Red, 40% P22,800
To White, 40% 22,800
To Blue, 20% _11,400
Total P57,000
38 Chapter 2

Problem 2 – 9

Allan, Eman and Gino Partnership


Statement of Profit Distribution
Year Ended December 31, 2008

Allan Eman Gino Total


Interest P 4,000 P 750 P 250 P 5,000
Commission (P16,120 – P5,000) x 10% – 1,112 1,112 2,224
Balance, equally __5,926 _5,925 _5,925 _17,776
Total P 9,926 P7,787 P7,287 P25,000
Adjustments (50% of P25,000 to Allan) __2,574 (1,287) (1,287) _____–
Total P12,500 P6,500 P6,000 P25,000

Problem 2 – 10

Gary, Sonny, and Letty Partnership


Statement of Partners' Capital Accounts
Year Ended December 31, 2008

Gary Sonny Letty Total


Capital balances, 1/1/08 P210,000 P180,000 P 90,000P480,000
Additional investments ___9,100 _______ _______ __9,100
Total _219,100 _180,000 _90,000 489,100
Profit distribution:
Salaries 13,680 11,520 10,640 35,840
Interest 25,920 21,600 10,800 58,320
Bonus to Gary and Sonny (Schedule 1) – – –
Balance, equally __(9,720) _(9,720) _(9,720)(29,160)
Total __29,880 _23,400 _11,720 _65,000
Total 248,980 203,400 101,720 554,100
Drawings _(21,000) (18,000) __(9,000)
_(48,000)
Capital balances, 12/31/08 P227,980 P185,400 P 92,720P506,100

Schedule 1: Computation of the bonus.

Net profit before interest, salaries and bonus P 65,000


Less:Salaries P35,840
Interest _58,320 __94,160
Net profit (loss) before bonus P(29,160)

Therefore no bonus is to be given to Gary and Sonny.


Partnership Operations 39
Problem 2 – 11

a. Entries to record the formation of the partnership and the events that occurred during 2008:

Cash 1,100,000
Inventory 800,000
Land 1,300,000
Equipment 1,000,000
Mortgage payable 500,000

Installment note payable 200,000


Kobe, capital (P600,000 + P800,000
+ P1,000,000 – P200,000) 2,200,000
Lebron, capital (P500,000 + P1,300,000
- P500,000) 1,300,000

(1) Inventory 300,000


Cash 240,000
Accounts payable 60,000

(2) Mortgage payable 50,000


Interest expense 20,000
Cash 70,000

(3) Installment note payable 35,000


Interest expense 20,000
Cash 55,000

(4) Accounts receivable 210,000


Cash 1,340,000
Sales 1,550,000

(5) Selling and general expenses 340,000


Cash 278,000
Accrued expenses payable 62,000

(6) Depreciation expense 60,000


Accumulated depreciation 60,000

(7) Kobe, drawing 104,000


Lebron, drawing 104,000
Cash 208,000

(8) Sales 1,550,000


Income summary 1,550,000

(9) Cost of goods sold 900,000


Inventory 900,000
P900,000 = P800,000 beginning inventory
+ 300,000 purchases
- 200,000 ending inventory

40 Chapter 2

Income summary 1,340,000


Cost of good sold 900,000
Selling and general expenses 340,000
Depreciation expense 60,000
Interest expense 40,000

Income summary 210,000


Kobe, capital 105,000
Lebron, capital 105,000

Kobe, capital 104,000


Lebron, capital 104,000
Kobe, drawing 104,000
Lebron, drawing 104,000

Schedule to allocate partnership net income for 2008:

Kobe Lebron Total


Profit percentage 60% 40% 100%
Beginning capital balance P2,200,000 P1,300,000
P3,500,000
Net income (P1,550,000 revenue
- P 1,340,000 expenses) 210,000
Interest on beginning capital
balances (3%) 66,000 39,000
(105,000)
P105,000
Salaries 120,000 120,000
(240,000)

P(135,000)
Residual deficit (81,000) (54,000)
(135,000)
Total P105,000 P105,000 -0-

b. Kobe-Lebron Partnership
Income Statement
For the Year Ended December 31, 2008

Sales
P1,550,000
Less: Cost of goods sold:
Inventory, January 1 P800,000
Purchases 300,000
Goods available for sale P1,100,000
Less: Inventory, December 31 (200,000)
(900,000)
Gross profit P650,000
Less: Selling and general expenses 340,000
Depreciation expenses 60,000 400,000
Operating income P250,000
Nonoperating expense- interest (40,000)
Net income P210,000

Partnership Operations 41

c. Kobe-Lebron Partnership
Balance Sheet
At December 31, 2008

Assets
Cash P1,589,000
Accounts receivable 210,000
Inventory 200,000
Land 1,300,000
Equipment (net) 940,000
Total assets P4,239,000

Liabilities and Capital


Liabilities:
Accounts payable P60,000
Accrued expenses payable 62,000
Installment note payable 165,000
Mortgage payable 450,000
Total liabilities P737,000
Capital:
Kobe, capital P2,201,000
Lebron, capital 1,301,000
Total capital 3,502,000
Total liabilities and capital P4239,000

42
Chapter 3
CHAPTER 3

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

3-1: c
Implied capital of the partnership (P90,000/20%)
P450,000
Actual value of the partnership
( 420,000)
Goodwill P
30,000

AQUINO LOCSIN DAVID


HIZON
Capital balances before Goodwill P252,000 P126,000 P42,000 –
Goodwill to old partners __18,000 ___9,000 __3,000
_____–
Total P270,000 P135,000 P45,000 –
Purchase by Hizon (20%) ( 54,000) ( 27,000) ( 9,000)
_90,000
Capital balances after admission P216,000 P108,000 P36,000
P 90,000

3-2: b
AQUINO LOCSIN DAVID
HIZON
Capital balances before admission P252,000 P126,000 P42,000 –
Purchase by Hizon (20%) ( 50,400) ( 25,200) ( 8,400)
_84,000
Capital balances after admission P201,600 P100,800 P33,600
P 84,000

3-3: d
AQUINO LOCSIN DAVID
TOTAL
Capital transferred P 50,400 P 25,200 P 8,400
P 84,000
Excess divided using profit and loss ratio __3,600 __1,800 ___600
__6,000
Cash distribution P 54,000 P 27,000 P 9,000
P 90,000

3-4: b

Selling price P132,000


Interest sold (444,000X1/5) ( 88,800)
Combine gain P 43,200

3-5: b
Implied value of the partnership (P40,000/1/4)
P160,000
Actual value
( 140,000)
Goodwill P
20,000

BERNAL CUEVAS
DIAZ
Cash balances P 80,000 P40,000
P 20,000
Goodwill, Profit and Loss ratio __12,000 __6,000
__2,000
Total P 92,000 P46,000 P 22,
000
Capital Transfer (1/4) ( 23,000) ( 11,500)
( 5,500)
Capital balances after admission P 69,000 P34,500
P 16,500
Partnership Dissolution – Changes in Ownership 43

3-6: b
BANZON CORTEZ
TOTAL
Capital Transfer (20%) P 16,000 P 4,000
P20,000
Excess, Profit and Loss ratio __6,000 __4,000
_10,000
Cash distribution P 22,000 P 8,000
P30,000

3-7: d
PEREZ CADIZ
TOTAL
Capital balances beginning P 24,000 P 48,000
P 72,000
Net profit, 1:2 5,430 10,860
16,290
Drawings ( 5,050) ( 8,000)( 13
,050)
Capital balances before admission P 24,380 P 50,860
P 75,240
Capital transfer (squeeze) ( 5,570) ( 13,240)
(18,810) (1/4)
Capital balances after admission 1:2 P 18,810 P 37,620
P 56,430
Capital transfer P 5,570 P 13,240
P18,810
Excess, 1:2 __3,730 __7,460
_11,190
Cash P 9,300 P 20,700
P30,000

3-8: a

Total agreed capital (P150,000/5/6) P180,000


Diana's Interest 1/6
Cash distribution P 30,000

3-9: a

Total agreed capital (P36,000/1/5) P180,000


Total contributed capital (80,000+40,000+36,000) ( 156,000)
Unrecognized Goodwill P 24,000

3-10: b Contributed Agreed Increase


Capital Capital (Dec.)
Old partners P110,000 P100,000 (P 10,000)
New partner __40,000 __50,000 _10,000
Total P150,000 P150,000 P –

Ben, capital balance before admission P 60,000


Bonus share to new partner (10,000X60%) ( 6,000)
Ben, capital after admission P 54,000

3-11: c

Total agreed capital (P40,000+20,000+17,000) P 77,000


Pete's interest 1/5
Pete's agreed capital balance P 15,400
44
Chapter 3

3-12: b Contributed Agreed Increase


Capital Capital (Dec.)
Old partner P 65,000 P60,000 (P 5,000)
New partner 25,000 (1/3) 30,000 _5,000
Total P 90,000 P90,000 P –

FRED RAUL LORY


Capital balances before admission P 35,000 P30,000 –
Investment by Lory – – 25,000
Bonus to Lory ( 3,500) ( 1,500) __5,000
Capital balances after admission P 31,500 P28,500 P 30,000

3-13: c

Total agreed capital (90,000+60,000+70,000) P220,000


Augusts' interest _____1/4
Agreed capital P 55,000
Contributed capital __70,000
Bonus to June & July P 15,000

JUNE JULY
Capital balances before admission P90,000 P 60,000
Bonus from August, equally __7,500 __7,500
Capital balances after admission P97,500 P 67,500

3-14: a

Total agreed capital (52,000 + 88,000)/80%) P175,000


Total capital of Mira & Nina after admission ( 140,000)
Cash paid by Elma P 35,000

3-15: a

Total agreed capital (P41,600/2/3) P 62,400


Total contributed capital (P23,000+18,600+16,000) ( 57,600)
Goodwill to new partner, Ang P 4,800

LIM ONG ANG


Capital balances before admission P23,000 P 18,600 –
Investment by Ang – – 16,000
Goodwill to August _____– ______– __4,800
Capital balances after admission P23,000 P 18,600 P20,800

Partnership Dissolution – Changes in Ownership 45

3-16: a

ANG BENG CHING DONG TOTAL


Capital balances before
admission P600,000 P 400,000 P 300,000 –
P1,300,000
Admission by Dong:
By Purchase (1/2) ( 300,000) – – 300,000 –
By Investment _______– _______– _______– _300,000
___300,000
Capital balances before
Goodwill and Bonus P300,000 P 400,000 P 300,000 P600,000
P1,600,000
Goodwill to Old Partners (sch. 1) 150,000 150,000 100,000 –400,000
Bonus to Old Partners (sch. 1) __37,500 __37,500 __25,000 ( 100,000)
________–
Capital balances after
admission P487,500 P 587,500 P 425,000 P500,000
P2,000,000

Schedule 1: CC AC Inc. (Dec.)


Old Partners P 1,000,000 P1,500,000 P500,000
New Partner 600,000 (25%) __500,000 ( 100,000) Bonus
Total P 1,600,000 P2,000,000 P400,000 GW

3-17: b
MONA LIZA ALMA LORNA TOTAL
Capital balances before
admission of Alma P150,000 P 50,000 – –
P 200,000
Admission of Alma:
Investment – – 80,000 – 80,000
Goodwill to old partner,
70:30 (sch. 1) __28,000 ___12,000 _______– ______–
___40,000
Capital balances before
admission of Lorna P178,000 P 62,000 P 80,000 –
P 320,000
Admission of Lorna:
Goodwill Written off, 5:3:2 (P 20,000) (P 12,000) ( P8,000) –
( P40,000)
Investment – – – 75,000 75,000
Goodwill to old partners,
5:3:2 (sch. 2) __10,000 ____6,000 ____4,000 ______–
___20,000
Capital balances after
admission P168,000 P 56,000 P 76,000 P 75,000
P 375,000

Schedule 1:
Total agreed capital (80,000/25%)
P 320,000
Total capital contributed (200,000+80,000)
( 280,000)
Goodwill to old partners, 70:30 P
40,000

Schedule 2:
Total agreed capital (75,000/20%)
P 375,000
Total contributed capital (280,000+75,000)
( 355,000)
Goodwill to old partners, 5:3:2 P
20,000

46
Chapter 3

3-18: c
RED WHITE BLUE
TOTAL
Unadjusted capital balances P175,000 P100,000 P 45,000
P320,000
Overvaluation of Marketable Securities ( 12,500) ( 7,500) ( 5,000)
( 25,000)
Allowance for Bad Debts ( 12,500) ( 7,500) ( 5,000)
( 25,000)
Adjusted capital balances before admission P150,000 P 85,000 P 35,000
P270,000

Total agreed capital (270,000/2/3) P405,000


Green's interest 1/3
Investment P135,000

3-19: b
XX YY ZZ WW
TOTAL
Capital balances before
admission P360,000 P225,000 P135,000 –
P720,000
Capital transfer
to WW (1/6) ( 60,000) ( 37,500) ( 22,500) _120,000
______–
Balances P300,000 P187,500 P112,500 P120,000
P720,000
Equalization of capital ( 100,000) __12,500 __87,500 ______–
______–
Balances P200,000 P200,000 P200,000 P120,000
P720,000
Net profit, equally 3,150 3,150 3,150 3,150
12,600
Drawings (2 months) _( 1,500) _( 2,000) _( 1,500) _( 2,000)
_( 7,000)
Capital balances before
WWs Investment P201,650 P201,150 P201,650 P121,150
P725,600

Total agreed capital (201,650+201,150+201,650)/2/3 P906,675


WW's interest 1/3
Agreed capital of WW P302,225
Contributed capital (see above) _121,150
Cash to be invested P181,075
3-20: a
A B C
Capital balances P 20,750 P 19,250
P 45,000
Understatement of assets, P12,000 __3,000 __3,000
__6,000
Balances before settlement to A P 23,750 P 22,250
P 51,000

Settlement to A P 30,250
A's interest (23,750+5,000) _28,750
Partial Goodwill to A P 1,500

Therefore:
1. Under partial Goodwill method the capital balances of B is P 22,250
2. Under Bonus method the capital balances of B would be:
B, capital balances before settlement to A P 22,250
Bonus to A (1,500X25/75) _( 500)
B, capital after retirement of A P 21,750
Partnership Dissolution – Changes in Ownership 47

3-21: a
Perez Reyes
Suarez
Capital balances P 100,000 P 150,000
P 200,000
Net income, P140,000 70,000 42,000
28,000
Undervaluation of inventory, P20,000 ___10,000 ____6,000
____4,000
Capital balances before settlement to Perez P 180,000 P 198,000
P 232,000
Settlement to Perez ( 195,000) – –
Bonus to Perez ___15,000 _( 9,000)
_( 6,000)
Capital balances after retirement P – P 189,000
P 226,000

3-22: c
ELY FLOR
GLOR
Capital balances P 320,000 P 192,000
P 128,000
Settlement to Ely ( 360,000) – –
Total Goodwill (P40,000/50%)P80,000 __40,000 ___24,000
___16,000
Capital balances after retirement of Ely P – P 216,000
P 144,000
3-23: c
_Alma_ _Betty_ _Total_
Capital balance 3/1/07 480,000 240,000 720,000
Net loss-2007:
Salary (10 months) 480,000 240,000 720,000
Interest (10 months) 40,000 20,000 60,000
Bal. beg. cap. ratio: 48:24 ( 544,000) ( 272,000) ( 816,000)
Total ( 24,000) ( 12,000) ( 36,000)
Capital balance 456,000 228,000 684,000
Drawings ( 24,000) ( 24,000) ( 48,000)
Capital balance, 12/31/07 432,000 204,000 636,000
Net profit- 2008:
Salary 576,000 288,000 864,000
Interest 43,200 20,400 63,600
Balance, equally ( 397,800) ( 397,800) ( 795,600)
Total 221,400 ( 89,400) 132,000
Capital balance 653,400 114,600 768,000
Drawings ( 24,000) ( 24,000) ( 48,000)
Capital balance 12/31/08 629,400 90,600 720,000

Total contributed capital (720,000 + 400,000) 1,120,000


Cora’s interest 40%
Cora’s agreed capital 448,000
Cora’s contributed capital 400,000
Bonus to Cora, from Alma and Betty 4:2 48,000
Therefore entry (c) is correct.

48
Chapter 3

3-24: a
_Pete_ _Carlos_ _Total_
Capital balance, beg. 2007 P80,000 P30,000 P110,000
2007 net profit (90,000 – 59,000):
Interest 8,000 3,000 11,000
Compensation 5,000 20,000 25,000
Balance, 4:6 ( 2,000) ( 3,000) ( 5,000)
Total 11,000 20,000 31,000
Balance 91,000 50,000 141,000
Withdrawal ( 8,000) ( 11,000) (19,000)
Repairs (charge to Pete) ( 5,000) - ( 5,000)
Capital balance, 12/31/07 78,000 39,000 117,000

1/1/08: Admission of Sammy


Total agreed capital (P117,000 +43,000) P160,000
Sammy’s interest 20%
Sammy’s agreed capital 32,000
Sammy’s contributed capital 43,000
Bonus to Pete & Carlos, 4:6 11,000
Therefore entry (a) is correct.

Partnership Dissolution – Changes in Ownership 49

SOLUTIONS TO PROBLEMS

Problem 3 – 1
(a) 1. Goodwill Method:
Total agreed capital (P75,000 ÷ 25%)....................................P300,000
Total contributed capital........................................................ ._275,000
Goodwill to old partners, P/L ratio.........................................P 25,000

Entry
Goodwill........................................................................... 25,000
Cash.................................................................................. 75,000
Red, capital.................................................................. 5,000
White, capital............................................................... 10,000
Blue, capital................................................................. 10,000
Green, capital............................................................... 75,000

2. Bonus Method:
Contributed capital of Green....................................................P 75,000
Agreed capital of Green (P275,000 x 25%).............................._68,750
Bonus to old partners, P/L ratio...............................................P 6,250

Entry:
Cash.................................................................................. 75,000
Green, capital............................................................... 68,750
Red, capital.................................................................. 1,250
White, capital............................................................... 2,500
Blue, capital................................................................. 2,500

(b) 1. Implicit Goodwill Method:


Total Implied Capital (P75,000 ÷ 25)....................................P300,000
Total existing capital.............................................................. ._200,000
Implied Goodwill to old partners............................................P100,000

Entries:
Goodwill........................................................................... 100,000
Red, capital.................................................................. 20,000
White, capital............................................................... 40,000
Blue, capital................................................................. 40,000

Red, capital (25% x P80,000)........................................... 20,000


White, capital (25% x p120,000)...................................... 30,000
Blue, capital (25% x P100,000)........................................ 25,000
Green, capital............................................................... 75,000

2. Red, capital (25% x P10,000)...................................................... 15,000


White, capital (25% x P80,000).................................................. 20,000
Blue, capital (25% x P60,000)..................................................... 15,000
Green, capital........................................................................ 50,000
50
Chapter 3
Problem 3 – 2
a. (1) Bonus Method:
Contributed capital of Tomas............................................................................. P140,000
Agreed capital of Tomas (P640,000 x 20%)...................................................... _128,000
Bonus to old partners, P/L ratio.......................................................................... P 12,000

BRUNO MARIO TOMAS TOTAL


Balances before admission..................... P200,000 P300,000 – P500,000
Admission of Tomas............................... ___9,000 ___3,000 _128,000 _140,000
Balances after admission........................ P209,000 P303,000 P128,000 P640,000

(2) Goodwill Method:


Total agreed capital (P140,000 ÷ 20%). ........................................ P700,000
Total contributed capital................................................................. _640,000
Goodwill to old partners, P/L ratio................................................. P 60,000

BRUNO MARIO TOMAS TOTAL


Balances before admission..................... P200,000 P300,000 P – P500,000
Admission of Tomas............................... __45,000 __15,000 _140,000 _200,000
Balances after admission........................ P245,000 P315,000 P140,000 P700,000

(3) Goodwill with subsequent write-off.


BRUNO MARIO TOMAS TOTAL
Balances from A-2.................................. P245,000 P315,000 P140,000 P700,000
Goodwill written off, 6:2:2..................... ( 36,000) ( 12,000) ( 12,000) ( 60,000)
Balances.................................................. P209,000 P303,000 P128,000 P640,000

b. BRUNO MARIO TOMAS TOTAL


Balances from A-2.................................. P245,000 P315,000 P140,000 P700,000
Goodwill written off, 4:4:2..................... ( 24,000) ( 24,000) ( 12,000) ( 60,000)
Balances.................................................. P221,000 P291,000 P128,000 P640,000

Problem 3 – 3

a. Total capital after admission (P76,000 + P104,000)........................................................ P180,000


Total capital before admission (P60,000 + P80,000)........................................................ _140,000
Goodwill recorded............................................................................................................ P 40,000

Total capital of the partnership (P180,000 ÷ 75%).......................................................... P240,000


Less: Total capital of old partners plus Goodwill (P140,000 + 40,000)........................... _180,000
Cash payment by Barry..................................................................................................... P 60,000

b. Total capital after admission (P52,000 + P68,000).......................................................... P120,000


Total capital before admission.......................................................................................... _140,000
Bonus to Barry.................................................................................................................. P 20,000

Agreed capital of Barry (P120,000 ÷ 75%) x 25%.......................................................... P 40,000


Less: Bonus ................................................................................................................... __20,000
Cash payment by Barry..................................................................................................... P 20,000
Partnership Dissolution – Changes in Ownership 51

Problem 3 – 4

a. Total agreed capital (P60,000 ÷ 20%).................................................P300,000


Total contributed capital (P100,000 + P40,000 + P60,000)................ ._200,000
Goodwill to old partners, P/L ratio......................................................P100,000

Entry:
Cash. .......................................................................................... 60,000
Goodwill..................................................................................... 100,000
Gene, capital......................................................................... 80,000
Nancy, capital....................................................................... 20,000
Ellen, capital......................................................................... 60,000

b. Cash.................................................................................................. 60,000
Ellen, capital............................................................................... 60,000
No Goodwill, no bonus because the total agreed capital is equal to the total contributed
capital.

c. Gene, capital ..................................................................................... 20,000


Nancy, capital.................................................................................... 8,000
Ellen, capital............................................................................... 28,000

d. Cash.................................................................................................. 32,000
Ellen, capital............................................................................... 32,000

Since the total agreed capital (P172,000) is equal to the total contributed capital (P172,000),
then no Goodwill or bonus is to be recorded.

e. Total agreed capital (P140,000 ÷ 80%)...............................................P175,000


Total contributed capital (P140,000 + P32,000)................................. ._172,000
Goodwill to new partner......................................................................P 3,000

Entry:
Cash. .......................................................................................... 32,000
Goodwill..................................................................................... 3,000
Ellen, capital......................................................................... 35,000

Problem 3 – 5

a. Cash.................................................................................................. 40,000
Cherry capital.............................................................................. 40,000

b. Total agreed capital (P120,000 + P50,000)..........................................P170,000


Cherry's interest...................................................................................____25%
Cherry's agreed capital.............................................................................42,500
Contributed capital............................................................................. .__50,000
Bonus to old partners, 70:30................................................................P 7,500
52
Chapter 3

Entry:
Cash. .......................................................................................... 50,000
Cherry, capital...................................................................... 42,500
Helen, capital........................................................................ 5,250
Cathy, capital........................................................................ 2,250

c. Total agreed capital (P120,000 + P25,000)..........................................P145,000


Cherry's interest...................................................................................____25%
Agreed capital of Cherry.........................................................................36,250
Contributed capital............................................................................. .__25,000
Bonus to new partner...........................................................................P 11,250

Entry:
Cash. .......................................................................................... 25,000
Helen, capital.............................................................................. 7,875
Cathy, capital.............................................................................. 3,375
Cherry, capital...................................................................... 36,250

d. Total agreed capital (P50,000 ÷ 25%).................................................P200,000


Total contributed capital (P120,000 + 50,000)......................................170,000
Goodwill to old partners, 70:30...........................................................P 30,000

Entry:
Cash ..................................................................................... 50,000
Goodwill..................................................................................... 30,000
Cherry, capital...................................................................... 50,000
Helen, capital........................................................................ 21,000
Cathy, capital........................................................................ 9,000

e. Total agreed capital (P120,000 ÷ 75%)...............................................P160,000


Total contributed capital (P120,000 + P25,000)................................. ._145,000
Goodwill to new partner......................................................................P 15,000

Entry:
Cash ..................................................................................... 25,000
Goodwill..................................................................................... 15,000
Cherry, capital...................................................................... 40,000

Problem 3 – 6

a. Total agreed capital (P600,000 ÷ 3/4)................................................................ P800,000


Santos interest..................................................................................................... _____1/4
Contribution of Santos........................................................................................ P200,000

b. Total agreed capital (P630,000 ÷ 3/4)................................................................ P840,000


Santos' interest.................................................................................................... _____1/4
Contribution of Santos........................................................................................ P210,000
Partnership Dissolution – Changes in Ownership 53

c. Total agreed capital (P624,000 ÷ 3/4).......................................................................................... P832,000


Less: Contributed capital of old partners....................................................................................... _600,000
Contributed capital of Santos........................................................................................................ P232,000

d. Total agreed capital (P600,000 ÷ 3/4).......................................................................................... P800,000


Less: Goodwill ............................................................................................................................ __10,000
Contributed capital........................................................................................................................ 790,000
Contributed capital of old partners................................................................................................ _600,000
Contributed capital of Santos........................................................................................................ P190,000

e. Total agreed capital (Contributed)................................................................................................. P820,000


Less: Contributed capital of old partners....................................................................................... _600,000
Contributed capital of Santos........................................................................................................ P220,000
Problem 3 – 7
a. Tony, capital ........................................................................................................ 40,000
Noel, capital...................................................................................................... 40,000

b. Cash ........................................................................................................ 90,000


Noel, capital...................................................................................................... 90,000
(P180,000 ÷ 2/3) x 1/3 = P90,000.

c. Cash......................................................................................................................... 56,000
Goodwill .................................................................................................................. 4,000
Noel, capital...................................................................................................... 60,000

Total agreed capital (P180,000 ÷ 3/4)...........................................................................P240,000


Total contributed capital (P180,000 + P56,000).............................................................._236,000
Goodwill to new partner.................................................................................................P 4,000

d. Subas, capital……………………………………………………………… ..... 14,400


Tony, capital………………………………………………………………… .. 9,600
Inventory……………………………………………………………….............
24,000

Cash......................................................................................................................... 52,000
Noel, capital...................................................................................................... 52,000
Total agreed capital (P52,000 ÷ 1/4).............................................................................P208,000
Total capital before inventory write-down (180,000 + 52,000)......................................(232,000)
Write-down to old partners capital.................................................................................( 24,000)
e. Land……………………………………………………………………………………….. 92,000
Subas, capital…………………………………………………………………… 55,200
Tony, capital……………………………………………………………………. 36,800
Subas, capital (P155,200 x 1/4)................................................................................. 38,800
Tony, capital (P116,800 x 1/4).................................................................................. 29,200
Noel, capital...................................................................................................... 68,000
Total resulting capital (P68,000 ÷ 1/4)..........................................................................P272,000
Total capital of old partner (net assets)............................................................................_180,000
Increase in value of land................................................................................................P 92,000
Capital of old partner after revaluation of land:
Subas (P100,000 + P55,200)..................................................................................P155,200
Tony (P80,000 + P36,800)........................................................................................116,800
54
Chapter 3

f. Cash.................................................................................................. 40,000
Subas, capital..................................................................................... 2,400
Tony, capital ..................................................................................... 1,600
Noel, capital................................................................................ 44,000

Agreed capital of Noel (P220,000 x 1/5)..............................................P 44,000


Contributed capital of Noel...................................................................._40,000
Bonus to Noel.......................................................................................P 4,000

g. Cash.................................................................................................. P60,000
Goodwill........................................................................................... 60,000
Noel, capital................................................................................ P 60,000
Subas, capital (P60,000 x 3/5)..................................................... 36,000
Tony, capital (P60,000 x 2/5)...................................................... 24,000

Total agreed capital (P60,000 ÷ 1/5)...................................................P300,000


Total contributed capital (P180,000 + P60,000)................................. ._240,000
Goodwill to old partner, 3:2.................................................................P 60,000

Problem 3 – 8

a. Conny, capital.................................................................................... 40,000


Andy, capital (P8,000 x 3/4).............................................................. 6,000
Benny, capital (P8,000 x 1/4)............................................................ 2,000
Cash. .......................................................................................... 48,000

b. Goodwill........................................................................................... 10,000
Conny, capital.................................................................................... 40,000
Cash. .......................................................................................... 50,000

c. Goodwill (P5,000 ÷ 1/5)................................................................... 25,000


Conny, capital.................................................................................... 40,000
Andy, capital (P25,000 x 3/5)...................................................... 15,000
Benny, capital (P25,000 x 1/5).................................................... 5,000
Cash ..................................................................................... 45,000

Problem 3 – 9

a. Spade, capital..................................................................................... 120,000


Jack, capital................................................................................. 120,000

b. Goodwill (P30,000 ÷ 50%)............................................................... 60,000


Ace, capital................................................................................. 12,000
Jack, capital................................................................................. 18,000
Spade, capital.............................................................................. 30,000

Spade, capital (P120,000 + P30,000)................................................. 150,000


Jack, capital................................................................................. 150,000
Partnership Dissolution – Changes in Ownership 55

Problem 3-9 (Continued)

c. Spade, capital..................................................................................... 180,000


Cash. .......................................................................................... 180,000

Ace, capital (P60,000 x 2/5).............................................................. 24,000


Jack, capital (P60,000 x 3/5).............................................................. 36,000
Spade, capital.............................................................................. 60,000

d. Land................................................................................................. 20,000
Ace, capital (20%)....................................................................... 4,000
Jack, capital (30%)...................................................................... 6,000
Spade, capital (50%)................................................................... 10,000

Spade, capital..................................................................................... 130,000


Ace, capital (P50,000 x .40).............................................................. 20,000
Jack, capital (P50,000 x .60).............................................................. 30,000
Cash. .......................................................................................... 60,000
Land. .......................................................................................... 120,000

e. Goodwill........................................................................................... 30,000
Spade, capital..................................................................................... 120,000
Cash. .......................................................................................... 150,000

f. Goodwill (P30,000 ÷ 50%)............................................................... 60,000


Spade, capital..................................................................................... 120,000
Ace, capital (P60,000 x 20%)...................................................... 12,000
Jack, capital (P60,000 x 30%)..................................................... 18,000
Cash. .......................................................................................... 150,000

g. Land................................................................................................. P40,000
Ace, capital (20%)....................................................................... 8,000
Jack, capital (30%)...................................................................... 12,000
Spade, capital (50%)................................................................... 20,000

Spade, capital (P120,000 x P20,000)................................................. 140,000


Ace, capital (P10,000 x 40%)............................................................ 4,000
Jack, capital (P10,000 x 60%)............................................................ 6,000
Land. .......................................................................................... 100,000
Note payable............................................................................... 50,000

56
Chapter 3

Problem 3 – 10

Case 1: Bonus of P10,000 to Eddy:


Eddy, capital............................................................................... 70,000
Charly, capital (P10,000 x 3/5).................................................... 6,000
Danny, capital (P10,000 x 2/5).................................................... 4,000
Cash ..................................................................................... 80,000

Case 2: Partial Goodwill to Eddy:


Goodwill..................................................................................... 4,000
Eddy, capital............................................................................... 70,000
Cash ..................................................................................... 74,000

Case 3: Bonus of P5,000 to remaining partner:


Eddy, capital............................................................................... 70,000
Charly, capital (P5,000 x 3/5)............................................... 3,000
Danny, capital (P5,000 x 2/5)............................................... 2,000
Cash ..................................................................................... 65,000

Case 4: Total Implied Goodwill of P24,000:


Goodwill..................................................................................... 24,000
Eddy, capital............................................................................... 70,000
Charly, capital (P24,000 x 3/6)............................................. 12,000
Danny, capital (P24,000 x 2/6)............................................. 8,000
Cash ..................................................................................... 74,000

Case 5: Other assets disbursed:


Eddy, capital............................................................................... 70,000
Other assets................................................................................. 20,000
Charly, capital (P60,000 x 3/6)............................................. 30,000
Danny, capital (P60,000 x 2/6)............................................. 20,000
Cash ..................................................................................... 40,000

Case 6: Danny purchases Eddy's capital interest:


Eddy, capital............................................................................... 70,000
Danny, capital....................................................................... 70,000

Partnership Dissolution – Changes in Ownership 57

Problem 3 – 11

a. 1/1/06 Building............................................................... 52,000


Equipment........................................................... 16,000
Cash .................................................................... 12,000
Santos capital.............................................. 40,000
To record initial investment.

12/31/06 Reyes capital........................................................ 22,000


Santos capital.............................................. 12,000
Income summary......................................... 10,000
To record distribution of loss as follows:
Santos Reyes Total
Interest................................................................. P 8,000 P – P 8,000
Additional profit.................................................. 4,000 4,000
Balance to Reyes................................................. ______ (22,000) (22,000)
Total.................................................................... P12,000 P(22,000) (P10,000)

1/1/07 Cash .................................................................... 15,000


Santos capital (15%)............................................ 300
Reyes capital (85%)............................................. 1,700
Cruz capital................................................. 17,000
(new investment by Cruz brings total capital to P85,000 after 2006 loss [80,000 –
10,000 + 15,000]. Cruz's 20% interest is P17,000 [85,000 x 20%] with the extra
P2,000 coming from the two original partners [allocated between them according
to their profit and loss ratio].)

12/31/07 Santos capital....................................................... 10,340


Reyes capital........................................................ 5,000
Cruz capital.......................................................... 5,000
Santos drawings.......................................... 10,340
Reyes drawings........................................... 5,000
Cruz drawings............................................. 5,000
To close drawings accounts for the year based on distributing 20%. Of each
partner's beginning capital balances [after adjustment for Cruz's investment] or
P5,000 whichever is greater. Santos's capital Is P51,700 [40,000 + 12,000 – 300].)

12/31/07 Income summary................................................. 44,000


Santos capital.............................................. 16,940
Reyes capital............................................... 16,236
Cruz capital................................................. 10,824
To allocate P44,000 income figure as computed below:
Santos Reyes Cruz
Interest (20% of P51,700).................................... P10,340
15% of P44,000 income....................................... 6,600
Balance, 60:40..................................................... ______ P16,236 P10,824
Total.................................................................... P16,940 P16,236 P10,824
58
Chapter 3

Capital balances as of December 31, 2008


Santos Reyes Cruz
Initial investment, 2007....................................... P40,000 P40,000
2007 profit........................................................... 12,000 (22,000)
Cruz investment................................................... (300) (1,700) P17,000
2007 drawings..................................................... (10,340) (5,000) (5,000)
2007 profit........................................................... _16,940 _16,236 _10,824
Capital, 12/31/07................................................. P58,300 P27,536 P22,824

1/1/08 Cruz capital.......................................................... 22,824


Diaz capital................................................. 22,824
To transfer capital purchase from Cruz to Diaz

12/31/08 Santos capital....................................................... 11,660


Reyes capital........................................................ 5,507
Diaz capital.......................................................... 5,000
Santos drawings.......................................... 11,660
Reyes drawings........................................... 5,507
Diaz drawings............................................. 5,000
To close drawings accounts based on 20% of beginning capital Balances (above)
or P5,0000 (whichever is greater).

12/31/08 Income summary................................................. 61,000


Santos capital.............................................. 20,810
Reyes capital............................................... 24,114
Diaz capital................................................. 16,076
To distribute profit for 2008 computed as follows:
Santos Reyes Diaz
Interest (20% of P58,300).................................... P11,660
15% of P61,000 profit.......................................... 9,150
Balance, P40,190, 60:40...................................... ______ P24,114 P16,076
Total.................................................................... P20,810 P24,114 P16,076

1/1/09 Diaz capital.......................................................... 33,900


Santos capital (15%)............................................ 509
Reyes capital (85%)............................................. 2,881
Cash............................................................ 37,290
Diaz capital is [33,900 (P22,824 – P5,000 + P16,076)]. Extra 10% is deducted
from the two remaining partners' capital accounts.

b. 1/1/06 Building............................................................... 52,000


Equipment........................................................... 16,000
Cash .................................................................... 12,000
Goodwill.............................................................. 80,000
Santos capital.............................................. 80,000
Reyes capital............................................... 80,000
To record initial investments. Reyes is credited with goodwill of P80,000 to match
Santos investment.
Partnership Dissolution – Changes in Ownership 59

12/31/06 Reyes capital.............................................................. 30,000


Santos capital.............................................. 20,000
Income summary......................................... 10,000
Interest of P16,000 is credited to Santos (P80,000 x 20%) along with a base of
P4,000. The remaining profit is now a P30,000 loss which is attributed entirely to
Reyes.

1/1/07 Cash .................................................................... 15,000


Goodwill.............................................................. 22,500
Cruz capital................................................. 37,500
Cash and goodwill contributed by Cruz are recorded. Goodwill is Computed
algebraically as follows:

P15,000 + goodwill = 20% (current capital + P15,000 + goodwill)


P15,000 + goodwill = 20% (P150,000 + P15,000 + goodwill)
P15,000 + goodwill = P33,000 + .20 goodwill
.80 goodwill = P18,000
goodwill = P22,500

12/31/07 Santos capital....................................................... 20,000


Reyes capital........................................................ 10,000
Cruz capital.......................................................... 7,500
Santos drawings.......................................... 20,000
Reyes drawings........................................... 10,000
Cruz drawings............................................. 7,500
To close drawings accounts based on 20% of beginning capital
Balances: Santos, p100,000; Reyes, P50,000; and Cruz, P37,500.

12/31/07 Income summary................................................. 44,000


Santos capital.............................................. 26,600
Reyes capital............................................... 10,400
Cruz capital................................................. 6,960
To allocate P44,000 profit as follows:
Santos Reyes Cruz
Interest (20% of P100,000).................................. P20,000
15% of P44,000 profit.......................................... 6,600
Balance of P17,400, 60:40................................... ______ P10,440 P 6,960
Total.................................................................... P26,600 P10,440 P 6,960

Capital balances as of December 31, 2004:


Santos Reyes Cruz
Initial investment, 2006....................................... P80,000 P80,000
2006 profit allocation........................................... 20,000 (30,000)
Additional investment.......................................... P37,500
2007 drawings..................................................... (20,000) (10,000) (7,500)
2007profit allocation............................................ __26,600 _10,440 __6,960
Capitals, 12/31/07................................................ P106,600 P50,440 P36,960
60
Chapter 3

1/1/08 Goodwill....................................................................... 26,588


Santos capital...................................................... 3,988
Reyes capital....................................................... 13,560
Cruz capital......................................................... 9,040
To record goodwill implied of Cruz's interest. In effect, the profit Sharing ratio is 15% to
Santos, 51% to Reyes (60% of 85% remaining after Santos's income), and 34% to Cruz
(40% of the 85% remaining after Santos' income). Diaz is paying P46,000, P9,040 in excess
of Cruz's capital (P36,960). The additional payment for this 34% income Interest indicates
total goodwill of P26,588 (P9,040/34%).
1/1/08 Cruz capital.................................................................. 46,000
Diaz capital......................................................... 46,000
To transfer of capital purchase.

12/31/08 Santos capital................................................................ 22,118


Reyes capital................................................................ 12,800
Diaz capital................................................................... 9,200
Santos drawings.................................................. 22,118
Reyes drawings................................................... 12,800
Diaz drawings..................................................... 9,200
To close drawings accounts based on 20% of beginning capitals.

12/31/08 Income summary.......................................................... 61,000


Santos capital...................................................... 31,268
Reyes capital....................................................... 12,800
Diaz capital......................................................... 9,200
To allocate profit for 2008 as follows:
Santos Reyes Diaz
Interest (20% of P110,588).......................................... P22,118
15% of P61,000............................................................ 9,150
Balance of P29,732, 60:40........................................... ______ P17,839 P11,893
Totals............................................................................ P31,268 P17,839 P11,893

Capital balances as of December 31, 2008:


Santos Reyes Diaz
12/31/07 balances......................................................... P106,600 P50,440
Goodwill....................................................................... 3,988 13,560
Capital purchased......................................................... P46,000
Drawings...................................................................... (22,118) (12,800) (9,200)
Profit allocation............................................................ __31,268 _17,839 _11,893
12/31/08 balances......................................................... P119,738 P69,039 P48,693

1/1/09 Goodwill....................................................................... 14,321


Santos capital...................................................... 2,148
Reyes capital....................................................... 7,304
Diaz capital......................................................... 4,869
To record implied goodwill. Diaz will be paid P53,562 (110% of the capital balance for his
interest. This amount is P4,869 in excess of the capital account. Since Diaz is only entitled
to a 34% share of profits and losses, the additional P4,869 must indicate that the partnership
as a whole is undervalued by P14,321 (P4,869/34%) which is treated as goodwill.
1/1/09 Diaz capital................................................................... 53,562
Cash.................................................................... 53,562
To record settlement to Diaz.
Partnership Dissolution – Changes in Ownership 61

Problem 3 – 12
Partnership Books Continued as Books of Corporation

Entries in the Books of the Corporation

(1) Inventories.......................................................................................... 26,000


Land ................................................................................................... 40,000
Building. ............................................................................................. 20,000
Accumulated depreciation – bldg........................................................ 20,000
Accumulated depreciation – equipment............................................... 30,000
Equipment................................................................................... 20,000
Jack capital................................................................................. 58,000
Jill capital................................................................................... 34,800
Jun capital................................................................................... 23,200
To adjust assets and liabilities of the partnership
to their current fair values.

(2) Cash ................................................................................................... 4,000


Jack capital......................................................................................... 18,000
Jill capital................................................................................... 20,200
Jun capital................................................................................... 1,800
To adjust capital accounts of the partners to 4:3:3 ratio.

(3) Jack capital......................................................................................... 100,000


Jill capital........................................................................................... 75,000
Jun capital........................................................................................... 75,000
Capital stock............................................................................... 250,000
To record issuance of stock to the partners.

New Books Opened for the New Corporation

Entries in the Books of the Partnership

(1) Inventories.......................................................................................... 26,000


Land ................................................................................................... 40,000
Building. ............................................................................................. 20,000
Accumulated depreciation – bldg........................................................ 20,000
Accumulated depreciation – equipment............................................... 30,000
Equipment................................................................................... 20,000
Jack capital................................................................................. 58,000
Jill capital................................................................................... 34,800
Jun capital................................................................................... 23,200
To adjust assets and liabilities of the partnership.

(2) Cash ................................................................................................... 4,000


Jack capital......................................................................................... 18,000
Jill capital................................................................................... 20,200
Jun capital................................................................................... 1,800
To adjust capital accounts of the partners.
62
Chapter 3

(3) Stock of JJJ Corporation..................................................................... 250,000


Accounts payable................................................................................. 30,000
Loans payable – Jill............................................................................. 40,000
Cash in bank............................................................................... 44,000
Accounts payable........................................................................ 26,000
Inventories.................................................................................. 60,000
Land........................................................................................... 60,000
Building. ..................................................................................... 70,000
Equipment................................................................................... 60,000
To record transfer of assets and liabilities to
The corporation and the receipt of capital stock

(4) Jack capital......................................................................................... 100,000


Jill capital........................................................................................... 75,000
Jun capital........................................................................................... 75,000
Stock of JJJ Corporation............................................................. 250,000
To record issuance of stock to the partners.

Entries in the Books of the Corporation

(1) To record the acquisition of assets and liabilities from the partnership:

Cash in bank. ...................................................................................... 44,000


Accounts receivable............................................................................. 26,000
Inventories.......................................................................................... 60,000
Land ................................................................................................... 60,000
Building (net). ..................................................................................... 70,000
Equipment (net)................................................................................... 60,000
Accounts payable........................................................................ 30,000
Loans payable............................................................................. 40,000
Capital stock............................................................................... 250,000

Problem 3 – 13
a. 1/1/06 Building 1,040,000
Equipment 320,000
Cash 240,000
Lim, capital 800,000
Sy, capital 800,000
(To record initial investment. Assets recorded at market value with two equal
capital balances.

12/31/06 Sy, capital 440,000


Lim, capital 240,000
Income summary 200,000
(The allocation plan specifies that Lim will receive 20% in interest [or 160,000
based on P800,000 capital balance] plus P80,000 more [since that amount is

Partnership Dissolution – Changes in Ownership 63

greater than 15% of the profits from the period]. The remaining P440,000 loss is
assigned to Sy.)

1/1/07 Cash 300,000


Lim, capital (15%) 6,000
Sy, capital (85%) 34,000
Tan, capital 340,000
(New investment by Tan brings total capital to P1,700,000 after 2006 loss
[P1,600,000 – P200,000 + P300,000]. Tan’s 20% interest is P340,000
[P1,700,000 x 20%] with the extra P40,000 coming from the two original
partners [allocated between them according to their profit and loss ratio].)

12/31/07 Lim, capital 206,800


Sy, capital 100,000
Tan, capital 100,000
Lim, drawings 206,800
Sy, drawings 100,000
Tan, drawings 100,000
(To close out drawings accounts for the year based on distributing 20% of each
partner’s beginning capital balances [after adjustment for Tan’s investment] or
P100,000 whichever is greater. Lim’s capital is P1,034,000 [P800,000 +
P240,000 – P6,000])

12/31/07 Income summary 880,000


Lim, capital 338,800
Sy, capital 324,720
Tan, capital 216,480
(To allocate P880,000 income figure for 2007 as determined below.)

Lim Sy Tan
Interest (20% of P1,034,000
beginning capital balance) P206,800
15% of P880,000 income 132,000
60:40 split of remaining P541,200 income - 324,720 216,480
Total P338,800 P524,720 P216,480

Capital balances as of December 31, 2007:


Lim Sy Tan
Initial 2006 investment P800,000 P800,000
2006 profit allocation 240,000 440,000
Tan’s investment (6,000) (34,000) P340,000
2007 drawings (206,800) (100,000) (100,000)
2007 profit allocation 338,800 324,720 216,480
12/31/07 balances P1,166,000 P550,720 P456,480

1/1/08 Tan, capital 456,480


Ang, capital 456,480
(To reclassify balance to reflect acquisition of Tan’s interest.)

64
Chapter 3

12/31/08 Lim, capital 233,200


Sy, capital 110,140
Ang, capital 100,000
Lim, drawings 233,200
Sy, drawings 110,140
Ang, drawings 100,000
(To close out drawings accounts for the year based on 20% of beginning capital
balances [above] or P100,000 [whichever is greater].)

12/31/08 Income summary 1,220,000


Lim, capital 416,200
Sy, capital 482,280
Ang, capital 321,520
(To allocate profit for 2008 determined as follows)
Lim Sy Ang
Interest (20% of P1,166,000 beg. capital) P233,200
15% of P1,220,000 income 183,000
60:40 split of remaining P803,800 - 482,280 321,520
Totals P416,200 P482,280 P321,520

1/1/09 Ang, capital 678,000


Lim, capital (15%) 10,180
Sy, capital 85%) 57,620
Cash 745,800
(Ang’s capital is P678,000 [P456,480 – P100,000 + P321,520]. Extra 10%
payment is deducted from the two remaining partners’ capital accounts.)

b. 1/1/06 Building 1,040,000


Equipment 320,000
Cash 240,000
Goodwill 1,600,000
Lim, capital 1,600,000
Sy, capital 1,600,000
(To record initial capital investments. Sy is credited with goodwill of P1,600,000
to match Lim’s investment.)

12/31/06 Sy, capital 600,000


Lim, capital 400,000
Income summary 200,000
(Interest of P320,000 is credited to Lim [P1,600,000 x 20%] along with a base of
P80,000. The remaining amount is now a P600,000 loss that is attributed entirely
to Sy.)

1/1/07 Cash 300,000


Goodwill 450,000
Tan, capital 750,000
(Cash and goodwill being contributed by Tan are recorded. Goodwill must be
calculated algebraically.)

Partnership Dissolution – Changes in Ownership 65

P300,000 + Goodwill = 20% (Current capital + P300,000 + Goodwill)


P300,000 + Goodwill = 20% (P3,000,000 + P300,000 + Goodwill)
P300,000 + Goodwill = P660,000 + .2 Goodwill
.8 Goodwill = P360,000
Goodwill = P450,000
12/31/07 Lim, capital 400,000
Sy, capital 200,000
Tan, capital 150,000
Lim, drawings 400,000
Sy, drawings 200,000
Tan, drawings 150,000
(To close out drawings accounts for the year based on 20% of beginning capital
balances: Lim- P2,000,000, Sy- P100,000, and Tan- P750,000.)

12/31/07 Income summary 880,000


Lim, capital 532,000
Sy, capital 208,800
Tan, capital 139,200
(To allocate P880,000 income figure as follows)

Lim Sy Tan
Interest (20% of P2,000,000)
beginning capital balance) P400,000
15% of P880,000 income 132,000
60:40 split of remaining P348,000 - P208,800 P139,200
Totals P532,000 P208,800 P139,200

Capital balances as of December 31, 2007:


Lim Sy Tan
Initial 2006 investment P1,600,000 P1,600,000
2006 profit allocation 400,000 (600,000)
Additional investment P750,000
2007 drawings (400,000) (200,000) (150,000)
2007 profit allocation 532,000 208,800 139,200
12/31/07 balances P2,132,000 P1,008,800 P739,200

1/1/08 Goodwill 531,760


Lim, capital (15%) 79,760
Sy, capital (51%) 271,200
Tan, capital (34%) 180,800
(To record goodwill indicated by purchase of Tan’s interest.)

In effect, profits are shared 15% to Lim, 51% to Sy – (60% of the 85% remaining after Lim’s
income), and 34% to Tan (50% of the 85% remaining after Lim’s income). Ang is paying
P920,000, an amount P180,800 in excess of Tan’s capital (P739,200). The additional payment for
this 34% income interest indicates total goodwill of P531,760 (P180,800/34%). Since Tan is
entitled to 34% of the profits but only holds 19% of the total capital, an implied value for the

66
Chapter 3

company as a whole cannot be determined directly from the payment of P920,000. Thus,
goodwill can only be computed based on the excess payment.

1/1/08 Tan, capital 920,000


Ang, capital 920,000
(To reclassify capital balance to new partner.)

12/31/08 Lim, capital 442,360


Sy, capital 256,000
Ang, capital 184,000
Lim, drawings 442,360
Sy, drawings 256,000
Ang, drawings 184,000
(To close out drawings accounts for the year based on 20% of beginning capital
balances [after adjustment for goodwill].)

12/31/08 Income summary 1,220,000


Lim, capital 625,360
Sy, capital 356,780
Ang, capital 237,860

To allocate profit for 2008 as follows:


Lim Sy Ang
Interest (20% of P2,211,760
beginning capital balance) P442,360
15% of P1,220,000 income 183,000
60:40 split of remaining P594,640 - 356,780 237,860
Totals P625,360 P356,780 P237,860

Capital balances as of December 31, 2008:


Lim Sy Ang
12/31/07 balances P2,132,000 P1,008,00 P739,200
Adjustment for goodwill 79,760 271,200 180,800
Drawings (442,360) ( 256,000) (184,000)
Profit allocation 625,360 356,780 237,860
12/31/08 balances P2,394,760 P1,380,780 P973,860

Ang will be paid P1,071,240 (110% of the capital balance) for her interest. This amount is
P97,380 in excess of the capital account. Since Ang is only entitled to a 34% share of profits and
losses, the additional P97,380 must indicate that the partnership as a whole is undervalued by
P286,420 (P97,380/34%). Only in that circumstance would the extra payment to Ang be justified:

1/1/09 Goodwill 286,420


Lim, capital (15%) 42,960
Sy, capital (51%) 146,080
Ang, capital (34%) 97,380
(To recognize implied goodwill.)

Partnership Dissolution – Changes in Ownership 67

1/1/09 Ang, capital 1,071,240


Cash 1,071,240
(To record final distribution to Ang.
68
Chapter 4

CHAPTER 4

MULTIPLE CHOICE ANSWERS AND SOLUTIONS


4-1: a
PAR BOOGIE BIRDIE
Capital balances before realization P 20,000 P 16,000 P 10,000
Loss on liquidation, P40,000 ( 20,000) ( 12,000) ( 8,000)
Cash distribution P – P 4,000 P 2,000

4-2: c
PING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000
Gain of P10,000 (150,000-140,000) __6,000 __2,000 __2,000
Cash distribution P 56,000 P 52,000 P 12,000

4-3: b
PING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000
Loss of P40,000 (P140,000-P100,000) ( 24,000) ( 8,000) ( 8,000)
Cash distribution P 26,000 P 42,000 P 2,000

4-4: a
PING PANG PONG
Capital balances before liquidation P 50,000 P 50,000 P 10,000
Loss of P70,000 (P140,000-P70,000) ( 42,000) ( 14,000) ( 14,000)
Balances P8,000 P 36,000 ( 4,000)
Absorption of Pong's deficiency, 6:2 ( 3,000) ( 1,000) __4,000
Cash distribution P 5,000 P 35,000 –

4-5: b
COLT MARK CLOCK
Capital balances before liquidation (net of loans)P290,000 P200,000 P220,000
Loss of P130,000, 4:3:3 ( 52,000) ( 39,000) ( 39,000)
Cash distribution P238,000 P161,000 P181,000

4-6: c
JONAS CARLOS TOMAS
Capital balances before liquidation P160,000 P 45,000 P 55,000
Loss of P60,000, 40:50:10 ( 24,000) ( 20,000) ( 6,000)
Cash distribution P136,000 P 25,000 P 49,000

Partnership Liquidation 69

4-7: a
ARIEL BERT CESAR
Capital balances before liquidation P40,000 P180,000 P 30,000
Loss of P100,000, 4:3:3 ( 40,000) ( 30,000) ( 30,000)
Cash distribution P – P150,000 P –

4-8: b
NORY OSCAR
Capital balances before realization P23,000 P 13,500
Additional investment by Nory for
the unpaid liabilities (33,000-18,000) 15,000 –
Loss on realization (schedule 1) ( 30,900) ( 20,600)
Payment by Oscar to Nory P 7,100 ( P7,100)
Schedule 1
Total capital before liquidation P 36,500
Unpaid liabilities 15,000
Total loss on realization P 51,500

4-9: d
BLACK WHITE GREEN
Capital balances before liquidation (net) P99,000 P 91,500 P138,000
Loss on realization (schedule 1) P27,500 ( 13,750) ( 27,500) _( 5,500)
Balances, cash distribution P85,250 P 64,000 P132,500

Schedule 1:
Capital balances of white (net) P 91,500
Cash received by White _83,250
White's share of total loss (30%) P 8,250

Total loss on realization (P8,250/39%) P 27,500

4-10: c
ANA EVA NORA
Capital balances before liquidation (net) P27,000 P 43,000 P 10,000
Loss on realization, P63,600 ( 25,320) ( 25,320) ( 12,660)
Balances P 1,680 P 17,680 ( 2,660)
Unrecorded liabilities, P500 ( 200) ( 200) ( 100)
Balances P 1,480 P 17,480 ( 2,760)
Elimination of Nora's deficiency ( 1,380) ( 1,380) __2,760
Payment to partners P 100 P 16,100 P –

4-11: d
ARIES LEO TAURUS
Capital balances before liquidation (net) P33,500 P 49,000 P 36,500
Loss on realization (schedule 1) P45,000 ( 22,500) ( 13,500) ( 9,000)
Payment to partners P11,000 P 35,500 P 27,500
70
Chapter 4

Schedule 1:
Taurus capital (net) P36,500
Payment to Taurus ( 27,500)
Share of total loss (20%) P 9,000

Total loss on realization (9,000/20%) P45,000

4-12: c
TOTAL MONA NORA
OLGA
Capital balances, June 11 P32,700 P15,000 P13,500
P 4,200
Net loss from operation (squeeze) ( 9,800) ( 4,200) ( 2,800)
( 2,800)
Capital balances, August 30 before
liquidation (48,500-25,600) P22,900 P10,800 P10,700
P 1,400
Loss on realization (47,500-30,000) ( 17,500) ( 7,500) ( 5,000)
( 5,000)
Balances P 5,400 P 3,300 P 5,700( 3,6
00)
Additional investment by Olga _1,500 _____– _____–
_1,500
Balances P 6,900 P 3,300 P 5,700( 2,1
00)
Elimination of Olga's deficiency ______ ( 1,260) ( 840)
_2,100
Payment to partners P 6,900 P 2,040 P 4,860P

4-13: b
RITA SARA TITA
Capital balances before liquidation P49,000 P18,000 P10,000
Operating loss, P21,000 ( 3,500) ( 7,000) ( 10,500)
Drawings ( 10,000) ( 15,000) ( 20,000)
Loans – 8,000 25,000
Loss on realization, P12,000 ( 2,000) ( 4,000) ( 6,000)
Balances P33,500 P – ( 1,500)
Absorption of Tita's deficiency __1,500 _____– _1,500
Payment to Nora P32,000 P – P –

4-14: a
CLARO PEDRO
ANDRO
Capital balances before liquidation P45,000 P27,000
P50,000
Loss on realization
Accounts Receivable (P50,000 X 40%) P20,000
Investment (P30,000 - P20,000) 10,000
Equipment (P60,000-P30,000) _30,000
Total P60,000 ( 24,000) ( 24,000)( 12,
000)
Payment to partners P21,000 P 3,000
P38,000

4-15: c
TOTAL MONALISA
Capital balances before liquidation (inclusive loans) P47,500 P28,500
P19,000
Loss on realization, (squeeze) ( 38,500) ( 23,100)
( 15,400)
Capital balances - cash distribution P 9,000 P 5,400P
3,600
Partnership Liquidation 71

Cash after realization P 37,500


Less Liabilities (P36,000-P7,500) ( 28,500)
Total capital after realization P 9,000

4-16: a

FF capital before distribution of net loss P100,000


Add: share of net loss (P10,000 X 40%) _( 4,000)
FF capital before liquidation 96,000
Cash settlement to FF ( 80,000)
FF share of total loss on realization (40%) P 16,000

Total loss on realization (P16,000/40%) P 40,000

Total capital before liquidation (P260,000-P10,000) P250,000


Add: Liabilities _100,000
Total assets P350,000
Cash before liquidation ( 50,000)
Non-cash assets P300,000
Loss on realization ( 40,000)
Cash to be realized P260,000

4-17: d
TOTAL CC DD EE
Capital balances before realization (net) P100,000 P 15,000 P22,500
P62,500
Loss on realization (squeeze) ( 125,000) ( 62,500) ( 37,500)
( 25,000)
Capital balances after realization
(liabilities-unpaid) (P 25,000) ( 47,500) ( 15,000)
P37,500
Elimination of CC's deficiency _______– __47,500 ( 28,500)
( 19,000)
Balances (P 25,000) – (P43,500)
P18,500
Investment by DD __43,500 ______– _43,500
_____–
Payment to EE P 18,500 P – P –
P18,500

4-18: d

Total capital before liquidation P 30,000


Liabilities __1,500
Total assets P 31,500
Less: Cash balance before realization
Cash after payment of liabilities P 11,100
payment of liabilities 1,500
Cash realized ( 11,600) __1,000
Non-cash asset P 30,500
Less: cash realized _11,600
Loss on realization P 18,900

72
Chapter 4

4-19: d
LL MM NN
TOTAL
Capital balances P 50,000 P 20,000 P 10,000
P 80,000
Salary of LL (P600 X 8 months) __4,800 _______ _______
___4,800
Capital balances before liquidation P 54,800 P 20,000 P 10,000
P 84,800
Loss on realization ( 44,880) ( 14,960) ( 14,960)
Balances P 9,920 P 5,040 (P 4,960)
Additional investment by NN ______– _____– __4,960
Payment to partners P 9,920 P 5,040 P –

4-20: b

KK's total interest (P60,000-P10,000) P 50,000


Less: Cash to be paid to KK __10,000
Share of total loss (1/3) P 40,000

Total loss on realization (P40,000/1/3) P120,000

Total assets:
Total interest of the partners before liquidation:
JJ (P70,000+P30,000+P10,000) P110,000
KK (P60,000-P10,000) 50,000
LL (P30,000+P10,000) __40,000 P200,000
Divide by ______50%
Total P400,000
Loss on realization _120,000
Cash to be realized P280,000

4-21: a
TOTAL NN OO PP
Capital balances, July 1 P 75,000 P 25,000 P 25,000
P 25,000
Advances to NN, August 1 ( 10,000) ( 10,000) – –
OO Loan, September 1 20,000 – 20,000 –
Interest, December 31 (6%)
NN (5 mos.) ( 250) ( 250)
OO (4 mos.) 400 400
Compensation to PP __2,500 _______ _______
___2,500
Capital balances before liquidation P 87,650 P 14,750 P 45,400
P 27,500
Loss on realization (squeeze) _56,250 ( 17,550) ( 17,550)
( 17,550)
Cash distribution P 35,000 ( 2,800) P 27,850 P
9,950

NN should pay P2,800 and this is to be divided to OO & PP equally or P1,400 each.

Partnership Liquidation 73

4-22: a
TOTAL PG JR AS
Capital balances before realization P 950,000 P350,000 P250,000
P350,000
Loss on realization (squeeze) ( 1,000,000) __20,000 ( 200,000)
_500,000
Capital balances after realization
(unpaid liabilities) (P 50,000) P 50,000 P 50,000
( 150,000)
Elimination of AS's deficiency _______– ( 90,000) ( 60,000)
P150,000
Cash to be absorbed P – (P 40,000) (P 10,000) P

4-23: a
RM ST
Capital balances before realization (net) P500,000 P825,000
Loss on realization, P1,225,000 ( 490,000) ( 735,000)
Payment to Partners P 10,000 P 90,000
4-24: a
TOTAL LT AM ZP
Capital balances before realization (net) P 27,500 P 20,000 P 5,000
P 2,500
Gain on realization (squeeze) __37,500 _18,750 __-9,375
__9,375
Capital balances after realization P 65,000 P 38,750 P 14,375
P 11,875

4-25: c
AG BM CP DJ
Capital balances before realization (net) P 420,000 P375,000 P205,000
P150,000
Loss on realization, P1,000,000 ( 300,000) ( 300,000) (200,000)
(200,000)
Balances P 120,000 P 75,000 P 5,000
P(50,000)
Additional investment by DJ
50,000

4-26: a
Settlement to Uy P351,500
Uy capital before liquidation (net):
Uy capital P553,500
Receivable from Uy ( 132,000) 421,500
Loss of Uy (50%) P 70,000

Total loss on realization (P70,000 ÷ 50%) P140,000

__Uy__ __Vi__ __Wi__ __Total__


CB before liquidation 553,500 452,500 486,000 1,492,000
Receivable from Uy (132,000) (132,000)
Loan to Wi ( 40,500) (40,500)
Salary payable to Vi 135,000 135,000
Interest before realization 421,500 587,500 445,500 1,454,500
Loss on realization ( 70,000) ( 42,000) ( 28,000) ( 140,000)
Settlement to partners 351,500 545,500 417,500 1,314,500

74
Chapter 4

SOLUTIONS TO PROBLEMS

Problem 4 – 1

Case 1
Rivas and Briones
Statement of Liquidation
December 31, 2008

Partners'
Capitals
Assets Rivas, Briones, Rivas
Briones
Cash Others Liabilities Loan Loan (90%)
(10%)
Balances before liquidation. . . P 20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000
P10,000
Realization of assets and
distribution of loss........... _134,000 ( 200,000) _______ _______ _______ ( 59,400)
( 6,600)
Balances................................ 154,000 – 132,000 18,000 20,000 ( 19,400)
3,400
Payment of liabilities............. ( 132,000) ______– ( 132,000) ______ _______ _______
______
Balances................................ 22,000 – – 18,000 20,000 ( 19,400)
3,400
Offset Rivas' loan against his
capital deficiency............ _______ _______ _______ ( 18,000) _______ _18,000
______
Balances................................ 22,000 – – – 20,000 ( 1,400)
3,400
Additional loss to Briones...... _______ _______ _______ _______ _______ __1,400
( 1,400)
Balances................................ 22,000 – – – 20,000 –
2,000
Payment to partner................. P(22,000) – – – P(20,000) –
P(2,000)

Case 2
Rivas and Briones
Statement of Liquidation
December 31, 2008

Partners'
Capitals
Assets Rivas, Briones, Rivas
Briones
Cash Others Liabilities Loan Loan (70%)
(30%)
Balances before liquidation. . . P20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000
P10,000
Realization of assets and
distribution of loss........... 134,000 ( 200,000) _______ ______ _______ ( 46,200)
( 19,800)
Balances................................ 154,000 – 132,000 18,000 20,000 ( 6,200)
9,800
Payment of liabilities............. ( 132,000) _______ ( 132,000) ______ _______ _______
______
Balances................................ 22,000 – – 18,000 20,000 ( 6,200)
9,800
Offset loan against capital
deficiency........................ ________ _______ _______ ( 6,200) ( 9,800) __6,200
__9,800
Balances................................ 22,000 – – 11,800 10,200 – –
Payment to partner................. P(22,000) – – P(11,800) P(10,200) –

Partnership Liquidation 75

Case 3

Rivas and Briones


Statement of Liquidation
December 31, 2008
Partners'
Capitals
Assets Rivas, Briones, Rivas
Briones
Cash Others Liabilities Loan Loan (50%)
(50%)
Balances before liquidation........ P 20,000 P200,000 P132,000 P 18,000 P20,000 P40,000
P10,000
Realization of assets and
distribution of loss............... _134,000 ( 200,000) _______ _______ ______ ( 33,000)
( 33,000)
Balances...................................... 154,000 – 132,000 18,000 20,000 ( 7,000) (
23,000)
Payment of liabilities.................. ( 132,000) _______ ( 132,000) __ _ _______
Balances...................................... 22,000 – – 18,000 20,000 ( 7,000) (
23,000)
Offset Briones'' loan against
his capital deficiency........... _______ _______ _______ _______ ( 20,000) ______
_20,000
Balances...................................... 22,000 – – 18,000 – 7,000 (
3,000)
Additional loss to Rivas.............. _______ _______ _______ _______ _______ ( 3,000)
__3,000
Balances...................................... 22,000 – – 18,000 – 4,000 –
Payment to partner...................... P(22,000) – – P(18,000) – P( 4,000)

Journal Entries

Case 1:
Cash.............................................................................................................. 134,000
Rivas, Capital................................................................................................. 59,400
Briones, Capital.............................................................................................. 6,600
Other Assets............................................................................................ 200,000
Liabilities. ..................................................................................................... 132,000
Cash........................................................................................................ 132,000
Rivas, Loan.................................................................................................... 18,000
Rivas, Capital.......................................................................................... 18,000
Briones, Capital.............................................................................................. 1,400
Rivas, Capital.......................................................................................... 1,400
Briones, Loan................................................................................................. 20,000
Briones, Capital.............................................................................................. 2,000
Cash .................................................................................................... 22,000
Case 2:
Cash.............................................................................................................. 134,000
Rivas, Capital................................................................................................. 46,200
Briones, Capital.............................................................................................. 19,800
Other Assets............................................................................................ 200,000
Liabilities. ..................................................................................................... 132,000
Cash........................................................................................................ 132,000
Rivas, Loan.................................................................................................... 6,200
Briones, Loan................................................................................................. 9,800
Rivas, Capital.......................................................................................... 6,200
Briones, Capital...................................................................................... 9,800
Rivas, Loan.................................................................................................... 11,800
Briones, Loan................................................................................................. 10,200
Cash........................................................................................................ 22,000
76
Chapter 4

Case 3:
Cash................................................................................................... 134,000
Rivas, Capital.................................................................................... 33,000
Briones, Capital................................................................................. 33,000
Other Assets................................................................................ 200,000
Liabilities........................................................................................... 132,000
Cash. ........................................................................................... 132,000
Briones, Loan.................................................................................... 20,000
Briones, Capital........................................................................... 20,000
Rivas, Capital.................................................................................... 3,000
Briones, Capital........................................................................... 3,000
Rivas, Loan........................................................................................ 18,000
Rivas, Capital.................................................................................... 4,000
Cash. ........................................................................................... 22,000

Problem 4 – 2

Blando and Castro


Statement of Liquidation
April 30, 2008
Partners'
Capitals
A s s e t s Accounts Blando, Blando
Castro
Cash Receivables Inventory Others Payable Loan (60%)
(40%)
Balances before
liquidation.................... P 18,000 P75,000 P90,000 P84,000 P42,000 P 24,000 P102,000
P99,000
Collection of
receivables and
distribution of loss........ _37,500 ( 75,000) _______ _______ _______ _______ ( 22,500)
( 15,000)
Balances............................ 55,500 – 90,000 84,000 42,000 24,000 79,500
84,000
Realization of
inventory and
distribution of
loss............................... _30,000 _______ ( 90,000) _______ _______ _______ ( 36,000)( 24
,000)
Balances............................ 85,500 – – 84,000 42,000 24,000 43,500
60,000
Realization of other
assets and distribution
of loss........................... _40,000 _______ _______ ( 84,000) _______ _______ ( 26,400)
( 17,600)
Balances............................ 125,500 – – – 42,000 24,000 17,100
42,400
Payment of accounts
payable......................... ( 42,000) _______ _______ _______ ( 42,000) _______ _______
_______
Balances............................ 83,500 – – – – 24,000 17,100
42,400
Payments to partners….. … P(83,500) – – – – P(24,000) P( 17,100)
P(42,400)

Partnership Liquidation 77
Problem 4 – 3
a. Electric Company
Statement of Partnership Realization and Liquidation
June 30, 2008

Capital Balances
Amp. Noncash Liabil- Volt, Amp Volt Watt
Cash Loan Assets ities Loan 50% 30% 20%
Balances 20,000 15,000 135,000 30,000 10,000 80,000 36,000
14,000
Sale of
assets at a loss _95,000 ______ (135,000) ______ ______ (20,000) (12,000)
( 8,000)
115,000 15,000 -0- 30,000 10,000 60,000 24,000
6,000
Payment to
creditors _(30,000) ______ _______ (30,000) ______ _______ ______
______
85,000 15,000 -0- -0- 10,000 60,000 24,000
6,000
Offset Amp,
receivable (15,000) (15,000)
Payments to partners:
Loan (10,000) (10,000)
Capitals _(75,000) ______ _______ _______ ______ (45,000) (24,000) ( 6
,000)
Balances -0- -0- -0- -0- -0- -0- -0-
-0-
b. (1) Cash 95,000
Amp, Capital 20,000
Volt, Capital 12,000
Watt, Capital 8,000
Noncash Assets 135,000
Sell noncash assets at a loss of P40,000.

(2) Liabilities 30,000


Cash 30,000
Pay creditors.

(3) Amp, Capital 15,000


Amp, Loan 15,000
Offset receivable from Amp against his capital credit.

(4) Volt, Loan 10,000


Amp, Capital 45,000
Volt, Capital 24,000
Watt, Capital 6,000
Cash 85,000
Final lump-sum distribution to partners.

Note: All partners permitted Amp to offset his receivable against his capital credit. Alternatively, Amp
could be required to pay the partnership the P15,000 receivable; the partnership would then pay him an
additional P15,000 for his capital credit. In this case, an offset of the receivable against the capital credit is
reasonable, provided the receivable is not interest-bearing, Amp has a sufficient capital credit, Amp is
personally solvent, and the note is not secured against specific assts of Amp. The offset is not automatic,
but must be determined by the terms of the initial note, and by the partners.

78
Chapter 4

Problem 4 – 4
a. Bina, capital before liquidation......................................................................................... P320,000
Payment to Bina................................................................................................................ _128,000
Loss absorbed by Bina (40%)........................................................................................... P192,000

Loss on realization (P192,000 ÷ 40%)............................................................................. P480,000

b. AIDA, BINA & CELIA


Statement of Partnership Liquidation
January 1, 2008

Capital
Cash Other Assets Aida Bina Celia
(5) (4) (1)
Balances before liquidation. P80,000 P720,000 P320,000 P320,000 P160,000
Realization & dist. of loss. . . 240,000 ( 720,000) ( 240,000) ( 192,000) ( 48,000)
Balances............................. 320,000 – 80,000 128,000 112,000
Settlement to partners.......... (320,000) _______ ( 80,000) ( 128,000) ( 112,000)

Problem 4 – 5

a. LL, capital before liquidation........................................................................................... P 70,000


Settlement to LL............................................................................................................... __98,000
Gain realized by LL (20%)............................................................................................... P 28,000

Total gain on realization (P28,000 ÷ 20%)...................................................................... P140,000


Other assets sold............................................................................................................... _500,000
Selling price ................................................................................................................... P640,000

b. JJ, KK & LL
Statement of Liquidation

Other Capital
Cash Assets Liabilities JJ (4) KK(4) (LL(2)
Balances before liquidation.... P50,000 P500,000 P60,000 P180,000 P240,000 P70,000
Realization & Dist. of gain.... 640,000 ( 520,000) _______ __56,000 __56,000 _28,000
Balances................................ 690,000 – 60,000 236,000 296,000 98,000
Payment of liabilities............. ( 60,000) ( 60,000)
Payment to Partners............... (630,000) _______ _______ ( 236,000) ( 296,000)
( 98,000)

Partnership Liquidation 79

Problem 4 – 6
a. BB.................................................... P160,000
CC.................................................... P20,000
DD................................................... P60,000
EE.................................................... P –0–

b. BB, CC, DD, & EE


Statement of Liquidation

C a p i t a l
Cash Liabilities BB (30%) CC (10%)DD (20%) EE (40%)
Balances before liquidation.... P 0 P60,000 P160,000 P80,000 (P120,000)
P(180,000)
Advances by BB to pay liabilities ( 60,000) 60,000
Deposit by DD....................... 60,000 ______ _______ _______ __60,000
________
Balances................................ 60,000 – 220,000 80,000 ( 60,000) ( 180,00
0)
Elimination of EE's deficiency ( 90,000) ( 30,000) ( 60,000) 180,000
Elimination of DD's deficiency ______ __( 90,000) ( 30,000) 120,000 –
Payment to partners................ 60,000 – 40,000 20,000 – –

Problem 4 – 7

Sayson and Company


Statement of Liquidation
–Date–

Liabilities P a r t n e r s' C a p i t a l s
Assets Accounts Notes Peña Sayson Zobel Ayala
Peña
Cash Noncash Payable Payable Loan (45%) (30%) (15%)
(10%)
Balances before liquidation.... P 15,000 P155,250 P11,250 P9,000 P 1,500 P 75,345 P 86,498 P(14,993)
P1,650
Realization of assets and
distribution of gain........... 185,000 ( 155,250) _______ ______ ______ 17,850 11,900 ______
______
Balances................................. 200,000 - 11,250 9,000 1,500 93,195 98,398 ( 14,993)
1,650
Payment of liabilities............. ( 20,250) ________ ( 11,250) ( 9,000) ______ ______ ______ _______
______
Balances................................. 179,750 - - - 1,500 93,195 98,398 ( 14,993)
1,650
Additional loss to Sayson,
Zobel and Peña;
45:30:10............................ _______ ________ ________ ______ ______ ( 7,937) ( 5,292) 14,993 (
1,764)
Balances................................. 179,750 - - - 1,500 85,258 93,106 -
(114)
Offset Peña's loan against
his capital deficiency........ _______ ________ ________ ______ ( 114) ______ ______ _______
114
Balances................................. 179,750 - - - 1,386 85,258 93,106 -
Payments to partners.............. P(179,750) P(1,386) P(85,258) P(93,106)

80
Chapter 4

Problem 4 – 8
a. Art, Bea and Cid Partnership
Statement of Liquidation
June 4, 2008

Assets Partners' Capital


Cash Other Liabilities Art (40%) Bea (40%) Cid
(20%)
Balances before liquidation
(including Bea loan, P4,000)...... P 6,000 P94,000 P20,000 P27,000 P43,000
P10,000
Realization of assets
at a loss of P63,300................... 30,000 ( 94,000) (25,320) (25,320) (12,660)
Unrecorded accounts payable.......... 500 (200) (200)
(100)
Payment to creditors........................ (20,500) ______ (20,500) ______ ______
______
Balances......................................... 16,200 - - 1,480 17,480
(2,760)
Eliminate Cid's deficit..................... ______ ______ ______ (1,380) (1,380)
_2,760
Balances......................................... 16,200 - - 100 16,100
Payment to Partners......................... (16,200) - - _( 100) ( 16,100)
-

b.
2008
July 5 Cash ............................................................................................. 30,700
Art capital (P63,300 x 40%)........................................................... 25,320
Bea capital (P63,300 x 40%).......................................................... 25,320
Cid capital (P63,300 x 20%)........................................................... 12,660
Other assets........................................................................... 94,000
To record realization of other assets at a loss of P63,300.

Art capital (P500 x 40%)................................................................ 200


Bea capital (P500 x 40%)............................................................... 200
Cid capital (P500 x 20%)................................................................ 100
Liabilities.............................................................................. 500
To record trade accounts payable.

Liabilities. ...................................................................................... 20,500


Cash. ..................................................................................... 20,500
To record payment of liabilities.

Art capital....................................................................................... 1,380


Bea capital...................................................................................... 1,380
Cid capital............................................................................. 2,760
To eliminate Cid's capital deficit.

Art capital....................................................................................... 100


Bea capital...................................................................................... 4,000
Cid capital. ..................................................................................... 12,100
Cash. ..................................................................................... 16,200
To record payments to partners to complete liquidation.

c. Cid's loss must be limited to P5,000, or P25,000 for the partnership (P5,000 / 20% = P25,000).
Because the liquidation of liabilities results in a loss of P500, only P24,500 may be lost on the
realization of other assets. This requires that other assets realize P69,500 (P94,000 – 24,500) to
enable Cid to receive P5,000 from the partnership to pay personal creditors in full.
Problem 4 –9
KGB Partnership
Statement of Realization and Liquidation
Lump-sum Liquidation on June 30, 2008

- Capital Balances -
Noncash G K G B
Cash Assets Liabilities Loan 20% 40% 40% -
Preliquidation balances 50,000 950,000 (480,000) (60,000) (240,000) (100,000) (120,000)
Sale of assets
and distribution
of 430,000 loss 520,000 950,000 - - 86,000 172,000 172,000
570,000 -0- (480,000) (60,000) (154,000) 72,000 52,000
Cash contributed
by B 50,000 - - - - - 50,000
620,000 -0- (480,000) (60,000) (154,000) 72,000 2,000

Distribution of deficit
of insolvent partner: (2,000)
20/60 (P2,000) 666
40/60 (P2,000) - - - - - 1,334 -
620,000 -0- (480,000) (60,000) (153,334) 73,334 -0-
Offset deficit with loan - - - 60,000 - (60,000) -
620,000 -0- (480,000) -0- (153,334) 13,334 -0-
Contribution by G 13,334 - (13,334) -
633,334 -0- (480,000) -0- (153,334) -0- -0-
Payment of creditors (480,000) - 480,000 - - - -
153,334 -0- -0- -0- (153,334) -0- -0-
Distribution to K (153,334) - - 153,334 - -

Postliquidation
balances -0- -0- -0- -0- -0- -0- -0- -
82
Chapter 4

KGB Partnership
Schedule of Distribution of Personal Assets
June 30, 2008

. K G B
Personal assets, excluding partnership
capital and loan interests 500,000 600,000 700,000
Personal liabilities (460,000) (480,000) (650,000)
Personal net worth, excluding
partnership capital and loan
interests 40,000 120,000 50,000
Contribution to partnership (13,334)
Distribution from partnership 153,334 -0- - -0- -
Personal capacity 193,334 106,666 -0- -
Partnership Liquidation by Installment 83

CHAPTER 5

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

5-1: b
RJ SJ TJ
Capital balances before liquidation P22,000 P30,000 P 8,000
Loan balances _10,000 ______– ______–
Total interest 32,000 30,000 8,000
Possible loss (40,000+10,000) ( 25,000) ( 15,000) ( 10,000)
Balances 7,000 15,000 ( 2,000)
Additional loss to RJ & SJ, 5:3 ( 1,250) ( 750) __2,000
Cash distribution P 5,750 P14,250 P –

5-2: a
AR BR CR DR
Capital balances P 5,500 P 5,150 P 6,850
P 4,500
Loan balances _1,000 _____– _____–
_____–
Total interest 6,500 5,150 6,850 4,500
Possible loss (23,000-6,000) ( 6,800) ( 5,100) ( 3,400)
( 1,700)
Balances ( 300) 50 3,450 2,800
Additional loss to BR, CR, DR, 3:2:1 ___300 ( 150) ( 100)
( 50)
Balances – ( 100) 3,350 2,750
Additional loss to CR & DR, 2:1 _____– ___100 _( 67)
_( 33)
Payment to partners P – P – P 3,283
P 2,717

Total liabilities P 1,000


Total Capital _22,000
Total Assets P23,000

5-3: c
BALANCES
DD EE FF GG
Capital balances P40,000 P30,000 P15,000
P25,000
Loan balances 5,000 10,000 – –
Advances _____– _____– ( 4,500) ( 2,
500)
Total interest 45,000 40,000 10,500
22,500
Divided by P/L Ratio ____50% ____30% ____10%
____10%
Loss Absorption balances 90,000 133,333 105,000
225,000
PI - TO GG – _____– _____– ( 91,667) __ __–
Balances 90,000 133,333 105,000
133,333
PII - TO EE & GG, 30:10 _____– ( 28,333) _____–
( 28,333)
Balances 90,000 105,000 105,000
10,500
PIII - TO EE, FF, GG, 3:1:1 _____– (15,000) ( 15,000)
( 15,000)
Balances P90,000 P90,000 P90,000
P90,000
PIV - P/L Ratio

84
Chapter 5

CASH PAYMENT
DD EE FF GG
PI - To GG – – –
P 9,167
PII - To EE (28,833 X 30%) – P 8,433 – –
GG (28,833 X 10%) – – – 2,833
PIII –To EE (15,000 X 30%) – 4,500 – –
FF (15,000 X 10%) – – 1,500 –
GG (15,000 X 10%) _____– _____– _____–
__1,500
Total – P12,933 P 1,500
P13,500
PIV - P/L Ratio

DD EE FF GG
Distribution of P18,000
PI - TO GG – – –
P 9,167
PII - TO EE & GG, 3:1, P8,833 _____– _6,625 _____–
__2,208
Cash distribution – P 6,625 –
P11,375

5-4: a
TAN LIM WAN
Capital balances before liquidation P40,000 P65,000 P48,000
Loss on realization, P40,000 ( 16,000) ( 16,000) ( 8,000)
Capital balances before cash distribution 24,000 49,000 40,000
Possible loss, P90,000 ( 36,000) ( 36,000) ( 18,000)
Balances ( 12,000) 13,000 22,000
Additional loss to Lim & Wan, 4:2 _12,000 ( 8,000) ( 4,000)
Cash distribution P – P 5,000 P18,000
5-5: b
TAN LIM WAN
Capital balances before cash distribution P24,000 P49,000 P40,000
Possible loss (90,000+3,000) ( 37,200) ( 18,600) ( 18,600)
Balances ( 13,200) 30,400 21,400
Additional loss to Lim & Wan, 4:2 _13,200 ( 8,800) _( 4,400)
Cash distribution P – P21,600 P17,000

5-6: d
Tan (14,000 X 40%) P5,600
Lim (14,000 X 40%) P5,600
Wan (14,000 X 20%) P2,800

5-7: a
CARPIO LOBO
Capital balances before liquidation P72,000 P54,000
Goodwill written-off ( 5,000) ( 5,000)
Cash balance 67,000 49,000
Possible loss (100,000+10,000), 110,000 ( 55,000) ( 55,000)
Capital balances before liquidation 12,000 ( 6,000)
Additional loss to Carpio ( 6,000) __6,000
Cash distribution P 6,000 P –
Partnership Liquidation by Installment 85

5-8: d
JACOB SANTOS
HERVAS
Capital balances before liquidation P40,000 P72,000
P 7,000
Loss on realization (120,000-90,000) ( 15,000) ( 9,000)
( 6,000)
Liquidation expenses, P2,000 ( 1,000) ( 600)
( 400)
Capital balances before cash distribution 24,000 62,400
63,600
Loan balances __8,000 _____–
_____–
Total interest 32,000 62,400
63,600
Possible Loss (210,000-120,000) ( 45,000) 27,000
( 18,000)
Balances ( 13,000) 35,400
45,600
Additional loss to Santos & Hervas _13,000 ( 7,800)
( 5,200)
Cash distribution P – P27,600
P40,400

5-9: d
A B C D
Capital balances before liquidation P16,200 P12,000 P37,700
P17,700
Salary payable– _____– ___160 ___240
_______
Balances 16,200 12,000 37,860( 17,9
40)
Loss on realization (P2,400) ( 600) ( 600) ( 600)
( 600)
Balances 15,600 11,400 37,260
17,340
Liquidation expenses (P600) ( 150) ( 150) ( 150)
( 150)
Balances 15,450 11,250 37,110
17,190
Loan balances 12,000 14,400 _____–
__9,600
Total interest 27,450 25,650 37,110
26,790
Possible Loss (126,000-18,000) ( 27,000) ( 27,000) ( 27,000)
( 27,000)
Balances 450 ( 1,350) 10,110( 21
0)
Additional loss to A & C ( 780) __1,350 ( 780)
____210
Balances ( 330) – 9,330 –
Additional loss to C ___330 _____– ( 330)
_____–
Cash distribution P – P – P 9,000 P

5-10: a
BALANCES
DY SY LEE
Total interest P22,000 P15,500 P14,000
Profit and Loss ratio 2/4 1/4 1/4
Loan absorption balances 44,000 62,000 56,000
Priority I - to Sy _____– ( 6,000) _____–
Balances 44,000 56,000 56,000
Priority II - to Sy & Less _____– ( 12,000) ( 12,000)
Total P44,000 P44,000 P44,000

CASH PAYMENTS
DY SY LEE
Priority I - to Sy (6,000 X 1/4) – 1,500 –
Priority II - to Sy (12,000 X 1/4) – 3,000 –
to Lee (12,000 X 1/4) _____– _____– _3,000
Total P – P 4,500 P 3,000
86
Chapter 5

Further cash distribution, profit and loss ratio


Cash distribution to Dy P 6,250
Divided by Dy's Profit and Loss ratio 2/4
Amount in excess of P7,560 12,500
Total payment under priority I & II __7,500
Total cash distribution to partner P20,000

5-11: d

Cash before liquidation P12,000


Cash realized _32,000
Total 44,000
Less: Payment of liquidation expense P 1,000
Payment of liability 5,400
Payment to partners (Q 5-10) 20,000 _26,400
Cash withheld P17,600

5-12: c

Loss absorption balances:


Cena (18,000/50%) P36,000
Batista (27,000/30%) 90,000
Excess of Batista 54,000
Multiply by Batista's Profit & Loss ratio ____30%
Priority I to Batista P16,200

5-13: c BALANCES
AA BB CC
Capital balances P15,000 P30,000 P10,000
Loan balances 10,000 _5,000 10,000
Total interest 25,000 35,000 20,000
Divided by Profit and Loss Ratio 2/5 2/5 1/5
Loss Absorption balances 62,500 87,520 100,000
Priority I to CC _____– _____– ( 12,500)
Balances 62,500 87,520 100,000
Priority II to BB & CC, 2:1 _____– ( 25,000) ( 25,000)
Total interest P62,500 P62,500 P62,500

CASH PAYMENTS
AA BB CC
Priority I to CC (12,500 X 1/5) – – 2,500
Priority II to BB (25,000 X 2/5) – 10,000 –
to CC (25,000 X 1/5) ____– _____– _5,000
Total P – P10,000 P 7,500
Priority III – P/L Ratio
Cash distribution to CC:
Priority I P2,500
Priority II (12,000-2,500) X 1/3 3,167
Total cash paid to CC P5,667
Partnership Liquidation by Installment 87

5-14: c
BALANCES
JJ KK LL MM
Capital balances P 60,000 P 64,500 P 54,000
P 30,000
Loan balances _18,000 _30,000 ______–
______–
Total interest _78,000 _94,500 _54,000
_30,000
Divided by Profit and Loss Ratio ____40% _____35% _____15%
_____10%
Loss Absorption balances 195,000 270,000 360,000
300,000
Priority I to LL ______– ______– ( 60,000)
______–
Balances 195,000 270,000 300,000
300,000
Priority II to LL, MM, 15:10 ______– ______– ( 30,000)
( 30,000)
Balances 195,000 270,000 270,000
270,000
Priority II to KK, LL, MM, 35:15:10 ______– ( 75,000) ( 75,000)
( 75,000)
Total P195,000 P195,000 P195,000
P195,000

CASH PAYMENT
JJ KK LL MM
Priority I to LL (30,000 X 15%) – – 9,000 –
Priority II to LL (30,000 X 15%) – – 4,500 –
to MM (30,000 X 10%) – – – 3,000
Priority II to KK (75,000 X 35%) – 1,750 – –
to LL (75,000 X 15%) – – 11,250 –
to MM (75,000 X 10%) ______– ______– ______–
___7,500
Total P – P 1,750 P 24,750
P 10,500

Further cash distribution, Profit and Loss ratio

Cash distribution to Partners (P38,100-9,000), P29,100

JJ KK LL MM TOTAL
Priority I to LL – – P 9,000 –
P 9,000
Priority II to LL, MM, 15:10 – – 4,500 3,000 7,500
Priority II to KK, LL, MM, 35:15:10
(29,100-16,500), 12,600 _____– __7,350 ___3,150 __2,100
__12,600
Cash distribution P – P 7,350 P 16,650 P 5,100
P 29,100

5-15: a
BALANCES
ARCE BELLO CRUZ
Capital balances P 20,000 P 24,900 P 15,000
Loan balances _10,000 ______– ______–
Total interest _32,000 _24,900 _15,000
Divided by Profit and Loss Ratio _____50% _____30% _____20%
Loss Absorption balances 64,000 83,000 75,000
Priority I to Bello ______– ( 8,000) ______–
Balances 64,000 75,000 75,000
Priority II to Bello & cruz, 3:2 ______– ( 11,000) ( 11,000)
Total P 64,000 P 64,000 P 64,000

88
Chapter 5

CASH PAYMENTS
ARCE BELLO CRUZ
P - I to Bello (8,000 X 30%) – 2,400 –
P - II to Bello (11,000 X 30%) – 3,300 –
to Cruz (11,000 X 20%) _____– _____– _2,200
Total P – P 5,700 P2,200

Further Cash distribution, Profit and Loss ratio


Based on the above cash priority program, the P2,000 is only a partial payment to Bello who
is entitled to a maximum of P2,400 under Priority I. Only after satisfying Priority I, Cruz will
receive payment and only after P7,900 has been distributed to Bello and Cruz will Arce receive
payment. Therefore no payments are made to Arce and Cruz.

5-16: a

Cash paid to Arce P2,000


Divide by Profit & Loss ratio _____5%
Amount in excess of P7,900 40,000
Add: cash paid under PI and PII _7,900
Total cash distribution to partners 47,900
Cash paid to Creditor (30,000-10,000) 20,000
Total 67,900
Less cash before realization _6,000
Cash realized from sale of asset P61,900

5-17: b

Cash distribution to Cruz P 6,200


Divide by profit and loss ratio 2/5
Cash distribution under Priority II 15,500
Multiply by Bello's Profit and Loss ratio 3/5
Cash distribution to Bello under Priority II 9,300
Cash distribution to Bello under Priority I __2,400
Total cash distribution to Bello P11,700

5-18: b
BALANCES CASH PAYMENT
MONZON NIEVA MONZON
NIEVA
Total Interest P22,500 P17,500
Profit and Loss ratio _____60% _____40%
Loss absorption balances 37,500 43,750
Priority I - to Nieka ______– ( 6,250) _____–
_2,500
Total P37,500 P37,500 P –
P2,500

Further cash distribution - Profit and Loss ratio

All the P2,000 should be paid Nieva, since she is entitled to P2,500 under Priority I
Partnership Liquidation by Installment 89

5-19: b
CASH MONZON NIEVA
Cash distribution P12,500 – –
PI to Nieva (2,500-2,000) ( 500) – 500
Balances, 6:40 _12,000 __7,200 _4,800
Cash distribution P – P 7,200 P5,300

5-20: a

Cash before liquidation P 5,000


June: Cash realized 18,000
Payment to creditor ( 20,000)
Payment to Partners __2,000
Cash balances, June 30 1,000
July: Cash realized 12,000
Payment of liquidation expense ( 500)
Payment to Partners ( 12,500)
Cash balances, July 31 –
Aug: Cash realized _22,500
Cash distribution for August,
Profit and Loss ratio P22,500

Distribution to Partners - August


Monzon (22,500 X 60%) P13,500

Nieva (22,500 x 40%) P 9,000


90
Chapter 5

SOLUTIONS TO PROBLEMS

Problem 5 – 1
Suarez, Tulio and Umali
Statement of Liquidation
January 1 to april 31, 2008

Assets Tulio, Umali, Partners' Capitals


Cash Others Liabilities Loan Loan Suarez (40%) tulio (35%)
Umali (25%)
Balances before liquidation. P 2,000.00 P46,000.00 P6,000.00 P5,000.00 P2,500.00 P14,450.00 P12,550.00
P7,500.00
January Installment:
Realization of assets and
distribution of loss.... 10,500.00 ( 12,000.00) _______ _______ ______ ( 600.00) ( 525.00)
( 375.00)
Balances......................... 12,500.00 34,000.00 6,000.00 5,000.00 2,500.00 13,850.00 12,025.00
7,125.00
Payment of expenses of
realization and distribution
to partners...................... ( 500.00) _______ _______ _______ _______ ( 200.00) ( 175.00)
( 125.00)
Balances......................... 12,000.00 34,000.00 6,000.00 5,000.00 2,500.00 13,650.00 11,850.00
7,000.00
Payment of liabilities..... ( 6,000.00) _______ ( 6,000.00) _______ _______ _______ ________
_______
Balances......................... 6,000.00 34,000.00 – 5,000.00 2,500.00 13,650.00 11,850.00
7,000.00
Payments to partners
(Schedule 1).............. ( 4,000.00) _______ _______ ( 3,812.50) ( 187.50) _______ _______
_______
Balances......................... 2,000.00 34,000.00 – 1,187.50 2,312.50 13,650.00 11,850.00
7,000.00
February Installment:
Realization of assets and
distribution of loss.... 6,000.00 ( 7,000.00) _______ _______ _______ __(400.00) ( 350.00)
( 250.00)
Balances......................... 8,000.00 27,000.00 – 1,187.50 2,312.50 13,250.00 11,500.00
6,750.00
Payment of expenses of
realization and distribution
to partners...................... ( 750.00) _______ ______ _______ _______ ( 300.00) ( 262.50)
( 187.50)
Balances......................... 7,250.00 27,000.00 – 1,187.50 2,312.50 12,950.00 11,237.50
6,562.50
Payments to partners
(Schedule 2).............. ( 6,000.00) _______ ______ ( 1,187.50) ( 1,812.50) ( 1,650.00) ( 1,350.00)
_______
Balances......................... 1,250.00 27,000.00 – – 500.00 11,300.00 9,887.50
6,562.50
March Installment:
Realization of assets and
distribution of loss.... 10,000.00 ( 15,000.00)______ ______ ______ ( 2,000.00) ( 1,750.00)
( 1,250.00)
Balances......................... 11,250.00 12,000.00 – – 500.00 9,300.00 8,137.50
5,312.50
Payment of expenses of
realization and distribution
to partners...................... ( 600.00) _______ ______ ______ _______ ( 240.00) ( 210.00)
( 150.00)
Balances......................... 10,650.00 12,000.00 – – 500.00 9,060.00 7,927.50
5,162.50
Payments to partners,
P & L ratio................( 10,150.00) ______ ______ ______ ( 500.00) ( 4,060.00) ( 3,552.50)
( 2,037.50)
Balances......................... 500.00 12,000.00 – – – 5,000.00 4,375.00
3,125.00
April Installment:
Realization of assets and
distribution of loss.... 4,000.00 ( 12,000.00)______ ______ ______ ( 3,200.00) ( 2,800.00)
( 2,000.00)
Balances......................... 4,500.00 – – – – 1,800.00 1,575.00
1,125.00
Payment of expenses of
realization and distribution
to partners...................... _(400.00) ______ ______ ______ ______ ___(160.00) ( 140.00)
( 100.00)
Balances......................... 4,100.00 – – – – 1,640.00 1,435.00
1,025.00
Final Payments to partnersP(41,100.00)_____– _____– _____– _____– P( 1,640.00) P( 1,435.00)
P(1,025.00)
Partnership Liquidation by Installment 91

Schedule 1

Suarez (40%) Tulio (35%)Umali (25%)


Capital balances...................................... P13,650.00 P11,850.00 P7,000.00
Loan balances......................................... _____ _– __5,000.00 _2,500.00
Total interests......................................... 13,650.00 16,850.00 9,500.00
Possible loss (P2,000 + P34,000)........... ( 14,400.00) ( 12,600.00) ( 9,000.00)
Balances.................................................. ( 750.00) 4,250.00 500.00
Additional loss to Tulio and Umali 35:25 ___750.00 ( 437.50) ( 312.50)
Payments to partners............................... – P 3,812.50 P 187.50
Apply to loan.......................................... __ __ – P 3,812.50 P 187.50
Schedule 2
Suarez (40%) Tulio (35%)Umali (25%)
Capital balances...................................... P12,950.00 P11,237.50 P6,562.50
Loan balances......................................... – __1,187.50 _2,312.50
Total........................................................ 12,950.00 12,425.00 8,875.00
Possible loss (P1,250 + P27,000)........... ( 11,300.00) ( 9,887.50) ( 7,062.50)
Payments to partners............................... P 1,650.00 P 2,537.50 P1,812.50
Apply to loan.......................................... – _1,187.50 _1,812.50
Apply to capital...................................... P 1,650.00 P 1,350.00 P

92
Chapter 5

Problem 5 – 2

Miller and Bell Partnership


Statement of Partnership Realization and Liquidation

Capital
Inven- Accounts Bell Miller Bell
Cash tory Payable Loan 80% 20%
Balances 25,000 120,000 15,000 60,000 65,000 5,000
Sale of inventory 40,000 ( 60,000) (16,000) (4,000)
Payment to
creditors (10,000) ______ (10,000) ______ ______ ______
55,000 60,000 5,000 60,000 49,000 1,000
Payments to
partners
(Schedule 1) (50,000) ______ ______ (49,000) _(1,000) ______
5,000 60,000 5,000 11,000 48,000 1,000
Sale of inventory 30,000 ( 60,000) (24,000) 6,000)
Payment to
creditors ( 5,000) ______ ( 5,000) ______ ______ ______
30,000 –0– –0– 11,000 24,000 (5,000)
Offset deficit
with loan ______ ______ ______ ( 5,000) ______ (5,000)
30,000 –0– –0– 6,000 24,000 –0–
Payments to
partners:
Loan ( 6,000) ( 6,000)
Capitals (24,000) ______ ______ ______ (24,000) ______
Balances –0– –0– –0– –0– –0– –0–

Schedule 1:
Miller and Bell Partnership
Schedule of Safe Payments to Partners

Miller Bell
80% 20%
Capital and loan balances 49,000 61,000
Possible loss of 60,000 on remaining inventory (48,000) (12,000)
Safe payment 1,000 49,000

Partnership Liquidation by Installment 93

Problem 5 – 3
HORIZON PARTNERSHIP
Statement of realization and Liquidation
May – July, 2008
Partners Capital
Assets SS TT PP
Cash Other Liabilities (1/3) (1/3) (1/3)
Balances before liquidation 20,000 280,000 80,000 60,000 70,000
90,000
May – sale of assets at a loss of P30,000 75,000 (105,000) ______ (10,000) (10,000)
(10,000)
Balances 95,000 175,000 80,000 50,000 60,000
80,000
Payment to creditors (80,000) ______ (80,000) ______ ______ ______
Balances 15,000 175,000 50,000 60,000
80,000
Payments to PP (Exhibit A) (15,000) ______ ______ ______ ______
(15,000)
Balances –0– 175,000 50,000 60,000
65,000
June – sale of assets at a loss of P36,000 25,000 (61,000) ______ (12,000) (12,000)
(12,000)
Balances 25,000 114,000 38,000 48,000
53,000
Payment to partners (Exhibit A) (25,000) ______ ______ ______ (10,000)
(15,000)
Balances –0– 114,000 38,000 38,000
38,000
July – sale of remaining assets at a loss of
P33,000 81,000 (114,000) (11,000) (11,000)
(11,000)
Balances 81,000 27,000 27,000
27,000
Payment to partners (81,000) (27,000) (27,000)
(27,000)

Exhibit A – Cash distributions to partners during liquidation:


SS TT PP

Capital account balances before liquidation 60,000 70,000


90,000
Income sharing ratio 1 1 1
Loss absorption balances 60,000 70,000
90,000
Required reduction to bring
capital account balance for PP
to equal the next highest balance for TT – PI. ______ ______
(20,000)
Balances 60,000 70,000
70,000
Required reduction to bring the balances for
TT and PP to equal the balance for SS – PII. ______ (10,000)
(10,000)
Balances 60,000 60,000
60,000

Summary of cash distribution program:


To creditors before partners receive anything 80,000
To partners:
(1) First distribution to PP 20,000
20,000
(2) Second distribution to TT and PP equally 20,000 10,000
10,000
(3) Any amount in excess of $120,000
to the three partners in income-
sharing ratio 1/3 1/3 1/3

b. After the cash distribution in June, the partners capital accounts had balances corresponding to the income-sharing
ratio (38,000 each). From this point on any cash payments to partners may be made in the income-sharing ratio or
equally in this problem. In other words, after the creditors are paid and TT and PP receive 10,000 and 30,000,
respective, any additional cash that becomes available may be paid to the three partners equally.

94
Chapter 5

Problem 5 – 4

1. X, Y and Z
Cash Priority Program
January 1, 2008

Balances Cash Payments


X Y Z X (50%) Y (30%) Z (20%)
Total
Capital balances.................................. P60,000 P45,000 P20,000
Loan balances..................................... 22,5000 15,000 6,500
Total interests..................................... P82,500 P60,000 P26,500

Loss absorption balances.................... P165,000 P200,000 P132,500


Priority I – to Y................................... (35,000) – P10,500 –
............................................................P10,500
Balances............................................. 165,000 165,000 132,500
Priority II – to X and Y....................... (32,500) (32,500) ________ P16,250 9,750 –
............................................................26,000
Total................................................... P132,500 P132,500 P132,500 P16,250 P20,250 –
............................................................P36,500

Any amount in excess of P36,500....... 50% 30% 20%


............................................................100%

2. January
Cash X Y Z
Available for distribution............................... P 7,500
Priority I – to Y.............................................. ( 7,500) P 7,500
Payment to partner......................................... – P 7,500 –

February....................................................... Cash X Y Z
Available for distribution............................... P20,000
Priority I – to Y (P10,500 – P7,500)............. ( 3,000) P 3,000
Priority II – to X and Y; 5:3........................... ( 17,000)P10,625 6,375 _____
Payments to partners...................................... P10,625 P 9,375 –

March............................................................ Cash X Y Z
Available for distribution............................... P45,000
Priority II – to X and Y; 5:3
(P26,000 – P17,000)................................. ( 9,000) P 5,625 P 3,375
Excess; 5:3:2.................................................. ( 36,000) 18,000 10,800 P7,200
Payments to partners...................................... P23,625 P14,175 P7,200

April.............................................................. Cash X Y Z
Available for distribution............................... P15,000
Excess; 5:3:2.................................................. ( 15,000) P 7,500 P 4,500 P3,000
Payments to partners...................................... P 7,500 P 4,500 P3,000

Partnership Liquidation by Installment 95

Problem 5 – 5
AB, CD & EF Partnership
Statement of Partnership Realization and Liquidation

Capital
Able Other Accounts CD AB CD EF
Cash Loan Assets Payable Loan 50% 30%
20%
Balances before liquidation 18,000 30,000 307,000 53,000 20,000 118,000 90,000
74,000
January transactions:
1. Collection of accounts
receivable at loss
of 15,000 51,000 ( 66,000) ( 7,500) ( 4,500)
( 3,000)
2. Sale of inventory at
loss of 14,000 38,000 ( 52,000) ( 7,000) ( 4,200)
( 2,800)
3. Liquidation expenses paid ( 2,000) ( 1,000) ( 600)
( 400)
4. Share of credit memorandum ( 3,000) 1,500 900
600
5. Payments to creditors ( 50,000) _____ ______ (50,000) _____ ______ _____
______
55,000 30,000 189,000 -0- 20,000 104,000 81,600
68,400
Sale payments to partners
(Schedule 1 ( 45,000) ______ _____ ______ (20,000) ______ ( 6,600)
(18,400)
10,000 30,000 189,000 -0- -0- 104,000 75,000
50,000
February transactions:
6. Liquidation expenses paid ( 4,000) ______ ______ ______ ______ ( 2,000) ( 1,200)
( 800)
6,000 30,000 189,000 -0- -0- 102,000 73,800
49,200
Safe payments to partners
(Schedule 2) -0- _____ ______ ______ ___ –0– –0–
–0–
6,000 30,000 189,000 -0- -0- 102,000 73,800
49,200
March transactions:
8. Sale of mac. & equip. at a
loss of 43,000 146,000 (189,000) ( 21,500) (12,900)
( 8,600)
9. Liquidation expenses paid ( 5,000) ______ _______ ______ ______ ( 2,500) ( 1,500)
( 1,000)
147,000 30,000 -0- -0- -0- 78,000 59,400
39,600
10. Offset AB's loan
receivable against capital (30,000) ( 30,000)
Payments to partners (147,000) ______ _______ ______ ______ ( 48,000) (59,400)
(39,600)
Balances at end of liquidation –0– –0– –0– –0– –0– –0– –0– –0–

96
Chapter 5

Partnership
Schedules of Safe Payments to Partners

AB CD EF
Schedule 1: January 50% 30% 20%
Capital and loan balancesa P74,000 P101,600 P68,400
Possible loss:
Other assets (189,000) and possible liquidation
costs (10,000) ( 99,500) ( 59,700) ( 39,800)
Balances ( 25,500) 41,900 28,600
Absorption of AB's potential deficit balance 25,500
CD : (25,500 x 3/5 = 15,300) ( 15,300)
EF : (25,500 x 2/5 = 10,200) ______ _______ ( 10,200)
Safe payment P -0- P 26,600 P 18,400
a = (104,000) capital less 30,000 loan receivable
= (81,600) capital plus 20,000 loan payable
= (68,400) capital
Schedule 2: February
Capital and loan balancesb 72,000 73,800 49,200
Possible loss:
Other assets (189,000) and possible liquidation
costs (6,000) ( 97,500) ( 58,500) ( 39,000)
( 25,500) 15,300 10,200
Absorption of AB's potential deficit balance 25,500
CD : (25,500 x 3/5 = 15,300) ( 15,300)
EF : (25,500 x 2/5 = 10,200) _______ ________ ( 10,200)
Safe payment –0– –0– –0–
b = (102,000) capital less 30,000 loan receivable
= (73,800) capital
= (49,200) capital

Partnership Liquidation by Installment 97

Problem 5 – 6

1. M, N, O and P
Cash Priority Program
January 1, 2008

Balances Cash Payments


M N O P M (3/8) N (3/8) O (1/8) P (1/8)
Total
Capital balances. .P 70,000 P 70,000 P 30,000 P 20,000
Loan balances... 20,000 5,000 25,000 15,000
Total interests......P 90,000 P 75,000 P 55,000 P 35,000

Loss absorption
balances..........P240,000 P200,000 P440,000 P280,000
Priority I – to O... _______ _______ ( 160,000) ________ – – P20,000 –
P20,000
Balances.............. 240,000 200,000 280,000 280,000
Priority II – to O
and P............... _______ _______ ( 40,000) ( 40,000) – – 5,000 P5,000
10,000
Balances.............. 240,000 200,000 240,000 240,000
Priority III – to
M, O and P.....( 40,000) _______ ( 40,000) ( 40,000)P15,000 – 5,000 5,000
25,000
Total....................P200,000 P200,000 P200,000 P200,000P15,000 – P30,000 P10,000
P55,000

Any amount in excess of P55,000 3/8 3/8 1/8 1/8


8/8

2.
Schedule 1

Cash M N O P
Available for distribution..................... P25,000
Priority I – to O.................................... ( 20,000) P20,000
Priority II – to O and P; 1:1.................. ( 5,000) ________ _______ 2,500 P2,500
Payments to partners............................ – – P22,500 2,500
Apply to loan........................................ ( 22,500) ( 2,500)
Apply to capital.................................... – – – –

Schedule 2

Cash M N O P
Available for distribution..................... P40,000
Priority II – to O and P; 1:1.................. ( 5,000 P 2,500 P2,500
Priority III – to M, O and P; 3:1:1........ ( 25,000) P15,000 5,000 5,000
Excess, 3:3:1:1..................................... ( 10,000) 3,750 P3,750 1,250
..............................................................1,250
Payments to partners............................ 18,750 P3,750 8,750 8,750
Apply to loan........................................ ( 18,750) ( 3,750) ( 2,500) ( 8,750)
Apply to capital – – P 6,250

98
Chapter 5

Problem 5 – 7

Bronze, Gold & Silver


Cash Distribution Plan
June 30, 2008
Loss Absorption Balances Capital and Loan Accounts
Bronze Gold Silver Bronze Gold Silver
Profit and loss ratio 50% 30%
20%
Pre-liquidation capital and
loan balances P55,000 P45,000
P24,000
Loss absorption balances
(Capital and loan
balances/P& L ratio) P110,000 P150,000 P120,000
Decrease highest LAB
to next highest:
Gold: (30,000 x .30) _______ ( 30,000) _______ ______ ( 9,000)
______
110,000 120,000 120,000 55,000 36,000
24,000
Decrease LAB's
to next highest:
Gold: (10,000 x .30) ( 10,000) ( 3,000)
Silver: (10,000 x .20) _______ ________ ( 10,000) _______ _______
_( 2,000)
P110,000 P110,000 P110,000 P 55,000 P 33,000 P
22,000

Summary of Cash Distribution


(If Offer of P100,000 is Accepted)

Accounts Bronze Gold Silver


Payable 50% 30% 20%
Cash available P106,000
First ( 17,000) P 17,000
Next ( 9,000) P 9,000
Next ( 5,000) 3,000 P 2,00
0
Additional paid in P&L ratio ( 75,000) _______ P37,500 22,500
15,000
P -0- P 17,000 P37,500 P34,500
P17,000

Partnership Liquidation by Installment 99

Problem 5 – 8
Part A
Balances Cash Payments
North South East West North South East
West
Total Interest (capital and loan
balances P120,000 P 88,000 P109,000 P 60,000
Divided by P/L ratio 30% 10% 20% 40%
Loss absorption potential P400,000 P880,000 P545,000 P150,000
Priority II – To South (335,000) ________ 33,500
Balances 400,000 545,000 545,000 150,000
Priority II – To South and East, 10:20 (145,000) (145,000) 14,500 29,000
Balances 400,000 400,000 400,000 150,000
Priority III – To North, South, and
east 30:10:20 (250,000) (250,000) (250,000) ______ 75,000 25,000 50,000
_____
Total 150,000 150,000 150,000 150,000 75,000 73,000 79,000

Further cash distribution – P/L ratio

Part B
(1) Cash 65,600
North capital (30% of P16,400 loss) 4,920
South capital (10%) 1,640
East capital (20%) 3,280
West capital (40%) 6,560
Accounts receivable 82,000
To records collection of receivables with losses allocated to partners.

(2) Cash 150,000


North capital (30% x P103,000) 30,900
South capital (10%) 10,300
East capital (20%) 20,600
West capital (40%) 41,200
Property and equipment 253,000
To record sale of property and equipment.

(3) North capital 31,800


South capital 58,600
East capital 35,000
West capital 15,200
Cash 140,600
To record cash installment to partners of P230,600 based on the cash distribution plan in Part A.

First P90,000 is held to pay liabilities (P74,000) and estimated liquidation expenses of P16,000.
Next P33,500 goes entirely to South.
Next P43,500 is split between to South (P14,500) and East (P29,000).
Remaining P63,600 is allocated to North (P31,800), South (P10,600) and East (P21,200)

(4) Liabilities 74,000


Cash 74,000
To record payment of liabilities.

100
Chapter 5

(5) Cash 71,000


North capital (30% of P30,000 loss) 9,000
South capital (10%) 3,000
East capital (20%) 6,000
West capital (40%) 12,000
Inventory 101,000
To record inventory sold.

(6) North capital 35,500


South capital 11,833
East capital 23,667
Cash 71,000
To record distribution of cash according to cash distribution plan. Although P87,000 cash
is being held, P16,000 must be retained to pay liquidation expenses. The Remaining
P71,000 is divided among North, South, and East on a 30:20 basis.

(7) North capital (30% of expenses) 3,300


South capital (10%) 1,100
East capital (20%) 2,200
West capital (40%) 4,400
Cash 11,000
To record liquidation expenses paid.

(8) North capital (30/60 of deficit) 2,080


South capital (10/60) 693
East capital (10/60) 1,387
West capital 4,160
To eliminate capital deficiency of West as computed below:

North South East West


Capital balances, beginning P120,000 P88,000 P109,000 P60,000
Loss on accounts receivable (4,920) ( 1,640) ( 3,280) ( 6,560)
Loss on property and equipment (30,900) (10,300) (20,600) (41,200)
Cash distribution (31,800) (58,600) (50,200) –0–
Liquidation expenses ( 3,300) ( 1,100) ( 2,200) ( 4,400)
Subtotal 4,580 1,527 3,053 ( 4,160)
Elimination of West deficiency ( 2,090) ( 693) ( 1,666) 4,160
Capital balances P 2,500 P 834 P 1,666 P –0–

(9) North capital 2,500


South capital 834
East capital 1,666
Cash 5,000
To record final cash distribution.
Partnership Liquidation by Installment 101

Problem 5 – 9

DR Company
Schedule of Safe Payments to Partners

Dan Red Ben


(40%) (30%) (30%)

Capital and loan balances, August 1, 2008 (42,000) (45,000) (17,000)


Write-off of P24,000 in goodwill 9,600 7,200 7,200
Write-off of P12,000 of receivables 4,800 3,600 3,600
Gain of P6,000 on sale of P32,000 of
inventory (one-half of P64,000 book
value) (2,400) (1,800) (1,800)
Capital and loan balances, August 31, 2008 (30,000) (36,000) (8,000)
Possible loss of P16,000 for remaining
receivables and P32,000 for
remaining inventory 19,200 14,400 14,400
Possible liquidation costs of P4,000 1,600 1,200 1,200
Balances (* = deficit) (9,200) (20,400) 7,600*
Distribute Ben’s potential deficit (7,600)
To Dan: P7,600 x 40/70 4,343
To Red: P7,600 x 30/70 3,257 -
Safe payments to partners (4,857) (17,143) -0- -

Of the P84,000 in cash at the end of August, P58,000 will be required to liquidate the debts to
outside creditors, and P4,000 must be held in reserve to pay possible liquidation costs. Thus, a
total of P22,000 in cash can be safely distributed to partners as of August 31, 2008.

Problem 5 – 10

(1) Journal entry to record Jenny’s contribution:

Cash 40,000
Equipment 60,000
Jenny, capital 100,000

Journal entry to record Kenny’s contribution:

Cash 60,000
Inventory 10,000
Equipment 180,000
Notes payable 50,000
Kenny, capital 200,000
102
Chapter 5

(2) Capital balances of Jenny and Kenny before admission of Lenny:

Jenny Kenny
Beginning capital balance P100,000 P200,000
Interest on beginning capital balance 10,000 20,000
Annual salary 15,000 20,000
Remainder 48,000 72,000
Ending capital balance P173,000 P312,000

Explanation:
Each partner receives 10% on beginning capital balance. Each partner receives
her respective income (P15,000 to Jenny and P20,000 to Kenny). The amount distributed
thus far is P65,000. The remainder to be distributed is P120,000 (P185,000 – 30,000 –
35,000). Two-fifths of this remainder of P129,000 (48,000) is allocated to Jenny; 3/5 x
P120,000 (72,000) is allocated to Kenny. The total income allocated to Jenny and Kenny
is P73,000 and P112,000 respectively.
The admission of Lenny can now be recorded by the following entry:

Cash 175,000
Lenny, capital 110,000
Jenny, capital 26,000
Kenny, capital 39,000

Explanation:
The book value of the partnership after the income distribution in 2006 was
P485,000 (P173,000 + P312,000). After Lenny’s contribution, the value of the
partnership is P485,000 + P175,000 = P660,000. A one-sixth interest in the partnership is
P660,000 x 1/6 = P110,000. Using the bonus method, we compute a bonus of P175,000 –
P110,000 = P65,000. Using the 2:3 profit sharing ratio, the amount allocated to Jenny is
P26,000 (2/5 x P65,000) and the amount allocated to Kenny is P39,000 (3/5 x P65,000).

(3) Schedule of Safe Payments


Jenny Kenny Lenny
Capital balances P200,000 P400,000 P200,000
Partner’s loan (50,000)
Gain on realization 9,000 15,000 6,000
Possible loss (156,000) (260,000) (104,000)
Safe payments to partners P 53,000 P105,000 P102,000

Explanation:
The sale of assets realized a gain of P30,000 (P210,000 – P180,000) which is
distributed to the partners on the new profit sharing ratio: 30% to Jenny, 50% to Kenny,
and 20% to Lenny. Liabilities are paid. A possible loss on the unsold assets (P520,000) is
distributed to partners in their profit and loss ratio of 30:50:20 to Jenny, Kenny and
Lenny respectively.
Joint Venture 103
CHAPTER 6

SOLUTIONS TO MULTIPLE CHOICES

6-1: a
Assets per Jessica Company- balance sheet P3,550,000
Jessica’s proportionate interest in assets of JV (50%) 1,000,000
Total assets of Jessica P4550,000

6-2: a Total liabilities only of Jenny Co.

6-3: b

6-4: b
Investment of Heart P80,000
Profit share:
Sales 150,800
Cost of sales (150,800 ÷ 125%) 120,640
Gross profit 30,160
Expenses 10,000
Net Profit 20,160
Profit/loss ratio x 40% 8,064
Balance of investment in JV P88,064

6-5: a
Cash P190,000
Merchandise inventory 29,360
Accounts receivable 150,800
Total assets 370,160
Sweet Co’s, proportionate interest x 60%
Sweet Company’s share in total asset P222,096

6-6: a
Sales 7,200
Cost of sales
Purchases P10,000
Merchandise inventory, end (50% of P10,000) __5,000 _5,000
Gross profit 2,200
Expenses ___500
Net profit P 1,700

104
Chapter 6
6-7: b
Original investment (cash) P10,000
Profit share (P1,700 / 2) ___850
Balance of Investment account P10,850

6-8: a
Joint venture account before profit distribution (credit balance) P 9,000
Unsold merchandise __2,500
Joint venture profit before fee to Salas P11,500

Joint venture profit after fee to Salas (P11,500 / 115%) P10,000

6-9: b
Fee of Salas (P10,000 x 15%) P 1,500
Profit share of Salas (P10,000 x 25%) _2,500
Total P 4,000

6-10: b
Salas Salve
Balance before profit distribution P 500 (dr) P 2,000 (cr)
Profit share:Sabas (P10,000 x 40%) 4,000
Salve (P10,000 x 35%) ______ _3,500
Balance P 3,500 (cr) P 5,500 (cr)

6-11: d
Joint venture account balance before profit distribution (debit) P 6,000
Joint venture profit (P4,500 x 3) _13,500
Cost of unsold merchandise (inventory) taken by Dante P19,500

6-12: b
Edwin Capital:
Debits: Balance before profit distribution P14,000
Credits: Profit share __4,500
Due from Edwin (debit balance) P 9,500

Joint Venture 105


Settlement to Ferdie (Balance of capital account)
Debits: P –0–
Credits: Balance before profit distribution P16,000
Profit share __4,500 _20,500
Due to Ferdie (credit balance) P20,500

Settlement to Dante (balance of JV Cash account)


Debits: Balance before cash settlement P30,000
Due from Edwin __9,500 P39,500
Credits: Due to Ferdie _20,500
Balance P19,000

6-13: a
JV account balance before profit distribution (cr) P 4,600
Unsold merchandise (required dr balance after profit distribution) __2,000
Joint venture profit before fee to Jerry P 6,600
Joint venture profit after fee (P6,600 / 110%) __6,000
Fee to Jerry P 600

6-14: d
Harry Capital Isaac Capital
Balances before profit distribution (P 200) P 1,800
Profit distribution:
Harry P6,000 x 50%) 3,000
Isaac (P6,000 x 20%) 1,200
Cash settlements P 2,800 P 3,000

6-15: b
Sales P14,000
Cost of sales:
Merchandise inventory, beg (contributions) P14,000
Freight 300
Purchases __4,000
Goods available for sale P18,300
Merchandise inventory, end (P8,300/2) __4,150 14,150
Gross profit (loss) (150)
Expenses (P400 + P200) __600
Net profit (loss) P( 750)
6-16: c
Contributions to the Joint Venture (P5,000 + P8,000) P13,000
Loss share (P750 x 50%) ( 375)
Unsold merchandise taken (withdrawal) ( 4,150)
Final settlement to jack P 8,475

106
Chapter 6

SOLUTIONS TO PROBLEMS

Problem 6 – 1

Books of Blanco (Manager) Books of Ablan

JV Cash 100,000 Investment in JV 90,000


Joint Venture 90,000 Merchandise inventory 90,000
Cash 100,000
Ablan Capital 90,000

Joint Venture 60,000


JV cash 60,000

Joint Venture 20,000


JV cash 20,000

JV cash 200,000
Joint Venture 200,000

Computation of JV Profit

Total debit to JV P170,000


Total credit to JV P200,000
Credit balance (Profit) P 30,000

Distribution
Joint Venture 30,000 Investment in JV 15,000
Profit from JV 15,000 Profit from JV 15,000
Ablan capital 15,000

Ablan capital 105,000 Cash 105,000


JV cash 105,000 Investment in JV 105,000
Cash 155,000
JV cash 155,000
Joint Venture 107

Problem 6 – 2

Books of the Joint Venture

1. Computer equipment 105,000


Ella capital 60,000
Fabia capital 45,000

2. Purchases 80,000
Supplies 2,000
Diaz capital 82,000

3. Expenses 9,000
Diaz capital 9,000

4. Cash 150,000
Sales 150,000

5. Expenses 30,000
Cash 30,000

6. Merchandise inventory 20,000


Ella capital 20,000

7. Fabia capital 10,000


Cash 10,000

8. Adjusting and closing entries:

(a) Expenses 500


Supplies 500

(b) Sales 150,000


Income summary 150,000

Income summary 77,500


Merchandise inventory 2,500
Purchases 80,000

Income summary 39,500


Expenses 39,500

Distribution of profit:
Income summary 33,000
Diaz capital 11,000
Ella capital 11,000
Fabia capital 11,000
108
Chapter 6

Books of Diaz

(1) Investment in Joint Venture 82,000


Cash 82,000

(2) Investment in Joint Venture 9,000


Cash 9,000

(3) To record profit share:

Investment in Joint Venture 11,000


Profit from Joint Venture 11,000

Books of Ella:

(1) Investment in Joint Venture 60,000


Computer equipment 60,000

(2) Investment in Joint Venture 20,000


Merchandise inventory 20,000

(3) To record profit share:

Investment in Joint Venture 11,000


Profit from Joint Venture 11,000

Books of Fabia:

(1) Investment in Joint Venture 45,000


Computer equipment 45,000

(2) Cash 10,000


Investment in Joint Venture 10,000

(3) To record profit share:

Investment in Joint Venture 11,000


Profit from Joint Venture 11,000
Joint Venture 109

Problem 6 – 3

(1) No Separate Set of Joint Venture Books is Used

Books of Duran (Manager)

May 1: Joint Venture 12,500


Castro capital 12,000
Cash 500

7: JV cash 10,000
Bueno capital 10,000

26: Joint Venture 9,500


JV cash 9,500

30: JV accounts receivable 16,000


Joint Venture 16,000

June 30: JV cash 15,000


JV accounts receivable 15,000

27: JV cash 9,000


Joint Venture 9,000

30: To record unsold merchandise taken by Duran:

Merchandise inventory 3,000


Joint Venture 3,000

To record profit distribution:

Joint Venture 6,000


Profit from JV 2,000
Bueno capital 2,000
Castro capital 2,000

To record settlements:

Bueno capital 12,000


Castro capital 14,000
JV cash 24,500
Cash 1,500

Accounts receivable 1,000


JV accounts receivable 1,000
110
Chapter 6

Books of Bueno

May 7: Investment in Joint Venture 10,000


Cash 10,000

June 30: Investment in Joint Venture 2,000


Profit from Joint Venture 2,000

Cash 12,000
Investment in Joint Venture 12,000

Books of Castro

May 1: Investment in Joint Venture 12,000


Merchandise inventory 12,000

June 30: Investment in Joint Venture 2,000


Profit from Joint Venture 2,000

Cash 14,000
Investment in Joint Venture 14,000

(2) A Separate Set of Books is used:

Books of the Joint Venture

May 1: Merchandise inventory 12,500


Castro capital 12,000
Duran capital 500

7: Cash 10,000
Bueno capital 10,000

26: Purchases 9,500


Cash 9,500

30: Accounts receivable 16,000


Sales 16,000

June 20: Cash 15,000


Accounts receivable 15,000

27: Cash 9,000


Sales 9,000
Joint Venture 111

June 30: Closing entries:

Sales 25,000
Income summary 25,000

Income summary 19,000


Merchandise inventory, end 3,000
Merchandise inventory 12,500
Purchases 9,500

Distribution of profit:

Income summary 6,000


Bueno capital 2,000
Castro capital 2,000
Duran capital 2,000

Settlements to Venturers:

Bueno capital 12,000


Castro capital 14,000
Duran capital 2,500
Merchandise inventory 3,000
Accounts receivable 1,000
Cash 24,500

Books of Duran (Manager/Operator)

May 1: Investment in Joint Venture 500


Cash 500

June 30: Investment in Joint Venture 2,000


Profit from Joint Venture 2,000

Cash 2,500
Investment in Joint Venture 2,500

Books of Bueno and Castro (Same as in No. 1 requirement)


112
Chapter 6

Problem 6 – 4

(1) Books of Seiko (Manager/Operator)

April1: JV Cash 102,000


Notes payable – PNB 34,000
Roles capital 34,000
Timex capital 34,000

May: Joint venture 64,100


Cash 16,300
Rolex capital 7,800

June: Rolex capital 30,000


JV cash 30,000

Joint venture 111,400


Cash 37,400
Rolex capital 64,700
Timex capital 9,300

July: Cash 40,000


Rolex capital 15,000
Timex capital 10,000
JV cash 65,000

Joint venture 55,770


Cash 13,970
Rolex capital 31,240
Timex capital 10,560

August: Cash 45,000


Rolex capital 67,000
Timex capital 13,500
JV cash 125,500

Joint venture 30,600


Cash 9,730
Rolex capital 16,560
Timex capital 4,310

To record sales:

JV cash (P421,000 x 96%) 404,160


Joint venture 404,160
Joint Venture 113

To record payment of loan to PNB:

Notes payable – PNB 34,000


Rolex capital 34,000
Timex capital 34,000
Joint venture (Interest expense) 8,000
JV cash 110,000

To record distribution of profit:

Joint venture 134,290


Gain from JV (30%) 40,287
Rolex capital (60%) 80,574
Timex capital (10%) 13,429

Computed as follows:

Total debits tot he JV account P269,870


Total credits to the JV account _404,160
Gain (credit balance) P134,290

To record settlement:

Cash 32,687
Rolex capital 128,874
Times capital 14,099
JV cash 175,660

Computations:

Settlement to Rolex - Balance of capital account:

Debits: June P30,000


July 15,000
August 67,000
Payment of note payable _34,000 P146,000

Credits: April 1 P34,000


May 47,800
June 64,700
July 31,240
August 16,560
Profit share _80,574 __274,874

Credit balance P 128,874


114
Chapter 6

Settlement to timex – Balance of capital account

Debits: July P 10,000


August 13,500
Payment of loan __34,000 P 57,500

Credits: April 1 P 34,000


June 9,300
July 10,560
August 4,310
Profit share __13,429 _71,599

Credit balance P 14,099

Settlement to Seiko – Balance of JV cash account

Debits: April 1 P102,000


Loan proceeds _404,160 P506,160

Credits: June P 30,000


July 65,000
August 125,500
Payment of loan _110,000 _330,500
Balance of JV cash 175,660
Less:Settlement to Rolex P128,874
Settlement to Timex __14,099 _142,973
Settlement to Seiko P 32,687

(2) Partial Balance Sheet


June 30, 2008

Books of Seiko (Manager/operator)

Current assets:
Investment in joint Venture:
Joint Venture assets:
Cash P 72,000
Joint Venture _175,500 P247,500
Less:Equity of other venturers
(P116,500 + P43,300) _159,800 87,700

Current liabilities:
Notes payable – PNB 34,000
Joint Venture 115

Computation of balances as of June 30, 2008:

JV Cash Joint Venture


April 1 P102,000 P30,000 June May P 64,100
Balance P 72,000 June _111,400
Balance P175,500

Notes Payable Rolex capital


P34,000 April June P 30,000 P 34,000 April 1
47,800 May
_______ __64,700 June
P 30,000 P146,500
P116,500

Timex capital
P34,000 April
__9,000 June
P43,300

Problem 6 – 5

Consolidated Balance Sheet

Cash P 61,000
Receivables 122,000
Inventory 102,500
Other assets __40,500
Total assets P326,000

Accounts payable P 61,000


Other liabilities 96,500
Capital stock 50,000
Retained earnings _118,500
Total liabilities and stockholders' equity P326,000

Consolidated Income Statement

Sales P246,750
Cost of sales _124,750
Gross profit 122,000
Operating expenses __58,250
Consolidated net income P 63,750

116
Chapter 6

Problem 6 –6

(a) Journal entries on venture books

June 15: Cash 1,000,000


MacDo 1,000,000
Initial contribution at 6%

July 1: Land 2,400,000


Mortgage payable 1,650,000
Cash 750,000
Purchased land for cash and 6% mortgage.

Aug 1: Cash 1,100,000


MacDo 1,100,000
Additional contribution at 6%.

Land 950,000
Cash 950,000
Paid for improvements.

Sept 30: Mortgage payable 250,000


Interest expense- Mortgage 3,750
Cash 253,750
Reduced mortgage and paid interest.

Oct 31: Mortgage payable 400,000


Interest expense- Mortgage 8,000
Cash 408,000
Reduced mortgage and paid interest.

Nov 30: Mortgage payable 300,000


Interest expense- Mortgage 7,500
Cash 307,500
Reduced mortgage and paid interest.

Dec 31: Mortgage payable 200,000


Interest expense- Mortgage 21,000
Cash 221,000
Reduced mortgage and make semi-annual
interest payment.
Joint Venture 117

31: Cash 2,600,000


Sales 2,600,000
Sales to date.

31: Commissions 130,000


Cash 130,000
P2,600,000 x 5%

31: Expenses 628,100


Cash 628,100
Paid expenses

31: Interest expense- Venturer 60,000


MacDo 60,000
6% on P1,000,000 from June 15 to
December 31, and on P1,100,000
from August 1 to December 31.

31: Sales 2,600,000


Land (cost of land sold) 1,145,000
Expenses 628,100
Commissions 130,000
Interest expense- mortgage 40,250
Interest- venturer 60,000
Income summary 596,650
To close income and expense accounts.

31: Income summary 596,650


MacDo 596,650
MacEn 238,660
To divide gain, 60:40.

31: MacDo 801,650


Cash 801,650
Payment on account.

(b) Journal entries on MacDo’s books:

June 15: Investment in Joint Venture 1,000,000


Cash 1,000,000
Initial contribution.
Aug 1: Investment in Joint Venture 1,100,000
Cash 1,100,000
Additional contribution.

118
Chapter 6

Dec 31: Investment in Joint Venture 60,000


Interest income 60,000
Interest earned on cash advanced.

31: Investment in Joint Venture 357,990


Gain on Joint Venture 357,990
60% of gain on venture.

31: Cash 801,650


Investment in Joint Venture 801,650
Repayment in part of advances.

(c) MacDo and MacEn Joint Venture


Income Statement
For the period from June 15 to December 31, 2008

Sales P2,600,000
Cost of land sold:
Land P2,400,000
Improvements 950,000
Total P3,350,000
Unsold land 2,205,000 1,145,000
Gross profit 1,455,000
Expenses:
Advertising and office expenses P 628,100
Interest on mortgage 40,250
Interest on advances 60,000
Commissions 130,000 858,350
Net gain P 596,650

Distributions:
MacDo (P596,650 x 60%) P 357,990
MacEn (P596,650 x 40%) 238,660

Mac Do and MacEn Joint Venture


Balance Sheet
December 31, 2008

Assets
Cash P 250,000
Land 2,205,000
Total Assets P2,455,000

Liabilities and equity:


Mortgage payable P 500,000
MacDo 1,716,340
MacEn 238,660
Total liabilities and equity P2,455,000
Joint Venture 119

Venturers equity (interest)


MacDo MacEn Total
Invested P2,100,000 P2,100,000
Shares:
Gain P 357,990 P238,660 P 596,650
Interest on advances 60,000 60,000
Commissions 130,000 130,000
Total 417,990 368,660 786,650
Balances 2,517,990 368,660 2,886,650
Withdrawn (801,650) (130,000) (931,650)
Equity (interests) P1,716,340 P238,660 P1,955,000
120
Chapter 7

CHAPTER 7

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

7-1: c

Amount realized secured by inventory P 30,000


Unsecured claim (P10,000 x 25%) __2,500
Total amount received P 32,500

7-2: d
Amount realized secured by inventory P120,000
Unsecured claim (P88,000 x 75%) __66,000
Total amount received P186,000

7-3: d (P15,000,000 + P200,000)

7-4: a
Realizable value:
Current assets P 50,000
Land and building P240,000
Less mortgage payable _200,000 __40,000
Total 90,000
Less accounts payable _160,000
Estimated deficiency to unsecured creditors P 70,000

7-5: c
Total realizable value to unsecured creditors (P90,000)/total unsecured
Claims (P160,000) = 56.25%

7-6: a
Free assets:
Current assets P 33,000
Buildings and equipment _110,000
Total P143,000

Liabilities with priority:


Administrative expenses P 20,000
Salary payable 6,000
Income taxes __8,000
Total P 34,000

Corporation in Financial Difficulty – Liquidation 121

Free assets after payment of liabilities with priority:


(P143,000 – P34,000) P109,000
Unsecured liabilities
Notes payable P 30,000
Accounts payable 83,000
Bonds payable __70,000
Total P183,000

Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60%

Payment of notes payable:


Value of security (land) P 90,000
60% of remaining P30,000 __18,000
Total collected P108,000

7-7: c
Free assets:
Other assets P 80,000
Excess from assets pledged with secured
Creditors (P116,000 – P70,000) __46,000
Total P126,000

Liabilities with priority P 42,000


Free assets after payment of liabilities with priority
(P126,000 – P42,000) P 84,000
Unsecured liabilities:
Excess of partially secured liabilities over pledge
Assets (P130,000 – P50,000) P 80,000
Unsecured creditors _200,000
Total P280,000

Recovery percentage: P84,000 / P280,000 = 30%

Payment of partially secured debt:


Value of pledged assets P 50,000
30% of remaining P80,000 __24,000
Total collected P 74,000
122
Chapter 7

7-8: a
The holder of Debt Two will receive P100,000 from the sale of the pledged
asset. Since the holder wants to receive P142,000 out of the total debt of
P170,000, the company must be able to generate enough cash to pay off
60% of the unsecured liabilities (P42,000/P70,000) after paying 100% of
the liabilities with priority (P110,000).

Unsecured liabilities:
Unsecured creditors P230,000
Excess liability of Debt One in excess of pledged
Asset (P210,000 – P180,000) 30,000
Excess liability of Debt Two in excess of pledged
Asset (P170,000 – P100,000) __70,000
Total unsecured liabilities P330,000
Necessary percentage ____60%
Cash needed for these liabilities P198,000

In order for the holder of Debt Two to received exactly P142,000, the other free assets
must be sold for P308,000. With that much money, the liabilities with priority
(P110,000) can be paid with the remaining P198,000 going to the unsecured debts of
P330,000. This 60% figure would insure that the holder of Debt Two would get
P100,000 from the pledged asset and P42,000 (P70,000 x 60%) from the free assets.

7-9: c
Estate equity, beg. (P100,000 – P85,000) P 15,000
Loss on realization (P100,000 – P75,000) ( 25,000)
Unrecorded liabilities:
Interest expense P 250
Administrative expense 4,000 ( 4,250)
Estate deficit P( 14,250)

7-10: c
Total assets at net realizable value P 75,000
Fully secured liabilities (40,000)
Estimated administrative expense _( 4,000)
Estimated amount available P 31,000
Unsecured claims (P45,000 + P250) (45,250)
Estimated deficiency to unsecured creditors P 14,250

Corporation in Financial Difficulty – Liquidation 123

7-11: b
Assets pledged with fully secured creditors P185,000
Fully secured creditors _130,000 55,000
Free assets
_160,000
Total free assets 215,000
Less: Liabilities with priority __35,000
Available to unsecured non-priority claims P180,000

7-12: b
Machinery P 10,000
Recoveries of unsecured claims (50,000 - 10,000) X .50 __20,000
Amount to be realized P 30,000

7-13: b
Notes Payable P 23,940
Less: Inventories _ 19,200
Unsecured Liabilities 4,740
% of recovery ____78%
Recovery 3,697
Add: Inventories _19,200
Amount to be received by Wood P 22,897

7-14: a - P7,000
7-15: a - P30,000
7-16: b - P57,200 [52,000 + (8,000 X .65)]
7-17: d - P72,800 (112,000 X .65)

7-18: d
Estimated loss:
Account Receivable P 8,160
Inventories (28,000 - 18,500) 9,500
Building (59,000 - 22,000) 3 7,000
Equipment (5,600 - 2,000) 3,600
Goodwill 5,650
Prepaid expenses ___430 P 64,340
Less: Stockholder's equity
Common stock P 72,000
Deficit ( 16,660) _55,340
Estimated deficiency P 9,000

124
Chapter 7

7-19: d
Accounts Receivable (39,350 - 16, 110) P 23,240
Notes Receivable (18,500 - 12,500) 600
Inventories (87,850 - 45,100) 42,750
Prepaid expenses 950
Equipment (48,800 - 9,000) __39,800
Total estimated loss P112,740

7-20: b P33,750 (95,000 - 61,250) on Land and Building

7-21: d
Total Free Assets:
Balance of Assets Pledged to
Fully Secured Creditor (95,000 - 90,000) P 5,000
Free Assets:
Cash P 2,700
Accounts Receivable 16,110
Inventories 45,100
Equipment __9,000 __72,910
Total 77,910
Less: Unsecured liabilities with priority (1,850 + 4,650) ___6,500
Net Free Assets P 71,410
Divide by Unsecured creditors:
Balance of Partially Secured Creditor
Notes Payable - PNB P 15,000
Notes Receivable __12,500 2,500
Accounts Payable 52,500
Notes Payable __51,250 103,750 ÷ P106,250
Estimated recovery % 67%

7-22: d
Fully secured (Notes Payable) P 90,000
Partially secured:
Notes Payable - PNB P12,500
Add (2,500 X 67%) __1,675 14,175
Unsecured Creditor with Priority 6,500
Unsecured Creditor without Priority (103,750 X 67%) __69,513
Total P180,188

Corporation in Financial Difficulty – Liquidation 125

7-23: a
Unsecured creditors without priority P1,102,500
Estimated deficiency to unsecured creditors:
Loss on realization 551,250
Estimated liquidation expenses 55,125
Total 606,375
Stockholders’ equity 441,000 165,375
Net free assets 937,125
Liabilities with priority 122,500
Free assets P 1,059,625

7-24: a
Estimated net gain (loss) on realization:
Gain on realization 78,750
Loss on realization (336,700) (257,950)
Estimated claims ( 43,750)
Total (301,700)
Stockholders equity 295,750
Estimated deficiency P( 5,950)

7-25: b
Notes payable (175,000 – 140,000) P 35,000
Unsecured liabilities (420,000 – 52,500) 367,500
Total 402,500
Free assets (157,500 + 210,000) 367,500
Estimated deficiency 35,000

7-26: a
Old receivable (net) P 38,000
Marketable securities 12,000
Old inventory 60,000
Depreciable assets- net 96,000
Total assets to be realized P206,000

7-27: a
Old receivable P 21,000
New receivable 47,000
Marketable securities 10,500
Sales of inventory 75,000
Total asset realized P153,500

7-28: a
Gain on sale of inventory (P75,000 – 60,000) 15,000
Loss on realization:
Marketable securities (12,000 – 10,500) 1,500
Trustee’s expenses 4,300
Depreciation 16,000 (21,800)
Net loss P( 6,800)

126 Chapter
7
SOLUTIONS TO PROBLEMS

Problem 7 – 1
(A) Laguna Company
Statement of Affairs
October 31, 2008
Book Estimated
Value Assets Realizable Value Free Assets
Assets pledge for fully secured creditors:
P107,000 .... Plant assets.................................................. P67,400
Less; Fully secured liabilities......................_ 50,400 P17,000
Assets pledged for partially secured creditors:
39,000. .... Inventories.................................................. P18,000

Free Assets:
4,000. ..... Cash............................................................ P 4,000
46,000. ..... Accounts, receivable................................... 46,000
2,000. ..... Supplies....................................................... __1,500 _51,500
Total free assets............................................... P68,500
Less: Unsecured liabilities with priority.......... __7,000
Net Free Assets............................................... P61,500
Estimated deficiency to unsecured creditors (to balance) _20,500
P198,000 P82,000
Book Creditors' Unsecured
Value Liabilities & Stockholders' Equity Claim Liabilities
Fully secured liabilities:
P50,400....... Mortgage payable (including interest, P400) P50,400
Partially secured liabilities:
21,000.. ..... Notes payable.............................................. P21,000
Less: Inventory............................................ _18,000 P 3,000
Unsecured creditors with priority:
5,800.. ..... Wages payable P 5,800
1,200.. ..... Property taxes payable................................ _1,200
Total............................................................ P 7,000
Unsecured creditors without priority:
60,000.. ..... Accounts payable........................................ 60,000
19,000.. ..... Notes payable.............................................. 19,000
Stockholders' Equity........................................ _____–
P198,000 P82,000
(B) Creditor Group Amount of Amount to
Percentage
Claim be Paid to be
paid
Unsecured liabilities with priority.................................... P7,000 P7,000 100.0%
Fully secured creditors..................................................... 50,400 50,400 100.0%
Partially secured creditors................................................ 21,000 20,250 * 96.4%
Unsecured creditors without priority................................ 79,000 59,250 75.0%
* P18,000 + (P3,000 X 0.75) = P20,250
(C) See statement of affairs in requirement (A)

Corporation in Financial Difficulty – Liquidation 127

Problem 7 – 2
VC Corporation
Statement of Realization and Liquidation
Month Ended January 31, 2008

Assets to be realized: Assets realized:


Land........................ P10,000 land............................. P 0
Building.................. 43,000 Building...................... 0
Equipment.............. 28,000 Equipment................... 8,800
Patents.................... __4,400 P85,400 Patents......................... _12,000
P20,800
Assets Acquired.............. 0 Assets not realized:
Land............................ P10,000
Building...................... 43,000
Equipment................... _13,000
66,000

Liabilities Liquidated: Liabilities to be Liquidated:


Account payable..... P14,000 Accounts payable........ P80,000
Loans payable......... __7,000 21,000 Loans payable............. _40,000
120,000

Liabilities not Liquidated:


Accounts payable.... 66,000
Loans payable......... 33,000 99,000

Gain on realization......................... ___7,600 Loss on realization.....................


___6,200
Total............................................... P213,000 Total...........................................
P213,000

VC Corporation
Balance Sheet
January 31, 2008

Cash ............................................... P 6,700 Accounts payable.........................


P 66,000
Land ............................................... 10,000 Loans payable..............................
33,000
Building......................................... 43,000 Estate deficit................................
( 26,300)
Equipment...................................... _13,000
Total............................................... P 72,700 P 72,7
00

VC Corporation
Estate Deficit
January 31, 2008

Gain on realization.................................................................... P 7,600


Loss in realization .................................................................... ( 6,200)
Trustee's expenses .................................................................... ( 1,300)
Net gain on realization.............................................................. P 100
Estate deficit, January 1, 2008................................................... ( 26,400)
Estate deficit, January 31, 2008................................................. P(26,300)

128 Chapter 7
Problem 7 – 3

Rizal Corporation
Statement of Affairs
Book Estimated Free
Values Assets Realizable Value Assets
Assets pledged to fully secured creditors:
P 80,000........... Land and building............................................... P102,000
Less: Mortgage payable...................................... 43,000 P 59,000
50,000........... Finished Goods................................................... P 55,000
Less: Loan payable............................................. 50,000 5,000

Assets pledged to partially secured creditors:


32,000........... Accounts receivable (80% x 30,000).................. 24,000
12,000........... Trucks................................................................. 3,500
Totals.................................................................. 27,500
Free Assets:
4,000........... Cash.................................................................... 4,000
8,000........... AR (20% x 30,000)............................................. 6,000
36,000........... Inventory – Materials.......................................... 27,000
1,000........... Prepaid expense.................................................. 0
8,000........... Trucks................................................................. 2,500
45,000........... Equipment........................................................... 25,000
16,000........... Intangible............................................................_______ 64,500
Total Free Assets..................................................... P128,500
Less: Unsecured liability with priority (12,000 + 8,000) 20,000
Net free assets.......................................................... 108,500
________ Estimated deficiency to unsecured creditors (to Balance)
81,000
P 292,000...........Total unsecured liabilities........................................ P189,500

Book Creditors' Unsecured


Values Liabilities and Equity Claim Liabilities
Fully secured creditors:
P 43,000........... Mortgage payable............................................... 94,000
50,000........... Loans payable..................................................... 50,000
Total.................................................................... 144,000

Partially secured creditors':


25,000........... Bank Loan........................................................... 25,000
Less: Receivable (80% x 30,000)........................ 24,000 P 1,000
5,000........... Truck Loan.......................................................... 5,000
Less: trucks......................................................... 3,500 1,500
Unsecured creditors with Priority:
12,000........... Wages payable.................................................... 12,000
8,000........... Taxes payable..................................................... 8,000
Totals.................................................................. 20,000
Unsecured creditors:
77,000........... Accounts payable................................................ 77,000
110,000........... Stockholder Loan................................................ 110,000 187,000
( 38,000)...........Stockholder Equity.................................................. –
P 292,000 Total......................................................................... P189,500
Corporation in Financial Difficulty – Liquidation 129

Problem 7 – 4

Mapayapa Corporation
Statement of Affairs
November 1

Book Estimated Free


Value Assets Realizable Value Assets
Assets pledged to fully secured creditors:
P60,000........ Investments................................................. P 69,000
180,000........ Accounts receivable.................................... 171,000
Total............................................................ 240,000
Less: Note payable...................................... 210,000 P 30,000

Free assets:
66,000........ Cash............................................................ P 66,000
248,000........ Accounts receivable.................................... 193,500
291,000........ Merchandise inventory................................ 180,000
870,000........ Plant & equipment...................................... 330,000
114,000........ Notes receivable.......................................... 108,300
–........ Patent.......................................................... __12,000 _889,800
Total free assets........................................... 919,800
Less: Unsecured liabilities with priority.......... __13,800
Net free asset............................................... 906,000
_________ Estimated deficiency (to balance).................... 60,300
P1,839,000 Total................................................................ P966,300

Book Creditor's Unsecured


Value Liabilities & Equity Claim Liabilities
Fully secured creditors:
P 210,000........ Notes payable.............................................. P210,000
Unsecured creditor with priority:
Accrued wages............................................ P 7,200
Accrued property tax................................... ___6,600
Total............................................................ P 13,800

Unsecured creditor:
960,000........
Account payable.......................................... P960,000
Accrued expenses........................................ 6,300
300,000........Capital stock
__369,000........Retained earnings............................................ _______
P1,839,000 Total................................................................ P966,300

130 Chapter 7

Problem 7 – 5

a. Total fair value of assets (estimated proceeds).......................... P471,000


Less:Fully and partially secured creditors claim:
Notes payable, interest (secured by receivable and
inventory)................................................................... 125,000
Bonds payable (secured by land & building).................... 231,000 356,000
Available to unsecured creditors............................................... 115,000
Less:Unsecured creditors with priority:
Wages payable..................................................................P 9,500
Taxes payable...................................................................__14,000 __23,500
Amount available to unsecured creditors.................................. P 91,500

b. Unsecured portion of notes payable and interests (P195-P125) P 70,000


Accounts payable...................................................................... __95,000
Total claims of unsecured creditors........................................... P165,000

P91,500
––––––– = 55.45%
P165,000

c. Distribution of P471,000:
Percent Total
Creditors Amount Realized Payment
Accounts payable P 95,000.... 55.45% P 52,678
Wages payable 9,500..... 100% 9,500
Taxes payable 14,000..... 100% 14,000
Notes payable & interests 125,000..... 100% 125,000
70,000 55.45% 38,815
Bonds payable & interests 231,000..... 100% _231,000
Total estimated payment........................................ P470,993

Corporation in Financial Difficulty – Liquidation 131

Problem 7 – 6
1. Evergreen Company
Statement of Affairs
June 30, 2008
Estimated Available for
Book Realizable Unsecured
Values ASSETS Values Creditors
Pledged with fully secured creditors:
P460,000 Land and building..................................... P340,000
Less: Mortgage payable (including accrued interest) (330,000) P 10,000
Free Assets:
80,000 Cash ......................................................... P 80,000
140,000 Accounts receivable – net......................... 126,000
100,000 Inventories................................................ 84,000
120,000 Machinery – net........................................ 40,000
100,000 Goodwill................................................... _ _____0_ 330,000
Total free assets........................................................... 340,000
Less: liabilities with priority........................................ _140,000
Net free assets.............................................................. 200,000
Estimated deficiency (Squeeze figure)......................... _130,000
P1,000,000 P330,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured & Unsecured
Priority Non-priority
Claims Liabilities
Liabilities with priority
P120,000 Wages payable.......................................... P120,000
20,000 Property taxes payable.............................. __20,000
Total......................................................... P140,000
Fully secured creditors
300,000 Mortgage payable..................................... 300,000
30,000 Interest on mortgage payable.................... __30,000
Total......................................................... P330,000
Unsecured creditors
220,000 Accounts payable......................................................... P220,000
100,000 Note payable-unsecured............................................... 100,000
10,000 Interest payable-unsecured........................................... 10,000

Stockholders' Equity
400,000 Capital stock............................................. ___
(200,000) Retained earnings (deficit)........................................... P330,000
P1,000,000

2. Settlement per peso of unsecured creditors is P.6250 (P200,000/P320,000). No payment is


made for the P10,000 unsecured interest claim.
132 ____ Chapter 7

Problem 7 – 7

1. Entries on trustee's books.


2008
March 1: Cash.......................................................P8,000
Accounts receivable – net.......................16,000
Inventories..............................................72,000
Land.......................................................40,000
Buildings – net.....................................200,000
Intangible assets.....................................52,000
Accounts payable........................................ P100,000
Note payable............................................... 80,000
Deferred revenue........................................ 2,000
Wages payable............................................ 6,000
Mortgage payable....................................... 160,000
Estate equity............................................... 40,000
To record custody of Kimerald Corporation.

March 1 to 31:Cash.......................................................15,200
Estate equity................................................800
Accounts receivable-net.............................. 16,000
To record collection of receivables and recognize loss.
Cash.......................................................38,800
Estate equity...........................................33,200
Inventories.................................................. 72,000
To record sale of inventories at a loss.

Cash.....................................................180,000
Estate equity...........................................60,000
Land............................................................ 40,000
Buildings-net.............................................. 200,000
To record sale of land and buildings at a loss.

Estate equity...........................................52,000
Intangible assets.......................................... 52,000
To write off intangible assets.

Estate equity...................................................16,400
Administrative expenses payable....................... 16,400
To accrue trustee expenses.

Corporation in Financial Difficulty – Liquidation 133

2. Financial Statements
Kimerald Corporation in Trusteeship
Balance Sheet
March 31, 2008

Assets
Cash ......................................................................................... P242,000

Liabilities and Deficit


Accounts payable. .................................................................... P100,000
Note payable-unsecured............................................................ 80,000
Revenue received in advance.................................................... 2,000
Wages payable.......................................................................... 6,000
Mortgage payable. .................................................................... 160,000
Administrative expense payable-new........................................ __16,400
Total liabilities.......................................................................... P364,400
Less: Estate deficit.................................................................... _122,400
Total liabilities net of deficit..................................................... P242,000

Kimerald Corporation in Trusteeship


Statement of Cash Receipts and Disbursements
March 1 to 31, 2008

Cash balance, March 1, 2008.................................................... P 8,000


Add: Cash receipts
Collections of receivables..................................P 15,200
Sale of inventories.................................................38,800
Sale of land and buildings...................................180,000 _234,000
Total......................................................................................... 242,000
Less: Cash disbursements......................................................... ____–0–
Cash balance, March 31, 2008.................................................. P242,000

Kimerald Corporation in Trusteeship


Statement of Changes in Estate Equity
March 1 to 31, 2008

Estate equity, March 1.............................................................. P 40,000


Less:Loss on uncollectible receivables.........................P 800
Loss on sale of inventories....................................33,200
Loss on sale of land and buildings.........................60,000
Loss on write off of intangibles.............................52,000
Administrative expenses....................................._16,400 _162,400
Estate deficit, March 31............................................................ P122,400

134 Chapter 7

3. Entries on trustee's books:


2008
April: Mortgage payable...........................................160,000
Cash..................................................................... 160,000
To record payment of secured creditors from
proceeds from sale of Land and buildings.

Administrative expenses payable-new..............16,400


Deferred revenue.................................................2,000
Wages payable....................................................6,000
Cash..................................................................... 24,400
To record payment of priority liabilities.

Accounts payable..............................................32,000
Note payable-unsecured....................................25,600
Cash..................................................................... 57,600
To record payment of P.32 per peso to unsecured
creditors (available Cash of P57,600 divided by
unsecured claims of P180,000).
Accounts payable..............................................68,000
Note payable-unsecured....................................54,400
Estate equity........................................................ 122,400
To write-off remaining liabilities and
close trustee's records.

Reorganization and Troubled Debt Restructuring


135

CHAPTER 8

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

8-1: a
Trade accounts payable (P52,000 + P62,700)
P114,700
12% preferred stock (5,000 x P1) P 5,000
Paid in capital in excess of par (5,000 x P9) 45,000
Cash (P62,700 x P0.80) _50,160
_100,160
Gain from discharge of indebtedness P
14,540

8-2: c

8-3: c

8-4: b
Carrying value of the note payable:
Principal P600,000
Interest
__60,000 P660,000
Restructured value:
Principal P400,000
Interest
_110,000 _510,000
Gain on debt restructuring
P150,000

8-5: d
Other income:
Fair value of land
P450,000
Books value of land
_360,000
Other income P
90,000

Extraordinary gain:
Book value of note payable
Principal P500,000
Interest __60,000
P560,000
Fair value of land
_450,000
Extraordinary gain
P110,000

8-6: a
Book value of bonds payable
P500,000
Par value of preferred stock (5,000 shares x P100)
_500,000
No gain no loss P
–0–

136
Chapter 8

8-7: a

Book value of notes payable:


Principal P 2,500
Interest
___500 P 3,000
Par value of common stock issued (200 shares x P5)
__1,000
Additional paid in capital
P 2,000
Add gain on payment of accounts payable:
Book value P 10,000
Payment __8,000
__2,000
Total gain on debt discharge
P 4,000

8-8: a
Carrying value of debt:
Note payable P100,000
Interest payable __12,000
P112,000
Fair value machinery
_(36,000)
Balance of debt P
76,000
Restructured debt:
Note payable P 50,000
Interest (P50,000 x .08 x 2) ___8,000
__58,000
Restructuring difference (gain)
P 18,000

8-9: d
Principal
P300,000
Interest payable (300,000 x 10%)
__30,000
Carrying value
P330,000

8-10: c
Should be P310,600
Restructured principal of note payable
P260,000
Interest payable:
On book value (P300,000 x 10% 30%) P 9,000
On restructured (P260,000 x 8% x 2) _41,600
__50,600
Future cash flows to liquidate the debt
P310,600

8-11: d
8-12: d
Loss on transfer of land:
Original cost P290,000
Market value _270,000
P 20,000

Gain on restructuring of debt:


Carrying value of debt P300,000
Market value of land _270,000
P 30,000
Reorganization and Troubled Debt Restructuring
137

8-13: a
Transfer gain (loss):
Carrying amount of equipment P80,000
Fair value of equipment 75,000
Transfer loss P(5,000)

Restructuring gain:
Carrying amount of the debt P100,000
Fair value of equipment transferred 75,000
Restructuring gain P 25,000

8-14: d
Carrying amount of real estate transferred P100,000
Fair value of real estate 90, 000
Loss on restructuring of payables P(10,000)

8-15: d
Carrying amount of liability P150,000
Fair value of real estate transferred 90,000
Restructuring gain P 60,000

8-16: c
Gain on revaluation of land (120,000 – 85,000) P 35,000
Gain on the extinguishment of debt (185,000 – 120,000) 65,000
Total gain P100,000

8-17: a
Carrying value of debt (P800,000 + 80,000) P880,000
Total future payments (P700,000 + 80,000) 780,000
Restructuring gain P100,000

8-18: a
First determine the expected future cash flows as follows:
70,000 x .79719 = P55,803
5,600 x 1.69005 = 9,464
Present value of future cash flow P65,267
The interest revenue can be computed using the effective interest method
as follows:
Present value at 12/31/06 P65,267
Interest income at 12/31/07 (65,267 x 12%) 7,832
Interest receivable at 12/31/07 (70,000 x 8%) 5,600 2,232
Present value at 12/31/07 P67,499

Interest income at 12/31/08 (67,499 x 12%) P 8,100

138
Chapter 8

SOLUTIONS TO PROBLEMS

Problem 8 – 1

Journal entries for company emerging from bankruptcy using fresh start
accounting:
– Receivables.......................................................................................10,000
Inventory. .........................................................................................10,000
Building............... 100,000
Reorganization value in excess of amount
Allocable to tangible assets.........................................................60,000
Additional paid in capital...................................................... 180,000
To adjust accounts to market value as part of fresh start accounting. Since the company has
a reorganization value of P760,000 but the assets have a market value of only P700,000
(P90,000 + P210,000 + P400,000), and account entitled Reorganization Value in Excess of
Amount Allocable to Tangible Assets must be recorded for P60,000.

Liabilities............. 300,000
Common stock (P330,000 x 80%)............................................... 264,000
Gain on debt discharge................................................................ 36,000
To record settlement of liabilities.

Problem 8 – 2

2008
July 14: Costs of reorganization................................................................50,000
Cash with escrow agent........................................................ 50,000

Common stock 580,000


Common stock (60,000 x P1)............................................... 60,000
Additional paid in capital...................................................... 520,000

Note payable – 10% 120,000


Interest payable (P120,000 x 10% x 3/12)................................... 3,000
Note payable – 12%.............................................................. 123,000

Trade accounts payable 100,000


Cash P100,000 x 0.80).......................................................... 80,000
Gain on debt discharge......................................................... 20,000

Additional paid in capital 290,000


Gain on debt discharge 20,000
Retained earnings.................................................................. 260,000
Costs of reorganization......................................................... 50,000

Reorganization and Troubled Debt Restructuring


139

Problem 8 – 3

Jade Corporation
Balance Sheet
December 31, 2008

ASSETS
Current assets:
Cash ................................................................................... P 23,000
Inventory............................................................................. __45,000 P 68,000
Property and equipment:
Land ................................................................................... 140,000
Buildings............................................................................. 220,000
Equipment........................................................................... _154,000 _514,000
Total assets. ........................................................................ P582,000

LIABILITIES AND STOCKHOLDERS' EQUITY


Liabilities not subject to compromise
Current liabilities:
Accounts payable................................................................. P 60,000
Long-term liabilities:
Note payable (2006)...... P100,000
Note payable (2003)...... _100,000. ._ 200,000 P260,000
Liabilities subject of compromise
Accounts payable................................................................. 123,000
Accrued expenses................................................................ 30,000
Income taxes payable........................................................... 22,000
Note payable (due 2008)....................................................... _170,000 _345,000
Total liabilities. ................................................................... 605,000

Stockholders' Equity
Common stock. ................................................................... 200,000
Retained earnings (deficit).................................................... (223,000) _(23,000)
Total liabilities and stockholders' equity (deficit)................. P582,000

Problem 8 – 4

Preliminary computations:
Book values prior to reorganization:
Total assets (P100,000 + P112,000 + P420,000 + P78,000).............. P710,000
Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 +
P185,000 + P200,000)................................................................. P800,000
Common stock (given)...................................................................... P240,000
Deficit (given) ............................................................................. P330,000

140
Chapter 8

Book values after reorganization:


Total assets (reorganization value)................................................................ P780,000
Total liabilities (P5,000 + P4,000 + P100,000 + P50,000 +
P71,000 + P110,000).............................................................................. P340,000
Common stock (returned shares are reissued)............................................... P240,000
Deficit (eliminated) ...................................................................................... –0–
Additional paid in capital (squeeze).............................................................. P200,000

Since the company will have 30,000 shares outstanding after the reorganization, the additional paid in
capital equals P6.66 per share.
Because the company has a reorganization value of P780,000 but the assets have a market value of only
P735,000, an account entitled Reorganization Value in Excess of Amount allocable to Tangible Assets
must be recognized for P45,000.

JOURNAL ENTRIES:
1. Land and buildings ......................................................................................80,000
Reorganization Value in excess of amount
allocable to tangible assets......................................................................45,000
Accounts receivable......................................................................... 20,000
Inventory ...................................................................................... 22,000
Equipment ...................................................................................... 13,000
Additional paid in capital................................................................ 70,000
To adjust accounts to market value as part of fresh start accounting.

2. Common stock...............................................................................................144,000
Additional paid in capital........................................................................ 144,000
To record shares turned in to the company by the owners as part of the reorganization plan. 18,000
shares at P8 par value.

3. Accounts payable........................................................................................... 80,000


Note payable........................................................................................... 5,000
Common stock, P8 par value.................................................................. 8,000
Additional paid in capital (P6.66 per share)........................................... 6,666
Gain on debt discharge........................................................................... 60,334
To record settlement of accounts payable.

4. Accrued expenses..........................................................................................35,000
Note payable........................................................................................... 4,000
Gain on debt discharge........................................................................... 31,000
To record settlement of accrued expenses.

5. Note payable............ 200,000


Note payable........................................................................................... 50,000
Common stock, P8 par value.................................................................. 80,000
Additional paid in capital (P6.66 per share)........................................... 66,667
Gain on debt discharge........................................................................... 3,333
To record settlement of note payable due in 2007

6. Note payable............ 185,000


Note payable........................................................................................... 71,000
Common stock, P8 par value.................................................................. 56,000
Additional paid in capital, P6.66 per share............................................. 46,667
Gain on debt discharge........................................................................... 11,333
To record settlement of note payable due in 2008
Reorganization and Troubled Debt Restructuring
141

Problem 8 – 5

7. Note payable. ....................................................................................200,000


Note payable. .............................................................................. 110,000
Gain on debt discharge................................................................ 90,000
To record settlement of note payable due in 2009

8. Additional paid in capital (P334,000 – P200,000).............................134,000


Gain on debt discharge......................................................................196,000
Retained earnings (deficit).......................................................... 330,000
To adjust additional paid in capital to appropriate balance, close out gain, and eliminate
deficit balance as part of fresh start accounting.

Since the Company has a reorganization value of P800,000 but only P653,000 can be assigned to
specific assets based on market value, the remaining P147,000 is reported as a Reorganization
Value in Excess of Amount Allocable to Identifiable Assets.

Sun Corporation
Balance Sheet – Fresh Start Accounting
December 31, 2008

ASSETS
Current assets
Accounts receivable................................................................................... P 18,000
Inventory................................................................................................... _111,000 P129,000
Property and equipment
Land and buildings. ................................................................................... 278,000
Machinery................................................................................................. _121,000 399,000
Intangible assets
Patents ................................................................................................... 125,000
Reorganization value in excess of amount allocable To identifiable assets _147,000 _272,000
Total assets. .............................................................................................. P800,000

LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities
Accounts payable....................................................................................... P 97,000
Long-term liabilities
Note payable (due in 2 years)..................................................................... P 35,000
Note payable (due in 5 years)..................................................................... 50,000
Note payable (due in 8 years)..................................................................... _100,000 _185,000
Total liabilities. ......................................................................................... P282,000

Stockholders' Equity:
Common stock. ......................................................................................... P500,000
Additional paid in capital (squeeze)........................................................... __18,000 _518,000
Total liabilities and stockholders' equity................................................................. P800,000
142
Chapter 9

CHAPTER 9

MULTIPLE CHOICE ANSWERS AND SOLUTIONS


9-1: d
Deferred gross profit, Dec. 31 (before adjustment) P1,050,000
Less: Deferred gross profit, Dec. 31 (after adjustment)
Installment accounts receivable, Dec. 31 P1,500,000
Gross profit rate ____÷ 25% __375,000
Realized gross profit, 2008 P 675,000
OR
Installment Sales (P1,050,000 ÷ 25%) P4,200,000
Less: Installment account receivable, Dec. 31 __1,500,00
Collection P2,700,000
Gross profit rate ___X 25%
Realized gross profit, 2008 P 675,000

9-2: a
2006 2007 2008
Deferred gross profit, before adjustment P7,230 P 60,750 P 120,150
Deferred gross profit, end
2006 (6,000 X 35%) 2,100
2007 (61,500 X 33%) 20,295
2008 (195,000 X 30%) ___58,500
Realized gross profit, December 31, 2008 P5,130 P 40,455 P 61,650
(Total – P107,235)
9-3: c

Deferred gross profit balance, end P 202,000


Divide by Gross profit rate based on sales (25% ÷ 125%) ____÷ 20%
Installment Accounts Receivable, end P1,010,000
Collection ___440,000
Installment Sales P1,450,000

9-4: b
Sales P1,000,000
Cost of installment sales __700,000
Deferred gross profit P 300,000
Less: Deferred gross profit, end
Installment accounts receivables, 12/31
(1,000,000-400,000) P 600,000
Gross profit rate (300,000 ÷ 1,000,000) ___X 30% __180,000
Realized gross profit P 120,000
Operating expenses ___80,000
Operating income 40,000
Interest and financing charges __100,000
Net income P 140,000
Installment Sales 143

9-5: a
Market value of repossessed merchandise P 30,000
(before reconditioning cost)
Less: unrecovered cost
Unpaid balance (80,000-30,000) P 50,000
Less: Deferred gross profit (50,000X20%) ___10,000 __40,000
Loss on repossession (P 10,000)

9-6: a
Installment sales P1,000,000
Less: collection on installment sales __200,000
Installment account receivables, 12/31/08 800,000
Gross profit rate (500,000 ÷ 1,000,000) ___X 50%
Deferred gross profit, 12/31/08 P 400,000

OR

Deferred gross profit (1,000,000-500,000) P500,000


Less: Realized Gross Profit (200,000 X 50%) _100,000
Deferred gross profit, 12/31/08 P400,000

9-7: d
Fair value of repossessed merchandise P120,000
Less: unrecovered cost
Unpaid balance P 200,000
Less: Deferred gross profit (200,000 X 32.5%) ___65,000 _135,000
Loss on repossession (P 15,000)

9-8: b
Realized gross profit:
Collections:
Downpayment P 35,000
Installment received (205,000-200,000) ___5,000
Total 40,000
Gross Profit Rate (150,000 ÷ 240,000) _X 62.5%
Realized gross profit P 25,000

Gain (loss) on repossession:


Appraised value of repossessed merchandise P165,000
Less:unrecovered cost
unpaid balance P 200,000
less: deferred gross profit (200,000 X 62.5%) __125,000 __75,000
Gain on repossession P 90,000

144
Chapter 9

9-9: b
Sch.1
Applying Applying Balance
to to of
Date Collection Interest principal principal
Apr-1 P7,000.00
Apr-1 750 750.00 6,250.00
May-1 625 125.00 500.00 5,750.00
Jun-1 625 115.00 510.00 5,240.00
Jul-1 625 104.80 520.20 4,719.80
Aug-1 625 __94.40 ___530.60 4,189.00
P439.20 P2,810.80

Gain (loss) on repossession:


Market value of repossessed merchandise P 1,875
Less:unrecovered cost
unpaid balance of principal (sch. 1) P 4,189
less: deferred gross profit (4,189 X 35%) __1,466 ___2,723
Loss on repossession (rounded) (P 848)

Realized gross profit:


Collection applying to principal (sch. 1) P2,810.80
Gross profit rate __X 35%
Realized gross profit P 983.78

9-10: c
Year of Sales
2007 2008
Deferred gross profit (Sales X Gross Profit Rate)
2007 (P300,000 X 30%) P 90,000
2008 (P450,000 X 40%) P 180,000
2007: Accounts written-off (P25,000 X 30%) ( 7,500)
Realized gross profit (P100,000 X 30%) ( 30,000)
2008: Accounts written-off, 2007 (P75,000 X 30%) ( 22,500)
Accounts written-off, 2008 (P50,000 X 40%) ( 60,000)
Realized gross profit, 2007 (P50,000 X 30%) ( 15,000)
Realized gross profit, 2008 (P150,000 X 40%) ________ ( 60,000)
Deferred gross profit, 12/31/08 (P75,000) P 15,000 P 60,000

9-11: a
Deferred gross profit, 2007 (P1,050,000 - 735,000) P 315,000
Realized gross profit, 2007 (P150,000 X 30%) ( 45,000)
Deferred gross profit, 12/31/07 270,000
Realized gross profit, 2008 (P390,000-90,000) X 30% ( 90,000)
Deferred gross profit, 12/31/08 P 180,000

Installment Sales 145

9-12: a
2007 2008
Deferred gross profit (Sales - Cost of Installment Sales) P 480,000 P450,000
Realized gross profit, 2007 (P630,000 X 40%) ( 252,000)
Realized gross profit, 2007 (P450,000 X 40%) ( 180,000)
Realized gross profit, 2008 (P900,000 X 30%) _______ ( 270,000)
Deferred gross profit, 12/31/08 (P228,000) P 48,000 P180,000

9-13: c
Trade-in value P 30,000
Less: Actual value
Estimated selling price P 25,000
Less:reconditioning cost P 1,250
normal gross profit (25,000 X 15%) __3,750 ___5,000 __20,000
Overallowance P 10,000
Realized gross profit:
Collection:
Downpayment P 5,000
Actual value of merchandise-Trade In 20,000
Installment collected (5,000 X 3) _15,000 P 40,000

Gross Profit Rate:


Sales P 85,000
Overallowance ( 10,000)
Net Sales P 75,000
Cost of Installment Sales _60,000
Gross Profit P 15,000
Gross Profit Rate (15,000 ÷ 75,000) _X 20%
Realized Gross Profit P 8,000
9-14: c
Collection excluding interest (P900,000-P300,000) P 600,000
Gross profit rate (P1,200,000 ÷ P3,600,000) X 33 1/3%
Realized Gross Profit, December 31, 2008 200,000
Add Interests __300,000
Total Revenue P 500,000

9-15: a
Wholesale value of repossessed merchandise P 4,000
Less: unrecovered cost
Unpaid balance:
Sales, 10/1/07 P 24,000
Collection, 2007 (6,000 ÷ 2,000) ( 8,000)
Collection, 2008 (1,000 X 7) ( 7,000) P 9,000
Deferred gross profit (9,000 X 25%) __2,250 ___6,750
Loss on repossession (P 2,750)
146
Chapter 9

9-16: a
Trade-in Value (P300 X 6) P 1,800
Less: Actual value
Estimated selling price (P315 X 6) P 1,890
Less:Reconditioning cost (P25 X 6) P150
Gross Profit (P1,890 X 10%) _189 ___339 ___1,551
Over-allowance P 249

9-17: a
Deferred gross profit, before adjustment P 76,000
Deferred gross profit, end
2007: P32,500 X (30% ÷ 130%) P 7,500
2008: P180,000 X (33 1/3% ÷ 133 1/3%) _45,000 __52,500
Realized gross profit on installment sales P 23,500

9-18: d
Unpaid balance (P27,000 - P16,000) P 11,000
Multiply by gross profit rate (P734,400 ÷ P2,160,000) ___X 34%
Deferred gross profit to be cancelled on repossession P 3,740

9-19: b
Collection:
2007 Downpayment P 600,000
2008 Installment collection 600,000
Interest __540,000
Total P1,740,000

Cost to be recovered P4,000,000


Since cost is not yet fully recovered, then no gross profit is to be recognized in 2008.

9-20: d
Regular Sales P 187,500
Cost of regular sales __112,500
Gross profit on regular sales P 75,000
Add: Realized gross profit on installment sales
2007 (25,000 X 50%) P12,500
2008 (62,500 X 55%) _34,375 __46,875
Total realized gross profit 121,875
Operating expenses ___31,250
Net income, 12/31/08 P 90,625

Installment Sales 147

9-21: a
Installment sales – 2007 P785,000
Collections:
Down payment (20% x 785,000) P157,000
Installment (40% x 628,000) 251,200 408,200
Installment accounts receivable 2007, 12/31/07 376,800
Gross profit rate on sales 35/135
Deferred gross profit- 2007, 12/31/07 P 97,689

9-22: a
Regular sales P1,575,000
Cost of regular sales 1,050,000
Gross profit on regular sales 525,000
Realized gross profit on installment sales:
Installment sales (1,093,750 x 240%) 2,625,000
Installment accounts receivable-12/31/08 1,575,000
Collections 1,050,000
Gross profit on rate on sales 140/240 612,500
Total realized gross profit 1,137,500
Operating expenses (1,137,500 x 70%) 796,250
Net income P
341,250

9-23: a
Regular sales P375,000
Cost of regular sales 215,000
Gross profit on regular sales 160,000
Realized gross profit on installment sales:
Collections excluding Interest (312,000 – 24,000)288,000
Gross profit rate (270,000/900,000) 30% 86,400
Total realized gross profit 246,400
Loss on repossession
Fair value of repossessed merchandise 54,000
Less: Unrecovered cost (100,000 x 70%) 70,000 ( 16,000)
Total realized GP after loss on repossession 230,400
Less: Operating expenses 72,000
Installment accounts written-off (44,000 x .70) 30,800 102,800
Net operating income 127,600
Interest income 24,000
Net income P151,600

148_ Chapter 9

SOLUTIONS TO PROBLEMS

Problem 9 – 1

Journal Entries:
2006 2007 2008
Installment A/R–2006................ 104,000 – –
Installment A/R–2007................ – 116,000 –
Installment A/R–2008................ – – 121,000
Installment Sales.................. 104,000 116,000 121,000

Cost of Installment Sales............ 64,480 68,440 73,810


Inventory............................. 64,480 68,440 73,810

Cash........................................... 66,980 125,520 145,460


Installment A/R–2006 57,200 29,120 15,000
Installment A/R–2007......... – 71,920 26,680
Installment A/R–2008......... - _ 76,230
Interest Revenue.................. 9,780 24,480 27,550

Installment Sales........................ 104,000 116,000 121,000


Cost of Installment Sales..... 64,480 68,440 73,810
Deferred Gross Profit–2006. 39,520 – –
Deferred Gross Profit–2007. – 47,560 –
Deferred Gross Profit–2008. – – 47,190
Deferred Gross Profit–2006....... 21,736 11,066 5,700
Deferred Gross Profit–2007....... – 29,487 10,939
Deferred Gross Profit–2008....... – – 29,730
Realized Gross Profit........... 21,736 40,553 46,369

Computations:
2006: P57,200 X .38 = P21,736

2007: P29,120 X .38 = P11,066


P71,920 X .41 = 29,987
Total RGP P40,553

2008: P15,000 X .38 = P 5,700


P26,680 X .41 = 10,939
P76,230 X .39 = 29,730
Total RGP P46,369

Installment Sales
149

Problem 9 – 2
2007: Inventory.................................................................................................45,200
Cash................................................................................................. 45,200
Notes Receivable 2007 (P32,000 + P62,000 + 3,600)............................97,600
Unearned Interest Revenue (P7,167 + P3,600)............................... 10,767
Installment Sales.............................................................................. 86,833
Cost of Installment Sales (P45,200 – P2,000 inventory increase)..........43,200
Inventory.......................................................................................... 43,200
Cash........................................................................................................35,600
Notes Receivable 2007.................................................................... 35,600
Unearned Interest Revenue 2007............................................................3,600
Interest Revenue.............................................................................. 3,600
Installment Sales.....................................................................................86,833
Cost of Installment Sales................................................................. 43,200
Deferred Gross Profit on Installment Sales–2007........................... 43,633
Deferred Gross Profit on Installment Sales–2007..................................16,080*
Realized Gross Profit on Installment Sales..................................... 16,080
*Gross profit percentage: 50.25% (P43,633 ÷ P86,833)
.5025 x 32,000 = P16,080
2008: Inventory.................................................................................................52,020
Cash................................................................................................. 52,020
Notes Receivable–2008..........................................................................89,5001
Unearned Interest Revenue.............................................................. 11,9552
Installment Sales.............................................................................. 77,545
160,000 + (P50,000 + P5,500) – P26,000* = 89,500
*2007 Notes receivable collected in 2008
2Interest revenue from 2007 notes: P7,167 – P5,579 = P1,588
Interest revenue from 2008 notes: P5,500 – P1,588 = P3,912
Discount on notes receivable at end of 2008..........................................P 8,043
Interest revenue from 2008 notes (see above)........................................ 3,912
Total discount at time of sale..................................................................P11,955

Cost of Installment Sales (P52,020 – P8,000)........................................44,020


Inventory.......................................................................................... 44,020
Cash........................................................................................................55,500
Notes Receivable–2007 (P62,000 – P36,000)................................. 26,000
Notes Receivable–2008................................................................... 29,500*
* P89,500 – P60,000 = P29,500
Discount on Notes Receivable–2007......................................................1,588
Discount on Notes Receivable–2008......................................................3,912
Interest Revenue.............................................................................. 5,500
Installment Sales.....................................................................................77,545
Cost of Installment Sales................................................................. 44,020
Deferred Gross Profit on Installment Sales–2008........................... 33,525
Deferred Gross Profit on Installment Sales–2007 (P26,000
– P1,538 = P24,412; P24,412 x .5025)...................................................12,267
Deferred Gross Profit on Installment Sales–2008..................................11,062*
Realized Gross Profit on Installment Sales..................................... 23,329
profit percentage: 43.23% (P33,525 ¸ P77,545)
.4323 x (P29,500 – P3,912) = P11,062
150 Chapter 9
Problem 9 – 3

Deferred gross profit, 1/1 P24,000


1. 2006: Gross profit rate = ––––––––––––––––––––– = ––––––– = 40%
Install. contracts rec'l, 1/1 P60,000

Deferred gross profit, 1/1 P24,000


2007: Gross profit rate = ––––––––––––––––––––– = ––––––– = 42%
Install. contracts rec'l, 1/1 P140,000

Gross profit P86,000


2008: Gross profit rate =––––––––––––– = ––––––––––= 43%
Installment sales P200,000
2. Journal Entries:
Accounts Receivable...................................................................................... 600,000
Sales....................................................................................................... 600,000
Installment Contracts Receivable – 2008...................................................... 200,000
Installment Sales..................................................................................... 200,000
Cost of Installment Sales............................................................................... 114,000
Shipments on Installment Sales.............................................................. 114,000
Purchases....................................................................................................... 476,000
Cash........................................................................................................ 476,000
Selling Expenses............................................................................................ 210,000
Cash........................................................................................................ 210,000
Cash.............................................................................................................. 790,000
Accounts Receivable.............................................................................. 560,000
Installment Contracts Receivable – 2006............................................... 40,000
Installment Contracts Receivable – 2007............................................... 80,000
Installment Contracts Receivable – 2008............................................... 110,000

Adjusting Entries:
Installment Sales............................................................................................ 200,000
Cost of Installment Sales........................................................................ 114,000
Deferred Gross Profit on Installment sales – 2008................................. 86,000
Deferred Gross Profit – 2006 (P40,000 x 40%)............................................. 16,000
Deferred Gross Profit – 2007 (P80,000 x 42%)............................................. 33,600
Deferred Gross Profit – 2008 (P110,000 x 43%)........................................... 47,300
Realized Gross Profit.............................................................................. 96,900
Doubtful Accounts Expense (1/4 x 1% x P600,000)..................................... 1,500
Allowance for Doubtful Accounts.......................................................... 1,500

Closing Entries:
Sales............................................................................................................. 600,000
Merchandise Inventory, December 31........................................................... 260,000
Shipments on Installment Sales..................................................................... 114,000
Merchandise Inventory, January 1.......................................................... 240,000
Purchases................................................................................................ 476,000
Selling Expenses..................................................................................... 210,000
Doubtful Accounts Expense................................................................... 1,500
Income Summary.................................................................................... 46,500
Realized Gross profit..................................................................................... 96,900
Income Summary.................................................................................... 96,900
Income Summary........................................................................................... 143,400
Retained Earnings................................................................................... 143,400
Installment Sales
151
3. Good Buy Mart
Income Statement
Year Ended December 31, 2008

Sales............................................................................................................. P600,000
Cost of sales:
Merchandise inventory, January 1.......................................................... P240,000
Purchases................................................................................................ 476,000
Cost of goods available for sale.............................................................. 716,000
Less Shipments on installment sales....................................................... 114,000
Cost of goods available for regular sales................................................ 602,000
Less Merchandise inventory, December 31............................................ 260,000 342,000
Gross profit on regular sales.......................................................................... 258,000
Add Realized gross profit on installment sales (Schedule 1)........................ 96,900
Total realized gross profit.............................................................................. 354,900
Operating expenses:
Selling expenses...................................................................................... 210,000
Doubtful accounts expense..................................................................... 1,500 211,500
Net income .................................................................................................... P143,400

Schedule 1
Years of Installment Sales
2006 2007 2008 Total
Collections ........................................... P40,000 P80,000 P110,000
Multiply by Gross profit rate................ 40% 42% 43%
Realized gross profit............................. P16,000 P33,600 P 47,300 P 96,900

4. Good Buy Mart


Balance Sheet
December 31, 2008
A s s e t s
Cash.............................................................................................................. P144,000
Merchandise inventory................................................................................... 260,000
Accounts receivable....................................................................................... P 62,000
Allowance for doubtful accounts................................................................... 3,500 58,500
Installment contracts receivable – 2006......................................................... 20,000
Installment contracts receivable – 2007......................................................... 60,000
Installment contracts receivable – 2008......................................................... 90,000
Other assets.................................................................................................... 200,000
Total Assets............................................................................................ P832,500
Liabilities and Equity
Liabilities:
Accounts payable.................................................................................... P 60,000
Deferred gross profit on installment sales – 2006.................................. 8,000
Deferred gross profit on installment sales – 2007.................................. 25,200
Deferred gross profit on installment sales – 2008.................................. 38,700
Total Liabilities....................................................................................... 131,900
Equity:
Capital stock........................................................................................... P406,000
Retained earnings.................................................................................... 294,600
700,600
Total Liabilities and Equity.................................................................... P832,500
152 Chapter 9

Problem 9 – 4

Deferred gross profit, 1/1 = P21,600 + P1,200 = P22,800


1. 2007: GP rate = ––––––––––––––––––––– = –––––––––––––––– = ––––––– =
30%
Install. contracts rec'l, 1/1 P24,000 + P52,000 P76,000

Gross profit P150,000 – P97,500 P52,500


2008: GP rate = –––––––––––––– = –––––––––––––––– = –––––––– =
35%
Installment sales P150,000 P150,000

2. Installment Sales............................................................................................ 150,000


Cost of Installment Sales........................................................................ 97,500
Deferred Gross Profit, 2008.................................................................... 52,500
Deferred Gross profit, 2007........................................................................... 14,400
Deferred Gross Profit, 2008........................................................................... 25,900
Realized Gross Profit.............................................................................. 40,300

Computation:
2007 2008
Sales Sales Total
Installment contracts receivable, 1/1..................... P76,000 P150,000
Less Installment contracts receivable, 12/31........ 24,000 76,000
Total credit for the period..................................... 52,000 74,000
Less Credit representing repossession.................. 4,000 –
Credit representing collections.............................. P48,000 P 74,000
Multiply by Gross profit rate................................ 30% 35%
Realized gross profit............................................. P14,400 P 25,900 P 40,300

Sales............................................................................................................. 212,000
Realized Gross Profit..................................................................................... 40,300
Loss on Repossession............................................................................. 400
Cost of Sales........................................................................................... 165,000
Selling and Administrative Expenses..................................................... 66,000
Income Summary.................................................................................... 20,900
Income Summary........................................................................................... 20,900
Retained Earnings................................................................................... 20,900

3. Apple Company
Income Statement
Year Ended December 31, 2008

Sales................................................................................................................................ P212,000
Cost of sales....................................................................................................... 165,000
Gross profit on regular sales............................................................................................. 47,000
Add Realized gross profit on installment sales (Schedule 1)............................ 40,300
Total realized gross profit................................................................................................. 87,300
Less Loss on repossession............................................................................. 400
Total realized gross profit after adjustment for loss on repossession............................... 86,900
Selling and administrative expenses................................................................... 66,000
Net income ....................................................................................................................... P 20,900
Installment Sales
153

Problem 9 – 4

Schedule 1

2007 2008
Sales Sales Total
Installment contracts receivable, 1/1........................ P76 000 P150,000
Less Installment contracts receivable, 12/31............ 24,000 76,000
Total credit for the period........................................ 52,000 74,000
Less Credit representing repossession...................... 4,000 –
Credit representing collections................................. P48,000 P 74,000
Multiply by Gross profit rate.................................... 30% 35%
Realized gross profit................................................ P14,400 P 25,900 P40,300

Problem 9 – 5

1. Cost of Installment Sales................................................................... 54,400


Shipments on Installment Sales................................................... 54,400

Installment Sales................................................................................ 80,000


Cost of Installment Sales............................................................. 54,400
Deferred Gross Profit, 2008........................................................ 25,600
Gross profit = P25,600 ÷ P80,000 = 32%
Deferred Gross Profit, 2007............................................................... 14,000
Deferred Gross Profit, 2008............................................................... 8,000
Realized Gross Profit.................................................................. 22,000

Computation:
2007 2008
Sales Sales Total
Installment contracts receivable, 1/1............. P82,000 P 80,000
Less Installment contracts receivable, 12/31. _ 36,000 _55,000
Total credit for the period.............................. 46,000 25,000
Less Credit representing repossession........... __6,000 ___ –
Credit representing collections...................... P40,000 P 25,000
Multiply by Gross profit rate......................... __35%* ___32%
Realized gross profit..................................... P14,000 P 8,000 P 22,000

DGP, 1/1 P28,700 (26,600 + 2,100)


*2007 Gross profit rate= ––––––– = ––––––– = 35%
ICR, 1/1 P82,000 (36,000 + 40,000 + 6,000)

154 Chapter 9

Sales.................................................................................................. 200,000
Merchandise Inventory, December 31............................................... 52,000
Shipments on Installment Sales......................................................... 54,400
Merchandise Inventory, January 1............................................... 60,000
Purchases..................................................................................... 180,000
Repossessed Merchandise........................................................... 3,000
Loss on Repossession.................................................................. 900
Operating Expenses..................................................................... 53,000
Income Summary........................................................................ 9,500

Realized Gross Profit......................................................................... 22,000


Income Summary........................................................................ 22,000

Income Summary............................................................................... 31,500


Retained Earnings....................................................................... 31,500

2. PPG Discount Center, Inc.


Income Statement
Year Ended December 31, 2008

Regular Installment Total


Sales........................................................... P200,000 P80,000 P280,000
Cost of sales:
Inventory, January 1............................. P 60,000
Purchases.............................................. 180,000
Repossessed merchandise..................... __3,000
Cost of goods available for sale............ 243,000
Less Shipments on installment sales..... _54,400
Cost of goods available for regular sales 188,600
Less Inventory, December 31............... _52,000 _136,600 54,400 191,000
Gross profit................................................. P 63,400 25,600 89,000
Less Deferred gross profit on installment
sales, 2008............................................ 17,600 17,600
Realized gross profit, 2008.......................... 8,000 71,400
Add Realized gross profit on 2007
installment sales.................................... 14,000 14,000
Total realized gross profit........................... 22,000 85,400
Less Loss on repossession........................... ___900 __900
Total realized gross profit after adjustment
for loss on repossession........................ P21,100 84,500
Operating expenses..................................... _53,000
Net income.................................................. P31,500

Installment Sales
155
Problem 9 – 6

1. London Products
Schedule of Cost of Goods Sold
Year Ended December 31, 2008

Merchandise inventory, January 1.................................................................................... P 48,000


Purchases ....................................................................................................................... 238,000
Freight-in ....................................................................................................................... 12,000
Repossessed merchandise.................................................................................. 14,000
Cost of goods available for sale........................................................................................ 312,000
Less Merchandise inventory, December 31......................................................... 52,000
Cost of goods sold............................................................................................................. P260,000

2. London Products
Schedule of Allocation of Cost of Goods Sold
Year Ended December 31, 2008

On Cash Ratio to Allocated


Amount Price Basis Total Cost
Cash sales ................... P60,000 P 60,000 60/400 P 39,000
Charge sales.................. 120,000 ÷ 120% 100,000 100/400 65,000
Installment sales........... 300,000 ÷ 125% 240,000 240/400 156,000
P 400,000 P260,000

3. London Products
Income Statement
Year Ended December 31, 2008

Installment Charge Cash


Total Sales Sales Sales
Sales................................................. P480,000 P 300,000 P120,000 P 60,000
Cost of goods sold.............................. 260,000 156,000 65,000 39,000
Gross profit........................................ P 220,000 P 144,000 P 55,000 P 21,000
Less Unrealized gross profit:
On installment contracts
receivable,12/31 (192,000 x 144/300) 92,160 92,160
Realized gross profit.......................... 127,840 51,840
Add Realized gross profit on
prior years' sales (Schedule 1):
2006..................................... 19,200
2007..................................... 14,700 33,900 33,900
Total realized gross profit.................. 161,740 85,740
Less Loss on repossession
(Schedule 2)................................ 10,200 10,200
Total realized gross profit after
adjustment for loss on
repossession................................ 151,540 P 75,540
Less Operating expenses.................... 93,000
Net income ........................................ P 58,540

156 Chapter 9

Schedule 1

2006 2007
Installment contracts receivable, January 1:
2006 – P32,000 ÷ 40%............................................................... P80,000
2007 – P56,000 ÷ 35%............................................................... P160,000
Less Installment contracts receivable, December 31......................... _22,000 __90,000
Total credits....................................................................................... 58,000 70,000
Less Credit representing repossession............................................... _10,000 28,000
Total collections................................................................................ P48,000 P 42,000
Multiply by Gross profit rate............................................................. ___40% ___35%
Realized gross profit.......................................................................... P19,200 P 14,700

Schedule 2

2006 2007 Total


Fair market value of repossessed merchandise.... P 2,000 P12,000 P 14,000
Less Unrecovered cost:
Unpaid balance.............................................. 10,000 28,000 38,000
Less Unrealized profit –
2006 – P10,000 x40%............................. 4,000
2007 – P28,000 x35%............................. 9,800 13,800
Balances ............................................................ __6,000 18,200 __24,200
Gain (loss) on repossession.................................. P(4,000) P( 6,200) P( 10,200)

Problem 9 – 7

1. 2007 2008
2007
2007 installment sales (P400,000 x 42%*)..................................P 168,000
2008:
2007 installment sales (P173,000 x 42%).................................... P 72,660
2008 installment sales (P560,000 x 38.5%*)............................... ________ __215,600
Deferred gross profit..........................................................................P 168,000 P 288,260

*Computation of Gross profit percentages (see next page)


2007 2008
Installment sales................................................................................P2,210,000 P3,100,000
Less Trade-in allowances (P226,000 – P158,000)............................. _______– ____68,000
Adjusted installment sales................................................................. 2,210,000 _3,032,000
Cost of sales:
Inventories, January 1 (new)....................................................... – 420,000
Purchases (new).......................................................................... 1,701,800 1,767,000
Repossessed merchandise............................................................ – _83,000*
Cost of goods available for sale................................................... 1,701,800 2,270,000

Installment Sales
157

Less: Inventories, December 31 –


New merchandise.................................................................. 420,000 358,820
Repossessed merchandise..................................................... _______– ____46,500
Total...................................................................................... 420,000 405,320
Cost of sales................................................................................ 1,281,800 _1,864,680
Gross profit........................................................................................ P 928,200 P1,167,320

Gross profit percentages.................................................................... 42% 38.5%


*2007 : P195,000 x 20%=P39,000
2008 : P110,000 x 40% =_44,000
P83,000

Uncollectible installment contracts expense, per books. P 99,000


Correct Uncollectible installment contracts expense:
Fair market value of repossessed merchandise –
2007 sales (P195,000 x 20%)........................... P 39,000
2008 sales (P110,000 x 40%)........................... __44,000 P 83,000
Unrecovered cost –
2007 sales [P105,000 x (100% – 42%)]............ 60,900
2008 sales [P82,000 x (100% – 38.5%)]........... __50,430 __111,330 __28,330
Adjustment to Uncollectible installment contracts expense P 70,670

Fortune Sales Corporation


Income Statement
Year Ended December 31, 2008

Cash Installment Total


Sales Sales Sales
Sales ..................................................................... P205,000 P3,032,000 P3,237,000
Cost of sales.................................................................. _158,000 _1,864,680 _2,022,680
Gross profit................................................................... P 47,000 1,167,320 1,214,320
Less Unrealized gross profit on 2005 installment
sales (Schedule 1)................................................... __247,170 __247,170
Realized gross profit on 2008 sales............................... 920,150 967,150
Add Realized gross profit on 2007 installment
sales (Schedule 2)................................................... ___51,240 ___51,240
Total realized gross profit.............................................. 971,390 1,018,390
Less Uncollectible installment contracts expense.......... ___28,330 ___28,330
Total realized gross profit after adjustment................... P 943,060 990,060
Operating expenses....................................................... __592,960
Net income.................................................................... P 397,100

158 Chapter 9

Schedule 1

Installment contracts receivable 2008, December 31.................... P 560,000


Installment contracts receivable 2008 defaulted........................... ___82,000
Total............................................................................................ P 642,000
Multiply by 2008 gross profit percentage..................................... ___38.5%
Unrealized gross profit on 2008 installment sales........................ P 247,170

Schedule 2

Installment contracts receivable 2007, January 1............................... P 400,000


Less Installment contracts receivable 2007, December 31................. __173,000
Total credits for the period................................................................. 227,000
Less Installment contracts receivable 2007 defaulted........................ __105,000
Total collections................................................................................ P 122,000
Multiply by 2007 gross profit percentage.......................................... _____42%
Realized gross profit on 2007 installment sales................................. P 51,240
1. Apportionment of cost (P600,000) to Lots 1, 2 and 3:

Lot 1 :2/3 x P360,000.................................... P 240,000


Lot 2 :2/3 x P240,000.................................... 160,000
Lot 3 :1/3...................................................... P120,000
1/3 x P240,000........................................ __80,000 __200,000
Total cost....................................................... P 600,000

Journal Entries for 2007


March 31
Cash.............................................................................................. 36,000.00
Notes Receivable (Lot 2)............................................................... 364,000.00
Lot 2 ..................................................................................... 160,000.00
Deferred gain on Sale of Land................................................ 240,000.00
June 30
Cash.............................................................................................. 120,000.00
Notes Receivable (Lot 3)............................................................... 720,000.00
Lot 3....................................................................................... 200,000.00
Deferred Gain on Sale of Land............................................... 640,000.00
Cash.............................................................................................. 16,000.00
Interest Income (P364,000 x 12% x 3/12)............................... 10,920.00
Notes Receivable (Lot 2)........................................................ 5,080.00
September 30
Cash.............................................................................................. 16,000.00
Interest Income (P358,920 x 12% x 3/12)............................... 10,767.60
Notes Receivable (Lot 2)........................................................ 5,232.40

Installment Sales
159

October 31
Cash.............................................................................................. 72,000.00
Notes Receivable (Lot 1)............................................................... 288,000.00
Lot 1....................................................................................... 240,000.00
Deferred Gain on Sale of Land............................................... 120,000.00
December 31
Cash.............................................................................................. 78,000.00
Notes Receivable (Lot 1)........................................................ 6,240.00
Notes Receivable (Lot 2)........................................................ 5,389.37
Notes Receivable (Lot 3)........................................................ 6,800.00
Interest Income....................................................................... 59,570.63

Computation:
Total Lot 1 Lot 2 Lot 3
Collections...................................... P78,000.00 P12,000.00 P16,000.00P50,000.00
Apply to interest:
Lot 1 – P288,000.00 x 12% x 2/12 5,760.00
Lot 2 – P353,687.60 x 12% x 3/12 59,570.63 10,610.63
Lot 3 – P720,000.00 x 12% x 6/12 _________ _________ _________ _43,200.00
Apply to principal........................... P18,429.37 P 6,240.00 P 5,389.37 P 6,800.00

2. Deferred Gain on Sale of Land (Lot 1).............................................. 26,080.00


Deferred Gain on Sale of Land (Lot 2).............................................. 31,021.06
Deferred Gain on Sale of Land (Lot 3).............................................. 96,368.00
Realized Gain on Sale of Land.................................................... 153,469.06

Computation:
Lot 1 Lot 2 Lot 3
Collections applied to principal....... P78,240.00 P51,701.77
P126,800.00
Multiply by Gross profit rates:
Lot 1 – P120,000 ÷ P360,000.... 33.33%
Lot 2 – P240,000 ÷ P400,000.... 60%
Lot 3 – P640,000 ÷ P840,000.... _________ _________ _____76%
Realized gain................................... P26,080.00 P31,021.06P96,368.00

3. Lot 3 (80% x P200,000).....................................................................160,000.00


Deferred Gain on Sale of Land (Lot 3) (P640,000 – P96,368)..........543,632.00
Loss on Repossession........................................................................ 9,568.00
Notes Receivable (Lot 3) (P720,000 – P6,800)........................... 713,200.00

160 Chapter 9

Problem 9 – 9

Galaxy Investment Company


Income Statement
Year Ended December 31, 2008

Sales Schedule 1) .................................................................................................... P 8,060,000


Cost of sales (Schedule 2)........................................................................................ 1,612,000
Gross profit............................................................................................................ 6,448,000
Less Sales commissions..........................................................................................
221,000
Gross profit............................................................................................................ 6,227,000
Less Deferred gross profit
Installment Notes Balance P5,370,000
––––––––––––––––––––– =–––––––––– =67% x P6,227,000 4,172,090
Installment Sales P8,060,000
Realized gross profit................................................................................................ 2,054,910
Expenses:
Advertising and promotion............................................................................ P 730,000
Sales manager's salary................................................................................... 120,000
General office expenses (1/4 x P236,000)..................................................... 59,000 909,000
Net profit ............................................................................................................... P 1,145,910

Schedule 1
Total Cash Installment
Sales Price Received Notes Balance
A lots : 26 @ P150,000................................................ P3,900,000 P1,650,000 P 2,250,000
B lots : 32 @ P100,000................................................ 3,200,000 800,000 2,400,000
C lots : 12 @ P80,000.................................................. 960,000 240,000 720,000
......................................................... P8,060,000 P2,690,000 P 5,370,000

Schedule 2
Number of Unit Total
Class Lots Price Sales Value
A........................................................................ 80 P150,000 P12,000,000
B........................................................................ 100 100,000 10,000,000
C........................................................................ 120 80,000 9,600,000
Total............................................................ 300 P31,600,000

Cost of tract:
Cost of land.................................................................................................... P 4,800,000
Legal fees, etc................................................................................................ 600,000
Grading contract............................................................................................. 225,000
Water and sewerage system contract............................................................. 184,900
Paving contract............................................................................................... 266,300
General office expenses (3/4 x P236,000)..................................................... 177,000
Total............................................................................................................. P 6,253,200

P6,253,200
Cost rate : –––––––––––– = 20% (rounded off)
P31,600,000
Cost of sales (P8,060,000 x 20%)........................................................................... P 1,612,000
Installment Sales
161

Problem 9 – 10

Rizal Company
Income Statement
Year Ended December 31, 2008

Installment sales [(P14,300 x 7) + (P725 x 4)]........................................... P103,000


Cost of goods sold on installment (schedule 1).......................................... __79,310
Gross profit. ............................................................................................... 23,690
Less Deferred gross profit on 19x8 sales
(P103,000 – P21,000 = P82,000 x 23%*)......................................... __18,860
Realized gross profit on 2008 sales............................................................ 4,830
Add Realized gross profit on prior years' sales –
2006 : P60,000 x 33-1/3*................................................................... P20,000
2007 : P115,000 x 35%*.................................................................... _40,250 __60,250
Total realized gross profit........................................................................... 65,080
Less Loss on repossession (Schedule 4)..................................................... __33,100
Total realized gross profit after adjustment................................................ 31,980
General and administrative expenses.......................................................... __50,000
Net income (loss)....................................................................................... P(18,020)

*See Schedule 3

Schedule 1

Purchases (P10,500 x 8)............................................................................. P 84,000


Repossessed merchandise........................................................................... ___2,520
Cost of goods available for sale.................................................................. 86,520
Less Inventory, December 31 –
Number of units on hand................................................................... 1
Multiply by average unit cost (Schedule 2)........................................ P 7,210 ___7,210
Cost of goods sold on installment............................................................... P 79,310

Schedule 2

Purchases during 2008 (P10,500 x 8)......................................................... P 84,000


Add Repossessed merchandise................................................................... ___2,520
Total.......................................................................................................... P 86,520
divide by Number of units (8 + 4).............................................................. _____12
Average unit cost........................................................................................ P 7,210

162 Chapter 9

Schedule 3

....................................................... 2006 2007 2008


Sales –
2006 : P15,000 x 10....................................... P150,000
2007 : P14,000 x 20....................................... P280,000
2008 : P14,300 x 7......................................... 100,100
P725 x 4.............................................. _______ _______ __2,900
Sales ....................................................... 150,000 280,000 103,000

Cost of goods sold:


Inventory, January 1........................................ – 20,000 –
Purchases ....................................................... 120,000 162,000 84,000
Repossessed merchandise................................ _____– _____– _2,520
Cost of goods available for sale....................... 120,000 182,000 86,520
Less Inventory, December 31.......................... _20,000 _____– _7,210
Cost of goods sold........................................... 100,000 182,000 79,310
Gross profit. ............................................................ P 50,000 P 98,000 P23,690
Gross profit rates...................................................... 33-1/3% 35% 23%

Schedule 4

Fair market value of repossessed merchandise........................................... P 2,520


Less Unrecovered cost –
Unpaid balance:
Original sales amount (P14,000 x 4)........................................... P 56,000
Collections prior to repossession................................................. __1,200
Total. ........................................................................................... 54,800
Less Unrealized profit (P54,800 x 35%)............................................ _19,180 _35,620
Loss on repossession.................................................................................. P33,100

Long-Term Construction Contracts 163

CHAPTER 10

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

10-1: a
Percentage of Completion Method:
Contract Price P1,000,000
Less:Total estimated cost
Cost incurred P 200,000
Estimated remaining cost _400,000 __600,000
Gross profit estimated 400,000
% of completion (200,000/600,000) __33 1/3%
Gross profit to be recognized P 133,333

Zero Profit Method: 0


10-2: a P100,000
2007 2008
Contract Price P9,000,000 P9,000,000
Less: Total estimated cost _7,800,000 _8,100,000
Estimated gross profit 1,200,000 900,000
% of completion:
2007 (3,900,000/7,800,000) 50%
2008(6,300,000/8,100,000) _________ ______78%
Gross profit earned to date 600,000 700,000
Less: Gross profit earned in prior year ________– ___600,000
Gross profit earned each year P 600,000 P 100,000

10-3: a
Contract Price P6,000,000
Less: Total estimated cost (3,600,000 + 1,200,000) _4,800,000
Estimated gross profit 1,200,000
% of completion (3,600,000/4,800,000) _____75%
Gross profit earned to date 900,000
Less: Gross profit earned in 2007 __600,000
Gross profit earned in 2008 P 300,000

10-4: b
Contract Price P3,000,000
Less: Total estimated cost (930,000 + 2,170,000) _3,100,000
Loss (P 100,000)

164
Chapter 10

10-5: b
Total cost to date, 2008 (4,800,000 X 60%) P2,880,000
Less: Cost incurred in 2007 (4,500,000 X 20%) __900,000
Cost incurred in 2008 P1,980,000

10-6: a
Percentage of Completion Method:
Contract Price P3,000,000
Less: Total estimated cost (900,000/1,800,000) _2,700,000
Estimated gross profit 300,000
% of completion (900,000/2,700,000) ___33.33%
Gross profit recognized, 2007 100,000
Add: Cost Incurred ___900,000
Construction in Progress - 2007 P 1,000,000
Zero Profit Method:
Cost incurred to Construction in Progress - 2007 P 900,000

10-7: a
2007 2008
Contract Price P4,200,000 P4,200,000
Less: Total estimated cost _3,000,000 _3,750,000
Estimated gross profit 1,200,000 450,000
% of completion _____20% ____100%
Gross Profit earned to date 240,000 450,000
Gross Profit earned in prior year _______– __240,000
Gross Profit earned this year P 240,000 P 210,000

10-8: b
Collections:
Contract Billings P 47,000
Less: Accounts receivable ___15,000
Collections P 32,000

Initial Gross Profit:


Contract Price P 800,000
Gross Profit rate:
Income recognized 10,000
Divide by Construction in Progress 50,000 =_____20%
Initial Gross Profit P 160,000

Long-Term Construction Contracts 165

10-9: a

Gross profit (loss) earned in 2008 (P 20,000)


Gross profit earned in prior years _180,000
Gross profit earned to date - 2008 160,000
Divide by percentage of completion - 2008 ___100%
Estimated gross profit - 2008 160,000
Less: Contract price 2,000,000
Total estimated cost 1,840,000
Less: Cost incurred - 2008 _820,000
Cost incurred to date - 2007 1,020,000
Less: Cost incurred - 2006 __360,000
Cost incurred in 2007 P 660,000

10-10: b
Gross profit earned to date - 2007 (P40,000 + P140,000) P 180,000
Divide by estimated gross profit - 2007:
Contract price P2,000,000
Gross profit rate [180,000/(1,020,000 + 180,000)] ___X 15% __300,000
Percentage of completion - 2007 60%

10-11: a, Refer to Q 10-10 solutions.

10-12: d

Contract price P2,000,000


Estimated gross profit - 2007 (Refer to Q 10-10) __300,000
Total estimated cost 1,700,000
Less: Cost incurred to date - 2007 (refer to Q 10-9) 1,020,000
Estimated cost to complete - 2007 P 680,000

10-13: d

2007: Construction in progress P 244,000


Less: Construction costs __210,000
Gross profit recognized - 2007 P 34,000

2008: Construction in progress (P728,000-P244,000) P 484,000


Less: Construction costs __384,000
Gross profit recognized - 2008 P 100,000

166
Chapter 10

10-14: d
Project 1
Project 2
Percentage of Completion Method:
Contract price P 420,000
P 300,000
Less: Total estimated cost
Cost incurred to date - 2008 P 240,000
P 280,000
Estimated cost to complete __120,000
___70,000
Total __360,000
__350,000
Estimated gross profit (Loss) 60,000
(50,000)
Percentage of completion __66.67%
_______–
Profit (loss) to be recognized P 40,000
(P 50,000)
Total is (P10,000)

Zero Profit Method - The loss (P50,000) for project 2 only.

10-15: a
2006 2007 2008
Contract price (cost X 120%) P3,744,000 P3,744,000
P3,744,000
Less: Total estimated costs
(1) Cost incurred to date 546,000 1,544,400
3,120,000
Estimated cost to complete _2,054,000 _1,315,000
________–
(2) Total _2,600,000 _2,860,000
_3,120,000
Estimated gross profit 1,144,000 884,000
624,000
Percentage of completion (1 ÷ 2) _____20% _____54%
____100%
Gross profit earned to date 240,240 477,360
624,000
Gross profit earned in prior years _______– __240,240
__477,360
Gross profit earned this year P 240,240 P 237,120 P
146,640

10-16: d
2007 2008
Contract price P6,300,000
P6,300,000
Less: Total estimated cost
Cost incurred to date 1,425,000
3,040,000
Estimated cost to complete _4,075,000
_1,960,000
Total P5,500,000
P5,000,000
Estimated gross profit 800,000
1,300,000
Percentage of completion:
2007 (1,425,000 - 50,000) ÷ 5,500,000 25%
2008 (3,040,000 - 50,000) ÷ 5,000,000 ________–
__59.80%
Profit earned to date 200,000
777,400
Less: Gross profit earned in prior year ________–
__200,000
Gross profit earned this year P 200,000
P 577,400

Long-Term Construction Contracts 167

10-17: a

Cash collections:
Progress billings P1,500,000
Less: Accounts receivable, end __500,000
Collection P1,000,000

Cost incurred to date:


Construction in Progress P1,600,000
Less: Gross profit earned __200,000
Cost incurred to date P1,400,000

10-18: d

Percentage of Completion Method:


Apartment A Apartment B
2007 2008 2007 2008
Contract price 1,620,000 1,620,000 2,520,000
2,520,000
Less: Total Estimated Costs
(1) Cost incurred to date P 600,000 P1,200,000 P1,560,000
P2,310,000
Estimated cost to complete 840,000 240,000 690,000 –
(2) Total estimated cost 1,440,000 1,440,000 2,250,000
2,310,000
Estimated Gross Profit 180,000 180,000 270,000
210,000
Percentage of completion (1 ÷ 2) _41.67% _83.33% _69.33%
_100.00%
Gross profit earned to date 75,000 150,000 187,200
210,000
Less: Gross profit earned in Prior years _______– ___75,000 _______–
__187,200
Gross Profit earned this year P 75,000 P 75,000 P 187,000 P
22,800

Total Gross Profit 20 (P75,000 + P22,800) P97,800


Zero Profit Method - P210,000 gross profit earned in 2008 for Apartment B.

10-19: d
2007 2008
Contract price:
2007 P6,000,000
2008 (P6,000,000-P50,000) _________
P5,950,000
Less: Total estimated costs
(1) Cost incurred to date 2,340,000
2,650,000
Estimated cost to complete 260,000 –
(2) Total estimated cost 2,600,000
2,650,000
Estimated Gross Profit 3,400,000
3,300,000
Percentage of completion (1 ÷ 2) ____90%
___100%
Gross profit earned to date 3,060,000
3,300,000
Less: Gross profit earned in Prior year _______–
3,060,000
Gross Profit earned this year P3,060,000 P
240,000
168
Chapter 10

10-20: a
2006 2007 2008
(1)Cost incurred to date P3,400,000 P5,950,000
P6,150,000
(2)Estimated cost to complete 1,600,000 150,000 –
(3)Total Estimated Costs 5,000,000 6,100,000
6,150,000

Percentage of completion (1 ÷ 3) 68% 98% 100%

Contract price P6,000,000 P6,000,000


P6,000,000
Less: Total estimated cost 5,000,000 6,100,000
6,150,000
Estimated Gross Profit 1,000,000 (100,000)
(150,000)
Percentage of completion 68% 100% 100%
Gross profit earned (loss) to date 680,000 (100,000)
(150,000)
Add: Cost incurred to date 3,400,000 5,950,000
6,150,000
Construction in Progress 4,080,000 5,850,000
6,000,000
Less: Contract billings 3,200,000 5,200,000
6,000,000
Balance P 880,000 P 650,000 –

10-21: c
Construction in Progress:
Cost incurred to date, 2007 P2,625,000
Gross profit earned, 2007 (Schedule 1) 100,000
P2,725,000
Less: Contract billings, 2006 (P3,250,000 x 75%)
2,437,500
Excess of Construction in Progress over Contract Billings (CA)
P 287,500

Schedule 1 – Computation of gross profit earned, 2006


2006 2007
Contract price P3,250,000
P3,250,000
Total estimated cost:
Cost to date 1,075,000
2,625,000
Estimated cost to complete 1,612,500
750,000
Total 2,687,500
3,375,000
Estimated gross profit (loss) 562,500
(125,000)
% of completion 40% –
Gross profit (loss) to date 225,000
(125,000)
Gross profit earned in prior years –
225,000
Gross profit earned this year P 225,000
P 100,000

10-22: a
2005 2006 2007
Contract price P2,800,000 P2,800,000
P2,800,000
Estimated cost:
Cost to date 1,300,000 1,960,000
2,440,000
Estimated costs to complete 1,360,000 780,000
380,000
Total 2,660,000 2,740,000
2,820,000
Estimated gross profit 140,000 60,000
(20,000)

% of completion 48.87% 71.53% –


Long-Term Construction Contracts 169
10-23: b
2007 Project A Project B Project
C
Contract price P2,900,000 P3,400,000
P 1,700,000
Estimated costs:
Cost to date 1,680,000 1,440,000 320,000
Estimated cost to complete 1,120,000 1,760,000
960,000
Total 2,800,000 3,200,000
1,280,000
Estimated gross profit 100,000 200,000 420,000
% of completion 60% 45% 25%
Gross profit earned this year (P255,000) P 60,000 P 90,000
P 105,000

2008 Project A Project B Project C Project


D
Contract price P2,900,000 P3,400,000 P1,700,000
P 2,000,000
Estimated costs
Cost to date2,640,000 2,120,000 1,183,000 560,000
Estimated costs to complete –0– 1,360,000 117,000
1,040,000
Total 2,640,000 3,480,000 1,300,000
1,600,000
Estimated gross profit (loss) 260,000 (80,000) 400,000 400,000
% of completion 100% – 91% 35%
Gross profit (loss) to date 260,000 (80,000) 364,000 140,000
Gross profit earned in prior year 60,000 90,000 105,000 –0–
Gross profit earned this year(P609,000) P 200,000 P 10,000 P 259,000
P 140,000

2007 2008
Gross profit earned P 255,000
P 609,000
General and administrative expenses 120,000 120,000
Net income P 135,000 P 489,000

10-24: c
Contract price
P10,000,000
Gross profit earned to date, 2008 (P900,000 – P100,000) 800,000
Total cost to date, 2008
9,200,000
Less: cost incurred in 2008
4,100,000
Cost to date, 2007
P 5,100,000
Gross profit earned to date P
900,000
Divided by % of completion:
(P5,100,000 + P900,000) / P10,000,000 60%
Estimated gross profit, 2007
P 1,500,000

10-25: d
Construction in progress:
Cost incurred to date
P 440,000
Gross profit earned to date (P2,500,000 – P2,000,000) 110,000
Total 550,000
Less: Contract billings (P2,500,000 x 30%) 750,000
Excess of contract billings over construction in progress (CL)
P( 200,000)
170
Chapter 10

10-26: a
Contract price P120,000,000
Total estimated cost:
Cost incurred to date:
Site labor cost 10,000,000
Cost of construction materials 30,000,000
Depreciation of special plant & equip 5,000,000
Total 45,000,000
Estimated cost to complete 55,000,000 100,000,000
Estimated gross profit 20,000,000
Percentage of completion (45/100) 45%
Gross profit to be recognized P 9,000,000

10-27: a
Cost incurred to date- 2007
Total estimated cost (8,000,000 / 40%) 20,000,000
Estimated cost to complete 8,000,000 P12,000,000
Cost incurred in 2007 3,700,000

3,700,000
Cost incurred in 2006 8,300,000
Estimated cost at completion- 2006 12,450,000
Total estimated cost- 2006 P20,750,000

Percentage of completion- 2006 (8,300,000/ 20,750,000) = 40%


10-28: a
2007
Contract 1 Contract 2 CIP-2007
Contract price P600,000 P450,000
Total estimated cost:
Cost incurred to date 150,000 87,500 P237,500
Estimated cost to complete 150,000 162,500
Total estimated cost 300,000 250,000
Estimated gross profit 300,000 200,000
Percentage of completion 50% 35%
Gross profit recognized P150,000 P70,000 P220,000

2008
Contract 1 Contract 2 Contract
3
Contract price 600,000 450,000 900,000
Total estimated cost 350,000 300,000 500,000
Estimated gross profit 250,000 150,000 400,000
Percentage of completion 80% 60% 36%
Gross profit earned to date 200,000 90,000 144,000
Gross profit earned in 2007 150,000 70,000 -
Gross profit earned this year 50,000 20,000 144,000

Long-Term Construction Contracts 171

10-29: a
Bicol Davao Aklan Total
Contract price P875,000 P1,225,000 P437,500
Total estimated cost
Cost incurred 656,250 175,000 175,000 1,006,250
Est. cost to complete - 700,000 175,000
Total estimated cost 656,250 875,000 350,000
Estimated gross profit 218,750 350,000 87,500
Percentage of completion 100% 20% 50%
Gross profit earned P218,750 P 70,000 P43,750 332,500

Percentage of completion Zero Profit


Total cost incurred 1,006,250 1,006,250
Total gross profit earned 332,500 218,750
Construction in progress 1,338,750 1,225,000
Less: Billings 1,312,500 1,312,500
Due from (to) 26,250 (87,500)

10-30: a
Contract price P40,825,000
Total estimated cost:
Cost incurred 8,475,000
Estimated cost to complete 28,400,000 36,875,000
Estimated gross profit 3,950,000
Percentage of completion 22.983%
Gross profit recognized P 907,830

172 Chapter 10

SOLUTIONS TO PROBLEMS

Problem 10 – 1
(a) 2007 2008
Contract Price P 450,000
P 450,000
Less: Total estimated cost
(1) Cost incurred to date 200,000320,000
Estimated costs to complete __100,000
_______–
(2) Total __300,000
_320,000
Estimated gross profit 150,000130,000
Percentage of completion (1 ÷ 2) ______2/3
___100%
Estimated gross profit to date 100,000130,000
Less: Gross profit earned in prior year _______–
__100,000
Gross profit earned this year P 100,000P
30,000

(b) Contract Price


P 450,000
Less: Total cost incurred
__320,000
Gross profit
P 130,000

(c) 2007: Construction in Progress 100,000


Cost of construction 200,000
Construction Revenue 300,000
2008: Construction in Progress 30,000
Cost of Construction 320,000
Construction Revenue 350,000
Problem 10 – 2

(a) Construction Revenue


P1,250,000
Less: Cost incurred
_1,250,000
Gross profit – 2008 P –
0–

Construction in Progress (cost incurred)


P1,250,000
Less: Contract billings (P5,800,000 x 30%)
_1,740,000
Billings in excess of related costs
P(490,000)

(b) Contract price


P5,800,000
Less: Total estimated costs
Cost incurred to date P1,250,000
Estimated costs to complete 3,740,000
5,000,000
Estimated gross profit 800,000
Percentage of Completion (P1,250,000 ÷ 500,000)
_____25%
Gross profit
P 200,000

Construction on Progress (P1,250,000 + P200,000)


P1,450,000
Less: Contract billings
_1,740,000
Billings in excess of related costs
P(290,000)
Long-Term Construction Contracts 173

Problem 10 – 3
(a) 2005 2006 2007 2008
Contract Price P55,000,000 P55,000,000 P55,000,000
P55,000,000
Less: Total estimated costs
(1) Cost incurred to date 15,000,000 25,000,000 35,000,000
50,000,000
Estimated costs to complete _35,000,000 25,000,000 15,000,000
________–
(2) Total _50,000,000 50,000,000 50,000,000
50,000,000
Estimated gross profit 5,000,000 5,000,000 5,000,000
5,120,000
Percentage of completion (1 ÷ 2) ______30% _____50% _____70%
____100%
Gross profit earned to date 1,500,000 2,500,000 3,500,000
5,000,000
Gross profit earned in prior yr(s) ________– _1,500,000 _2,500,000
_3,500,000
Gross profit earned the year P 1,500,000 P 1,000,000 P 1,000,000
P 1,500,000

(b) 2007 2008


(1) Construction in Progress 15,000,000 15,000,000
Cash or Payable 15,000,000
15,000,000

(2) Accounts Receivable 15,000,000 20,000,000


Contract Billings 15,000,000
20,000,000

(3) Cash 12,000,000 25,000,000


Accounts Receivable 12,000,000
25,000,000

(4) Construction in Progress 1,000,000 1,500,000


Cost of Construction 15,000,000 15,000,000
Construction Revenue 16,000,000
16,500,000

Problem 10 – 4

(a) 2006 2007 2008


Cost incurred to date P 1,000,000 P 5,500,000
P10,000,000
Divide by total estimated cost P 9,000,000 P11,000,000
_12,000,000
Percentage of Completion 11.11% 50% 83.33%

2006 2007 2008


(b) Contract Price P15,000,000 P15,000,000
P15,000,000
Less: Total Estimated Cost
Cost incurred to date 1,000,000 5,500,000
10,000,000
Estimated costs to complete __8,000,000 __5,500,000
__2,000,000
Total __9,000,000 _11,000,000
_12,000,000
Estimated gross profit 6,000,000 4,000,000
3,000,000
Percentage of completion ___11.11% ______50%
___83.33%
Gross profit earned to date 666,600 2000,000
9,500,000
Less: Gross profit earned in prior yrs. ________– ___666,600
_2,000,000
Gross profit earned this year P 666,600 P 1,333,400
P 500,000
174 Chapter
10

(c) (1) Construction in progress (cost incurred) 1,000,000


Cash
1,000,000

(2) Accounts Receivable 1,325,000


Contract Billings
1,325,000

(3) Cash 1,200,000


Accounts Receivable
1,200,000

(4) Construction in progress (gross profit) 666,600


Cost of construction 1,000,000
Construction Revenue
1,666,600

Problem 10 – 5

(1) 2005 2006 2007 2008


Contract Price P14,000,000 P14,000,000 P14,000,000
P14,000,000
Less: Total Estimated Cost
Cost incurred to date 6,500,000 9,800,000 12,200,000
13,900,000
Estimated cost to complete __6,800,000 _3,900,000 _1,900,000
________–
Total _13,300,000 13,700,000 14,100,000
13,900,000
Estimated gross profit 700,000 300,000 ( 100,000) 100,000
Percentage of completion ___48.87% ___71.53% _____100%
____100%
Gross profit (loss) to date 342,090 214,590 ( 100,000) 100,000
Less: Gross profit (loss) in prior yrs. ________– ___342,090 ___214,590
( 100,000)
Gross profit (loss) this year P 342,090 P( 127,500) P( 314,590) P
200,000

(2) 2005 2006 2007 2008


Cost of construction 6,500,000 3,300,000 2,400,000 1,700,000
Construction in progress 342,090 127,500 314,590 200,000
Construction Revenue 6,842,090 3,172,500 2,085,410
1,900,000

Problem 10 – 6

(1) 2005 2006 2007


Contract Price P 6,000,000 P 6,000,000 P 6,000,000
Less: Total estimated costs
Cost incurred to date 3,400,000 5,950,000 6,150,000
Estimated costs to complete _2,100,000 ___150,000 ________–
Total _5,500,000 _6,100,000 _6,150,000
Estimated gross profit 500,000 ( 100,000) ( 150,000)
Percentage of completion ___61.82% _______– ________–
Gross profit (loss) to date 309,100 ( 100,000) ( 150,000)
Gross profit (loss) in prior yrs. ________– __309,100 ( 100,000)
Gross profit (loss) this year P 309,100 P 409,100 P 50,000
Long-Term Construction Contracts
175

(2) 2005 2006 2007


Cost of construction 3,400,000 2,550,000 200,000
Construction in progress 309,100 409,100
50,000
Construction Revenue 3,709,100 2,140,900
150,000

(3) Cash 400,000


Accounts Receivable 400,000

Contract Billings 6,000,000


Construction in progress 6,000,000

Problem 10 – 7
(1) 2006 2007 2008
Contract Price P16,000,000 P16,000,000 P16,000,000
Less:Total Estimated Cost
Cost incurred to date 4,600,000 9,100,000 14,350,000
Estimated costs to complete __9,640,000 __5,100,000 _________–
Total _14,240,000 _14,200,000 _14,350,000
Estimated gross profit 1,760,000 1,800,000 1,650,000
Engineer's estimate of comp. ______31% ______58% _____100%
Gross profit to date 545,600 1,044,000 1,650,000
Less: Gross profit earned in prior yrs. ________– __545,600 _1,044,000
Gross profit earned this yr. P 545,600 P 498,410 P 606,000

(2) 2006 2007 2008


(a) Construction on progress 4,600,000 4,500,000 5,250,000
Cash 4,600,000 4,500,000
5,250,000

(b) Accounts receivable 5,000,000 6,000,000 5,000,000


Contract billings 5,000,000 6,000,000
5,000,000

(c) Cash 4,500,000 5,400,000 6,100,000


Accounts receivable 4,500,000 5,400,000
6,100,000

(d) Cost of constructions 4,600,000 4,500,000 5,250,000


Construction in progress 545,600 498,400 606,000
Construction revenue 5,145,600 4,998,400
5,856,000
(e) Contract billings 16,000,000
Construction on progress
16,000,000

(3) Zero Profit Method: 2008 Entres


(a) Construction in progress 5,250,000
Cash / accounts payable 5,250,000

(b) Accounts receivable 5,000,000


Contract billings 5,000,000
176
Chapter 10

(c) Cash 6,100,000


Accounts receivable 6,100,000

(d) Cost of construction 5,250,000


Construction in progress 1,650,000
Construction revenue 6,900,000

(e) Contract billings 16,000,000


Construction in progress 16,000,000

(4) The following entry would be the only one different from (2).

2006 2007 2008


* Cost of construction 4,414,400 3,821,600 6,114,000
Construction in progress 545,600 498,400 606,000
Construction revenue 4,960,000 4,320,000
6,720,000

* Total estimated costs x estimated percentage of completion.

Problem 10 – 8

(1) 2006 2007 2008


Contract Price P6,500,000 P6,500,000
P6,500,000
Less:Total Estimated Costs
Cost incurred to date 2,150,000 5,250,000
6,850,000
Estimated costs to complete _3,850,000 _1,500,000
________–
Total _6,000,000 _6,750,000
_6,850,000
Estimated gross profit (loss) 500,000 (250,000)
(350,000)
Less: Gross profit (loss) in prior yrs. ________– ___520,000
_(250,000)
Gross profit (loss) this years P 520,000 P( 250,000)
P( 600,000)

(2) In 2008 when the project is completed.

Franchise Accounting 177


CHAPTER 11

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

11-1: b
No revenue is to be reported. Because the franchisor fails to render substantial
services to the franchisee as of December 31, 2008.

11-2: c
Initial franchise fee P5,000,000
Less: Cost of franchise ____50,000
Net income P4,950,000

11-3: a
The total initial franchise fee of P500,000 is to be recognized as earned because the
collectibility of the note for the balance is reasonably assured.

11-4: b
Cash downpayment P 100,000
Collection of note applying to principal __200,000
Revenue from initial franchise fee P 300,000

11-5: a
Cash downpayment, January 2, 2008 P2,000,000
Collection applying to principal, December 31, 2008 _1,000,000
Total Collection 3,000,000
Gross profit rate [(5,000,000-500,000) ÷ 5,000,000] _____90%
Realized gross profit, December 31, 2008 P2,700,000

11-6: b
Face value of the note (P1,200,000 - P400,000) P 800,000
Present value of the note (P200,000 X 2.91) __582,000
Unearned interest income, July 1, 2008 P 218,000

11-7: d
Initial franchise fee P1,200,000
Less: unearned interest income __218,000
Deferred revenue from franchise fee P 982,000

11-8: d
Initial franchise fee P 500,000
Continuing franchise fee (P400,000 X .05) ___20,000
Total revenue 520,000
Cost ___10,000
Net income P 510,000

178
Chapter 11

11-9: b
Deferred Revenue from franchise fee:
Downpayment P6,000,000
Present value of the note (P1,000,000 X 2.91) 2,910,000
P8,910,000
Less: Cost of franchise fee
_2,000,000
Deferred gross profit
P6,910,000

Gross profit rate (6,910,000 ÷ 8,910,000) 77.55%

Downpayment (collection during 2008)


P6,000,000
Gross profit rate
___77.55%
Realized gross profit from initial franchise fee
P4,653,000
Add: Continuing franchise fee (5,000,000 X .05)
__250,000
Total
P4,903,000
Less: Franchise expense
___50,000
Operating income
P4,853,000
Interest income, 12/31/05 (P2,910,000 X 14%) X 6/12
__203,700
Net income
P5,056,700

11-10: b
Face value of the note receivable
P1,800,000
Present value of the note receivable
1,263,900
Unearned interest income P
536,100

Initial franchise fee


P3,000,000
Less: Unearned interest income __
536,100
Deferred revenue from franchise fee
P2,463,900
11-11: a
Revenues from:
Initial franchise fee
P1,000,000
Continuing franchise fee (P2,000,000 X .05)
100,000
Total revenue from franchise fees
P1,100,000

11-12: d
Realized gross profit from initial franchise fee [(350,000 + 90,000) x 37%]
P 162,800
Continuing franchise fee (P121,000 + P147,500) x 5%
___13,425
Total revenue 176,225
Expenses
___42,900
Net operating profit 133,325
Interest income (P900,000 x 15%) x 6/12
___67,500
Net income
P 200,825

Franchise Accounting 179

11-13: c
Cash down-payment P
95,000
Present of the note (P40,000 x 3.0374)
__121,496
Total P 216,
496

11-14: a
Initial franchise fee
P 50,000
Continuing franchise fee (P400,000 x 5%)
__20,000
Total revenue
P 70,000

11-15: c
Should be P80,000
Initial franchise fee – down-payment (P100,000 / 5)
P 20,000
Continuing franchise fee (P500,000 x 12%)
__60,000
Total earned franchise fee
P 80,000

11-16: a
The unearned interest credited is the difference between the face value and the
present value of the notes receivable (900,000 – 720000).

The down payment of P600,000 is recognized as revenue since it is a fair


measure of the services already performed by the franchisor.

11-17: b
Cora (P100,000 + P500,000) P 600,000
Dora (P100,000 + P500,000) 600,000
Total P1,200,000

11-18:
Down payment (3,125,000 x 40%) P1,250,000
Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 1,425,000
Adjusted sales value of initial franchise fee 2,675,000
Direct cost of services 802,500
Gross profit 1,872,500

Gross profit rate (1,872,500 ÷ 2,675,000) 70%

180
Chapter 11

Date Collection Interest Principal Balance of PV of NR


1/1 P1,425,000
6/30 468,750 171,000 297,750 1,127,250
12/30 468,750 135,270 333,480 793,770
Total collection applying to principal 631,230
Down payment 1,250,000
Total collection 1,881,230
Gross profit rate 70%
Realized gross profit on
initial franchise fee 1,316,861

11-19: c
Franchise Accounting 181

SOLUTIONS TO PROBLEMS

Problem 11 – 1

a. The collectibility of the note is reasonably assured.

Jan. 2: Cash...................................................................................12,000,000
Notes receivable................................................................ 8,000,000
Deferred Revenue from IFF......................................... 20,000,000

July 31: Deferred cost of Franchises............................................... 2,000,000


Cash.............................................................................. 2,000,000
Nov. 30: Cash/AR........................................................................... 29,000
Revenue from continuing franchise fee (CFF).............. 29,000

Dec. 31: Cash / AR......................................................................... 36,000


Revenue from CFF....................................................... 36,000

Cash.................................................................................. 2,800,000
Notes receivable........................................................... 2,000,000
Interest income (P8,000,000 x 10%)............................. 800,000

Adjusting Entries:
(1) Cost of franchise revenue........................................... 2,000,000
Deferred cost of franchises.................................. 2,000,000

(2) Deferred revenue from IFF........................................20,000,000


Revenue from IFF.................................................. 20,000,000
To recognize revenue from the initial franchise fee.

b. The collectibility of the note is not reasonably assured.

Jan. 2 to Dec. 31 = Refer to assumption a.

Adjusting entry: to recognized revenue from the initial franchise fee (installment method)

(1) To defer gross profit:


Deferred Revenue from IFF.......................................20,000,000
Cost of Franchise Revenue.................................. 2,000,000
Deferred gross profit – Franchises....................... 18,000,000
GPR = P18,000 ÷ P20,000,000 = 90%

(2) To recognize gross profit:


Deferred gross profit – Franchises.............................12,600,000
Realized gross profit............................................ 12,600,000
(P14,000,000 X 90%)

182
Chapter 11

Problem 11 – 2
a. Collection of the note is reasonably assured.
Jan. 5: Cash. .................................................................................... 600,000
Notes Receivable.................................................................. 1,000,000
Unearned interest income................................................. 401,880
Deferred revenue from F.F............................................... 1,198,120
Face value of NR............................................................................. 1,000,000
Present value (P200,000 x P2,9906)................................................ __598,120
Unearned interest............................................................................. 401,880

Nov. 25: Deferred cost of Franchise................................................ 179,718


Cash.............................................................................. 179,718

Dec. 31: Cash / AR......................................................................... 4,000


Revenue from CFF....................................................... 4,000
(P80,000 X 5%)

Cash.................................................................................. 200,000
Notes Receivable.......................................................... 200,000

Adjusting Entries:
1) Unearned interest income................................................. 119,624
Interest income........................................................... 119,624
P598,120 x 20%

2) Cost of Franchise.............................................................. 179,718


Deferred cost of Franchise......................................... 179,718

3) Deferred revenue from FF................................................ 1,198,120


Revenue from FF....................................................... 1,198,120
b. Collection of the note is not reasonably assured.
Jan. 5 to Dec. 31 before adjusting entries – Refer to Assumption a.

Dec. 31: Adjusting Entries:


1) Unearned interest income................................................. 119,624
Interest income.......................................................... 119,624

2) Cost of franchise............................................................... 179,718


Deferred cost of franchise.......................................... 179,718

3) Deferred revenue from FF................................................ 1,198,120


Cost of Franchise....................................................... 179,718
Deferred gross profit – Franchise............................... 1,018,402
GPR = 1,018,402 ÷ 1,198,120 = 85%)

4) Deferred gross profit – Franchise.....................................578,319.60


Realized gross profit – Franchise............................... 578,319.60
(P600,000 + P200,000- P119,624) x 85%

Franchise Accounting 183

Problem 11 – 3

2007
July 1: Cash. .......................................................................................... 120,000
Notes Receivable......................................................................... 320,000
Unearned interest income..................................................... 66,408
Deferred revenue from FF.................................................... 373,592
Face value of NR......................................................................... P320,000
Present value (P80,000 x 3.1699)................................................ _253,592
Unearned interest income............................................................ P 66,408
Sept. 1 to
Nov. 15: Deferred cost of franchise........................................................... 80,000
Cash. .................................................................................... 80,000
(P50,000 + P30,000)

Dec. 31: Adjusting Entry:


Unearned interest income............................................................ 12,680
Interest income..................................................................... 12,680
(P253,592 x 10% x 1/2)

2008
Jan. 10: Deferred cost of franchise........................................................... 50,000
Cash. .................................................................................... 50,000

July 1: Cash. .......................................................................................... 80,000


Note receivable..................................................................... 80,000

Dec. 31: Adjusting Entries:


(1) Cost of franchise................................................................... 130,000
Deferred cost of franchise................................................. 130,000

(2) Deferred revenue from FF.................................................... 373,592


Revenue from FF.............................................................. 373,592

(3) Unearned interest income..................................................... 25,360


Interest income................................................................. 25,360

184
Chapter 11

Problem 11 – 4
2008
Jan. 10: Cash. .......................................................................................... 6,000,000
Deferred revenue from FF.................................................... 6,000,000

Jan. 10 to
July 15: Franchise expense....................................................................... 2,250,000
Cash. .................................................................................... 2,250,000
Deferred revenue from FF........................................................... 4,000,000
Revenue from FF.................................................................. 4,000,000
Initial Franchise fee....................................................................P6,000,000
Deficiency
Market value of costs (P180,000 ÷ 90%) x 10 yrs................( 2,000,000)
Adjusted initial fee (revenue).......................................................P4,000,000

July 15: (a) Continuing expenses............................................................. 180,000


Cash / Accounts payable................................................... 180,000

(b) Deferred revenue from FF.................................................... 200,000


Revenue from CFF........................................................... 200,000
(P180,000 ÷ 90%)
Problem 11 – 5
a) Adjusted initial franchise fee:
Total initial F.F........................................................................... P4,500,000
Less: Face Market value of kitchen equipment........................... _1,800,000
Adjusted initial FF....................................................................... P2,700,000
Revenues:
Initial FF. .................................................................................... P2,700,000
Sale of kitchen equipment........................................................... 1,800,000
Continuing F.F. (P2,000,000 x 2%)............................................. ___40,000
Total. .......................................................................................... 4,540,000
Expenses:
Initial expenses............................................................................P 500,000
Cost of kitchen equipment........................................................... 1,500,000 _2,000,000
Net income........................................................................................ P2,540,000

b) Journal Entries:
Jan. 2: Cash. .................................................................................... 1,500,000
Notes receivable.................................................................... 3,000,000
Deferred revenue from FF (adjusted SV)......................... 2,700,000
Revenue from FF (Market value of equipment)................ 1,800,000

Cost of kitchen equipment.................................................... 1,500,000


Kitchen equipment............................................................ 1,500,000

Franchise Accounting 185

Jan. 18: Franchise expense....................................................................... 500,000


Cash.................................................................................. 500,000

April 1: Cash .........................................................................................2,000,000


Notes receivable............................................................... 2,000,000

Dec. 31: Cash .........................................................................................1,000,000


Notes receivable............................................................... 1,000,000
Cash / Account receivable........................................................... 40,000
Revenue from continuing FF............................................ 40,000

Deferred revenue from FF........................................................... 2,700,000


Revenue from FF.............................................................. 2,700,000

Problem 11 – 6

Recognition of initial franchise fee (IFF) (6 mos. after opening)


Revenue from initial FF:
Total initial FF...................................................................................P2,500,000
Less: Deficiency in continuing FF (Sch. 1)........................................ 160,000 2,340,000
Expense (costs of initial services).............................................................. __700,000
Net income................................................................................................ P1,640,000

Schedule 1 – Estimated deficiency in CFF


(1) (2)
Yr. of Estimated Market Value (Excess of 2 over 1)
Contract Continuing FF of Continuing Services Deficiency
1 P220,000 P250,000 P 30,000
2 220,000 250,000 30,000
3 220,000 250,000 30,000
4 220,000 125,000 –
5 220,000 125,000 –
6 150,000 125,000 –
7 150,000 125,000 –
8 150,000 125,000 –
9 90,000 125,000 35,000
10 90,000 125,000 __35,000
P160,000

Recognition of revenue from CFF and costs:

Years 1-3 Years 4-5 Years 6-8 Years 9-10


Revenue from CFF......................... P250,000 P220,000 P150,000 P125,000
Expenses....................................... _200,000 _100,000 _100,000 _100,000
Net income.................................... P 50,000 P120,000 P 50,000 P 25,000

186
Chapter 11
Problem 11 – 7

1/12/2008 6/1/2008 7/1/2008 6/30/2009


Revenues:
Initial FF (Sch. 1) – – 287,200 –
Interest income – – – 45,490*
Continuing FF – – – 48,000
Others 62,500 80,000 – –
Expenses:
Initial expenses – – ( 70,000) –
Continuing expense – – – ( 36,000)
Others ( 50,000) ( 68,000) – –
Net Income P 12,500 P 12,000 P217,200 P 57,490

* P454,900 x 10% = P45,490

Schedule 1: Computation of initial FF to the recognized:


Total initial fee ........................................................................................................... P750,000
Less: Interest unearned on the note......................................................................... ( 145,100)
A
Market value of inventory.............................................................................. ( 80,000)
B
Market value of equipment............................................................................ ( 62,500
B
Deficiency in continuing costs....................................................................... ( 175,200)
C
Adjusted initial FF....................................................................................................... P287,200

A. Unearned Interest:
Face value of the note........................................................................................... P600,000
Present value (120,000 x 3.7908).......................................................................... 454,900
rounded
Unearned interest.................................................................................................. P145,100

B. Market value of equipment and inventory:


Equipment (P50,000 ÷ 80%)................................................................................ P 62,500
Inventory.............................................................................................................. 80,000

Income from Sales:


Equipment Inventory Total
Sales Price. .................................................. P62,500 P80,000 P142,500
Cost............................................................. 50,000 68,000
118,000
Net income .................................................. P12,500 P12,000 P 24,500

C. Analysis of Continuing costs:


Market value of costs is P4,000/Mo. or P48,000 / yr.
Continuing Fees:
Years 1-4 Years 5-16 Years 17-20
Gross revenues ........................................... P330,000/mo. P450,000/mo. P500,000/mo.
Gross fees per month................................... P 2,475/mo. P 3,375/mo. P 3,750/mo.

Gross fees per year...................................... P 29,700 P 40,500 P 45,000


Market value of continuing costs................ ( 48,000) ( 48,000) ( 48,000)
Deficiency per year...................................... ( 18,300) ( 7,500) ( 3,000)
Number of years.......................................... x4 x 12 x4
Deficiency ........................................... P( 73,200) P( 90,000) P( 12,000)

Total deficiency for 20 years is P175,200


Franchise Accounting 187

Dates of Revenue Recognition:...................................................... Types of Revenue


January 12, 2008............................................................ Sale of equipment
June 1, 2008................................................................... Sale of inventory
July 1, 2008.................................................................... Initial FF (as adjusted0
June 30, 2009................................................................. Interest income and
continuing revenue.