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UNIT I: ACCOUNTING FOR A PARTNERSHIP

Lecture Notes

PARTNERSHIP ACCOUNTING
unlimited liability
easy to form

FORMATION OF PARTNERSHIP
Cash contribution of the partners recorded @ face value
Non-cash assets recorded @ agreed value, usually the fair value

o Bonus Method
1. No recording of unidentifiable assets pertaining to goodwill
2. Total Agreed Capital (TAC) = Total Contributed Capital (TCC)
3. There would only be a transfer of capital from one partner to another

o Cash Invested/Withdrawn
1. If adjusted capital is more than the unadjusted capital
ADDITIONAL INVESTMENT
2. If adjusted capital is less than the unadjusted capital
WITHDRAWAL

OPERATIONS
o Profit and Loss Agreement
Scenario Profit Loss Result
1. Both profit and loss agreement Follow the agreement
are given.
2. There is a profit agreement but Follow profit agreement
no loss agreement
3. No profit agreement but there is For profit, use original capital
a loss agreement ratio
For loss, follow the agreement
4. Both profit and loss agreement For both, use original capital
ratio.

o Salaries and Interest


1. Salaries & interest should be recorded as provided regardless of the result of the
operations.
2. This could be fractional year.
* Payments of salaries, interest & bonus are not treated as part of expense

o Bonus it should only be given if there is profit and bases depends on partners
agreement

MODADV1 Handout
Dr. Rodiel C. Ferrer
Statement of Changes in Partners Capital
Beginning Capital P xxx
Add: Additional Investment xxx
Less: Irregular or Permanent Withdrawal (xxx)
Balance Before Net Income P xxx
Add: Share In Net Income xxx
Less: Regular Drawings (xxx)
CAPITAL, END P xxx

* If withdrawal is SILENT to permanent or regular, it will be considered as permanent


withdrawal.

DISSOLUTION
1. Admission by purchase without revaluation
Purchase price is to be ignored.
Transaction between new partner and the partner who is selling shares is
considered as PERSONAL TRANSACTION.
The total agreed capital would still be equal to the total contributed capital

2. Admission by purchase with revaluation


Purchase price is used to determine the amount of revaluation
example: purchase price
= Total Agreed Capital
% of interest
Less: Total Contributed Capital
REVALUATION

* Amount of revaluation increases the amount of capital of the old partner and so is
distributed among P& L ratio

3. Admission by investment
Bonus method is to be applied if the problem is silent.
Revaluation method should also be applied if the problem says so.
TAC = TCC

Pro-forma:
o Bonus to old partner
Cash xxx
Capital, old partner xxx
Capital, old partner xxx
Capital, new partner xxx

o Bonus to new partner


Cash xxx
Capital, old partner xxx
Capital, old partner xxx
Capital, new partner xxx

MODADV1 Handout
Dr. Rodiel C. Ferrer
4.
TCC TAC BONUS
K- Old Partner 1 P xxx P xxx P xxx
T Old Partner 2 xxx xxx xxx
Total P xxx P xxx P xxx
R New Partner 1 xxx xxx xxx
TOTAL P xxx P xxx 0

5. Admission by purchase and admission by investment


UNADJUSTED ADJUSTED TAC BONUS
TCC
K- Old Partner 1 P xxx P xxx P xxx P xxx
T Old Partner 2 xxx xxx xxx xxx
Total P xxx P xxx P xxx P xxx
R New Partner 1 xxx xxx xxx xxx
TOTAL P xxx P xxx P xxx 0

RETIREMENT
1. Computation of Total Interest
Capital P xxx
+/- Share in Net Income/Loss xxx
+/- Revaluation xxx
+/- Loan Balance xxx
TOTAL INTEREST P xxx

o Classification of Loan Balances


ADDED TO CAPITAL (LIABILITY) DEDUCTED FROM CAPITAL(ASSET)
Loan FROM partner Loan TO partner
Due TO partner Due FROM partner
Loan payable TO partner Loan payable FROM partner

2. Total interest is more than settlement of its retiring partners


Bonus to REMAINING PARTNERS
3. Total interest is less than settlement of the retiring partner
Bonus to RETIRING PARTNER

LIQUIDATION
1. Lump-sum liquidation
2. Installment liquidation or piecemeal

o Lump-sum Liquidation
1. Assets realization
2. Liabilities payment
3. Capital distribution

MODADV1 Handout
Dr. Rodiel C. Ferrer
4. Marshalling of asssets
o Partnership Assets
Who do you prioritize first?
i. Partnership creditors
ii. Personal creditors
iii. Partners
o Personal assets
Who do you prioritize first?
i. Personal creditors
ii. Partnership creditors
iii. Partners

o Installment Liquidation
o Cash Priority Program (CPP)
1. Determine the total interest
2. Compute loss absorption balance (LAB)
LAB =Total Interest
P & L ratio
3. Equalize loss absorption balance from the highest to the second highest
until equal to determine priority of payment
4. Distribution to partners (difference in LAB x P&L ratio)

Partner A Partner B Partner C TOTAL


Total Interest P xxx P xxx P xxx P xxx
Divided by P&L ratio xxx xxx xxx xxx
Loss Absorption Balance P xxx P xxx P xxx P xxx

Priority I P xxx P xxx


Priority II P xxx xxx xxx
Priority III P xxx xxx xxx xxx
CASH DISTRIBUTION P xxx P xxx P xxx P xxx
When to use CPP?
If there is no deficiency in the partners capital
When the problem gives payment to any of the partners
ex. If partner A receives P xxx, how much will partner B receive?
3. If there is no additional investment

o Schedule of Safe Payment


1. Determine the total interest
2. Compute the maximum possible loss
2.1. Unsold non cash assets @ book value; plus
2.2. Liquidation expenses or cash withheld
3. Distributed deficit
4. Distribution to partners

* Under the statement of liquidation, partners are assumed to be solvent.


* Under the schedule of safe payment, partners are assumed to be insolvent

MODADV1 Handout
Dr. Rodiel C. Ferrer
COMPUTATION OF CASH DISTRIBUTION:
Cash, beginning P xxx
+ Proceeds from sale of Non Cash Assets xxx
- Total Liabilities recorded & unrecorded (xxx)
- Liquidation expenses (xxx)
CASH DISTRIBUTION P xxx

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT II: CORPORATE LIQUIDATION

Lecture Notes

CORPORATE LIQUIDATION
1) Assets should be recorded at Fair Value (FV) or Net Realizable Value (NRV)
2) Intangible assets and pre-payments are DERECOGNIZED upon Corporate Liquidation

o Statement of Affairs initial report that shows the available asset values and debts of
the debtor corporation
o Statement of Realization and Liquidation periodic report of the reviewer shows how
the receiver managed the assets of the debtor corporation on behalf of the creditors

Assets are classified into three (3) categories:


1. Assets pledged to FULLY secured creditors (APTFSC)
FV of asset >Liability
2. Assets pledged to PARTIALLY secured creditors (APTPSC)
FV of asset < Liability
3. Free assets assets not pledged as security for any liability
includes value of APTFSC in excess of liability

Liabilities are classified into four (4) categories:


1. Unsecured liability with priority
a. Administrative expenses trustees expenses
b. Salaries and wages
c. Taxes
2. Fully secured creditors (FSC)
3. Partially secured creditors (PSC)
4. Unsecured creditors

NUMERATOR DENOMINATOR
1) Excess of APTFSC over FSC: 4) Excess of PSC over APTPSC:
APTFSC P xxx PSC P xxx
FSC ( xxx) P xxx APTPSC ( xxx) P xxx

2) Free Assets xxx 5) Liability w/o priority xxx


TOTAL FREE ASSETS P xxx TOTAL UNSECURED LIAB P xxx

3) Less: Liabilities w/ priority


a. Administrative exp. P xxx
b. Salaries xxx
c. Taxes xxx ( xxx)
NET FREE ASSETS P xxx

% of recovery = NET FREE ASSETS .


TOTAL UNSECURED LIABILITY

Estimated deficiency = Net Free Assets Total Unsecured Liability

MODADV1 Handout
Dr. Rodiel C. Ferrer
COMPUTATION FOR TOTAL PAYMENT TO ALL CREDITORS:
Fully Secured Creditors P xxx
Partially Secured Creditors:
Assets Pledged to Partially Secured Creditors (P xxx * 100%) P xxx
Excess of PSC over APTPSC ( P xxx * % of recovery) xxx xxx
Liability with Priority xxx
Liability without Priority ( P xxx * % of recovery) xxx
TOTAL PAYMENT TO ALL CREDITORS P xxx

OR

Net Realizable Value of Assets = Total Payment to Creditors

STATEMENT OF REALIZATION AND LIQUIDATION

Assets to be realized xxx xxx Assets realized


Assets acquired xxx xxx Assets not realized
Liabilities liquidated xxx xxx Liabilities to be liquidated
Liabilities not liquidated xxx xxx Liabilities assumed
Supplementary charges xxx xxx Supplementary credits
Net Income xxx xxx Net Loss

COMPUTATION FOR ENDING CASH BALANCE:

A = L+E
Cash Liabilities not SHE ITEMS
Assets not
liquidated
realized

Equity P xxx
Liabilities NOT liquidated xxx
Less: Assets NOT realized xxx
ENDING CASH BALANCE P xxx

NOTE: If Retained Earnings balance is ending, it already includes net income or net loss. If not,
then add or deduct the net income or net loss.

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT III: INSTALLMENT SALES

Lecture Notes

INSTALLMENT SALES
1) If collectability of the note is REASONABLY ASSURED, ACCRUAL METHODshould be
applied. In this topic the entire amount of GP becomes part of the net income.
2) If the collectability of the note is NOT REASONABLY ASSURED, INSTALLMENT
METHOD should be applied

COMPUTATION OF NET INCOME:


Gross Profit (GP) on Regular Sales P xxx
Realized Gross Profit (RGP) on Installment Sales xxx
TOTAL RGP P xxx
Less: Expenses
1) Selling Expenses P xxx
2) Loss on Repossession xxx
3) Loss on Write-off xxx ( xxx)
NET INCOME P xxx

*GP on Regular Sales *RGP on Installment Sales


Sales P xxx Collection P xxx
Less: Cost of Regular Sales ( xxx) Multiplied by GP rate ( xxx)
GP ON REGULAR SALES P xxx RGP ON INSTALLMENT SALES P xxx

3) Installment Accounts Receivable


IAR, beginning (prior year) xxx xxx Collections
or
Installment sales xxx Repossessed accounts
(current year) or IAR defaulted
xxx Write-off
IAR, ending xxx

4) Gain or Loss on Repossession


COMPUTATION OF FV OF REPOSSESSED MERCHANDISE:
Estimated Selling Price P xxx
Reconditioning cost ( xxx)
Normal Profit ( xxx)
Cost to sell ( xxx)
FV OF REPOSSESSED MERCHANDISE AFTER RECONDITIONING
COST P xxx

* If it is BEFORE reconditioning cost, IGNORE the amount of reconditioning cost.


* If the problem is SILENT if the estimated selling price is before or after recondition cost,
deduct the reconditioning cost
* If the problem says ESTIMATED WHOLESALE VALUE or APPRAISED VALUE, the
normal profit should not be deducted anymore.

MODADV1 Handout
Dr. Rodiel C. Ferrer
COMPUTATION OF GAIN (LOSS) ON REPOSSESSION:
FV of Repossessed Merchandise P xxx
Less: Unrecovered cost
1) IAR-defaulted P xxx
Less: DGP related to receivables ( xxx )
or
2) IAR x cost ratio xxx ( xxx)
GAIN (LOSS) ON REPOSSESSION P xxx

* If Unrecovered Cost > FV or Repossessed Merchandise = LOSS ON REPOSSESSION


* If Unrecovered Cost < FV of Repossessed Merchandise = GAIN ON REPOSSESSION

Journal entry:
Repossessed Merchandise @ FV xxx
DGP xxx
Loss on Repossession xxx
IAR defaulted xxx
Gain on Respossession (if any) xxx

4) Write-off
Journal entry:
Regular Sales
Allowance on Doubtful accounts xxx
Accounts Receivable xxx
Installement Sales
DGP xxx
Loss on Write-off xxx
IAR xxx

5) Deferred Gross Profit


COMPUTATION OF DEFERRED GROSS PROFIT:
Installment Sales P xxx
Cost of Installment Sales ( xxx)
DGP P xxx

DGP
RGP (Collection x GP rate) xxx xxx DGP, beginning
DGP on Repossessed Merchandise xxx
DGP on Write-off xxx
xxx DGP, ending

MODADV1 Handout
Dr. Rodiel C. Ferrer
COMPUTE GP RATE FOR INSTALLMENT SALES:
IS prior year IS current year
DGP DGP
IAR IS

6) Trade-In
1)
Downpayment Cash P xxx
2)
Downpayment FV of merchandise traded in xxx
3)
Collection Interest xxx
TOTAL COLLECTION P xxx
X GP Rate * %
RGP P xxx

COMPUTE FOR GP RATE OF MERCHANDISE TRADED IN:


Installments Sales P xxx
Less: Over allowance (xxx)
Add: Under allowance (if any) xxx
ADJUSTED SALES P xxx
Less: Cost of Sales (xxx)
GP P xxx

Gross Profit
= GP Rate
Adjusted Sales

* Trade in value of merchandise > FV of merchandise traded in = OVERALLOWANCE


* Trade in value of merchandise < FV of merchandise traded in = UNDERALLOWANCE

NOTE: If the trade in allowance is deducted from the invoice price before computing the
amount of down payment if the problem says that the trade-in is part of the down
payment.
or
[(Adjusted sales FV of RM) x % of DP] = Amount of Downpayment

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT IV: LONG TERM CONSTRUCTION CONTRACTS

Lecture Notes

Long-term Construction Contracts


1) Contract Price = Progress Billings
2) Contract Price + Escalation Clause Penalty Clause = Progress Billings

3) Two Methods:
Percentage of Completion Method
With dependable estimates are available
a.k.a. cost to cost model
20x2 20x3 20x4
a) Contract Price P xxx P xxx P xxx
b) Cost Incurred (to date) P xxx P xxx P xxx
c) Estimated costs to complete xxx xxx xxx
d) Total Estimated costs (a + b) xxx xxx xxx
e) Total Estimated Gross Profit (a d) P xxx P xxx P xxx
f) Multiply by Percentage of Completion
(b/d) x % x % x %
Gross Profit to date (e x f) P xxx P xxx P xxx
Gross Profit (previous year) - ( xxx ) ( xxx )
Gross Profit (current year) P xxx P xxx P xxx

20x2 20x3 20x4


a) Cost Incurred (to date) P xxx P xxx P xxx
b) Gross Profit (to date) xxx xxx xxx
c) Construction In Progress P xxx P xxx P xxx
d) Progress Billings (to date) xxx xxx xxx
DUE FROM/DUE TO P xxx P xxx P xxx

NOTE: Due From (Current Asset), Due To (Current Liability)

MODADV1 Handout
Dr. Rodiel C. Ferrer
Zero Profit Method
No dependable estimates are available

20x2 20x3 20x4


a) Contract Price P xxx P xxx P xxx
b) Cost Incurred (to date) P xxx P xxx P xxx
c) Estimated costs to complete xxx xxx xxx
d) Total Estimated costs (a + b) xxx xxx xxx
e) Total Estimated Gross Profit (a d) P xxx P xxx P xxx
f) Multiply by: 100% or 0%
x % x % x %
Gross Profit to date (e x f) P xxx P xxx P xxx
Gross Profit (previous year) - ( xxx ) ( xxx )
Gross Profit (current year) P xxx P xxx P xxx

NOTE: No profit is recognized until the construction contract is completed.


: When it is probable that total estimated costs will exceed the contract price,
the expected loss shall be treated as an expense immediately.

4) Contract Retention may be part of billing but not paid to contractor


Does not have an income element

Journal entry:
Cash xxx
Contract Retention xxx
Accounts Receivable xxx

Upon Completion:
Cash xxx
Contract Retention xxx

5) Mobilization fee
Deducted from the bills of contractors in equal installments covering the project
period
Does not have income element

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT V: FRANCHISE ACCOUNTING

Lecture Notes

FRANCHISE ACCOUNTING
1) CRS Criteria in recognizing initial franchise fee as revenue:
(1) Cash or the down payment must be NON-REFUNDABLE.
All the conditions
(2) Notes Receivables must be REASONABLY ASSURED.
MUST BE met (3) Services must be SUBSTANTIALLY PERFORMED.
If the problem is silent, the best indicator of the criterion is when the
company commences operation

* If any of the conditions is not followed, the entire amount of IFF becomes an unearned
revenue, except when:
a) The down payment is non-refundable; and
b) The down payment represents the fair measure of the services performed.
Under the two conditions, the amount of down payment becomes revenue, however,
the remaining balance is considered unearned revenue.

2) If the notes receivable is REASONABLY ASSURED, the ACCRUAL METHOD is used,


however, if it is NOT REASONABLY ASSURED, use INSTALLMENT METHOD.

Franchise Cost
DIRECT COST INDIRECT COST
IFF Direct Cost Expense
CFF Expense Expense

3) If the problem is silent, the notes receivable is considered reasonably assured.

Case 1 Case 2 Case 3 Case 4


Interest bearing Interest bearing Non -Interest bearing Non - Interest bearing
NR - reasonably assured NR - not reasonably assured NR - reasonably assured NR not reasonably assured

Revenue (IFF) Downpayment Revenue (DP + PV) Downpayment


- Cost of Sales + Collection - Cost of Sales + Collection
Gross Profit Total Collection Gross Profit - Interest
+ CFF (Sales x %) x GP% + CFF (Sales x %) Total Collection
+ Interest Income RGP + Interest Income x GP%
- Expense + CFF (Sales x %) - Expense RGP
NET INCOME + Interest Income NET INCOME + CFF (Sales x %)
- Expense + Interest Income
NET INCOME - Expense
NET INCOME

Common Question for Case 3:


How much is the revenue from franchise?
1) Revenue (DP + PV) P xxx
2) CFF xxx
TOTAL REVENUE FROM FRANCHISE P xxx

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT VI: INTEREST ON JOINT VENTURES

Lecture Notes

JOINT VENTURES
IFRS 11 (Jan 1, 2013)
(1) (2) (3)
IAS 31 jointly controlled entity jointly contributed jointly controlled
assets operations

IFRS 11 (1)jointly controlled entity (2)


jointly controlled operations
- Contractual - Sharing of control
- Establishes joint control - Unanimous consent in operating &
- Equity method financial decisions
- SNI: Investment Joint Venture xxx
Investment Income xxx Joint Venture - P/L
- Dividends: Cash xxx
Inv. Income xxx Purchases Sales

1-19% financial asset @ FV through P&L Expenses


@ FV through OCI
cost method or FV method CR - unadjusted
20-49% investment in associate Unsold merchandise
equity method CAPITAL Cash
50 % joint control equity method Cash Loss
Withdraw Profit
Invested
Merchandise
51-100% investment in subsidiary Merchandise
cost method Loss Profit

Section No. 15: Joint Ventures for SMEs DR CR


1) Equity Method
2) Cost Method Due from Due to managing
3) FV Model operations

COMPUTATION OF CARRYING VALUE OF INVESTMENT:


EQUITY METHOD COST METHOD FV MODEL
Purchase Price Purchase Price Purchase Price
+ Transaction Cost + Transaction Cost + Unrealized Gain
+ Share in Net Income - Impairment Loss - Unrealized Loss
- Dividends CV OF INVESTMENT CV OF INVESTMENT
- Amortization of UVA
+ Amortization of OVA
- Impairment Loss
CV OF INVESTMENT

* Share in net income fractional year

MODADV1 Handout
Dr. Rodiel C. Ferrer
COMPUTATION OF PROFIT (LOSS):
EQUITY METHOD COST METHOD FV MODEL
+ Share in Net Income Dividends Dividends
+/- Gain (Loss) on Sale +/- Gain (Loss) on Sale + Unrealized Gain
+ Amortization of UVA - Impairment Loss - Unrealized Loss
- Amortization of OVA PROFIT (LOSS) - Transaction Cost
- Impairment Loss +/- Gain (Loss) on Sale
PROFIT (LOSS) PROFIT (LOSS)

COMPUTATION OF HOW MUCH THE SETTLEMENT TO VENTURERS:


Investment in terms of cash or merchandise P xxx
+ Share in Net Income xxx
- Withdrawal of cash or merchandise ( xxx)
- Unsold merchandise given to venturers ( xxx)
FINAL SETTLEMENT P xxx

COMPUTATION OF TOTAL INTEREST:


Joint venture cash P xxx
+/- Settlement to (A) venture
[ A, Capital + SNI unsold merchandise given to (A) ] xxx
Settlement to (B) P xxx
+ Unsold merchandise given to (B) xxx
TOTAL INTEREST P xxx

SMEs
Methods used Change to
Cost Model
Public price quotation FV Model
(public offering)
FV Model
FV cannot be determined Cost Model
reliably without undue effort

FV Model
Use FV model, if there is a published price quotation given, if cost method is used.
Under this model, SNI is not considered in computing net income however the
dividend is treated as income
Cash xxx
Dividend Income xxx
Any cost to sell is ignored. The FV of investment should only be considered.
The CV is of how much is the FV at the end of the year

Cost Model
Same with FV, the entity will record dividend income
Cash xxx
Dividend Income xxx

MODADV1 Handout
Dr. Rodiel C. Ferrer
Equity Model
Equity model is always equity model unless there is a change in ownership.
If the company loses joint control, there would be a shift to cost model or fair model.

MODADV1 Handout
Dr. Rodiel C. Ferrer
UNIT VII: DEBT RESTRUCTURING

Lecture Notes

DEBT RESTRUCTURING
- Debt restructuring is a situation where the creditor for economic or legal reasons related
to the debtors financial difficulties, grants to the debtor concession that would not be
granted in a normal business relationship.

Types of Debt Restructuring:


1. Asset Swap
2. Equity Swap
3. Modification of terms

ASSET SWAP
- Under PFRS 9 , asset swap is treated as a derecognition of a financial liability or
extinguishment of an obligation
- The difference between the carrying amount of the financial liability and the
consideration given shall be recognized in profit or loss

Carrying Value of Liability P xxx


Less: Carrying Value of Asset ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx

- Under USA GAAP, asset swap is recorded as if two transactions have taken
place, namely, the sale of the asset and the extinguishment of the liability.
FMV of property given P xxx
Less: CV of property given ( xxx)
GAIN ON EXCHANGE P xxx

Carrying Value of Liability P xxx


Less: FMW of Asset ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx

- PFRS 9 should be followed as this in conformity with international accounting


standard

EQUITY SWAP
- Issuance of share capital by the debtor to the creditor in full or partial payment of
an obligation
Carrying Value of Liability P xxx
Less: FMV of Stock * ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx
* FMV of stock includes Ordinary Shares and Share Premium

MODADV1 Handout
Dr. Rodiel C. Ferrer
- If the fair value of the equity instruments issued cannot be reliably measured, the
equity instruments issued to extinguish a financial liability shall be measured at
the following amounts in order of priority:
a. Fair value of equity instruments issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished

MODIFICATION OF TERMS
- PFRS 9 provides that a substantial modification of terms of an existing financial
liability shall be accounted for as an extinguishment of the old financial liability
and recognition of a new financial liability
- There is substantial modification of terms, if the amount of gain on existing of
debt is AT LEAST 10% of the carrying amount of the old liability

Carrying Value of Liability P xxx


Present Value of Restructured Liability* ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx
* PV of new or restructured liability which is discounted using the old effective
rate
- Premium is recognized if the new carrying value of the old liability is greater than
the new liability when there is modification

MODADV1 Handout
Dr. Rodiel C. Ferrer