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Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, Cabuyao, Laguna

Name: _________________________________ Score:___________
Advance Financial Accounting & Reporting Mr. D.R. Magalang

Problem I
Jacky, Kharla and Lynda are partners with profit and loss ratio of 50%, 30% and 20%, respectively. The
partners decided to liquidate the partnership effective January 1, 2014. The partnership trial balance on
December 31, 2014 was as follows:

Debit Credit
Cash P 50,000
Non-cash assets 450,000
Liabilities to Creditors P135,000
Loan payable – Lynda 15,000
Jacky, Capital 180,000
Kharla, Capital 120,000
Lynda, Capital 50,000
Totals P500,000 P500,000

REQUIRED: Prepare a statement of liquidation. The non-cash assets are sold for P112,500 and liquidation
expenses of P7,500 are paid. Linda is insolvent and is unable to repay the partnership for the debit balance.

Problem II

On December 31, 2014, the accounting records of MMM, NNN, and OOO Partnership (a general partnership)
included the following ledger account balances:
(Dr.) Cr.
MMM, drawing P( 60,000)
OOO, drawing ( 22,500)
NNN, loan 75,000
MMM, capital 307,500
NNN, capital 251,250
OOO, capital 270,000

Total assets of the partnership amounted to P1,196,250, including P131,250 cash, and partnership liabilities
totaled P375,000. The partnership was liquidated on December 31, 2011, and OOO received P208,125 cash
pursuant to the liquidation. MMM, NNN, OOO shared net income and losses in a 5:3:2 ratios, respectively.

What is (1) the amount realized from the sale of non-cash assets; (2) the cash balance after payment of
A. (1) P755,625; (2) P886,875 C. (1) P868,125; (2) P624,375
B. (1) P643,125; (2) P774,375 D. (1) P868,125; (2) P999,375

Problem III

Flamingo, Durango and Mortero are partners in a wholesale business. On January 1, 2014 the total capital was
P240,000 and drawings presented as follows:

Capitals Drawings
Flamingo P 50,000 P 30,000
Durango 40,000 20,000
Mortero 150,000 10,000

Partners agree that profit and loss ratio are shared equally. Because of the failure of some debtors to pay their
outstanding accounts, the partnership loss heavily and the partners are compelled to liquidate the partnership.
After exhausting the partnership assets, including those arising from an operating profit of P36,000 in 2014,
they still owe P42,000 to creditors on December 31, 2014. Flamingo has no personal assets but the others are
well off.

What are the (1) partnership liquidating loss, and (2) the amount that Mortero will receive as a result of the
A. (1) P222,000; (2) P57,000 C. (1) P258,000; (2) P 6,550
B. (1) P 80,000; (2) P78,000 D. (1) P258,000; (2) P39,000
Problem IV

Following is the balance sheet of Arami, Portho and Artagna Partnership on June 4, 2014, immediately prior to
its liquidation:
Assets Liabilities and Partnership Capital
Cash P 12,000 Liabilities P 40,000
Other Assets 188,000 Potho, Loan 8,000
Arami, Capital 54,000
Portho, Capital 78,000
Artagna, Capital 20,000
Totals P200,000 P200,000
The partners shared net income and losses as follows: Arami, 40%, Portho, 40% and Artagna, 20%. On June 4,
2014, the other assets were realized at P61,400, and P41,000 had to be to liquidate the liabilities because of an
unrecorded trade accounts payable of P1,000. Arami and Portho were solvent, but Artagna’s personal liabilities
exceeded personal assets by P10,000. How much would each partner receive?
A. Arami, P3,360; Portho, P35,360; Artagna, P0
B. Arami, P2,960; Portho, P34,960; Artagna, P0
C. Arami, P 200; Portho, P24,200; Artagna, P0
D. Arami, P 200; Portho, P32,200; Artagna, P0
Problem V
AA, BB and CC are partners sharing profits and loss in the ratio of 4:3:3, respectively. On January 1, 2014, they
decided to liquidate the partnership and the balance sheet prepared were as follows:
Assets Liabilities and Partnership Capital
Cash P 8,000 Liabilities P 24,000
Other Assets 184,000 BB, Loan 20,000
CC, Loan 10,000
AA, Capital 57,800
BB, Capital 50,200
CC, Capital 30,000
Totals P192,000 P192,000
The following transactions as a result of liquidation were as follows:
Book Value Cash Realized Costs of Cash Withheld at the
Of Assets from Sale of liquidation Payment to end of the month for
Sold Assets paid Creditors Anticipated Expenses
January P48,000 P42,000 P 2,000 P24,000 P 8,000
February 28,000 24,000 3,000 4,000
March 60,000 40,000 4,000 10,000
April 48,000 20,000 10,000 0
1. Prepare a statement of liquidation with supporting schedules to accompany the statement
(schedule of safe payments)
2. Prepare a cash priority program/cash distribution plan showing how cash should be distributed
to partners as it becomes available.
Problem VI

When Rey and Koniff, general partners of the Rey Koniff Partnership who shared net income and losses in a
4:6 ratio, were incapacitated in an accident, a liquidator was appointed to rise up the partnership. The
partnership’s balance sheet showed the following:
Assets Liabilities and Capital
Cash P 70,000 Liabilities P 40,000
Other Assets 200,000 Rey, Capital 142,000
Goodwill 20,000 Koniff, Capital 108,000
Totals P 290,000 P 290,000
Because of the specialize nature of the non cash assets, the liquidator anticipated that considerable time would
be required to dispose them. Liquidation expenses paid P10,000 for advertising, rent, travel, etc. in the process
of liquidating the partnership, an overlooked bill for landscaping services of P4,000 is discovered and in
addition, partners agree to keep a P6,000 contingent funds. Determine the amount of cash that should be paid to
each partner.
Rey Koniff Rey Koniff
A. P46,000 P 0 C. P30,000 P0
B. 10,000 0 D. 20,000 0
Problem VII

The partnership of JJ, KK, LL and MM is preparing to liquidate. Profit and loss sharing ratios are shown in the
summarized balance sheet at December 31, 2014 as follows:
Assets Liabilities and Capitals
Cash P 400,000 Other liabilities P 200,000
Inventories 400,000 JJ, loan 200,000
Loan to KK 40,000 JJ, Capital (40%) 400,000
Other assets 1,020,000 KK, Capital (20%) 640,000
LL, Capital (20%) 200,000
MM, Capital (20%) 220,000
Totals P1,860,000 Totals P1,860,000

During January 2015, the inventories are sold for P170,000, the other liabilities are paid, and P100,000 is set-
aside for contingencies.

Compute the total cash payment to partners and the cash that should be receive by JJ and KK:
Payment Payment
to partners JJ KK to partners JJ KK
A. P390,000; P46,667; P323,334 C. P290,000; P 0 P290,000
B. P410,000; P60,000; P330,000 D. P270,000; P 0 P270,000

Problem VIII

The ABC Partnership is being dissolved. All liabilities have been liquidated. The balance of assets at hand is
being realized gradually. The following are details of each partners’ accounts.

Capital Current Account

Account Undistributed
(Original Earnings Loans to Profit and
Investment) (net of Drawings) Partnership Loss Ratio
A P20,000 P1,000 cr. P15,000 40%
B 25,000 2,000 dr. 40%
C. 10,000 1,000 cr. 5,000 20%

If A receives P16,000 at this point, how much will BB and CC receive?

A. P23,000 P16,000 C. P20,000 P6,000
B. 3,000 6,000 D. 4,000 4,500

Problem IX

The balance sheet of the Partnership Duro, Kemp and Ruth on December 31, 2014 before liquidations shows
the following:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P150,000
Other Assets 560,000 Notes payable 100,000
Loan to Ruth 20,000 Loan from Kemp 10,000
Duro, capital (50%) 170,000
Kemp, capital (30%) 170,000
Ruth, capital (20%) 100,000
Totals P700,000 Totals P700,000

The partnership decided to liquidate as soon as possible after December 31, 2014, and all cash on hand, except
for P10,000 contingency balance is to be distributed at the end of each month until the liquidation is completed.

If in the first month of realization and distribution, the partnership pays liquidation expenses of P5,000 and
Kemp receives P60,000, what are the cash proceeds from the initial sale of other assets?
A. P160,000 C. P200,000
B 180,000 D. 205,000

Problem X (Method of Recognizing Gross Profit in Installment Sales)

On October 31, 2014, The Dionne Company sold merchandise to Poker Corporation for P800,000. Terms of the
sale called for a down payment of P200,000 and the balance is payable in three annual installment of P200,000
beginning October 31, 2015. The cost of merchandise on the book of Dionne on the date of sale was P520,000.
The perpetual inventory system is used. The company’s fiscal year end is December 31.


1. Compute the amount of gross profit and cost to be recognized in each of the four years of the
installment sale applying each of the following method:
A. Time of Sale or Point of delivery revenue recognition
B. Time of collection revenue recognition:
 Installment sales method (Cost-Profit Recovery Method)
 Cost Recovery Method (Sunk Cost Method)
 Profit Recovery Method

Problem XI (Computations of Realized Gross Profit)

The Carol Company accounts for its sales on installment sales basis. At the beginning of 2014, ledger accounts
include the following account balances:

Installment Accounts Receivable, 2012 P 45,000

Installment Accounts Receivable, 2013 144,000
Deferred Gross Profit, 2012 18,900
Deferred Gross Profit, 2013 54,000

At the end of 2014, account balances before adjustment for realized gross profit on installment sales are:

Installment Accounts Receivable, 2012 P 0

Installment Accounts Receivable, 2013 36,000
Installment Accounts Receivable, 2014 195,000
Deferred Gross Profit, 2012 18,900
Deferred Gross Profit, 2013 51,525
Deferred Gross Profit, 2014 90,000

Installment sales on 2014 are made at 25% above cost of merchandise sold; cash sales amounting P350,000
were made at a markup of 30% of sales and credit sales of P100,000 at a markup of 32%. During 2014, upon
default in payment by the customer, the company repossessed the merchandise with an estimated market value
of P3,000. The sales was made in 2014 for P16,200 and P9,600 had been collected prior to repossession.

Required: Compute the following

1. Total realized gross profit before gain or loss on repossession in 2014

2. Realized gross profit on installment sales in 2014 for 2014 sales
3. Realized gross profit on installment sales in 2014 for 2013 sales
4. Realized gross profit on installment sales in 2014 for 2012 sales
5. Realized gross profit on installment sales in 2014.

Problem XII (Subsequent Sale of Repossessed Merchandise)

Using the same information in Problem II, assuming that Carol Company wants to improve the salability of the
repossessed merchandise, the company incurred P250 for reconditioning. After which, the company was able to
sell the merchandise to another customer for P4,062.50 at a down payment of 40%. Compute the realized gross
profit on the subsequent installment sale.
A. P425 C. P325
B. 406 D. 260

Problem XIII (Computation of Deferred Gross Profit)

Since there is no reasonable basis for estimating the collectability, Plus Appliance Company uses the
installment method of recognizing revenue for the following sales:

2013 2014
Sales P225,000 P337,500
Collections from:
2013 sales 75,000 37,500
2014 sales 112,500
2013 sales 7,500 15,000
2014 sales 30,000
Accounts written-off:
2013 sales 18,750 56,250
2014 sales 18,750
Gross profit rate 30% 40%

What amount should Plus Appliance Company report as deferred gross profit in its December 31, 2014 balance
A. P123,750 C. P75,000
B. 93,750 D. 70,500

Problem XIV (Accounting for Trade-In Merchandise)

Nissan, Inc. sells a new car costing P1,080,000 for P1,530,000 on installment basis on October 1, 2014. Terms
of the payment included the acceptance of a used car with trade-in allowance of P540,000. Cash of P90,000 was
paid in addition to the trade-in car with the balance to be paid in ten monthly installments due at the end of each
month commencing the month of sale. The estimated selling price of the car after reconditioning cost of
P22,500 is P450,000. A 15% gross profit was usual from the sale of used car. The company uses the installment
method of accounting to recognized gross profit.


1. Give the entry to record the above transactions for the year 2014.
2. What is the realized gross profit on installment sale in 2014?

Problem XV (Cost Recovery Method)

The following information pertains to the sale of real estate by FILSTAR Realty Company on December 31,
Sales Price
Down payment P 300,000
Purchase money mortgage 2,700,000
Total P3,000,000
Carrying amount of Real Estate 2,000,000
Profit from sale P1,000,000

The mortgage is payable in nine annual installments of P300,000 beginning December 31, 2014 plus interest at
10%. The December 31, 2014 installment was paid as scheduled, together with interest of P270,000. The
company uses the cost recovery method to account for the sale. What amount of income should the company
recognized in 2014 from the real estate sale and it’s financing?
A. P520,000 C. P270,000
B. 370,000 D. 0

Problem XVI (Cost Recovery Method)

On January 1, 2013, Tom And Jerry sells 200 acres of farmland to Spike for P600,000, taking in exchange a
10% interest-bearing note. Tom And Jerry purchased the farmland in 1997 at a cost of P500,0000. The note will
be paid in three installments of P241,269 each on December 31, 2013, 2014 and 2015. Collectability of the note
is uncertain. Therefore, Tom And Jerry uses the cost recovery method to account for this installment sale.


1. For each year, compute the cash collections, deferred interest revenue, installment receivable balances,
unrecovered cost, realized gross profit, and interest revenue realized.

Problem XVII (Repossession and Trade-Ins)

The Casa Appliance Company makes all sales in the installment contracts and accordingly reports income on
the installment basis. Installment contract receivables are accounted for by years. Defaulted contracts are
recorded by debiting Loss on Repossession accounts and crediting the appropriate Installment Contract
Receivable account for the unpaid balance at the time of default. All possessions and trade-ins are recorded at
realizable values. The following data relate to the transactions during 2013 and 2014.

2013 2014
Installment sales P150,000 P198,500
Installment contract receivable, Dec. 31:
2013 sales 80,000 25,000
2014 sales 95,000
Purchases 100,000 120,000
New merchandise inventory, Dec. 31 at cost 10,000 26,000
Loss on repossessions 6,000

The company auditor disclosed that the inventory taken on December 31, 2014 did not include certain
merchandise received as trade-in on December 2, 2014 for which an allowance was given. The realizable value
of the merchandise is P1,500 which was also the allowance on the trade-in. No entry was made to record this
merchandise on the books at the time it was received. In 2014, a 2013 contract was defaulted and the
merchandise was repossessed. At the time of default, the repossessed merchandise had a realizable value of
P2,500. The repossessed merchandise was neither recorded nor included in the physical inventory on December
31, 2014

Required: Compute the following

1. The gross profit rate in 2014 after adjustment

2. The balance of Deferred Gross Profit – 2013 as of December 31, 2013
3. The total realized gross profit to be reported in 2014
4. The adjusted gain (loss) on repossession

Problem XVIII (Installment Sales with Present Value)

On September 30, 2013, Musik Instruments Co. sold for P32,000 a piano costing P20,000. The down payment
was P3,200 and the balance was to be paid on 12 installments at the end of each succeeding month using
present value. Interest at 1% a month was charged on the unpaid balance of the contract, with payments first
applying to accrued interest and the balance to principal. After three installment payments, the customer
defaulted. The piano was repossessed in March 1, 2014. It was estimated that the piano had a fair value of
P11,500 after reconditioning costs of P300. The present value factors are:

Present value of 1 at 1% for 12 periods 0.8874

Present value of an annuity of 1 at 1% for 12 periods 11.2551

Required: Compute

1. Monthly collections as to principal and interest for the year 2013

2. The realized gross profit on installment sales for the year 2013
3. The gain or loss on repossession in March 1, 2014.

Problem I (Journal Entries: Franchise – Earned and Unearned)

Pitsa Hut Sells a franchise that requires an initial franchise fee of P70,000. A down payment of P20,000 cash is
required with the balance covered by issuance of a P50,000, 10% note payable by the franchisee in five annual
equal installments.

Required: Prepare the entry(ies), assuming:

2. If all the material services have been substantially performed by the franchisor, the refund period has
expired, and the collectibility of the note is reasonably assured.
3. If the refund period has expired and the collectibility of the note is reasonably assured, but all material
services have not been substantially performed by the franchisor.
4. If all the material services have been substantially performed by the franchisor and the collectibility of
the note is reasonably assured, but the refund period has not expired.

Problem XIX. Interest-Bearing Note; Franchise Revenue, Gross Profit and Net Income.

On January 1, 2012, Salamat Corporation entered into a franchise agreement with Domini Corporation to sell
their products and to operate a franchise for a period of twenty years.

The agreement provides for an initial franchise fee of P5,000,000, P1,250,000 down payment upon signing of
the contract and the balance is payable in four annual payment plus interest every December 31. Domini signs a
10% interest-bearing note for the balance.

The agreement further provides that the franchisor will assist in site location, make a survey of potential market,
supervise construction activity and training of management employees and perform a few relatively minor

On December 31, 2012, Domini Corporation has rendered services to the franchisee amounting to P1,500,000.
Operating expenses amounted to P100,000.

Required: Assuming that there is a substantial performance of services and the initial down payment is not
refundable, compute the franchise revenue, gross profit and net income, if:
6. The collectibility of the note is reasonably assured.
7. The collectibility of the note is not reasonably assured.

Problem XX. Non-Interest-Bearing Note; Franchise Revenue, Gross Profit and Net Income.

Dilaw Franchising Corporation franchises its name to different people across the country. The franchise
agreement requires the franchisee to make an initial payment of P1,200,000 and signs a P3,200,000 non-interest
bearing note on the agreement date. The note is to be paid in four annual payments of P800,000 each year
beginning December 31 from agreement date. The initial payment is refundable until the date of opening.
Interest rates are assumed to be 10% for this type of borrowing agreement. The information on present and
future value factors is as follows:
Present value of 1 at 10% for 4 periods 0.6830
Present value of an annuity of 1 at 10% for 4 periods 3.1699
Future value of 1 at 10% for 4 periods 1.4641
Future value of an annuity of 1 at 10% for 4 periods 4.6410
The franchisor agrees to make market studies, find a location, train the employees, and perform a few relatively
minor services. The following transactions in 2012, describe the relationship with Connie, a franchisee:
January 3: Entered into a franchise agreement.
February 2: Completed a market study at a cost of P120,776.
June 1: General expenses paid, P50,000.
August 7: Found suitable location, service cost P300,000.
November 2: Completed training program for employees, cost P700,000.
December 8: Franchise outlet opened and business operations started.
December 31: Received first annual payments.

Required: Compute the franchise revenue, gross profit and net income, if:
1. The collectibility of the note is reasonably assured
2. The collectibility of the note is not reasonably assured (assume installment sales method).

Problem XXI. Franchise Revenue.

On December 31, 2012, SS authorize HH to operate as a franchisee for an initial franchise fee of P270,000. Of
this amount, P108,000 was received upon signing of the contract agreement and the balance is represented by a
note due in three annual payments of P54,000 each beginning December 31, 2013. The present value on
December 31, 2012, for three annual payments, appropriately discounted is P129,600. According to the
agreement, the nonrefundable down payment represent of a fair measure of the services already performed by
SS and substantial future services re still to be rendered. However, the collectibility of the note is reasonably
certain. SS’s December 31, 2012 income statement should report earned franchise fee from HH in the amount
A. P237,600 C. P 0
B. 108,000 D. 129,600

Problem XXII. Franchise with Defaults.

Each of Goldiwow, Inc., 21 new franchisees contracted to pay an initial franchise fee of P30,000. By December
31, 2012, each franchisee had paid a non-refundable P10,000 fee and signed a note to pay P10,000 principal
plus the market rate of interest on December 31, 2013, and December 31, 2014. Experience indicates that one
franchisee will default on the additional payments. Services for the initial franchise fee will be performed in
2013. What amount of net unearned franchise fees would Goldiwow report at December 31, 2012?
A. P400,000 C. P610,000
B. 600,000 D. 630,000

Problem XXIII. Continuing Franchise Fees.

Kriselda’s Company sells a franchise that requires an initial franchise fee of P70,000. A down payment of
P20,000 cash is required with the balance covered by the issuance of P50,000, 10% note, payable by the
franchisee in 5 equal annual installment. Kriselda’s Company also charges the franchisee a continuing franchise
fee of P9,000. Compute the franchise revenue- continuing franchise at the time of the receipt of P9,000: (1) if
the fee is earned fro providing continuing services; (2) if P1,000 of the fee is for national advertising that is still
to be rendered:
A. (1) P 0; (2) P 0 C. (1) P9,000; (2) P8,000
B. (1) P9,000; (2) P9,000 D. (1) P 0 ; (2) P8,000

Problem XXIV. Initial Franchise Fee with Bargain Purchase Option.

Swit, Inc. charges P90,000 for a franchise, with P18,000 paid when the agreement is signed and the balance is
four annual payments, discounted at 9%, is P58,315. The franchisee has the right to purchase P20,000 of
equipment for P16,000. If the collectibility of the payment is reasonably assured, and substantial performance
by Swit, Inc. has occurred, the amount of revenue from franchise fees that should be recognized is:
A. P72,000 C. P76,315
B. 72,315 D. 90,000

Problem XXV. Option to Purchase the Franchise Outlet.

Mang Dunalds, Inc. grants a franchise to Ms. Juliby for an initial franchise fee of P2,000,000. The agreement
provides that Mang Dunalds has the option to purchase within one year the franchisee’s business and it seems
certain that the franchisor will exercise the option. On Mang Dunald, Inc. books, how should the initial
franchise fee be recognized?
A. Deferred revenue and to be amortized
B. Realized revenue
C. Extraordinary revenue
D. Deferred revenue and will be treated as a reduction in investment when the option is exercised.