KEY ANSWERS & SOLUTIONS PRACTICAL ACCOUNTING 2 1ST PB JULY 16, 2011 1. C 2. B 3. A 4. BONUS (556,250; 706,250; 537,500) 5. D 6. B 7. D 8. D 9. A 10.

C 11. D 12. A 13. B 14. B 15. C 16. A 17. B 18. D 19. D 20. A 21. B 22. C 23. B 24. B 25. C SOLUTIONS 1. Assets at fair value Joe (80,000 + 400,000) Smith (40,000 + 280,000) Less: Liabilities assumed Capital 2. Capitals before admission Admission of Vince: By purchase By investment Capital balances Goodwill to old partners (330,000 315,000) Bonus to old partners (92,000 70,000) Capital after admission 3. Salary Balance, equally Income for year 2013 only Income for year 2012 (60:40) Reported income for year 2013 Joe 480,000 120,000 360,000 ======== Mitz 95,000 95,000 7,500 11,000 113,500 ======== A 18,000 1,500 19,500 2,400 21,900 ======= 320,000 60,000 260,000 ========= Mart 60,000 60,000 3,000 4,400 67,400 ======== Total 18,000 3,000 21,000 4,000 25,000 ========= Vince 12,000 80,000 92,000 ( 22,000 ) 70,000 ========== Smith 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. C A D C A A D C A B A D B C C B A A B A A A A A B

Marc 80,000 ( 12,000 ) 68,000 4,500 6,600 79,100 ======= D 1,500 1,500 1,600 3,100 =======

4. A Capital balances before admission of D 700,000 Admission of D: By purchase from A (1/2) ( 350,000) By investment Capital balances 350,000 Goodwill to old partners, 3:3:2, P 550,000 206,250 Goodwill to new partner, P 200,000 Capital balances after admission 556,250 ========= Goodwill computation: Total agreed capital of the new partnership Total contributed capital Goodwill To new partner (2,400,000 x 1/4 ) 400,000 To old partners 5. Salaries Interest on average capital Balance, equally A 30,000 2,167 ( 1,483 ) 30,684 ========= B 30,000 800 ( 1,484 ) 29,316 ========

B 500,000

C 400,000

D -

500,000 206,250 706,250 ======== 2,400,000 1,650,000 750,000 200,000 550,000 ========== Total 60,000 2,967 ( 2,967 ) 60,000 =========

350,000 400,000 400,000 750,000 137,500 200,000 537,500 950,000 ========= =========

No bonus since the basis of such computation would be zero. Average capital: A = 325,000/10 mos B = 120,000/10 mos = = 32,500 12,000

6. Whether there is a profit or a loss, F will have a greater advantage. When there is a profit, F will obtain a 20% bonus on profits before the bonus, and also take 40% of the profit after the bonus. I on the other hand, will receive only 60% of the profit after the bonus. 11. Total agreed capital after the admission of David (40,000 x 5) Less: Contribution/investment of David Capital balances of AD before the admission of David Capital contribution (140,000 + 40,000) Reduction of inventory Amount paid (34,000 + 10,000) Less: Book value of interest acquired (180,000 x 1/5) Excess Divided by/Capitalized at Amount of land to be increased Total agreed capital (given) (x) Davids capital interest Agreed capital to be credited to David Contributed/Invested capital of David Bonus to David Cash Allan, capital Dan, capital David, capital 40,000 3,000 1,000 44,000 200,000 40,000 160,000 180,000 20,000 ========= 44,000 36,000 8,000 1/5 40,000 ======== 220,000 1/5 44,000 40,000 4,000 ========

12.

13.

14.

Profit per books, 2008 Unrecorded: Accrued expenses 2008 Accrued income 2008 Prepaid expenses 2007 Unearned income 2007 Corrected profit, 2008 Bs share in the 2008 net profit: 17% x 14,650 =

15,000 ( 1,050 ) 875 ( 1,400 ) 1,225 14,650 ========= 2,490.50 50,000 3,200 46,800 0 46,800 40% 117,000 300,000 183,000 ========= 471,000 231,000 23,500 125,000 70,000 95,000

15.

Quincy capital before liquidation Less: Share in liquidation expenses (8,000 x 40%) Quincy capital before realization of noncash assets Less: Cash received by Quincy (minimum) Share in the loss on realization Divided by: P/L ratio Loss on realization Less: Noncash assets Proceeds from sale Total assets at realizable values Priority claims: Fully secured creditors (220,000 + 11,000) Liabilities with priority (9,500 + 14,000) Partially secured creditors (60,000 + 65,000) Net amount available to unsecured creditors Unsecured creditors: Partially secured creditors (unsecured portion) Accounts payable Estimated deficiency to unsecured creditors

16.

379,500

165,000 ( 73,500 ) ========== 125,000 38,815 163,815 =========

17.

Estimated amount to be paid to Notes payable plus interest: Partially secured by accounts receivable and inventory Unsecured portion (195,000 125,000) x 55.45%* Total payment * Estimated recovery rate (91,500 / 165,000) 55.45%

18.

Michaels salary is an unsecured with priority, therefore, he receives the full amount. Meldcan 1,050 x (35,000/60,000) = 630 Compboy 5,000 + (6,300 5,000) x 60% = 5,780 Serpor Fully secured creditor, receive 2,650 (2,500 + 150). Estimated losses on realization of assets Less: Estimated gains on realization of assets Additional assets* Estimated net (gain) or loss in assets realization Add: Additional liabilities** Estimated net (gain) or loss Less: Stockholders equity: Capital stock Deficit Estimated amount to be recovered by stockholders Therefore, the prorate payment on the peso is: 2,000,000 1,440,000 1,280,000 ( 2,720,000 720,000 ) 960,000 240,000 800,000 560,000 ========= = .70

19.

2,000,000 1,200,000

560,000/ 800,000

* Additional assets are assets completely written off in the books in the past year but subsequently have a realizable value. * Additional liabilities, are liabilities in addition to the recorded liabilities in the balance sheet. In other words, they are unrecorded liabilities and expenses. Examples are liquidation expenses such as administrative and trustee fees, liability on damage suits, acquired interest on mortgage payable, unbilled creditors fees and the like. 26. Consolidation of parent and subsidiary is achieved by adding together like items, such as the trader receivables in SM (800,000) and SMDC (500,000). Under proportionate consolidation, the investor includes its share of the assets, such as trade receivables, it jointly controls, so one third of P 300,000 = P 100,000 for BDO. 27. Using proportionate consolidation, Ayala should recognize 25% of Greenbelts inventories, under PAS 31. Ayala should only recognize the proportion of the gain it has made on the sale that is attributable to the other venturers. Ayala should recognize P 40,000 (25% of P 160,000) less P 15,000 (25% of the P 60,000 profit it made on the sale to Greenbelt) = P 25,000. 31. Collections during 2008 Gross profit rate: Installment sales: Notes receivable (32,000 + 62,000 + 3,600) Unearned interest income (7,167 + 3,600) Installment sales Cost of installment sales (45,200 2,000) Gross profit GPR Realized gross profit Trade in value Actual value: Estimated sales price Less: Reconditioning cost Gross profit (25,000 x 15%) Overallowance 32,000 97,600 ( 10,767 ) 86,833 43,200 43,633 50.25% 16,080 ======== 30,000 25,000 1,250 3,750 5,000

32.

20,000 10,000 ======== The overallowance is treated as a deduction from the selling price of new equipment. Collections: Downpayment: Cash Actual value of trade in Installment collection (3 mos x 5,000) Total GPR (15,000/75,000) Realized gross profit 37. Construction in Progress: Cost incurred to date, 2007 Gross profit (loss) earned to date, 2007 (3,375,000 3,250,000) Balance as of Dec. 31, 2007 Less: Contract billings, 2007 (3,250,000 x 75%) Current asset

5,000 20,000

25,000 15,000 40,000 20% 8,000 =======

2,625,000 ( 125,000 ) 2,500,000

2,437,500 62,500 ===========

38.

Franchise revenue: Downpayment Note receivable Total Cost of franchise fee Realized gross profit

200,000 1,000,000 1,200,000 900,000 300,000 =========

39.

Since the collectibility of the note is reasonably assured, the accrual basis should be applied. There, full gross profit is recognized in the year of sale. Sales (187,500 x 4.3553) Cost of sales Gross profit (realized) 816,619 637,500 179,119 ========= 179,119 27,221 206,340 ========= 0 78,134 78,134 ========

40.

Gross profit (realized) Interest revenue for 4 mos. (816,619 x 10% x 4/12) Total income for 2011

41.

Gross profit (realized) already recognized in 2011 Interest revenue 8 mos in year 1 (81,662* x 8/12) 54,441 4 mos in year 2 (71,078* x 4/12) 23,693 Total income for 2012

* Schedule of discount amortization/interest income computation: Year 1 2 42. Face amount 1,125,000 937,500 Unamortized discount 308,381 226,719 Net amount 816,619 710,781 Discount amort. 81,662 71,078

Since the collectibility of the note cannot be reasonably assured, the installment sales method should be applied. Also, if there is high degree of uncertainty as to collectibility, the cost recovery method may be used. Installment sale: Gross profit (179,119/816,619) Gross profit earned in 2011 (0* x 22%) * no collection in 2011 22% (rounded) 0

43.

Gross profit earned in 2011 Interest revenue Total income for 2011 Collections in 2012 Less: Interest revenue from Sept. 01, 2011 to Aug. 31, 2012 Collection as to principal (x) GPR Gross profit realized in 2012 Add: interest revenue for 2012 Total income for 2012

0 27,221 27,221 ======== 187,500 81,662 105,838 22% 23,284 78,134 101,418 =========

44.

48. 49. 50.

All of the others are actually insurance contracts and (a) is an investment contract. 2008: 50,000 30,000 10,000 + 2,000 2009: 50,000 30,000 10,000 + 4,000 = = 12,000 14,000

In 2011, the initial franchise fee of P 1,000,000 is recognized as revenue. Therefore, in 2012, the only amount of revenue to be recognized is the P 50,000, the continuing franchisee fee.