advance accounting book 1

Partnership – Basic Considerations and Formation 1

CHAPTER 1

MULTIPLE CHOICE ANSWERS AND SOLUTIONs

1-1: aJose'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: aCash P100,000Land 300,000Mortgage payable ( 50,000 )

Net assets (Julio, capital) P350,000

1-4: bTotal Capital (P300,000/60%) P500,000Perla's interest ______40%

Perla's capital P200,000Less:Non-cash asset contributed at market value

Land P 70,000Building 90,000Mortgage 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: bReyes Santos

Cash P200,000 P300,000Inventory – 150,000Building – 400,000Equipment 150,000Mortgage payable ________ ( 100,000 )

Net asset (capital) P350,000 P750,000

1-7: cAA BB CC

Cash P 50,000Property at Market Value P 80,000Mortgage payable ( 35,000)Equipment at Market Value _______ _______ P55,000

Capital P 50,000 P 45,000 P55,000

2 Chapter 1

1-8: aPP RR SS

Cash P 50,000 P 80,000 P 25,000Computer at Market Value __25,000 _______ __60,000

Capital P 75,000 P 80,000 P 85,000 1-9: c

Maria Nora

Cash P 30,000Merchandise inventory P 90,000Computer equipment 160,000Liability ( 60,000)Furniture and Fixtures 200,000 ________

Total contribution P230,000 P190,000

Total agreed capital (P230,000/40%) P575,000Nora's interest ______60%

Nora's agreed capital P345,000Less: 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: aLara Mitra

Cash P130,000 P200,000Computer equipment – 50,000Note payable ________ _( 10,000 )

Net asset invested P130,000 P240,000

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

1-12: aPerez Reyes

Cash P 50,000 P 70,000Office Equipment 30,000 –Merchandise – 110,000Furniture 100,000Notes payable _______ ( 50,000 )

Net asset invested P 80,000 P230,000Partnership – Basic Considerations and Formation 3

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

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

Net capital P460,000

1-13: bRequired capital of each partner (P300,000/2) P150,000Contributed capital of Ruiz:

Total assets P105,000Less Liabilities __15,000 __90,000

Cash to be contributed by Ruiz P 60,000

1-14: dTotal assets:

Cash P 70,000Machinery 75,000Building _225,000 P370,000

Less: Liabilities (Mortgage payable) __90,000

Net assets (equal to Ferrer's capital account) P280,000Divide by Ferrer's P & L share percentage ____70%

Total partnership capital P400,000

Required capital of Cruz (P400,000 X 30%) P120,000Less Assets already contributed:

Cash P 30,000Machinery and equipment 25,000Furniture and fixtures __10,000 __65,000

Cash to be invested by Cruz P 55,000

1-15: dAdjusted assets of C Borja

Cash P 2,500Accounts Receivable (P10,000-P500) 9,500Merchandise inventory (P15,000-P3,000) 12,000Fixtures __20,000 P 44,000

Asset contributed by D. Arce:Cash P 20,000Merchandise __10,000 __30,000

Total assets of the partnership P 74,000

4 Chapter 1

1-16: aCash to be invested by Mendez:

Adjusted capital of Lopez (2/3)Unadjusted capital P158,400Adjustments:

Prepaid expenses 17,500Accrued expenses ( 5,000)Allowance for bad debts (5% X P100,000) _( 5,000 )

Adjusted capital P165,900

Total partnership capital (P165,900/2/3) P248,850Multiply by Mendez's interest ⅓

Mendez's capital P 82,950Less Merchandise contributed __50,000

Cash to be invested by Mendez P 32,950

Total Capital:Adjusted capital of Lopez P165,900Contributed capital of Mendez __82,950

Total capital P248,850 1-17: d

Moran, capital (40%)Cash P 15,000Furniture and Fixtures _100,000 P115,000

Divide by Moran's P & L share percentage ______40%

Total partnership capital P287,500Multiply by Nakar's P & L share percentage ______60%

Required capital of credit of Nakar: P172,500Contributed capital of Nakar:

Merchandise inventory P 45,000Land 15,000Building __65,000

Total assets P125,000Less Liabilities __30,000 P 95,000

Required cash investment by Nakar P 77,500

1-18: cGarcia's adjusted capital (see schedule 1) P40,500Divide by Garcia's P & L share percentage ______40%

Total partnership capital P101,250Flores' 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 17,250Partnership – Basic Considerations and Formation 5

Schedule 1:Garcia, capital:

Unadjusted balance P 49,500Adjustments:

Accumulated depreciation ( 4,500)Allowance for doubtful account ( 4,500 )

Adjusted balance P 40,500

Schedule 2:Flores capital:

Unadjusted balance P 57,000Adjustments:

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 5,000Accrued 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) P237,500Divide by the total percentage share of Ortiz and Ponce (50% + 30%) ______80%

Total capital of the partnership before the admission of Roxas P296,875Multiply by Roxas' interest ______20%

Cash to be invested by Roxas P 59,375

1-20: dMerchandise to be invested by Gomez:

Total partnership capital (P180,000/60%) P300,000

Gomez's capital (P300,000 X 40%) P120,000Less 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) P180,000Less 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: bUnadjusted Ell, capital (P75,000 – P5,000) P 70,000Allowance for doubtful accounts ( 1,000)Accounts payable ( 4,000 )

Adjusted Ell, capital P 65,000

1-22: cTotal partnership capital (P113,640/1/3) P340,920Less David's capital _113,640

Cortez's capital after adjustments P227,280Adjustments made:

Allowance for doubtful account (2% X P96,000) 1,920Merchandise inventory ( 16,000)Prepaid expenses ( 5,200)Accrued expenses ___3,200

Cortez's capital before adjustments P211,2001-23: a

Total assets at fair value P4,625,000Liabilities (1,125,000)Capital balance of Flor P3,500,000

1-24: cTotal capital of the partnership (P3,500,000 ÷ 70%) P5,000,000Eden agreed profit & loss ratio 30% Eden agreed capital 1,500,000Eden contributed capital at fair value 812,000Allocated 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 P957,000Agreed capital (profit and loss ratio) 382,800 382,800 191,400 957,000Capital transfer (Bonus) P 88,200 P(91,800) P 3,600 -

1-26: dTotal agreed capital (P90,000 ÷ 40%) P225,000Contributed capital of Candy (P126,000+P36,000-P12,000) 150,000Total agreed capital (P90,000 ÷ 40%) 225,000Candy, agreed capital interest 60%Agreed capital of Candy 135,000Contributed capital of Candy 150,000Withdrawal P 15,000


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

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

1-29: c__Alex_ _Carlos_ __Total__

Contributed capital P100,000 P84,000 P184,000Agreed 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............................................................. 600Merchandise Inventory...................................................... 600

2. Pedro Castro, Capital............................................................. 200Allowance for Bad Debts.................................................. 200

3. Accrued Interest Receivable.................................................. 35Pedro Castro, Capital......................................................... 35

Computation:P1,000 x 6% x 3/12 = P15P2,000 x 6% x 2/12 = _20

Total................................P35

4. Pedro Castro, Capital............................................................. 100Accrued Interest Payable................................................... 100

(P4,000 x 5% x 6/12 = P100)

5. Pedro Castro, Capital............................................................. 800Accumulated Depreciation – Furniture and Fixtures........ 800

6. Office Supplies....................................................................... 400Pedro Castro, Capital......................................................... 400

To record the investment of Jose Bunag.

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


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............................................................................... 4,000Accounts Payable......................................................................... 10,000Accrued Interest Payable.............................................................. 100Allowance for Bad Debts............................................................. 1,200Accumulated Depreciation – Furniture and Fixtures................... 1,400Pedro Castro, Capital.................................................................... 30,135

Cash........................................................................................ 6,000Notes Receivable................................................................... 3,000Accounts Receivable.............................................................. 24,000Accrued Interest Receivable.................................................. 35Merchandise Inventory.......................................................... 7,400Office Supplies....................................................................... 400Furniture and Fixtures............................................................ 6,000

New Partnership Books

To record the investment of Pedro Castro.

Cash ........................................................................................... 6,000Notes Receivable.......................................................................... 3,000Accounts Receivable.................................................................... 24,000Accrued Interest Receivable......................................................... 35Merchandise Inventory................................................................. 7,400Office Supplies............................................................................. 400Furniture and Fixtures.................................................................. 6,000

Notes Payable......................................................................... 4,000Accounts Payable................................................................... 10,000Accrued Interest Payable....................................................... 100Allowance for Bad Debts....................................................... 1,200Accumulated Depreciation – Furniture and Fixtures............. 1,400Pedro Castro, Capital............................................................. 30,135

To record the investment of Jose Bunag.

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

10 Chapter 1

2. Castro and Bunag PartnershipBalance Sheet

October 1, 2008

A s s e t s

Cash ........................................................................................................... P21,067.50Notes receivable........................................................................................... 3,000.00Accounts receivable..................................................................................... P 24,000Less Allowance for bad debts...................................................................... ___1,200 22,800.00Accrued interest receivable.......................................................................... 35.00Merchandise inventory................................................................................ 7,400.00Office supplies ........................................................................................... 400.00Furniture and fixtures.................................................................................. 6,000Less Accumulated depreciation................................................................... ___1,400 __4,600.00

Total Assets......................................................................................... P59,302.50

Liabilities and Capital

Notes payable ........................................................................................... P 4,000.00Accounts payable......................................................................................... 10,000.00Accrued interest payable.............................................................................. 100.00Pedro Castro, Capital................................................................................... 30,135.00Jose Bunag, Capital..................................................................................... _15,067.50

Total Liabilities and Capital................................................................ P59,302.50

Problem 1 – 2Contributed Capitals:

Jose: Capital before adjustment...................................................... P 85,000Notes Payable......................................................................... 62,000Undervaluation of inventory.................................................. 13,000Underdepreciation.................................................................. ( 25,000) P 135,000

Pedro: Cash........................................................................................ 28,000Pablo: 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%).............................................................. 57,875Pablo (P231,500 x 25%)............................................................... __57,875

Total. ............................................................................................ P231,500


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

Contributed AgreedCapital Capital Goodwill

Jose P135,000 P137,000 (50%) 2,000Pedro 28,000 68,500 (25%) 40,500Pablo __68,500 __68,500 (25%) _____–

Total P231,500 274,000 42,500

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

Jose, Pedro and Pablo PartnershipBalance SheetJune 30, 2008

Bonus Method Goodwill MethodAssets:

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

Total P284,500 P327,000

Liabilities and Capital:

Accounts payable P 53,000 P 53,000Jose, capital (50%) 115,750 137,000Pedro, capital (25%) 57,875 68,500Pablo, 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...................................................................... 500Accumulated Depreciation – Furniture and Fixtures............. 500

12 Chapter 1

To close the books.

Estimated Uncollectible Account....................................................... 4,800Accumulated Depreciation – Furniture and Fixtures.......................... 1,500Accounts Payable................................................................................ 3,600Pepe Basco, Capital............................................................................ 31,500

Cash. ............................................................................................ 400Accounts Receivable.................................................................... 16,000Merchandise Inventory................................................................. 20,000Furniture and Fixtures.................................................................. 5,000

2. Books of the Partnership

To record the investment of Pepe Basco.

Cash.................................................................................................... 400Accounts Receivable........................................................................... 16,000Merchandise Inventory....................................................................... 20,000Furniture and Fixtures......................................................................... 5,000

Estimated Uncollectible account.................................................. 4,800Accumulated Depreciation – Furniture and Fixtures................... 1,500Accounts Payable......................................................................... 3,600Pepe Basco, Capital...................................................................... 31,500

To record the investment of Carlo Torre.

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

Computation:Pepe Basco, capital (Base)........................................................... P31,500Divide by Pepe Basco's P & L ratio............................................. ___40%

Total agreed capital...................................................................... P78,750Multiply 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 Sales1. Adjusting Entries

(a) Sales, Capital.......................................................................... 3,200Accumulated Depreciation – Fixtures............................... 3,200

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


2. Closing Entry

Allowance for Bad Debts............................................................. 12,800Accumulated Depreciation – Delivery Equipment....................... 8,000Accumulated Depreciation – Fixtures.......................................... 91,200Accounts Payable......................................................................... 64,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 8,000Sales, Capital................................................................................ 224,000

Cash........................................................................................ 4,800Accounts Inventory................................................................ 72,000Merchandise Inventory.......................................................... 192,000Prepaid Insurance................................................................... 3,200Delivery Equipment............................................................... 48,000Fixtures.................................................................................. 96,000Goodwill................................................................................ 32,000

Books of Roces (Books of the Partnership)

1. Adjusting Entries

(a) Roces, Capital............................................................................... 1,600Allowance for Bad Debts....................................................... 1,600

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

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

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

2. To record the investment of Sales.

Cash.................................................................................................... 4,800Accounts Receivable........................................................................... 72,000Merchandise Inventory....................................................................... 192,000Prepaid Insurance................................................................................ 3,200Delivery Equipment............................................................................ 48,000Fixtures............................................................................................... 96,000Goodwill. ............................................................................................ 32,000

Allowance for Bad Debts............................................................. 12,800Accumulated Depreciation – Delivery Equipment....................... 8,000

Accumulated Depreciation – Fixtures.......................................... 91,200Accounts Payable......................................................................... 64,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 8,000Sales, Capital................................................................................ 224,000

14 Chapter 1

b. Sales' books will be used by the partnership

Books of Roces



2. Closing Entry

Allowance for Bad Debts............................................................. 1,600Accumulated Depreciation – Delivery Equipment....................... 12,800Accumulated Depreciation – Fixtures.......................................... 64,000Accounts Payable......................................................................... 104,000Accrued Taxes.............................................................................. 6,400Roces, Capital............................................................................... 224,000

Cash........................................................................................ 14,400Accounts Receivable.............................................................. 57,600Merchandise Inventory.......................................................... 132,800Prepaid Insurance................................................................... 4,800Delivery Equipment............................................................... 19,200Fixtures.................................................................................. 144,000Goodwill................................................................................ 40,000

Books of Sales (Books of the Partnership)



2. To record the investment of Roces.

Cash.................................................................................................... 14,400Accounts Receivable........................................................................... 57,600Merchandise Inventory....................................................................... 132,800Prepaid Insurance................................................................................ 4,800Delivery Equipment............................................................................ 19,200Fixtures............................................................................................... 144,000Goodwill. ............................................................................................ 40,000

Allowance for Bad Debts............................................................. 1,600Accumulated Depreciation – Delivery Equipment....................... 12,800Accumulated Depreciation – Fixtures.......................................... 64,000Accounts Payable......................................................................... 104,000

Accrued Taxes.............................................................................. 6,400Roces, Capital............................................................................... 224,000


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

Books of Roces



2. Closing Entry

See Requirement (b).

Books of Sales



2. Closing Entry


New Partnership Books

To record the investment of Roces and Sales.

Cash.................................................................................................... 19,200Accounts Receivable........................................................................... 129,600Merchandise Inventory....................................................................... 324,800Prepaid Insurance................................................................................ 8,000Delivery Equipment (net)................................................................... 46,400Fixtures (net)....................................................................................... 84,800Goodwill ........................................................................................... 72,000

Allowance for Bad Debts............................................................. 14,400Accounts Payable......................................................................... 168,000Notes Payable............................................................................... 40,000Accrued Taxes.............................................................................. 14,000Roces, Capital............................................................................... 224,000Sales, Capital................................................................................ 224,000

16 Chapter 1

Problem 1 – 5

1. To close Magno's books.

Allowance for Bad Debts.................................................................... 1,000Accounts Payable................................................................................ 6,000Notes Payable...................................................................................... 10,000Accrued Interest Payable.................................................................... 300R. Magno, Capital............................................................................... 24,700

Cash. ............................................................................................ 5,000Accounts Receivable.................................................................... 13,000Merchandise Inventory................................................................. 12,000Equipment.................................................................................... 3,000Other Assets................................................................................. 9,000

2. To adjust the books of Lagman.

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

3. To record the investment of Magno.

Cash.................................................................................................... 5,000Accounts Receivable........................................................................... 13,000Merchandise Inventory....................................................................... 12,000Equipment........................................................................................... 3,000Other Assets........................................................................................ 9,000

Allowance for Bad Debts............................................................. 1,000Accounts Payable......................................................................... 6,000Notes Payable............................................................................... 10,000Accrued Interest Payable.............................................................. 300R. Magno, Capital........................................................................ 24,700

To adjust the investments of the partners.

Cash.................................................................................................... 10,300R. Magno, Capital........................................................................ 10,300

(P35,000 – P24,700 = P10,300)

J. Lagman, Capital.............................................................................. 35,790Cash. ............................................................................................ 23,300Accounts Payable to J. Lagman.................................................... 12,490

(P63,000 + P7,790 = P70,790 – P35,000 = P35,790)


4. Lagman and MagnoBalance Sheet

December 31, 2008

A s s e t s

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

Total Assets.................................................................................. P115,790


Accounts payable................................................................................ P 18,000Notes payable...................................................................................... 15,000Accrued interest payable..................................................................... 300Accounts payable to J. Lagman.......................................................... 12,490J. Lagman, capital............................................................................... 35,000R. Magno, capital................................................................................ __35,000

Total Liabilities and Capital......................................................... P115,790

Problem 1 – 6

1. Books of Toledo

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

Books of Ureta

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

Cash (90% x P12,000).................................................................. 10,800Loss from Sale of Office Equipment............................................ 1,200

Office Equipment................................................................... 12,000

Toledo, Capital (1/4 x P1,200)..................................................... 300Ureta, Capital................................................................................ 900

Loss from Sale of Office Equipment..................................... 1,200

18 Chapter 1

2. New Partnership Books

Cash. ............................................................................................ 3,200Accounts Receivable.................................................................... 32,000Merchandise................................................................................. 40,000Office Equipment......................................................................... 10,000

Allowance for Bad Debts....................................................... 4,800Accounts Payable................................................................... 10,000Notes Payable......................................................................... 2,000Toledo, Capital....................................................................... 68,400

To record the investment of Toledo.

Cash. ............................................................................................ 22,800Accounts Receivable.................................................................... 24,000Merchandise................................................................................. 36,000Toledo, Capital............................................................................. 300

Allowable for Bad Debts....................................................... 2,400Accounts Payable................................................................... 16,000Ureta, Capital......................................................................... 64,700

To record the investment of Ureta.

3. Cash.................................................................................................... 3,400Ureta, Capital................................................................................ 3,400

To record Ureta's cash contribution.

Computation:Toledo, capital (P68,400 – P300)................................................. P 68,100Divide by Toledo's profit share percentage.................................. ____50%

Total agreed capital of the partnership......................................... P136,200Multiply by Ureta's profit share percentage................................. ____50%

Agreed capital of Ureta................................................................ P 68,100Ureta, capital................................................................................. __64,700

Cash contribution of Ureta........................................................... P 3,400 or

Toledo, capital (P68,400 – P300)................................................. P 68,100Less Ureta, capital........................................................................ __64,700

Cash contribution of Ureta........................................................... P 3,400


4. Toledo and Ureta PartnershipBalance SheetJuly 1, 2008

A s s e t s

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

Total Assets.................................................................................. P164,200


Accounts payable................................................................................ P 26,000Notes payable...................................................................................... 2,000Toledo, capital..................................................................................... 68,100Ureta, capital....................................................................................... __68,100

Total Liabilities and Capital......................................................... P164,200

20 Chapter 2

CHAPTER 2

MULTIPLE CHOICE ANSWERS AND SOLUTIONS2-1: d

Jordan Pippen Total

Annual salary P120,000 P80,000P200,000Balance, equally ( 10,000 ) ( 10,000 )( 20,000 )

Total P110,000 P 70,000P180,000

2-2: aJJ KK LL Total

Bonus (.20 X P90,000) P18,000 – –P 18,000Interest

JJ (.15 X P100,000) P15,000 – –)KK (.15 X P200,000) P 30,000 –)LL (.15 X P300,000) P45,000)

90,000Balance, equally ( 6,000 ) ( 6,000 ) ( 6,000 )( 18,000 )

Total profit share P27,000 P 24,000 P39,000P 90,000

2-3: a

2-4: aAllan Michael Total

InterestAllan - .10 X (P40,000 + 60,000 /2) P 5,000 )Michael - .10 X (P60,000 + 70,000/2) P 6,500)

P 11,500Balance, 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 4,000P 22,000Salaries 30,000 20,00050,000Balance, equally ( 35,000 ) ( 35,000 ) ( 35,000 ) (105,000)

Total P 7,000 ( P29,000 ) (P11,000 ) (P 3 3,000)

2-6: bAverage Capital

Capital Months PesoDate Balance Unchanged Months

January 1 140,000 6 P 840,000July 1 180,000 1 180,000August 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: cCapital Months Peso

Date Balance Unchanged Months

January 1 P16,000 3 P 48,000April 1 17,600 2 35,200June 1 19,200 3 57,600September 1 15,200 4 __60,800

12 P201,600

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

2-8: aNet profit before bonus P 24,000Net profit after bonus (P24,000/120%) __20,000

Bonus to RJ 4,000Balance (P24,000-P4,000)X3/5 __12,000

Total profit share P 16,000

2-9: aLT AM Total

Interest P3,200 P 3,600 P 6,800Salaries 15,000 7,500 22,500Balance, 3:2 (11,580) ( 7,720) ( 19,300)

Total P 6,620 P 3,380 P 10,000

2-10: bNet income after salary, interest and bonus P467,500Add back: Salary (P10,000 X 12) P120,000

Interest (P250,000 X .05) __12,500 _132,500

Net income after bonus (80%) P600,000Net income before bonus (P600,000/80%) _750,000

Paul's bonus P150,000

2-11: bCC DD EE Total

Salary P 14,000 P 14,000

Balance P14,000 P 8,400 5,60028,000Additional profit to DD ( 1,500 ) __2,100 ( 600 ) ______–

Total P12,500 P10,500 P 19,000 P 42, 000

Net incomeFees Earned P90,000Expenses _48,000

Net Income P42,000

22 Chapter 2

2-12: cLL MM NN Total

Interest P 2,000 P 1,250 P 750 P 4,000

Annual Salary 8,500 – –8,500Additional profit to give LL, P20,000 9,500 5,700 3,80019,000*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: aRR 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 P11,875P100,000

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

2-14: b AA BB CC TotalAA - 100,000 X 10% P 10,000 )

150,000 X 20% 30,000 )P 40,000Remainder, 210,000

BB (60,000 X .05) P 3,000 )CC (60,000 X .05) P 3,000

6,000Balance, equally __68,000 _68,000 _68,000_204,000

Total P108,000 P71,000 P71,000P250,000

2-15: aAJ BJ CJ Total

Bonus to CJNet profit before bonus P44,000Net profit after bonus (P44,000/110%)P40,000 – – P4,000

P4,000Interest to BJ – P1,000 –1,000Salaries P 10,000 – 12,00022,000Balance, 4:4:2 __6,800 _6,800 __3,400_17,000

Total P 16,800 P7,800 P19,400P44,000

2-16: cTotal profit share of Pedro P200,000Less: 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%) P325,000Add: Total Salaries P150,000

Total Interest __70,000 _220,000

Total Partnership Income P545,000Partnership Operations 23

2-17: cNet income before extraordinary gain and bonus (69,600-12,000) P 57,600Net 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 9,600Balance, equally P 24,000 24,000 48,000

Net profit before extraordinary gain P 24,000 P 33,600 P 57,600Extraordinary 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 32,000Annual Salary 36,000 – 36,000Remainder 60:40 __60,000 _40,000 _100,000

Total P116,000 P 52,000 P168,000

2-19: aDV JE FR Total

Interest on excess (Deficiency) P 15,000 P 3,750 (P 7,500)P 11,250Remainder 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: cCorrection of 1998 profit:

Net income per books P 19,500Understatement of depreciation ( 2,100)Overstatement of inventory, December 31 ( 11,400 )

Adjusted net income P 6,000

Pete Rico TotalDistribution of net income per book:

Equally P 9,750 P 9,750 P 19,500

Distribution of adjusted net incomeEqually ( 3,000 ) ( 3,000 ) ( 6,

000)

Required Decrease P 6,750 P 6,750 P 13,500

2-21: aTiger Woods Total

Salaries P 64,000 P100,000P164,000Interest 24,000 30,00054,000

Bonus (P360,000-P54,000)X.25 76,500 –76,500Remainder, 30:70 __19,650 __45,850__65,500

Total P184,150 P175,850P360,000

24 Chapter 2

2-22: aHolly Field Total

Salaries P 20,000 – P 20,000Commission – P 25,000 25,000Interest 32,000 33,600 65,600Bonus, schedule 1 30,000 – 30,000Remainder, 60:40 __35,640 _23,760 __59,400

Total P117,640 P 82,360 P200,000

Schedule 1Net income before salary, commission,

interest and bonus P200,000Less: salaries __20,000

Net income before bonus P180,000Net income after bonus (P180,000/120%) _150,000

Bonus P 30,000 2-23: a

Mike Tyson Total

Capital balance, beginning P600,000 P400,000P1,000,000Additional investment 100,000 200,000300,000Capital withdrawal -200,000 ( 100,000 ) _-

300,000Capital balance before profit and loss distribution P500,000 P500,000P1,000,000

Net income:Salary P200,000 P300,000 P 50

0,000Balance, 3:2 __60,000 __40,000

__100,000

Total P260,000 P340,000 P 60 0,000

Total P760,000 P840,000P1,600,000Drawings ( 200,000 ) ( 300,000 ) ( 5

00,000)

Capital balance, end P560,000 P540,000P1,100,000

Average Capital - King:Capital Months Peso


January 1 P40,000 3 P120,000April 1 55,000 9 _495,000

12 P615,000Average capital – P615,000/12 = P51,250

Average Capital - Queen:Capital Months Peso


January 1 P100,000 7 P700,000April 1 130,000 5 __650,000

12 P1,350,000

Average capital - P1,350,000 / 12 =P112,500Partnership Operations 25

2-24: dDistribution of Net Income - Schedule 1

King Queen Total

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

Total P40,800 P39,200 P80,000

Schedule 2

Net income before allocation P80,000Less: Interest _16,375

Net income before bonus P63,625Net 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 P140,000Additional investment _15,000 __30,000 __45,000Capital balance before profit and

loss distribution P55,000 P130,000 P185,000Net income (Schedule 2) 40,800 39,000 80,000Drawings (P400 X 52) ( 20,80 0) ( 20,800 ) ( 41,600 )

Capital balance, December 31 P75,000 P148,400 P223,400

2-25: dTotal receipts (P1,500,000 + P1,625,000) P3,125,000

Expenses ( 1,080,000 )

Net income P2,045,000

Distribution to PartnersRed – 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. 31Capital Balance, Jan. 1 P 374,000Additional investment ___22,000Capital balance before profit and

loss distribution P 396,000Profit share 1,063,400Drawings ( 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 P180,000P330,000

Additional investment, Nov. 1 _______ __60,000__60,000

Capital balances before salaries, profit and Drawings 150,000 240,000390,000

Profit share:Interest 15,000 20,000

35,000Balance, 60:40 51,000 34,000

85,000

Total 66,000 54,000120,000

Total 216,000 294,000510,000

Salaries _18,000 _24,000_42,000

Total 234,000 318,000552,000

Drawings (18,000) (24,000)(42,000)

Capital balances, Feb. 28 P216,000 P294,000P510,000

2-27: aSusan Tanny Total

Capital balances, 1/1 P150,000 P30,000P180,000

Additional investment, 4/1 8,0008,000

Capital withdrawals, 7/1 _______ (6,000)_(6,000)

Balances before profit distribution 158,000 24,000182,000

Profit distribution:Interest 23,400 4,050

27,450Bonus (20% x P30,000) 6,000

6,000Balance, equally (1,725) (1,725)

(3,450)

Total 21,675 _8,32530,000

Total 179,675 32,325212,000

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 P110,000P300,000

Loss distribution, 1st year:Salaries 20,000 10,000

30,000Interest 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 72,000 107,000280,000

Drawings (10,000) (10,000) (10,000)(30,000)

Capital balances, beg. 2nd year 91,000 62,000 97,000250,000

Profit distribution, 2nd year:Salaries 20,000 10,000

30,000Interest 9,100 6,200 9,700

25,000Balance, 5:3:2 ( 7,500 ) ( 4,500 ) ( 3,000 )

(15,000)

Total 21,600 _1,700 16,70040,000

Total 112,600 63,700 113,700290,000

Drawings _(10,000) (10,000) _(10,000)_(30,000)

Capital balances, end of 2nd year P102,600 P53,700 P103,700P260,000

2-29: cJay Kay Loi Total

Capital balances, 1/1/06 P30,000 P30,000 P30,000P90,000

Additional investment, 2006 5,000 5,000Capital withdrawal, 2006 _(5,000) _(4,000) ______

_(9,000)

Capital balances 25,000 26,000 35,00086,000

Profit distribution, 2006:Interest 3,000 3,000 3,000 9,000Salary 7,000 7,000Balance, equally _1,000 _1,000 _1,000

__3,000

Capital balances, 1/1/07 36,000 30,000 39,000105,000

Additional investment, 2007 5,000 5,000Capital withdrawal, 2002 ______ _(3,000) _(8,000)

(11,000)


Profit distribution, 2007:Interest 3,600 3,000 3,900

10,500Salary 7,000 7,000Balance, equally _1,500 _1,500 _1,500

__4,500


Additional investment, 2008 6,000 6,000Capital withdrawal, 2008 ______ _(4,000) _(2,000)

_(6,000)


Profit distribution, 2008:Interest 5,310 3,150 3,640

12,100Salary 7,000 7,000Balance, equally __3,300 __3,300 __3,300

___9,900

Capital balances, 12/31/08 per books P68,710 P33,950 P47,340P150,000

Understatement of depreciation (2,000) (2,000) (2,000)(6,000)

Adjusted capital balances, 12/31/08 P66,710 P31,950 P45,340P144,000

28 Chapter 2

2-30: a

Ken Len Mon Total

Capital balances, 1/1/07 P100,000 P100,000 P100,000P300,000

Additional investment, 2007 40,00040,000

Capital withdrawal, 2007 ( 20,000 ) _______ _______( 20,000 )

Balances 80,000 140,000 100,000320,000

Profit distribution, 2007 (Schedule 1)Salary 60,000

60,000Balance, beg. Capital ratio 20,000 20,000 20,000

60,000


Capital withdrawal, 2008 ( 20,000 ) ( 40,000 ) _______( 60,000 )

Balances 80,000 120,000 180,000380,000

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 P264,546P500,000

Schedule 1 – Computation of net profit:Total capital, 2008 (P647,500 – P147,500) P500,000Total 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 P750,000Additional 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 P120,000Additional investment (Land) 60,000Drawings ( 80,000 )Capital balance before net profit (loss) 100,000Capital balance, end 150,000Profit share (40%) 50,000Net profit (P50,000 ÷ 40%) P125,000


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 48,000 144,00010% interest on beg. capital 8,000 4,000 12,000Bal. beg. cap. ratio: 8:4 ( 108,000) ( 54,000) ( 162,000) Total ( 4,000) ( 2,000) ( 6,000)

Capital balance 76,000 38,000 114,000Drawings ( 4,000) ( 4,000) ( 8,000) Capital balance, 12/31/07 72,000 34,000 106,000 Net profit- 2008:

Annual salary 96,000 48,000 144,00010% interest on BC 7,200 3,400 10,600Bonus 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 18,100 128,000Drawings ( 4,000) ( 4,000) ( 8,000)

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

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

30 Chapter 2


Problem 2 – 1

1. Castro : (P26,000/P42,500) x P23,800 = P14,560Diaz : (P16,500/P42,500) x P23,800 = __9,240

P23,800


P23,800

Computation of Average Capitals:

Castro: Capital Months PesoDate Balances Unchanged Months

1/1...................................... P26,000 3 P 78,0004/10.................................... 29,000 1 29,0005/1...................................... 36,000 3 108,0008/1...................................... 32,000 5 _160,000

12 P375,000

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

Diaz: Capital Months PesoDate Balances Unchanged Months1/1...................................... P16,500 5 P 82,5006/1...................................... 21,500 3 64,5009/1...................................... 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 P12,000Salaries......................................................... 36,000 24,000 60,000Balance, 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 4,760Interest (b).................................................... 1,100 – 1,100Balance, 3:2................................................. _10,764 _7,176 _17,940

Total............................................................. P16,624 P7,176 P23,800


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]........................... P29,000Average of Diaz [(P16,500 + P18,500) 2]......................................... _18,000

Castro's excess........................................................................................ P11,000Multiply by............................................................................................. ___10%

Interest.................................................................................................... P 1,100


P23,800

Problem 2 – 2

a. Average Capital:Robin: Date Balances Months Peso

Unchanged Months

Jan. 1 P135,000 2 P270,000Feb. 28 95,000 2 190,000Apr. 30 175,000 5 875,000Sept. 30 195,000 3 __585,000

12 P1,920,000

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

Hood: Date Balances Months PesoUnchanged Months

Jan. 1 P140,000 3 P420,000Mar. 31 200,000 3 600,000June 30 150,000 2 300,000Aug. 31 220,000 2 440,000Oct. 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 = P240,000Hood : 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 30,600Salaries................................................................. 60,000 100,000 160,000Bonus (P510,000 – 30,600 – 160,000) x 25%).... 78,850 – 79,850Balance, equally................................................... _119,775 _119,775 _239,550

Totals.................................................................... P274,025 P235,975 P510,000

c. Robin Hood TotalsInterest:

Robin (P195,000 – P135,000) 10%............. P 6,000Hood (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 P200,000Bonus (see computations below).......................... 62,000 62,000Balance, equally................................................... _124,000 _124,000 _248,000

Totals.................................................................... P266,000 P244,000 P510,000Bonus Computations:

Net income before salaries and bonus...................................................... P510,000Less Salaries............................................................................................. 200,000

Net income before bonus.......................................................................... 310,000Net 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 30,000Commission (2% x P1,000,000)........................... P 20,000 20,000Interest of 8% on average capital......................... 32,800 31,200 64,000Bonus (see computations below).......................... 9,818 9,818 19,636Balance, equally................................................... __44,182 __44,182 __88,364

Total..................................................................... P116,800 P105,200 P222,000Bonus Computations:

Income before salary, commissions, interest & bonus.............................. P222,000Salary and commission (P30,000 + P20,000)........................................... ( 50,000)Interest...................................................................................................... ( 64,000 )

Income before bonus................................................................................. 108,000Income after bonus (P108,000 110%).................................................. _98,182

Bonus........................................................................................................ P 9,818

b. Income Summary................................................. P 222,000De Villa, capital........................................... 116,800De Vera, capital........................................... 105,200


Problem 2 – 4

a. East North West Total

Salaries................................................ P15,000 P20,000 P18,000 P53,000Bonus (see computation below).......... 3,760 3,760Interest (see computation below)........ 2,800 4,000 4,800 11,600Balance, 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........................................................................... P78,960Net 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)............................................................................. 4,000West (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 P11,966Salaries................................................ 24,000 21,000 25,000 70,000Bonus (see computations below)........ 4,280 4,280Balance, 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 PesosDate Balances Unchanged Months

1/1 P30,000 4 P120,0005/1 36,000 4 144,0009/1 28,000 4 _112,000

12 P376,000

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

North: Months PesosDate Balances Unchanged Months

1/1 P40,000 2 P80,0003/1 31,000 4 124,0007/1 36,000 2 72,0009/1 40,000 4 _160,000

12 P436,000

Average capital (P436,000 12).......................................... P 36,333 34 Chapter 2

West: Months PesosDate Balances Unchanged Months

1/1 P50,000 3 P150,0004/1 57,000 2 114,0006/1 60,000 2 120,0008/1 48,000 5 _240,000

12 P624,000

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

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

Total...................................................................................... P 11,966

Bonus Computations:Net income............................................................................. P 68,000Less Salary............................................................................. _21,000

Net income before bonus....................................................... 47,080Net 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 8,990Salaries ........................................... P21,000 P 18,000 – 39,000Interest on beginning capital............... 3,000 4,000 5,000 12,000Remainder, 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.......................................................... P92,940Less Salaries (P21,000 + P18,000)............................................................ _39,000

Net income before bonus........................................................................... P53,940Net 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 P30,000Interest (see computation on p. 30)..... 7,200 9,600 13,800 30,600Balance, equally.................................. __3,133 __3,133 __3,134 __9,410

Total................................................... P22,333 P22,733 P24,934 P70,000Partnership Operations 35

Interest on Average Capital:Maria:

P80,000 x 8% x 6 months....................... P 3,200P100,000 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.. . ...................... P10,800P150,000 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 P380,000Additional Investment......................... 20,000 – – 20,000

Capital Withdrawal............................. – – ( 30,000) ( 30,000)Net Income.......................................... 22,333 22,733 24,934 70,000Drawings ........................................... ( 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 P20,000Interests on average capital:

Alvin (P120,000 x 10%)............. 12,000Benny (P200,000 x 10%)........... 20,000Celia (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 CapitalYear Ended December 31, 2008

Alvin Benny Celia Total

Capitals, January 1, 2008.................... P120,000 P180,000 P220,000 P520,000Additional investments....................... 60,000 40,000 100,000Capital withdrawals............................ _______ ________ _(20,000) _(20,000)

Balances.............................................. 120,000 240,000 240,000 600,000Net loss (see above)............................ __2,600 __(9,400) _(17,200) _(24,000)

Balances.............................................. 122,600 230,600 222,800 576,000Drawings. ........................................... _(16,000) _______ _______ _(16,000)

Capitals, December 31, 2008.............. P106,600 P230,600 P222,800 P560,00036 Chapter 2

3. Correcting entry:

Celia capital........................................ 2,400Alvin capital............................... 2,200Benny 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 51,000 171,000Net 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 46,000 138,400Additional investment, 2007........................ _____– _____– __6,000 ___6,000

Balances....................................................... 41,200 51,200 52,000 144,400Net income - 2007, 40: 30: 30..................... 10,800 8,100 8,100 27,000Withdrawals, 2007....................................... (17,000) ( 7,000 ) ( 3,200 ) ( 27,200 )

Capital Balances, 12/31/07.......................... 35,000 52,300 56,900 144,200Additional investment, 2008........................ ______– ______– ___6,000 ___6,000

Balances....................................................... 35,000 52,300 62,900 150,200Net income, 2008 (schedule 1).................... 56,365 42,272 20,363 120,000Withdrawals, 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 P84,000Bonus (see computations below)........ – 10,909 – 10,909Interest................................................. 3,600 3,600 3,600 10,800Balance, equally.................................. _* 4,765 __4,763 __4,763 __14,291

Totals................................................... P56,365 P43,272 P20,363 P120,000

Bonus computations:Net income before bonus....................................................................... P120,000Net income after bonus (P120,000 110%)......................................... _109,091

Bonus to Nelson.................................................................................... P 10,909

* To TotalPartnership Operations 37

Problem 2 – 8Red, White & Blue PartnershipStatement of Partners' Capital

For Year Ended December 31, 2008

Red White Blue Green Total

Balances, beginning of year 40,200 20,200 40,600 P101,000Add: 20% of fees billed to personal clients 8,800 4,800 4,400 18,000

Green's share of fees (Exhibit A) 3,200 3,200Remaining 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 35,800Uncollectible accounts identified

with clients of each partner 2,400 900 3,300Excess 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 PartnershipExhibit A – Computation and Division of Net income

For Year Ended December 31, 2008

Total revenue from fees P120,000Expenses, excluding depreciation and doubtful

accounts expense P38,700Less: Excess rent charged to N ($300 x 6) __1,800

Subtotal 36,900Add: 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 P40,000Add: Doubtful accounts expense ($3,000 x 0.60) __1,800Total 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 8,800White P24,000 x 2% 48,000Blue, P22,000 x 20% 4,400 P18,000

Green's share of fees:Gross fees from new clients after April 1, Year 1 24,000Less: Allocated expenses ($40,000 x $24,000/

$120,000) __8,000

Net income from new clients P16,000Green'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% P22,800To White, 40% 22,800To Blue, 20% _11,400

Total P57,00038 Chapter 2

Problem 2 – 9

Allan, Eman and Gino PartnershipStatement of Profit DistributionYear Ended December 31, 2008

Allan Eman Gino Total

Interest P 4,000 P 750 P 250 P 5,000Commission (P16,120 – P5,000) x 10% – 1,112 1,112 2,224Balance, equally __5,926 _5,925 _5,925 _17,776

Total P 9,926 P7,787 P7,287 P25,000Adjustments (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 PartnershipStatement of Partners' Capital AccountsYear Ended December 31, 2008

Gary Sonny Letty Total

Capital balances, 1/1/08 P210,000 P180,000 P 90,000 P480,000Additional investments ___9,100 _______ _______ __9,100

Total _219,100 _180,000 _90,000 489,100Profit distribution:

Salaries 13,680 11,520 10,640 35,840Interest 25,920 21,600 10,800 58,320Bonus 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 248,980 203,400 101,720 554,100Drawings _(21,000) (18,000) __(9,000)

_(48,000)

Capital balances, 12/31/08 P227,980 P185,400 P 92,720 P506,100

Schedule 1: Computation of the bonus.

Net profit before interest, salaries and bonus P 65,000Less: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 1,100,000Inventory 800,000Land 1,300,000Equipment 1,000,000

Mortgage payable 500,000

Installment note payable 200,000Kobe, capital (P600,000 + P800,000

+ P1,000,000 – P200,000) 2,200,000Lebron, capital (P500,000 + P1,300,000

- P500,000) 1,300,000

(1) Inventory 300,000Cash 240,000Accounts payable 60,000

(2) Mortgage payable 50,000Interest expense 20,000

Cash 70,000

(3) Installment note payable 35,000Interest expense 20,000

Cash 55,000

(4) Accounts receivable 210,000Cash 1,340,000

Sales 1,550,000

(5) Selling and general expenses 340,000Cash 278,000Accrued expenses payable 62,000

(6) Depreciation expense 60,000Accumulated depreciation 60,000

(7) Kobe, drawing 104,000Lebron, drawing 104,000

Cash 208,000

(8) Sales 1,550,000Income summary 1,550,000

(9) Cost of goods sold 900,000Inventory 900,000P900,000 = P800,000 beginning inventory

+ 300,000 purchases- 200,000 ending inventory

40 Chapter 2

Income summary 1,340,000Cost of good sold 900,000Selling and general expenses 340,000Depreciation expense 60,000Interest expense 40,000

Income summary 210,000Kobe, capital 105,000Lebron, capital 105,000

Kobe, capital 104,000Lebron, 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 P1,300,000P3,500,000Net income (P1,550,000 revenue

- P 1,340,000 expenses) 210,000Interest on beginning capital

balances (3%) 66,000 39,000 (105,000 )

P105,000Salaries 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 PartnershipIncome Statement

For the Year Ended December 31, 2008

SalesP1,550,000Less: Cost of goods sold:

Inventory, January 1 P800,000Purchases 300,000 Goods available for sale P1,100,000

Less: Inventory, December 31 (200,000 ) (900,000 )

Gross profit P650,000Less: Selling and general expenses 340,000

Depreciation expenses 60,000 400,000 Operating income P250,000Nonoperating expense- interest (40,000 )Net income P210,000


c. Kobe-Lebron PartnershipBalance Sheet

At December 31, 2008

AssetsCash P1,589,000Accounts receivable 210,000

Inventory 200,000Land 1,300,000Equipment (net) 940,000 Total assets P4,239,000

Liabilities and CapitalLiabilities:

Accounts payable P60,000Accrued expenses payable 62,000Installment note payable 165,000Mortgage payable 450,000

Total liabilities P737,000Capital:

Kobe, capital P2,201,000Lebron, 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: cImplied capital of the partnership (P90,000/20%)

P450,000Actual value of the partnership( 420,000 )

Goodwill P 30,000

AQUINO LOCSIN DAVIDHIZON

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 P36,000P 90,000

3-2: bAQUINO 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 P33,600P 84,000

3-3: dAQUINO LOCSIN DAVID

TOTAL

Capital transferred P 50,400 P 25,200 P 8,400P 84,000Excess 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 P132,000Interest sold (444,000X1/5) ( 88,800 )

Combine gain P 43,200

3-5: b

Implied value of the partnership (P40,000/1/4)P160,000Actual value( 140,000 )

Goodwill P 20,000

BERNAL CUEVASDIAZ

Cash balances P 80,000 P40,000P 20,000Goodwill, 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 P34,500P 16,500

Partnership Dissolution – Changes in Ownership 43

3-6: b

BANZON CORTEZTOTAL

Capital Transfer (20%) P 16,000 P 4,000P20,000Excess, Profit and Loss ratio __6,000 __4,000_10,000

Cash distribution P 22,000 P 8,000 P30,000

3-7: dPEREZ CADIZ

TOTAL

Capital balances beginning P 24,000 P 48,000P 72,000Net profit, 1:2 5,430 10,86016,290Drawings ( 5,050 ) ( 8,000 ) ( 13

,050)

Capital balances before admission P 24,380 P 50,860P 75,240Capital 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 13,240P18,810Excess, 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) P180,000Diana's Interest 1/6

Cash distribution P 30,000

3-9: a

Total agreed capital (P36,000/1/5) P180,000Total contributed capital (80,000+40,000+36,000) ( 156,000 )

Unrecognized Goodwill P 24,000

3-10: b Contributed Agreed IncreaseCapital 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 60,000Bonus 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 77,000Pete's interest 1 /5

Pete's agreed capital balance P 15,400 44 Chapter 3

3-12: b Contributed Agreed IncreaseCapital 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 – – 25,000Bonus 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 _____1/4Agreed capital P 55,000Contributed capital __70,000

Bonus to June & July P 15,000

JUNE JULY

Capital balances before admission P90,000 P 60,000Bonus 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%) P175,000Total 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 62,400Total 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 – – 16,000Goodwill to August _____– ______– __4,800

Capital balances after admission P23,000 P 18,600 P20,800


3-16: a

ANG BENG CHING DONG TOTALCapital 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 beforeGoodwill and Bonus P300,000 P 400,000 P 300,000 P600,000P1,600,000Goodwill to Old Partners (sch. 1) 150,000 150,000 100,000 – 400,000Bonus to Old Partners (sch. 1) __37,500 __37,500 __25,000 ( 100,000 )________–

Capital balances afteradmission 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 P500,000New Partner 600,000 (25%) __500,000 ( 100,000 ) Bonus

Total P 1,600,000 P2,000,000 P400,000 GW

3-17: bMONA LIZA ALMA LORNA TOTAL

Capital balances beforeadmission of Alma P150,000 P 50,000 – –P 200,000

Admission of Alma:Investment – – 80,000 – 80,000Goodwill to old partner,

70:30 (sch. 1) __28,000 ___12,000 _______– ______–___40,000Capital 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 75,000Goodwill to old partners,

5:3:2 (sch. 2) __10,000 ____6,000 ____4,000 ______–___20,000

Capital balances afteradmission P168,000 P 56,000 P 76,000 P 75,000 P 375,000

Schedule 1:Total agreed capital (80,000/25%)P 320,000Total 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 375,000Total contributed capital (280,000+75,000)( 355,000)

Goodwill to old partners, 5:3:2 P 20,000

46 Chapter 3

3-18: cRED WHITE BLUE

TOTAL

Unadjusted capital balances P175,000 P100,000 P 45,000P320,000

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) P405,000Green's interest 1/3

Investment P135,000

3-19: bXX YY ZZ WW

TOTALCapital balances before

admission P360,000 P225,000 P135,000 –P720,000

Capital transferto WW (1/6) ( 60,000 ) ( 37,500 ) ( 22,500 ) _120,000______–

Balances P300,000 P187,500 P112,500 P120,000P720,000

Equalization of capital ( 100,000 ) __12,500 __87,500 ______–______–

Balances P200,000 P200,000 P200,000 P120,000P720,000

Net profit, equally 3,150 3,150 3,150 3,15012,600

Drawings (2 months) _( 1,500 ) _( 2,000 ) _( 1,500 ) _( 2,000 )_( 7,000 )

Capital balances beforeWWs Investment P201,650 P201,150 P201,650 P121,150P725,600

Total agreed capital (201,650+201,150+201,650)/2/3 P906,675WW's interest 1 /3

Agreed capital of WW P302,225Contributed capital (see above) _121,150

Cash to be invested P181,075 3-20: a

A B C

Capital balances P 20,750 P 19,250P 45,000Understatement 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 30,250A'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 22,2502. Under Bonus method the capital balances of B would be:

B, capital balances before settlement to A P 22,250Bonus to A (1,500X25/75) _( 500 )

B, capital after retirement of A P 21,750 Partnership Dissolution – Changes in Ownership 47

3-21: aPerez Reyes

Suarez

Capital balances P 100,000 P 150,000P 200,000Net income, P140,000 70,000 42,00028,000Undervaluation of inventory, P20,000 ___10,000 ____6,000____4,000

Capital balances before settlement to Perez P 180,000 P 198,000P 232,000Settlement 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: cELY FLOR

GLOR

Capital balances P 320,000 P 192,000P 128,000Settlement 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 60,000Bal. beg. cap. ratio: 48:24 ( 544,000) ( 272,000) ( 816,000)Total ( 24,000) ( 12,000) ( 36,000)

Capital balance 456,000 228,000 684,000Drawings ( 24,000) ( 24,000) ( 48,000)Capital balance, 12/31/07 432,000 204,000 636,000 Net profit- 2008:

Salary 576,000 288,000 864,000Interest 43,200 20,400 63,600Balance, equally ( 397,800) ( 397,800) ( 795,600)Total 221,400 ( 89,400) 132,000

Capital balance 653,400 114,600 768,000Drawings ( 24,000) ( 24,000) ( 48,000)Capital balance 12/31/08 629,400 90,600 720,000

Total contributed capital (720,000 + 400,000) 1,120,000Cora’s interest 40%Cora’s agreed capital 448,000Cora’s contributed capital 400,000Bonus to Cora, from Alma and Betty 4:2 48,000Therefore 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 11,000Compensation 5,000 20,000 25,000Balance, 4:6 ( 2,000) ( 3,000) ( 5,000)Total 11,000 20,000 31,000

Balance 91,000 50,000 141,000Withdrawal ( 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 SammyTotal agreed capital (P117,000 +43,000) P160,000Sammy’s interest 20%Sammy’s agreed capital 32,000Sammy’s contributed capital 43,000Bonus to Pete & Carlos, 4:6 11,000

Therefore entry (a) is correct.



Problem 3 – 1(a) 1. Goodwill Method:

Total agreed capital (P75,000 25%)....................................P300,000Total contributed capital......................................................... ._275,000

Goodwill to old partners, P/L ratio..........................................P 25,000

EntryGoodwill............................................................................ 25,000Cash................................................................................... 75,000

Red, capital.................................................................... 5,000White, capital................................................................ 10,000Blue, capital................................................................... 10,000Green, capital................................................................ 75,000

2. Bonus Method:Contributed capital of Green.....................................................P 75,000Agreed 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................................................................ 68,750Red, capital.................................................................... 1,250White, capital................................................................ 2,500Blue, capital................................................................... 2,500

(b) 1. Implicit Goodwill Method:Total Implied Capital (P75,000 25).....................................P300,000Total existing capital............................................................... ._200,000

Implied Goodwill to old partners.............................................P100,000

Entries:Goodwill............................................................................ 100,000

Red, capital.................................................................... 20,000White, capital................................................................ 40,000Blue, capital................................................................... 40,000

Red, capital (25% x P80,000)............................................ 20,000White, capital (25% x p120,000)....................................... 30,000Blue, capital (25% x P100,000)......................................... 25,000

Green, capital................................................................ 75,000

2. Red, capital (25% x P10,000)....................................................... 15,000White, capital (25% x P80,000)................................................... 20,000Blue, capital (25% x P60,000)...................................................... 15,000

Green, capital......................................................................... 50,00050 Chapter 3

Problem 3 – 2a. (1) Bonus Method:

Contributed capital of Tomas............................................................................. P140,000Agreed 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 – P500,000Admission 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%). ........................................ P700,000Total 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 – P500,000Admission 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 P700,000Goodwill 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 P700,000Goodwill 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)........................................................ P180,000Total capital before admission (P60,000 + P80,000)........................................................ _140,000

Goodwill recorded............................................................................................................ P 40,000

Total capital of the partnership (P180,000 75%).......................................................... P240,000Less: 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).......................................................... P120,000Total capital before admission.......................................................................................... _140,000

Bonus to Barry.................................................................................................................. P 20,000

Agreed capital of Barry (P120,000 75%) x 25%.......................................................... P 40,000Less: 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%).................................................P300,000Total contributed capital (P100,000 + P40,000 + P60,000)................ ._200,000

Goodwill to old partners, P/L ratio.......................................................P100,000

Entry:Cash. ............................................................................................ 60,000Goodwill....................................................................................... 100,000

Gene, capital.......................................................................... 80,000Nancy, capital........................................................................ 20,000Ellen, capital.......................................................................... 60,000

b. Cash.................................................................................................... 60,000Ellen, capital................................................................................. 60,000

No Goodwill, no bonus because the total agreed capital is equal to the total contributed capital.

c. Gene, capital ....................................................................................... 20,000Nancy, capital..................................................................................... 8,000

Ellen, capital................................................................................. 28,000

d. Cash.................................................................................................... 32,000Ellen, 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%)...............................................P175,000Total contributed capital (P140,000 + P32,000).................................. ._172,000

Goodwill to new partner.......................................................................P 3,000

Entry:Cash. ............................................................................................ 32,000Goodwill....................................................................................... 3,000

Ellen, capital.......................................................................... 35,000

Problem 3 – 5

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

b. Total agreed capital (P120,000 + P50,000)..........................................P170,000Cherry's interest....................................................................................____25%

Cherry's agreed capital..............................................................................42,500Contributed capital............................................................................... .__50,000

Bonus to old partners, 70:30.................................................................P 7,500 52 Chapter 3

Entry:Cash. ............................................................................................ 50,000

Cherry, capital........................................................................ 42,500Helen, capital......................................................................... 5,250Cathy, capital......................................................................... 2,250

c. Total agreed capital (P120,000 + P25,000)..........................................P145,000Cherry's interest....................................................................................____25%

Agreed capital of Cherry...........................................................................36,250Contributed capital............................................................................... .__25,000

Bonus to new partner............................................................................P 11,250

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

Cherry, capital........................................................................ 36,250

d. Total agreed capital (P50,000 25%).................................................P200,000Total contributed capital (P120,000 + 50,000).......................................170,000

Goodwill to old partners, 70:30............................................................P 30,000

Entry:Cash ....................................................................................... 50,000Goodwill....................................................................................... 30,000

Cherry, capital........................................................................ 50,000Helen, capital......................................................................... 21,000Cathy, capital......................................................................... 9,000

e. Total agreed capital (P120,000 75%)...............................................P160,000Total contributed capital (P120,000 + P25,000).................................. ._145,000

Goodwill to new partner.......................................................................P 15,000

Entry:Cash ....................................................................................... 25,000Goodwill....................................................................................... 15,000

Cherry, capital........................................................................ 40,000

Problem 3 – 6

a. Total agreed capital (P600,000 3/4)................................................................. P800,000Santos interest...................................................................................................... _____1/4

Contribution of Santos......................................................................................... P200,000

b. Total agreed capital (P630,000 3/4)................................................................. P840,000Santos' interest..................................................................................................... _____1/4

Contribution of Santos......................................................................................... P210,000Partnership Dissolution – Changes in Ownership 53

c. Total agreed capital (P624,000 3/4)............................................................................................. P832,000Less: Contributed capital of old partners......................................................................................... _600,000

Contributed capital of Santos........................................................................................................... P232,000

d. Total agreed capital (P600,000 3/4)............................................................................................. P800,000Less: Goodwill ............................................................................................................................... __10,000

Contributed capital........................................................................................................................... 790,000Contributed capital of old partners................................................................................................... _600,000

Contributed capital of Santos........................................................................................................... P190,000

e. Total agreed capital (Contributed)................................................................................................... P820,000Less: Contributed capital of old partners......................................................................................... _600,000

Contributed capital of Santos........................................................................................................... P220,000Problem 3 – 7

a. Tony, capital .......................................................................................................... 40,000Noel, capital........................................................................................................ 40,000

b. Cash .......................................................................................................... 90,000Noel, capital........................................................................................................ 90,000

(P180,000 2/3) x 1/3 = P90,000.

c. Cash............................................................................................................................ 56,000Goodwill .................................................................................................................... 4,000

Noel, capital........................................................................................................ 60,000

Total agreed capital (P180,000 3/4)..............................................................................P240,000Total 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............................................................................................................................ 52,000Noel, capital........................................................................................................ 52,000

Total agreed capital (P52,000 1/4)................................................................................P208,000Total 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…………………………………………………………………… 55,200Tony, capital……………………………………………………………………. 36,800

Subas, capital (P155,200 x 1/4)................................................................................... 38,800Tony, capital (P116,800 x 1/4).................................................................................... 29,200

Noel, capital........................................................................................................ 68,000Total resulting capital (P68,000 1/4).............................................................................P272,000Total capital of old partner (net assets)............................................................................._180,000Increase in value of land....................................................................................................P 92,000Capital of old partner after revaluation of land:

Subas (P100,000 + P55,200).....................................................................................P155,200Tony (P80,000 + P36,800)..........................................................................................116,800

54 Chapter 3

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

Noel, capital.................................................................................. 44,000

Agreed capital of Noel (P220,000 x 1/5)...............................................P 44,000Contributed capital of Noel....................................................................._40,000

Bonus to Noel........................................................................................P 4,000

g. Cash.................................................................................................... P60,000Goodwill. ............................................................................................ 60,000

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

Total agreed capital (P60,000 1/5)....................................................P300,000Total contributed capital (P180,000 + P60,000).................................. ._240,000

Goodwill to old partner, 3:2..................................................................P 60,000

Problem 3 – 8

a. Conny, capital..................................................................................... 40,000Andy, capital (P8,000 x 3/4)............................................................... 6,000Benny, capital (P8,000 x 1/4)............................................................. 2,000

Cash. ............................................................................................ 48,000

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

Cash. ............................................................................................ 50,000

c. Goodwill (P5,000 1/5).................................................................... 25,000Conny, capital..................................................................................... 40,000

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

Problem 3 – 9

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

b. Goodwill (P30,000 50%)................................................................ 60,000Ace, capital................................................................................... 12,000Jack, capital.................................................................................. 18,000Spade, capital................................................................................ 30,000

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


Problem 3-9 (Continued)

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

Ace, capital (P60,000 x 2/5)............................................................... 24,000Jack, capital (P60,000 x 3/5)............................................................... 36,000

Spade, capital................................................................................ 60,000

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

Spade, capital...................................................................................... 130,000Ace, capital (P50,000 x .40)................................................................ 20,000Jack, capital (P50,000 x .60)............................................................... 30,000

Cash. ............................................................................................ 60,000Land. ............................................................................................ 120,000

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

Cash. ............................................................................................ 150,000

f. Goodwill (P30,000 50%)................................................................ 60,000Spade, capital...................................................................................... 120,000

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

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

Spade, capital (P120,000 x P20,000).................................................. 140,000Ace, capital (P10,000 x 40%)............................................................. 4,000Jack, capital (P10,000 x 60%)............................................................. 6,000

Land. ............................................................................................ 100,000Note payable................................................................................. 50,000

56 Chapter 3

Problem 3 – 10

Case 1: Bonus of P10,000 to Eddy:Eddy, capital................................................................................. 70,000Charly, capital (P10,000 x 3/5).................................................... 6,000Danny, capital (P10,000 x 2/5)..................................................... 4,000

Cash ....................................................................................... 80,000

Case 2: Partial Goodwill to Eddy:Goodwill....................................................................................... 4,000Eddy, 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)................................................ 3,000Danny, capital (P5,000 x 2/5)................................................ 2,000Cash ....................................................................................... 65,000

Case 4: Total Implied Goodwill of P24,000:Goodwill....................................................................................... 24,000Eddy, capital................................................................................. 70,000

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

Case 5: Other assets disbursed:Eddy, capital................................................................................. 70,000Other assets................................................................................... 20,000

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

Case 6: Danny purchases Eddy's capital interest:Eddy, capital................................................................................. 70,000

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


Problem 3 – 11

a. 1/1/06 Building................................................................ 52,000Equipment............................................................ 16,000Cash ..................................................................... 12,000

Santos capital............................................... 40,000To record initial investment.

12/31/06 Reyes capital......................................................... 22,000Santos capital............................................... 12,000Income summary......................................... 10,000

To record distribution of loss as follows: Santos Reyes Total

Interest.................................................................. P 8,000 P – P 8,000Additional profit................................................... 4,000 4,000Balance to Reyes.................................................. ______ (22,000) (22,000)

Total..................................................................... P12,000 P(22,000) (P10,000)

1/1/07 Cash ..................................................................... 15,000Santos capital (15%)............................................. 300Reyes 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........................................................ 10,340Reyes capital......................................................... 5,000Cruz capital........................................................... 5,000

Santos drawings........................................... 10,340Reyes drawings............................................ 5,000Cruz 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.................................................. 44,000Santos capital............................................... 16,940Reyes capital................................................ 16,236Cruz capital.................................................. 10,824

To allocate P44,000 income figure as computed below:Santos Reyes Cruz

Interest (20% of P51,700).................................... P10,34015% of P44,000 income....................................... 6,600Balance, 60:40...................................................... ______ P16,236 P10,824

Total..................................................................... P16,940 P16,236 P10,82458 Chapter 3

Capital balances as of December 31, 2008Santos Reyes Cruz

Initial investment, 2007........................................ P40,000 P40,0002007 profit............................................................ 12,000 (22,000)Cruz investment.................................................... (300) (1,700) P17,0002007 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........................................................... 22,824Diaz capital.................................................. 22,824

To transfer capital purchase from Cruz to Diaz

12/31/08 Santos capital........................................................ 11,660Reyes capital......................................................... 5,507Diaz capital........................................................... 5,000

Santos drawings........................................... 11,660

Reyes drawings............................................ 5,507Diaz 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.................................................. 61,000Santos capital............................................... 20,810Reyes capital................................................ 24,114Diaz capital.................................................. 16,076

To distribute profit for 2008 computed as follows:Santos Reyes Diaz

Interest (20% of P58,300).................................... P11,66015% of P61,000 profit.......................................... 9,150Balance, P40,190, 60:40....................................... ______ P24,114 P16,076

Total..................................................................... P20,810 P24,114 P16,076

1/1/09 Diaz capital........................................................... 33,900Santos capital (15%)............................................. 509Reyes capital (85%).............................................. 2,881

Cash............................................................. 37,290Diaz 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................................................................ 52,000Equipment............................................................ 16,000Cash ..................................................................... 12,000Goodwill............................................................... 80,000

Santos capital............................................... 80,000Reyes capital................................................ 80,000

To record initial investments. Reyes is credited with goodwill of P80,000 to match Santos investment.


12/31/06 Reyes capital............................................................... 30,000Santos capital............................................... 20,000Income 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 ..................................................................... 15,000Goodwill............................................................... 22,500

Cruz capital.................................................. 37,500Cash 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 = P18,000goodwill = P22,500

12/31/07 Santos capital........................................................ 20,000Reyes capital......................................................... 10,000Cruz capital........................................................... 7,500

Santos drawings........................................... 20,000Reyes drawings............................................ 10,000Cruz drawings.............................................. 7,500

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

12/31/07 Income summary.................................................. 44,000Santos capital............................................... 26,600Reyes capital................................................ 10,400Cruz capital.................................................. 6,960

To allocate P44,000 profit as follows:Santos Reyes Cruz

Interest (20% of P100,000).................................. P20,00015% of P44,000 profit.......................................... 6,600Balance 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 P80,0002006 profit allocation........................................... 20,000 (30,000)Additional investment.......................................... P37,5002007 drawings...................................................... (20,000) (10,000) (7,500)2007profit allocation............................................ __26,600 _10,440 __6,960

Capitals, 12/31/07................................................. P106,600 P50,440 P36,96060 Chapter 3

1/1/08 Goodwill....................................................................... 26,588Santos capital...................................................... 3,988Reyes capital....................................................... 13,560Cruz 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.................................................................. 46,000Diaz capital......................................................... 46,000

To transfer of capital purchase.

12/31/08 Santos capital................................................................ 22,118Reyes capital................................................................ 12,800Diaz capital................................................................... 9,200

Santos drawings.................................................. 22,118

Reyes drawings................................................... 12,800Diaz drawings..................................................... 9,200

To close drawings accounts based on 20% of beginning capitals.

12/31/08 Income summary.......................................................... 61,000Santos capital...................................................... 31,268Reyes capital....................................................... 12,800Diaz capital......................................................... 9,200

To allocate profit for 2008 as follows:Santos Reyes Diaz

Interest (20% of P110,588).......................................... P22,11815% of P61,000............................................................ 9,150Balance 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 P50,440Goodwill....................................................................... 3,988 13,560Capital purchased......................................................... P46,000Drawings...................................................................... (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....................................................................... 14,321Santos capital...................................................... 2,148Reyes capital....................................................... 7,304Diaz 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................................................................... 53,562Cash.................................................................... 53,562

To record settlement to Diaz.Partnership Dissolution – Changes in Ownership 61

Problem 3 – 12Partnership Books Continued as Books of Corporation

Entries in the Books of the Corporation

(1) Inventories............................................................................................ 26,000Land .................................................................................................... 40,000Building. .............................................................................................. 20,000Accumulated depreciation – bldg......................................................... 20,000Accumulated depreciation – equipment................................................ 30,000

Equipment.................................................................................... 20,000Jack capital.................................................................................. 58,000Jill capital.................................................................................... 34,800Jun capital.................................................................................... 23,200

To adjust assets and liabilities of the partnershipto their current fair values.

(2) Cash .................................................................................................... 4,000Jack capital.......................................................................................... 18,000

Jill capital.................................................................................... 20,200Jun capital.................................................................................... 1,800

To adjust capital accounts of the partners to 4:3:3 ratio.

(3) Jack capital.......................................................................................... 100,000Jill capital............................................................................................ 75,000Jun capital............................................................................................ 75,000

Capital stock................................................................................ 250,000To record issuance of stock to the partners.

New Books Opened for the New Corporation

Entries in the Books of the Partnership

(1) Inventories............................................................................................ 26,000Land .................................................................................................... 40,000Building. .............................................................................................. 20,000Accumulated depreciation – bldg......................................................... 20,000Accumulated depreciation – equipment................................................ 30,000

Equipment.................................................................................... 20,000Jack capital.................................................................................. 58,000Jill capital.................................................................................... 34,800Jun capital.................................................................................... 23,200

To adjust assets and liabilities of the partnership.

(2) Cash .................................................................................................... 4,000Jack capital.......................................................................................... 18,000

Jill capital.................................................................................... 20,200Jun capital.................................................................................... 1,800

To adjust capital accounts of the partners.62 Chapter 3

(3) Stock of JJJ Corporation...................................................................... 250,000Accounts payable.................................................................................. 30,000Loans payable – Jill.............................................................................. 40,000

Cash in bank................................................................................ 44,000Accounts payable......................................................................... 26,000Inventories.................................................................................... 60,000Land............................................................................................. 60,000Building. ...................................................................................... 70,000Equipment.................................................................................... 60,000

To record transfer of assets and liabilities toThe corporation and the receipt of capital stock

(4) Jack capital.......................................................................................... 100,000Jill capital............................................................................................ 75,000Jun capital............................................................................................ 75,000

Stock of JJJ Corporation............................................................. 250,000To 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. ....................................................................................... 44,000Accounts receivable.............................................................................. 26,000Inventories............................................................................................ 60,000Land .................................................................................................... 60,000Building (net). ...................................................................................... 70,000Equipment (net).................................................................................... 60,000

Accounts payable......................................................................... 30,000Loans payable.............................................................................. 40,000Capital stock................................................................................ 250,000

Problem 3 – 13a. 1/1/06 Building 1,040,000

Equipment 320,000Cash 240,000

Lim, capital 800,000Sy, capital 800,000

(To record initial investment. Assets recorded at market value with two equal capital balances.

12/31/06 Sy, capital 440,000Lim, capital 240,000Income 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


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

1/1/07 Cash 300,000Lim, capital (15%) 6,000Sy, 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 206,800Sy, capital 100,000Tan, capital 100,000

Lim, drawings 206,800Sy, drawings 100,000Tan, 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 880,000Lim, capital 338,800Sy, capital 324,720Tan, capital 216,480

(To allocate P880,000 income figure for 2007 as determined below.)

Lim Sy TanInterest (20% of P1,034,000

beginning capital balance) P206,80015% of P880,000 income 132,00060:40 split of remaining P541,200 income - 324,720 216,480Total P338,800 P524,720 P216,480

Capital balances as of December 31, 2007: Lim Sy Tan

Initial 2006 investment P800,000 P800,0002006 profit allocation 240,000 440,000Tan’s investment (6,000) (34,000) P340,0002007 drawings (206,800) (100,000) (100,000)2007 profit allocation 338,800 324,720 216,48012/31/07 balances P1,166,000 P550,720 P456,480

1/1/08 Tan, capital 456,480Ang, capital 456,480

(To reclassify balance to reflect acquisition of Tan’s interest.)

64 Chapter 3

12/31/08 Lim, capital 233,200Sy, capital 110,140Ang, capital 100,000

Lim, drawings 233,200Sy, drawings 110,140Ang, 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 416,200Sy, capital 482,280Ang, capital 321,520

(To allocate profit for 2008 determined as follows)

Lim Sy AngInterest (20% of P1,166,000 beg. capital) P233,20015% of P1,220,000 income 183,00060:40 split of remaining P803,800 - 482,280 321,520

Totals P416,200 P482,280 P321,520

1/1/09 Ang, capital 678,000Lim, capital (15%) 10,180Sy, 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 1,040,000Equipment 320,000Cash 240,000Goodwill 1,600,000

Lim, capital 1,600,000Sy, 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 600,000Lim, capital 400,000Income 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 300,000Goodwill 450,000

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


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 400,000Sy, capital 200,000Tan, capital 150,000

Lim, drawings 400,000Sy, drawings 200,000Tan, 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 880,000Lim, capital 532,000Sy, capital 208,800Tan, capital 139,200

(To allocate P880,000 income figure as follows)

Lim Sy TanInterest (20% of P2,000,000)

beginning capital balance) P400,00015% of P880,000 income 132,00060:40 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 P1,600,0002006 profit allocation 400,000 (600,000)Additional investment P750,0002007 drawings (400,000) (200,000) (150,000)2007 profit allocation 532,000 208,800 139,20012/31/07 balances P2,132,000 P1,008,800 P739,200

1/1/08 Goodwill 531,760Lim, capital (15%) 79,760Sy, capital (51%) 271,200Tan, 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 920,000Ang, capital 920,000

(To reclassify capital balance to new partner.)

12/31/08 Lim, capital 442,360Sy, capital 256,000Ang, capital 184,000

Lim, drawings 442,360Sy, drawings 256,000Ang, 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 1,220,000Lim, capital 625,360Sy, capital 356,780Ang, 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 183,00060:40 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 P739,200Adjustment for goodwill 79,760 271,200 180,800Drawings (442,360) ( 256,000) (184,000)Profit allocation 625,360 356,780 237,86012/31/08 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 286,420Lim, capital (15%) 42,960Sy, capital (51%) 146,080Ang, capital (34%) 97,380

(To recognize implied goodwill.)


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

(To record final distribution to Ang.

68 Chapter 4

CHAPTER 4


4-1: aPAR BOOGIE BIRDIE

Capital balances before realization P 20,000 P 16,000 P 10,000Loss 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 10,000Gain 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: bPING PANG PONG

Capital balances before liquidation P 50,000 P 50,000 P 10,000Loss 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: aPING PANG PONG

Capital balances before liquidation P 50,000 P 50,000 P 10,000Loss 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: bCOLT MARK CLOCK

Capital balances before liquidation (net of loans)P290,000 P200,000 P220,000Loss of P130,000, 4:3:3 ( 52,000 ) ( 39,000 ) ( 39,000 )

Cash distribution P238,000 P161,000 P181,000

4-6: cJONAS CARLOS TOMAS

Capital balances before liquidation P160,000 P 45,000 P 55,000Loss 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: aARIEL BERT CESAR

Capital balances before liquidation P40,000 P180,000 P 30,000Loss of P100,000, 4:3:3 ( 40,000 ) ( 30,000 ) ( 30,000 )

Cash distribution P – P150,000 P –

4-8: bNORY OSCAR

Capital balances before realization P23,000 P 13,500Additional 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 36,500Unpaid liabilities 15,000

Total loss on realization P 51,500

4-9: dBLACK WHITE GREEN

Capital balances before liquidation (net) P99,000 P 91,500 P138,000Loss 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 91,500Cash 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: cANA EVA NORA

Capital balances before liquidation (net) P27,000 P 43,000 P 10,000Loss 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: dARIES LEO TAURUS

Capital balances before liquidation (net) P33,500 P 49,000 P 36,500Loss 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) P36,500Payment to Taurus ( 27,500)

Share of total loss (20%) P 9,000

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

4-12: cTOTAL MONA NORA

OLGA

Capital balances, June 11 P32,700 P15,000 P13,500

P 4,200Net 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 P10,700P 1,400Loss on realization (47,500-30,000) ( 17,500 ) ( 7,500 ) ( 5,000 )( 5,000 )

Balances P 5,400 P 3,300 P 5,700 ( 3,600)

Additional investment by Olga _1,500 _____– _____–_1,500

Balances P 6,900 P 3,300 P 5,700 ( 2,100)

Elimination of Olga's deficiency ______ ( 1,260 ) ( 840 ) _2,100

Payment to partners P 6,900 P 2,040 P 4,860 P –

4-13: bRITA SARA TITA

Capital balances before liquidation P49,000 P18,000 P10,000Operating loss, P21,000 ( 3,500) ( 7,000) ( 10,500)Drawings ( 10,000) ( 15,000) ( 20,000)Loans – 8,000 25,000Loss 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: aCLARO PEDRO

ANDRO

Capital balances before liquidation P45,000 P27,000P50,000Loss on realization

Accounts Receivable (P50,000 X 40%) P20,000Investment (P30,000 - P20,000) 10,000Equipment (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: cTOTAL MONA LISA

Capital balances before liquidation (inclusive loans) P47,500 P28,500P19,000

Loss on realization, (squeeze) ( 38,500 ) ( 23,100 )( 15,400 )

Capital balances - cash distribution P 9,000 P 5,400 P 3,600Partnership Liquidation 71

Cash after realization P 37,500Less Liabilities (P36,000-P7,500) ( 28,500 )

Total capital after realization P 9,000

4-16: a

FF capital before distribution of net loss P100,000Add: share of net loss (P10,000 X 40%) _( 4,000 )FF capital before liquidation 96,000Cash 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) P250,000Add: Liabilities _100,000

Total assets P350,000Cash before liquidation ( 50,000 )

Non-cash assets P300,000Loss on realization ( 40,000 )

Cash to be realized P260,000

4-17: dTOTAL CC DD EE

Capital balances before realization (net) P100,000 P 15,000 P22,500P62,500Loss 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)P18,500Investment by DD __43,500 ______– _43,500_____–

Payment to EE P 18,500 P – P – P18,500

4-18: d

Total capital before liquidation P 30,000Liabilities __1,500

Total assets P 31,500Less: Cash balance before realization

Cash after payment of liabilities P 11,100payment of liabilities 1,500Cash realized ( 11,600 ) __1,000

Non-cash asset P 30,500Less: cash realized _11,600

Loss on realization P 18,900

72 Chapter 4

4-19: dLL MM NN

TOTAL

Capital balances P 50,000 P 20,000 P 10,000P 80,000Salary of LL (P600 X 8 months) __4,800 _______ __________4,800

Capital balances before liquidation P 54,800 P 20,000 P 10,000P 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 50,000Less: 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) P110,000KK (P60,000-P10,000) 50,000LL (P30,000+P10,000) __40,000 P200,000

Divide by ______50%

Total P400,000Loss 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 25,000P 25,000Advances 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 45,400P 27,500Loss 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.


4-22: aTOTAL PG JR AS

Capital balances before realization P 950,000 P350,000 P250,000P350,000Loss on realization (squeeze) ( 1,000,000 ) __20,000 ( 200,000 )_500,000Capital 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: aRM ST

Capital balances before realization (net) P500,000 P825,000Loss on realization, P1,225,000 ( 490,000 ) ( 735,000 )

Payment to Partners P 10,000 P 90,000

4-24: aTOTAL LT AM ZP

Capital balances before realization (net) P 27,500 P 20,000 P 5,000P 2,500Gain 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: cAG BM CP DJ

Capital balances before realization (net) P 420,000 P375,000 P205,000P150,000Loss 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: aSettlement to Uy P351,500Uy capital before liquidation (net):

Uy capital P553,500Receivable 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 1,492,000Receivable 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 1,454,500Loss 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


Problem 4 – 1

Case 1Rivas and BrionesStatement of LiquidationDecember 31, 2008

Partners'Capitals

Assets Rivas, Briones, RivasBriones

Cash Others Liabilities Loan Loan (90%)(10%)

Balances before liquidation.... P 20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000P10,000

Realization of assets anddistribution 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 hiscapital 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 2Rivas and BrionesStatement of LiquidationDecember 31, 2008

Partners'Capitals



Balances before liquidation.... P20,000 P200,000 P132,000 P 18,000 P 20,000 P40,000P10,000

Realization of assets anddistribution 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 ) – –


Case 3

Rivas and BrionesStatement of LiquidationDecember 31, 2008

Partners'Capitals



Balances before liquidation........ P 20,000 P200,000 P132,000 P 18,000 P20,000 P40,000P10,000

Realization of assets anddistribution 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.............................................................................................................. 134,000Rivas, Capital................................................................................................. 59,400Briones, Capital.............................................................................................. 6,600

Other Assets............................................................................................ 200,000Liabilities. ..................................................................................................... 132,000

Cash........................................................................................................ 132,000Rivas, Loan.................................................................................................... 18,000

Rivas, Capital.......................................................................................... 18,000Briones, Capital.............................................................................................. 1,400

Rivas, Capital.......................................................................................... 1,400Briones, Loan................................................................................................. 20,000Briones, Capital.............................................................................................. 2,000

Cash .................................................................................................... 22,000Case 2:

Cash.............................................................................................................. 134,000Rivas, Capital................................................................................................. 46,200Briones, Capital.............................................................................................. 19,800

Other Assets............................................................................................ 200,000Liabilities. ..................................................................................................... 132,000

Cash........................................................................................................ 132,000Rivas, Loan.................................................................................................... 6,200Briones, Loan................................................................................................. 9,800

Rivas, Capital.......................................................................................... 6,200Briones, Capital...................................................................................... 9,800

Rivas, Loan.................................................................................................... 11,800Briones, Loan................................................................................................. 10,200

Cash........................................................................................................ 22,00076 Chapter 4

Case 3:Cash.................................................................................................... 134,000Rivas, Capital...................................................................................... 33,000Briones, Capital................................................................................... 33,000

Other Assets................................................................................. 200,000Liabilities............................................................................................ 132,000

Cash. ............................................................................................ 132,000Briones, Loan...................................................................................... 20,000

Briones, Capital............................................................................ 20,000Rivas, Capital...................................................................................... 3,000

Briones, Capital............................................................................ 3,000Rivas, Loan......................................................................................... 18,000Rivas, Capital...................................................................................... 4,000

Cash. ............................................................................................ 22,000

Problem 4 – 2

Blando and CastroStatement of LiquidationApril 30, 2008

Partners'Capitals

A s s e t s Accounts Blando, BlandoCastro

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 P102,000P99,000

Collection ofreceivables anddistribution of loss........ _37,500 ( 75,000 ) _______ _______ _______ _______ ( 22,500 ) ( 15,000 )

Balances............................. 55,500 – 90,000 84,000 42,000 24,000 79,50084,000

Realization ofinventory anddistribution ofloss................................ _30,000 _______ ( 90,000 ) _______ _______ _______ ( 36,000 ) ( 24

,000)

Balances............................. 85,500 – – 84,000 42,000 24,000 43,50060,000

Realization of otherassets and distributionof loss............................ _40,000 _______ _______ ( 84,000 ) _______ _______ ( 26,400 ) ( 17,600 )

Balances............................. 125,500 – – – 42,000 24,000 17,10042,400

Payment of accountspayable.......................... ( 42,000 ) _______ _______ _______ ( 42,000 ) _______ ______________

Balances............................. 83,500 – – – – 24,000 17,10042,400

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 BalancesAmp. 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 36,00014,000

Sale ofassets at a loss _95,000 ______ (135,000) ______ ______ (20,000) (12,000)

( 8,000 )

115,000 15,000 -0- 30,000 10,000 60,000 24,0006,000

Payment tocreditors _(30,000) ______ _______ (30,000) ______ _______ ______

______

85,000 15,000 -0- -0- 10,000 60,000 24,0006,000

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 20,000Volt, Capital 12,000Watt, Capital 8,000

Noncash Assets 135,000Sell noncash assets at a loss of P40,000.

(2) Liabilities 30,000Cash 30,000

Pay creditors.

(3) Amp, Capital 15,000Amp, Loan 15,000

Offset receivable from Amp against his capital credit.

(4) Volt, Loan 10,000Amp, Capital 45,000Volt, Capital 24,000Watt, Capital 6,000

Cash 85,000Final 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......................................................................................... P320,000Payment to Bina................................................................................................................ _128,000

Loss absorbed by Bina (40%)........................................................................................... P192,000

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

b. AIDA, BINA & CELIAStatement of Partnership Liquidation

January 1, 2008

CapitalCash Other Assets Aida Bina Celia

(5) (4) (1)Balances before liquidation. P80,000 P720,000 P320,000 P320,000 P160,000Realization & dist. of loss. . . 240,000 ( 720,000 ) ( 240,000 ) ( 192,000 ) ( 48,000 )

Balances............................. 320,000 – 80,000 128,000 112,000Settlement to partners.......... (320,000 ) _______ ( 80,000 ) ( 128,000 ) ( 112,000 )

Problem 4 – 5

a. LL, capital before liquidation........................................................................................... P 70,000Settlement to LL............................................................................................................... __98,000

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

Total gain on realization (P28,000 20%)...................................................................... P140,000Other assets sold............................................................................................................... _500,000

Selling price ................................................................................................................... P640,000

b. JJ, KK & LL Statement of Liquidation

Other CapitalCash Assets Liabilities JJ (4) KK(4) (LL(2)

Balances before liquidation.... P50,000 P500,000 P60,000 P180,000 P240,000 P70,000Realization & Dist. of gain.... 640,000 ( 520,000 ) _______ __56,000 __56,000 _28,000

Balances................................ 690,000 – 60,000 236,000 296,000 98,000Payment of liabilities............. ( 60,000) ( 60,000)Payment to Partners............... (630,000 ) _______ _______ ( 236,000 ) ( 296,000 ) ( 98,000)


Problem 4 – 6

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

b. BB, CC, DD, & EE Statement of Liquidation

C a p i t a lCash 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) 60,000Deposit by DD....................... 60,000 ______ _______ _______ __60,000

________

Balances................................ 60,000 – 220,000 80,000 ( 60,000) ( 180,000)

Elimination of EE's deficiency ( 90,000) ( 30,000) ( 60,000) 180,000Elimination of DD's deficiency ______ __( 90,000 ) ( 30,000 ) 120,000 –

Payment to partners................ 60,000 – 40,000 20,000 – –

Problem 4 – 7

Sayson and CompanyStatement 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

PeñaCash 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 anddistribution 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 againsthis 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 PartnershipStatement of LiquidationJune 4, 2008

Assets Partners' CapitalCash 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

P10,000Realization 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.2008July 5 Cash ............................................................................................. 30,700

Art capital (P63,300 x 40%)........................................................... 25,320Bea capital (P63,300 x 40%).......................................................... 25,320Cid capital (P63,300 x 20%)........................................................... 12,660

Other assets........................................................................... 94,000To record realization of other assets at a loss of P63,300.

Art capital (P500 x 40%)................................................................ 200Bea capital (P500 x 40%)............................................................... 200Cid capital (P500 x 20%)................................................................ 100

Liabilities.............................................................................. 500To record trade accounts payable.

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

To record payment of liabilities.

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

Cid capital............................................................................. 2,760To eliminate Cid's capital deficit.

Art capital....................................................................................... 100Bea capital...................................................................................... 4,000

Cid capital. ..................................................................................... 12,100Cash. ..................................................................................... 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 PartnershipStatement of Realization and LiquidationLump-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 52,000Cash 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 PartnershipSchedule of Distribution of Personal Assets

June 30, 2008

. K G BPersonal assets, excluding partnership capital and loan interests 500,000 600,000 700,000Personal liabilities (460,000) (480,000) (650,000)Personal net worth, excluding partnership capital and loan interests 40,000 120,000 50,000Contribution 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


5-1: bRJ SJ TJ

Capital balances before liquidation P22,000 P30,000 P 8,000Loan balances _10,000 ______– ______–

Total interest 32,000 30,000 8,000Possible 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: aAR BR CR DR

Capital balances P 5,500 P 5,150 P 6,850P 4,500Loan balances _1,000 _____– _____–_____–

Total interest 6,500 5,150 6,850 4,500Possible loss (23,000-6,000) ( 6,800 ) ( 5,100 ) ( 3,400 ) ( 1,700 )

Balances ( 300) 50 3,450 2,800Additional loss to BR, CR, DR, 3:2:1 ___300 ( 150 ) ( 100 )( 50 )

Balances – ( 100) 3,350 2,750Additional loss to CR & DR, 2:1 _____– ___100 _( 67 )_( 33 )

Payment to partners P – P – P 3,283 P 2,717

Total liabilities P 1,000Total Capital _22,000

Total Assets P23,000

5-3: cB A L A N C E S

DD EE FF GG

Capital balances P40,000 P30,000 P15,000P25,000Loan balances 5,000 10,000 – –Advances _____– _____– ( 4,500 ) ( 2,

500)

Total interest 45,000 40,000 10,50022,500Divided by P/L Ratio ____50% ____30% ____10%____10%

Loss Absorption balances 90,000 133,333 105,000225,000PI - TO GG – _____– _____– ( 91,667 ) __ __–

Balances 90,000 133,333 105,000133,333PII - TO EE & GG, 30:10 _____– ( 28,333 ) _____–( 28,333 )

Balances 90,000 105,000 105,00010,500PIII - TO EE, FF, GG, 3:1:1 _____– (15,000) ( 15,000 )( 15,000 )

Balances P90,000 P90,000 P90,000P90,000PIV - P/L Ratio

84 Chapter 5

CASH PAYMENT

DD EE FF GG

PI - To GG – – –P 9,167PII - To EE (28,833 X 30%) – P 8,433 – –

GG (28,833 X 10%) – – – 2,833PIII –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 P13,500PIV - P/L Ratio

DD EE FF GGDistribution of P18,000PI - TO GG – – –P 9,167PII - TO EE & GG, 3:1, P8,833 _____– _6,625 _____–__2,208

Cash distribution – P 6,625 – P11,375

5-4: aTAN LIM WAN

Capital balances before liquidation P40,000 P65,000 P48,000Loss on realization, P40,000 ( 16,000 ) ( 16,000 ) ( 8,000 )

Capital balances before cash distribution 24,000 49,000 40,000Possible loss, P90,000 ( 36,000 ) ( 36,000 ) ( 18,000 )

Balances ( 12,000) 13,000 22,000Additional loss to Lim & Wan, 4:2 _12,000 ( 8,000 ) ( 4,000 )

Cash distribution P – P 5,000 P18,000

5-5: bTAN LIM WAN

Capital balances before cash distribution P24,000 P49,000 P40,000Possible loss (90,000+3,000) ( 37,200 ) ( 18,600 ) ( 18,600 )

Balances ( 13,200) 30,400 21,400Additional loss to Lim & Wan, 4:2 _13,200 ( 8,800 ) _( 4,400 )

Cash distribution P – P21,600 P17,000

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

5-7: aCARPIO LOBO

Capital balances before liquidation P72,000 P54,000Goodwill written-off ( 5,000 ) ( 5,000 )

Cash balance 67,000 49,000Possible 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: dJACOB SANTOS

HERVAS

Capital balances before liquidation P40,000 P72,000P 7,000Loss 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 62,40063,600Loan balances __8,000 _____–_____–

Total interest 32,000 62,40063,600Possible Loss (210,000-120,000) ( 45,000 ) 27,000( 18,000 )

Balances ( 13,000) 35,40045,600Additional loss to Santos & Hervas _13,000 ( 7,800 )( 5,200 )

Cash distribution P – P27,600P40,400

5-9: dA B C D

Capital balances before liquidation P16,200 P12,000 P37,700P17,700

Salary payable– _____– ___160 ___240_______

Balances 16,200 12,000 37,860 ( 17,940)

Loss on realization (P2,400) ( 600 ) ( 600 ) ( 600 )( 600 )

Balances 15,600 11,400 37,26017,340Liquidation expenses (P600) ( 150 ) ( 150 ) ( 150 )( 150 )

Balances 15,450 11,250 37,11017,190Loan balances 12,000 14,400 _____–__9,600

Total interest 27,450 25,650 37,11026,790Possible Loss (126,000-18,000) ( 27,000 ) ( 27,000 ) ( 27,000 )( 27,000 )

Balances 450 ( 1,350) 10,110 ( 210)

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: aBALANCES

DY SY LEE

Total interest P22,000 P15,500 P14,000Profit and Loss ratio 2/4 1/4 1/4Loan absorption balances 44,000 62,000 56,000Priority I - to Sy _____– ( 6,000 ) _____–

Balances 44,000 56,000 56,000Priority 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 ratioCash distribution to Dy P 6,250Divided 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 P12,000Cash realized _32,000

Total 44,000Less: Payment of liquidation expense P 1,000

Payment of liability 5,400Payment to partners (Q 5-10) 20,000 _26,400

Cash withheld P17,600

5-12: c

Loss absorption balances:Cena (18,000/50%) P36,000Batista (27,000/30%) 90,000

Excess of Batista 54,000Multiply 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 P10,000Loan 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 87,520 100,000Priority I to CC _____– _____– ( 12,500 )

Balances 62,500 87,520 100,000Priority 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) – – 2,500Priority 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 RatioCash distribution to CC:

Priority I P2,500

Priority II (12,000-2,500) X 1/3 3,167

Total cash paid to CC P5,667Partnership Liquidation by Installment 87

5-14: cBALANCES

JJ KK LL MM

Capital balances P 60,000 P 64,500 P 54,000P 30,000Loan 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 195,000 270,000 360,000300,000Priority I to LL ______– ______– ( 60,000 )______–

Balances 195,000 270,000 300,000300,000Priority II to LL, MM, 15:10 ______– ______– ( 30,000 )( 30,000 )

Balances 195,000 270,000 270,000270,000Priority II to KK, LL, MM, 35:15:10 ______– ( 75,000 ) ( 75,000 )( 75,000 )

Total P195,000 P195,000 P195,000P195,000

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%) – – – 3,000Priority 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 9,000Priority II to LL, MM, 15:10 – – 4,500 3,000 7,500Priority 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: aBALANCES

ARCE BELLO CRUZ

Capital balances P 20,000 P 24,900 P 15,000Loan 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 75,000Priority I to Bello ______– ( 8,000 ) ______–

Balances 64,000 75,000 75,000Priority 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 ratioBased 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 P2,000Divide by Profit & Loss ratio _____5%

Amount in excess of P7,900 40,000Add: cash paid under PI and PII _7,900

Total cash distribution to partners 47,900Cash paid to Creditor (30,000-10,000) 20,000

Total 67,900Less cash before realization _6,000

Cash realized from sale of asset P61,900

5-17: b

Cash distribution to Cruz P 6,200Divide by profit and loss ratio 2 /5

Cash distribution under Priority II 15,500Multiply by Bello's Profit and Loss ratio 3 /5

Cash distribution to Bello under Priority II 9,300Cash distribution to Bello under Priority I __2,400

Total cash distribution to Bello P11,700

5-18: bBALANCES CASH PAYMENT

MONZON NIEVA MONZONNIEVA

Total Interest P22,500 P17,500

Profit and Loss ratio _____60% _____40%

Loss absorption balances 37,500 43,750Priority 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 IPartnership Liquidation by Installment 89

5-19: bCASH MONZON NIEVA

Cash distribution P12,500 – –PI to Nieva (2,500-2,000) ( 500) – 500Balances, 6:40 _12,000 __7,200 _4,800

Cash distribution P – P 7,200 P5,300

5-20: a

Cash before liquidation P 5,000June: Cash realized 18,000

Payment to creditor ( 20,000)Payment to Partners __2,000

Cash balances, June 30 1,000July: Cash realized 12,000

Payment of liquidation expense ( 500)Payment to Partners ( 12,500 )

Cash balances, July 31 –Aug: Cash realized _22,500Cash distribution for August,

Profit and Loss ratio P22,500

Distribution to Partners - AugustMonzon (22,500 X 60%) P13,500

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

90 Chapter 5


Problem 5 – 1

Suarez, Tulio and UmaliStatement of LiquidationJanuary 1 to april 31, 2008

Assets Tulio, Umali, Partners' CapitalsCash 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 P12,550.00P7,500.00

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 12,025.007,125.00Payment of expenses ofrealization and distributionto 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 11,850.007,000.00Payment of liabilities..... ( 6,000 .00 ) _______ ( 6,000 .00 ) _______ _______ _______ ________

_______

Balances......................... 6,000.00 34,000.00 – 5,000.00 2,500.00 13,650.00 11,850.007,000.00Payments 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 11,850.007,000.00

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

6,750.00Payment of expenses ofrealization and distributionto 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 11,237.506,562.50Payments 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 9,887.506,562.50

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 8,137.505,312.50Payment of expenses ofrealization and distributionto partners....................... ( 600 .00) _______ ______ ______ _______ ( 240 .00 ) ( 210 .00 )( 150.00 )

Balances......................... 10,650.00 12,000.00 – – 500.00 9,060.00 7,927.505,162.50Payments 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 4,375.003,125.00

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 1,575.001,125.00Payment of expenses ofrealization and distributionto partners....................... _(400 .00 ) ______ ______ ______ ______ ___(160 .00 ) ( 140 .00 )( 100.00 )

Balances......................... 4,100.00 – – – – 1,640.00 1,435.001,025.00 Final Payments to partnersP(41,100 .00 )_____– _____– _____– _____– P( 1,640 .00) P( 1,435 .00) P(1,025.00)


Schedule 1

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

Capital balances....................................... P13,650.00 P11,850.00 P7,000.00Loan balances.......................................... _____ _– __5,000 .00 _2,500 .00

Total interests.......................................... 13,650.00 16,850.00 9,500.00Possible loss (P2,000 + P34,000)........... ( 14,400 .00 ) ( 12,600 .00 ) ( 9,000 .00

Balances................................................... ( 750.00) 4,250.00 500.00Additional 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 P6,562.50Loan balances.......................................... – __1,187 .50 _2,312 .50

Total......................................................... 12,950.00 12,425.00 8,875.00Possible 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 P1,812.50Apply 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 PartnershipStatement of Partnership Realization and Liquidation

CapitalInven- 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 1,000Payments to partners

(Schedule 1) (50,000) ______ ______ (49,000) _(1,000) ______

5,000 60,000 5,000 11,000 48,000 1,000Sale 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 PartnershipSchedule of Safe Payments to Partners

Miller Bell80% 20%

Capital and loan balances 49,000 61,000Possible loss of 60,000 on remaining inventory (48,000) (12,000)

Safe payment 1,000 49,000


Problem 5 – 3HORIZON PARTNERSHIPStatement of realization and LiquidationMay – July, 2008

Partners CapitalAssets 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

90,000May – 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 60,00080,000

Payment to creditors (80,000) ______ (80,000) ______ ______ ______

Balances 15,000 175,000 50,000 60,00080,000

Payments to PP (Exhibit A) (15,000) ______ ______ ______ ______(15,000)

Balances –0– 175,000 50,000 60,00065,000

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 48,00053,000

Payment to partners (Exhibit A) (25,000) ______ ______ ______ (10,000)(15,000)

Balances –0– 114,000 38,000 38,00038,000

July – sale of remaining assets at a loss ofP33,000 81,000 (114,000 ) (11,000) (11,000)(11,000)

Balances 81,000 27,000 27,00027,000

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 70,00090,000

Income sharing ratio 1 1 1Loss absorption balances 60,000 70,000

90,000Required reduction to bring

capital account balance for PPto equal the next highest balance for TT – PI. ______ ______(20,000)

Balances 60,000 70,00070,000

Required reduction to bring the balances forTT and PP to equal the balance for SS – PII. ______ (10,000)(10,000)

Balances 60,000 60,00060,000

Summary of cash distribution program:To creditors before partners receive anything 80,000To partners:(1) First distribution to PP 20,00020,000(2) Second distribution to TT and PP equally 20,000 10,00010,000(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

B a l a n c e s C a s h P a y m e n t sX Y Z X (50%) Y (30%) Z (20%)

Total

Capital balances................................... P60,000 P45,000 P20,000Loan balances...................................... 22,5000 15,000 6,500

Total interests...................................... P82,500 P60,000 P26,500

Loss absorption balances..................... P165,000 P200,000 P132,500Priority I – to Y................................... (35,000 ) – P10,500 –.............................................................P10,500

Balances.............................................. 165,000 165,000 132,500Priority 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 7,500Priority I – to Y.............................................. ( 7,500 ) P 7,500

Payment to partner......................................... – P 7,500 – February....................................................... Cash X Y Z

Available for distribution............................... P20,000Priority I – to Y (P10,500 – P7,500)............. ( 3,000) P 3,000Priority 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............................... P45,000Priority II – to X and Y; 5:3

(P26,000 – P17,000)................................. ( 9,000) P 5,625 P 3,375Excess; 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............................... P15,000Excess; 5:3:2.................................................. ( 15,000 ) P 7,500 P 4,500 P3,000

Payments to partners...................................... P 7,500 P 4,500 P3,000


Problem 5 – 5AB, CD & EF PartnershipStatement 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 90,00074,000

January transactions:1. Collection of accounts

receivable at lossof 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 900600

5. Payments to creditors ( 50,000 ) _____ ______ (50,000) _____ ______ ___________

55,000 30,000 189,000 -0- 20,000 104,000 81,60068,400

Sale payments to partners(Schedule 1 ( 45,000 ) ______ _____ ______ (20,000) ______ ( 6,600 )(18,400)

10,000 30,000 189,000 -0- -0- 104,000 75,00050,000

February transactions:6. Liquidation expenses paid ( 4,000 ) ______ ______ ______ ______ ( 2,000 ) ( 1,200 )

( 800 )

6,000 30,000 189,000 -0- -0- 102,000 73,80049,200

Safe payments to partners(Schedule 2) -0 - _____ ______ ______ ___ –0 – –0–

–0–

6,000 30,000 189,000 -0- -0- 102,000 73,80049,200

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 59,40039,600

10.Offset AB's loanreceivable 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

PartnershipSchedules of Safe Payments to Partners

AB CD EFSchedule 1: January 50% 30% 20%

Capital and loan balancesa P74,000 P101,600 P68,400Possible loss:

Other assets (189,000) and possible liquidationcosts (10,000) ( 99,500 ) ( 59,700 ) ( 39,800 )

Balances ( 25,500) 41,900 28,600Absorption 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 49,200Possible loss:

Other assets (189,000) and possible liquidationcosts (6,000) ( 97,500 ) ( 58,500 ) ( 39,000 )

( 25,500) 15,300 10,200Absorption 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


Problem 5 – 6

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

B a l a n c e s C a s h P a y m e n t sM 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 20,000Loan balances. . . 20,000 5,000 25,000 15,000

Total interests......P 90,000 P 75,000 P 55,000 P 35,000

Loss absorptionbalances..........P240,000 P200,000 P440,000 P280,000

Priority I – to O..._______ _______ ( 160,000 ) ________ – – P20,000 –P20,000

Balances.............. 240,000 200,000 280,000 280,000Priority II – to O

and P..............._______ _______ ( 40,000 ) ( 40,000 ) – – 5,000 P5,000

10,000

Balances.............. 240,000 200,000 240,000 240,000Priority 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 P10,000P55,000

Any amount in excess of P55,000 3/8 3/8 1/8 1/88/8

2.Schedule 1

Cash M N O P

Available for distribution..................... P25,000Priority I – to O.................................... ( 20,000) P20,000Priority II – to O and P; 1:1.................. ( 5,000 ) ________ _______ 2,500 P2,500

Payments to partners............................ – – P22,500 2,500Apply to loan........................................ ( 22,500 ) ( 2,500 )Apply to capital.................................... – – – –

Schedule 2

Cash M N O P

Available for distribution..................... P40,000Priority II – to O and P; 1:1.................. ( 5,000 P 2,500 P2,500Priority III – to M, O and P; 3:1:1........ ( 25,000) P15,000 5,000 5,000Excess, 3:3:1:1..................................... ( 10,000 ) 3,750 P3,750 1,250 .............................................................. 1,250

Payments to partners............................ 18,750 P3,750 8,750 8,750Apply to loan........................................ ( 18,750 ) ( 3,750 ) ( 2,500 ) ( 8,750 )Apply to capital – – P 6,250 –

98 Chapter 5

Problem 5 – 7

Bronze, Gold & SilverCash Distribution PlanJune 30, 2008

Loss Absorption Balances Capital and Loan Accounts

Bronze Gold Silver Bronze Gold SilverProfit and loss ratio 50 % 30 % 20 %

Pre-liquidation capital andloan balances P55,000 P45,000P24,000

Loss absorption balances(Capital and loanbalances/P& L ratio) P110,000 P150,000 P120,000

Decrease highest LABto next highest:

Gold: (30,000 x .30) _______ ( 30,000 ) _______ ______ ( 9,000 )______

110,000 120,000 120,000 55,000 36,00024,000

Decrease LAB'sto 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 SilverPayable 50% 30% 20%

Cash available P106,000First ( 17,000) P 17,000Next ( 9,000) P 9,000Next ( 5,000) 3,000 P 2,000Additional paid in P&L ratio ( 75,000 ) _______ P37,500 22,500 15,000

P -0 - P 17,000 P37,500 P34,500P17,000


Problem 5 – 8Part A

Balances Cash Payments

North South East West North South East West

Total Interest (capital and loanbalances 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 P150,000Priority II – To South (335,000) ________ 33,500

Balances 400,000 545,000 545,000 150,000Priority II – To South and East, 10:20 (145,000) (145,000) 14,500 29,000

Balances 400,000 400,000 400,000 150,000Priority 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) 4,920South capital (10%) 1,640East capital (20%) 3,280West capital (40%) 6,560

Accounts receivable 82,000To records collection of receivables with losses allocated to partners.

(2) Cash 150,000North capital (30% x P103,000) 30,900South capital (10%) 10,300East capital (20%) 20,600West capital (40%) 41,200

Property and equipment 253,000To record sale of property and equipment.

(3) North capital 31,800South capital 58,600East capital 35,000West capital 15,200

Cash 140,600To 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 74,000Cash 74,000

To record payment of liabilities.

100 Chapter 5

(5) Cash 71,000North capital (30% of P30,000 loss) 9,000South capital (10%) 3,000East capital (20%) 6,000West capital (40%) 12,000

Inventory 101,000To record inventory sold.

(6) North capital 35,500South capital 11,833East capital 23,667

Cash 71,000To 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) 3,300South capital (10%) 1,100East capital (20%) 2,200West capital (40%) 4,400

Cash 11,000To record liquidation expenses paid.

(8) North capital (30/60 of deficit) 2,080South capital (10/60) 693East capital (10/60) 1,387

West capital 4,160To eliminate capital deficiency of West as computed below:

North South East West Capital balances, beginning P120,000 P88,000 P109,000 P60,000Loss 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 2,500South capital 834East capital 1,666

Cash 5,000To record final cash distribution.


Problem 5 – 9

DR CompanySchedule 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 7,200Write-off of P12,000 of receivables 4,800 3,600 3,600Gain 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 14,400Possible liquidation costs of P4,000 1,600 1,200 1,200Balances (* = 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 40,000Equipment 60,000

Jenny, capital 100,000

Journal entry to record Kenny’s contribution:

Cash 60,000Inventory 10,000Equipment 180,000

Notes payable 50,000Kenny, capital 200,000

102

Chapter 5

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

Jenny KennyBeginning capital balance P100,000 P200,000Interest on beginning capital balance 10,000 20,000Annual salary 15,000 20,000Remainder 48,000 72,000Ending 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 175,000Lenny, capital 110,000Jenny, capital 26,000Kenny, 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 P200,000Partner’s loan (50,000)Gain on realization 9,000 15,000 6,000Possible 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: aAssets per Jessica Company- balance sheet P3,550,000Jessica’s proportionate interest in assets of JV (50%) 1,000,000Total assets of Jessica P4550,000

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

6-3: b

6-4: bInvestment of Heart P80,000Profit share:

Sales 150,800Cost of sales (150,800 ÷ 125%) 120,640Gross profit 30,160Expenses 10,000Net Profit 20,160Profit/loss ratio x 40% 8,064

Balance of investment in JV P88,064

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

6-6: aSales 7,200Cost of sales

Purchases P10,000Merchandise inventory, end (50% of P10,000) __5,000 _5,000

Gross profit 2,200Expenses ___500

Net profit P 1,700

104 Chapter 6

6-7: bOriginal investment (cash) P10,000Profit share (P1,700 / 2) ___850

Balance of Investment account P10,850

6-8: aJoint venture account before profit distribution (credit balance) P 9,000Unsold 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: bFee of Salas (P10,000 x 15%) P 1,500Profit share of Salas (P10,000 x 25%) _2,500

Total P 4,000

6-10: bSalas 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: dJoint venture account balance before profit distribution (debit) P 6,000Joint venture profit (P4,500 x 3) _13,500

Cost of unsold merchandise (inventory) taken by Dante P19,500

6-12: bEdwin Capital:

Debits: Balance before profit distribution P14,000Credits: 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 P39,500Credits:Due to Ferdie _20,500

Balance P19,000

6-13: aJV account balance before profit distribution (cr) P 4,600Unsold merchandise (required dr balance after profit distribution) __2,000

Joint venture profit before fee to Jerry P 6,600Joint venture profit after fee (P6,600 / 110%) __6,000Fee to Jerry P 600

6-14: d Harry Capital Isaac Capital

Balances before profit distribution (P 200) P 1,800Profit distribution:

Harry P6,000 x 50%) 3,000Isaac (P6,000 x 20%) 1,200

Cash settlements P 2,800 P 3,000

6-15: bSales P14,000Cost of sales:

Merchandise inventory, beg (contributions) P14,000Freight 300Purchases __4,000

Goods available for sale P18,300Merchandise 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) P13,000Loss share (P750 x 50%) ( 375)Unsold merchandise taken (withdrawal) ( 4,150 )

Final settlement to jack P 8,475

106 Chapter 6


Problem 6 – 1

Books of Blanco (Manager) Books of Ablan

JV Cash 100,000 Investment in JV 90,000Joint Venture 90,000 Merchandise inventory 90,000

Cash 100,000Ablan Capital 90,000

Joint Venture 60,000JV cash 60,000

Joint Venture 20,000JV cash 20,000

JV cash 200,000Joint Venture 200,000

Computation of JV Profit

Total debit to JV P170,000Total credit to JV P200,000

Credit balance (Profit) P 30,000

DistributionJoint Venture 30,000 Investment in JV 15,000

Profit from JV 15,000 Profit from JV 15,000Ablan capital 15,000

Ablan capital 105,000 Cash 105,000JV cash 105,000 Investment in JV 105,000

Cash 155,000JV cash 155,000

Joint Venture 107

Problem 6 – 2

Books of the Joint Venture

1. Computer equipment 105,000Ella capital 60,000Fabia capital 45,000

2. Purchases 80,000Supplies 2,000

Diaz capital 82,000

3. Expenses 9,000Diaz capital 9,000

4. Cash 150,000Sales 150,000

5. Expenses 30,000Cash 30,000

6. Merchandise inventory 20,000Ella capital 20,000

7. Fabia capital 10,000Cash 10,000

8. Adjusting and closing entries:

(a) Expenses 500Supplies 500

(b) Sales 150,000Income summary 150,000

Income summary 77,500Merchandise inventory 2,500

Purchases 80,000

Income summary 39,500Expenses 39,500

Distribution of profit:Income summary 33,000

Diaz capital 11,000Ella capital 11,000Fabia capital 11,000

108

Chapter 6

Books of Diaz

(1) Investment in Joint Venture 82,000Cash 82,000

(2) Investment in Joint Venture 9,000Cash 9,000

(3) To record profit share:

Investment in Joint Venture 11,000Profit from Joint Venture 11,000

Books of Ella:

(1) Investment in Joint Venture 60,000Computer equipment 60,000

(2) Investment in Joint Venture 20,000Merchandise inventory 20,000



Books of Fabia:

(1) Investment in Joint Venture 45,000Computer equipment 45,000

(2) Cash 10,000Investment in Joint Venture 10,000



Joint Venture 109

Problem 6 – 3

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

Books of Duran (Manager)

May 1: Joint Venture 12,500Castro capital 12,000Cash 500

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

26: Joint Venture 9,500JV cash 9,500

30: JV accounts receivable 16,000Joint Venture 16,000

June 30: JV cash 15,000JV accounts receivable 15,000

27: JV cash 9,000Joint Venture 9,000

30: To record unsold merchandise taken by Duran:

Merchandise inventory 3,000Joint Venture 3,000

To record profit distribution:

Joint Venture 6,000Profit from JV 2,000Bueno capital 2,000Castro capital 2,000

To record settlements:

Bueno capital 12,000Castro capital 14,000

JV cash 24,500Cash 1,500

Accounts receivable 1,000JV accounts receivable 1,000

110 Chapter 6

Books of Bueno

May 7: Investment in Joint Venture 10,000Cash 10,000

June 30: Investment in Joint Venture 2,000Profit from Joint Venture 2,000

Cash 12,000Investment in Joint Venture 12,000

Books of Castro

May 1: Investment in Joint Venture 12,000Merchandise inventory 12,000



(2) A Separate Set of Books is used:

Books of the Joint Venture

May 1: Merchandise inventory 12,500Castro capital 12,000Duran capital 500

7: Cash 10,000Bueno capital 10,000

26: Purchases 9,500Cash 9,500

30: Accounts receivable 16,000Sales 16,000

June 20: Cash 15,000Accounts receivable 15,000

27: Cash 9,000Sales 9,000

Joint Venture 111

June 30: Closing entries:

Sales 25,000Income summary 25,000

Income summary 19,000Merchandise inventory, end 3,000

Merchandise inventory 12,500Purchases 9,500

Distribution of profit:

Income summary 6,000Bueno capital 2,000Castro capital 2,000Duran capital 2,000

Settlements to Venturers:

Bueno capital 12,000Castro capital 14,000Duran capital 2,500

Merchandise inventory 3,000Accounts receivable 1,000Cash 24,500

Books of Duran (Manager/Operator)

May 1: Investment in Joint Venture 500Cash 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 102,000Notes payable – PNB 34,000Roles capital 34,000Timex capital 34,000

May: Joint venture 64,100Cash 16,300Rolex capital 7,800

June: Rolex capital 30,000JV cash 30,000

Joint venture 111,400Cash 37,400Rolex capital 64,700Timex capital 9,300

July: Cash 40,000Rolex capital 15,000Timex capital 10,000

JV cash 65,000


August: Cash 45,000Rolex capital 67,000Timex capital 13,500

JV cash 125,500


To record sales:

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

Joint Venture 113

To record payment of loan to PNB:

Notes payable – PNB 34,000Rolex capital 34,000Timex capital 34,000Joint venture (Interest expense) 8,000

JV cash 110,000

To record distribution of profit:

Joint venture 134,290Gain from JV (30%) 40,287Rolex capital (60%) 80,574Timex capital (10%) 13,429

Computed as follows:

Total debits tot he JV account P269,870Total credits to the JV account _404,160

Gain (credit balance) P134,290

To record settlement:

Cash 32,687Rolex capital 128,874Times capital 14,099

JV cash 175,660

Computations:

Settlement to Rolex - Balance of capital account:

Debits: June P30,000July 15,000August 67,000Payment of note payable _34,000 P146,000

Credits:April 1 P34,000May 47,800June 64,700July 31,240August 16,560Profit share _80,574 __274,874

Credit balance P 128,874

114 Chapter 6

Settlement to timex – Balance of capital account

Debits: July P 10,000August 13,500Payment of loan __34,000 P 57,500

Credits:April 1 P 34,000June 9,300July 10,560August 4,310Profit share __13,429 _71,599

Credit balance P 14,099

Settlement to Seiko – Balance of JV cash account

Debits: April 1 P102,000Loan proceeds _404,160 P506,160

Credits: June P 30,000July 65,000August 125,500Payment of loan _110,000 _330,500

Balance of JV cash 175,660Less:Settlement to Rolex P128,874

Settlement to Timex __14,099 _142,973

Settlement to Seiko P 32,687

(2) Partial Balance SheetJune 30, 2008

Books of Seiko (Manager/operator)

Current assets:Investment in joint Venture:

Joint Venture assets:Cash P 72,000Joint 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 64,100Balance P 72,000 June _111,400

Balance P175,500

Notes Payable Rolex capital

P34,000 April June P 30,000 P 34,000 April 147,800 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 61,000Receivables 122,000Inventory 102,500Other assets __40,500

Total assets P326,000

Accounts payable P 61,000Other liabilities 96,500Capital stock 50,000Retained earnings _118,500

Total liabilities and stockholders' equity P326,000

Consolidated Income Statement

Sales P246,750Cost 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 1,000,000MacDo 1,000,000

Initial contribution at 6%

July 1: Land 2,400,000Mortgage payable 1,650,000Cash 750,000

Purchased land for cash and 6% mortgage.

Aug 1: Cash 1,100,000MacDo 1,100,000

Additional contribution at 6%.

Land 950,000Cash 950,000

Paid for improvements.

Sept 30: Mortgage payable 250,000Interest expense- Mortgage 3,750

Cash 253,750Reduced mortgage and paid interest.

Oct 31: Mortgage payable 400,000Interest expense- Mortgage 8,000


Nov 30: Mortgage payable 300,000Interest expense- Mortgage 7,500


Dec 31: Mortgage payable 200,000Interest expense- Mortgage 21,000

Cash 221,000Reduced mortgage and make semi-annual interest payment.

Joint Venture 117

31: Cash 2,600,000Sales 2,600,000

Sales to date.

31: Commissions 130,000Cash 130,000

P2,600,000 x 5%

31: Expenses 628,100Cash 628,100

Paid expenses

31: Interest expense- Venturer 60,000MacDo 60,000

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

31: Sales 2,600,000Land (cost of land sold) 1,145,000Expenses 628,100Commissions 130,000Interest expense- mortgage 40,250Interest- venturer 60,000Income summary 596,650

To close income and expense accounts.

31: Income summary 596,650MacDo 596,650MacEn 238,660

To divide gain, 60:40.

31: MacDo 801,650Cash 801,650

Payment on account.

(b) Journal entries on MacDo’s books:

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

Initial contribution.

Aug 1: Investment in Joint Venture 1,100,000

Cash 1,100,000Additional contribution.

118 Chapter 6

Dec 31: Investment in Joint Venture 60,000Interest income 60,000

Interest earned on cash advanced.

31: Investment in Joint Venture 357,990Gain on Joint Venture 357,990

60% of gain on venture.

31: Cash 801,650Investment in Joint Venture 801,650

Repayment in part of advances.

(c) MacDo and MacEn Joint VentureIncome StatementFor the period from June 15 to December 31, 2008

Sales P2,600,000Cost of land sold:

Land P2,400,000Improvements 950,000Total P3,350,000Unsold land 2,205,000 1,145,000

Gross profit 1,455,000Expenses:

Advertising and office expenses P 628,100Interest on mortgage 40,250Interest on advances 60,000Commissions 130,000 858,350

Net gain P 596,650

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

Mac Do and MacEn Joint VentureBalance SheetDecember 31, 2008

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

Liabilities and equity:Mortgage payable P 500,000MacDo 1,716,340MacEn 238,660Total 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 596,650Interest on advances 60,000 60,000Commissions 130,000 130,000

Total 417,990 368,660 786,650 Balances 2,517,990 368,660 2,886,650Withdrawn (801,650) (130,000) (931,650 )Equity (interests) P1,716,340 P238,660 P1,955,000

120 Chapter 7

CHAPTER 7


7-1: c

Amount realized secured by inventory P 30,000Unsecured claim (P10,000 x 25%) __2,500

Total amount received P 32,500

7-2: dAmount realized secured by inventory P120,000Unsecured 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 50,000Land and building P240,000Less mortgage payable _200,000 __40,000

Total 90,000Less accounts payable _160,000

Estimated deficiency to unsecured creditors P 70,000

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

7-6: aFree assets:

Current assets P 33,000Buildings and equipment _110,000

Total P143,000

Liabilities with priority:Administrative expenses P 20,000Salary 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 liabilitiesNotes payable P 30,000Accounts payable 83,000Bonds 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 90,00060% of remaining P30,000 __18,000

Total collected P108,000

7-7: cFree assets:

Other assets P 80,000Excess 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 pledgeAssets (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 50,00030% of remaining P80,000 __24,000

Total collected P 74,000

122 Chapter 7

7-8: aThe 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 P230,000Excess liability of Debt One in excess of pledged

Asset (P210,000 – P180,000) 30,000Excess liability of Debt Two in excess of pledged

Asset (P170,000 – P100,000) __70,000

Total unsecured liabilities P330,000Necessary 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: cEstate equity, beg. (P100,000 – P85,000) P 15,000Loss 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: cTotal assets at net realizable value P 75,000Fully secured liabilities (40,000)Estimated administrative expense _( 4,000)

Estimated amount available P 31,000Unsecured claims (P45,000 + P250) (45,250)

Estimated deficiency to unsecured creditors P 14,250


7-11: bAssets pledged with fully secured creditors P185,000Fully secured creditors _130,000 55,000Free assets_160,000

Total free assets 215,000Less: Liabilities with priority __35,000

Available to unsecured non-priority claims P180,000

7-12: bMachinery P 10,000Recoveries of unsecured claims (50,000 - 10,000) X .50 __20,000

Amount to be realized P 30,000

7-13: bNotes Payable P 23,940Less: Inventories _ 19,200

Unsecured Liabilities 4,740% of recovery ____78%

Recovery 3,697Add: 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: dEstimated loss:

Account Receivable P 8,160Inventories (28,000 - 18,500) 9,500Building (59,000 - 22,000) 3 7,000Equipment (5,600 - 2,000) 3,600Goodwill 5,650Prepaid expenses ___430 P 64,340

Less: Stockholder's equityCommon stock P 72,000

Deficit ( 16,660 ) _55,340

Estimated deficiency P 9,000

124 Chapter 7

7-19: dAccounts Receivable (39,350 - 16, 110) P 23,240Notes Receivable (18,500 - 12,500) 600Inventories (87,850 - 45,100) 42,750Prepaid expenses 950Equipment (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: dTotal Free Assets:

Balance of Assets Pledged toFully Secured Creditor (95,000 - 90,000) P 5,000

Free Assets:Cash P 2,700Accounts Receivable 16,110Inventories 45,100Equipment __9,000 __72,910

Total 77,910Less: Unsecured liabilities with priority (1,850 + 4,650) ___6,500

Net Free Assets P 71,410Divide by Unsecured creditors:

Balance of Partially Secured CreditorNotes Payable - PNB P 15,000Notes Receivable __12,500 2,500

Accounts Payable 52,500Notes Payable __51,250 103,750 ÷ P106,250

Estimated recovery % 67%

7-22: dFully secured (Notes Payable) P 90,000Partially secured:

Notes Payable - PNB P12,500Add (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


7-23: aUnsecured creditors without priority P1,102,500Estimated deficiency to unsecured creditors:

Loss on realization 551,250Estimated liquidation expenses 55,125Total 606,375Stockholders’ equity 441,000 165,375

Net free assets 937,125Liabilities with priority 122,500Free assets P 1,059,625

7-24: aEstimated net gain (loss) on realization:

Gain on realization 78,750Loss on realization (336,700) (257,950)

Estimated claims ( 43,750)Total (301,700)Stockholders equity 295,750Estimated deficiency P( 5,950)

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

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

7-27: aOld receivable P 21,000New receivable 47,000Marketable securities 10,500

Sales of inventory 75,000Total asset realized P153,500

7-28: aGain on sale of inventory (P75,000 – 60,000) 15,000Loss on realization:

Marketable securities (12,000 – 10,500) 1,500Trustee’s expenses 4,300Depreciation 16,000 (21,800)

Net loss P( 6,800)

126 Chapter 7 SOLUTIONS TO PROBLEMS

Problem 7 – 1(A) Laguna Company

Statement of AffairsOctober 31, 2008

Book EstimatedValue Assets Realizable Value Free Assets

Assets pledge for fully secured creditors: P107,000 .... Plant assets................................................... P67,400

Less; Fully secured liabilities......................_ 50,400 P17,000Assets 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................................................ P68,500Less: Unsecured liabilities with priority.......... __7,000

Net Free Assets................................................ P61,500 Estimated deficiency to unsecured creditors (to balance) _20,500

P198,000 P82,000Book Creditors' Unsecured

Value Liabilities & Stockholders' Equity Claim LiabilitiesFully secured liabilities:

P50,400....... Mortgage payable (including interest, P400) P50,400Partially secured liabilities:

21,000. . ..... Notes payable............................................... P21,000Less: 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

PercentageClaim 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)


Problem 7 – 2VC CorporationStatement of Realization and LiquidationMonth Ended January 31, 2008

Assets to be realized: Assets realized:Land........................ P10,000 land.............................. P 0Building.................. 43,000 Building....................... 0Equipment............... 28,000 Equipment................... 8,800Patents..................... __4,400 P85,400 Patents......................... _12,000P20,800

Assets Acquired............... 0 Assets not realized:Land............................ P10,000Building....................... 43,000Equipment................... _13,000

66,000

Liabilities Liquidated: Liabilities to be Liquidated:Account payable..... P14,000 Accounts payable........ P80,000Loans payable......... __7,000 21,000 Loans payable............. _40,000120,000

Liabilities not Liquidated:Accounts payable.... 66,000Loans payable......... 33,000 99,000

Gain on realization......................... ___7,600 Loss on realization.....................___6,200

Total............................................... P213,000 Total...........................................P213,000

VC CorporationBalance SheetJanuary 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 CorporationEstate DeficitJanuary 31, 2008

Gain on realization..................................................................... P 7,600Loss in realization ..................................................................... ( 6,200)Trustee's expenses ..................................................................... ( 1,300 )

Net gain on realization............................................................... P 100Estate deficit, January 1, 2008................................................... ( 26,400 )

Estate deficit, January 31, 2008................................................. P(26,300 )

128 Chapter 7 Problem 7 – 3

Rizal CorporationStatement of Affairs

Book Estimated FreeValues A s s e t s 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 55,000Less: Loan payable............................................. 50,000 5,000

Assets pledged to partially secured creditors:32,000........... Accounts receivable (80% x 30,000).................. 24,00012,000........... Trucks................................................................. 3,500

Totals.................................................................. 27,500

Free Assets:4,000........... Cash.................................................................... 4,0008,000........... AR (20% x 30,000)............................................. 6,000

36,000........... Inventory – Materials.......................................... 27,0001,000........... Prepaid expense.................................................. 08,000........... Trucks................................................................. 2,500

45,000........... Equipment........................................................... 25,00016,000........... Intangible............................................................_______ 64,500

Total Free Assets..................................................... P128,500Less: 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' UnsecuredValues 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.......................................................... 5,000Less: trucks......................................................... 3,500 1,500

Unsecured creditors with Priority:12,000........... Wages payable.................................................... 12,0008,000........... 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......................................................................... P189,500Corporation in Financial Difficulty – Liquidation 129

Problem 7 – 4

Mapayapa CorporationStatement of AffairsNovember 1

Book Estimated FreeValue Assets Realizable Value Assets

Assets pledged to fully secured creditors:P60,000........ Investments.................................................. P 69,000180,000........ Accounts receivable..................................... 171,000

Total............................................................. 240,000Less: Note payable....................................... 210,000 P 30,000

Free assets:66,000........ Cash............................................................. P 66,000

248,000........ Accounts receivable..................................... 193,500291,000........ Merchandise inventory................................ 180,000870,000........ Plant & equipment....................................... 330,000114,000........ Notes receivable........................................... 108,300

–........ Patent........................................................... __12,000 _889,800

Total free assets........................................... 919,800Less: 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 UnsecuredValue Liabilities & Equity Claim Liabilities

Fully secured creditors:P 210,000........ Notes payable............................................... P210,000

Unsecured creditor with priority:Accrued wages............................................. P 7,200Accrued property tax................................... ___6,600

Total............................................................. P 13,800

Unsecured creditor:960,000........ Account payable.......................................... P960,000

Accrued expenses........................................ 6,300300,000........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).......................... P471,000Less:Fully and partially secured creditors claim:

Notes payable, interest (secured by receivable andinventory).................................................................... 125,000

Bonds payable (secured by land & building).................... 231,000 356,000

Available to unsecured creditors................................................ 115,000Less:Unsecured creditors with priority:

Wages payable...................................................................P 9,500Taxes payable....................................................................__14,000 __23,500

Amount available to unsecured creditors................................... P 91,500

b. Unsecured portion of notes payable and interests (P195-P125) P 70,000Accounts 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 52,678Wages payable 9,500..... 100% 9,500Taxes payable 14,000..... 100% 14,000Notes payable & interests 125,000..... 100% 125,000

70,000 55.45% 38,815Bonds payable & interests 231,000..... 100% _231,000

Total estimated payment......................................... P470,993


Problem 7 – 61. Evergreen Company

Statement of AffairsJune 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 10,000Free Assets:

80,000 Cash .......................................................... P 80,000140,000 Accounts receivable – net.......................... 126,000100,000 Inventories................................................. 84,000120,000 Machinery – net......................................... 40,000100,000 Goodwill.................................................... _ _____0_ 330,000

Total free assets............................................................ 340,000Less: liabilities with priority......................................... _140,000

Net free assets.............................................................. 200,000Estimated deficiency (Squeeze figure)......................... _130,000

P1,000,000 P330,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Secured & Unsecured Priority Non-priority Claims Liabilities

Liabilities with priorityP120,000 Wages payable........................................... P120,000

20,000 Property taxes payable............................... __20,000

Total.......................................................... P140,000Fully secured creditors

300,000 Mortgage payable...................................... 300,00030,000 Interest on mortgage payable..................... __30,000

Total.......................................................... P330,000Unsecured creditors

220,000 Accounts payable.......................................................... P220,000100,000 Note payable-unsecured............................................... 100,00010,000 Interest payable-unsecured........................................... 10,000

Stockholders' Equity400,000 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.2008March 1: Cash........................................................P8,000

Accounts receivable – net.......................16,000Inventories..............................................72,000Land........................................................40,000Buildings – net......................................200,000Intangible assets......................................52,000

Accounts payable........................................ P100,000Note payable............................................... 80,000Deferred revenue......................................... 2,000Wages payable............................................ 6,000Mortgage payable........................................ 160,000Estate equity................................................ 40,000

To record custody of Kimerald Corporation.

March 1 to 31:Cash........................................................15,200Estate equity................................................800

Accounts receivable-net.............................. 16,000To record collection of receivables and recognize loss.

Cash........................................................38,800

Estate equity...........................................33,200Inventories................................................... 72,000

To record sale of inventories at a loss.

Cash......................................................180,000Estate equity...........................................60,000

Land............................................................ 40,000Buildings-net............................................... 200,000

To record sale of land and buildings at a loss.

Estate equity...........................................52,000Intangible assets.......................................... 52,000

To write off intangible assets.

Estate equity...................................................16,400Administrative expenses payable....................... 16,400

To accrue trustee expenses.


2. Financial StatementsKimerald Corporation in TrusteeshipBalance SheetMarch 31, 2008

AssetsCash .......................................................................................... P242,000

Liabilities and DeficitAccounts payable....................................................................... P100,000Note payable-unsecured............................................................ 80,000Revenue received in advance.................................................... 2,000Wages payable........................................................................... 6,000Mortgage payable. ..................................................................... 160,000Administrative expense payable-new........................................ __16,400

Total liabilities........................................................................... P364,400Less: Estate deficit..................................................................... _122,400

Total liabilities net of deficit..................................................... P242,000

Kimerald Corporation in TrusteeshipStatement of Cash Receipts and DisbursementsMarch 1 to 31, 2008

Cash balance, March 1, 2008..................................................... P 8,000Add: Cash receipts

Collections of receivables...................................P 15,200Sale of inventories..................................................38,800Sale of land and buildings....................................180,000 _234,000

Total.......................................................................................... 242,000Less: Cash disbursements.......................................................... ____–0–

Cash balance, March 31, 2008................................................... P242,000

Kimerald Corporation in TrusteeshipStatement of Changes in Estate EquityMarch 1 to 31, 2008

Estate equity, March 1............................................................... P 40,000Less:Loss on uncollectible receivables.........................P 800

Loss on sale of inventories.....................................33,200Loss on sale of land and buildings.........................60,000Loss on write off of intangibles.............................52,000Administrative expenses......................................_16,400 _162,400

Estate deficit, March 31............................................................. P122,400

134 Chapter 7

3. Entries on trustee's books:

2008April: Mortgage payable............................................160,000

Cash..................................................................... 160,000To record payment of secured creditors from proceeds from sale of Land and buildings.

Administrative expenses payable-new..............16,400Deferred revenue.................................................2,000Wages payable.....................................................6,000

Cash..................................................................... 24,400To record payment of priority liabilities.

Accounts payable...............................................32,000Note payable-unsecured....................................25,600

Cash..................................................................... 57,600To record payment of P.32 per peso to unsecured creditors (available Cash of P57,600 divided by unsecured claims of P180,000).

Accounts payable...............................................68,000Note payable-unsecured....................................54,400

Estate equity......................................................... 122,400To write-off remaining liabilities and close trustee's records.

Reorganization and Troubled Debt Restructuring 135

CHAPTER 8


8-1: aTrade accounts payable (P52,000 + P62,700)P114,70012% preferred stock (5,000 x P1) P 5,000Paid in capital in excess of par (5,000 x P9) 45,000Cash (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: bCarrying value of the note payable:

Principal P600,000Interest

__60,000 P660,000Restructured value:

Principal P400,000Interest

_110,000 _510,000

Gain on debt restructuringP150,000

8-5: dOther income:

Fair value of landP450,000

Books value of land_360,000

Other income P 90,000

Extraordinary gain:Book value of note payable

Principal P500,000Interest __60,000

P560,000Fair value of land

_450,000

Extraordinary gainP110,000

8-6: aBook value of bonds payableP500,000Par 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 2,500Interest

___500 P 3,000Par value of common stock issued (200 shares x P5)__1,000

Additional paid in capitalP 2,000Add gain on payment of accounts payable:

Book value P 10,000Payment __8,000

__2,000

Total gain on debt dischargeP 4,000

8-8: aCarrying value of debt:

Note payable P100,000Interest payable __12,000

P112,000Fair value machinery_(36,000)

Balance of debt P 76,000

Restructured debt:Note payable P 50,000Interest (P50,000 x .08 x 2) ___8,000

__58,000

Restructuring difference (gain)P 18,000

8-9: dPrincipalP300,000Interest payable (300,000 x 10%)__30,000

Carrying valueP330,000

8-10: cShould be P310,600Restructured principal of note payableP260,000Interest payable:

On book value (P300,000 x 10% 30%) P 9,000On restructured (P260,000 x 8% x 2) _41,600

__50,600

Future cash flows to liquidate the debtP310,600

8-11: d

8-12: dLoss on transfer of land:

Original cost P290,000Market value _270,000

P 20,000

Gain on restructuring of debt:Carrying value of debt P300,000Market value of land _270,000

P 30,000 Reorganization and Troubled Debt Restructuring 137

8-13: aTransfer gain (loss):Carrying amount of equipment P80,000Fair value of equipment 75,000Transfer loss P(5,000)

Restructuring gain:Carrying amount of the debt P100,000Fair value of equipment transferred 75,000Restructuring gain P 25,000

8-14: dCarrying amount of real estate transferred P100,000Fair value of real estate 90, 000Loss on restructuring of payables P(10,000)

8-15: dCarrying amount of liability P150,000Fair value of real estate transferred 90,000Restructuring gain P 60,000

8-16: cGain on revaluation of land (120,000 – 85,000) P 35,000Gain on the extinguishment of debt (185,000 – 120,000) 65,000Total gain P100,000

8-17: aCarrying value of debt (P800,000 + 80,000) P880,000Total future payments (P700,000 + 80,000) 780,000Restructuring gain P100,000

8-18: aFirst determine the expected future cash flows as follows:

70,000 x .79719 = P55,8035,600 x 1.69005 = 9,464

Present value of future cash flow P65,267

The interest revenue can be computed using the effective interest methodas follows:

Present value at 12/31/06 P65,267Interest income at 12/31/07 (65,267 x 12%) 7,832

Interest receivable at 12/31/07 (70,000 x 8%) 5,600 2,232Present value at 12/31/07 P67,499

Interest income at 12/31/08 (67,499 x 12%) P 8,100

138 Chapter 8


Problem 8 – 1

Journal entries for company emerging from bankruptcy using fresh start accounting:– Receivables........................................................................................10,000

Inventory. ..........................................................................................10,000Building............... 100,000Reorganization value in excess of amount

Allocable to tangible assets..........................................................60,000Additional 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............. 300,000Common stock (P330,000 x 80%)............................................... 264,000Gain on debt discharge................................................................. 36,000

To record settlement of liabilities.

Problem 8 – 2

2008July 14: Costs of reorganization.................................................................50,000

Cash with escrow agent......................................................... 50,000

Common stock 580,000Common stock (60,000 x P1)................................................ 60,000Additional paid in capital....................................................... 520,000

Note payable – 10% 120,000Interest payable (P120,000 x 10% x 3/12)................................... 3,000

Note payable – 12%............................................................... 123,000

Trade accounts payable 100,000Cash P100,000 x 0.80)........................................................... 80,000

Gain on debt discharge........................................................... 20,000

Additional paid in capital 290,000Gain on debt discharge 20,000

Retained earnings................................................................... 260,000Costs of reorganization.......................................................... 50,000

Reorganization and Troubled Debt Restructuring 139

Problem 8 – 3

Jade CorporationBalance SheetDecember 31, 2008

ASSETSCurrent assets:Cash .................................................................................... P 23,000Inventory.............................................................................. __45,000 P 68,000Property and equipment:Land .................................................................................... 140,000Buildings.............................................................................. 220,000Equipment............................................................................ _154,000 _514,000

Total assets........................................................................... P582,000

LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities not subject to compromiseCurrent liabilities:Accounts payable.................................................................. P 60,000Long-term liabilities:Note payable (2006)...... P100,000Note payable (2003)...... _100,000. ._ 200,000 P260,000Liabilities subject of compromiseAccounts payable.................................................................. 123,000Accrued expenses.. ............................................................... 30,000Income taxes payable............................................................ 22,000Note payable (due 2008)........................................................ _170,000 _345,000

Total liabilities. .................................................................... 605,000

Stockholders' EquityCommon stock. .................................................................... 200,000Retained 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).............. P710,000Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 +

P185,000 + P200,000).................................................................. P800,000Common stock (given)........................................................................ P240,000Deficit (given) .............................................................................. P330,000

140 Chapter 8

Book values after reorganization:Total assets (reorganization value)................................................................ P780,000Total liabilities (P5,000 + P4,000 + P100,000 + P50,000 +

P71,000 + P110,000).............................................................................. P340,000Common stock (returned shares are reissued)............................................... P240,000Deficit (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 amountallocable to tangible assets......................................................................45,000

Accounts receivable......................................................................... 20,000Inventory ...................................................................................... 22,000Equipment ...................................................................................... 13,000Additional paid in capital................................................................ 70,000

To adjust accounts to market value as part of fresh start accounting.

2. Common stock...............................................................................................144,000Additional 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........................................................................................... 80,000Note payable........................................................................................... 5,000Common stock, P8 par value.................................................................. 8,000Additional paid in capital (P6.66 per share)........................................... 6,666Gain on debt discharge........................................................................... 60,334

To record settlement of accounts payable.

4. Accrued expenses..........................................................................................35,000Note payable........................................................................................... 4,000Gain on debt discharge........................................................................... 31,000

To record settlement of accrued expenses.

5. Note payable............ 200,000Note payable........................................................................................... 50,000

Common stock, P8 par value.................................................................. 80,000Additional paid in capital (P6.66 per share)........................................... 66,667Gain on debt discharge........................................................................... 3,333

To record settlement of note payable due in 2007

6. Note payable............ 185,000Note payable........................................................................................... 71,000Common stock, P8 par value.................................................................. 56,000Additional paid in capital, P6.66 per share............................................. 46,667Gain on debt discharge........................................................................... 11,333

To record settlement of note payable due in 2008Reorganization and Troubled Debt Restructuring 141

Problem 8 – 5

7. Note payable. .....................................................................................200,000Note payable. ............................................................................... 110,000Gain on debt discharge................................................................. 90,000

To record settlement of note payable due in 2009

8. Additional paid in capital (P334,000 – P200,000)..............................134,000Gain on debt discharge........................................................................196,000

Retained earnings (deficit)........................................................... 330,000To 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 CorporationBalance Sheet – Fresh Start AccountingDecember 31, 2008

ASSETSCurrent assetsAccounts receivable.................................................................................... P 18,000Inventory.................................................................................................... _111,000 P129,000Property and equipmentLand and buildings. .................................................................................... 278,000Machinery.................................................................................................. _121,000 399,000Intangible assetsPatents .................................................................................................... 125,000Reorganization value in excess of amount allocable To identifiable assets _147,000 _272,000

Total assets................................................................................................. P800,000

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable........................................................................................ P 97,000Long-term liabilities

Note payable (due in 2 years)...................................................................... P 35,000Note payable (due in 5 years)...................................................................... 50,000Note payable (due in 8 years)...................................................................... _100,000 _185,000

Total liabilities. .......................................................................................... P282,000

Stockholders' Equity:Common stock. .......................................................................................... P500,000Additional paid in capital (squeeze)............................................................ __18,000 _518,000

Total liabilities and stockholders' equity................................................................. P800,000142 Chapter 9

CHAPTER 9

MULTIPLE CHOICE ANSWERS AND SOLUTIONS 9-1: d

Deferred gross profit, Dec. 31 (before adjustment) P1,050,000Less: Deferred gross profit, Dec. 31 (after adjustment)

Installment accounts receivable, Dec. 31 P1,500,000Gross profit rate ____ 25% __375,000

Realized gross profit, 2008 P 675,000 OR

Installment Sales (P1,050,000 25%) P4,200,000Less: Installment account receivable, Dec. 31 __1,500,00

Collection P2,700,000Gross profit rate ___X 25%

Realized gross profit, 2008 P 675,000

9-2: a2006 2007 2008

Deferred gross profit, before adjustment P7,230 P 60,750 P 120,150Deferred gross profit, end

2006 (6,000 X 35%) 2,1002007 (61,500 X 33%) 20,2952008 (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 P1,010,000Collection ___440,000

Installment Sales P1,450,000

9-4: bSales P1,000,000Cost 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 120,000Operating expenses ___80,000

Operating income 40,000Interest and financing charges __100,000

Net income P 140,000 Installment Sales 143

9-5: aMarket value of repossessed merchandise P 30,000

(before reconditioning cost)Less: unrecovered cost

Unpaid balance (80,000-30,000) P 50,000Less: Deferred gross profit (50,000X20%) ___10,000 __40,000

Loss on repossession (P 10,000)

9-6: aInstallment sales P1,000,000Less: collection on installment sales __200,000

Installment account receivables, 12/31/08 800,000Gross 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) P500,000Less: Realized Gross Profit (200,000 X 50%) _100,000

Deferred gross profit, 12/31/08 P400,000

9-7: dFair value of repossessed merchandise P120,000Less: unrecovered cost

Unpaid balance P 200,000Less: Deferred gross profit (200,000 X 32.5%) ___65,000 _135,000

Loss on repossession (P 15,000)

9-8: bRealized gross profit:Collections:

Downpayment P 35,000Installment received (205,000-200,000) ___5,000

Total 40,000Gross Profit Rate (150,000 240,000) _X 62.5%

Realized gross profit P 25,000

Gain (loss) on repossession:Appraised value of repossessed merchandise P165,000Less:unrecovered cost

unpaid balance P 200,000less: deferred gross profit (200,000 X 62.5%) __125,000 __75,000

Gain on repossession P 90,000

144 Chapter 9

9-9: bSch.1

Applying Applying Balanceto to of

Date Collection Interest principal principal

Apr-1 P7,000.00Apr-1 750 750.00 6,250.00May-1 625 125.00 500.00 5,750.00Jun-1 625 115.00 510.00 5,240.00Jul-1 625 104.80 520.20 4,719.80Aug-1 625 __94.40 ___530.60 4,189.00

P439.20 P2,810.80

Gain (loss) on repossession:Market value of repossessed merchandise P 1,875Less:unrecovered cost

unpaid balance of principal (sch. 1) P 4,189less: 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) P2,810.80Gross profit rate __X 35%

Realized gross profit P 983.78

9-10: c Year of Sales

2007 2008Deferred gross profit (Sales X Gross Profit Rate)

2007 (P300,000 X 30%) P 90,0002008 (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: aDeferred gross profit, 2007 (P1,050,000 - 735,000) P 315,000Realized gross profit, 2007 (P150,000 X 30%) ( 45,000 )

Deferred gross profit, 12/31/07 270,000Realized 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 P450,000Realized 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: cTrade-in value P 30,000Less: Actual value

Estimated selling price P 25,000Less: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 5,000Actual value of merchandise-Trade In 20,000Installment collected (5,000 X 3) _15,000 P 40,000

Gross Profit Rate:Sales P 85,000Overallowance ( 10,000 )

Net Sales P 75,000Cost of Installment Sales _60,000

Gross Profit P 15,000Gross Profit Rate (15,000 75,000) _X 20 %

Realized Gross Profit P 8,000

9-14: cCollection excluding interest (P900,000-P300,000) P 600,000Gross 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: aWholesale value of repossessed merchandise P 4,000Less: unrecovered cost

Unpaid balance:Sales, 10/1/07 P 24,000Collection, 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: aTrade-in Value (P300 X 6) P 1,800Less: Actual value

Estimated selling price (P315 X 6) P 1,890Less:Reconditioning cost (P25 X 6) P150

Gross Profit (P1,890 X 10%) _189 ___339 ___1,551

Over-allowance P 249

9-17: aDeferred gross profit, before adjustment P 76,000Deferred gross profit, end

2007: P32,500 X (30% 130%) P 7,5002008: P180,000 X (33 1/3% 133 1/3%) _45,000 __52,500

Realized gross profit on installment sales P 23,500

9-18: dUnpaid balance (P27,000 - P16,000) P 11,000Multiply by gross profit rate (P734,400 P2,160,000) ___X 34%

Deferred gross profit to be cancelled on repossession P 3,740

9-19: bCollection:

2007 Downpayment P 600,0002008 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: dRegular Sales P 187,500Cost of regular sales __112,500

Gross profit on regular sales P 75,000Add: Realized gross profit on installment sales

2007 (25,000 X 50%) P12,5002008 (62,500 X 55%) _34,375 __46,875

Total realized gross profit 121,875Operating expenses ___31,250

Net income, 12/31/08 P 90,625


9-21: aInstallment sales – 2007 P785,000Collections:

Down payment (20% x 785,000) P157,000Installment (40% x 628,000) 251,200 408,200

Installment accounts receivable 2007, 12/31/07 376,800Gross profit rate on sales 35/135Deferred gross profit- 2007, 12/31/07 P 97,689

9-22: aRegular sales P1,575,000Cost of regular sales 1,050,000Gross profit on regular sales 525,000Realized gross profit on installment sales:

Installment sales (1,093,750 x 240%) 2,625,000Installment accounts receivable-12/31/08 1,575,000Collections 1,050,000Gross profit on rate on sales 140/240 612,500

Total realized gross profit 1,137,500Operating expenses (1,137,500 x 70%) 796,250

Net income P 341,250

9-23: aRegular sales P375,000Cost of regular sales 215,000Gross profit on regular sales 160,000Realized gross profit on installment sales:

Collections excluding Interest (312,000 – 24,000)288,000Gross profit rate (270,000/900,000) 30% 86,400

Total realized gross profit 246,400Loss on repossession

Fair value of repossessed merchandise 54,000Less: 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 127,600Interest income 24,000Net income P151,600

148_ Chapter 9


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 73,810Inventory.............................. 64,480 68,440 73,810

Cash............................................ 66,980 125,520 145,460Installment A/R–2006 57,200 29,120 15,000Installment A/R–2007.......... – 71,920 26,680Installment A/R–2008.......... - _ 76,230Interest Revenue.................. 9,780 24,480 27,550

Installment Sales........................ 104,000 116,000 121,000Cost of Installment Sales..... 64,480 68,440 73,810Deferred 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 5,700Deferred Gross Profit–2007....... – 29,487 10,939Deferred 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 = P11,066P71,920 X .41 = 29,987

Total RGP P40,553

2008: P15,000 X .38 = P 5,700P26,680 X .41 = 10,939P76,230 X .39 = 29,730

Total RGP P46,369


Problem 9 – 22007: Inventory.................................................................................................45,200

Cash................................................................................................. 45,200

Notes Receivable 2007 (P32,000 + P62,000 + 3,600)............................97,600Unearned Interest Revenue (P7,167 + P3,600)............................... 10,767Installment Sales.............................................................................. 86,833

Cost of Installment Sales (P45,200 – P2,000 inventory increase)..........43,200Inventory.......................................................................................... 43,200

Cash........................................................................................................35,600Notes Receivable 2007.................................................................... 35,600

Unearned Interest Revenue 2007............................................................3,600Interest Revenue.............................................................................. 3,600

Installment Sales.....................................................................................86,833Cost of Installment Sales................................................................. 43,200Deferred 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.................................................................................................52,020Cash................................................................................................. 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 20082Interest revenue from 2007 notes: P7,167 – P5,579 = P1,588Interest revenue from 2008 notes: P5,500 – P1,588 = P3,912

Discount on notes receivable at end of 2008..........................................P 8,043Interest revenue from 2008 notes (see above)........................................ 3,912

Total discount at time of sale..................................................................P11,955

Cost of Installment Sales (P52,020 – P8,000)........................................44,020Inventory.......................................................................................... 44,020

Cash........................................................................................................55,500Notes Receivable–2007 (P62,000 – P36,000)................................. 26,000Notes Receivable–2008................................................................... 29,500*

* P89,500 – P60,000 = P29,500

Discount on Notes Receivable–2007......................................................1,588Discount on Notes Receivable–2008......................................................3,912

Interest Revenue.............................................................................. 5,500

Installment Sales.....................................................................................77,545Cost of Installment Sales................................................................. 44,020Deferred 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)...................................................12,267Deferred 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) = P11,062150 Chapter 9

Problem 9 – 3

Deferred gross profit, 1/1 P24,0001. 2006: Gross profit rate = ––––––––––––––––––––– = ––––––– = 40%

Install. contracts rec'l, 1/1 P60,000

Deferred gross profit, 1/1 P24,0002007: Gross profit rate = ––––––––––––––––––––– = ––––––– = 42%

Install. contracts rec'l, 1/1 P140,000

Gross profit P86,0002008: Gross profit rate =––––––––––––– = ––––––––––= 43%

Installment sales P200,0002. Journal Entries:

Accounts Receivable...................................................................................... 600,000Sales....................................................................................................... 600,000

Installment Contracts Receivable – 2008...................................................... 200,000Installment Sales..................................................................................... 200,000

Cost of Installment Sales............................................................................... 114,000Shipments on Installment Sales.............................................................. 114,000

Purchases....................................................................................................... 476,000Cash........................................................................................................ 476,000

Selling Expenses............................................................................................ 210,000Cash........................................................................................................ 210,000

Cash.............................................................................................................. 790,000Accounts Receivable.............................................................................. 560,000Installment Contracts Receivable – 2006............................................... 40,000Installment Contracts Receivable – 2007............................................... 80,000Installment Contracts Receivable – 2008............................................... 110,000

Adjusting Entries:

Installment Sales............................................................................................ 200,000Cost of Installment Sales........................................................................ 114,000Deferred Gross Profit on Installment sales – 2008................................. 86,000

Deferred Gross Profit – 2006 (P40,000 x 40%)............................................. 16,000Deferred Gross Profit – 2007 (P80,000 x 42%)............................................. 33,600Deferred Gross Profit – 2008 (P110,000 x 43%)........................................... 47,300

Realized Gross Profit.............................................................................. 96,900

Doubtful Accounts Expense (1/4 x 1% x P600,000)..................................... 1,500Allowance for Doubtful Accounts.......................................................... 1,500

Closing Entries:Sales............................................................................................................. 600,000Merchandise Inventory, December 31........................................................... 260,000Shipments on Installment Sales..................................................................... 114,000

Merchandise Inventory, January 1.......................................................... 240,000Purchases................................................................................................ 476,000Selling Expenses..................................................................................... 210,000Doubtful Accounts Expense................................................................... 1,500Income Summary.................................................................................... 46,500

Realized Gross profit..................................................................................... 96,900Income Summary.................................................................................... 96,900

Income Summary........................................................................................... 143,400Retained Earnings................................................................................... 143,400

Installment Sales 1513. Good Buy Mart

Income StatementYear Ended December 31, 2008

Sales............................................................................................................. P600,000Cost of sales:

Merchandise inventory, January 1.......................................................... P240,000Purchases................................................................................................ 476,000

Cost of goods available for sale.............................................................. 716,000Less Shipments on installment sales....................................................... 114,000

Cost of goods available for regular sales................................................ 602,000Less Merchandise inventory, December 31............................................ 260,000 342,000

Gross profit on regular sales.......................................................................... 258,000Add Realized gross profit on installment sales (Schedule 1)........................ 96,900

Total realized gross profit.............................................................................. 354,900Operating expenses:

Selling expenses...................................................................................... 210,000Doubtful 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 P110,000Multiply by Gross profit rate................ 40% 42% 43%

Realized gross profit............................. P16,000 P33,600 P 47,300 P 96,900

4. Good Buy MartBalance SheetDecember 31, 2008A s s e t s

Cash.............................................................................................................. P144,000Merchandise inventory................................................................................... 260,000Accounts receivable....................................................................................... P 62,000Allowance for doubtful accounts................................................................... 3,500 58,500

Installment contracts receivable – 2006......................................................... 20,000Installment contracts receivable – 2007......................................................... 60,000Installment contracts receivable – 2008......................................................... 90,000Other assets.................................................................................................... 200,000

Total Assets............................................................................................ P832,500

Liabilities and Equity

Liabilities:Accounts payable.................................................................................... P 60,000Deferred gross profit on installment sales – 2006.................................. 8,000Deferred gross profit on installment sales – 2007.................................. 25,200Deferred gross profit on installment sales – 2008.................................. 38,700

Total Liabilities....................................................................................... 131,900Equity:

Capital stock........................................................................................... P406,000Retained earnings.................................................................................... 294,600

700,600

Total Liabilities and Equity.................................................................... P832,500152 Chapter 9

Problem 9 – 4

Deferred gross profit, 1/1 = P21,600 + P1,200 = P22,8001. 2007: GP rate = ––––––––––––––––––––– = –––––––––––––––– = ––––––– =

30%Install. contracts rec'l, 1/1 P24,000 + P52,000 P76,000

Gross profit P150,000 – P97,500 P52,5002008: GP rate = –––––––––––––– = –––––––––––––––– = –––––––– =35%

Installment sales P150,000 P150,000

2. Installment Sales............................................................................................ 150,000Cost of Installment Sales........................................................................ 97,500Deferred Gross Profit, 2008.................................................................... 52,500

Deferred Gross profit, 2007........................................................................... 14,400Deferred Gross Profit, 2008........................................................................... 25,900

Realized Gross Profit.............................................................................. 40,300

Computation:2007 2008Sales Sales Total

Installment contracts receivable, 1/1..................... P76,000 P150,000Less Installment contracts receivable, 12/31........ 24,000 76,000

Total credit for the period..................................... 52,000 74,000Less Credit representing repossession.................. 4,000 –

Credit representing collections.............................. P48,000 P 74,000Multiply by Gross profit rate................................ 30% 35%

Realized gross profit............................................. P14,400 P 25,900 P 40,300

Sales............................................................................................................. 212,000Realized Gross Profit..................................................................................... 40,300

Loss on Repossession............................................................................. 400

Cost of Sales........................................................................................... 165,000Selling and Administrative Expenses..................................................... 66,000Income Summary.................................................................................... 20,900

Income Summary........................................................................................... 20,900Retained Earnings................................................................................... 20,900

3. Apple CompanyIncome StatementYear Ended December 31, 2008

Sales................................................................................................................................ P212,000Cost of sales....................................................................................................... 165,000

Gross profit on regular sales............................................................................................. 47,000Add Realized gross profit on installment sales (Schedule 1)............................ 40,300

Total realized gross profit................................................................................................. 87,300Less Loss on repossession............................................................................. 400

Total realized gross profit after adjustment for loss on repossession............................... 86,900Selling and administrative expenses................................................................... 66,000

Net income ....................................................................................................................... P 20,900 Installment Sales 153

Problem 9 – 4

Schedule 1

2007 2008Sales Sales Total

Installment contracts receivable, 1/1........................ P76 000 P150,000Less Installment contracts receivable, 12/31............ 24,000 76,000

Total credit for the period......................................... 52,000 74,000Less Credit representing repossession...................... 4,000 –

Credit representing collections................................. P48,000 P 74,000Multiply by Gross profit rate.................................... 30% 35%

Realized gross profit................................................. P14,400 P 25,900 P40,300

Problem 9 – 5

1. Cost of Installment Sales.................................................................... 54,400Shipments on Installment Sales.................................................... 54,400

Installment Sales................................................................................. 80,000Cost of Installment Sales.............................................................. 54,400Deferred Gross Profit, 2008......................................................... 25,600

Gross profit = P25,600 P80,000 = 32%

Deferred Gross Profit, 2007................................................................ 14,000Deferred Gross Profit, 2008................................................................ 8,000

Realized Gross Profit.................................................................... 22,000

Computation:2007 2008Sales Sales Total

Installment contracts receivable, 1/1.............. P82,000 P 80,000Less Installment contracts receivable, 12/31. _ 36,000 _55,000

Total credit for the period.............................. 46,000 25,000Less Credit representing repossession........... __6,000 ___ –

Credit representing collections...................... P40,000 P 25,000Multiply 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................................................................................................... 200,000Merchandise Inventory, December 31................................................ 52,000Shipments on Installment Sales.......................................................... 54,400

Merchandise Inventory, January 1............................................... 60,000Purchases...................................................................................... 180,000Repossessed Merchandise............................................................ 3,000Loss on Repossession................................................................... 900Operating Expenses...................................................................... 53,000Income Summary......................................................................... 9,500

Realized Gross Profit.......................................................................... 22,000Income Summary......................................................................... 22,000

Income Summary................................................................................ 31,500Retained Earnings......................................................................... 31,500

2. PPG Discount Center, Inc.Income StatementYear Ended December 31, 2008

Regular Installment Total

Sales............................................................ P200,000 P80,000 P280,000Cost of sales:

Inventory, January 1.............................. P 60,000Purchases............................................... 180,000Repossessed merchandise..................... __3,000

Cost of goods available for sale............ 243,000Less 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 89,000Less Deferred gross profit on installment

sales, 2008............................................. 17,600 17,600

Realized gross profit, 2008.......................... 8,000 71,400Add Realized gross profit on 2007

installment sales.................................... 14,000 14,000

Total realized gross profit............................ 22,000 85,400Less Loss on repossession........................... ___900 __900

Total realized gross profit after adjustmentfor loss on repossession......................... P21,100 84,500

Operating expenses...................................... _53,000

Net income................................................... P31,500

Installment Sales 155Problem 9 – 6

1. London ProductsSchedule of Cost of Goods SoldYear Ended December 31, 2008

Merchandise inventory, January 1.................................................................................... P 48,000Purchases ....................................................................................................................... 238,000Freight-in ....................................................................................................................... 12,000Repossessed merchandise.................................................................................. 14,000

Cost of goods available for sale........................................................................................ 312,000Less Merchandise inventory, December 31......................................................... 52,000

Cost of goods sold............................................................................................................. P260,000

2. London ProductsSchedule of Allocation of Cost of Goods SoldYear Ended December 31, 2008

On Cash Ratio to AllocatedAmount Price Basis Total Cost

Cash sales ................... P60,000 P 60,000 60/400 P 39,000Charge sales.................. 120,000 120% 100,000 100/400 65,000Installment sales........... 300,000 125% 240,000 240/400 156,000

P 400,000 P260,000

3. London ProductsIncome StatementYear Ended December 31, 2008

Installment Charge CashTotal 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 contractsreceivable,12/31 (192,000 x 144/300) 92,160 92,160

Realized gross profit.......................... 127,840 51,840Add Realized gross profit on

prior years' sales (Schedule 1):2006..................................... 19,2002007..................................... 14,700 33,900 33,900

Total realized gross profit.................. 161,740 85,740Less Loss on repossession

(Schedule 2)................................ 10,200 10,200 Total realized gross profit after

adjustment for loss onrepossession................................ 151,540 P 75,540

Less Operating expenses.................... 93,000

Net income ........................................ P 58,540

156 Chapter 9

Schedule 1

2006 2007Installment contracts receivable, January 1:

2006 – P32,000 40%................................................................ P80,0002007 – P56,000 35%................................................................ P160,000

Less Installment contracts receivable, December 31.......................... _22,000 __90,000

Total credits........................................................................................ 58,000 70,000Less Credit representing repossession................................................ _10,000 28,000

Total collections.................................................................................. P48,000 P 42,000Multiply 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 38,000Less Unrealized profit –

2006 – P10,000 x40%............................. 4,0002007 – 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

20072007 installment sales (P400,000 x 42%*)..................................P 168,000

2008:2007 installment sales (P173,000 x 42%).................................... P 72,6602008 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 P3,100,000Less 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)........................................................ – 420,000Purchases (new)............................................................................ 1,701,800 1,767,000Repossessed merchandise............................................................. – _83,000*

Cost of goods available for sale................................................... 1,701,800 2,270,000


Less: Inventories, December 31 –New merchandise................................................................... 420,000 358,820Repossessed 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 99,000Correct Uncollectible installment contracts expense:

Fair market value of repossessed merchandise –2007 sales (P195,000 x 20%)............................ P 39,0002008 sales (P110,000 x 40%)............................ __44,000 P 83,000

Unrecovered cost –2007 sales [P105,000 x (100% – 42%)]............ 60,9002008 sales [P82,000 x (100% – 38.5%)]........... __50,430 __111,330 __28,330

Adjustment to Uncollectible installment contracts expense P 70,670

Fortune Sales CorporationIncome StatementYear Ended December 31, 2008

Cash Installment TotalSales Sales Sales

Sales ...................................................................... P205,000 P3,032,000 P3,237,000Cost of sales................................................................... _158,000 _1,864,680 _2,022,680

Gross profit..................................................................... P 47,000 1,167,320 1,214,320Less Unrealized gross profit on 2005 installment

sales (Schedule 1).................................................... __247,170 __247,170

Realized gross profit on 2008 sales................................ 920,150 967,150Add Realized gross profit on 2007 installment

sales (Schedule 2).................................................... ___51,240 ___51,240

Total realized gross profit.............................................. 971,390 1,018,390Less Uncollectible installment contracts expense.......... ___28,330 ___28,330

Total realized gross profit after adjustment.................... P 943,060 990,060Operating expenses........................................................ __592,960

Net income..................................................................... P 397,100

158 Chapter 9

Schedule 1

Installment contracts receivable 2008, December 31..................... P 560,000Installment contracts receivable 2008 defaulted............................ ___82,000

Total............................................................................................... P 642,000Multiply 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 400,000Less Installment contracts receivable 2007, December 31................. __173,000

Total credits for the period.................................................................. 227,000Less Installment contracts receivable 2007 defaulted........................ __105,000

Total collections.................................................................................. P 122,000Multiply 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 240,000Lot 2 :2/3 x P240,000.................................... 160,000Lot 3 :1/3....................................................... P120,000

1/3 x P240,000......................................... __80,000 __200,000

Total cost........................................................ P 600,000

Journal Entries for 2007

March 31Cash................................................................................................ 36,000.00Notes Receivable (Lot 2)................................................................ 364,000.00

Lot 2 ....................................................................................... 160,000.00Deferred gain on Sale of Land................................................. 240,000.00

June 30Cash................................................................................................ 120,000.00Notes Receivable (Lot 3)................................................................ 720,000.00

Lot 3......................................................................................... 200,000.00Deferred Gain on Sale of Land................................................ 640,000.00

Cash................................................................................................ 16,000.00Interest Income (P364,000 x 12% x 3/12)................................ 10,920.00Notes Receivable (Lot 2)......................................................... 5,080.00

September 30Cash................................................................................................ 16,000.00

Interest Income (P358,920 x 12% x 3/12)................................ 10,767.60Notes Receivable (Lot 2)......................................................... 5,232.40


October 31Cash................................................................................................ 72,000.00Notes Receivable (Lot 1)................................................................ 288,000.00

Lot 1......................................................................................... 240,000.00Deferred Gain on Sale of Land................................................ 120,000.00

December 31Cash................................................................................................ 78,000.00

Notes Receivable (Lot 1)......................................................... 6,240.00Notes Receivable (Lot 2)......................................................... 5,389.37Notes Receivable (Lot 3)......................................................... 6,800.00Interest Income......................................................................... 59,570.63

Computation:Total Lot 1 Lot 2 Lot 3

Collections....................................... P78,000.00 P12,000.00 P16,000.00 P50,000.00Apply to interest:

Lot 1 – P288,000.00 x 12% x 2/12 5,760.00Lot 2 – P353,687.60 x 12% x 3/12 59,570.63 10,610.63Lot 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)............................................... 26,080.00Deferred Gain on Sale of Land (Lot 2)............................................... 31,021.06Deferred 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 P51,701.77P126,800.00

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 P31,021.06 P96,368.00

3. Lot 3 (80% x P200,000)......................................................................160,000.00Deferred Gain on Sale of Land (Lot 3) (P640,000 – P96,368)..........543,632.00Loss on Repossession......................................................................... 9,568.00

Notes Receivable (Lot 3) (P720,000 – P6,800)........................... 713,200.00

160 Chapter 9

Problem 9 – 9

Galaxy Investment CompanyIncome StatementYear Ended December 31, 2008

Sales Schedule 1) .................................................................................................... P 8,060,000Cost of sales (Schedule 2)........................................................................................ 1,612,000

Gross profit............................................................................................................ 6,448,000Less Sales commissions.......................................................................................... 221,000

Gross profit............................................................................................................ 6,227,000Less Deferred gross profit

Installment Notes Balance P5,370,000––––––––––––––––––––– =–––––––––– =67% x P6,227,000 4,172,090Installment Sales P8,060,000

Realized gross profit................................................................................................ 2,054,910Expenses:

Advertising and promotion............................................................................ P 730,000Sales manager's salary................................................................................... 120,000General office expenses (1/4 x P236,000)..................................................... 59,000 909,000

Net profit ............................................................................................................... P 1,145,910

Schedule 1Total Cash Installment

Sales Price Received Notes Balance

A lots : 26 @ P150,000................................................ P3,900,000 P1,650,000 P 2,250,000B lots : 32 @ P100,000................................................ 3,200,000 800,000 2,400,000C lots : 12 @ P80,000.................................................. 960,000 240,000 720,000

......................................................... P8,060,000 P2,690,000 P 5,370,000

Schedule 2Number of Unit Total

Class Lots Price Sales Value

A........................................................................ 80 P150,000 P12,000,000B........................................................................ 100 100,000 10,000,000C........................................................................ 120 80,000 9,600,000

Total............................................................ 300 P31,600,000

Cost of tract:Cost of land.................................................................................................... P 4,800,000Legal fees, etc................................................................................................ 600,000Grading contract............................................................................................. 225,000Water and sewerage system contract............................................................. 184,900Paving contract............................................................................................... 266,300General office expenses (3/4 x P236,000)..................................................... 177,000

Total............................................................................................................. P 6,253,200

P6,253,200Cost rate : –––––––––––– = 20% (rounded off)

P31,600,000Cost of sales (P8,060,000 x 20%)........................................................................... P 1,612,000 Installment Sales 161

Problem 9 – 10

Rizal CompanyIncome StatementYear Ended December 31, 2008

Installment sales [(P14,300 x 7) + (P725 x 4)]........................................... P103,000Cost of goods sold on installment (schedule 1)........................................... __79,310

Gross profit. ................................................................................................ 23,690Less Deferred gross profit on 19x8 sales

(P103,000 – P21,000 = P82,000 x 23%*).......................................... __18,860

Realized gross profit on 2008 sales............................................................. 4,830Add Realized gross profit on prior years' sales –

2006 : P60,000 x 33-1/3*.................................................................... P20,0002007 : P115,000 x 35%*..................................................................... _40,250 __60,250

Total realized gross profit............................................................................ 65,080Less Loss on repossession (Schedule 4)...................................................... __33,100

Total realized gross profit after adjustment................................................. 31,980General 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................................................................... 86,520Less Inventory, December 31 –

Number of units on hand..................................................................... 1Multiply 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 84,000Add Repossessed merchandise.................................................................... ___2,520

Total........................................................................................................... P 86,520divide by Number of units (8 + 4)............................................................... _____12

Average unit cost......................................................................................... P 7,210

162 Chapter 9

Schedule 3

........................................................ 2006 2007 2008Sales –

2006 : P15,000 x 10....................................... P150,0002007 : P14,000 x 20....................................... P280,0002008 : 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 84,000Repossessed merchandise................................ _____– _____– _2,520

Cost of goods available for sale....................... 120,000 182,000 86,520Less 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 2,520Less Unrecovered cost –

Unpaid balance:Original sales amount (P14,000 x 4)............................................ P 56,000

Collections prior to repossession.................................................. __1,200

Total. ............................................................................................ 54,800Less Unrealized profit (P54,800 x 35%)............................................. _19,180 _35,620

Loss on repossession.................................................................................... P33,100

Long-Term Construction Contracts 163

CHAPTER 10


10-1: aPercentage of Completion Method:

Contract Price P1,000,000Less:Total estimated cost

Cost incurred P 200,000Estimated 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 P100,0002007 2008

Contract Price P9,000,000 P9,000,000Less: 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: aContract Price P6,000,000Less: 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 900,000Less: Gross profit earned in 2007 __600,000

Gross profit earned in 2008 P 300,000

10-4: bContract Price P3,000,000Less: Total estimated cost (930,000 + 2,170,000) _3,100,000

Loss (P 100,000 )

164 Chapter 10

10-5: bTotal cost to date, 2008 (4,800,000 X 60%) P2,880,000Less: Cost incurred in 2007 (4,500,000 X 20%) __900,000

Cost incurred in 2008 P1,980,000

10-6: aPercentage of Completion Method:

Contract Price P3,000,000Less: 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 100,000Add: 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: a2007 2008

Contract Price P4,200,000 P4,200,000Less: 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: bCollections:

Contract Billings P 47,000Less: Accounts receivable ___15,000

Collections P 32,000

Initial Gross Profit:Contract Price P 800,000Gross Profit rate:

Income recognized 10,000

Divide by Construction in Progress 50,000 =_____20%

Initial Gross Profit P 160,000


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 160,000Divide by percentage of completion - 2008 ___100%

Estimated gross profit - 2008 160,000Less: Contract price 2,000,000

Total estimated cost 1,840,000Less: Cost incurred - 2008 _820,000

Cost incurred to date - 2007 1,020,000Less: 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 180,000Divide by estimated gross profit - 2007:

Contract price P2,000,000Gross 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 P2,000,000Estimated gross profit - 2007 (Refer to Q 10-10) __300,000

Total estimated cost 1,700,000Less: 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 244,000Less: Construction costs __210,000

Gross profit recognized - 2007 P 34,000

2008: Construction in progress (P728,000-P244,000) P 484,000Less: Construction costs __384,000

Gross profit recognized - 2008 P 100,000

166 Chapter 10

10-14: dProject 1

Project 2Percentage of Completion Method:Contract price P 420,000 P 300,000 Less: Total estimated cost

Cost incurred to date - 2008 P 240,000P 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 P3,744,000P3,744,000Less: Total estimated costs

(1) Cost incurred to date 546,000 1,544,4003,120,000

Estimated cost to complete _2,054,000 _1,315,000________–

(2) Total _2,600,000 _2,860,000_3,120,000

Estimated gross profit 1,144,000 884,000624,000Percentage of completion (1 2) _____20% _____54%____100%

Gross profit earned to date 240,240 477,360624,000Gross 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: d2007 2008

Contract price P6,300,000P6,300,000Less: Total estimated cost

Cost incurred to date 1,425,0003,040,000

Estimated cost to complete _4,075,000_1,960,000

Total P5,500,000P5,000,000

Estimated gross profit 800,0001,300,000Percentage 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 200,000777,400Less: Gross profit earned in prior year ________–__200,000

Gross profit earned this year P 200,000 P 577,400


10-17: a

Cash collections:Progress billings P1,500,000Less: Accounts receivable, end __500,000

Collection P1,000,000

Cost incurred to date:Construction in Progress P1,600,000Less: 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 2,520,0002,520,000

Less: Total Estimated Costs(1) Cost incurred to date P 600,000 P1,200,000 P1,560,000P2,310,000

Estimated cost to complete 840,000 240,000 690,000 –

(2) Total estimated cost 1,440,000 1,440,000 2,250,0002,310,000

Estimated Gross Profit 180,000 180,000 270,000210,000

Percentage of completion (1 2) _41.67% _83.33% _69.33%_100.00%

Gross profit earned to date 75,000 150,000 187,200210,000

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: d2007 2008

Contract price:2007 P6,000,0002008 (P6,000,000-P50,000) _________

P5,950,000Less: Total estimated costs

(1) Cost incurred to date 2,340,0002,650,000

Estimated cost to complete 260,000 –

(2) Total estimated cost 2,600,0002,650,000

Estimated Gross Profit 3,400,0003,300,000Percentage of completion (1 2) ____90%___100%

Gross profit earned to date 3,060,0003,300,000Less: Gross profit earned in Prior year _______–3,060,000

Gross Profit earned this year P3,060,000 P 240,000168 Chapter 10

10-20: a2006 2007 2008

(1)Cost incurred to date P3,400,000 P5,950,000P6,150,000(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 P6,000,000P6,000,000

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 5,850,0006,000,000

Less: Contract billings 3,200,000 5,200,000 6,000,000

Balance P 880,000 P 650,000 –

10-21: cConstruction in Progress:

Cost incurred to date, 2007 P2,625,000Gross profit earned, 2007 (Schedule 1) 100,000

P2,725,000Less: 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, 20062006 2007

Contract price P3,250,000P3,250,000Total estimated cost:

Cost to date 1,075,0002,625,000

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


10-22: a2005 2006 2007

Contract price P2,800,000 P2,800,000 P2,800,000

Estimated cost:Cost to date 1,300,000 1,960,000

2,440,000Estimated 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: b2007 Project A Project B Project

C Contract price P2,900,000 P3,400,000P 1,700,000 Estimated costs:

Cost to date 1,680,000 1,440,000 320,000Estimated 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 P1,700,000P 2,000,000 Estimated costs

Cost to date2,640,000 2,120,000 1,183,000 560,000Estimated 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) 364,000 140,000Gross 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 255,000P 609,000General and administrative expenses 120,000 120,000

Net income P 135,000 P 489,000

10-24: cContract priceP10,000,000Gross profit earned to date, 2008 (P900,000 – P100,000) 800,000

Total cost to date, 2008 9,200,000Less: cost incurred in 2008

4,100,000

Cost to date, 2007P 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, 2007P 1,500,000

10-25: dConstruction in progress:

Cost incurred to dateP 440,000

Gross profit earned to date (P2,500,000 – P2,000,000) 110,000

Total 550,000Less: 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: aContract price P120,000,000Total estimated cost:

Cost incurred to date:Site labor cost 10,000,000Cost of construction materials 30,000,000Depreciation of special plant & equip 5,000,000Total 45,000,000

Estimated cost to complete 55,000,000 100,000,000Estimated gross profit 20,000,000Percentage of completion (45/100) 45% Gross profit to be recognized P 9,000,000

10-27: aCost incurred to date- 2007

Total estimated cost (8,000,000 / 40%) 20,000,000Estimated cost to complete 8,000,000 P12,000,000

Cost incurred in 2007 3,700,000

3,700,000Cost incurred in 2006 8,300,000Estimated cost at completion- 2006 12,450,000Total 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-2007Contract price P600,000 P450,000Total estimated cost:

Cost incurred to date 150,000 87,500 P237,500Estimated cost to complete 150,000 162,500Total estimated cost 300,000 250,000

Estimated gross profit 300,000 200,000Percentage of completion 50% 35%Gross profit recognized P150,000 P70,000 P220,000

2008Contract 1 Contract 2 Contract 3

Contract price 600,000 450,000 900,000Total estimated cost 350,000 300,000 500,000Estimated gross profit 250,000 150,000 400,000Percentage of completion 80% 60% 36%Gross profit earned to date 200,000 90,000 144,000Gross profit earned in 2007 150,000 70,000 -Gross profit earned this year 50,000 20,000 144,000


10-29: a Bicol Davao Aklan Total

Contract price P875,000 P1,225,000 P437,500Total estimated cost

Cost incurred 656,250 175,000 175,000 1,006,250Est. cost to complete - 700,000 175,000Total estimated cost 656,250 875,000 350,000

Estimated gross profit 218,750 350,000 87,500Percentage of completion 100% 20% 50%Gross profit earned P218,750 P 70,000 P43,750 332,500

Percentage of completion Zero ProfitTotal cost incurred 1,006,250 1,006,250Total gross profit earned 332,500 218,750Construction in progress 1,338,750 1,225,000Less: Billings 1,312,500 1,312,500Due from (to) 26,250 (87,500)

10-30: aContract price P40,825,000Total estimated cost:

Cost incurred 8,475,000Estimated cost to complete 28,400,000 36,875,000

Estimated gross profit 3,950,000Percentage of completion 22.983%Gross profit recognized P 907,830

172 Chapter 10


Problem 10 – 1(a) 2007 2008

Contract Price P 450,000 P 450,000 Less: Total estimated cost

(1) Cost incurred to date 200,000 320,000Estimated costs to complete __100,000

_______–

(2) Total __300,000_320,000

Estimated gross profit 150,000 130,000Percentage of completion (1 2) ______2/3___100%

Estimated gross profit to date 100,000 130,000Less: Gross profit earned in prior year _______–__100,000


(b) Contract PriceP 450,000Less: Total cost incurred__320,000

Gross profitP 130,000

(c) 2007: Construction in Progress 100,000Cost of construction 200,000

Construction Revenue 300,0002008: Construction in Progress 30,000

Cost of Construction 320,000Construction Revenue 350,000

Problem 10 – 2

(a) Construction RevenueP1,250,000Less: Cost incurred_1,250,000

Gross profit – 2008 P – 0 –

Construction in Progress (cost incurred)P1,250,000Less: Contract billings (P5,800,000 x 30%)_1,740,000

Billings in excess of related costsP(490,000)

(b) Contract priceP5,800,000Less: Total estimated costs

Cost incurred to date P1,250,000Estimated costs to complete 3,740,000

5,000,000

Estimated gross profit 800,000Percentage of Completion (P1,250,000 500,000)_____25%

Gross profitP 200,000

Construction on Progress (P1,250,000 + P200,000)P1,450,000Less: Contract billings_1,740,000

Billings in excess of related costsP(290,000)


Problem 10 – 3(a) 2005 2006 2007 2008

Contract Price P55,000,000 P55,000,000 P55,000,000P55,000,000Less: Total estimated costs

(1) Cost incurred to date 15,000,000 25,000,000 35,000,00050,000,000

Estimated costs to complete _35,000,000 25,000,000 15,000,000________–

(2) Total _50,000,000 50,000,000 50,000,00050,000,000

Estimated gross profit 5,000,000 5,000,000 5,000,0005,120,000

Percentage of completion (1 2) ______30% _____50% _____70%____100%

Gross profit earned to date 1,500,000 2,500,000 3,500,0005,000,000Gross 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 15,000,000Cash or Payable 15,000,000

15,000,000

(2) Accounts Receivable 15,000,000 20,000,000Contract Billings 15,000,000

20,000,000

(3) Cash 12,000,000 25,000,000Accounts Receivable 12,000,000

25,000,000

(4) Construction in Progress 1,000,000 1,500,000Cost of Construction 15,000,000 15,000,000

Construction Revenue 16,000,00016,500,000

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 P15,000,000P15,000,000Less: Total Estimated Cost

Cost incurred to date 1,000,000 5,500,00010,000,000

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 4,000,0003,000,000Percentage of completion ___11.11% ______50%

___83.33%

Gross profit earned to date 666,600 2000,0009,500,000Less: 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) 1,000,000Cash

1,000,000

(2) Accounts Receivable 1,325,000Contract Billings

1,325,000

(3) Cash 1,200,000Accounts Receivable

1,200,000

(4) Construction in progress (gross profit) 666,600Cost of construction 1,000,000

Construction Revenue1,666,600

Problem 10 – 5

(1) 2005 2006 2007 2008

Contract Price P14,000,000 P14,000,000 P14,000,000P14,000,000Less: Total Estimated Cost

Cost incurred to date 6,500,000 9,800,000 12,200,00013,900,000

Estimated cost to complete __6,800,000 _3,900,000 _1,900,000________–

Total _13,300,000 13,700,000 14,100,00013,900,000

Estimated gross profit 700,000 300,000 ( 100,000) 100,000Percentage of completion ___48.87% ___71.53% _____100%____100%

Gross profit (loss) to date 342,090 214,590 ( 100,000) 100,000Less: 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 2008Cost of construction 6,500,000 3,300,000 2,400,000 1,700,000Construction in progress 342,090 127,500 314,590 200,000

Construction Revenue 6,842,090 3,172,500 2,085,4101,900,000

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 2,550,000 200,000Construction in progress 309,100 409,10050,000

Construction Revenue 3,709,100 2,140,900150,000

(3) Cash 400,000Accounts Receivable 400,000

Contract Billings 6,000,000Construction in progress 6,000,000

Problem 10 – 7

(1) 2006 2007 2008

Contract Price P16,000,000 P16,000,000 P16,000,000Less:Total Estimated Cost

Cost incurred to date 4,600,000 9,100,000 14,350,000Estimated 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 1,650,000Engineer's estimate of comp. ______31% ______58% _____100%

Gross profit to date 545,600 1,044,000 1,650,000Less: 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 4,500,0005,250,000

(b) Accounts receivable 5,000,000 6,000,000 5,000,000Contract billings 5,000,000 6,000,000

5,000,000

(c) Cash 4,500,000 5,400,000 6,100,000Accounts receivable 4,500,000 5,400,000

6,100,000

(d) Cost of constructions 4,600,000 4,500,000 5,250,000Construction in progress 545,600 498,400 606,000

Construction revenue 5,145,600 4,998,4005,856,000(e) Contract billings 16,000,000

Construction on progress16,000,000

(3) Zero Profit Method: 2008 Entres(a) Construction in progress 5,250,000

Cash / accounts payable 5,250,000

(b) Accounts receivable 5,000,000Contract billings 5,000,000

176 Chapter 10

(c) Cash 6,100,000Accounts receivable 6,100,000

(d) Cost of construction 5,250,000Construction in progress 1,650,000

Construction revenue 6,900,000

(e) Contract billings 16,000,000Construction 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 545,600 498,400 606,000Construction 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 P6,500,000P6,500,000Less:Total Estimated Costs

Cost incurred to date 2,150,000 5,250,0006,850,000

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


11-1: bNo revenue is to be reported. Because the franchisor fails to render substantial services to the franchisee as of December 31, 2008.

11-2: cInitial franchise fee P5,000,000Less: Cost of franchise ____50,000

Net income P4,950,000

11-3: aThe 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: bCash downpayment P 100,000Collection of note applying to principal __200,000

Revenue from initial franchise fee P 300,000

11-5: aCash downpayment, January 2, 2008 P2,000,000Collection applying to principal, December 31, 2008 _1,000,000

Total Collection 3,000,000Gross profit rate [(5,000,000-500,000) 5,000,000] _____90%

Realized gross profit, December 31, 2008 P2,700,000

11-6: bFace value of the note (P1,200,000 - P400,000) P 800,000Present value of the note (P200,000 X 2.91) __582,000

Unearned interest income, July 1, 2008 P 218,000

11-7: dInitial franchise fee P1,200,000Less: unearned interest income __218,000

Deferred revenue from franchise fee P 982,000

11-8: dInitial franchise fee P 500,000Continuing franchise fee (P400,000 X .05) ___20,000

Total revenue 520,000Cost ___10,000

Net income P 510,000

178 Chapter 11

11-9: bDeferred Revenue from franchise fee:

Downpayment P6,000,000Present value of the note (P1,000,000 X 2.91) 2,910,000

P8,910,000Less: Cost of franchise fee_2,000,000

Deferred gross profitP6,910,000

Gross profit rate (6,910,000 8,910,000) 77.55%

Downpayment (collection during 2008)P6,000,000Gross profit rate___77.55%

Realized gross profit from initial franchise feeP4,653,000Add: Continuing franchise fee (5,000,000 X .05)__250,000

TotalP4,903,000Less: Franchise expense___50,000

Operating incomeP4,853,000Interest income, 12/31/05 (P2,910,000 X 14%) X 6/12__203,700

Net incomeP5,056,700

11-10: bFace value of the note receivableP1,800,000Present value of the note receivable

1,263,900

Unearned interest income P 536,100

Initial franchise feeP3,000,000Less: Unearned interest income __

536,100

Deferred revenue from franchise feeP2,463,900

11-11: aRevenues from:

Initial franchise feeP1,000,000

Continuing franchise fee (P2,000,000 X .05) 100,000

Total revenue from franchise feesP1,100,000

11-12: dRealized 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 176,225Expenses___42,900

Net operating profit 133,325Interest income (P900,000 x 15%) x 6/12___67,500

Net incomeP 200,825


11-13: cCash down-payment P

95,000Present of the note (P40,000 x 3.0374)__121,496

Total P 216, 496

11-14: aInitial franchise feeP 50,000Continuing franchise fee (P400,000 x 5%)__20,000

Total revenueP 70,000

11-15: cShould be P80,000Initial franchise fee – down-payment (P100,000 / 5)P 20,000Continuing franchise fee (P500,000 x 12%)__60,000

Total earned franchise feeP 80,000

11-16: aThe 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: bCora (P100,000 + P500,000) P 600,000Dora (P100,000 + P500,000) 600,000Total P1,200,000

11-18:Down payment (3,125,000 x 40%) P1,250,000Present value of notes receivable ( 1,875,000/4) 468,750 x 3.04 1,425,000Adjusted sales value of initial franchise fee 2,675,000Direct cost of services 802,500Gross 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 NR1/1 P1,425,0006/30 468,750 171,000 297,750 1,127,25012/30 468,750 135,270 333,480 793,770Total collection applying to principal 631,230Down payment 1,250,000Total collection 1,881,230Gross profit rate 70%Realized gross profit on

initial franchise fee 1,316,861

11-19: c



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............................................ 2,000,000Deferred 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................................... 2,000,000Deferred 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 – 2a. Collection of the note is reasonably assured.

Jan. 5: Cash. ..................................................................................... 600,000Notes Receivable................................................................... 1,000,000

Unearned interest income.................................................. 401,880Deferred revenue from F.F................................................ 1,198,120

Face value of NR............................................................................. 1,000,000Present 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............................................................... 179,718Deferred cost of Franchise.......................................... 179,718

3) Deferred revenue from FF................................................. 1,198,120Revenue 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................................................................ 179,718Deferred cost of franchise........................................... 179,718

3) Deferred revenue from FF................................................. 1,198,120Cost of Franchise........................................................ 179,718Deferred gross profit – Franchise............................... 1,018,402

GPR = 1,018,402 1,198,120 = 85%)

4) Deferred gross profit – Franchise......................................578,319.60Realized gross profit – Franchise................................ 578,319.60

(P600,000 + P200,000- P119,624) x 85%


Problem 11 – 3

2007

July 1: Cash. ........................................................................................... 120,000Notes Receivable.......................................................................... 320,000

Unearned interest income...................................................... 66,408Deferred revenue from FF..................................................... 373,592

Face value of NR.......................................................................... P320,000Present value (P80,000 x 3.1699)................................................. _253,592

Unearned interest income............................................................. P 66,408

Sept. 1 toNov. 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............................................................ 50,000Cash. ..................................................................................... 50,000

July 1: Cash. ........................................................................................... 80,000Note receivable...................................................................... 80,000

Dec. 31: Adjusting Entries:(1) Cost of franchise.................................................................... 130,000

Deferred cost of franchise................................................. 130,000

(2) Deferred revenue from FF..................................................... 373,592Revenue from FF............................................................... 373,592

(3) Unearned interest income...................................................... 25,360Interest income.................................................................. 25,360

184 Chapter 11

Problem 11 – 42008

Jan. 10: Cash. ........................................................................................... 6,000,000Deferred revenue from FF..................................................... 6,000,000

Jan. 10 toJuly 15: Franchise expense......................................................................... 2,250,000

Cash. ..................................................................................... 2,250,000

Deferred revenue from FF............................................................ 4,000,000Revenue from FF................................................................... 4,000,000

Initial Franchise fee.....................................................................P6,000,000Deficiency

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.............................................................. 180,000Cash / Accounts payable................................................... 180,000

(b) Deferred revenue from FF..................................................... 200,000Revenue from CFF............................................................ 200,000

(P180,000 90%)Problem 11 – 5

a) Adjusted initial franchise fee:Total initial F.F............................................................................. P4,500,000Less: Face Market value of kitchen equipment............................ _1,800,000

Adjusted initial FF........................................................................ P2,700,000Revenues:

Initial FF. ..................................................................................... P2,700,000Sale of kitchen equipment............................................................ 1,800,000Continuing F.F. (P2,000,000 x 2%)............................................. ___40,000

Total. ........................................................................................... 4,540,000Expenses:

Initial expenses.............................................................................P 500,000Cost 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..................................................................... 3,000,000Deferred revenue from FF (adjusted SV).......................... 2,700,000Revenue from FF (Market value of equipment)................ 1,800,000

Cost of kitchen equipment..................................................... 1,500,000Kitchen equipment............................................................. 1,500,000


Jan. 18: Franchise expense......................................................................... 500,000Cash................................................................................... 500,000

April 1: Cash ..........................................................................................2,000,000Notes receivable................................................................ 2,000,000

Dec. 31: Cash ..........................................................................................1,000,000Notes receivable................................................................ 1,000,000

Cash / Account receivable............................................................ 40,000Revenue from continuing FF............................................. 40,000

Deferred revenue from FF............................................................ 2,700,000Revenue 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 2,340,000Expense (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 30,0002 220,000 250,000 30,0003 220,000 250,000 30,0004 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 P125,000Expenses........................................ _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 6/30/2009Revenues:

Initial FF (Sch. 1) – – 287,200 –Interest income – – – 45,490*Continuing FF – – – 48,000Others 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 ........................................................................................................... P750,000Less: Interest unearned on the note......................................................................... ( 145,100)A

Market value of inventory.............................................................................. ( 80,000)B

Market value of equipment............................................................................ ( 62,500B

Deficiency in continuing costs....................................................................... ( 175,200 )C

Adjusted initial FF....................................................................................................... P287,200

A. Unearned Interest:Face value of the note........................................................................................... P600,000Present 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 62,500Inventory.............................................................................................................. 80,000

Income from Sales:Equipment Inventory Total

Sales Price. .................................................. P62,500 P80,000 P142,500Cost............................................................. 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 45,000Market value of continuing costs................ ( 48,000 ) ( 48,000 ) ( 48,000)

Deficiency per year...................................... ( 18,300) ( 7,500) ( 3,000)Number of years.......................................... x 4 x 12 x 4

Deficiency ........................................... P( 73,200) P( 90,000) P( 12,000)

Total deficiency for 20 years is P175,200Franchise Accounting 187

Dates of Revenue Recognition:....................................................... Types of Revenue

January 12, 2008.............................................................. Sale of equipmentJune 1, 2008..................................................................... Sale of inventoryJuly 1, 2008..................................................................... Initial FF (as adjusted0June 30, 2009................................................................... Interest income and

continuing revenue.

advance accounting book 1

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