UNIT I: ACCOUNTING FOR A PARTNERSHIP Lecture Notes PARTNERSHIP ACCOUNTING – unlimited liability – easy to form FORMATION OF PARTNERSHIP
– Cash contribution of the partners recorded @ face value
– Non-cash assets recorded @ agreed value, usually the fair value o Bonus Method
1. No recording of unidentifiable assets pertaining to goodwill 2. Total Agreed Capital (TAC) = Total Contributed Capital (TCC) 3. There would only be a transfer of capital from one partner to another o Cash Invested/Withdrawn
1. If adjusted capital is more than the unadjusted capital ADDITIONAL INVESTMENT
2. If adjusted capital is less than the unadjusted capital WITHDRAWAL
OPERATIONS
o Profit and Loss Agreement
Scenario Profit Loss Result
1. Both profit and loss agreement are given.
Follow the agreement 2. There is a profit agreement but
no loss agreement
Follow profit agreement 3. No profit agreement but there is
a loss agreement
For profit, use original capital ratio
For loss, follow the agreement 4. Both profit and loss agreement For both, use original capital
ratio. o Salaries and Interest
1. Salaries & interest should be recorded as provided regardless of the result of the operations.
2. This could be fractional year.
* Payments of salaries, interest & bonus are not treated as part of expense
o Bonus – it should only be given if there is profit and bases depends on partners agreement
Statement of Changes in Partner’s Capital
Beginning Capital P xxx
Add: Additional Investment xxx
Less: Irregular or Permanent Withdrawal (xxx)
Balance Before Net Income P xxx
Add: Share In Net Income xxx
Less: Regular Drawings (xxx)
CAPITAL, END P xxx * If withdrawal is SILENT to permanent or regular, it will be considered as permanent
withdrawal. DISSOLUTION
1. Admission by purchase without revaluation
Purchase price is to be ignored.
Transaction between new partner and the partner who is selling shares is considered as PERSONAL TRANSACTION.
The total agreed capital would still be equal to the total contributed capital 2. Admission by purchase with revaluation
Purchase price is used to determine the amount of revaluation example: purchase price
% of interest
* Amount of revaluation increases the amount of capital of the old partner and so is distributed among P& L ratio
3. Admission by investment
Bonus method is to be applied if the problem is silent.
Revaluation method should also be applied if the problem says so.
TAC = TCC Pro-forma:
o Bonus to old partner
Cash xxx
Capital, old partner xxx
Capital, old partner xxx
Capital, new partner xxx
o Bonus to new partner
Cash xxx
Capital, old partner xxx
Capital, old partner xxx
Capital, new partner xxx
= Total Agreed Capital
Less: Total Contributed Capital REVALUATION
4.
5. Admission by purchase and admission by investment
RETIREMENT
1. Computation of Total Interest
Capital P xxx
+/- Share in Net Income/Loss xxx
+/- Revaluation xxx
+/- Loan Balance xxx
TOTAL INTEREST P xxx
o Classification of Loan Balances
ADDED TO CAPITAL (LIABILITY) DEDUCTED FROM CAPITAL(ASSET)
– Loan FROM partner – Loan TO partner
– Due TO partner – Due FROM partner
– Loan payable TO partner – Loan payable FROM partner 2. Total interest is more than settlement of its retiring partners
Bonus to REMAINING PARTNERS
3. Total interest is less than settlement of the retiring partner Bonus to RETIRING PARTNER
LIQUIDATION
1. Lump-sum liquidation
2. Installment liquidation or piecemeal o Lump-sum Liquidation 1. Assets – realization 2. Liabilities – payment 3. Capital – distribution TCC TAC BONUS K- Old Partner 1 P xxx P xxx P xxx T – Old Partner 2 xxx xxx xxx Total P xxx P xxx P xxx R – New Partner 1 xxx xxx xxx TOTAL P xxx P xxx 0 UNADJUSTED ADJUSTED TCC TAC BONUS K- Old Partner 1 P xxx P xxx P xxx P xxx T – Old Partner 2 xxx xxx xxx xxx Total P xxx P xxx P xxx P xxx R – New Partner 1 xxx xxx xxx xxx TOTAL P xxx P xxx P xxx 0
4. Marshalling of asssets o Partnership Assets
Who do you prioritize first? i. Partnership creditors ii. Personal creditors iii. Partners
o Personal assets
Who do you prioritize first? i. Personal creditors ii. Partnership creditors iii. Partners
o Installment Liquidation
o Cash Priority Program (CPP) 1. Determine the total interest
2. Compute loss absorption balance (LAB)
3. Equalize loss absorption balance from the highest to the second highest until equal to determine priority of payment
4. Distribution to partners (difference in LAB x P&L ratio)
When to use CPP?
– If there is no deficiency in the partners capital
– When the problem gives payment to any of the partners
ex. If partner A receives P xxx, how much will partner B receive? 3. If there is no additional investment
o Schedule of Safe Payment 1. Determine the total interest
2. Compute the maximum possible loss
2.1. Unsold non cash assets @ book value; plus 2.2. Liquidation expenses or cash withheld 3. Distributed deficit
4. Distribution to partners
* Under the statement of liquidation, partners are assumed to be solvent. * Under the schedule of safe payment, partners are assumed to be insolvent
Partner A Partner B Partner C TOTAL
Total Interest P xxx P xxx P xxx P xxx Divided by P&L ratio xxx xxx xxx xxx Loss Absorption Balance P xxx P xxx P xxx P xxx
Priority I P xxx P xxx
Priority II P xxx xxx xxx
Priority III P xxx xxx xxx xxx
CASH DISTRIBUTION P xxx P xxx P xxx P xxx LAB =Total Interest
COMPUTATION OF CASH DISTRIBUTION:
Cash, beginning P xxx
+ Proceeds from sale of Non Cash Assets xxx
- Total Liabilities recorded & unrecorded (xxx)
- Liquidation expenses (xxx)
CASH DISTRIBUTION P xxx
UNIT II: CORPORATE LIQUIDATION Lecture Notes
CORPORATE LIQUIDATION
1) Assets should be recorded at Fair Value (FV) or Net Realizable Value (NRV)
2) Intangible assets and pre-payments are DERECOGNIZED upon Corporate Liquidation o Statement of Affairs – initial report that shows the available asset values and debts of
the debtor corporation
o Statement of Realization and Liquidation – periodic report of the reviewer shows how the receiver managed the assets of the debtor corporation on behalf of the creditors
Assets are classified into three (3) categories:
1. Assets pledged to FULLY secured creditors (APTFSC) FV of asset >Liability
2. Assets pledged to PARTIALLY secured creditors (APTPSC) FV of asset < Liability
3. Free assets – assets not pledged as security for any liability – includes value of APTFSC in excess of liability
Liabilities are classified into four (4) categories: 1. Unsecured liability with priority
a. Administrative expenses – trustees expenses b. Salaries and wages
c. Taxes
2. Fully secured creditors (FSC) 3. Partially secured creditors (PSC) 4. Unsecured creditors
NUMERATOR DENOMINATOR
1) Excess of APTFSC over FSC: 4) Excess of PSC over APTPSC: APTFSC P xxx PSC P xxx
FSC ( xxx) P xxx APTPSC ( xxx) P xxx 2) Free Assets xxx 5) Liability w/o priority xxx TOTAL FREE ASSETS P xxx TOTAL UNSECURED LIAB P xxx 3) Less: Liabilities w/ priority
a. Administrative exp. P xxx b. Salaries xxx
c. Taxes xxx ( xxx) NET FREE ASSETS P xxx
% of recovery = NET FREE ASSETS .
TOTAL UNSECURED LIABILITY
COMPUTATION FOR TOTAL PAYMENT TO ALL CREDITORS:
Fully Secured Creditors P xxx
Partially Secured Creditors:
Assets Pledged to Partially Secured Creditors (P xxx * 100%) P xxx
Excess of PSC over APTPSC ( P xxx * % of recovery) xxx xxx
Liability with Priority xxx
Liability without Priority ( P xxx * % of recovery) xxx
TOTAL PAYMENT TO ALL CREDITORS P xxx
OR
Net Realizable Value of Assets = Total Payment to Creditors
STATEMENT OF REALIZATION AND LIQUIDATION
Assets to be realized xxx xxx Assets realized
Assets acquired xxx xxx Assets not realized
Liabilities liquidated xxx xxx Liabilities to be liquidated
Liabilities not liquidated xxx xxx Liabilities assumed
Supplementary charges xxx xxx Supplementary credits
Net Income xxx xxx Net Loss
COMPUTATION FOR ENDING CASH BALANCE:
A = L + E
Equity P xxx
Liabilities NOT liquidated xxx
Less: Assets NOT realized xxx
ENDING CASH BALANCE P xxx
NOTE: If Retained Earnings balance is ending, it already includes net income or net loss. If not, then add or deduct the net income or net loss.
Cash Assets not realized Liabilities not liquidated SHE ITEMS
UNIT III: INSTALLMENT SALES Lecture Notes
INSTALLMENT SALES
1) If collectability of the note is REASONABLY ASSURED, ACCRUAL METHODshould be applied. In this topic the entire amount of GP becomes part of the net income.
2) If the collectability of the note is NOT REASONABLY ASSURED, INSTALLMENT
METHOD should be applied
COMPUTATION OF NET INCOME:
Gross Profit (GP) on Regular Sales P xxx
Realized Gross Profit (RGP) on Installment Sales xxx
TOTAL RGP P xxx Less: Expenses 1) Selling Expenses P xxx 2) Loss on Repossession xxx 3) Loss on Write-off xxx ( xxx) NET INCOME P xxx
*GP on Regular Sales *RGP on Installment Sales Sales P xxx Collection P xxx
Less: Cost of Regular Sales ( xxx) Multiplied by GP rate ( xxx)
GP ON REGULAR SALES P xxx RGP ON INSTALLMENT SALES P xxx
3) Installment Accounts Receivable IAR, beginning (prior year) or xxx xxx Collections Installment sales (current year) xxx Repossessed accounts or IAR defaulted xxx Write-off IAR, ending xxx 4) Gain or Loss on Repossession COMPUTATION OF FV OF REPOSSESSED MERCHANDISE: Estimated Selling Price P xxx
Reconditioning cost ( xxx)
Normal Profit ( xxx)
Cost to sell ( xxx)
FV OF REPOSSESSED MERCHANDISE AFTER RECONDITIONING COST P xxx * If it is BEFORE reconditioning cost, IGNORE the amount of reconditioning cost.
* If the problem is SILENT if the estimated selling price is before or after recondition cost, deduct the reconditioning cost
* If the problem says ESTIMATED WHOLESALE VALUE or APPRAISED VALUE, the normal profit should not be deducted anymore.
COMPUTATION OF GAIN (LOSS) ON REPOSSESSION:
* If Unrecovered Cost > FV or Repossessed Merchandise = LOSS ON REPOSSESSION * If Unrecovered Cost < FV of Repossessed Merchandise = GAIN ON REPOSSESSION
Journal entry:
Repossessed Merchandise @ FV xxx
DGP xxx
Loss on Repossession xxx
IAR – defaulted xxx
Gain on Respossession (if any) xxx
4) Write-off Journal entry:
Regular Sales
Allowance on Doubtful accounts xxx
Accounts Receivable xxx
Installement Sales
DGP xxx
Loss on Write-off xxx
IAR xxx
5) Deferred Gross Profit
COMPUTATION OF DEFERRED GROSS PROFIT:
Installment Sales P xxx
Cost of Installment Sales ( xxx)
DGP P xxx
DGP
RGP (Collection x GP rate) xxx xxx DGP, beginning DGP on Repossessed Merchandise xxx
DGP on Write-off xxx
xxx DGP, ending
FV of Repossessed Merchandise P xxx
Less: Unrecovered cost
1) IAR-defaulted P xxx
Less: DGP related to receivables ( xxx )
or
2) IAR x cost ratio xxx ( xxx)
COMPUTE GP RATE FOR INSTALLMENT SALES: IS – prior year IS – current year
DGP DGP IAR IS 6) Trade-In 1) Downpayment – Cash P xxx 2)
Downpayment – FV of merchandise traded in xxx 3)
Collection – Interest xxx
TOTAL COLLECTION P xxx
X GP Rate * %
RGP P xxx
COMPUTE FOR GP RATE OF MERCHANDISE TRADED IN:
Installments Sales P xxx
Less: Over allowance (xxx)
Add: Under allowance (if any) xxx
ADJUSTED SALES P xxx
Less: Cost of Sales (xxx)
GP P xxx
* Trade in value of merchandise > FV of merchandise traded in = OVERALLOWANCE * Trade in value of merchandise < FV of merchandise traded in = UNDERALLOWANCE
NOTE: If the trade in allowance is deducted from the invoice price before computing the amount of down payment if the problem says that the trade-in is part of the down payment.
or
[(Adjusted sales – FV of RM) x % of DP] = Amount of Downpayment
Gross Profit
UNIT IV: LONG TERM CONSTRUCTION CONTRACTS Lecture Notes
Long-term Construction Contracts
1) Contract Price = Progress Billings
2) Contract Price + Escalation Clause – Penalty Clause = Progress Billings 3) Two Methods:
Percentage of Completion Method
– With dependable estimates are available – a.k.a. cost to cost model
20x2 20x3 20x4 a) Contract Price P xxx P xxx P xxx b) Cost Incurred (to date) P xxx P xxx P xxx c) Estimated costs to complete xxx xxx xxx d) Total Estimated costs (a + b) xxx xxx xxx e) Total Estimated Gross Profit (a – d) P xxx P xxx P xxx f) Multiply by Percentage of Completion
(b/d) x % x % x %
Gross Profit to date (e x f) P xxx P xxx P xxx Gross Profit (previous year) - ( xxx ) ( xxx ) Gross Profit (current year) P xxx P xxx P xxx
20x2 20x3 20x4 a) Cost Incurred (to date) P xxx P xxx P xxx b) Gross Profit (to date) xxx xxx xxx c) Construction In Progress P xxx P xxx P xxx d) Progress Billings (to date) xxx xxx xxx DUE FROM/DUE TO P xxx P xxx P xxx NOTE: Due From (Current Asset), Due To (Current Liability)
Zero Profit Method
– No dependable estimates are available
20x2 20x3 20x4 a) Contract Price P xxx P xxx P xxx b) Cost Incurred (to date) P xxx P xxx P xxx c) Estimated costs to complete xxx xxx xxx d) Total Estimated costs (a + b) xxx xxx xxx e) Total Estimated Gross Profit (a – d) P xxx P xxx P xxx f) Multiply by: 100% or 0%
x % x % x % Gross Profit to date (e x f) P xxx P xxx P xxx Gross Profit (previous year) - ( xxx ) ( xxx ) Gross Profit (current year) P xxx P xxx P xxx NOTE: No profit is recognized until the construction contract is completed.
: When it is probable that total estimated costs will exceed the contract price, the expected loss shall be treated as an expense immediately.
4) Contract Retention may be part of billing but not paid to contractor – Does not have an income element
Journal entry: Cash xxx Contract Retention xxx Accounts Receivable xxx Upon Completion: Cash xxx Contract Retention xxx 5) Mobilization fee
– Deducted from the bills of contractors in equal installments covering the project period
UNIT V: FRANCHISE ACCOUNTING Lecture Notes
FRANCHISE ACCOUNTING
1) CRS – Criteria in recognizing initial franchise fee as revenue:
(1) Cash or the down payment must be NON-REFUNDABLE. (2) Notes Receivables must be REASONABLY ASSURED. (3) Services must be SUBSTANTIALLY PERFORMED.
If the problem is silent, the best indicator of the criterion is when the company commences operation
* If any of the conditions is not followed, the entire amount of IFF becomes an unearned revenue, except when:
a) The down payment is non-refundable; and
b) The down payment represents the fair measure of the services performed. Under the two conditions, the amount of down payment becomes revenue, however, the remaining balance is considered unearned revenue.
2) If the notes receivable is REASONABLY ASSURED, the ACCRUAL METHOD is used, however, if it is NOT REASONABLY ASSURED, use INSTALLMENT METHOD.
Franchise Cost
DIRECT COST INDIRECT COST
IFF Direct Cost Expense
CFF Expense Expense
3) If the problem is silent, the notes receivable is considered reasonably assured.
Common Question for Case 3:
How much is the revenue from franchise?
1) Revenue (DP + PV) P xxx
2) CFF xxx
TOTAL REVENUE FROM FRANCHISE P xxx Case 1
– Interest bearing – NR - reasonably assured
Case 2 – Interest bearing
– NR - not reasonably assured
Case 3
– Non -Interest bearing – NR - reasonably assured
Case 4
– Non - Interest bearing – NR –not reasonably assured
Revenue (IFF) Downpayment Revenue (DP + PV) Downpayment
- Cost of Sales + Collection - Cost of Sales + Collection
Gross Profit Total Collection Gross Profit - Interest
+ CFF (Sales x %) x GP% + CFF (Sales x %) Total Collection
+ Interest Income RGP + Interest Income x GP%
- Expense + CFF (Sales x %) - Expense RGP
NET INCOME + Interest Income NET INCOME + CFF (Sales x %)
- Expense + Interest Income
NET INCOME - Expense
NET INCOME
All the conditions MUST BE met
UNIT VI: INTEREST ON JOINT VENTURES Lecture Notes
JOINT VENTURES
IFRS 11 (Jan 1, 2013)
IAS 31 (1)jointly controlled entity (2)jointly contributed (3)jointly controlled assets operations IFRS 11 (1)jointly controlled entity (2)jointly controlled operations
- Contractual
- Establishes joint control - Equity method
- SNI: Investment – Joint Venture xxx Investment Income xxx - Dividends: Cash xxx
- Sharing of control
- Unanimous consent in operating & financial decisions
Inv. Income xxx 1-19% financial asset @ FV through P&L @ FV through OCI cost method or FV method 20-49% investment in associate equity method
50 % joint control equity method 51-100% investment in subsidiary cost method
Section No. 15: Joint Ventures for SMEs 1) Equity Method
2) Cost Method 3) FV Model
COMPUTATION OF CARRYING VALUE OF INVESTMENT:
EQUITY METHOD COST METHOD FV MODEL
Purchase Price Purchase Price Purchase Price
+ Transaction Cost + Transaction Cost + Unrealized Gain + Share in Net Income - Impairment Loss - Unrealized Loss
- Dividends CV OF INVESTMENT CV OF INVESTMENT
- Amortization of UVA + Amortization of OVA
- Impairment Loss
CV OF INVESTMENT
* Share in net income – fractional year
Joint Venture - P/L Purchases Sales Expenses
CR - unadjusted Unsold merchandise Loss Profit Withdraw Invested
Loss Profit
DR CR
Due from Due to managing operations
CAPITAL Cash
Merchandise Cash
COMPUTATION OF PROFIT (LOSS):
EQUITY METHOD COST METHOD FV MODEL
+ Share in Net Income Dividends Dividends
+/- Gain (Loss) on Sale +/- Gain (Loss) on Sale + Unrealized Gain + Amortization of UVA - Impairment Loss - Unrealized Loss - Amortization of OVA PROFIT (LOSS) - Transaction Cost
- Impairment Loss +/- Gain (Loss) on Sale
PROFIT (LOSS) PROFIT (LOSS)
COMPUTATION OF HOW MUCH THE SETTLEMENT TO VENTURERS:
Investment in terms of cash or merchandise P xxx
+ Share in Net Income xxx
- Withdrawal of cash or merchandise ( xxx)
- Unsold merchandise given to venturers ( xxx)
FINAL SETTLEMENT P xxx
COMPUTATION OF TOTAL INTEREST: Joint venture –cash P xxx
+/- Settlement to (A) venture [ A, Capital + SNI – unsold merchandise given to (A) ] xxx
Settlement to (B) P xxx
+ Unsold merchandise given to (B) xxx
TOTAL INTEREST P xxx
SME’s Methods used Change to Cost Model Public price quotation (public offering) FV Model FV Model FV cannot be determined reliably without undue effort Cost Model FV Model – Use FV model, if there is a published price quotation given, if cost method is used. – Under this model, SNI is not considered in computing net income however the dividend is treated as income Cash xxx
Dividend Income xxx
– Any cost to sell is ignored. The FV of investment should only be considered. – The CV is of how much is the FV at the end of the year Cost Model – Same with FV, the entity will record dividend income Cash xxx
Equity Model
– Equity model is always equity model unless there is a change in ownership.
UNIT VII: DEBT RESTRUCTURING Lecture Notes
DEBT RESTRUCTURING
- Debt restructuring is a situation where the creditor for economic or legal reasons related to the debtor’s financial difficulties, grants to the debtor concession that would not be granted in a normal business relationship.
Types of Debt Restructuring: 1. Asset Swap
2. Equity Swap
3. Modification of terms ASSET SWAP
- Under PFRS 9 , asset swap is treated as a derecognition of a financial liability or extinguishment of an obligation
- The difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss
Carrying Value of Liability P xxx
Less: Carrying Value of Asset ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx
- Under USA GAAP, asset swap is recorded as if two transactions have taken place, namely, the sale of the asset and the extinguishment of the liability. FMV of property given P xxx
Less: CV of property given ( xxx)
GAIN ON EXCHANGE P xxx
Carrying Value of Liability P xxx
Less: FMW of Asset ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx
- PFRS 9 should be followed as this in conformity with international accounting standard EQUITY SWAP - Issuance of share capital by the debtor to the creditor in full or partial payment of an obligation Carrying Value of Liability P xxx
Less: FMV of Stock * ( xxx)
GAIN ON EXTINGUISHMENT OF DEBT P xxx * FMV of stock includes Ordinary Shares and Share Premium
- If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments issued to extinguish a financial liability shall be measured at the following amounts in order of priority:
a. Fair value of equity instruments issued b. Fair value of liability extinguished c. Carrying amount of liability extinguished MODIFICATION OF TERMS
- PFRS 9 provides that a substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old financial liability and recognition of a new financial liability
- There is substantial modification of terms, if the amount of gain on existing of debt is AT LEAST 10% of the carrying amount of the old liability
Carrying Value of Liability P xxx
Present Value of Restructured Liability* ( xxx) GAIN ON EXTINGUISHMENT OF DEBT P xxx
* PV of new or restructured liability which is discounted using the old effective rate
- Premium is recognized if the new carrying value of the old liability is greater than the new liability when there is modification