ACCO 30013 - Accounting for Special Transactions PDF

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ACCO 30013 – Accounting for Special TransactionsINSTRUCTIONAL MATERIALSFORACCOUNTING FOR SPECIALTRANSACTIONS(ACCO 30013)COMPILED BY:REYNAN C. MURTOSInstructorACCO 30013 – Accounting for Special Transactions OVERVIEW TABLE OF CONTENTS COURSE OUTCOMES ACCOUNTING FOR PARTNERSHIP CORPORATE LIQUIDATION A...

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INSTRUCTIONAL MATERIALS FOR ACCOUNTING FOR SPECIAL TRANSACTIONS (ACCO 30013)

COMPILED BY: REYNAN C. MURTOS Instructor

COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

TABLE OF CONTENTS

OVERVIEW .......................................................................................................................... 3 COURSE OUTCOMES ......................................................................................................... 4 ACCOUNTING FOR PARTNERSHIP ................................................................................... 5 CORPORATE LIQUIDATION.............................................................................................. 25 ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY ......................................... 32 REVENUE RECOGNITION: SALE OF GOODS AND SERVICES ...................................... 39 REVENUE RECOGNITION: CONSIGNMENT SALES ........................................................ 52 REVENUE RECOGNITION: INSTALLMENT SALES .......................................................... 55 REVENUE RECOGNITION: FRANCHISING ...................................................................... 59 REVENUE RECOGNITION: LONG-TERM CONSTRUCTION CONTRACT ....................... 63 REFERENCES ................................................................................................................... 68

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

OVERVIEW This course deals with specialized accounting problems likely to be encountered by accountants. The study of the various topics in this course is based upon fundamental valuation accounting and accounting theory as applied to special income and expense recognition method and expanded business operations. This course also includes specialized problems in partnership accounting; corporate liquidation; accounting for home office, branch and agency; and revenue from contracts with customers (sale of goods and services, consignment, installment sales, long-term construction contracts, and franchising).

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

COURSE OUTCOMES Upon completion of the course, the students will be able to: a. Apply the law on partnerships and understand the essential elements and general aspects in accounting for partnership formation, division of profits and losses, change in ownership, death and retirement of a partner, and liquidation of partnership. b. Apply the fundamental concepts in accounting for home office, branch, and agency. c. Apply the fundamental concepts of revenue recognition in sale of goods and services, consignment sales, installment sales, long-term construction contracts, and franchising.

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

ACCOUNTING FOR PARTNERSHIP Learning Objectives After discussing the topics, the learner will be able to: • Define different types of partnership and kinds of partners; • Understand the initial investment valuation and recognition; • Identify the different method of recording initial investments; • Journalize the required entries in the books of the partnership; • Prepare the statement of financial position immediately after formation; • Recognize and measure partnership income and expenses; • Identify the different methods of allocating partnership profit and loss; • Journalize profit or loss distribution to partners; • Identify errors and misstatements in the financial statements; • Define and describe partnership dissolution; • Identify the different reasons of partnership dissolution; • Account for the admission of a partner by purchase and by investment; • Determine the partners’ equity upon withdrawal, retirement, death, or incapacity; • Record the incorporation of a partnership; • Define and describe partnership liquidation; • Identify and explain the causes of partnership liquidation; • Understand the nature of lump-sum and installment liquidation; • Understand and apply the concepts of marshalling of assets and right of offset; • Journalize the realization of non-cash assets, payment of liabilities and final settlement to partners in lump sum and installment liquidation; and • Prepare statement of liquidation with supporting schedules of cash distribution (periodic schedule of payment and cash priority program). Partnership Formation Partnership – is a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing profits among themselves. Characteristics of a Partnership • Co-ownership of contributed capital – Assets contributed to the partnership become assets of the partnership by virtue of its separate legal personality. • Income Tax – Partnership except General Professional Partnership (like CPAs, lawyers, etc.) are subject to income tax rate of 30% based on net income. • Limited Life – A partnership may be dissolved at any time by action of the partners or by operation of law. • Legal Entity – A partnership has a legal personality separate and distinct from that each of the partners. • Mutual Agency – Any partner may act as an agent of the partnership in conducting its affairs. • Mutual Participation in Profit – A partner has the right to share in partnership profits. • Unlimited Liability – The personal assets of any partner may be used to satisfy the creditors’ claims in the partnership if the firm’s assets are not enough to settle the liabilities to outsiders. Advantages of a Partnership • It is easy and inexpensive to organize compared with a corporation.

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

• • • • •

The unlimited liability of the partners makes it reliable from the point of view of the creditors. The combined personal credit of the partners offers better opportunity for obtaining additional capital than a sole proprietorship. The participation in the business by more than one person makes possible for a closer supervision of all its activities. The direct gain to the partners is an incentive to give close attention to the business. The personal element in the character of the partners is retained.

Disadvantages of a Partnership • The personal liability of a partner for partnership debts deters many from investing capital in a partnership. • A partner may be subject to a personal liability for the wrongful acts or omissions of his associates. • It is less stable because it can be easily dissolved. • There is divided authority among partners. • There is a constant likelihood of dissension and disagreement when each of the partners has the same authority in the management of the partnership. • There is difficulty in disposing of interest since no formal established marketplace exists for the sale of partnership interest. Types of Partnership 1. As to Activity a. Trading Partnership – one whose main activity is the manufacture or the purchase and sale of goods. b. Non-Trading Partnership – one organized for the purpose of rendering services. 2. As to Object a. Universal Partnership • Universal Partnership of all Present Property – one in which the partners contribute all the properties which actually belong to each of them at the time of formation. All assets contributed to the partnership and subsequent acquisitions become common partnership assets. • Universal Partnership of all Profit – one which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable property or immovable property which each of the partners may possess at the time of formation. Partnership assets consist of assets acquired during the life of the partnership and only the usufruct or use of the assets contributed at the time of formation. The original movable or immovable property contributed do not become common partnership assets. b. Particular Partnership – one which has for its object determinate things, their use or fruits, or a specific undertaking or the exercise of a profession or vocation. 3. As to Liability of Partners a. General Partnership – one consisting of general partners who are liable prorata and sometimes solidarily with their separate property for partnership debts. b. Limited Partnership – one formed by two or more persons having as members one or more general partners and one or more limited partners who as such are not bound by the obligations of the partners.

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

4. As to Duration a. Partnership at Will – one for which no time is specified and is not formed for a particular undertaking or venture and which may be terminated any time by mutual agreement of the partners or by the will of one alone. b. Partnership with a Fixed Term – one in which the term or period for which the partnership is to exist is agreed upon or one formed for a particular undertaking and upon the expiration of that term or completion of the particular undertaking, the partnership is dissolved unless continued by the partners. 5. As to Representation to Others a. Ordinary Partnership – one which actually exists among the partners and also as to third persons. b. Partnership by Estoppel – one which in reality is not a partnership but is considered partnership only in relation to those who by their conduct or omission are precluded to deny or disprove the partnership’s existence. 6. As to Legality of Existence a. De Jure Partnership – one which has complied with all the requirements for its establishment. b. De Facto Partnership – one which has failed to comply with one or more of the legal requirements for its establishment. 7. As to Publicity a. Secret Partnership – one wherein the existence of certain persons as partners is not made known to the public by any of the partners. b. Open Partnership – one wherein the existence of certain persons as partners is made known to the public by the members of the firm. Kinds of Partners 1. As to Contribution a. Capitalist Partner – one who contributes capital in the form of money or property. b. Industrial Partner – one who contributes industry, labor, talent, skills or service. c. Capitalist Industrial Partner – one who contributes money, property and industry. 2. As to Liability a. General Partner – one whose liability to third persons extends to his separate (private) property. b. Limited Partner – one whose liability to third persons is limited only to the extent of his capital contribution into the partnership. 3. As to Management a. Managing Partner – one who manages actively the business of the partnership. b. Silent Partner – one who does not participate in the management of the partnership affairs. 4. Other Classifications a. Liquidating Partner – one who takes charge of the winding up of partnership affairs upon dissolution. b. Nominal Partner – one who is not really a partner, not being a party to the partnership agreement but is made liable as a partner for the protection of innocent third persons. c. Ostensible Partner – one who takes active part in the management of the partnership and is known to the public as a partner in the business.

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

d. Secret Partner – one who takes active part in the management of the business but whose connection with the partnership in concealed or unknown to the public. e. Dormant Partner – one who does not take active part in the management of the business and is not known to the public as a partner. He is both a silent and a secret partner. Articles of Co-Partnership A partnership is created by an oral or a written agreement. Since partnerships are required to be registered with the Securities and Exchange Commissions (SEC), it is necessary that the agreement be in writing. In this case, misunderstanding and disputes among partners relative to the nature and terms of the contract may be avoided or minimized. The written agreement between or among partners which governs the formation, operation and dissolution of the partnership is referred to as the “Articles of Co-Partnership”. The Articles of Co-Partnership normally includes the following: • Name of the partnership • Name and address of the partners • Rights and responsibilities if each partner • The purpose for which the partnership is formed • The initial and additional investments to be made by each of the partner • The withdrawals that maybe made by partners and the limitations, if any • The profit and loss ratio • Procedures on dissolving the partnership Accounting for Partnership As compared to other forms of business organization, accounting for partnership differs with regard to capital accounts. In a partnership, there should be as many capital accounts and as many drawing accounts as there are partners. Example: In ABC Partnership, the partners are AAA, BBB and CCC. The capital accounts are: AAA Capital, BBB Capital and CCC Capital. The drawing accounts are: AAA Drawing, BBB Drawing and CCC Drawing. The transactions affecting the capital and drawing accounts of each partner are: CAPITAL Permanent withdrawal (decrease) of capital Original investment by a partner Share in the partnership profit from Share in the partnership loss from operations operations Debit balance of drawing account closed to Additional investment by a partner capital DRAWING Personal withdrawal by a partner in Share in partnership profit from operation anticipation of profits (temporary withdrawal (this may be credited directly to capital) of capital) Share in partnership loss from operation (this may be debited directly to capital) Aside from the contributions, the partnership may acquire additional financing from its present partners. Any loan between a partner and the partnership is always accompanied by a proper loan documentation such as promissory note. A loan from partner is shown as “Loan Payable, Advances from Partner, Due to Partner” on the partnership books similar to any other loan. Unless all partners agree otherwise, the partnership is obligated to pay the

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

individual partner interest on the loan and such interest is reported in the Income Statement of the partnership as an “Expense”. On the other hand, the partnership may also lend money to a partner. In this case, the partnership records a “Loan Receivable, Advances to Partner, Due from Partner”. Again, unless otherwise agree by the partners, the loan bears interest and such interest is reported in the Income Statement of the partnership as “Income”. Partnership can be formed by (at least): 1. One individual and one individual 2. One individual and one sole proprietorship 3. One sole proprietorship and one sole proprietorship Partners Contributions Partners may contribute cash, property or industry to the partnership. Assets contributions are debited to the appropriate asset accounts and credited to the capital accounts of the partners. Below are the rules: • If the asset contributed is cash, it is recorded in the partnership books at face value. • If the assets contributed are in the form of properties or non-cash assets, such are recorded at agreed values. In the absence of an agreement, such are recorded at fair market values. • If the contribution is service, a memorandum entry is prepared. In some instances, one or two or all of the partners are former sole proprietors who decide to unite their assets and liabilities to form a stronger enterprise. In such situation, the new partnership may open a new set of books or may continue using the books of one of the sole proprietors. If a new set of books will be used, entries are prepared to record the contributions. However, if the books of one of the sole proprietors are used, the following procedures shall be followed: 1. Adjust the books of the sole proprietor which shall be used as partnership books. 2. Record the investment of the other partners. Capital Credit is Different from Capital Contribution Prior to recording partners’ initial contributions to the partnership, the individual partners first agree not only on the valuation of asset contributions but also on their capital credit. The “capital credit” of each partner is the percentage of equity that each of them will have in the net assets of the newly formed partnership. Generally, the capital share of a partner is proportionate to his capital contribution. However, in recognition of intangible factors such as a partner’s special expertise, established clientele or necessary business connections, partners may agree to a division of capital that is not proportionate to their capital contributions. This will give rise to allowing “BONUS” on initial investments. Partnership Operation Accounting for partnership operations is essentially the same as accounting for the operations of any other forms of business organization. Sale of merchandise on account is debited to Accounts Receivable and credited to Sales. Collection of accounts is debited to Cash and credited to Accounts Receivable. The purchase of merchandise on account is recorded by a debit to Purchases and credit to Accounts Payable. Payment of accounts is debited to Accounts Payable and credited to Cash. Payment of expenses is debited to Expenses and credited to Cash.

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

At the end of the accounting period, adjustments are made for merchandise inventory, accruals, prepayments, provisions for uncollectible accounts and provision for depreciation. Profit is determined in the usual manner that is by matching revenues and expenses. Special Problems in Partnership Accounting 1. Closing Entries 2. Distribution of Profits and Losses 3. Preparation of Worksheet/Working Paper 4. Preparation of Financial Statements Distribution of Profits and Losses Since a partnership is composed of two or more persons, there should be a clear indication on how the partnership profit or loss be equitably divided among the partners. The following are the factors to be considered in establishing a just and fair profit and loss sharing agreement: • Services rendered by the partners to the partnership. Salaries are given to partners proportionate to time devoted to the organization. Those who devote more time should have greater salary share. (Salaries). • Amount of capital contributed by the partners. Interest on capital contribution is allowed to each partner to give recognition to the differences in capital contributed to the partnership. Thus, a partner with highest capital contribution gets the highest interest share. (Interest on Capital – Beginning, Ending or Average). • Entrepreneurship ability or managerial skills of the partners. Bonus is allowed to partner when the partnership realizes profits in order to give recognition to managerial skills. (Bonus) Rules in Dividing Profits and Losses The following is the list of rules in the division of profits and losses: 1. As to Capitalist Partners a. Division of Profits • In accordance with agreement • In the absence of an agreement, division of profits is in accordance with capital contribution b. Division of Losses • In accordance with agreement • If only the division of profits is agreed upon, then the division of losses will follow the same proportion • In In the absence of an agreement, division of profits is in accordance with capital contribution 2. As to Industrial Partners a. Division of Profits • In accordance with agreement b. Division of Losses • In accordance with agreement • In the absence of an agreement, the industrial partner shall have no share in his character as an industrial partner

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COLLEGE OF ACCOUNTANCY AND FINANCE ACCO 30013 – Accounting for Special Transactions

Correction of Errors T...