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CHAPTER 5 : PARTNERSHIP LIQUIDATION BY INSTALLMENTINSTALLMENT LIQUIDATION Involves selling of some assets, paying the liabilities of the partnership, and dividing the available cash to the partners, selling additional assets to make further payments to partners until all the assets have been sold an...

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CHAPTER 5 : PARTNERSHIP LIQUIDATION BY INSTALLMENT INSTALLMENT LIQUIDATION - Involves selling of some assets, paying the liabilities of the partnership, and dividing the available cash to the partners, selling additional assets to make further payments to partners until all the assets have been sold and all cash has been distributed to the creditors and partners. Procedures for Liquidation by Installment 1. Record the realized assets and distribute the realized gain/losses among partners using their profit and loss ratio. 2. Pay the liquidation expenses and unrecorded liabilities and distribute these among the partners 3. Pay the liabilities to outsiders. 4. Distribute cash to the partners after possible future losses have been apportioned. STATEMENT OF PARTNERSHIP LIQUIDATION - Supported by a schedule of safe installment payments to partners called SCHEDULE OF SAFE PAYMENTS that are prepared periodically. - Cash is only distributed to a partner only if he has an excess credit balance in his partnership interest. Order of priority payments: 1. Realized assets and distribution of loss 2. Payment of liquidation expense AND unrecorded liabilities 3. Payments of accounts payable 4. Payment to partners 5. Loan is inly deducted if the partner who has loan receives payment STATEMENT OF LIQUIDATION BASIC FORMAT

Steps for Schedule of Safe Payments preparation: 1. Determine the total interest of each partner. (add loan balances to the partner's capital) 2. Compute the total possible loss of the partnership to be absorbed by each partner. (total value of remaining non cash asset and cash withheld) SCHEDULE OF SAFE PAYMENTS FORMAT

*Possible Loss computation: Other unsold assets Cash Withheld Total Possible Loss

xxx xxx xxx *absorbed by profit and loss ratio

Possible (hypothetically) loss: 1. Value of remaining non cash assets 2. Cash withheld to pay for anticipated liquidation expenses and unrecorded liabilities. Cash Withheld - Cash set aside to insure payment of potential liquidation expense. - BEGINNING BALANCE OF NEXT PERIOD in Statement of Liquidation CASH BALANCE IN STATEMENT OF LIQUIDATION = PAYMENTS TO PARTNER IN SCHEDULE OF SAFE PAYMENTS [The payment to partner will result to a decrease of their capital balances for the following month] Capital Deficiency - eliminated inly BEFORE the FINAL payment to partners CASH DISTRIBUTION PROGRAM - Supporting schedule for the allocation of the maximum possible loss each time an installment distribution is contemplated - A cash predetermination plan when cash is or becomes available - Prepared PRIOR to liquidation - based on CONSERVATIVE ASSUMPTION with respect to future events Procedure to prepare Cash Distribution Program 1. Compute the loss absorption potential to each partner by dividing the total interest by the profit and loss percentage. 2. Determine the priority of payments to partners, The partner with the biggest loss absorption potential is priority. 3. Compute the amount to be paid to the partners under each priority by multiplying the excess loss absorption potential by his profit and loss percentage.

CASH DISTRIBUTION PROGRAM FORMAT

CHAPTER 6 : CORPORATE LIQUIDATION INSOLVENCY - When entity’s debt is larger than all of its assets at fair value An insolvent corporation has different alternatives such as: 1. Liquidation 2. Reorganization 3. Debt restructuring STATEMENT OF AFFAIRS - Shows available asset values and debts of the corporation - Normally prepared at the start of liquidation. Assets are classified into 3 categories: 1. Assets pledged to fully secured creditors – when net realizable value of asset exceeds secured liability 2. Assets pledged to partially secured creditors – when net realizable value of asset is less than secured liability 3. Free Assets – Asset that is not pledged as security Liabilities are classified into 4 categories: 1. Unsecured liabilities with priority – administrative expense, wages, salaries, taxes 2. Fully secured creditors – ERV of asset ≥ Liability 3. Partially secured creditors – ERV of asset ≤ Liability 4. Unsecured creditors – Other liabilities that has no lien on any asset STATEMENT OF AFFAIRS FORMAT

*Expected Recovery Percentage = Estimated Amounts to be Recovered by Creditors

N et F ree Assets T otal U nsecured C laims

STATEMENT OF REALIZATION AND LIQUIDATION - Shows how the receiver managed the assets of the corporation on behalf of the creditors. ….cont

SPECIAL REVENUE RECOGNITION TOPICS: Installment Accounting Long Term Construction Contracts Franchises CHAPTER 8 : INSTALLMENT ACCOUNTING Two general approaches: 1. GROSS PROFIT RECOGNIZED AT TIME OF SALE - AR is debited, Sales is credited - Require recognition of all expenses relating to the sales of the same period 2. GROSS PROFIT RECOGNIZED IN PERIOD WHICH CASH IS COLLECTED - Amount of cash collected become the bases for GROSS PROFIT RECOGNITION Alternative Procedures: a. COST RECOVERY METHOD - Gross Profit is NOT recognized until COLLECTION = COST OF GOODS SOLD - Interest and Principal are treated as recovery of the cost - After covering all cost, collections are recognized as gross profit - Applicable in sales of services b. GROSS PROFIT REALIZATION METHOD - First Collection are realized as gross profit - After recognition of FULL profit, collections are treated as recovery of cost - Lacks conservatism; seldom used c. INSTALLMENT METHOD - Collection recognized as partial recovery of cost and partial realization of profit in the same proportion of their effect on the original price - Aims to spread gross profit in the installment over the life of the contract - Frequently used in practice; Acceptable for income tax purposes INSTALLMENT METHOD OF ACCOUNTING - Deferred Gross Profit depends on the GROSS PROFIT RATE and the CASH COLLECTION OF INSTALLMENT RECEIVABLES. Selling Price - Cost Of Sale = Deferred Gross Profit/Unrealized Gross Profit Gross Profit Rate X Balance Of Installment Receivables = Balance Deferred Profit GROSS P ROF IT GROSS PROFIT RATE = SELLIN G P RIC E

EXPENSES ON INSTALLMENT SALES - Since deferral recognition of gross profit constitutes a delayed recognition on both sales revenue and cost of goods sold, it requires the consistency of the treatment to related expenses to be examined INTEREST ON INSTALLMENT CONTRACTS RECEIVABLE - Since the collection period for installment sales is usually long and may involve large receivable balances, interest is often charged to be paid concurrently with each installment payment. 1. EQUAL PERIOD PAYMENTS Periodic Payment = 2. INTEREST

Original Balance of Installment Contracts Receivable P resent values of Annuity

REALIZED GROSS PROFIT

SAMPLE FORMAT COMPUTATION OF NET INCOME

ACCOUNTING PROCEDURES UNDER INSTALLMENT METHOD 1. INSTALLMENT SALES OF CONVENTIONAL MERCHANDISE - Sales, Receivable, and Cost of Sales have separate account designations for  installments I.e. Installment Sales vs Sales; Installment Contracts Receivable vs Accounts Receivable; Cost of Installment Sales vs Cost of Sales - Installment Receivable and Deferred Gross Profit must be maintained separately according to year of sale - Journalize Deferred Gross Profit at the date of sale or end of period - Realized Gross Profit on Installment Sales should be periodically recognized in proportion to current collection of Installment Receivable 2. INSTALLMENT SALES OF REAL ESTATE

CHAPTER 9 : LONG TERM CONSTRUCTION CONTRACTS Long Term Construction Contracts - Construction project that extends through more than one accounting period. - Both parties agree contract price on advance. CONSTRUCTION CONTRACTS - PAS 11, contacts specifically negotiated for the construction of an asset or a combination of assets closely interrelated or interdependent in terms of design, technology, and its ultimate purpose or use. FIXED PRICE CONTRACT Contractor agrees to a fixed contract price or fixed rate per unit of output, to which some is subject to cost escalation clauses.

COST PLUS CONTRACT Contractor is reimbursed for allowable or defined costs, plus a percentage of the cost or a fixed fee.

Cost Revenue - Revenue is measured at fair value of the consideration received or receivable. - Includes amount initially agreed in the contract. - May include incentive payments Construction Cost - Cost directly related to the specific contract Types: 1. COST INCURRED TO DATE - Precontract costs and cost incurred after contract acceptance - Precontract cost become cost incurred to date only when contract is accepted. - Cost incurred after acceptance are cost incurred toward completion of project, credited in the Construction in Progress account. 2. ESTIMATED COST TO COMPLETE - Anticipated costs of material, labor, subcontracting cost, and indirect cost required to complete project Subcontracting Cost - Cost incurred when principal contractor hires other contractors to perform part of the project. - Included in the Construction in Progress account. Cost of Materials Purchased in Advance of Their Use - Not treated as cost incurred UNTIL materials have been used in production. COMBINING AND SEGEMENTING CONTRACTS - Contracts are combined if they are closely related, asset are singly negotiated, part of a single project with overall profit margin, and performed continuously. - Contracts are segmented if there are separate proposals for separate components of a project, assets are subject to separate negotiation, and cost and revenue of each asset can be separately identified. COMPUTATION AND RECOGNITION OF CONSTRUCTION REVENUE PERCENTAGE TO COMPLETION METHOD - Used when estimates are reliable - Gross profit is recognized as construction progresses - Revenue = Construction Cost + CIP 1. Input measures (Cost to Cost) - Used for one large project

D EGREE OF COM P LET ION =

C ost Incurred T otal Estimated Cost

REALIZED GROSS P ROF IT = Degree of Completion x Gross P rof it 2. Output measures (Units of Delivery) - Used for several units project - Revenue is recognized when a unit is completed, delivered, and accepted by the buyer, although the entire project is not yet finished. Year Revenue Total Revenue x % completion Cost (XXX) Gross Profit XXX

ZERO PROFIT METHOD - Used when estimates are not reliable - Revenue = Construction Cost...