Advanced-Accounting-Part 1-Dayag-2015-Chapter-11 PDF

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Summary

Chapter 11Problem I 1. Oil Pipeline.......................................... ......18,000,Cash............................................. ......18,000,Oil Pipeline operating expenses (30% x P12,000,000)..............3,600,Cash............................................. ......3,600,Cash............

Description

Chapter 11 Problem I 1. Oil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... .

18,000,000

Oil Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... .

3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .... Revenue from Oil Pipeline (30% x P19,800,000) . . . . . . . . . . . .....

5,940,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . .... Accumulated depreciation – oil pipeline. . . . . . . . . . . . . . . . . . . . .

900,000

18,000,000

3,600,000

5,940,000

900,000

Thus, the share of X Inc. in net income of the joint operations would be as follows:

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Less: Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... Amortization expense: P18,000,000 ( 30%) / 20 years. . . . . . . . P60,000,000 (100%) / 20 years. . . . . . . . Net Income of the Joint Operation. . . . . . . . . . . . . . . . . . . . . . . . .... Multiplied by: 30% interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proportionat e Share (30%) P 5,940,000 3,600,000

Total (100% based) P19,800,00 0 12,000,000

900,000 _3,000,000

__________ P 1,440,000

P 4,800,000 ______30% P 1,440,000

Problem II 1. The following journal entries would be recorded: Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Steel Pipes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . ...

18,000,000 13,200,000 3,360,000 1,440,000

The following should be observed in relation to the above journal entry: • X should recognize a gain of P3,360,000 [70% x (P18,000,000 – P13,200,000)]* •

A portion of the gain can be recognized on the contribution of assets to a joint operation. PFRS 11 indicates the following:

When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation. When such transactions provide evidence of a reduction in the net realizable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognized fully by the joint operator. •

A gain can be recognized when the significant risks and rewards have been transferred. Pipeline operating expenses (30% x P12,000,000). . . . . . . . . . . . ..... Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... .

3,600,000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .... Revenue from Pipeline (30% x P19,800,000) . . . . . . . . . . . . . . . . . . . Amortization expense – pipeline (P18,000,000/20 years). . . . . . . .... Accumulated depreciation pipeline. . . . . . . . . . . . . . . . . . . . . . .

5,940,000

Unrealized gain – contra account (P1,440,000/ 20 years). . . . . . . ... Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72,000

3,600,000

5,940,000 900,000 900,000

72,000

The following should be observed in relation to the above journal entry: • The joint operator’s own interest in the gain is recognized over the life of the asset. •

The unrealized gain is a contra account to the pipeline account; it should not be reported as a deferred gain on the liability side of the balance sheet. When X Inc., prepares a balance sheet, the unrealized gain will be offset against the pipeline such that the pipeline’s net cost is P16,560,000 (P18,000,000 – P1,440,000). As the net cost of the pipeline is being amortized, the unrealized gain account is also being amortized. In effect, the unrealized gain is being brought into income over the life of the pipeline. As the pipeline is being used to generate revenue on transactions with outsiders, the operator’s own share of the unrealized gain is being recognized in net income. This is similar to what happened in Chapter 18 (Intercompany Sales of Property and Equipment) of Volume II, when the unrealized profits from an intercompany sale of a depreciable asset were realized over the life of the depreciable asset.

Thus, the share of X Inc. in net income of the joint operation would be as follows: Revenue (30% x P19,800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ Less: Operating expenses (30% x P12,000,000) . . . . . . . . . . . . . . . . . . . . . . . . . ....... Amortization expense: P60,000,000 x 30% = P18,000,000 / 20 years. . . . ....... Add: Gain on steel pipes [70%* x (P18,000,000 – P13,200,000)] . . . . . . . . . . . . ... .. Realized gain – amortization**(P1,440,000/20 years). . . . . . . . . . . . . . . . . . . . . . . Net Income of X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......

P 5,940,000 3,600,000 900,000 3,360,000 _____72,000 P 4,872,000

* PFRS 11 states that: “When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, as such, the joint operator shall recognize gains and losses resulting from such a transaction only to the *extent of the other parties’ interests in the joint operation.” ** Sales price of P18,000,000 – P13,200,000, cost of steel pipes = P4,800,000 x 30% = P1,440,000

2. refer to the above entry Gain on steel pipes (70%* of gain). . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain – contra account (30% of gain, P4,800,000) . ...

P3,360,000

Amortization expense – pipeline (P18,000,000/20 years). . . . . . . .... Less: Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... Amortization expense for the year…………………………………………

P 900,0000 ____72,000

Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Less: Net unrealized gain, end of 20x4: Unrealized gain – contra account (30% of gain, P4,800,000) . . Less: Amortization for 20x4…………………………………………… Net cost of Oil Pipeline……………………………………………………….

P18,000,00 0

P1,440,000

3.

P 828,000

4.

Problem III 1. • Contributions of cash by the operators Cash KK Company Cerise Company Contribution by joint operators.

P1,440,000 ____72,000

__1,368,00 0 P16,632,00 0

360,000 180,000 180,000

• Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96,000 Cash 60,000 Loans payable – machinery and equipment 36,000 Contribution by joint operators. Materials Accounts payable Acquisition of materials. • Labor incurrence Payroll Cash

78,000 78,000

86,400 84,000

Accrued payroll Annual labor.

2,400

• Loans from the bank Cash Bank loans payable Amount borrowed.

72,000 72,000

• Repayment of loan – machinery and equipment and other factory expenses Loan payable – machinery and equipment 12,000 Cash 12,000 Partial payment of loan. Accounts payable Cash Payment of trade creditors.

50,400 50,400

Factory overhead control – heat, light and power Cash Payment of manufacturing expenses such as heat, light and power. • Depreciation of machinery and equipment Factory overhead control – depreciation Accumulated depreciation Depreciation of equipment.

156,000 156,000

9,600 9,600

• Transfer of materials, labor and overhead to Work-in-Process Work-in-process 309,600 Payroll Materials Factory overhead control – heat, light and power Factory overhead control – depreciation Allocation of costs to work-in-process • Transfer of Work-in-Process to Finished Goods Inventory. Finished goods Work-in-process Allocation to finished goods

86,400 57,600 156,000 9,600

216,000 216,000

• Transfer of Finished Goods Inventory to Joint Operators throughout the year KK Company 96,000 DD Company 96,000 Finished goods 192,000 Delivery of output to joint operators.

Contribution – Drei 180,000 Contribution – Cerise 180,000 Bank loan 60,000

2.

Cash 60,000

Machinery and equipment

84,000

Labor

12,000

Machinery and equipment

50,400 Accounts payable 156,000 Factory overhead control Balance 12/31/x4

Labor 86,400 Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600

Work-in-Process 216,000

to Finished Goods

3. a. Total assets, P282,000 b. KK’s investment, P84,000 c. DD’s investment, P84,000 December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment Less: Accumulated depreciation Total Assets Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 Cost of inventory distributed DD Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity

P 57,600 24,000 93,600 20,400 P 195,600 P 96,000 9,600

P

2,400 27,600

P 60,000 24,000

P 180,000 ( 96,000) P 180,000 ( 96,000)

86,400 P282,000

P 30,000

__84,000 P 114,000 168,000 P282,000

P 84,000

P 84,000 P168,000

Problem IV AACompany accounts for its interest in joint operation as follows: January 1, 20x5, Shell Company records its interest in the joint operation, the asset cash being distinguished as an asset in a joint operation by the use of (JO): Cash in Joint Operation (JO). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Contribution of cash to joint operations.

6,750,000 6,750,000

On December 31, 20x5, the joint operation has used the cash to purchase various assets, obtain loans, produce inventory and incur expenses. As a joint contributor of 50% of the cash into the joint operation, Shell Company is entitled to 50% of all the assets, liabilities, expenses and output of the joint operation. From the balance sheet of the joint operation, it should be noted on the following items: Net assets of the joint operation (P12,915,000 – P5,715,000)……..P 7,200,000 Inventory…………………………………………………………………… 900,000 From the costs incurred information, it can be seen that the joint operation generated P7,200,000 worth of inventory. If only P900,000 is still on hand in the joint operation, then P6,300,000 worth of inventory must have been transferred to each joint operators of P3,150,000. The eventual transfer of inventory to the joint operators, the joint operation decreases the inventory balance and also decreases the equity contribution (net assets) of the joint operators. The contributions section of the balance sheet of the joint operation at the end of the period, after the transfer of inventory, is as follows (refer to the balance sheet above): Shell Company initial contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Petron Company initial contribution . . . . . . . . . . . . . . . . . . . . . . . . . ... Less: Inventory transferred. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 6,750,000 __3,150,000

P 3,600,000

P6,750,000 __3,150,000

_ 3,600,000 P 7,200,000

On December 31, 20x5, Shell Company makes the following entry in its records to replace “Cash in JO” with a 50% share of each of the accounts — assets and liabilities — in the balance sheet of the joint operation. 2. P5,805,000. The entry also recognizes the inventory of P3,150,000 transferred to Shell Company from the joint operation. Finished goods inventory in JO (P900,000 x 50% . . . . . . . . .. . . ... Work-in-Process inventory in JO (P2,925,000 x 50%). . . . . . . . . . . ... Materials inventory in JO (P450,000 x 50%). . . . . . . . . . . . . . . . . .... . Heavy Machineries in JO (P6,750,000 x 50%) . . . . . . . . . . . . . . . . . . . Finished goods inventory (P6,300,000 x 50%). . . . . . . . . . . . . . . ..... Accounts payable in JO (P675,000 x 50%) . . . . . . . . . . . . . . . . . . Accrued payroll in JO (P540,000 x 50%). . . . . . . . . . . . . . . . . . .. Loans payable in JO (P4,500,000 x 50%). . . . . . . . . . . . . . . . . . ... Cash in JO [P6,750,000 – (P1,890,000 x 50%] . . . . . . . . . . . . .

450,000 1,462,500 225,000 3,375,000 3,150,000 337,500 270,000 2,250,000 5,805,000

Note that Shell Company’s share of cash in the joint operation is calculated by finding the difference between the share at the beginning of the period, the initial contribution in this example, and the share at the end of the period. Problem V 1. The joint operator, Entity A account for their interests in the joint operation as follows: Entity X—in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

4,800,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

4,800,000

8,400,000

Entity Y—in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

7,200,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

7,200,000

8,400,000

Problem VI The joint operator, Entity K account for their interests in the joint operation as follows: January 1, 20x4 (P12,000,000 / 5 = P2,400,000) Property, plant and equipment (interest in an aircraft) Cash To recognize the purchase of an ownership-interest in a jointly controlled aircraft.

In 20x4 Cash Profit or loss (rental income) To recognize income earned in renting to others the use of the aircraft in 20x4.

2,400,000 2,400,000

12,000 12,000

Profit or loss (aircraft operating expenses) Cash To recognize the costs of running an aircraft in 20x4.

180,000

Profit or loss (depreciation expense) Accumulated depreciation (interest in an aircraft To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5 operators = P120,000 share for each joint operator.

120,000

Problem VII

180,000

120,000

1. The following are the summaries of the above transactions for a joint operation in the form of a partnership: Event a. b.

c. d. e.

Investment in Joint Operation Dr. Cr. P 12,000 120,000

AA Dr.

BB Cr. P12,000 120,000

Dr.

CC Cr.

Dr.

Cr.

P 6,000

6,000 180,000

120,000 P588,000

P60,000

P204,000 3,600

P312,000 3,600

___3,000

________

________

______

P72,000 3,600 6,000 _______

10,800

f. *

________

6,000 ___3,000

NI**

P318,000 _297,000 P597,000

P597,000 ________ P597,000

P210,600 ________ P210,600

P252,000 __112,200 P364,200

P315,600 ________ P315,600

P 60,000 _147,000 P195,000

P81,600 _______ P81,600

_______ P 16,800 31,800 P48,600

_______ P597,000

________ P597,000

_153,600 P364,200

________ P364,200

________ P315,600

_120,600 P315,600

_______ P81,600

_33,000 P81,600

Cash** * Settlement Totals

* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000. **NI – Net Income Allocation AA Allowance for cleaning-up operations Commission: Aljon: 40% of P204,000

BB

CC P 3,000

P81,600

Elerie: 40% of P312,000 Mac: 40% of P72,000

P 3,000 81,600

P124,80 0 28,800

10,20 30,600 0 _______ P112,20 P135,00 P31,80 Total 0 0 0 **Total credits of P597,000 – Total debits of P318,000 = P279,000, net income. Balance (75%: 25%)

Total

124,800 28,800 40,80 0 P279,00 0

2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows: AA, capital 153,600 BB, capital 120,600 CC, capital 33,000 Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations. Problem VIII 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment

Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)

P2,016,000 P 1,080,000 324,000 P 72,000 288,000 180,000 ( 252,000) ( 360,000)

1,404,000 612,000

P

Positive excess: Goodwill (excess of cost over fair value)

252,000 P 360,000

The over/under valuation of assets and liabilities are summarized as follows: AA Co. AA Co. (Over) Under Book value Fair value Valuation Inventories (sold in 20x4) P1,200,000 P1,440,000 P 240,000 Land 1,080,000 2,040,000 960,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000 600,000 Equipment – net ( 7 year remaining life) 1,440,000 600,000 ( 840,000) (1,320,000 Bonds payable (due January 1, 20x9) ( 1,200,000) ) ( 120,000) Net P4,320,000 P5,160,000 P 840,000 A summary or depreciation and amortization adjustments is as follows: Over/ 30% Account Adjustments to be amortized Under thereof Life P Inventories (sold in 20x4) 240,000 P 72,000 1 Land 960,000 288,000 Buildings – net ( 10 year remaining life...