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ADVANCED FINANCIAL ACCOUNTING AND REPORTINGProblem PortionNumbers 1 and 2 (Partnership Formation)A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with assessed value of P100,000 with historical cost of P800,000 and accumulated depreciation of P600,000. A ...

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING Problem Portion Numbers 1 and 2 (Partnership Formation) A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with assessed value of P100,000 with historical cost of P800,000 and accumulated depreciation of P600,000. A day after the partnership formation, the equipment was sold for P 300,000.

B will contribute a land and building with carrying amount of P1,200,000 and fair value of P1,500,000. The land and building are subject to a mortgage payable amounting to P300,000 to be assumed by the partnership. The partners agreed that B will have 60% capital interest in the partnership. The partners also agreed that C will contribute sufficient cash to the partnership.

1. What is the total agreed capitalization of the ABC Partnership? A. B. C. D.

1,500,000 2,000,000 2,500,000 3,000,000

2. What is the cash to be contributed by C in the ABC Partnership? A. B. C. D.

500,000 600,000 700,000 800,000

Numbers 3 and 4

(Partnership Operation – Capital Account Transactions)

On January 1, 2018, A, B and C formed ABC Partnership with total agreed capitalization of P1,000,000. The capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio is 3:2:5, respectively for A, B and C.

During 2018, A and B made additional investments of P200,000 and P500,000, respectively. At the end of 2018, B and C made drawings of P300,000 and P100,000, respectively. On December 31, 2018, the capital balance of B is reported at P200,000.

3. What is the net income or net loss of ABC Partnership for the year ended December 31, 2018? A. 500,000 loss B. 1,000,000 loss C. 800,000 income D. 1,200,000 income 4. What is the capital balance of C on December 31, 2018? A. 150,000 B. 50,000 C. 200,000 D. 250,000

Page 2 Numbers 5, 6, and 7 (Partnership Operation – Distribution of profit or loss) On January 1, 2018, A, B and C formed ABC Partnership with original capital contribution of P300,000, P500,000 and P200,000. A is appointed as managing partner. During 2018, A, B and C made additional investments of P500,000, P200,000 and P300,000, respectively. At the end of 2018, A, B and C made drawings of P200,000, P100,000 and P400,000, respectively. At the end of 2018, the capital balance of C is reported at P320,000. The profit or loss agreement of the partners is as follows:

   

10% interest on original capital contribution of the partners. Quarterly salary of P40,000 and P10,000 for A and B, respectively. Bonus to A equivalent to 20% of Net Income after interest and salary to all partners Remainder is to be distributed equally among the partners.

5. What is the partnership profit for the year ended December 31, 2018? A. 900,000 B. 1,020,000 C. 1,050,000 D. 960,000 6. What is A’s share in partnership profit for 2018? A. B. C. D.

190,000 340,000 540,000 200,000

7. What is B’s share in partnership profit for 2018? A. 200,000 B. 290,000 C. 50,000 D. 90,000

Page 3 Number 8 (Admission of partner by purchase) On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 1:6:3: Current Assets Noncurrent Assets

1,000,000 2,000,000

Total Liabilities A, Capital B, Capital C, Capital

600,000 900,000 800,000 700,000

On January 1, 2019, D is admitted to the partnership by purchasing 40% of the capital interest of B at a price of P500,000. What is the capital balance of B after the admission of D on January 1, 2019? A. B. C. D.

540,000 480,000 420,000 300,000

Number 9 (Retirement of partner) On December 31, 2018, ABC Partnership’s Statement of Financial Positions shows that A, B and C have capital balances of P500,000, P300,000 and P200,000 with profit or loss ratio of 1:3:6. On January 1, 2019, C retired from the partnership and received P350,000. At the time of C’s retirement, an asset of the partnership is undervalued. What is the capital balance of A after the retirement of C? A. B. C. D.

462,500 537,500 562,500 525,000

Number 10 (Retirement of partners) On December 31, 2018, ABC Partnership’s Statement of Financial Position shows that A, B and C have capital balances of P400,000, P300,000 and P100,000 with profit or loss ratio of 1:4:5. On January 1, 2019, C retired from the partnership and received P80,000. At the time of C’s retirement, the assets and liabilities of the partnership are properly valued. What is the capital balance of B after the retirement of C? A. B. C. D.

284,000 308,000 316,000 320,000

Page 4 Number 11 (Partnership Dissolution – Admission of New Partner by Investment) On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 1:6:3: Current Assets Noncurrent Assets

1,300,000 2,000,000

Total Liabilities A, Capital B, Capital C, Capital

300,000 1,400,000 700,000 900,000

On January 1, 2019, D is admitted to the partnership by investing P1,000,000 to the partnership for 20% capital interest. If the all the assets of the existing partnership are properly valued, what is the capital balance of C after the admission of D? A. 960,000 B. 900,000 C. 840,000 D. 1,200,000

Numbers 12 and 13 (Admission of new partner by investment) On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 5:1:4: Current Assets Noncurrent Assets

1,500,000 2,000,000

Total Liabilities A, Capital B, Capital C, Capital

500,000 1,100,000 1,200,000 700,000

On January 1, 2019, D is admitted to the partnership by investing P500,000 to the partnership for 10% capital interest. The total agreed capitalization of the new partnership is P3,000,000. 12. What is the capital balance of D after his admission to the partnership? A. B. C. D.

500,000 300,000 350,000 400,000

13. What is the capital balance of C after the admission of D to the partnership? A. B. C. D.

580,000 820,000 500,000 780,000

Page 5 Numbers 14 and 15 (Partnership Liquidation – Lump Sum Liquidation) On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 6:1:3 of partners A, B and C respectively, revealed the following data: Cash Receivable from A Other noncash assets

1,000,000 500,000 2,000,000

Other Liabilities 2,000,000 Payable to B 1,000,000 Payable to C 100,000 A, Capital 700,000 B, Capital (650,000) C, Capital 350,000 On January 1, 2019, the partners decided to liquidate the partnership. All partners are legally declared to be personally insolvent. The other noncash assets were sold for P1,500,000. Liquidation expenses amounting to P100,000 were incurred.

14. How much cash was received by B at the end of partnership liquidation? A. B. C. D.

250,000 150,000 290,000 270,000

15. How much cash was received by C at the end of partnership liquidation? A. B. C. D.

270,000 150,000 350,000 220,000

Page 6

Numbers 16, 17 and 18 (Partnership Liquidation – Installment Liquidation) On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 5:3:2 of respective partners A, B and C. showed the following information:

Cash Noncash assets

1,600,000 1,400,000

Total Liabilities A, Capital B, Capital C, Capital

2,000,000 100,000 500,000 400,000

On January 1, 2019, the partners decided to liquidate the partnership in installment. All partners are legally declared to be personally insolvent. As of January 31, 2019, the following transactions occurred:     

Noncash assets with a carrying amount P1,000,000 were sold at a gain of P100,000. Liquidation expenses for the month of January amounting to P50,000 were paid. It is estimated that liquidation expenses amounting to P150,000 will be incurred for the month of February, 2019. 20% of the liabilities to third persons were settled. Available cash was distributed to the partners.

As of February 28, 2019, the following transactions occurred:    

Remaining noncash assets were sold at a loss of P100,000. The final liquidation expenses for the month of February amounted to P100,000. The remaining liabilities to third persons were settled at a compromise amount of P1,500,000. Remaining cash was finally distributed to the partners.

16. What is the amount of cash received by partner C on January 31, 2019? A. B. C. D.

260,000 240,000 300,000 350,000

17. What is the share of B in the maximum possible loss on January 31, 2019? A. B. C. D.

275,000 110,000 120,000 165,000

18. What is the amount of total cash withheld on January 31, 2019? A. 550,000 B. 1,600,000 C. 1,750,000 D. 1,700,000

Page 7

Numbers 19, 20 and 21

(Corporate Liquidation)

Cagayan Company is experiencing financial problems which resulted to ultimate bankruptcy. The statement of financial position of the entity before liquidation is presented below: Cash Inventory Land

 

100,000 300,000 200,000

Income tax payable Salaries payable Note payable Mortgage payable Accounts payable Contributed capital Deficit

200,000 300,000 800,000 100,000 400,000 500,000 (1,700,000)

The note payable is secured by the inventory with net realizable value of P250,000. The mortgage payable is secured by the land with fair value of P120,000.

19. What is the amount received by the holder of the note payable at the end of corporate liquidation? A. B. C. D.

320,000 300,000 250,000 260,000

20. What is the amount received by the holder of the mortgage payable at the end of corporate liquidation? A. B. C. D.

120,000 200,000 150,000 100,000

21. What is the amount received by the employees at the end of corporate liquidation concerning their salaries? A. B. C. D.

100,000 120,000 72,000 300,000

Page 8

Numbers 22 and 23 (Corporate Liquidation) Surigao Company is bankrupt and has undergone corporate liquidation. Presented below is its statement of financial position before the start of liquidation: Cash Machinery Building

   

300,000 500,000 1,200,000

Accounts Payable Salaries Payable Income tax Payable Loan Payable Mortgage payable Contributed capital Deficit

100,000 200,000 300,000 400,000 500,000 800,000 (300,000)

Liquidation expenses amounting to P600,000 were paid. The loan payable is secured by the machinery with fair value of P300,000. The mortgage payable is secured by the building. At the end of liquidation, the holder of loan payable received P340,000.

22. What is the amount received by the holder of accounts payable at the end of liquidation? A. B. C. D.

85,000 15,000 40,000 60,000

23. What is the amount of net free assets available at the end of liquidation? A. 80,000 B. 40,000 C. 120,000 D. 200,000

Page 9

Numbers 24, 25 and 26 (Joint Arrangement classified as Joint Operation) Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating entities as component for their final products of cellular phones and tablets. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of 60:40. At the end of first operation of Entity C, the financial statements provided the following data: Inventory Land Building

1,000,000 3,000,000 5,000,000

Accounts payable Note payable Loan payable Share capital Retained earnings Sales revenue

2,000,000 1,000,000 4,000,000 1,000,000 1,000,000 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the assets and liabilities of Entity C: 

Entity A owns the land and incurs the loan payable of Entity C.



Entity B owns the building and incurs the note payable of Entity C.



The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their capital interest in Entity C.



The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000 and P2,000,000, respectively. As of the end of the first year, Entity A and Entity B were able to resell 30% and 60% of the inventory coming from Entity C to third persons.

24. What is the amount of total assets to be reported by Entity A concerning its interest in Entity C? A. B. C. D.

5,400,000 3,000,000 3,600,000 5,000,000

25. What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C? A. B. C. D.

1,800,000 2,200,000 2,800,000 2,400,000

26. What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C? A. B. C. D.

2,300,000 2,100,000 3,000,000 2,500,000

Page 10

Numbers 27 and 28 (Joint Arrangement classified as Joint Venture Equity Method)

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C. Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital interest of Entity C. The financial statements of Entity C provided the following data for its two-year operation: Net income (loss) 2018 2019

200,000 (2,000,000)

Dividends declared 100,000 -

27. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of Financial Position on December 31, 2019? A. 1,080,000 B. 1,040,000 C. 240,000 D. 200,000 28. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of Financial Position on December 31, 2019? A. 1,500,000 B. 1,620,000 C. 360,000 D. 900,000

Page 11

Numbers 29 and 30 (Joint venture - Intercompany Transaction)

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C by investing P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C. The financial statements of Entity C provided the following data for 2018: 

Entity C reported net income of P1,000,000 for 2018 and paid cash dividends of P400,000 on December 31, 2018.



During 2018, Entity C sold inventory to Entity A with gross profit of P50,000. Eighty percent of those inventories were resold by Entity A to third persons during 2018 and the remainder was resold to third persons during 2019.



On July 1, 2018, Entity C sold a machinery to Entity B at a loss of P20,000. At the time of sale, the machinery has remaining useful life of 2 years.

29. What is the investment income to be reported by Entity A for the year ended December 31, 2018? A. B. C. D.

603,000 606,000 594,000 597,000

30. What is the balance of Investment in Entity C to be reported by Entity B on December 31, 2018? A. B. C. D.

2,242,000 2,241,000 2,238,000 2,248,000

Page 12

Numbers 31 and 32 Joint Venture – IFRS for SMEs (Fair Value Model or Equity Method) On January 1, 2018, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled entity by investing P500,000 each in exchange for 10,000 ordinary shares each of Entity C. Entity A and Entity B each incurred P20,000 transaction costs. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C. For the year ended December 31, 2018, Entity C reported net income of P100,000 and declared dividends in the amount of P30,000. On December 31, 2018, the ordinary shares of Entity C are quoted at P56. 31. If Entity A elected fair value model to account its investment in Entity C, what is the net effect on Entity A’s profit or loss for the year ended December 31, 2018? A. B. C. D.

55,000 net profit 60,000 net profit 15,000 net profit 40,000 net profit

32. If Entity B elected equity method to account its investment in Entity C, what is the carrying amount of Entity B’s Investment in Entity C on December 31, 2018? A. B. C. D.

520,000 540,000 535,000 555,000

Numbers 33 and 34 Joint Venture – IFRS for SMEs (Cost Method or Equity Method) On January 1, 2018, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled entity by investing P200,000 each in exchange for 20,000 ordinary shares each of Entity C. Entity A and Entity B each incurred P10,000 transaction costs. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C. For the year ended December 31, 2018, Entity C reported net income of P50,000 and declared dividends in the amount of P10,000. On December 31, 2018, the investment in Entity C has value in use of P215,000. 33. If Entity A elected cost method to account its Investment in Entity C, what is the carrying amount of Entity A’s Investment in Entity C on December 31, 2018? A. B. C. D.

210,000 215,000 230,000 200,000

34. If Entity B elected equity method to account its Investment in Entity C, what is the net effect in Entity B’s profit or loss for the year ended December 31, 2018? A. 25,000 net profit B. 5,000 net profit C. 10,000 net profit D. 15,000 net profit

Page 13

Number 35 (Installment sales) Nikko Company, which began operations on January 5, 2018, appropriately uses the installment method of revenue recognition. The following information pertains to the operations for 2018 and 2019:

Sales Collections from : 2018 sales 2019 sales Accounts written off from 2018 sales 2019 sales Gross profit rates

2018

2019

300,000

450,000

100,000

50,000

-

150,000

25,000

75,000

-

150,000

30%

40%

What amount should be reported as deferred gross profit on December 31, 2019? A. 75,000 B. 80,000 C. 112,000 D. 125,000

Numbers 36 and 37 ( Installment sales) Appliance Company reports gross profit on the installment basis. The following data are available:

Installment sales Cost of goods – installment sales Gross profit

2018

2019

2020

240,000 180,000 60,000

250,000...