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ACCO 20043Financial Accounting and Reporting Part 2An Instructional MaterialCompiled by:Melinda S. BalbarinoMaria Teresa M. CorralesMarietta M. DoqueniaJulieta G. FonteEditha A. PeraltaAndrea Rose E. RimorinCatherine D. SottoTABLE OF CONTENTSContent Page NumberCover Page 1Title Page 2General Informa...

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ACCO 20043 Financial Accounting and Reporting Part 2

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ACCO 20043

Financial Accounting and Reporting Part 2

An Instructional Material

Compiled by:

Melinda S. Balbarino Maria Teresa M. Corrales Marietta M. Doquenia Julieta G. Fonte Editha A. Peralta Andrea Rose E. Rimorin Catherine D. Sotto

ACCO 20043 Financial Accounting and Reporting Part 2

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GENERAL INFORMATION ABOUT THE COURSE Course Code and Title

:

ACCO 20043 - FINANCIAL ACCOUNTING AND REPORTING 2

Semester and Academic Year

:

Second Semester, Academic Year 2020- 2021

Course Credit

:

3 Units

Pre-Requisite

:

ACCO 20033 - FINANCIAL ACCOUNTING AND REPORTING 1

Course Description

:

This subject includes the accounting for partnership liquidation, lump sum method and by installment. It also focuses on the components in organizing a corporation, the stockholders’ equity section of the Statement of Financial Position and other Corporate transactions & related topics.

Course Outcomes

:

Upon completion of the course, the students will be able to: a. Have detailed knowledge and understanding of partnership liquidation, lump-sum and installment; b. Complete the accounting cycle and other requirements for a Corporation c. Competence and honesty in the performance of accountancy service; d. Demonstrate the qualities of a future accountant; and e. Skilled in the use of a calculator, computer and other business equipment.

General Instructions

:

Faculty members who prepared this instructional material purposively chose only five (5) topics which are the most relevant topics when learning about accounting partnership liquidation and corporation. FOR STUDENTS WITH INTERNET CONNECTIVITY, you are tasked to answer the activities or assessment tools in accordance with the instruction of your instructor. FOR STUDENTS WHO DO NOT HAVE INTERNET CONNECTIVITY AND RECEIVED THIS INSTRUCTIONAL MATERIAL VIA COURIER SERVICES, you are tasked to accomplish the activities or assessment tools as well as the midterm and finals examination at your own space. You may have your answers handwritten OR computerized and printed.

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TABLE OF CONTENTS

Content

Page Number

Cover Page

1

Title Page

2

General Information About the Course

3

Module 1 – Partnership Liquidation (Lump-Sum)

5

Module 2 – Partnership Liquidation (Installment Liquidation)

19

Module 3 - Organization and Formation of a Corporation

31

Module 4 – Corporate Operations (Dividends, Book Value Per Share, and Earnings Per Share

60

Module 5 – Share Capital Transactions Subsequent to Original Issuance

75

Midterm Examination

91

Finals Examination

99

ACCO 20043 Financial Accounting and Reporting Part 2

MODULE 1 PARTNERSHIP LIQUIDATION – LUMP SUM LIQUIDATION OVERVIEW As per defined in the previous discussion on partnership dissolution, it does not necessarily mean termination of the business, instead, it refers to the termination of the partnership as a going concern. In some cases, dissolution results in the reorganization of the partnership as a new unit that will not necessitate the liquidation process. However, if the recognized condition calls for winding up of business affairs, this will require the process of liquidation. The association of the partners for the purpose of carrying on the business activities in the usual manner is considered ended. Termination is that point in time when all partnership affairs are completely ended and finally settled. It signifies the end of the life of an existing partnership. Some of the causes where there is partnership dissolution with liquidation include the accomplishment of the objective for which the partnership was formed, termination of the period covered as stated in the contract and mutual agreement among the partners to dissolve and liquidate the partnership. MODULE OBJECTIVES At the end of the lesson/module, the student will be able to:     

Distinguish the difference between dissolution and liquidation of a partnership Recognize the two types partnership liquidation Prepare a Statement of Liquidation using the lump-sum Method Prepare the entries to record the partnership liquidation and other related entries Partnership liquidation is the process of winding up the business operations/affairs after dissolution.

This is the process where non-cash assets are reduced to cash and distributing the proceeds to the proper parties. The following procedures are to be followed in the process of liquidation: 1. 2. 3.

Conversion of non-cash assets into cash Payment of liabilities to creditors other than partners Payment to partners in the following order: a. Loans to the partnership b. Capital contribution c. Share in profits

1. Conversion of non-cash assets into cash The process of converting non-cash assets into cash is called realization. This involves the collection of receivables, selling of inventories, and selling of property and equipment.

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ACCO 20043 Financial Accounting and Reporting Part 2

Realization of non-cash assets may either result in a gain or loss on realization and will be distributed to the partners based on their profit and loss agreement. Gain on realization is the excess of the selling price over the cost or book value of the assets being disposed, otherwise, the result would be a loss on realization. There is not much problem if the result is a gain since there would be enough cash to settle all the outside creditors and the partners. However, problem arises when the realization resulted in a loss since this will be distributed among the partners as a deduction from their capital balance. If the partner’s capital balance resulted in a negative amount (debit balance) after the distribution of the loss, this is known as capital deficiency and must be eliminated and the affected partner will be known as the deficient partner.

Capital deficiency may be eliminated in the following manner: a) If the deficient partner has a loan to the partnership, he may exercise the right of offset, which is the legal right to apply part or all of the amount owing to a partner on a loan balance against deficiency in his capital account resulting from losses in the process of liquidation. The loan payable to a partner has a higher priority in liquidation than a partner’s capital balance but a lower priority than liabilities to outside creditors. b) If the deficient partner is solvent and has no loan to the partnership, he may make an additional investment equal to the amount of his capital deficiency, and c) If the deficient partner is insolvent, his capital deficiency will be absorbed by the remaining partners as additional loss based on their profit and loss sharing. A partner is considered solvent if his personal assets exceed his personal liabilities while an insolvent partner is one whose personal liabilities exceed his personal assets. Liquidation expenses maybe incurred to facilitate the realization of non-cash assets and will result in reduction to cash and will be distributed to partners as a deduction in their capital balances according to their profit and agreement. 2. Payment of liabilities to creditors other than partners In the distribution of proceeds from realization, the partnership creditors other partners has the top priority. If the cash available is sufficient, liabilities to this group of creditors must first be settled in full before making any payment to the partners in whatever capacity they are entitled into. In case the partnership cannot meet its obligation to outside creditors, the personal assets of the partners will be applied as payment but only if there is an excess over his personal liabilities. In other words, priority is given to the partner’s personal creditors and any excess will be applied as payment to the partnership creditors. Marshalling of assets involves the order of priorities or creditors’ rights against the partnership assets and the personal assets of the individual partners. The order in which claims against the assets of the partnership will be marshaled is as follows: 1) partnership outside creditors; 2) partners’ claims other than capital and profits, such as loan payable; and

ACCO 20043 Financial Accounting and Reporting Part 2

3) partners’ claims to capital or profits, to the extent of credit balances in capital accounts

3. Payment to partners After the settlement of the liabilities to the partnership outside creditors, any capital deficiency resulting from the distribution of loss on realization, must first be eliminated before making payments to the partners. Settlement with the partners follows this order of priority: 1) Loans to the partnership 2) Capital contributed 3) Share in the profits Accounting problems involved in partnership liquidation include the following: 1. Determining the profit or loss from the beginning of the accounting period to the date of liquidation and the distribution of the such profit or loss; 2. Closing of the partnership books; 3. Correction of the discovered accounting errors of prior periods; and 4. Liquidation of the partnership.

TYPES OF LIQUIDATION 1.

Lump-sum liquidation – this is a process whereby the distribution of cash to partners is done only after all the non-cash assets have been realized, the gain or loss is distributed, and the obligation with the partnership outside creditors have been settled.

2. Liquidation by installment or piece-meal liquidation – this is the process whereby assets are realized on a piecemeal basis and cash is distributed to partners on a periodic basis as it becomes available even before all non-cash assets are realized.

STATEMENT OF LIQUIDATION The statement of liquidation is a statement prepared to show the summary of the process of liquidation. It is the basis for the preparation of journal entries to record the liquidation. It presents the realization of non-cash assets and the distribution of the proceeds to the proper parties.

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ACCO 20043 Financial Accounting and Reporting Part 2

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ILLUSTRATIVE PROBLEM Assume that the statement of financial position of King, Jolly and Donald shows the following account balances before liquidation:

KING, JOLLY and DONALD Statement of Financial Position October 1, 2019

ASSETS Cash Other Assets

Total Assets

P

16,000 272,000

P 288,000

LAIBILITIES AND CAPITAL Liabilities Jolly, Loan Donald, Loan King, Capital Jolly, Capital Donald, Capital Total Liabilities and Capital

P 89,600 4,000 6,400 76,000 48,000 64,000 P 288,000

Profit and loss ratio: 4:4:2 to King, Jolly and Donald, respectively. Required: 1. Prepare a Statement of Liquidation for each case below: Case 1 – The other assets were sold for P 280,000 Case 2 – The other assets were sold for P 200,000 Case 3 – The other assets were sold for P 148,000 Case 4– The other assets were sold for P 136,000. Deficient partner is solvent. Case 5 – The other assets were sold for P 136,000. Deficient partner is insolvent. Case 6 – The other assets were sold for P 136,000. Additional cash investment of deficient partner is considered as second cash distribution to partners requiring a schedule to accompany the statement of liquidation to determine amounts paid to partners. 2. Journal entries to record the liquidation process.

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Journal entries: a) Sale of other assets and distribution of gain Cash

280,00 0

Other assets

272,00 0 3,200 3,200 1,600

King, capital Jolly, Capital Donald, Capital b) Payment of liabilities Liabilities

89,60 0

Cash

89,60 0

c) Payment to partners Jolly, loan Donald, loan King, Capital Jolly, Capital Donald, Capital Cash

4,000 6,400 79,20 0 51,20 0 65,60 0 206,40 0

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ACCO 20043 Financial Accounting and Reporting Part 2

ACCO 20043 Financial Accounting and Reporting Part 2

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ACCO 20043 Financial Accounting and Reporting Part 2

ACCO 20043 Financial Accounting and Reporting Part 2

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ACCO 20043 Financial Accounting and Reporting Part 2

ACCO 20043 Financial Accounting and Reporting Part 2

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ACCO 20043 Financial Accounting and Reporting Part 2

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The Schedule to Accompany the Statement of Liquidation shows amounts to be paid to the partners. Total partners’ interest will be reduced by the restricted interest for possible losses if the deficient partner fails to pay his capital deficiency. Restricted interest for possible loss will continue until all deficiencies or debit capital balances are eliminated, after which, balances will now be called as Free Interest-amounts to be paid to partners, where payments are applied first t loan, then on capital.

King, Jolly and Donald Schedule To Accompany Statement of Liquidation October 1-31, 2019

Capital balances Add: loan balances Total partners’ Interest Restricted interests – possible loss to P 2,400 to King and Donald in the ratio of 4:2 if Jolly fails to pay his deficiency Free interest – amount to be paid to partner

King P 21,600

Jolly (P 2,400)

P 21,600

(P2,400 )

(1,600) P 20,000

2,400

Payment to apply on: Loan Capital Cash settlement

P 20,000 P 20,000

Donald P 36,800 6,400 P 43,200 (800) P 42,400

P 6,400 36,000 P 42,400

COMPUTATION OF CASH SETTLEMENT TO PARTNERS There are some problems that ask for the computation of cash settlement to partners but do not require the preparation of a statement of liquidation. In such cases, the following must have taken place before computing the cash settlement to partners: a) Non-cash assets must have been realized b) Liabilities to outside creditors are already settled c) Gain or loss on realization have not been distributed to partners’ capital accounts To determine if there is a gain or loss on realization, comparison must be made between the debits (cash available to partners) and the total credits (partners’ loans and capital balances). If total debit exceeds total credit, the excess is a gain on realization, and if the total debit is less than

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the total credit, the difference is a loss on realization. Such gain or loss on realization must first be distributed before proceeding with the liquidation process. ILLUSTRATIVE PROBLEM On June 30, 2019, the capital balances of Joe, Andy and Greg are P 80,000, P 50,000 and P 10,000, respectively. Profits and losses are shared 3:2:1. The partners decided to liquidate, and the non-cash assets were realized for P 74,000. After paying the liabilities amounting to P 24,000, cash balance showed P 56,000 for distribution to partners. The loss on realization would then be computed as follows: Total capital (credit) 80,000+50,000+10,000 Less cash balance for distribution to partners Loss on realization

P 140,000 56,000 P 84,000 =======

Settlement of cash to partners would be distributed as follows:

Capital balances Loss on realization Balances Additional loss to Joe and Andy for the deficiency of Greg in the ratio of 3:2 Free interest – amount to be paid to partner

Joe P 80,000 (42,000) P 38,000

Andy P 50,000 (28,000) P 22,000

Greg P 10,000 (14,000) (P 4,000)

(2,400) P 35,600

(1,600) P 20,400

4,000 -

REFERENCES



Baysa & Lupisan Accounting for Partnership & Corp

ACCO 20043 Financial Accounting and Reporting Part 2

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ASSESSMENT TOOLS I. A.

EXERCISES Bob, Gary and Bob, who share profits and losses in the ratio of 4:4:2, respectively, decide to liquidate their partnership on December 31, 2019. The condensed statement of financial position is presented below just prior to liquidation.

Cash Other Assets

Total Assets

BGC Partnership Statement of Financial Position December 31, 2019 ASSETS LIABILITIES AND EQUITY P 40,000 Liabilities P 224,000 680,000 Gary, Loan 10,000 Crab, Loan 16,000 Bob, Capital 190,000 Gary, Capital 120,000 Crab, Capital 160,000 P 720,000

Total Liabilities and Equity

P 720,000

Instruction: Prepare a statement of Liquidation and the required journal entries for each of the following cases and supporting schedule of cash distribution, if necessary assuming cash is immediately distributed to the proper parties. Assume also that the deficient partner/s will invest cash which is then distributed as second payment to the proper parties. Case A Case B

P 700,000 500,000

Case C Case D

P 370,000 340,000

Case E Case F

P 250,000 180,000

B.

Jack, Jill, Dick and Jane are partners with capitals of P 22,000, P 20,600, P 27,400 and P 18,000 respectively. Jack has a loan balance of P 4,000. Profits and losses are shared 40%; 30%; 20%; 10% by Jack, Jill, Dick and Jane respectively. Assuming assets were sold and liabilities paid and the balance of cash showed P 24,000. Prepare a schedule showing how the P 24,000 will be distributed to the partners.

C.

The partnership accounts of Guess, Jag and Levis are shown below as of December 31, 2019. Profits and losses are shared 50%; 30%; and 20%, respectively. Guess, Drawing (debit balance) Levis, Drawing (debit balance) Jag, Loan Guess, Capital Jag, Capital Levis, Capital

P (32,000) (12,000) 40,000 164,000 134,000 144,000

ACCO 20043 Financial Accounting and Reporting Part 2

Total assets amounted to P 638,000, including cash of P 70,000, and P 200,000 worth of liabilities. On January 2019, the partnership was liquidated, and Jag received P 111,000 cash as final settlement. Required: 1. 2. 3.

The total loss from the liquidation of the partnership Prepare the statement of liquidation. Journal entries to record the liquidation.

D.

Red, White, and Blue are partners who share profits and losses 20%; 30%; and 50% respectively. The partners have decided to liquidate the partnership. Their capital accounts show the following balances: Red – P 60,000 credit; White – P 90,000 credit; Blue – P 30,000 debit. What is the amount of cash available for distribution?

E.

Orange and Lemon share profits and losses equally. They decided to liquidate their partnership when their net assets amounted to P 260,000. Capital balances were P 170,000 and P 90,000, respectively. If the non-cash assets were sold for an amount equal to book value, what amount of cash should Orange and Lemon respectively received?

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ACCO 20043 Financial Accounting and Reporting Part 2

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MODULE 2 INSTALLMENT LIQUIDATION OVERVIEW Under the installment liquidation, the cash settlement is on installment or piece meal basis. As soon as cash becomes available, and the liabilitie...