Financial Accounting and Reporting MILAN-Chapter 13 Problem 3 PDF

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PROBLEM 3: JOURNAL ENTRIESFact pattern:The net assets of ABC Co. consist of the following: A (20%), ₱100,000; B (30%), ₱150,000; and C (50%), ₱200,000. The net assets are fairly valued.Use the fact pattern above to answer the eight independent cases below: D acquires half of C's capital interest for...

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PROBLEM 3: JOURNAL ENTRIES Fact pattern: The net assets of ABC Co. consist of the following: A (20%), ₱100,000; B (30%), ₱150,000; and C (50%), ₱200,000. The net assets are fairly valued. Use the fact pattern above to answer the eight independent cases below: 1. D acquires half of C's capital interest for ₱120,000 Requirement: Provide the journal entry. Date

C, Capital (200,000 x 1/2) D, Capital To record the admission of D to the partnership

100,000 100,000

2. D acquires 25% of A's, B's and C's capital interests for ₱150,000. Requirements: a. Provide the journal entry. b. How much are the capital balances of the partners after the admission of D? c. How much is the gain or loss to be recognized in the partnership's books? d. How will A, B and C divide the ₱150,000 payment of D, and how much are the personal gains (losses) of A, B and C? Requirement (a) Date

A, Capital (100,000 x 25%)

25,000

B, Capital (150,000 x 25%)

37,500

C, Capital (200,000 x 25%)

50,000

D, Capital To record the admission of D to the partnership Requirement (b)

112,500

Capital beg.

A 100,000

B 150,000

C 200,000

D -

TOTALS 450,000

Sales of Interest to D Capital end.

(25,000) 75,000

(37,500) 112,500

(50,000) 150,000

112,500 112,500

450,000

Requirement (c) Zero. No gain or loss is recognized in the partnership’s books when new partner is admitted. Requirement (d)

Debit to capital account Excess allocated based on P/L ratio (150K payment of D- 112.5K credited to D) x 20%; 30%; 50%

Share in the payment of D Debit to capital account Capital end.

A 25,000

B 37,500

C 50,000

TOTALS 112,500

7,500 32,500 25,000 7,500

11,250 48,750 37,500 11,250

18,750 68,750 50,000 18,750

37,500 150,000 112,500 37,500

3. (Ignore the previous assumption regarding the net assets being fairly valued.) D acquires 25% of A's, B's, and C's capital interests for ₱150,000. The carrying amount of the partnership's net assets as of this date approximates fair value except for equipment with carrying amount of ₱680,000 and fair value of ₱830,000. Requirements: a. Provide the journal entries. b. Determine the capital balances of the partners after the admission of D. Given:

Equipment

Carrying amount

Fair value

680,000

830,000

Increase/ (Decreased) 150,000

Requirement (a) Date

Equipment

150,000

A, Capital (150,000 x 20%)

30,000

B, Capital (150,000 x 30%)

45,000

C, Capital (150,000 x 50%) To record the revaluation of equipment

75,000

Adjusted capital balances: A 100,000 30,000 130,000

Unadjusted capital Share in revaluation Adjusted capital

B 150,000 45,000 195,000

C 200,000 75,000 275,000

TOTALS 450,000 150,000 600,000

D’s admission: Date

A, Capital (130K x 25%)

32,500

B, Capital (195K x 25%)

48,750

C, Capital (275K x 25%)

68,750

D, Capital To record the admission of D to the partnership

150,000

Requirement (b): A 130,000 (32,500) 97,500

Adj. capital before admission Sale of interest to D Capital after D's admission

B 195,000 (48,750) 146,250

C 275,000 (68,750) 206,250

D 150,000 150,000

TOTAL 600,000 600,000

4. (use fact pattern above.) D invests ₱112,500 for a 20% interest in the net assets and profits of the partnership. Requirement: Provide the journal entry. Solution: Net assets before admission Investment of D Net assets after admission D's interest in net assets

450,000 112,500 562,500 20%

D's capital credit Investment of D Bonus

112,500 112,500 -

Requirement: Date

Cash

112,500 D, Capital (450K + 112.5K) x 20% To record the admission of D to the partnership

112,500

5. D invests ₱180,000 cash for a 20% interest in the net assets and profits of the partnership. The partners use the bonus method. Requirements: a. Provide the journal entry to record D's admission b. Compute for the partners' respective capital balances after D's admission c. Compute for the revised profit and loss sharing ratio of the partners after D's admission. Solution: Net assets before admission Investment of D Net assets after admission D's interest in net assets

450,000 180,000 630,000 20%

D's capital credit Investment of D Bonus to old partners

126,000 180,000 (54,000)

Requirement (a) Date

Cash

180,000 D, Capital (450K + 180K) x 20%

126,000

A, Capital (54K x 20%)

10,800

B, Capital (54K x 30%)

16,200

C, Capital (54K x 50%) To record the admission of D to the partnership

27,000

Requirement (b)

Capital, before admission Investment of D Bonus to old partners Capital, after admission

A 100,000

B 150,000

C 200,000

10,800 110,800

16,200 166,200

27,000 227,000

D 180,000 (54,000) 126,000

Requirement (c)

A (100% - 20%) x 20% B (100% - 20%) x 30% C (100% - 20%) x 50% D Total

New P/L ratio 16% 24% 40% 20% 100%

6. D invests ₱100,000 cash for a 20% interest in the net assets and profits of the partnership. The partners use the bonus method. Requirements: a. Provide the entry to record the admission of D. b. Compute for the capital balances of the partners after D's admission. Solution: Net assets before admission Investment of D Net assets after admission D's interest in net assets

450,000 100,000 550,000 20%

D's capital credit Investment of D

110,000 100,000 10,000

Bonus to D

TOTALS 450,000 180,000 630,000

Requirement (a) Date

Cash

100,000

A, Capital (10K x 20%)

2,000

B, Capital (10K x 30%)

3,000

C, Capital (10K x 50%)

5,000

D, Capital (450K + 100K) x 20% To record the admission of D to the partnership

110,000

Requirement (b)

Capital, before admission Investment of D Bonus to old partners Capital, after admission

A 100,000

B 150,000

C 200,000

(2,000) 98,000

(3,000) 147,000

(5,000) 195,000

D 100,000 10,000 110,000

TOTAL 450,000 100,000 550,000

7. (Ignore the previous assumption regarding the net assets approximating fair value.) D notifies A, B and C that he wants to invest for a one-fourth (1/4) interest in the partnership's net assets and profits. The carrying amount of the net assets approximates fair value except for land stated at its acquisition cost of P200,000 but has a fair value of P500,000. Requirement: If no bonus shall be allowed, how much should D invest in the partnership? Given: Carrying amount

Fair value

200,000

500,000

land

Increase/ (Decreased) 300,000

Adjusted capital balances:

Unadjusted capital Share in revaluation Adjusted capital

A 100,000 60,000 160,000

B 150,000 90,000 240,000

C 200,000 150,000 350,000

TOTAL 450,000 300,000 750,000

Requirement: Solution: Net assets before admission Divide by: (100% - 25% interest of D) Net assets after admission Multiply by: D's interest in net assets D's investment

750,000 75% 1,000,000 25% 250,000

8. (Use fact pattern above.) D invests equipment with a historical cost of ₱200,000 and fair value of ₱160,000 for a 20% interest in e net assets and profits of the partnership. The partners use the bonus method. Requirement: Compute for the capital balances of the partners after D's admission Solution: Net assets before admission Investment of D Net assets after admission D's interest in net assets

450,000 160,000 610,000 20%

D's capital credit Investment of D

122,000 160,000 (38,000)

Bonus to old partners

Requirement:

Adj. capital before admission Investment of D Bonus to old partner = (15K x 20%; 30%; 50%) Capital after D's admission

A 100,000

B 150,000

C 200,000

7,600 107,600

11,400 161,400

19,000 219,000

D 160,000 (38,000) 122,000

Fact pattern: The net assets of ABC Co. as of June 30, 20x1 consists of following: A (20%), ₱300,000; B (30%), ₱500,000; and C (50%), ₱200,000. Profit of ₱1,800,000 for the six months ended June 30, 20x1 is not yet closed to partners' respective capital accounts. The net assets approximate fair values. Use the fact pattern above to answer the independent cases below:

TOTAL 450,000 160,000 610,000

9. On July 1, 20x1, C sold his partnership interest to A and B for P1,240,000. A and B share proportionately in C's interest. Requirements: a. Provide the journal entry to record the withdrawal of C. b. Compute for the capital balances of A and B after the withdrawal of C. c. Compute for the effect of C's withdrawal on the total partnership capital. Solution:

Unadjusted balance Share in profit= (1.8M x 20%); (1.8M x 30%); (1.8M x 50%) Adjusted balance

A (20%) 300,000 360,000 660,000

B (30%) 500,000 540,000 1,040,000

C (50%) TOTAL 200,000 1,000,000 900,000 1,800,000 1,100,000 2,800,000

Requirement (a) July 1,

C, Capital

20x1

1,100,000

A, Capital (1.1M x 20%/50%)

440,000

B, Capital (1.1M x 30%/50%)

660,000

Requirement (b)

Bal. before withdrawal Withdrawal of C= (1.1M x 20%/50%); (1.1M x 30%/50%) Bal. after withdrawal

A 660,000 440,000 1,100,000

B 1,040,000 660,000 1,700,000

C 1,100,000 (1,100,000) -

TOTAL 2,800,000 1,800,000 2,800,000

Requirement (c) The withdrawal of C has no effect on the partnership capital as it remains at ₱2,800,000 before and after C’s withdrawal. 10. C retires on July 1, 20x1. The partnership pays C ₱1,240,000 as settlement of his interest. Requirements: a. Provide the journal entry to record the withdrawal of C. b. Compute for the capital balances after C's withdrawal.

c. Compute for the effect of C's withdrawal on the total partnership capital Requirement (a) 1,100,000

July 1,

C, Capital

20x1

A, Capital (1.24M-1.1M) x 20%/50%)

56,000

B, Capital (1.24M-1.1M) x 30%/50%)

84,000 1,240,000

Cash Requirement (b)

Adj. bal. before retirement

A 660,000

B 1,040,000

Payment to C Bonus to C= (140K x 20%/50%); (140K x 30%/50%) Bal. after retirement

(56,000) 604,000

(84,000) 956,000

C TOTAL 1,100,000 2,800,000 (1,240,000) 1,240,000 140,000 1,560,000

Requirement C Adj. bal. before retirement Payment to C Bal. after retirement

2,800,000 (1,240,000) 1,560,000

The capital balance is reduced by the ₱1,240,000 payment for C’s capital balance

11. C retires on July 1, 20x1 and receives cash of ₱1,000,000 and equipment with carrying amount of ₱200,000 and fair value of ₱600,000 as settlement of his interest. Requirement: Compute for the capital balances after C's retirement Given:

Equipment

Carrying amount

Fair value

200,000

600,000

Increase/ (Decreased) 400,000

Solution:

Unadjusted balance Share in profit = (1.8M x 20%); (1.8M x 30%); (1.8M x 50%) Share in revaluation= (600K - 200K) x 20%; 30% & 50% Adjusted balances

A B 300,000 500,000 360,000 540,000 80,000 120,000 740,000 1,160,000

C TOTAL 200,000 1,000,000 900,000 1,800,000 200,000 400,000 1,300,000 3,200,000

Requirement:

Adj. bal. before retirement Payment to C= (1M + 600K) Bonus to C= (300K x 20%/50%); (300K x 30%/50%) Bal. after retirement

A 740,000 (120,000) 620,000

B 1,160,000

C TOTAL 1,300,000 3,200,000 (1,600,00) (1,600,000) (180,000) 300,000 980,000 1,600,000...