Module 4 - Acctg. for Special Transactions PDF

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St. Joseph College of BulacanSan Jose Patag, Sta. Maria BulacanLesson ModuleCourse Title : Accounting for Special Transactions Level : Third Year Course Code: Pre - 6 Lesson No .: 4Objectives :At the end of this Module, the student will be able to: Determine capital balances upon retirement, withdra...

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St. Joseph College of Bulacan San Jose Patag, Sta. Maria Bulacan

Lesson Module Course Title: Accounting for Special Transactions Course Code: Pre - 6

Level: Third Year Lesson No.: 4

Objectives: At the end of this Module, the student will be able to: 1. Determine capital balances upon retirement, withdrawal, death, or incapacity 2. Journalize the required entries in the books of the partnership 3. Prepare the statement of financial position immediately after dissolution 4. Record entries in the incorporation of a partnership Subject Matter:

Accounting for Partnership Dissolution – Retirement, Withdrawal, Death and Incapacity of a Partner

Procedures: A. Motivation – the instructor will ask students to tell something about the picture.

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B. Lesson Presentation

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Solution:  Case 1 – Edna sold her interest to Erna for P600,000 Edna, Capital Erna, Capital To record the sale of Edna’s interest to Erna

600,000 600,000

 Case 2 – Edna sold her interest to Erna for P650,000 Edna, Capital Erna, Capital To record the sale of Edna’s interest to Erna

600,000 600,000

The difference between the amount paid (650,000) and the interest acquired (600,000) which is 50,000 is a personal gain of Edna which is not recorded in the partnership books.

 Case 3 – Edna sold her interest to Erna for P500,000 Edna, Capital Erna, Capital To record the sale of Edna’s interest to Erna

600,000 600,000

The difference between the amount paid (500,000) and the interest acquired (600,000) which is 100,000 is a personal loss of Edna which is not recorded in the partnership books.

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Solution:  Case 1 – Carlo sold his interest to Marlo for P400,000 Carlo, Capital Marlo, Capital To record the sale of Carlo’s interest to Marlo

400,000 400,000

 Case 2 – Carlo sold his interest to Marlo for P450,000 Carlo, Capital Marlo, Capital To record the sale of Carlo’s interest to Marlo

400,000 400,000

The difference between the amount paid (450,000) and the interest acquired (400,000) which is 50,000 is a personal loss of Marlo which is not recorded in the partnership books.

 Case 3 – Carlo sold his interest to Marlo for P360,000 Carlo, Capital Marlo, Capital To record the sale of Carlo’s interest to Marlo

400,000 400,000

The difference between the amount paid (360,000) and the interest acquired (400,000) which is 40,000 is a personal gain of Marlo which is not recorded in the partnership books.

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Solution:  Case 1 – The partnership paid P500,000 to Vilma Vilma, Capital Cash To record the retirement of Vilma



500,000 500,000

No Bonus or revaluation was recognized because the amount paid is equal to the capital interest of Vilma

 Case 2 – The partnership paid P600,000 to Vilma  A. Bonus Method Vilma, Capital Alma, Capital (100,000 x 3/8) Elma, Capital (100,000 x 5/8) Cash To record the retirement of Vilma



500,000 37,500 62,500 600,000

Under the Bonus Method, If the amount paid by the partnership is more than the capital interest of the retiring partner, the difference is bonus to the retiring partner from the remaining partner.

 B. Asset Revaluation Method Amount paid by the partnership Less: Vilma’s capital interest Vilma’s share in asset revaluation Divided by Vilma’s profit ratio Total asset revaluation

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600,000 500,000 100,000 20% 500,000

The entry to record asset revaluation is Asset Alma, Capital (500,000 x 30%) Vilma, Capital (500,000 x 20%) Elma, Capital (500,000 x 50%) To record the asset revaluation

500,000 150,000 100,000 250,000

Notice that Vilma’s capital after the entry above becomes P600,000 (500,000 + 100,000). The entry to record the retirement of Vilma is Vilma, Capital Cash To record the retirement of Vilma

600,000 600,000

 Case 3 – The partnership paid P450,000 to Vilma  A. Bonus Method Vilma, Capital Alma, Capital (50,000 x 3/8) Elma, Capital (50,000 x 5/8) Cash To record the retirement of Vilma



500,000 18,750 31,250 450,000

Under the Bonus Method, If the amount paid by the partnership is less than the capital interest of the retiring partner, the difference is bonus to the remaining partner from the retiring partner.

 B. Asset Revaluation Method Amount paid by the partnership Less: Vilma’s capital interest Vilma’s share in negative asset revaluation Divided by Vilma’s profit ratio Total negative asset revaluation

450,000 500,000 (50,000) 20% 250,000

The entry to record asset revaluation is Alma, Capital (250,000 x 30%) Vilma, Capital (250,000 x 20%) Elma, Capital (250,000 x 50%) Asset To record the negative asset revaluation

75,000 50,000 125,000 250,000

Notice that Vilma’s capital after the entry above becomes P450,000 (500,000 - 50,000). The entry to record the retirement of Vilma is Vilma, Capital Cash To record the retirement of Vilma

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450,000 450,000

C. Application EXERCISE 4-1 Reas , Felias, and Diaz are partners sharing profit and loss in the ratio of 4:2:4. Reas asked to be allowed to withdraw from the partnership. Shown below is the statement of financial position of the firm prior to the withdrawal of Reas but after nominal accounts were closed as at June 30, 2013 Assets Cash Other Assets

220,000.00 156,000.00

Total Assets

376,000.00

Liabilities and Capital Liabilities Reas, capital Felias, Capital Diaz, Capital Total Liabilities and capital

40,000.00 164,000.00 80,000.00 92,000.00 376,000.00

Required: Prepare the entries to record the withdrawal of Reas in each of the following independent assumptions. 1. Reas sold his interest to Frias for P200,000 2. Reas sold his interest to Diaz and Felias for P150,000, the interest being divided equally by the remaining partners. 3. Reas sold his interest to the partnership. The partners agreed to make immediate cash settlement to Reas for P164,000 4. Reas sold his interest to the partnership. The partners agreed to make immediate cash settlement to Reas for P152,000 (use bonus method) 5. Reas sold his interest to the partnership. The partners agreed to make immediate cash settlement to Reas for P152,000 (use asset revaluation method) 6. Reas sold his interest to the partnership. The partners agreed to make immediate cash settlement to Reas for P170,000 (use bonus method) 7. Reas sold his interest to the partnership. The partners agreed to make immediate cash settlement to Reas for P170,000 (use asset revaluation method) EXERCISE 4-2 Octem, Novem, and Decem are partners sharing profits in the ratio of 3:2:1, respectively. Their capital accounts balances are P150,000, P90,000, and P60,000 on December 31, 2013, when Decem decides to withdraw. The partnership paid Decem P90,000 for her interest. Profits after the retirement of Decem are to be shared equally. Required: 1. Prepare the entries to record Decem’s retirement using (a) Bonus method and (b) Asset revaluation method 2. Which method is to be preferred by Octem? What is the amount of gain to Octem through the use of this method as compared with another alternative?

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EXERCISE 4-3 The capital accounts of Marvelo, Ravelo, Salcelo, and Angelo, who share profits and losses in the ratio of 2:2:2:4 respectively shown below: Marvelo Ravelo Salcelo Angelo Total

120,000 160,000 140,000 80,000 500,000

On May 31, 2013, with the consent of the other partners, a. Salcelo retired from the partnership and was paid P100,000cash in full settlement of his interest in the partnership. b. Marcelo was admitted to the partnership with a P40,000 cash investment for a 10% interest in the net assets of the partnership using the bonus method. Required: Prepare the journal entries to record the retirement of Salcelo and the admission of Marcelo. EXERCISE 4-4 Rina and Rida wish to acquire the partnership interest of their partner Risa, on July , 2013 Partnership assets are to be used to acquire Risa’s interest in the firm. The partner’s profit and loss ratio is 3:2:1. The statement of financial position on July 1, 2013 is as follows: Cash Accounts receivable(net) Equipment (net) Other Assets Total Assets

296,000 144,000 540,000 120,000 1,100,000

Liabilities Rina, Capital Rida, Capital Risa, Capital Total Liabilities and capital

180,000 480,000 240,000 200,000 1,100,000

Required: Prepare the entries to record the withdrawal of Risa under each of the following independent cases: 1. 2. 3. 4.

Risa is paid P256,000 (bonus method) Risa is paid P180,000 (bonus method) Risa is paid P180,000 (asset revaluation method) Risa accepts cash of P162,000 and an equipment with a current fair value of P36,000. The equipment costs P120,000 and is 60% depreciated, and has no residual value. Record any gain or loss on the disposal of equipment directly to the partner’s capital accounts.

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EXERCISE 4-5 Rossu, Picasso, and Veloso, have capital balances of P240,000, P140,000, and P160,000 respectively on December 31, 2012 and they share profits and losses in the ratio of 3:2:5. During the year, 2013, the partnership suffered a net loss of P64,000 and each partner had withdrawn P48,000 cash n the partnership. Picasso is unhappy with the operations of the partnership and has decided to withdraw from the firm as of December 31, 2013. Required: 1. Compute the balance of the partner’s capital accounts prior to the withdrawal of Picasso. 2. Picasso will accept P60,000 for his interest from the partnership. Give the entry to record Picasso’s withdrawal assuming inventory is overvalued. 3. The partners agree to the partnership buying Picasso’s interest for P96,000. Give the entry to record Picasso’s withdrawal using a. Asset revaluation method prior to the withdrawal b. Bonus Method EXERCISE 4-6 Del Rosario, Del Barrio, and Del Rio formed a partnership on January 1, 2011. They agreed to distribute profits and losses in the ratio of original capital contributions which are P125,000, P50,000, and P25,000 respectively. Presented below are the earnings of the firm and drawings made by each partner for the period 2011 – 2013:

Net Profit (loss) Del Rosario Del Barrio Del Rio

2011 88,000 30,000 15,600 10,400

2012 37,000 30,000 15,600 10,400

2013 (21,000) 20,000 10,400 10,400

At the start of 2013, Del Rosario and Del Barrio allow Del Rio to retire from the partnership. Since the books of the firm had never been audited, the partners agreed to an audit in arriving at the settlement amount. In retiring, Del Rio was allowed to take certain furniture and was charged P3,000, although the book value was P9,000, the balance of Del Rio’s interest was paid in cash. Presented below are items that were revealed during the audit: Unrecorded accrued expenses Unrecorded accrued revenues Overstatement of inventories Understatement of depreciation on assets still held

2011 800 500 3,000 300

2012 1,000 200 4,000 700

2013 1,300 300 4,000 400

Required: 1. Prepare a statement of changes in partner’s equity, covering the period January 1, 2011 to the time of Del Rio’s retirement after considering the errors. 2. Prepare the entries to record the retirement of Del Rio. 10 | P a g e

EXERCISE 4-7 Rodel, Jomel, and Marcel have been partners in an accounting firm for 10 years. Jomel has decided to withdraw from the partnership. They share profits and losses in the ratio of 3:4:3. To facilitate Jomel’s withdrawal, the partnership closed its books and prepared the statement of financial position as follows: Cash Accounts receivable(net) Equipment (net) Other Assets Total Assets

636,000 144,000 240,000 180,000 1,200,000

Liabilities Rodel, Capital Jomel, Capital Marcel, Capital Total Liabilities and capital

120,000 300,000 480,000 300,000 1,200,000

Required: Prepare the necessary journal entries to record the withdrawal of Jomel on the books of the partnership under each of the following independent cases: 1. It is agreed by the partners that the Equipment and Other Assets are undervalued by P72,000 and P48,000 respectively. Jomel is to receive a lumpsum cash payment. 2. Jomel is to receive P240,000 now and P216,000 in monthly installment of P24,000 each under the bonus method. 3. Jomel is to receive P360,000 now and P18,000 at the end of each of the next six months using a. Bonus method b. Asset revaluation method EXERCISE 4-8 Dida, Frida, and Vida shares profits and losses in the ratio of 2:1:1 have capital balances of P240,000, P180,000 and P150,000 respectively as of July 31, 2010. Dida is to retire from the partnership. The partners agree to increase the value of merchandise inventory by 21,000 and that the allowance for doubtful accounts be reduced by P3,000. Dida agrees to accept an interest bearing note for P150,000 in partial settlement of his ownership equity. The remainder of her claim is to be paid in cash. Frida nad Vida are to share equally in the net income or loss of the partnership. Required: Prepare entries to the record the following: 1. The adjustment of the net assets. 2. The withdrawal of Dida

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EXERCISE 4-9 Piolo, Paulo, Philo, and Polo share profits and losses in the ratio of 40:30:15:15 respectively has capital balances of P168,000, P150,000, P96,000 and P90,000 as of January 1, 2013. The partnership agreement provides that in the event of death of a partner, the firm shall continue until the end of the fiscal period. Profits shall be considered to have been earned proportionately during the period and the deceased partner’s capital shall be adjusted by his share of the profit or loss to the date of death. From the date of death until the date of settlement with the estate, there shall be added interest of 10% computed on the adjusted capital. The remaining partners shall continue to divide profits in the old ratio. Payments to the estate shall be made within two years from the date of the partner’s death. Polo died on September 30, 2013. The books of the partnership were closed as of December 31, arriving at a credit balance of P90,000 for the Income Summary account. On December 31, 2013, Philo notified the remaining partners that he was retiring from the partnership and was willing to accept in settlement of his interest the balance of his capital account after the distribution of profit less 25%. The remaining partners accepted his offer and issued a 120-day, 10% note to Philo in payment of his interest. Required: 1. Prepare all the necessary journal entries to record the above transactions. 2. Prepare a statement of changes in partner’s equity. EXERCISE 4-10 Partners Thomas, Aquinas, and Elias, share profits and losses in the ratio of 5:3:2 respectively. At the end of 2013, the partnership had the following statement of financial position. Cash Receivables Inventory Equipment (net) Total Assets

220,000 100,000 80,000 140,000 540,000

Liabilities Thomas, Capital Aquinas, Capital Elias, Capital Total Liabilities and capital

132,000 176,000 120,000 112,000 540,000

It is agreed that Elias is to withdraw from the partnership on this date. Required: For each case listed below, prepare the entry to record the withdrawal of Elias 1. Aquinas buys ¼ of Elias interest for P32,000 and Thomas buys ¾ for P96,000 2. Elias, with the consent of the other partners, give his equity to his friend, Chi, who is accepted as a partner in the firm. 3. An analysis of the asset indicates that P16,000 of the receivables will probably prove uncollectible and that inventories are understated by P24,000. It is agreed that the assets are to be adjusted accordingly and that Elias is to be paid an amount equal to the book value of hs adjusted equity. 4. Elias is given P80,000 cash and equipment having a book value of P88,000. The partners agree that no revaluation of assets will be made. 5. Elias is paid P120,000 from the partnership funds for his interest. The bonus indicated by this payment is charged against the continuing partners as 5/8 against Aquinas and 3/8 against Aquinas 12 | P a g e

D. Assessment Name: ________________________________ Date: ___________________ Score: Course/Year/Section: ____________________ Prof. ___________________________

Quiz No. 4 A Retirement, Death, Withdrawal or Incapacity of a Partner

100

Test 1: True or False. Write the TRUE if the statement is correct and write the word FALSE if the statement is false. _______

_______ _______ _______ _______

_______

_______ _______

_______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______

1. A partner who desires to withdraw from the partnership may, without the consent of the other partners, sell all or part of his interest either to an outsider, to the other partners, or to the partnership itself. 2. The death of a partner transfers his entire interest to his estate prior to settlement by the partnership. 3. Any asset revaluation recognized upon the retirement of a partner is subjected to depreciation on the remaining partner’s operation. 4. The withdrawal of an existing partner dissolves the partnership; but the addition of a new partner does not. 5. Accounting for the withdrawal of a partner when one of the remaining partner buys the retiring partner’s interest is not the same as when an outside person buys a retiring partner’s interest. 6. The partnership must measure net income or net loss for the fraction of the year up to withdrawal date of withdrawing partner and allocate profit or loss according to the existing ratio. 7. Withdrawal by a partner at less than book value of his capital interest results in a loss to the other partners allocated according to their profit and loss ratio. 8. When a retiring partner is paid more than his capital interest without recording asset revaluation, the excess payment is treated as a bonus to the retiring partner from the remaining partner. 9. The retirement of one of the partners automatically dissolves the partnership. 10. The sale of interest of the retiring partner to a new partner will require the recognition of a gain or loss on the partnership books 11. The determination of the capital interest of an incapacitated partner is similar to the determination of the capital interest of a retiring partner. 12. Upon death of one of the partners, the remaining partners may continue operations based on the old Articles of Co-Partnership. 13. The asset revaluation at the time of retirement of one of the partners maybe calculated by dividing the excess payment to the retiring partner by his fraction of interest. 14. The bonus to the retiring partner reduces the capital accounts of the remaining partners in the partnership. 15. A retiring partner’s interest is always payable in the form of cash. 16. The retiring Partner’s Capital interest includes his share in the net income or net loss of the partnership up to the date of the retirement. 17. Loans made by a partnership to the partners, as recorded on the partnership books, reduces the interest of the retiring partner. 18. The partnership may allow any of its partners to withdraw or retire from the firm. After such withdrawal, the business may continue its operations. 19. The interest of a retiring partner upon retirement need not be established; anyway the partner is already retiring. 20. Accounting for the sale of a retiring partner’s interest to the continuing partners is the same as sale to the partnership

Test 2: MULTIPLE CHOICES: Write the let...