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ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONSPRELIM EXAMS 2020- 2021On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of P300,000. P500,000, and P200,000, respectively. A is appointed as managing partner.During 2018, A, B, and C made additional investment of P50...

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ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONS PRELIM EXAM S.Y 2020-2021

On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of P300,000. P500,000, and P200,000, respectively. A is appointed as managing partner. During 2018, A, B, and C made additional investment 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 are 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. 1. What is the profit or loss of the partnership for the year ended December 31, 2018? ANSWER: 1,050,000 2. What is the share of A in the partnership profit or loss for 2018? ANSWER: 540,000 3. What is the share of B in the partnership profit or loss for 2018? ANSWER: 290,000 Solution: Ending Balance Drawings Orig. Investment Add'l Investment C's Share in Profit

320,000 400,000 (200,000) (300,000) 220,000

Salary Interest Bonus Remainder TOTAL

C's share in profit for the year 2018 Interest of C [200000 x 10%] C's share in remaining share Number of partners remaining profit after interest, salary and bonus divided by: Net profit after interest, salary but before bonus add: Total Interest and Salary [200000 + 100000]

A 160,000 30,000 15,000 200,000 540,000

B 40,000 50,000 200,000 290,000

C 200,000 20,000

TOTAL

100,000 150,000 200,000 600,000 220,000 1,050,000

220,000 (20,000) 200,000 x 3 600,000 / 80% 750,000 300,000 1,050,000

4. On January 1, 2020, K and J formed KJ Partnership and the articles of co-partnership provides the profit or loss shall be distributed accordingly: • 10% interest on average capital balance • P50,000 and P100,000 quarterly salary for K and J, respectively. • The remainder shall be distributed in the ratio of 3:2 for K and J, respectively. The following transactions regarding the capital balances of the partners for year 2020 are provided: Year 2020 K, Capital J, Capital Jan. 1 investment P1,000,000 P500,000 Mar. 31 investment 100,000

July 1 withdrawal Sept. 30 withdrawal Oct. 1 investment

200,000 200,000 700,000

The chief accountant of the partnership reported net income of P1,000,000 for year 2020. What is the capital balance of K on December 31, 2020? ANSWER: 1,951,5000 Solution: Compute for Average capital of K Date Capital No. of Balance months unchanged 1/1 100,000 x 6 7/1 800,000 x 3 10/1 1,500,000 x 3 12

6,000,000 2,400,000 45,000,000 12,900,000

Average Capital: 12,900,000/12 = 1,075,000 K’s Interest: 1,075,000 x 10% = 107,500 Amount to be Allocated:

1,000,000 K

J

Salary

200,000

400,000

600,000

Interest

107,500

52,500

160,000

Remainder (3:2) Share of partners in Net Income

144,000

96,000

240,000

451,500

548,500

1,000,000

Compute for average capital of J Date Capital No. of Balance months unchanged 1/1 500,000 x 3 4/1 600,000 x 6 10/1 400,000 x 3 12

1,500,000 3,600,000 1,200,000 6,300,000

Average Capital: 6,300,000/12= 525,000 J’s Interest: 525,000 x 10% = 52,500 K’s Capital Balance Initial Investment Drawings

1,000,000 (200,000)

Add’l Investment

700,000

Capital Balance Share of K in Net Income

1,500,000 451,500

K’s Capital Balance on 12/31/20

1,951,500

5. On July 1, 2020, K and J formed a partnership with initial investment of P1M and P2M, respectively. K is appointed as the managing partner. The articles of co-partnership provide that profit and loss shall be distributed accordingly: • 30% interest on the original capital contribution. • Monthly salary of P20,000 and P10,000, respectively for K and J. • K shall be entitled to bonus equivalent to 20% of net income after salary, interest and bonus. • The remainder shall be distributed in the ratio of 3:2, respectively. • The partnership reported a P750,000 net income What is the share in net income of K for the year ended December 31, 2020? ANSWER: 350,000 Solution: Compute for Interest: K’s interest = 1,000,000 x 30% x 6/12 = 150,000 J’s Interest = 2,000,000 x 30% x 6/12 = 300,000 Compute for salary: K’s Salary = 20,000 x 6 = 120,000 J’s Salary = 10,000 x 6 = 60,000

Compute for K’s Bonus: B= 20% (Net Income – Bonus - Interest – Salary) B= 20% (750,000 – Bonus – 450,000 – 180,000) B= 20% (120,000 – B) B= 24,000 - 0.20B B+ 0.20B = 24,000 1.2B = 24,000 1.2 B= 20,000

Amount to be Allocated:

750,000 K 150,000 120,000 20,000 60,000 350,000

Interest (30%) Salary Bonus Remainder (3:2) Share in Net income

J 300,000 60,000 40,000 400,000

450,000 180,000 20,000 100,000 750,000

6. K and J have just formed a partnership. K contributed cash of P920,000 and office equipment that costs P422,000. The equipment had been used in her sole proprietorship and had been 70% depreciated. The current value of the equipment is P295,000. K also contributed a note payable of P87,000 to be assumed by the partnership. The partners agreed on a profit and loss ratio of 50% each. K is to have a 70% interest in the partnership. J contributed only the merchandise inventory from his sole proprietorship carried at P550,000 of a FIFO basis. The current fair value of the merchandise is P525,000. To consummate the formation of the partnership, K should make additional investment of? ANSWER: 97,000 Solution: K Cash Equipment Notes payable inventory Total contribution

J 920,000 295,000 (87,000) 525,000 525,000

1,128,000

J’s share in contribution Divided by: Capital of partnership Deduct the partners contribution: K’s contribution J’s contribution Additional Contribution of K

Partnership 920,000 295,000 (87,000) 525,000 1,063,000

525,000 / 30% 1,750,000 (1,128,00) (525,000) 97,000

7. On March 1, 2018, K and J formed a partnership with each contributing the following assets: K J Cash 300,000 700,000 Machinery & Equipment 250,000 750,000 Building 2,250,000 Furnitures & Fixtures 100,000 -

The building is subject to a mortgage loan of P800,000, which is to be assumed by the partnership. Agreement provides that K and J share profits and losses 30% and 70%, respectively. On march 1, 2018, the balance in J’s capital account should be? ANSWER: 2,900,000 Solution: Cash Machinery and equipment Building Mortgage J’s capital balance

J’s Capital 700,000 750,000 2,250,000 (800,000) 2,900,000

8. On April 30, 2008, JJ, KK, and LL formed a partnership by combining their separate business proprietorship. JJ contributed cash of P75,000. KK contributed property with a P54,000 carrying amount, a P60,000 original cost, and P120,000 fair value. The partnership accepted the responsibility for the P52,500 mortgage attached to the property. LL contributed equipment with a P45,000 carrying amount, P112,500 original cost, and P82,500 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which part has the largest April 30, 2008 capital balance? LL A summary balance sheet for the J, K, and L partnership appears below. The partners share profits and losses in a ratio of 2:3:5, respectively. Assets Cash 50,000 Inventory 62,500 Marketable securities 100,000 Land 50,000 Building-net 250,000 Total assets 512,500 Equities J, capital K, capital L, capital Total equities

212,500 200,000 100,000 512,500

ANSWER: 82,500 Solution: JJ Cash 75,000 Property Mortgage Equipment 75,000

KK

LL

120,000 (52,000) 68,000

82,500 82,500

9. The partners agree to admit M for a one-fifth interest. The fair market value of partnership land is appraised at $100,000 and the fair market value of inventory is $87,500. The assets are to be revalued prior to the admission of M. How much cash must M invest to acquire a one-fifth interest?

ANSWER: 146,875 Solution: Unadjusted balance Land Inventory Adjusted Balance

Cash 50,000

50,000

Non cash J (20%) K (30%) L (50%) 462,500 212,500 200,000 100,000 (50,000) 10,000 15,000 25,000 (25,000) 5,000 7,500 12,500 537,500 227,500 222,500 137,500

J, capital K, capital L, capital Total Capital before M admission Divided by (1/5 of 100%=80%) Total capital after M admission Total Capital Before M admission Cash M should invest in partnership

227,500 222,500 137,500 587,500 / 80% 734,735 (587,500) 146,875

10. What will the profit and loss sharing ratio (in percentage) of K after M’s investment? ANSWER: 24% Solution: K’s interest ratio = 30% x 80% = 24%

J has decided to retire from the partnership of J, K, and L. The partnership will pay J $200,000. Bonus is to be recorded in the transaction as implied by the excess payment to J. A summary balance sheet for the partnership appears below. The partners share profits and losses in a ratio of 1:1:3, respectively. Assets Cash Inventory Marketable securities Land Building-net Total assets

75,000 82,000 38,000 150,000 255,000 600,000

Equities J, capital K, capital L, capital Total equities

160,000 140,000 300,000 600,000

11. What partnership capital will K have after J retires? ANSWER: 130,000 12. What partnership capital will L have after J retires? ANSWER:270,000 Solution:

J J, Capital 160,000 Retirement Payment (200,000) Allocation to remaining partners 40,000 ENTRIES: K, Capital [40,000 x ¼] L, Capital [40,000 x ¾] J, Capital Cash

K

L

Capital Balance 160,000

140,000

300,000

allocation

(160,000)

(10,000)

(30,000)

-

130,000

270,000

10,000 30,000 160,000 200,000

The partnership of J, K, and L was dissolved, and by July 1, 2006, all assets had been converted into cash and all partnership liabilities were paid. The partnership balance sheet on July 1, 2006 (with partner residual profit and loss sharing percentages) was as follows: Cash J, capital (30%) K, capital (40%) L, capital (30%)

10,000 40,000 (20,000) (10,000)

The value of partners' personal assets and liabilities on July 1, 2006 were as follows:

Personal assets Personal liabilities

K 45,000 30,000

L 30,000 20,000

J 25,000 10,000

13. How much will L receive after the liquidation? ANSWER: 0 14. How much will J receive after liquidation? ANSWER: 35,000 15. How much will K receive after liquidation? ANSWER: 0 Solution: PARTNER’S PERSONAL ASSETS AND LIABILITIES ON JULY 1, 2006 K L J Personal Assets 45,000 30,000 25,000 Personal Liabilities 30,000 20,000 10,000 Net assets 15,000 10,000 15,000

Capital Balance Additional contribution (K&L) Balance after Contribution Allocation of K’s insolvency Payment to partners

J K L 40,000 (20,000) (10,000) 15,000 10,000 40,000 (5,000) (5,000) 5,000 35,000 0 0

The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement of partnership liquidation) was as follows:

Cash Inventory Loan to Omar Loan to Quek Plant assets-net Total assets

$58,000 60,000 8,000 14,000 70,000 $210,000

Accounts payable Notes payable Omar, capital (40%) Paolo, capital (25%) Quek, capital (35%) Total liab. /equity

$34,000 62,000 24,000 26,000 64,000 $210,000

Liquidation events in November were as follows: • The inventory was sold for $10,000 above book value; • Plant assets with a book value of $60,000 were sold for $34,000. 16. How much will Omar receive after the liquidation? ANSWER: 5,600 17. How much will Paolo receive after liquidation? ANSWER: 19,500 18. How much will Quek receive after liquidation? ANSWER: 40,900 Solution: Unadjusted Balances Plant Assets Inventory Payment of Liability Loans to partners

Adjusted Balance

Cash Non cash assets Liability Omar 58,000 152,000 96,000 24,000 70,000 (60,000) 4,000 34,000 (60,000) (10,400) 162,000 32,000 96,000 17,600 (96,000) (22,000) (8,000) 10,000 9,600 (10,000) (4,000) 66,000 5,600

Paolo Quek 26,000 64,000 2,500 3,500 (6,500) (9,100) 22,000 58,400 22,000 (2,500) 19,500

(14,000) 44,400 (3,500) 40,900

Partners Roger, Sergio, and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to liquidate their partnership. The statement of Financial Position of the partnership at the time of liquidation is shown below: Cash Other Assets

120,000 360,000

Accounts payable Loan from Sergio Roger, Capital Sergio, Capital Tito, Capital

93,000 30,000 108,000 120,000 129,000

19. The partners desire to prepare an installment distribution schedule showing how cash would be distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the maximum absorbable loss of Sergio is? ANSWER: 300,000 Solution: Loan from Sergio Capital Balances Before liquidation Total, Interest Divided by: P/L ratio Maximum Loss absorption capacity Rank of payment Maximum Loss absorption Capacity Difference between 1st and 2nd Balance Difference of 1st, 2nd and 3rd Equal Balance

Sergio (50%) 30,000 120,000 150,000 50% 300,000 3rd

Roger (30%)

Tito (20%)

108,000 108,000 30% 360,000 2nd

129,000 129,000 20% 645,000 1st

300,000

360,000

300,000

360,000 (60,000) 300,000

645,000 (285,000) 360,000 (60,000) 300,000

300,000

20. The schedule of possible losses on capital balances would indicate the cash distribution. After the payment to outside creditors, what amount would be distributed to Tito? ANSWER: 57,000 Solution: Difference between 1st and 2nd Tito’s P/L ratio Amount to be distributed to Tito

285,000 x 20% 57,000

21. Assuming the first sale of other assets having book value of P150,000, realized P45,000 and all available cash is distributed. Roger would receive what amount of cash? ANSWER: 9,000 Solution: Amount Realized Rogers share P/L ratio Cash roger would receive

45,000 x 30% 9,000

22. Killua Corporation is undergoing liquidation since August 1, 2011. Five months later, on December 31, 2011, its condensed realization and liquidation statement shows the following: ASSETS: To be realized P1,375,000 Acquired 750,000 Realized 1,200,000 Not Realized 1,375,000 LIABILITIES: Liquidated Not Liquidated To be Liquidated

1,875,000 1,700,000 2,250,000

Assumed

1,625,000

Supplementary: Charges 3,125,000 Credits 2,800,000 The net gain/loss for the five-month period is? ANSWER:425,000 Solution: Debit Assets to be realized Assets acquired Liabilities Liquidated Liabilities not liquidated Charges Supplementary expense Supplementary Income Supplementary Expense Net gain/Loss

1375,000 750,000 1,875,000 1,700,000 5,700,000 3,125,000 8,825,000

Credit Assets Realized Assets not realized Liabilities to be liquidated Liabilities assumed Credits Supplementary Income

1,200,000 1,375,000 2,250,000 1,625,000 6,450,000 2,800,000 9,250,000

9,250,000 (8,825,000) 425,000

The following date were taken from the statement of affairs of Gon Corporation: Assets pledged for fully secured liabilities (ERNV: P 75,000) P90,000 Assets pledged for partially secured liabilities (ERNV: P52,000) 74,000 Free Assets (current fair value, P40,000) 70,000 Unsecured liabilities with priority 7,000 Fully secured liabilities 30,000 Partially secured liability 60,000 Unsecured liabilities without priority 112,000

23. The amount that would be paid to creditors with priority is? ANSWER: Unsecured liabilities with priority = 7,000 24. The amount to be paid to fully secured creditors is? ANSWER: Fully secured creditors = 30,000 25. The amount to be paid to partially secured creditors is? ANSWER: 57,200 26. The amount to be paid to unsecured creditors is? ANSWER: 72,800 Solution: Assets fully pledged Assets partially pledged Free Assets Realizable value of assets Fully secured creditors Partially secured creditors Unsecured Creditors with priorities Total free assets

75,000 52,000 40,000 167,000 (30,000) (52,000) (7,000) 78,000

Unsecured Liabilities without priority Unsecured portion of PSL Remaining Liabilities

112,000 8,000 120,000

Recovery Rate: Total FA/ RL = 78,000/120,000 = 0.65 Amounts to be paid to Partially Secure creditors: Assets Partially Pledged Estimated recoverable or unsecured portion (8,000*0.65) Amount to be paid to Partially Secured Creditors

52,000 5,200 57,200

Amount to be paid to Unsecure Creditor w/o priority: Unsecured liabilities without priority 112,000 Recoverable rate x 0.65 Amount to be paid to Unsecure Creditor w/o priority 72,800

27. Netero Company sells some equipment, the cash price of which is P100,000, for P140,000 with a commitment to service the equipment for a period of two years, with no further charges. Revenue to be recognized upon sale is? ANSWER: 100,000. Cash price is used to recognized revenue upon sale. 28. Meruem Corporation provides service contracts for maintenance of their electrical systems. On October 1, 2018 it agrees a four-year contract with a major customer for P154,000. Cost over the period of the contract are reliably estimated at P51,333. Under PFRS 15, how much revenue should the company recognize in 2018? ANSWER: 9,625 Solution: Transaction price Divided by term of contract Annual allocation of price Multiply: Revenue to be recognized

154,000 / 4yrs 38,500 3/12 9,625

29. On July 1, 2018, Hisoka Company handed over to a client a new computer system. The contract price for the supply of the system and after-sales support for 12 months was P800,000 and Hisoka estimates the cost of the after-sales support at P120,000. It normally marks up such cost by 50% when tendering for support contracts The revenue Hisoka should recognize in its financial year ended December 31, 2018 is? ANSWER: 710,000 Solution: Contract price Cost of after sales (120,000 x 150%) Revenue

800,000 (180,000) 620,000

Cost realized for the year (180,000 x 6/12) 90,000 Revenue to be recognize for 12/31/18 710,000

30. Silva has arrangements with its customers that, in any 12-month period ending March 31, if they purchase goods for a value of at least P1 million, they will receive a retrospective discount of 2%. Silva’s year-end is December 31, and it has made sales to a customer during the period April 1 to December 31 of P900,000. How much revenue should Silva recognize? ANSWER: 882,000 Solution: Sales (April 1 – December 31) Discount 2% Revenue to be recognize

900,000 x 98% 882,000

THEORIES: 1. PFRS 15 does not apply to contracts for insurance and reinsurance. ANSWER: TRUE 2. Per PFRS 15, it is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods to services to a customer. ANSWER: TRANSACTION PRICE 3. Per PFRS 15, revenue is recognized once risk and rewards are transferred to the buyer or p...