Solution in AFAR Problem Solving PDF

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Advanced Financial Accounting and Reporting Solution in Problem Solving Fair Market Value of Land and Building contributed by B P1,500, Less: Mortgage Payable to be assumed by ABC Partnership (300,000) Capital Credit of B in ABC Partnership P1,200, Divided by B’s Capital Interest Ratio /60% Total Ag...

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Advanced Financial Accounting and Reporting Solution in Problem Solving 1.

Fair Market Value of Land and Building contributed by B Less: Mortgage Payable to be assumed by ABC Partnership Capital Credit of B in ABC Partnership Divided by B’s Capital Interest Ratio Total Agreed Capitalization of ABC Partnership (1) (B)

P1,500,000 (300,000) P1,200,000 /60% P2,000,000

2.

Capital Credit of A in ABC Partnership (Proceeds from sale of equipment) (2) (C)

P 300,000

3.

Fair Market Value of Land and Building contributed by B Less: Mortgage Payable to be assumed by ABC Partnership Capital Credit of B in ABC Partnership (3) (D)

P1,500,000 (300,000) P1,200,000

4.

Total Agreed Capitalization of ABC Partnership Less: Total Capital Credit of A and B (P300,000 + P1,200,000) Cash to be contributed by C in ABC Partnership (4) (A)

P2,000,000 1,500,000 P 500,000

5.

January 1, 2021 B’s Capital Balance (P1,000,000 x 10%) Add: B’s additional investment during 2021 Less: B’s drawings at the end of 2021 Less: B’s capital balance on December 31, 2021 B’s Share in Net Loss for the year ended December 31, 2021 Divided by B’s interest in profit or loss Net loss of ABC Partnership for the year ended December 31, 2021(5) (A)

P 100,000 500,000 (300,000) (200,000) (P 100,000) /20% (P 500,000)

6.

January 1, 2021 A’s Capital Balance (P1,000,000 x 50%) Add: A’s additional investment during 2021 Less: A’s Share in Net Loss during 2021 (P500,000 x 30%) December 31, 2021 Capital Balance of A (6) (C)

P 500,000 200,000 (150,000) P 550,000

7.

January 1, 2021 C’s Capital Balance (P1,000,000 x 40%) Less: C’s Share in Net Loss during 2021 (P500,000 x 50%) Less: C’s drawings at the end of 2021 December 31, 2021 Capital Balance of C (7) (B)

P 400,000 (250,000) (100,000) P 50,000

8.

December 31, 2018 C’s Capital Balance Add: C’s drawings at the end of 2018 Less: C’s additional investment during 2018 Less: C’s capital balance on January 1, 2018 C’s share in partnership profit for the year ended December 31, 2018 (8) (D)

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

9.

C’s share in profit for the year 2018 Less: Interest on original capital contribution of C (200,000 x 10%) C’s share in the remaining profit after interest, salary and bonus Multiply by number of partners Remaining profit after interest, salary and bonus Divided by 80% Net profit after salary and interest but before bonus to managing partner Add: Total interest and salary (100,000 + 200,000) Partnership profit for the year ended December 31, 2018 (9) (C)

P 220,000 (20,000) P 200,000 x 3 P 600,000 / 80% P 750,000 300,000 P1,050,000

Partnership profit for the year ended December 31, 2018 Less: Total interest and salary (100,000 + 200,000) (300,000) Net profit after salary and interest but before bonus to managing partner Multiply by Bonus percentage Bonus to A as managing partner (10) (B)

P1,050,000

10.

P 750,000 x 20% P 150,000

11

January 1, 2018 A’s capital balance P 300,000 Add: Additional investment of A during 2018 500,000 Less: Drawings of A during 2018 (200,000) Add: A’s share in partnership profit during 2018 (30,000+160,000+150,000+200,000) 540,000 December 31, 2018 A’s capital balance (11) (A) P1,140,000

12

January 1, 2018 B’s capital balance Add: Additional investment of B during 2018 Less: Drawings of B during 2018 Add: B’s share in partnership profit during 2018 (50,000+40,000+200,000) December 31, 2018 B’s capital balance (12) (C)

P 500,000 200,000 (100,000) 290,000 P 890,000

13.

Capital Balance of B before the admission of D Less: Capital to be transferred to D (P800,000 x 40%) Capital Balance of B after the admission of D (13) (B)

P 800,000 ( 320,000) P 480,000

14.

Capital Balance of A before the retirement of C Add: Share of A in asset revaluation (P150,000/60%x10%) Capital Balance of A after the retirement of C (14) (D)

P 500,000 25,000 P 525,000

15.

Capital Balance of B before the retirement of C Add: Share of B from Bonus given by C (P20,000 x 4/5) Capital Balance of B after the retirement of C (15) (C)

P 300,000 16,000 P 316,000

16.

Capital Balance of C before the admission of D Add: Share of C in bonus given by D (P200,000 x 30%) Capital Balance of C after the admission of D (16) (A)

P 900,000 60,000 P 960,000

17.

Capital Balance of B before the admission of D Add: Share of B in Asset Revaluation (P1,000,000 x 60%) Capital Balance of B after the admission of D (17) (B)

P 700,000 600,000 P1,300,000

18.

Total contributed capital of all partners (P3,000,000 + P500,000) Less: Total agreed capitalization of new partnership Asset impairment to be shared by old partners only

P3,500,000 3,000,000 P 500,000

Share of A in asset impairment (P500,000 x 50%) (18) (D)

P 250,000

19.

Contributed capital by D to the new partnership Less: Capital credit to D in the new partnership (P3,000,000 x 10%) Bonus given by D to the existing partners (19) (A)

P 500,000 300,000 P 200,000

20.

Capital credit of D to the new partnership (P3,000,000 x 10%) (20) (B)

P 300,000

21.

Capital Balance of C before the admission of D Less: C’s share in asset impairment (P500,000 x 40%) Add: C’s share in bonus given by D (P200,000 x 40%) Capital Balance of C after the admission of D (21) (A)

P 700,000 (200,000) 80,000 P 580,000

22.

Capital Balance of B before liquidation Add: Payable to B Capital Balance of B after the right of offset Less: Share of B in Total Loss on Liquidation ((500,000+100,000) x 10%) Capital Balance of B after loss on liquidation but before absorption of A’s insolvency Less: Share of B in A’s debit capital balance (P160,000 x 1/4) Cash received by B at the end of partnership liquidation (22) (A)

(P 650,000) 1,000,000 P 350,000 60,000 P 290,000 (40,000) P 250,000

23.

Capital Balance of C before liquidation Add: Payable to C Capital Balance of C after the right of offset Less: Share of C in Total Loss on Liquidation ((500,000+100,000) x 30%) Capital Balance of C after loss on liquidation but before absorption of A’s insolvency Less: Share of C in A’s debit capital balance (P160,000 x 3/4) Cash received by C at the end of partnership liquidation (23) (B)

P 350,000 100,000 P 450,000 180,000 P 270,000 (120,000) P 150,000

24.

Capital Balance of B before liquidation Less: Share in presumed total loss in liquidation (P70,000/10% x 40%) Cash received by B at the end of partnership liquidation (24) (D)

P 300,000 280,000 P 20,000

25.

Cash received by partners at the end of liquidation ((P80,000 (A) + P20,000 (B)) Add: Cash paid for liquidation expenses Add: Cash paid for total liabilities Less: Cash balance before the start of liquidation Net proceeds from the sale of noncash assets (25) (A)

P 100,000 50,000 1,500,000 (1,200,000) P 450,000

26.

Capital Balance of C before liquidation Less: Share of C in Total Loss in Liquidation during January (P500,000* x 20%) Capital Balance of C after loss on liquidation but before absorption of A’s insolvency Less: Share of C in A’s debit balance (P150,000 x 2/5) Cash received by C at the end of partnership liquidation (26) (B)

P 400,000 (100,000) P 300,000 (60,000) P 240,000

Cash balance before start of liquidation Add: Net proceeds from sale of noncash asset during January (P1,000,000 + P100,000) Less: Cash paid for liquidation expenses during January Less: Cash paid for liabilities to third person during January (P2,000,000 x 20%) Less: Cash withheld for unpaid liabilities to third person (P2,000,000 x 80%) Less: Cash withheld for estimated future liquidating expenses Cash available for distribution to partners Less: Total capital of all partners (100,000+500,000+400,000) Total loss on liquidation for the first month of installment

P1,600,000 1,100,000 (50,000) (400,000) (1,600,000) (150,000) P 500,000 (1,000,000) P 500,000*

27.

Estimated future liquidating expenses on January 31, 2021 Add: Book value of remaining noncash assets on January 31, 2021 Maximum possible loss on January 31, 2021 B’s share in maximum possible loss (P550,000 x 30%) (27) (D)

P 150,000 400,000 P 550,000 P 165,000

28.

Cash withheld for future liquidating expenses P 150,000 Add: Cash withheld for remaining unpaid liabilities to third persons (P2,000,000 x 80%) 1,600,000 Total cash withheld on January 31, 2021 (28) (C) P1,750,000

29.

Capital Balance of A on January 31, 2021 Add: Share of A in total loss in liquidation during February (P50,000* x 50%) Cash received by A on February 28, 2021 during final liquidation (29) (A)

P 100,000 (25,000) P 75,000

Cash balance on January 31, 2021 Add: Net proceeds from sale of noncash asset during January (P400,000 - P100,000) Less: Cash paid for liquidation expenses during February Less: Cash paid for liabilities to third person during February Cash available for final distribution to partners Less: Total capital of all partners (100,000+240,000+160,000) Total loss on liquidation for the first month of installment

P1,750,000 300,000 (100,000) (1,500,000) P 450,000 (500,000) P 50,000*

30.

Amount received by holder of note payable (NRV of Inventory) (30) (C) P 250,000 Note: Only the net realizable value of collateral inventory will be received since there is no available net free asset.

31

Amount received by holder of mortgage payable (Fair value of Land) (31) (D)

P 100,000

Note: The mortgage payable will be fully collected because it is fully secured credit.

32.

Cash P 100,000 Add: Free assets from fully secured mortgage payable (P120,000 – P100,000) 20,000 Total Free assets for unsecured credits with priority P 120,000 Amount received by employees for their salary (32) (B) P 120,000 Note: Since only P120,000 free assets are available, it must all be given to employees who are preferred over the government.

33.

Amount received by national government for income taxes (33) (D) None Note: Since only P120,000 free assets are available, it must all be given to employees for their salaries which are preferred over the claims of the government for income taxes.

34.

Amount received by partially secured loans payable P 340,000 Less: Fair value of collateral – machinery (300,000) Recovered amount from the unsecured portion of partially secured loans payable P 40,000 Divided by unsecured portion of partially secured loans payable (P400,000 – P300,000) /100,000 Recovery percentage on unsecured credits 40%

35.

Amount received by holder of accounts payable (P100,000 x 40%) (34) (C)

P

36.

Accounts payable Add: Unsecured portion of partially secured loans payable (P400,000 – P300,000) Total unsecured credits including unsecured portion of partially secured loans payable Multiply by recovery percentage of unsecured credits Net free assets (35) (A)

P 100,000 100,000 P 200,000 x 40% P 80,000

37.

Net free assets Add: Liquidation expenses paid Add: Salaries payable Add: Income tax payable Less: Cash Free assets from building used as collateral for fully secured mortgage payable Add: Book value of fully secured mortgage payable Fair value of building used as collateral of mortgage payable (36) (B)

P

80,000 600,000 200,000 300,000 (300,000) P 880,000 500,000 P1,380,000

38.

Land owned by Entity A Add: Interest of Entity A on co-owned inventory (P1,000,000 x 60%) Total assets to be reported by Entity A concerning its interest in Entity C (38) (C)

P3,000,000 600,000 P3,600,000

39.

Notes payable owed by Entity B P 1,000,000 Add: Interest of Entity B on co-owed accounts payable (P2,000,000 x 40%) 800,000 Total liabilities to be reported by Entity B concerning its interest in Entity C (39) (A) P1,800,000

40.

Sales revenue reported by Entity C Less: Unsold inventory of Entity A coming from Entity C (P1,000,000 x 70%) Less: Unsold inventory of Entity B coming from Entity C (P2,000,000 x 40%) Sales revenue to third persons

P5,000,000 (700,000) (800,000) P3,500,000

Sales revenue to be reported by Entity A (P3,500,000 x 60%) (40) (B)

P2,100,000

41.

Sales revenue to be reported by Entity B (P3,500,000 x 40%) (41) (D)

P1,400,000

42.

Initial Measurement of Investment in Entity C (Entity A’s book) on January 1, 2021 P 1,000,000 Add: 2021’s Share in net income of Entity C (Joint Venture) (P200,000 x 40%) 80,000 Less: 2021’s Dividend received from Entity C (P100,000 x 40%) 40,000 December 31, 2021 Book Value of Investment in Entity C (Equity Method) (42) (B) P1,040,000

43.

Initial Measurement of Investment in Entity C (Entity B’s book) on January 1, 2021 Add: 2021’s Share in net income of Entity C (Joint Venture) (P200,000 x 60%) Less: 2021’s Dividend received from Entity C (P100,000 x 60%) December 31, 2021 Book Value of Investment in Entity C (Entity B’s book) Possible share in net loss for year 2022 for Entity B (P3,000,000 x 60%)

40,000

P 1,500,000 120,000 (60,000) P 1,560,000 (P1,800,000)

Maximum investment loss is the book value of Investment account (43) (A)

P1,560,000

44.

Possible share in net income for year 2023 for Entity A (P5,000,000 x 40%) Less: Unrecognized share in net loss for year 2022 for Entity A (P3,000,000 x 40%) – (P1,040,000) Investment income for year 2023 for Entity A (44) (D)

P2,000,000

45.

December 31, 2022 Book Value of Investment in Entity C (Entity B’s Book) Add: 2023’s share in net income (P5,000,000 x 60%) – P240,000 Less: 2023’s dividend received from Entity C (1,000,000 x 60%) December 31, 2023 Book Value of Investment in Entity C (B’s Book) (43) (D)

P

46.

Unadjusted investment income of Entity A for year 2020 (P1,000,000 x 60%) Less: Unrealized gross profit in ending inventory of Entity A (P50,000 x 20% x 60%) Adjusted investment income of Entity A for year 2020 (46) (C)

P 600,000 (6,000) P 594,000

47.

Initial measurement of Investment in Entity C (Entity B’s Book) Add: Unadjusted investment income of Entity B for year 2020 (P1,000,000 x 40%) Add: Unrealized loss on sale of machinery (P20,000 x 40%) Less: Realized loss on sale of machinery (P20,000/2 x 6/12 x 40%) Less: 2020 dividend received from Entity C (P400,000 x 40%) December 31, 2020 Book Value of Investment in Entity C (B’s Book ) (47) (A)

P2,000,000 400,000 8,000 (6,000) (160,000) P2,242,000

48.

Unadjusted investment loss for year 2021 (P500,000 x 40%) Add: Realized loss on sale of machinery (P20,000/2 x 40%) Adjusted investment loss of Entity B for year 2021 (48) (C)

(P 200,000) (4,000) (P 204,000)

49.

Initial measurement of Investment in Entity C (Entity A’s Book) Add: 2020’s investment income Less: 2020’s dividend received from Entity C (P400,000 x 60%) Less: Unadjusted investment loss of Entity A for year 2021 (P500,000 x 60%) Add: Realized gross profit on beginning inventory (P50,000 x 20% x 60%) Less: 2021’s dividend received from Entity C (P100,000 x 60%) December 31, 2021 Book Value of Investment in Entity C (A’s Book) (49) (A)

P3,000,000 594,000 (240,000) (300,000) 6,000 (60,000) P3,000,000

50.

Transaction costs – Expense as incurred under Fair Value Model Unrealized holding gain on changes in fair value (P560,000 – P500,000) Dividend income (P30,000 x 50%) Effect in net profit under Fair Value Model (50) (A)

(P 20,000) 60,000 15,000 P 35,000

51.

Initial measurement of Investment under Equity Method (P500,000 + P20,000) P 520,000 Add: Share in net income of Joint Venture (P100,000 x 50%) 50,000 Less: Dividend received from Joint Venture (P30,000 x 50%) (15,000) Book value of Investment on December 31, 2020 under equity method (51) (D) P 555,000 Note: There is no impairment loss because fair value less cost to sell of P560,000 is higher than book value.

52.

Book value of Investment under Cost Method (Cost) (P200,000 + P10,000) (52) (A) P 210,000

53.

Share in net income of joint venture (P50,000 x 50%) Impairment loss of Investment under equity method (P230,000 – P215,0000) Effect in net profit under Equity Method (53) (C)

P 25,000 ( 15,000) P 10,000

54.

Unadjusted installment sales Add: Undervaluation of traded car (P150,000 – P50,000) Adjusted installment sales Less: Cost of production of car Adjusted gross profit Divided by Adjusted installment sales Adjusted gross profit rate based on sales (54) (D)

P 400,000 100,000 P 500,000 (300,000) P 200,000 /500,000 40%

(160,000) P1,840,000 0 2,760,000 (600,000) P2,160,000

55.

Cash down payment (P400,000 x ¼) Fair value of traded used car Collected annual installments on December 31, 2020 (P250,000/5) Total collections Multiply by gross profit rate Realized gross profit for the year ended December 31, 2020 (55) (B)

P 100,000 150,000 50,000 P 300,000 x40% P 120,000

56.

Fair value of repossessed inventory Less: Unrecovered cost of defaulted installment receivable (P200,000 x 60%) Loss on Repossession (56) (C)

P 110,000 (120,000) (P 10,000)

57.

Selling price of repossessed car Less: Cost of such repossessed car (P110,000 + P10,000) Gross profit on sale of repossessed car (57) (B)

P 140,000 (120,000) P 20,000

58.

Allocated revenue to construction of stall (P400,000 x 200,000/500,000) (58) (B)

P 160,000

59.

Revenue from delivery of raw materials (P400,000 x 250,000/500,000) x 3,000/10,000 (59) (C)

P

60,000

60.

Revenue from use of entity’s trade name (P400,000 x 50,000/500,000)/10yrs (60) (B) P

61.

Revenue from construction of franchisee’s stall (P400,000 x 200,000/500,000) Revenue from delivery of raw materials (P400,000 x 250,000/500,000) x 3,000/10,000 Revenue from the use of entity’s trade name (P400,000 x 50,000/500,000)/10 years Revenue from contingent franchisee fee (P100,000 x 5%) Total revenue for the year ended December 31, 2020 (58) (A)

P 160,000 60,000 4,000 5,000 P 229,000

62.

Cash downpayment Present value of note receivable Initial franchise fee revenue Less: Direct cost of initial franchise fee Gross profit under accrual basis (62) (D)

P 200,000 240,183 P 440,183 352,146 P 88,037

63.

Gross profit under accrual basis Add: Interest Income for year 2020 (P240,183 x 12%) Add: Contingent franchise fee revenue (P50,000 x 8%) Less: Indirect cost – Expense as incurred Net income under accrual basis (63) (A)

P

64.

Cash downpayment Present value of note receivable Initial franchise fee revenue Less: Direct cost of initial franchise fee ...