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```ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONS
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?
Solution:
December 31, 2018 C’s Capital Balance
320,000
Add: C’s drawings at the end of 2018
400,000
Less: C’s additional investment during 2018
(300,000)
Less: C’s Capital balance on January 1, 2018
(200,000)
C’s share in the partnership profit for the year ended December 31, 2018
220,000
Less: Interest on original capital contribution of C
(200,000 x 10%)
(20,000)
C’s share in the remaining profit after interest, salary and bonus
200,000
Multiply by number of partners
x3
Remaining profit after interest, salary and bonus
600,000
Divided by 80%
/ 80%
Net profit after salary and interest but before bonus to managing partner
750,000
(100,000 + 200,000)
300,000
Partnership profit for the year ended December 31, 2018
1,050,000
2. What is the share of A in the partnership profit or loss for 2018?
Solution:
Interest on Capital
(10% x 300,000)
Salary
(40,000 x 4)
Bonus to A
Equal Share in Remaining Profit (600,000/ 3)
Total Share of A in Partnership Profit
3. What is the share of B in the partnership profit or loss for 2018?
30,000
160,000
150,000
200,000
540,000
Solution:
Interest on Capital
(10% x 500,000)
Salary
(10,000 x 4)
Equal Share in Remaining Profit (600,000/ 3)
Total Share of B in Partnership Profit
50,000
40,000
200,000
290,000
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
200,000
Sept. 30 withdrawal
200,000
Oct. 1 investment
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?
Solution:
Weighted Average capital of K
Months
Weighted
Weighted Average capital of J
Date
Balances
Date
Balances
Jan 1
1,000,000
July 1
(200,000)
Oct 1
700,000
Total
weighted
1,075,000
Months
outstanding
12/12
6/12
3/12
average
K
Amount
being
Allocated
Allocation:
a.
Salaries
(50k*4 ; 100k*4)
b. Interest
(10%*1.075M;
10%*525K)
c.
Remaining
profits (3:2)
As allocated
Weighted
average
1,000,000
(100,000)
175,000
capital
J
outstanding
Jan 1
500,000
12/12
Mar 31
100,000
9/12
Sept 30
(200,000)
3/12
Total weighted average capital
Total
average
500,000
75,000
(50,000)
525,000
Beginning balance
1,000,000
Withdrawals
(200,000)
1,000,000
200,000
400,000
600,000
107,500
52,500
144,000
451,500
700,000
160,000
Share in profit
451,500
96,000
240,000
K’s Capital Balance
548,500
1,000,000
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?
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?
Solution:
K
J
Total
Cash
920,000
920,000
Equipment
295,000
295,000
Inventory
525,000
525,000
Notes Payable
(87,000)
(87,000)
Capital Balance
1,128,000
525,000
1,653,000
J’s Share in Contribution
Divided by
Partnership Capital
Less: K’s contribution
J’s contribution
525,000
30%
1,175,000
(1,128,000)
(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?
Solution:
K
Cash
300,000
Machinery & Equipment
250,000
Building
Furniture & Fixtures
100,000
Less: Mortgage Assumed by
the partnership
Capital balance
650,000
The balance in J’s capital account should be 2,900,000.
J
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?
Answer: LL has the largest capital balance
Solution:
JJ
KK
LL
Total
77,000
Cash
77,000
120,000
120,000
Property
82,500
Equipment
82,500
Less: Mortgage
(52,500)
(52,500)
attached to property
67,500
227,000
Capital balance
77,000
82,500
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
212,500
200,000
100,000
Total equities
512,500
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?
Solution;
Total Capital of the old partnership
(212.5K + 200K + 100K)
512,500
Revaluation of land
(100,000 – 50,000)
50,000
Inventory
(87,500- 62,500)
25,000
587,500
Divide by profit and loss (old partnership)
4/5
Total capital of the new partnership
734,375
Multiplied by profit and loss of M
1/5
Required contribution of M
146,875
10. What will the profit and loss sharing ratio (in percentage) of K after M’s investment?
Solution:
K’s profit and loss percentage
30%
Less: K’s P&L ratio * M’s interest
( 30% x 20%)
6%
New Profit and loss sharing ratio of K
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?
Journal entry to record retirement
J, Capital
160,000
K, Capital (40k*1/4)
10,000
L, Capital (40k*3/4)
30,000
Cash
200,000
K, Capital
140,000
10,000
130,000
12. What partnership capital will L have after J retires?
Journal entry to record retirement
J, Capital
160,000
K, Capital (40k*1/4)
10,000
L, Capital (40k*3/4)
30,000
Cash
200,000
L, Capital
300,000
30,000
270,000
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
13. How much will L receive after the liquidation?
Solution:
K
Personal assets
45,000
Personal liabilities
(30,000)
Personal Capital
15,000
J (30%)
Capital balances
Balance
Allocation of loss (5k*3/6 ;
5k*3/6)
40,000
J
25,000
10,000
L
30,000
(20,000)
10,000
J
25,000
(10,000)
15,000
K (40%)
L (30%)
(10,000)
40,000
(20,000)
15,000
(5,000)
(2,500)
5,000
(2,500)
37,500
0
(12,500)
(10,000)
Balance
Allocation of loss to J
37,500
(2,500)
35,000
14. How much will J receive after liquidation?
Solution:
K
Personal assets
45,000
Personal liabilities
Personal Capital
5k*3/6)
Balance
Allocation of loss to J
Personal Capital
(30,000)
(20,000)
(10,000)
15,000
10,000
15,000
5k*3/6)
K (40%)
40,000
L (30%)
(10,000)
40,000
(20,000)
15,000
(5,000)
(2,500)
5,000
(2,500)
37,500
0
(12,500)
10,000
(2,500)
2,500
0
37,500
(2,500)
35,000
L
(10,000)
J
30,000
25,000
(30,000)
(20,000)
(10,000)
15,000
10,000
15,000
J (30%)
Capital balances
Balance
Allocation of loss (5k*3/6 ;
J
25,000
15. How much will K receive after liquidation?
Solution:
K
Personal assets
45,000
Personal liabilities
L
30,000
J (30%)
Capital balances
Balance
Allocation of loss (5k*3/6 ;
10,000
(2,500)
2,500
0
40,000
K (40%)
L (30%)
(10,000)
40,000
(20,000)
15,000
(5,000)
(2,500)
5,000
(2,500)
37,500
0
(12,500)
10,000
(10,000)
Balance
Allocation of loss to J
37,500
(2,500)
35,000
(2,500)
2,500
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?
Solution:
Computation for gain /loss on sale
a) Sale of inventory
(60,000 + 10,000)
b) Sale of plant assets
Net Cash proceeds
Less: Carrying amount of Non cash asset
(60,000 + 70,000)
Loss on sale
Omar (40%)
Paolo (25%)
Capital Balances
24,000
26,000
17. Loan to Omar
(8,000)
Total
16,000
26,000
Allocation of loss
(10,400)
(6,500)
5,600
19,500
by partners
How much will Paolo receive after liquidation?
70,000
34,000
104,000
(130,000)
(26,000)
Quek (35%)
64,000
(14,000)
50,000
(9,100)
Total
114,000
(22,000)
92,000
(26,000)
40,900
66,000
Solution:
Computation for gain /loss on sale
a) Sale of inventory
b) Sale of plant assets
Net Cash proceeds
Less: Carrying amount of Non cash asset
Loss on sale
(60,000 + 10,000)
(60,000 + 70,000)
Omar (40%)
Paolo (25%)
Quek (35%)
Capital Balances
24,000
26,000
64,000
18. Loan to Omar
(8,000)
(14,000)
Total
16,000
26,000
50,000
Allocation of loss
(10,400)
(6,500)
(9,100)
5,600
19,500
40,900
by partners
How much will Quek receive after liquidation?
Solution:
Computation for gain /loss on sale
a) Sale of inventory
(60,000 + 10,000)
b) Sale of plant assets
Net Cash proceeds
Less: Carrying amount of Non cash asset
(60,000 + 70,000)
Loss on sale
Capital Balances
Loan to Omar
Total
Allocation of loss
by partners
Omar (40%)
24,000
(8,000)
16,000
(10,400)
Paolo (25%)
26,000
5,600
70,000
34,000
104,000
(130,000)
(26,000)
Total
114,000
(22,000)
92,000
(26,000)
66,000
70,000
34,000
104,000
(130,000)
(26,000)
26,000
(6,500)
Quek (35%)
64,000
(14,000)
50,000
(9,100)
Total
114,000
(22,000)
92,000
(26,000)
19,500
40,900
66,000
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?
Solution:
20.
Divide by: Profit and loss ratio
Maximum absorbable loss
(120,000 + 30,000)
150,000
50%
300,000
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?
Solution:
Maximum loss absorption capacity
Roger (30%)
Capital Balances
Payable to Sergio
Total interest
Divide by: Profit and loss ratio
Maximum loss absorption capacity
Rank of payment
108,000
108,000
30%
360,000
2nd
Roger (30%)
Rank of payment
Maximum loss absorption capacity
Difference between 1st and 2nd
Balance
Difference between 1st, 2nd, and 3rd
Equal balance
Sergio, (50%)
120,000
30,000
150,000
50%
300,000
3rd
Sergio, (50%)
2nd
360,000
3rd
300,000
360,000
60,000
300,000
300,000
300,000
300,000
Tito (20%)
129,000
129,000
20%
645,000
1st
Tito (20%)
1st
645,000
285,000
360,000
60,000
300,000
Tito: 1st priority (285,000 x 20%)
Tito will receive 57,000 on the first cash distribution after the settlement to outside
creditors.
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?
Solution:
Cash
Balance
Realization
Balance after realization
Payment to Payables
Balance after payment
Allocation of Sergio’s
deficiency (7,500 x 30
%/50% ; 20%/50%)
Payment to Partners
120,000
45,000
165,000
63,000
102,000
Other
Asset
360,000
(360,000)
0
Accounts
Payable
93,000
Loan from
Sergio
30,000
93,000
(93,000)
30,000
(30,000)
Roger
(30%)
108,000
(94,500)
13,500
Tito
(20%)
129,000
(63,000)
66,000
13,500
Sergio,
(50%)
120,000
(157,500)
(37,500)
30,000
(7,500)
(4,500)
7,500
(3,000)
9,000
66,000
63,000
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
Assumed
1,875,000
1,700,000
2,250,000
1,625,000
Supplementary:
Charges
3,125,000
Credits
2,800,000
The net gain/loss for the five-month period is?
Solution:
Assets to be realized
P1,375,000 Assets Realized
Assets Acquired
750,000 Assets Not Realized
Liabilities Liquidated
1,875,000 Liabilities to be Liquidated
Liabilities not Liquidated
1,700,000 Liabilities Assumed
Supplementary Charges
3,125,000 Supplementary Credits
Total
8,825,000 Total
Net Income (9.25M-8.825M)
425,000
The following date were taken from the statement of affairs of Gon Corporation:
1,200,000
1,375,000
2,250,000
1,625,000
2,800,000
9,250,000
Assets pledged for fully secured liabilities (ERNV: P 75,000)
Assets pledged for partially secured liabilities (ERNV: P52,000)
Free Assets (current fair value, P40,000)
Unsecured liabilities with priority
Fully secured liabilities
Partially secured liability
Unsecured liabilities without priority
P90,000
74,000
70,000
7,000
30,000
60,000
112,000
23. The amount that would be paid to creditors with priority is?
Unsecured liabilities with priority
7,000
24. The amount to be paid to fully secured creditors is?
Fully secured liabilities
30,000
25. The amount to be paid to partially secured creditors is?
Solution:
Net Free Assets
(40,000 + 45,000 – 7,000)
Divide by: Unsecured Priority Claims
(112,000 + 8,000)
Recovery percentage
Assets pledged to partially secured liabilities at NRV
Add: (Recovery percentage x Unsecured portion of PSL (65% x 8,000)
Payment to partially secured creditors
26. The amount to be paid to unsecured creditors is?
Net Free Assets
(40,000 + 45,000 – 7,000)
Divide by: Unsecured Priority Claims
(112,000 + 8,000)
Recovery percentage
Assets pledged to partially secured liabilities at NRV
Add: (Recovery percentage x Unsecured portion of PSL (65% x 8,000)
Payment to partially secured creditors
78,000
120,000
65%
52,000
5,200
57,200
78,000
120,000
65%
52,000
5,200
57,200
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?
The revenue to be recognized upon sale is the cash price of 100,000.
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?
Solution:
Contract price
154,000
Multiply by (Oct- Dec)
3/48
Revenue
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?
Solution:
After sale support cost
120,000
Multiply by
6/12
60,000
Multiply by mark up
150%
90,000
Computer system
800,000
Less:
(90,000)
Revenue
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?
Price
Less: Discount (900K × 2%)
Revenue
900,000
(18,000)
882,000
THEORIES:
1. PFRS 15 does not apply to contracts for insurance and reinsurance.
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.
3. Per PFRS 15, revenue is recognized once risk and rewards are transferred to the buyer or
purchaser.
Explanation: Per PFRS 15, revenue is recognised when the goods or services are transferred
to the customer, at the transaction price. Revenue is recognised in accordance with that
core principle by applying a 5-step model.
4. Per PFRS 15, if the stand-alone selling price is not available, the entity cannot estimate it
since they are not allowed to do so, because estimates are sometimes, misleading.
Explanation: If stand-alone selling price is not available, the entity must estimate the standalone selling price. There are three methods that are recommended for estimating standalone selling prices that are not observable: adjusted market approach, expected cost plus
margin approach, and residual approach.
5. Revenue from an artistic performance is recognized once
a. The audience register for the event online
b. The tickets for the concert are sold
c. Cash has been received from the tickets sales
d. The event takes place
Explanation: (d) Revenue from an artistic performance is recognized when the event
takes place. According to PFRS criteria, we recognize revenue when the seller has done
what is to be expected to be entitled to payment.
6. Which of the following is an advantage of a partnership?
a. mutual agency
b. limited life
c. unlimited liability
d. none of these
Explanation: (d) All of the choices from a to c pertains to the unique features of a general
partnership.
7. The first step in the liquidation process is to
a. convert noncash assets into cash.
b. pay partnership creditors
c. compute any net income (loss) up to the date of dissolution.
d. allocate any gains or losses to the partners.
Explanation: (d) When a partnership is liquidated, the books should be adjusted and has
closed the net profit or loss for the period in the manner they have agreed to in the
partnership agreement, It should be carried to the partners’ capital accounts.
8. Offsetting a partner's loan balance against his debit capital balance is referred to as the.
9. Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3
Explanation: (b) Partnership creditors have first claim on partnership assets. Creditors may
not claim on personal assets of the partners if partnership assets are available. However, if
the partnership does not have any assets left to pay the creditors, the creditors may claim
the partners’ personal assets. Also, personal creditors are to be settled by personal capital
of the partners, and therefore, do not have any claims on the partnership assets.
10. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first
year of operation, the partnership incurs a \$20,000 loss. The partners should share the
losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.
Explanation: (b) If it was not stipulated in the partnership agreement, the ratio of
partnership profits is the same as with the ratio of losses.
11. In a liquidation proceeding, if the proceeds on the realization of an asset exceed the lien
against that asset, the excess is assigned to:
a. The holder of the lien
b. Other lien holders whose assets will not realize a sufficient amount to cover liens
c. Meet the claims of the unsecured creditors
d. The stockholders
Explanation: (c) The amount realizable in excess of the lien form part of the free assets
and is assigned to cover unsecured debts.
12. An accounting statement of affairs of a corporation in financial difficulty indicates that
unsecured creditors would receive P0.40 on the peso. Which one of the following assets is
most likely to realize the smallest percentage of its book value?
a. Accounts receivable
b. Inventories
c. Plant and equipment
d. Goodwill
Explanation: (d) As defined, goodwill is the present value of future excess profits over a
normal rate of return. It is likely to have no realizable value if the company is in financial
difficulty.
13. In corporate liquidation, these are the assets that have not been pledged and hence are not
related to individual liability items.
14. It is a statement of position from a quitting concern point of view.
15. The computation of a safe installment payment for the XYZ partnership resulted in only
partner Z receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the loan
to Z before distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that assumed
capital deficits created in X's and Y's capital balances were losses to be allocated
to Z; Z's capital balance was the only capital balance left with a credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
Explanation: (c) Both cases are correct. In statement I, loans to partners should be paid
first before allocating cash available for distribution to partners so that total capital
balances are adjusted first before allocating cash payments. Statement II is correct
because it is assumed that all unrealized assets were considered as losses of the
partnership, and therefore, may leave some partners as insolvent as a result of loss
allocation. Therefore, Z, as the only solvent partner, will absorb the capital deficiencies
of partners X and Y.
ESSAY
1. Explain briefly the distinction between PAS 18 and PFRS 15.
PAS 18 considers different recognition criteria for different types of income received, while
PFRS 15 provides a standardized five-step model to recognize all types of revenue earned from
customer contracts. Also, under PAS 18, the timing of revenue recognition from the sale of goods is
based primarily on the transfer of risks and rewards. PFRS 15, instead, focuses on when control of
those goods has transferred to the customer. This different approach may result in a change of
timing for revenue recognition for some entities.
2. Discuss the 5-step method introduced by PFRS 15.
The first step is to identify the contract with the customer. PFRS 15 defines a contract as
an agreement between two or more parties that creates enforceable rights and obligations and sets
out the criteria for every contract that must be met. The contract can be implicit or explicit, and it
can be oral or written. A contract exists for the purposes of revenue recognition only if the
following are true: (1)it has commercial substance, affecting the risk, timing, or amount of the
seller’s future cash flows; (2) it has been approved by both the seller and the customer, indicating
commitment to fulfilling their obligations; (3)it specifies the seller’s and customer’s rights
regarding the goods or services to be transferred; (4) it specifies payment terms; and (5) it is
probable that the seller will collect the amount it is entitled to receive. The contract is deemed
inexistent if neither the seller nor the customer has performed any obligations under the contract
and both the seller and the customer can terminate the contract without penalty.
The second step is to identify the separate performance obligation within a contract. A
performance obligation is a promise in a contract with a customer to transfer a good or service to
the customer. The third step is to determine the transaction price. Transaction price is the
amount of consideration that a company expects to receive from a customer in exchange for
transferring a good or service to a customer, excluding amounts collected on behalf of third parties.
There are variable considerations which occur when some of the contract depends on the outcome
of the event. The constraint in determining the transaction price is when sellers only include an
estimate of variable consideration in the transaction price to the extent that it is probable that a
significant revenue reversal will not occur when the uncertainty associated with the variable
consideration is resolved. The fourth step is to allocate the transaction price to performance
obligations. For a contract that has more than one performance obligation, an entity should
allocate the transaction price to each performance obligation in an amount that depicts the amount
of consideration to which the entity expects to be entitled in exchange for satisfying each
performance obligation. The fifth step is to recognize revenue when (or as) each performance
obligation is satisfied. The performance obligation is satisfied when control of the goods or services
is transferred from the seller to the customer, which is the case for contracts with one performance
obligation.
3. How does liquidation differ from rehabilitation of financially troubled corporation.
Both are formal insolvency procedures but there are significant differences between the
two. In terms of trading position, severe cash flow problems are being experienced by the company
but the underlying business is viable and insolvency may be avoided in the situation for
rehabilitation of financially troubled corporation. On the other hand, in liquidation- specifically in
creditors’ voluntary liquidation and compulsory liquidation, the company is insolvent and cannot
pay its creditors. There is no hope for the business; therefore, assets need to be sold before the
company is closed down.
In terms of the main objective, rehabilitation of a financially troubled corporation or
administration focuses in rescuing the company by restructuring or otherwise returning it to
profitability so as to avoid insolvency. On the contrary, liquidation procedures would mean winding
up the company by realizing its assets so that creditors and shareholders can be repaid.
In terms of interests, the company interests are at the fore, alongside those of creditors for
rehabilitation procedures, while in liquidation, with the exception of voluntary liquidation, the
interests of the company are no longer relevant once the process is under way. The main focus is on
maximizing creditor returns.
4. Explain the purpose or purposes of a cash priority program or cash safe payment schedule in
partnership liquidation. Why is it beneficial?
Safe payment schedules are an effective method of computing the amount of safe payments
to partners and preventing excessive payments to any partner. This is beneficial because payments
may be made with full assurance that the money will not have to be returned to the partnership at
some later date in the event of future realization losses. On the other hand, the cash priority
program has the advantage of informing the partners at the beginning of the liquidation process
when they will receive cash in relation to other partners. The cash priority program is only
prepared once at the beginning of the winding up process while the safe payment schedule portray
what could happen in the future on a worst case basis. Both are beneficial to make sure that no
partner can get too much cash too soon.
5. Why should assets and liabilities be updated to current values prior to accounting for
dissolution?
Assets and liabilities should be updated to current values prior to accounting for dissolution
in order to achieve equity. Updating assets and liabilities provides accurate asset and liability
valuation on an ongoing basis to users of the company's reported financial information. When there
is a change in the ownership of the partnership, the problem of assigning a fair value of the firm
arises. That is why two approaches were used to address this issue: revaluation approach and
absence of revaluation approach.
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