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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? Answer: 1,050,000 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 Add: Total interest and salary (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? Answer: 540,000 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? Answer: 290,000 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? Answer: 1,951,500 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 Additional investment 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? Answer: 97,000 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 Additional contribution of K 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? Answer: 2,900,000 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? Answer: 146,875 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 Adjusted capital balance 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? Answer: 24% 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? Answer: 130,000 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? Answer: 270,000 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? Answer: 0 Solution: K Personal assets 45,000 Personal liabilities (30,000) Personal Capital 15,000 J (30%) Capital balances Add: Additional investment by K 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) Add: Additional investment by L Balance Allocation of loss to J Adjusted capital balance 37,500 (2,500) 35,000 14. How much will J receive after liquidation? Answer: 35,000 Solution: K Personal assets 45,000 Personal liabilities Personal Capital 5k*3/6) Add: Additional investment by L Balance Allocation of loss to J Adjusted capital balance Personal Capital (30,000) (20,000) (10,000) 15,000 10,000 15,000 5k*3/6) Add: Additional investment by L 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 Add: Additional investment by K Balance Allocation of loss (5k*3/6 ; J 25,000 15. How much will K receive after liquidation? Answer: 0 Solution: K Personal assets 45,000 Personal liabilities L 30,000 J (30%) Capital balances Add: Additional investment by K 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 Adjusted capital balance 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? Answer: 5,600 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) Amounts received 5,600 19,500 by partners How much will Paolo receive after liquidation? Answer: 19,500 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) Amounts received 5,600 19,500 40,900 by partners How much will Quek receive after liquidation? Answer: 40,900 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 Amounts received 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? Answer: 300,000 Solution: 20. Adjusted capital of Sergio 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? Answer: 57,000 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? Answer:9,000 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? Answer: 425,000 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? Answer: 7,000 Unsecured liabilities with priority 7,000 24. The amount to be paid to fully secured creditors is? Answer: 30,000 Fully secured liabilities 30,000 25. The amount to be paid to partially secured creditors is? Answer: 57,200 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? Answer: 57,200 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? Answer: 100,000 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? Answer: 9,625 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? Answer: 710,000 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? Answer: 882,000 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. 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 purchaser. Answer: FALSE 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. Answer: FALSE. 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. Answer: Right of offset 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. Answer: FREE ASSETS 14. It is a statement of position from a quitting concern point of view. Answer: Statement of Affairs 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.