PARTNERSHIP FORMATION

Valuation PRO FORMA

1. Cash - Face Value
2. Non cash assets (order of priority) PARTNER A PARTNER B
• Agreed value Unadjusted capital xx xx
• FMV / Appraised value Increase in asset xx xx
• Carrying value Decrease in asset (xx) (xx)
3. Liabilities - NOT considered assumed if Increase in liabilities (xx) (xx)
the problem is silent. Decrease in liabilities xx xx
Adjusted capital xx xx

Analysis:
Increase in asset = increase in capital
Decrease in asset = decrease in capital
Increase in liabilities = decrease in capital
Decrease in liabilities = increase in capital

Contributed Asset (Agreed/FMV/Appraised) xx

Liability assumed by the partnership (xx)
Contributed Capital xx

Total agreed capital xx

Multiply by: Capital interest (%) x
Capital credit / Agreed capital xx

IF SILENT: CONTRIBUTED CAPITAL = CAPITAL CREDIT

NOTE: Contributed capital is DIFFERENT from capital credit. Since the

capital credit is the capital that is recorded in the books.

Journal entry

Cash xx
Land xx
Building xx
A, Capital xx

A, Capital xx
Accounts payable xx

If you see a phrase stating that "CASH SETTLEMENT MUST BE MADE WITHIN THE
PARTNERS" this transaction is a private transaction OUTSIDE the partnership.
Hence, NOT RECORDED in the partnership books.

If you see a phrase "A PARTNER SHALL HAVE ADDITIONAL INVESTMENT IN ORDER TO
EQUALIZE THE CAPITAL BALANCES OF THE PARTNERS" this transaction is RECORDED
in the partnership books.
PARTNERSHIP OPERATIONS

Rules in the distribution of profits & losses

PRO FORMA 1) As to the capitalist partner
X Y TOTAL • Division of profits
Salaries x x x A) In accordance with agreement
Bonus x x x B) In the absence of agreement, in accordance with capital
Interest x x x
contributions
Remainder x x x
Total x x x
• Division of losses
SALARIES A) In accordance with agreement
• Given regardless of the result of the operation. B) If only division of profits is agreed upon, the division of
• Salaries can be fractional depending on the date the losses will be the same as the agreement on the division of
partnership was formed. profits.
C) In the absence of agreement, division of losses is in
INTEREST accordance with capital contributions.
• Given regardless of the result of the operation.
• Either by simple average or weighted average. 2) As to industrial partner
• Either by beginning capital or ending capital. • Division of profits
A) In accordance with agreement
NOTE: TEMPORARY WITHDRAWAL is NOT CONSIDERED in the computation of B) In the absence of agreement, just & equitable share.
weighted average capital.

PERMANENT WITHDRAWAL is CONSIDERED in the computation of weighted • Division of losses

average capital. A) In accordance with agreement
B) In the absence of agreement, the capitalist - industrial
In the absence of any information, whether the withdrawal is partner, in his character as industrial partner shall have NO
temporary or not, the basis would be: share in the losses. But in his capacity as capitalist partner
will share in proportion of their capital contribution.
Withdrawal = Salaries = TEMPORARY
Withdrawal < Salaries = TEMPORARY
Withdrawal > Salaries = The EXCESS in salaries is PERMANENT Note: If the problem mentions the phrase "in so far available" or if
the partnership allocation is based on priority, that means the
BONUS
partnership profit distribution explicitly stated that at the point
• Given if there is a PROFIT ONLY.
that the allocated profit already equaled net profit, allocation
• The basis of the bonus should be a positive amount.
stops. Use the amount that would have been distributed as the basis in
allocating any remaining profit.

CORRECTION OF ERRORS
1) Determine the correct net profit of the prior period.
2) Compute the proper share of each partner using the profit and loss
ratio in the year in which the error occurred.
3) Compute the difference between the share in the profit that each
partner actually received and the share of each partner would have
received in #2.
4) Adjust partners capital accounts by the amount in #3.
PARTNERSHIP DISSOLUTION
ADMISSION OF A NEW PARTNER

Purchase of Interest Investment in the partnership

• NOT RECORDED in the partnership books • RECORDED in the partnership books
• Partnership capital remains the SAME before & after the • Partnership capital is INCREASED by the incoming
admission of the incoming partner partner's contribution
• No gain or loss is recognized in the partnership books • No gain or loss is recognized in the partnership
books

WITHDRAWAL OF THE OLD PARTNER

Purchase by remaining partners Settlement by the Partnership

• NOT RECORDED in the partnership books • RECORDED in the partnership books
• Partnership capital remains the SAME before & after the • Partnership capital is DECREASED by the payment for the
retirement or death of the outgoing partner outgoing partner's capital balances
• NO GAIN OR LOSS is recognized in the partnership books • NO GAIN OR LOSS is recognized in the partnership books

NOTE: Whenever there is a dissolution, you need to update first the capital balances of the partners.
1. Allocate net income to partners
2. Revalue assets & or liabiltiies

PRO FORMA

PARTNERS TOTAL CONTRIBUTED CAPITAL (TCC) TOTAL AGREED CAPITAL (TAC)

A xx xx
B xx xx
C xx xx
D xx xx

Note: For example, partner D is the new partner.

If the problem does not state that there is revaluation of assets, then there is NO REVALUATION.
If TOTAL AGREED CAPITAL (TAC) is not given, analyze the problem whether the revaluation is upward or downward.
Compute TAC: Total capital of old partners / Total capital % OR Capital of new partner / Capital %
Choose the lower amount between the two if revaluation DOWNWARD, otherwise if revaluation UPWARD the higher amount
ANALYSIS
• If TCC & TAC is NOT EQUAL. Hence, there is either a REVALUATION UPWARD or REVALUATION DOWNWARD. This revaluation will
be shared by the OLD partners in accordance to their ORIGINAL P&L RATIO.
• If TCC & TAC is EQUAL, no revaluation.

NEW PARTNER/S TCC & TAC

TCC = TAC : NO BONUS
TCC > TAC : BONUS TO OLD PARTNERS (using OLD P/L RATIO)
TCC < TAC : BONUS TO NEW PARTNER

BONUS vs REVALUATION
P&L RATIO = CAPITAL RATIO : Bonus & Revaluation will yield same result
P&L RATIO > CAPITAL RATIO : Bonus method should be prefer
P&L RATIO < CAPITAL RATIO : Revaluation method should be prefer

FORMULA FOR THE INTEREST OF RETIRING PARTNER

Investments xx
Withdrawals (xx)
Share in partnership profits to date of retirement xx
Share in partnership losses to date of retirement (xx)
Loans & advances TO the partnership xx
Loans & advances FROM the partnership (xx)
Revaluation upward of assets xx
Revaluation downward of assets (xx)
INTEREST UPON RETIREMENT xx
PARTNERSHIP LIQUIDATION
SECRET TECHNIQUE

Step 1

Cash beginning xx
Cash proceeds from sale of NCA xx
Payment of liabilities (ACTUAL) (xx)
Remaining UNPAID liabilities (xx)
Estimated future liquidation expenses (xx)
Cash available to partners xx

Step 2

A B TOTAL
Capital interest before liquidation xx xx xx
Work back figures (xx) (xx) (xx)
Payment to partners (cash available to partners) xx xx xx

Note:
• Capital interest = Capital balance + Loans Payable (partnership POV) - Loans Receivable (partnership POV)
• In case the partner has a deficit (negative capital balance) check whether the partner is solvent or insolvent.
If the problem is silent, the assumption is INSOLVENT. Absorb the deficit until all deficit is exhausted.
• In case the liquidation will take several months, the CAPITAL INTEREST that we will use in the 2nd month is the
ending capital of the partners in the first month. (Capital interest January - Share in loss of NCA January -
Payment to partners January = Beg Capital February)

Schedules that may be used to determine cash payments to partners

1. Schedule of safe payments
Anticipate the two worst case scenarios
• Assume a total loss on all remaining non cash assets, provide for all possible losses, including potential
liquidation cost & unrecorded liabilities
• Assume that partners with a potential capital deficit will be unable to pay anything (assumed personally
insolvent)

What are the possible losses?

• Amounts of unrealized non cash asset, plus
• Amount of cash withheld such as payment for unpaid expenses / liabilities & anticipated liquidation expenses

The hypothetical deficit balance is allocated to partners having capitals with CREDIT balances using their P&L ratio

2. Cash priority program

Formula: Maximum loss absorption capacity = Total partners interest in the partnership / Partners profit or loss %
• Cash distribution plan is able to inform the partners at the beginning of the liquidation process when they will
receive cash in relation to other partners
• PARTNERS ARE BEING RANKED. The TOTAL INTEREST (equity account) balances before liquidation represent the
equities of the partners in the partnership, being the CAPITAL plus LOANS PAYABLE TO PARTNER minus LOANS
RECEIVABLE FROM PARTNER
• The TOTAL INTEREST is divided by the profit & loss ratio to determine the MAXIMUM ABSORPTION CAPACITY. This
ranks the partners in terms of who could absorb the largest loss & who could absorb the smallest loss. Ranking
the partners in this manner reveals the order in which cash should be distributed to them as it becomes
available
• VULNERABILITY RANKINGS = the partner with the LOWEST absorption capacity is considered to be the MOST VULNERABLE
to partnership losses. In other words, if the maximum absorbable loss will be attained, it consumes all partners
capital, thus no amount would be given to that partner with lowest absorption capacity

EXAMPLE

A (20%) B (30%) C(50%)

Capital balances before liquidation 100,000 150,000 200,000
Payable to B 20,000
TOTAL INTEREST in the partnership 100,000 170,000 200,000
Divide by: P/L % 20% 30% 50%
Maximum loss absorption capacity 500,000 566,667 400,000
Rank of payment 2nd 1st 3rd

A (20%) B (30%) C (50%)

Rank of payment 2nd 1st 3rd
Maximum loss absorption capacity 500,000 566,667 400,000
Difference between 1st & 2nd (66,667)
Balance 500,000 500,000 400,000
Difference between 1st, 2nd & 3rd (100,000) (100,000)
Equal balance 400,000 400,000 400,000

CASH PRIORITY PROGRAM

A (20%) B (30%) C (50%)

Rank of payment 2nd 1st 3rd
1st priority (66,667 x 30%) 20,000
2nd priority (100,000 x 20%) (100,000 x 30%) 20,000 30,000
Total 20,000 50,000

• B is paid 20,000 first

• Next, A & B are paid 20,000 & 30,000
• Any remaining cash will be distributed to all partners based on their P/L Ratio
CORPORATE LIQUIDATION
Prepared in the assumption of liquidation, that is quitting concern, not going concern.

CLASSIFICATION OF ASSETS

Assets pledged to fully secured creditors NRV of the asset ≥ Related liability
Assets pledged to partially secured creditors NRV of the asset < Related liability
Free assets Not pledged as security to any liability

CLASSIFICATION OF LIABILITIES

Fully secured liability Creditor has lien on specific assets having estimated NRV that is greater than or equal to the
amount of liability
Partially secured Creditor has lien on specific assets having estimated NRV that is less than the amount of
liability liability
Unsecured liabilities WITH Creditor has no lien on any specific assets of the debtor corporation, but its claim ranks ahead
priority of other unsecured liabilities in the order of payment
• Administrative / Liquidation expenses
• Salaries
• Taxes
Unsecured liabilities All other liabilities for which the creditor has no lien on any specific assets of the debtor
WITHOUT priority corporation

PRO FORMA OF STATEMENT OF AFFAIRS

SHORTCUT TECHNIQUES IN STATEMENT OF AFFAIRS

• Net free assets < Unsecured Liabilities Without Priority = Estimated deficiency to unsecured creditors

NOTE: If there is deficiency, compute for the recovery percentage.

• Recovery % = Net free assets / Total unsecured liabilities WITHOUT priority

Payments to
 Fully secured creditors 100%
Partially secured creditors
• Secured portion • 100%
• Unsecured portion • Unsecured portion x Recovery %
Unsecured WITH priority 100%
Unsecured WITHOUT priority Total Unsecured Liabilities WITHOUT Priority x Recovery %

NOTE: The UNSECURED LIABILITIES WITHOUT PRIORITY should EXCLUDE the unsecured portion from PARTIALLY secured creditors

WAYS TO COMPUTE ESTIMATED DEFICIENCY

Diskarte #1

Net free Assets xx

Less: Total unsecured liabilities WITHOUT priority xx
Estimated deficiency xx

Diskarte #2

Total unsecured liabilities WITHOUT priority xx

Multiply by: (1 - % of recovery) %
Estimated deficiency xx

Diskarte #3

Estimated NRV/FMV of assets xx

Recorded liabilities (xx)
Unrecorded liabilities / expenses (xx)
Estimated deficiency xx

Diskarte #4

Estimated (Gain) Loss on Realization Xx/(xx)

Add: Unrecorded expenses xx
Estimated net loss xx
Less: Stockholder's equity (xx)
Estimated deficiency xx

STATEMENT OF REALIZATION & LIQUIDATION (SORAL)

Statement of Affairs Statement of Realization & Liquidation

BASED ON Estimates Actual liquidation results
PROVIDING Summary of estimated results of a completed Ongoing reporting of trustee's activities & is updated throughout
liquidation liquidation process

DR > CR = Loss
DR < CR = Gain

COMPUTATION OF ESTATE DEFICIT, END

 Estate equity / Deficit, beg xx
Net gain (loss) on realization Xx/(xx)
Administrative expenses xx
Estate equity / Deficit, end xx

ALTERNATIVE WAY TO COMPUTE FOR CASH, END

Estate equity / Deficit, end xx

Liabilities not liquidated xx
TOTAL ASSETS, end xx
Assets not liquidated (xx)
CASH, end xx
LONG TERM CONSTRUCTION CONTRACTS
Five steps in the recognition of revenue from contracts (PFRS 15)
1. Identify the contracts with customers
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligation
5. Recognize revenue when a performance obligation is satisfied

Revenue can be recognized

• OVER TIME or PERCENTAGE OF COMPLETION
• POINT IN TIME or COST RECOVERY METHOD

Two types of construction contracts

• Fixed price contract
• Cost plus contract

Construction revenue is based on the following:

• Agreed variation (+/-)
• Cost escalation on a fixed price contract (+)
• Penalties imposed due to delays by the contractor (-)
• # of units (+)
It should comprise of the amount specified in the contract, subject to the following:
• Variations
• Incentive payments
• Claims
Note: For the three items mentioned above, it must be PROBABLE & CAN BE MEASURED RELIABLY to be a contract revenue.

CONSTRUCTION COST

1. Cost that relate directly to the specific contract

• Site labor cost, including site supervision
• Cost of materials used in construction
• Depreciation of plant & equipment used in the contract
• Cost of moving plant, equipment, & materials to & from the contract site
• Cost of hiring plant & equipment
• Cost of design & technical assistance that are directly related to the contract
• Estimated cost of rectification & guarantee work, including expected warranty cost
• Claims from third parties

2. Cost that are attributable to the contract activity in general & can be allocated to the contract, such as
• Insurance
• Cost of design & technical assistance not directly related to a specific contract
• Construction overheads

3. Other cost which are specifically chargeable to the customer under the terms of the contract, general administration
cost & development cost

Cost excluded from construction contracts

• General administration cost (unless reimbursable specified in the contract)
• Research & development (unless reimbursable specified in the contract)
• Depreciation of IDLE plant & equipment not used on any particular contract
• Selling cost
• Advances to subcontractor
• Materials delivered but not yet utilized (except if materials are specialized)

PRO FORMA COMPUTATION OF REALIZED GROSS PROFIT EACH YEAR

YEAR 1 YEAR 2 YEAR 3

Contract price xx xx xx
(-) Total estimated cost (xx) (xx) (xx)
Total estimated gross profit xx xx xx
(x) % of completion X% X% X%
Gross profit to date xx xx xx
(-) Gross profit prior year/s (xx) (xx)
Gross profit - CURRENT YEAR xx xx xx
NOTE: If loss it is recognized 100%

Total Estimated Cost is computed by

Cost incurred each year xx

(+)Cost incurred prior year xx
Cost incurred to date xx
(+) Estimated cost to complete xx
 TOTAL ESTIMATED COST xx

Percentage of Completion is computed by

TOTAL cost incurred to date / Total Estimated Cost

TOTAL cost incurred to date / (Total cost incurred to date + Estimated cost to complete)

ANALYSIS OF ACCOUNTS

YEAR 1 YEAR 2 YEAR 3

Revenue (Contract price x % of completion THIS YEAR) xx xx xx
Cost (Cost incurred THIS YEAR) (xx) (xx) (xx)
Gross profit xx xx xx

FINANCIAL STATEMENT PRESENTATION

Construction in progress xx
Progress billings (xx)
Net xx

If positive amount = Contract Asset / Due from Client

If negative amount = Contract Liability / Due to Client

ANOTHER WAY OF COMPUTATION

2021 2022 2023

Cost incurred TO DATE xx xx xx
Estimated cost to complete xx xx xx
Total Estimated Cost xx xx Xx

Percentage of completion TO DATE % % %

=
(Cost incurred to date / Total Estimated Cost)

NOTE: Check every year if the TOTAL ESTIMATED COST exceeds the CONTRACT PRICE. If that's the case recognized the loss 100%.

2021 2022 YTD 2023 YTD

REVENUE xx xx xx xx xx
COST (xx) (xx) (xx) (xx) (xx)
GROSS PROFIT xx xx xx xx xx

Revenue = Contract price x % of completion

Cost incurred to date = Cost YTD
CONSIGNMENT

TYPES OF GOODS IN CONSIGNMENT

1. Sold units
2. Unsold units

TYPES OF COST INCURRED IN CONSIGNMENT

1. Inventoriable cost - are product cost to be allocated to BOTH sold & unsold units.

• Freight from consignor to consignee (but freight on units returned are expensed)
• Insurance freight of consigned goods
• Handling cost
• Cartage
• Packing
• Other expenses related to consigned goods

2. Non - inventoriable cost - are those that which are not to be allocated.

• Advertising expense
• Delivery & installation
• Commission
• Reconditioning on delivered units to customers
• Insurance in transit to customers
• Other selling expenses
• Other expenses related to sold units

Things to remember:
1. Freight cost incurred by either the consignor or consignee in transferring the goods from consignor to the
consignee are inventoriable (product cost) & must be allocated between the cost of units sold & cost of
inventory on hand
2. Any inventoriable cost (freight) related to returned goods must be charged to profit or loss
3. Selling expenses including the consignee's commission shall be deducted in full
4. The cost of inventory on consignment is determined by adding the cost of goods on hand plus other inventoriable
cost
5. Goods on consignment is used under the periodic inventory system & inventory is used in the perpetual inventory
system
6. In some cases, the consignor requires cash advance from the consignee which are eventually recovered
periodically by the consignee through monthly deductions, in proportion to the number of units sold, from the
remittance which accompany the monthly account sales
7. Agreement of the consignor & the consignee shall prevail as long as it is not contrary to law, morals, customs &
public policy.
FRANCHISE (PFRS 15)
STEPS ON RECOGNIZING REVENUE

Step 1: Identify the Contract

• Is an agreement between two or more parties that created enforceable rights and obligations

CRITERIA TO BE MET IN ORDER FOR A CONTRACT TO EXIST FOR PURPOSES OF REVENUE RECOGNITION
• The contract has commercial substance
• The entity can identify the payment terms
• The parties to the contract have approved the contract
• The entity can identify each party's rights regarding goods or services to be rendered
• It is probable that the entity will collect the consideration to which it will be entitled

FOR THE PURPOSE OF APPLYING IFRS 15; A CONTRACT DOES NOT EXIST IF BOTH OF THE FOLLOWING ARE TRUE
• Contract is unperformed
• Both seller and the buyer can terminate the contract without penalty

CONTRACT ASSET - CONDITIONAL

RECEIVABLES - UNCONDITIONAL

CONTRACT MODIFICATIONS
• Is a change in the scope or price (or both) of a contract that is approved by the parties to the contract
• Examples: Change order, variation or amendment

TWO SCENARIOS IN CONTRACT MODIFICATIONS

• Creates new contract if the conditions are met:
○ The scope of the contract increases because of the addition of promised goods or services THAT ARE DISTINCT
○ The price of the contract increases by an amount of consideration that reflects the entity's standalone selling
prices of the additional promised goods or services and any appropriate adjustments to that price

A good or service that is promised to customer is distinct if BOTH of the following criteria are met:
○ The customer can benefit from the good or service
○ The entity's promise to transfer the good or service to the customer is separately identifiable from other
promises in the contract

• Modifications of the existing contract

○ An entity shall account for the existing contract modification as if it were part of the existing contract if the
remaining goods or services are NOT DISTINCT

Step 2: Identify the separate performance obligation

• Performance obligation is a promise in a contract to provide a product or service to a customer

○ Distinct - separate performance obligation
○ Not distinct - combine the performance obligation

Step 3: Determine the transaction price

• Amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or
services to a customer
• When determining the transaction price, an entity shall consider the effects of ALL of the following:
○ Variable considerations
○ Existence of a significant financing component
○ Noncash considerations
○ Consideration payable to a customer

Step 4: Allocate transaction price to the separate performance obligation

• Does not apply to contracts with single performance obligation
• Allocation basis is relative fair value or stand alone selling price of each performance obligation
• If the stand alone selling price is not directly observable an entity shall estimate the stand alone selling price

EXAMPLE

Step 5: Recognize revenue when each performance obligation is satisfied

• Satisfaction over the period of time (RIGHT TO ACCESS)
• Satisfaction at a point in time (RIGHT TO USE)
HOME OFFICE & BRANCH ACCOUNTING

AGENCY BRANCH
Not a separate entity, viewed as an Accounted for separately, has a complete set of books. For external reporting
extension of the home office. purposes, branch's financial statements are being combined to the home office.
Display merchandise & take customer Carries stock of merchandise
orders; but do not carry stock of Provides goods & services similar to home office
merchandise
Customers orders are sent to the Grants credit terms within company policies
home office for approval
Holds revolving fund cash Has its own assets & able to incur its own liabilities

ACCOUNTING FOR AGENCY

• Neither keeps a complete set of books nor uses a double - entry system of accounts
• Transactions are being recorded by the home office
• A record of sales to customers & a list of cash payments supported by vouchers are sufficient
• Imprest system is usually adopted by the home office for the working fund of the sales agency
• Entries made by the home office depend on whether sales agency net income is determined separately or not
separately

The following are some of the pro forma journal entries related to the transactions of the agency
ACCOUNTING FOR BRANCH

• A branch operates as a separate business unit but is subjected to control by the home office.
• Both the home office & branch maintain separate books. However, all accounts are combined for external reporting
purposes.
• Transactions with outside parties are recorded in the usual manner.
• Transactions between the home office & a branch are recorded in intracompany accounts.
• Reciprocal accounts are used by both home office & branch
○ Investment in branch / Branch Current - an asset account & has a normal debit balance & is being maintained
by the home office
○ Home office / Office Current - this takes place the capital account & has a normal credit balance & is being
maintained by the branch
• Other reciprocal accounts
○ Shipments to branch - deduction from the merchandise available for sale on the home office books. This
account is used when inventories are being transferred by the home office to its branch.
○ Shipments from home office - additions to purchases to arrive at the merchandise available for sale in the
books of the branch. This account is used when inventories are being received by the branch from the home
office.
NOTE:
• Kung sino magrerecord ng PPE, sakanya yung debit to PPE.
• Kung sino bumili ng PPE, sakanya yung credit to cash.
• Kung sino gagamit ng PPE, sakanya depreciation expense
• Kung sino magrerecord ng PPE, sakanya accumulated depreciation

PREPARATION OF SEPARATE & COMBINED FINANCIAL STATEMENTS

• Combined financial statements for both branch & home office for EXTERNAL USE. In combining the branch data with
home office data, working paper elimination of certain reciprocal interoffice items is necessary.
○ Home office & Investment in branch are eliminated
○ Shipments from Home office & Shipments to branch are eliminated
○ Other interoffice revenue & expense items are also eliminated so that the results of transactions with
outsiders are only reflected.

INVENTORY SHIPMENT TO BRANCH BILLED ABOVE COST

• Shipment to branch credited at cost by the home office
• Shipment from home office debited at transfer price by the branch
• Difference represents the mark - up that is reflected in the loading in the branch inventories account.
○ Allowance for markup in branch inventory
○ Allowance for overvaluation
 ○ Loading in branch inventory
○ Unrealized profit
○ Allowance for unrealized gross margin in branch inventory
○ Deferred profit
○ Unrealized intercompany inventory profit
• Be mindful that mark - up percentage may vary from one period to another.

ELIMINATING ENTRIES

PRO FORMA COMPUTATION

Transactions between the Home Office & Branch

COST BILLED AOI

Beg inventory xx xx xx
Shipment from home office xx xx xx
Total goods available for sale xx xx xx
Ending inventory (xx) (xx) (xx)
Cost of goods sold xx xx xx

Transactions between Outsiders & Branch

Beginning inventory xx
Purchases xx
Freight xx
Total goods available for sale xx
Ending inventory (xx)
Cost of goods sold xx

Individual profit of the branch

Sales (branch) xx
Cogs (Combined from transactions between H.O & Outsiders) (xx)
Individual Gross Profit of branch xx
Operating expenses (xx)
Individual Profit of branch xx

NOTE: In computing TGAS, shipments from home office AT BILLED PRICE is INCLUDED

TRUE PROFIT OF THE BRANCH

Sales (branch) xx
Cogs (Combined from transactions between H.O & Outsiders) (xx)
 Individual Gross Profit of branch xx
Operating expenses (xx)
True profit of the branch xx

NOTE: In computing TGAS, shipments from home office AT COST is INCLUDED

INTERBRANCH TRANSFER OF CASH

• There may be occasions where in the home office may instruct transfer of cash from one branch to another branch.
• The commonly used approach is to treat the transfer as if they went through the home office directly.
• The branches involved in an interbranch transfer generally account for the transfers as if they are dealing with
the home office rather than with another branch.

INTERBRANCH TRANSFER OF MERCHANDISE

• There may be instances when home office finds it necessary to authorize the transfer of merchandise from one
branch to another branch.
• Similar to interbranch of cash, interbranch transfers are treated as if they went through the home office.
• Special problem arises with respect to EXCESS FREIGHT charges because of the indirect routing of shipments.
• Since branch receiving the shipments are properly charged with freight & freight is properly accounted as
inventoriable cost, any EXCESS FREIGHT should be absorbed by home office & treated as OPERATING EXPENSE. On the
other hand, any reduction in freight is a SAVINGS by the home office & its not recognized in the home office
books.

ANALYSIS
• Home office transfers inventory to Branch A. Branch A pays freight that's why it has credit cash.
• Later on, Home Office instructed Branch A to transfer the merchandise to Branch B.
• Branch A will credit freight - in (freight from H.O to Branch A)
• Branch B will debit freight - in (normal freight, means the freight - in from H.O to Branch B directly)
• Branch B will debit freight - in (freight on INDIRECT ROUTING if there is savings)
• The difference of the freight on indirect routing less the normal freight is the excess freight which is debited
in the home office books.

INVENTORY DESTROYED BY FIRE

• For computation of net sales, consider sales returns ONLY.
BUSINESS COMBINATION
A business combination occurs when one company acquires another or when two or more companies merge into one. After
the combination, one company gains control over the other.

Business combinations are carried out either through:

• Asset Acquisition; OR
• Stock Acquisition

• Asset acquisition - acquirer purchases the ASSETS & assumes the LIABILITIES of the acquiree in exchange for
cash or other non - cash consideration. Business combination effected through ASSET ACQUISITION may be either
merger or consolidation.
○ Merger: A + B = A or B
○ Consolidation: A + B = C

• Stock acquisition - the acquirer obtains CONTROL over the acquiree by acquiring majority ownership interest
(more than 50%) in the voting rights of the acquiree. Acquirer = Parent, Acquiree = Subsidiary.

Classification of Business Combination

• Horizontal Integration - combination that involves companies within the same industry that has been previously
competitors.
Example: Shell & Petron were to combine

• Vertical Integration - combination takes place between two companies involved in the same industry but at
different levels.
Example: A tire manufacturer & a tire distributor

• Conglomerate Combination - is one involving companies in unrelated industries having title, if any, production
of market similarities for the purpose of entering into new market or industries.
Example: Tire manufacturer & insurance company

Accounting for Business Combination

1. Identifying the acquirer
2. Determining the acquisition date
3. Recognizing & measuring goodwill
• Consideration transferred
• Non - controlling interest in the acquiree
• Previously held equity interest in the acquiree
• Identifiable assets acquired & liabilities assumed on the business combination

The consideration transferred in a business combination is measured at FAIR VALUE.

• Cash
• Non - cash assets
• Equity instruments
• Contingent consideration

Summary notes for Contingent Consideration

Date of Acquisition
• Measured at FAIR VALUE JOURNAL ENTRY
Equity Credit: Share premium - Contingent Consideration (SP-CC)
Cash Credit: Estimated liability on Contingent Consideration (ELCC)

Subsequent to Date of
Acquisition
Equity NOT remeasured
Cash If changes were due to the facts & circumstances that existed at date of acquisition /
within the measurement period
• Adjust the estimated liability on contingent consideration & the corresponding
goodwill / gain on bargain purchase

If changes were due to the facts & circumstances after date of acquisition / beyond
measurement period
• Adjust the estimated liability on contingent consideration ONLY. Recognize gain or
loss on re-measurement of ELCC in profit or loss

Note: Re-measurement period is 1 year

If Contingent event
happens
Equity Close the balance of SP-CC, any balancing figures is to be treated based on the following:
• If it resulted to a LOSS, charge to share premium. If insufficient, charge to R.E.
• If it resulted to a GAIN, credit it to share premium.
Cash Any gain or loss is recognized in profit or loss. Gain or loss is the difference of the
balance of the contingent liability versus the actual cash paid upon happening of the
contingent event.

If Contingent event did NOT happen

Equity Transfer SP-CC to Share Premium
Cash Transfer ELCC to Gain (P&L)

Specific recognition principles

• Operating Leases
○ Acquiree is the lessee
 GR: The acquirer DOES NOT recognize any assets or liabilities related to an operating lease in which
the acquiree is the lessee.
 Exception: The acquirer determines whether the terms of each operating lease in which the acquiree is
the lessee are favorable or unfavorable.
Favorable - acquirer recognizes an intangible assets
Unfavorable - acquirer recognizes a liability
○ Acquiree is the lessor - the acquirer DOES NOT recognize separate intangible asset or liability regardless
of whether the terms of operating lease are favorable or unfavorable when compared with market terms.

ACQUISITION RELATED COST

ACQUISITION METHOD PURCHASE METHOD

Applicability Full PFRS PFRS for SME's
Directly Attributable Cost Acquisition of net assets Capitalized
• Professional fees paid to • Expensed
Accountants
• Legal advisers Acquisition of stocks
• Valuers • Separate FS - Capitalized
• Consultants • Consolidated FS - Expensed
• Finders fees
• Brokerage fees
Indirectly Attributable Cost
• General & Administrative Cost Expensed Expensed
• Cost of maintaining an internal
acquisitions department
Stock Issuance Cost Charged in the following order of Charged in the following order of
• Transaction cost such as stamp priority: priority:
duties • Share premium from issuance • Share premium from issuance
• Professional adviser's fees • If insufficient, share premium • If insufficient, share premium from
 • Underwriting cost from previous issuance previous issuance
• Brokerage fees • If still insufficient, charged • If still insufficient, charged to
to Retained Earnings Retained Earnings
Debt Issue Cost or Bond Issue Cost Deduction to the fair value of the Deduction to the fair value of the debt
debt issued issued
Non controlling Interest Full (NCI @ Fair Value) / Partial Partial ONLY (NCI @ Proportionate)
(NCI @ Proportionate)
Goodwill Subject to Impairment Amortized (presumed life is 10yrs) and
to be subjected to impairment

NOTE: Listing fees of shares to PSE – PIC Q and A No. 2011-04 states that listing fees of shares to PSE is treated
as an expense and not as charged to share premium

FORMULAS ON ACQUISITION OF NET ASSETS (MERGER)

NOTE: ALL EQUITY ACCOUNTS OF THE ACQUIREE IS IRRELEVANT

ORDINARY SHARE CAPITAL

Ordinary share capital of surviving before merger xx
Newly issued shares @par xx
Total Ordinary Share Capital xx

RETAINED EARNINGS
Retained earnings of surviving before merger xx
Gain from bargain purchase xx
Share issuance cost can't be absorbed by share premium (xx)
Indirect & direct cost (xx)
Total Retained earnings xx

SHARE PREMIUM
Share premium of surviving before merger xx
Resulting share premium from newly issued shares xx
Share issuance cost absorbed by share premium (xx)
Total Share Premium xx

ASSETS
Assets of surviving @BV before merger xx
Assets of dissolved @FV xx
Goodwill xx
All cash payments (xx)
Total Assets xx

LIABILITIES
Liabilities of surviving @BV before merger xx
Liabilities of dissolved @FV xx
Contingent consideration xx
Unpaid expenses xx
Consideration transferred bonds payable @FV net of bond issue cost xx
Total Liabilities xx
BUSINESS COMBINATION - STOCK ACQUISITION
PRO FORMA - COMPUTATION

TOTAL PARENT NCI

Consideration transferred
(Inclusive of Control Premium) xx xx
Non Controlling Interest (NCI) xx xx
TOTAL xx xx xx
BV SHE - Subsidiary
FV Adjustments (+/-) 100% 75% 25%
Fair Value SHE - Subsidiary (xx) (xx) (xx)
Goodwill / (Gain on bargain purchase) xx xx xx

Non Controlling Interest

• If NCI is measured @Fair Value / Full goodwill, do FLOORTEST.
NCI @ FV / FULL GOODWILL = Consideration transferred / % of acquirer's interest x % of NCI
NCI @ Proportionate / PARTIAL GOODWILL = Fair value net assets acquired x % of NCI
Choose whichever is HIGHER between the two
Note: The amount of consideration transferred that will be use in computing the NCI @FV shall EXCLUDE
control premium.

• If NCI is measured @Proportionate / Partial goodwill, NO NEED for floor test.

NCI @ Proportionate = Fair value net assets acquired x % of NCI

Consolidation Date of Acquisition

Investment in subsidiary xx
Cash xx
To record investment in subsidiary

Working paper elimination entries - Date of Acquisition

Share capital - Subsidiary xx

Share premium - Subsidiary xx
Retained earnings - Subsidiary xx
Investment in subsidiary xx
Non controlling interest xx
To eliminate SHE - Subsidiary

Inventory xx
Equipment xx
Notes payable xx
Deferred tax asset xx
Accounts payable xx
Bonds payable xx
Deferred tax liability xx
Investment in subsidiary xx
Non controlling interest xx
To record fair value adjustments in subsidiary's assets & liabilities

Goodwill xx
Investment in subsidiary xx
Non controlling interest xx
To record goodwill

OR

Investment in subsidiary xx
Non controlling interest xx
Gain on bargain purchase xx
To record gain on bargain purchase

NOTE: Investment in subsidiary & NCI should be zero after the WPEE.

Working paper elimination entries - Subsequent to date of Acquisition

Dividend income xx
Non controlling interest xx
Dividend declared - subsidiary xx
To eliminate dividend income

Depreciation expense - equipment xx

Accumulated depreciation xx
Depreciation expense - building xx
To record allocation of amortization

Non controlling interest - net income subsidiary xx

Non controlling interest xx
To record NCI in net income

FORMULAS

NCI - January 1 (beg) xx

NCI - net income xx
NCI - dividend declared subsidiary (xx)
NCI December 31 (end) xx

Retained earnings - Parent January 1 (beg) xx

Consolidated net income attributable to parent xx
Dividend declared - parent (xx)
Consolidated Retained Earnings - Parent December 31 (end) xx

Ordinary shares - Parent xx

Share premium - Parent xx
Consolidated retained earnings xx
NCI, end xx
Consolidated Shareholders Equity xx

PARENT SUBSIDIARY NCI

Net income xx xx xx
Dividend income xx
Elimination of dividend income (xx)
Gain on bargain purchase xx
Unrealized GAIN on sale of PPE (DOWNSTREAM) (xx)
Realized GAIN on sale of PPE (DOWNSTREAM) xx
Unrealized LOSS on sale of PPE (DOWNSTREAM) xx
Realized LOSS on sale of PPE (DOWNSTREAM) (xx)
Unrealized GAIN on sale of PPE (UPSTREAM) (xx) (xx)
Realized GAIN on sale of PPE (UPSTREAM) xx xx
Unrealized LOSS on sale of PPE (UPSTREAM) xx xx
Realized LOSS on sale of PPE (UPSTREAM) (xx) (xx)
Realized GP beg inventory (DOWNSTREAM) xx
Unrealized GP end inventory (DOWNSTREAM) (xx)
Realized GP beg inventory (UPSTREAM) xx xx
Unrealized GP end inventory (UPSTREAM) (xx) (xx)
Amortization of PPE (xx) (xx)
Amortization of Inventory (xx) (xx)
Balance BEFORE Impairment xx xx xx
Impairment of goodwill (xx) (xx)
Balance AFTER Impairment xx xx xx

Note: Impairment of goodwill = NCI Goodwill / Total Goodwill x Impairment loss

If the problem says "INCOME FROM OWN OPERATION" the dividend income is already deducted

Consolidated net income = Parent (column) + Subsidiary (column)

NCI - net income = NCI (column)
Consolidated net income - attributable to parent = Parent (column) + Subsidiary (column) - NCI (column)
CONSOLIDATION

Sales of the Parent xx

Sales of the Subsidiary xx
Intercompany sale (xx)
Consolidated sales xx

Cogs - Parent xx
Cogs - Subsidiary xx
Intercompany sale (xx)
Amortization of excess of (FV over BV) or BV over FV of inventory (Xx)/Xx
Unrealized profit ending inventory (UPEI) xx
Realized profit beginning inventory (RPBI) (xx)
Consolidated Cogs xx

Gross profit - Parent xx

Gross profit - Subsidiary xx
RPBI xx
UPEI (xx)
Consolidated Gross Profit xx

Interest income - Parent xx

Interest income - Subsidiary xx
Intercompany interest income (xx)
Consolidated interest income xx

Dividend income - Parent xx

Dividend income - Subsidiary xx
Intercompany dividends (xx)
Consolidated dividend income xx

Opex - Parent xx
Opex - Subsidiary xx
Amortization of excess of FV over the BV or BV over the FV of depreciable assets Xx/(Xx)
Realized loss on sale of depreciable assets xx
Realized gain on sale of depreciable assets (xx)
Consolidated Operating Expenses xx

Gain on sale - Parent xx

Gain on sale - Subsidiary xx
Unrealized gain on sale (xx)
Consolidated gain on sale xx

Loss on sale - Parent xx

Loss on sale - Subsidiary xx
Unrealized loss on sale (xx)
Consolidated loss on sale xx

Interest expense - Parent xx

Interest expense - Subsidiary xx
Intercompany interest expense (xx)
Consolidated interest expense xx

Cash - Parent xx
Cash - Subsidiary xx
Consolidated cash xx
Receivables - Parent xx
Receivables - Subsidiary xx
Intercompany receivables (xx)
Intercompany dividend receivables (xx)
Consolidated receivables xx

Inventory - Parent xx
Inventory - Subsidiary xx
Excess of the FV over the BV or (BV over the FV) of inventory of subsidiary at the date of acquisition Xx/(Xx)
Amortization of excess of the (FV over the BV) or BV over the FV of inventory of subsidiary (Xx)/Xx
UPEI (xx)
Consolidated inventories xx

Land - Parent xx
Land - Subsidiary xx
Excess of the FV over BV or (BV over the FV) of land of the subsidiary Xx/(Xx)
Amortization of the excess of (FV over BV) or BV over the FV of land of the subsidiary (Xx)/Xx
Consolidated land xx

Depreciable asset net - Parent xx

Depreciable asset net - Subsidiary xx
Excess of the FV over BV or (BV over the FV) of depreciable asset of subsidiary at the date of Xx/(Xx)
acquisition
Amortization of excess of (FV over BV) or BV over FV of depreciable asset of the subsidiary (Xx)/Xx
(Unrealized gain) / Unrealized loss (Xx)/Xx
Realized gain / (Realized loss) Xx/(Xx)
Consolidated depreciable assets xx

Goodwill - Parent (BEFORE business combination) xx

Goodwill arising from business combination xx
Impairment of goodwill arising from business combination (xx)
Consolidated goodwill xx

Liabilities - Parent xx
Liabilities - Subsidiary xx
Intercompany payables (xx)
Dividend payable to the parent (xx)
Consolidated Liabilities xx

Bonds payable - Parent xx

Bonds payable - Subsidiary xx
BV bonds retired (xx)
Consolidated bonds payable xx

Ordinary & Preference share capital - Parent xx

Share premium - Parent xx
Consolidated retained earnings xx
NCI - Net Assets xx
Items in OCI of the parent xx
Consolidated Shareholder's Equity xx
INTERCOMPANY TRANSACTIONS
Downstream transaction - PARENT (SELLER) to SUBSIDIARY (BUYER)

Upstream transaction - SUBSIDIARY (SELLER) to PARENT (BUYER)

INTERCOMPANY SALE OF INVENTORY

Assume that P (80% ownership) purchased from outsider inventory for P15,000. On the same year, P sold the inventory
to S at P20,000. On the same year, 60% of the inventory purchased by S from P was sold to outsider for P50,000.

TRANSACTIONS BOOKS OF PARENT BOOKS OF SUBSIDIARY

1) Purchase of P from outsider Purchases 15,000 NO ENTRY YET
Accounts Payable 15,000
2) Sale by P to S for 20,000 Accounts Receivable 20,000 Purchases 20,000
Sales 20,000 Accounts Payable 20,000
3) Sale by S to outsider, 60% of the inventory for NO ENTRY Accounts Receivable 50,000
50,000 Sales 50,000

Effects of the intercompany transaction

1. Sales & Purchases are overstated
2. Merchandise Inventory, beginning is overstated because of the RPBI due to previous year mark - up of the
seller to the buyer
3. Merchandise Inventory, ending is overstated because of the UPEI due to the mark - up of the seller to the
buyer
4. Accounts receivable & Accounts payable are also overstated, provided remain unpaid

Working paper elimination entries

IF DOWNSTREAM IF UPSTREAM
1. To eliminate the intercompany sales & Sales xx Sales xx
purchases Purchases xx Purchases xx
2. To eliminate intercompany AR & AP Accounts payable xx Accounts payable xx
Accounts receivable xx Accounts receivable xx
3. To recognize the realized profit in the Retained earnings - Parent xx R.E beg - Parent xx
beginning inventory (RPBI) Cost of goods sold xx NCI xx
Downstream - cost method Cost of goods sold xx
Upstream - cost method
Investment in subsidiary xx
Cost of goods sold xx Investment in subsidiary xx
Downstream - equity method NCI xx
Cost of goods sold xx
Upstream - equity method

4. To eliminate unrealized profit in the Cost of goods sold xx Cost of goods sold xx
ending inventory (UPEI) Inventory, end xx Inventory, end xx

ANALYSIS
In #3, realized profit in beg inventory. R.E is debited since the R.E last year was overstated due to the profit
that was recognized in the books of the selling affiliate last year. Cogs is credited to increase gross profit this
year & to recognize the profit this year.

In #4, unrealized profit in ending inventory. Cogs is debited to decrease the gross profit. Inventory, end is
credited to reduce the mark - up of the selling affiliate (since it is as if the buying affiliate buys directly
from the supplier of the selling affiliate).

NOTE: Carefully take a look of the gross profit of the selling affiliate whether based on sales or based on cost

INTERCOMPANY SALE OF DEPRECIABLE FIXED ASSETS

WORKING PAPER ELIMINATION ENTRIES

IF UPSTREAM IF DOWNSTREAM
1. To eliminate the Equipment 14,000 Equipment 14,000
intercompany sale Gain on sale 6,000 Gain on sale 6,000
in the year of sale Acc depr. 20,000 Acc depr. 20,000

Acc depr. 1,000 Acc depr. 1,000

Dep exp. 1,000 Dep exp. 1,000

The first entry will bring back the fixed The first entry will bring back the fixed
assets to its original net book value & the assets to its original net book value & the
second entry will correct the depreciation second entry will correct the depreciation of
of the equipment the equipment

2. To eliminate the Equipment 14,000 Equipment 14,000

intercompany sale R.E beg 4,000 R.E beg 5,000
subsequent to year NCI 1,000 Acc depr. 19,000
of sale Acc depr. 19,000
Acc depr. 1,000
Acc depr. 1,000 Dep exp. 1,000
Dep exp. 1,000
The first entry will bring back the fixed
The first entry will bring back the fixed assets to its original net book value. But
assets to its original net book value. But the gain on sale is only 5,000 since the
the gain on sale is only 5,000 since the 1,000 was already realized last year. The
1,000 was already realized last year. The second entry will correct the depreciation of
second entry will correct the depreciation the equipment
of the equipment

INTERCOMPANY SALE OF NON DEPRECIABLE ASSETS

GOVERNMENT ACCOUNTING
BUDGETING PROCESS

1) Budget preparation

○ DBM issues budget call

○ Govt agencies prepare budget proposal

• Budget hearing
○ Govt agencies defend & justify their budget proposal before DBM
○ DBM deliberates, recommend & consolidate
○ DBM submits the budget proposal to the President

• Presentation to the office of the president

○ President & cabinet members reviews the budget proposal from DBM
○ After reviewing the proposal, they will come up with the president's budget

2) Budget legislation

• House deliberation
○ Congress conduct hearings to scrutinize the president's budget to formulate congress version
○ Congress prepares the general appropriation bill
○ Senate conduct hearings to scrutinize the president's budget to formulate senate version
○ The bicameral deliberation reconciles the congress version & senate version & submit it to the president
○ The final version from the bicameral deliberation , the general appropriation bill will become general
appropriation act upon signing of the president

3) Budget execution

• DBM release guidelines to the govt agencies

○ Govt agencies submit Budget Execution Documents

• DBM formulates the Allotment Release Program

○ DBM sets the limit on the budget for Govt agencies

• Incurrence of obligation
○ DPWH can now hire employees, enter into contracts

• Disbursement - actual payment of DPWH

○ DBM issues Notice of Cash Allocation (NCA)

4) Budget accountability

• Budget accountability reports

○ Govt agencies submit monthly & quarterly reports

• Performance reviews
○ DBM & COA reviews if the budget are being spend properly

• Audit
○ COA audits the govt agencies

ACCOUNTING & RECORDING PROCESS

• Registry (for monitoring purposes)

○ Registry of Revenue & Other Receipts (RROR)
○ Registry of Appropriation & Allotment (RAPAL)
○ Registry of Allotment, Obligations & Disbursement (RAOD)
○ Registry of Budgets, Utilization & Disbursement (RBUD)

• RROR, RAPAL, RAOD, RBUD can still be sub-classify into four:

○ Personnel services (PS)
○ Maintenance & other Operating expenses (MOOE)
○ Financial expenses (FE)
○ Capital outlays (CO)

CHART OF ACCOUNTS (GAM)

1) Cash - Collecting Officer (CO)- use whenever the govt agency has a collection
2) Cash in bank - Local Currency (LC) - use whenever the govt agency will deposit in a bank
3) Cash - Treasury / Agency Deposit Regular (TAC) - use whenever the govt agency will deposit to Bureau of Treasury
4) Cash - Modified Disbursement System Regular - use whenever the govt agency will receive notice of cash allocation
5) Cash - Tax Remittance Advice (TRA) - use whenever the govt agency will have withholding of taxes

JOURNAL ENTRIES - DOST

• Receives appropriation - posted in RAPAL

• Receives allotment from DBM amounting to 8M - posted in RAPAL & RAOD

• DOST incurs obligation from hiring of employees, purchase of office supplies & office equipment - posted in RAOD -
PS (hiring of employees), RAOD - MOOE (office supplies), RAOD - CO (office equipment)

• DOST receives Notice of Cash Allocation from DBM amounting to 7M, net of tax

Cash - Modified Disbursement System (MDS) Regular 7,000,000

Subsidy from National Government 7,000,000
NON - PROFIT ORGANIZATIONS
• Currently, IFRS do not contain specific guidance for NPO concerning the accounting treatment & the
presentation of financial statements
• NPO's are based in part on the accounting principles specifically provided under U.S GAAP SFAS 116 & SFAS
117

CONTRIBUTIONS - refer to resources received in non-reciprocal transactions.

SFAS 116 classifies contributions based on DONOR'S restrictions as follows:

• Unrestricted - available for immediate use

• Temporarily restricted - restricted by the donor
○ The NPO's use is dependent upon:
 The performance of a specific task
 The happening of a future event; OR
 The passage of time
• Permanently restricted - restricted by the donor in such a way that the organization will never be able to
use the contribution itself; however, the organization may be able to use the income therefrom

Contributions are measured at fair value at the date of contributions, and are reported as either:

• Unrestricted support - revenue from unrestricted contributions; OR

• Restricted support - revenue from temporarily restricted or permanently restricted contributions

Other funds held by NPO's

• Endowment fund
○ Term endowment fund - under the donor's restrictions, the NPO can use a PORTION of the principal each
period. This is classified as temporarily restricted
○ Regular endowment fund - under the donor's restrictions, the NPO cannot spend any of the principal. This
is classified as permanently restricted